chapter four 

competitive 


modern

markets


“Hard-nosed competition is the best 
assurance of a healthy business.” 
Donald M Kendall, 
former Chairman and CEO of 
PepsiCo, Inc. 
4.1 
The Government believes strongly that open, 
transparent and effective markets are vital to encourage 
efficiency and innovation. This chapter sets out how 
the Government will open and modernise markets. 

4.2 
Competition keeps businesses on their toes and 
makes them work harder to keep their customers 
satisfied. It provides the greatest possible incentive for 
businesses constantly to improve and to become more 
productive. That is why competitive markets at home 
are a crucial springboard for global success. And why 
international trade also drives greater competitiveness. 
As the European Single Market becomes our home 
market we will all benefit. 

4.3 
The law greatly influences the extent to which 
markets are open and competitive. Protectionism and 
unnecessary regulation limit choice and increase costs 
to business and consumers. Well-crafted liberalisation 
unleashes ideas and capabilities, helping business 
to create innovative new products and services. The 
success of the UK telecommunications industry, for 
example, shows the benefits liberalisation can bring. 

Opening
markets


4.4 
The UK is one of the world’s most open 
economies. Our aim is to maintain this position. 

4.5 
To do so we need to ensure markets are fair 
and accessible. At home this requires a strong, 
forward-looking competition policy. The innovation and 
enterprise necessary to build a competitive knowledge 
driven economy must be encouraged. Those who 
seek to damage competition and limit markets must 
be subject to vigorous scrutiny and strong penalties. 

4.6 
The Competition Act, which became law in 
November 1998, provides a real deterrent to unfair and 
anti-competitive behaviour. The Act outlaws cartels and 
the abuse of a dominant market position. The Office of 
Fair Trading (OFT) and sector regulators will have strong 
powers, including the power to impose penalties of up 
to ten per cent of UK turnover. The Government will 
provide the OFT with an extra £15 million over three 
years to enforce the new legislation effectively. 

4.7 
The Government has no plans at present to 
change the merger regime, but it is important to 
monitor its effectiveness. A consultation paper will 
be published in early 1999 on the case for reform. 


4.8 
It is not enough just to strengthen competition 
in the domestic market. We also need to ensure 
competition is effective in international markets. 
The Government will work with the EU to this end 
in the World Trade Organisation. A lot has already 
been achieved to liberalise international trade, but 
there is more to be done. In co-operation with our 
EU partners, the Government will seek to make 
removal of remaining barriers, in particular those 
affecting knowledge driven businesses and services, 
a priority in future trade negotiations. 

4.9 
The Government has put the UK in a better 
position to influence decision-making in Brussels. At 
the Cardiff Summit in June 1998, EU leaders agreed 
that each Member State should submit a report on its 
economic strengths and weaknesses. These reports 
will highlight what needs to be done to make Europe’s 
economy more flexible and competitive. The UK 
published its progress report on 1 December 1998. 

4.10 The Single Market benefits British businesses 
by giving them a much larger home market in which 
to compete. However, these benefits will only be 
delivered if all Member States meet their obligations 
to remove barriers to trade within the EU. The EU 
has set up a Scoreboard to show how well individual 
Member States are performing. The Government has 
encouraged the European Commission to use the 
Scoreboard to take action to make the Single Market 
work more effectively. The UK will lead by example. 
The Government has set itself the target of 
implementing 98 per cent of Single Market measures 
by the end of 2000. It will also support further 
measures to strengthen competition in product 
markets and liberalise capital markets. This will 
benefit business and consumers alike. 
4.11 The introduction of the euro in 11 EU Member 
States on 1 January 1999 will have a major impact. 
Fifty per cent of our exports are to the participating 
countries, and 45 per cent of UK SMEs have trading 
links with those countries. Of these SMEs, only nine 
per cent had made any preparations by May 1998. 
Following the first phase of the Government’s 
information campaign, this number has risen to 
23 per cent. The Government will continue to 
provide practical help to small businesses as the 
euro is introduced. The Government will consider 
offering financial support under existing schemes 
in euros where it is to the country’s competitive 
advantage to do so, for example, for certain 
internationally mobile investments. 
Modernisingmarkets 

