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Appointing a Pub Tsar

    Calls for a statutory code for pubcos and a 'Pub Tsar' are another potentially damaging manifestation of politicians wanting to be seen to be doing something, writes CPS Research Fellow Keith Boyfield. 

    MPs of all parties are demonstrating a new-found interest in being photographed at their local pub. What explains this sudden fondness for the ‘Dog & Duck’?

    It might be a sure sign a general election is not far away. Politicians of every hue reckon imbibing a drink at their local will endear them to constituents.

    This was manifested in a debate in Parliament on 21st January. Backbench MPs were assiduous in mentioning names of pubs threatened with closure or where time had been called.

    The number of pubs in Britain has certainly plummeted from around 70,000 in 1980 to around 50,000 today (source: PPPA). The reasons for this slide can be attributed to enforcement of stricter drink driving laws, the smoking ban and the fact younger people do not drink the quantities consumed by either their parents or grandparents. Tastes change and many old fashioned ‘boozers’ have been converted into gastro pubs or restaurants. This is a reflection of the market responding to shifting demand.

    These changes were ushered in by the Beer Orders first introduced in 1989 by a Conservative government. This ended the previous monopoly tie with an individual brewer and forced big brewers such as Bass and Scottish & Newcastle to sell off their regional portfolio of pubs resulting in the emergence of Pubcos, notably Admiral Taverns and Punch and Enterprise Inns, which did not brew their own beer but owned a large portfolio of licensed premises to which they supplied food and drink.

    Pubcos have attracted criticism over the years from campaign groups such as CAMRA and MPs who say that they have been exploiting tenants. True, some of the practices adopted by certain Pubcos appear to have been ill-advised and overly short term.  Their PR practices will probably be taught at business school in years to come as an example of how not to get on with stakeholders.

    However, a series of competition inquiries by the Office of Fair Trading failed to come up with any evidence that consumers’ interests were being damaged. Quite the reverse: the OFT concluded from its most recent inquiry that there were a large number of competing pub outlets owned by different operators. Furthermore, consumers were benefiting from significant competition and a choice.

    The downward trend might well be reversed by enterprising new players in the marketplace such as Draft House, which runs a clutch of public houses in the capital. 

    A series of parliamentary inquiries have criticised major Pubcos for the way in which they supply beer and other beverages to tied pubs. Some of the loudest voices critical of the Pubcos have been LibDem MPs such as Greg Mulholland and, significantly, Vince Cable, the current Secretary of State at the Department of Business, Innovation & Skills (BIS).

    Dr Cable and his ministerial team concluded last year that statutory intervention was required in the marketplace. Consequently, a consultation document recommended the creation of a new statutory adjudicator to enforce mandatory rules for all companies owning more than 500 pubs. Ministers argued this additional regulatory framework would enable the adjudicator to enforce a new legal code governing rentals, as well as impose fines. One of the key principles was to ensure the landlord of a tied pub was no worse off financially than one who ran a free house.

    On the face of it such intervention might have appeal but looked at more closely, this whole initiative unravels. For instance, how does one calculate whether rent paid by a tied tenant is less fair than one who runs a free house? Nobel Prize-winning economist Ronald Coase pointed out how regulation of such issues pushes up transaction costs, deters new entrants and damages consumer interests. This initiative is a classic example.

    Why do we need an additional statutory code and adjudicator, costing an estimated minimum of £800,000-a-year? Why isn’t existing law, particularly competition law, sufficient? (Remember the OFT found no evidence of abuse).

    As Damien Hinds MP suggested, it is hardly in the interests of any Pubco to exploit tenants if it is to prosper in the longer term. Any statutory intervention to reduce the price of drinks – the ‘wet rent’ - supplied to tied pubs would merely force up rent on the tenants’ premises to achieve the same target rate of return.

    Probably much to the surprise of Dr Cable and BIS, a London Economics report commissioned by the Department to assess the likely repercussions of the establishment of a pub Tsar indicated any such intervention would lead to a greater loss of jobs and result in far more pub closures than if the industry was left to negotiate tenancies on a willing buyer and seller basis.

    Indeed, it calculated that if the Government was to implement a statutory code with a guest beer option or allow tenants to go free-of-tie - with the assumption all tenants opted to go down this route - one might see as many as 20% of existing pubs close and as many as 33,100 jobs lost.

    In the debate ministers side-stepped direct questions about whether they would seek to introduce legislation to impose a new statutory code and adjudicator this side of a general election.  It seems many in the cabinet – as well as the Treasury – believe adopting the statutory option in order to be seen to be doing something would merely backfire.

    This long running wrangle is a good example of where Conservatives tend to differ from Liberal Democrats.  Wiser observers realise establishing yet another regulatory agency would not necessarily achieve its desired goals. It looks as though there will be insufficient support for the inclusion in the Queen’s Speech. If omitted, there would not be time to pilot the measure through parliament before the election.

    It was clear Labour would have no hesitation in setting up a pub Tsar; the party believes in greater statutory regulation of the economy.  The Opposition benches appeared deaf to strong evidence such action would probably lead to greater pub closures and job losses.

    For Chuka Umunna and colleagues, being seen to take affirmative regulatory action is the key objective. While it may win a few votes, it will not necessarily work in favour of those it is meant to protect, or for customers who will have to pay for the regulatory levy imposed by any statutory pub Tsar.

    Keith Boyfield is a leading economist and writer who specialises in marketing, competition and regulatory policy. He runs a City consultancy advising multi national companies, non profit organisations and media groups.  He has also served as a consultant to the European Commission.

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