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Unfair competition

Source: Public Sector Executive Jan/Feb 2012

Many public sector organisations are trying to deal with budget cuts by beefing up their income generation. But acting like private businesses means being regulated like private businesses, including the full rigours of competition law, and the Office of Fair Trading is taking an interest. PSE talks to the OFT’s Deborah Jones, director in its services infrastructure and public markets group.

The OFT has recently produced new guidance designed to inform public sector organisations about the pitfalls of contravening competition law when they act in ways that mimic private sector businesses, by offering services or products for profit-generating reasons, in competition with businesses.

The guidance has been actively sent to 50 bodies, associations and umbrella groups active in commerce, including Government departments, and is also available online.

As chronicled in PSE, the OFT has been paying closer attention to the public sector in the last couple of years, as highlighted in its annual plan for 2011-12.

Deborah Jones, a director in the OFT’s Services, Infrastructure and Public Markets group, told PSE: “It’s increasingly the case that markets in public services continue to be opened to the private and voluntary sectors. It’s also the case that some public sector bodies are being encouraged to use assets they’ve got to generate more revenue, so that can be another way in which public sector bodies come into what otherwise would have been a private sector arena.

“Those developments mean a number of public sector bodies are conducting economic, commercial activities, which bring them within the remit of competition law.”

The OFT has had a “growing realisation”, she said, that public bodies often didn’t realise competition law applied to them, and that policy-makers demanding more income generation might not realise how the law works.

A 2004 policy note needed updating, she said, while one recent case involving a public sector buying organisation, which was marketing and selling what it bought to schools, also highlighted some of the risks.

Jones explained: “Concerns were raised about the way in which these bodies were marketing their goods and services to schools. Schools should have full choice about where to go and buy their goods and services from.”

There was no formal investigation under the Competition Act, Jones said, rather just an intervention by the OFT to ensure the organisations involved in the group, called Pro5, understood the law. They gave assurances they would abide by it.

There are two types of consequences of not doing so; firstly, agreements infringing competition law are void, meaning the risk falls on both parties. Secondly, the OFT can apply sanctions – financial penalties amounting to 10% of turnover, for example, and individuals can face investigation too, and directors can be disqualified. In extreme cases, criminal law against cartels can be used.

Avoiding this means, ultimately, understanding the difference between a public sector body exercising a social function and a commercial function. To understand these differences in full requires a thorough reading of the guidance and possibly legal advice, but Jones said that in general, if a public body is undertaking an activity for profit, for revenue generating purposes, in direct competition with the private sector, it is likely to fall under the purview of competition law – but only for the commercial activities themselves, not everything else it does.

An example is Companies House, whose supply of online company data search tools is governed by competition law because it is doing it for profit and in competition, but its function as the database of information relating to the founding of companies and holding their details is a public, social function.

Jones: “One of the things we’re at pains to point out in the guide is that public bodies don’t have to comply with competition law in every single thing they do; only where they’re competing with private providers for revenue.”

She’s says also there’s no bar on councils working together to offer services, or working with private companies – it’s all about the type of activity they do.

There aren’t statistics showing exactly how many public sector bodies might be acting as ‘undertakings’ as far as competition law is concerned, but it’s clear that there are an increasing number of them.

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