Competition regulator warns of the risks posed by potential 'sector deals' under UK's industrial strategy

In outlining a new industrial strategy for the UK earlier this year, the government announced that it would consider industry suggestions on steps that could be taken to help improve productivity in their sector, such as deregulation, tax breaks, targeted funding or moves to tackle market access barriers with other countries.

However, in a response submitted to that strategy, the CMA said (17-page / 411KB PDF) that so-called sector deals, and similarly policies that support businesses on the basis of their location, "may distort competition between firms that receive support and those that do not" and "can lead to unintended consequences".

It said that government could end up "picking winners" between businesses in competition with one another on a cross-sector basis, and that this could see investment "diverted from more productive firms (that sit outside the supported sector) to less productive firms (that sit inside the supported sector)". This, it said, could see the UK "producing products less efficiently, or producing products that are not favoured by customers".

Another risk is that businesses that receive support may have less incentive to become more efficient, and that this could harm their "prospects of competing with overseas rivals", the CMA said.

Giving sector-based support could also serve as a barrier to entry into the market by new companies and to innovation, it warned, citing some examples.

"Innovation in fields such as e-commerce, nanotechnology and robotics have the potential to re-draw sector boundaries, as firms with expertise in these emerging technologies transfer their expertise to other product and service markets," the CMA said. "Policies that provide support to a narrowly defined sector (such as bricks and mortar retail) risk ossifying markets, slowing entry, and slowing the emergence of new business models."

The CMA said that the government intervention can "complement competition policy, and increase economic growth and consumer welfare" where it targets "a clear and well-defined market failure", or "removes or reduces other distortions", such as "poorly designed tax and regulatory systems".

It said that "economy wide R&D tax breaks" are an example of a measure that the government could introduce which would be "less likely to create distortions".

The CMA said that the government should identify if there are market failures that need correcting before "progressing sector deals". In addition, the government should "where possible, seek to achieve policy objectives through mechanisms that harness competition and work ‘with the grain’ of markets; and design interventions that distort competition no more than is necessary to achieve the policy objective at hand".

The CMA also issued advice to the government on the extent to which it should consider submissions by market incumbents seeking to demonstrate how support for their sector could boost productivity.

"In the sector deal consultation process, policy makers should avoid giving undue weight to the views of incumbents," the CMA said. "While incumbents can be a useful source of information, they have incentives to strategically provide information that acts to their benefit, rather than that of consumers. This can lead to ‘regulatory capture’ and regulation that favours incumbents over consumers."

"One way to manage this risk would be to ensure that potential new entrants and consumers are also listened to as part of the sector deal process," it said.

The CMA said a "competition impact assessment of new policy proposals arising from sector deals" should be carried out, and that it was willing to help government departments undertake such studies.

The regulator also warned of the risk that commercially sensitive information could be shared by businesses working together to try to win a sector deal in breach of competition rules.

"In the course of the sector deal process, policy makers should also be mindful that activity that promotes industry collaboration could potentially facilitate anti-competitive exchange of information between undertakings," the CMA said. "Should competitively sensitive information or insight about competitors’ actions be shared among competitors, competition may be dampened and suppliers may be encouraged to breach competition law. For example, exchange of future investment intentions may give firms insight into the competitive constraints faced by their rivals and give an indication of their plans, reducing competitive uncertainty."