The United Kingdom’s Competition Commission (CC) is unusual among competition authorities, in that it is able to subject entire markets to an in-depth review, in circumstances where there is no suggestion that market participants have acted in a way that would infringe general competition law. The CC also has the power to impose potentially extensive remedies to address any concerns that may arise from its investigation.
Under the relevant provisions of the Enterprise Act 2002, the Office of Fair Trading (OFT), a sectoral regulator or a government minister may refer any market to the CC for an in-depth market investigation if it, he or she has reasonable grounds for suspecting that any feature of a market prevents, restricts or distorts competition. In practice, the threshold for having such suspicion is low, as it is possible to ascertain that almost any market does not operate in a perfectly competitive manner in at least some respects. Once a market has been referred to the CC, it has up to two years to establish whether the initial suspicions that led to the reference were well-founded. At the end of this period, the CC must issue a final report and, to the extent that an adverse effect on competition has been identified, announce the remedies that it will impose to improve competition. As graphically illustrated by two recent announcements by the CC, its remedies power extends to ordering the disposal of major business assets, as well as the imposition of far-reaching behavioural obligations on businesses.
The CC’s first announcement, made on 14 January 2014, arose from the publication of its final report on the market for aggregates, cement and ready-mix concrete. The 468 page report sets out the CC’s conclusion that a combination of structural and conduct features give rise to an adverse effect on competition in the British markets for bulk and bagged cement, due to the resulting coordination between the three main domestic cement producers: Cemex, Hanson and Lafarge Tarmac. (In brief, the structural features relate to the fact that the market is highly concentrated and transparent, with high barriers to entry; product homogeneity; customer behaviour; and the degree of vertical integration, whereas the conduct features concern the tendency of suppliers to engage in practices that facilitate market stability and price parallelism, such as making generic price announcements and buying from each other.)
The CC concluded that this situation is exacerbated by the existence of exclusive long-term arrangements for the supply by Lafarge Tarmac of granulated blast furnace slag (GBS) to Hanson. Lafarge Tarmac is itself the only domestic producer of GBS. Hanson grinds GBS to produce ground granulated blast furnace slag (GGBS), a partial substitute for and important input into cement. As a result of this arrangement, Hanson is the only domestic producer of GGBS.
By the CC’s estimate, the restriction of competition arising from these features costs consumers at least £30 million a year for cement and a further £15-20 million for GGBS. To address its concerns, the CC will require Lafarge Tarmac to divest a cement plant and some ready-mix cement plants to a new entrant buyer, to create a fifth British cement producer. In addition, the CC will require the publication of market data on cement production to be delayed by at least three months and prohibit the sending of generic price announcement letters to customers. The CC will also require Hanson to divest one of its GGBS production facilities, with Lafarge Tarmac being obliged to supply the buyer of that facility with GBS. The buyer, which will become an alternative British source of GGBS, may not also be a British cement producer.
Interestingly, these extensive remedies follow the creation of a new British cement producer (HCM) only a year ago, pursuant to remedies imposed by the CC as a condition for its clearance of the creation of Lafarge Tarmac, which combined the cement operations of Anglo American plc and Lafarge SA. While this remedy was sufficient to allow that transaction to go ahead, based on the CC’s conclusions following its market investigation it was clearly insufficient to ensure a competitive market in cement. At least the parties to this investigation will gain some comfort from the fact that the CC raised no concerns with the markets for aggregates or ready mix cement.
Given the far-reaching nature of the remedies, and the resulting impact on the business of the companies concerned, an appeal of the CC’s final report to the Competition Appeal Tribunal (CAT) seems highly likely. Indeed, on the day of publication of the CC’s final report Lafarge Tarmac and Hanson were reported in the press to be “considering legal action”. Each company has already filed appeals against procedural decisions made by the CC in the course of the investigation, which had been stayed pending publication of the final report. On the assumption that those appeals will now be reactivated, they would be combined with a wider legal fight to avoid, or at least delay, the forced disposals. Based on an appeal against a divestment remedy in the previous case, such an appeal could delay any divestments for as much as three years. In the meantime, there is speculation that the planned flotation of Lafarge Tarmac will have to be postponed, due to the attendant uncertainty.
On 16 January, just two days after the cement report, the CC published its provisional decision on remedies in its market investigation into the provision of private healthcare in the UK. This is the last step in the investigation process before publication of the final report, which is due in March.
As noted in our previous client advisory the OFT referred the private healthcare market to the CC in April 2012 due to concerns over high levels of concentration in service provision, as well as significant barriers to entry and information asymmetries. In addition to the obvious difficulty of building and staffing new private hospitals, the OFT also noted that certain terms in agreements between incumbent providers and insurers could make it harder for new providers to enter the market.
In August 2013, the CC issued its provisional findings, which largely confirmed the concerns raised by the OFT. Specifically, the CC stated that it had found that an adverse effect on competition arose from two structural features, namely high barriers to entry and expansion and weak competitive constraints (particularly in London), as well as conduct features, including the operation of incentive schemes to encourage referrals to a particular provider and a lack of information on performance of hospitals and consultants. The CC provisionally estimated that the resulting reduction in competition was costing customers between £173 and £193 million a year.
In light of these concerns, the CC has proposed a wide-ranging remedies package comprising:
the divestment of nine hospitals (comprising two central London hospitals owned by Hospital Corporation of America (HCA) and seven hospitals owned by BMI Healthcare located across England);
a new mandatory review process for any proposal by a private operator to enter into an agreement to operate a private patient unit in a National Health Service hospital in a local area where it faces little competition;
prohibition of clinician incentive schemes that encourage patient referrals to their facilities; and
a new requirement for the collection and publication of information on the performance of private hospitals and individual consultants and the provision of consultant fee information to patients.
The CC is now seeking views on its provisional remedies decision, after which it will proceed with finalising its report. While there may be some adjustment round the edges, we would expect its final report to follow the approach set out in its provisional decision in material respects. In preparation for such an outcome, the Chief Executives of both HCA and BMI issued strongly worded criticisms of the proposed remedies on the day they were announced. BMI has already appealed procedural decisions made by the CC in the course of the investigation to the CAT and, as with the cement investigation, new appeals to the CAT against any final remedies package are almost inevitable.
These two reports raise many interesting issues that a short client advisory cannot hope to cover. One thing that is clear is the potentially significant impact that a market investigation can have on the affected companies. It is notable that the two cement companies affected by the divestments are wholly or partly foreign-owned (Hanson is owned by the German producer Heidelberg Cement, whereas Lafarge Tarmac is a joint venture of Lafarge of France and Anglo-American, a UK-headquartered firm with roots in South Africa), as are the two groups that look set to be forced to sell hospitals (HCA is American, BMI is South African). The significant role of companies based outside the UK in the UK economy is largely a reflection of its openness to inward investment and we would certainly not suggest that these remedies display any bias against foreign companies. Nevertheless, it seems likely that the inherent unpredictability of the market investigation regime, combined with the potentially significant impact of any remedies, will further complicate the decisions of companies looking to invest significant sums in UK business.
Another aspect worth highlighting is the interaction between the market investigation regime and general competition law (as set out in Article 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) and, in the UK, Chapter I and Chapter II of the Competition Act 1998 (CA98)). It should be borne in mind that the conduct examined in these investigations was not found to have infringed a competition law prohibition (whether the prohibition of anticompetitive agreements contained in Article 101 TFEU/Chapter I CA98 or the prohibition of abuse of dominance in Article 102 TFEU/Chapter II CA98). Although the CC’s concerns in the cement market focused on coordination of conduct by the large producers, it acknowledged that this was at most tacit collusion, rather than the sort of explicit collusion prohibited by Article 101 TFEU. Indeed, the CC made it clear that it had no issues with investigating the sector while a parallel Article 101 investigation of various European cement producers was underway. It seems at least arguable, however, that the long term GBS and GGBS supply agreements to which the CC objected may infringe both Article 101 and 102 and therefore could have been tackled under those provisions (or their domestic equivalents). Similarly, it may have been possible to use Article 101 against the incentive arrangements highlighted as causing harm in the private healthcare sector. Given the higher degree of predictability of Article 101, we would suggest that use of this instrument should generally be preferred over market investigations, if it can achieve the same outcome. We accept, however, that the wider structural issues, especially those highlighted in the private healthcare report, would be more difficult to tackle using general competition law.
These two reports certainly suggest a new-found enthusiasm for structural remedies within the CC. While the power to impose structural remedies has been in place since 2003, their use may have been encouraged by the CC’s recent success in forcing the divestment of two of BAA’s London airports, Gatwick and Stansted, especially as this intervention appears to have led to greater competition between those airports and BAA’s remaining airport at Heathrow. (Interestingly, that forced disposal had a significant impact on another non-British company, as it took place after BAA (now Heathrow Airport Holdings) was acquired by a consortium of shareholders led by Ferrovial of Spain and including a Canadian pension fund and the sovereign wealth fund of Singapore.)
As well as being popular with the CC, the attractiveness of forced divestments has apparently not been lost on politicians. The day after the CC published its provisional remedies report on private healthcare, the leader of the UK opposition Ed Miliband stated in a highly publicised speech that a future Labour government would force large high street banks to sell branches to two new entrant ‘challenger banks’ and would seek the help of the new Competition and Market Authority (CMA) to achieve this. (In April, the CMA will take on the CC’s full market investigation powers, as well as the competition powers of the OFT. At the same time, the government will acquire new powers to trigger investigations on public interest as well as competition grounds.)
The prospect of being able to force banks to sell valuable assets is clearly attractive for politicians, given continued economic difficulties and bankers’ attendant unpopularity in the eyes of voters. Although at this time it is unclear what the legal basis of any such intervention would be, given that Mr Miliband has said that he would seek a report from the CMA in six months on how to create the two new banks rather than a full-length market investigation, it seems likely that the forced divestments in the cement and healthcare markets outlined above will not be the last.
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