4.12 The knowledge driven economy poses challenges 
to traditional markets and their regulation. Markets in 
services and information work differently to markets in 
physical commodities, for which most regulation was 
originally designed. As well as opening markets, we have 
to modernise them. The Government is committed to 
getting regulation right for new and developing markets. 
One of the most critical areas is electronic commerce. 
Electronic commerce 
4.13 The digital age is already here. Over a million 
people in the UK became Internet users in the third 
quarter of 1998. Fifteen per cent of the adult 
population is now connected to the Internet. 

competitive modern markets


4.14 Electronic commerce worldwide is valued at 
US$12 billion, and is set to reach US$350-500 billion 
by 2002. It is already having a huge impact on the way 
that markets work. 
. 
Direct links between consumers and suppliers are 
hitting traditional intermediaries and brokers, for 
example, those who sell insurance, financial services 
and travel packages. 
. 
Digital retailing allows a huge range of products to 
be marketed directly to consumers, by-passing 
traditional retailers. 
. 
Business-to-business trade is being revolutionised. 
4.15 Markets only work when they are trusted by 
buyers and sellers. Many people fear that personal 
information such as credit card details given over the 
Internet could be misused. In fact technology now 
allows the recipient of an electronic message to be 
sure who sent it and that it has not been read by 
others. To build trust in electronic commerce, the 
Government will introduce an Electronic Commerce 
Bill to establish a voluntary licensing scheme for 
organisations providing secure message services. 
4.16 Many businesses and consumers are unclear 
about how consumer protection laws can be enforced 
when an electronic transaction takes place across 
borders. The UK is playing a leading part in international 
discussions on the way forward. Within Europe, moves 
are under way to ensure that consumers involved in 
cross-border disputes about electronic transactions 
are treated in the same way as those buying by more 
traditional means such as mail order. 
4.17 The Government will also work with consumers 
and businesses trading electronically to draw up a 
code of conduct by Summer 1999. This would enable 
traders committed to best practice to use an on-line 
digital hallmark, and give consumers help with 
effective complaint and redress procedures at the 
click of a mouse. 
4.18 The Government’s strong preference is for self-
regulation. But it will consider changes to the law if 
these arrangements do not provide the reassurance 
consumers need. 
4.19 As well as helping to create confidence in the 
market, the Government will remove obstacles that 
stand in the way of electronic commerce. For example, 
some aspects of existing law discriminate against 
electronic documents, and the legal validity of electronic 
signatures is unclear. Proposals in the Electronic 
Commerce Bill will be designed to ensure that 
electronic documents and signatures become the 
legal equivalent of pen and paper. 
4.20 We cannot allow international trade on the 
Internet to be smothered by red tape. There is now 
international agreement that no “bit tax” should be 
imposed on Internet trade. The Government is 
determined to ensure that on-line products are treated 
as services, attracting no customs charges, and that 
import and export procedures can be completed 
electronically. 
53 


casestudycasestudy 
Linking locations 
with new technology 
The independent 
television and film 
post-production sector 
has a total turnover of 
£400 million a year and 
employs around 7,000 
people. Thirty-five per 
cent of businesses are 
based in or around 
Soho in central London. 
Some of the UK’s 
leading post-
Gareth Wreddon and Neil Harris, Sohonet. 
Communications regulation 
4.21 Our communications infrastructure underpins 
much of the economy. Radio-based services alone 
contribute over £13 billion a year to GDP and provide 
over 400,000 jobs. 
4.22 Competition in infrastructure and services 
provides benefits to consumers and promotes 
innovation. Use of the Internet, for example, is five 
times higher where there is competition in the 
telecommunications infrastructure than it is in 
monopoly markets. 
4.23 The Government is going to reform 
telecommunications regulation. The reforms will take 
account of the responses to the Green Paper on 
Convergence17 published in July 1998. 
4.24 At present, all those who run telecommunications 
systems have to be licensed. When this requirement 
was introduced, it was expected there would be only 
a few public telecoms operators – in fact there are now 
over 270 operators. We need a new, more flexible 
approach: one in which regulation can be rolled back 
more easily as competition increases; one which 
caters better for the way in which telecommunications 
and media are combining. 
17 Regulating Communications: approaching convergence in the 
Information Age, Cm 4022, joint DTI/DCMS consultation, July 1998. 

The combination of 
Sohonet and an eight-

production companies 
are now working 
together to provide 
special effects 
for Hollywood 
blockbusters like 
Lost in Space. The 
Sohonet project, 
backed by DTI, enables 
film and video material 
to be distributed 
around Soho – and to 
and from Hollywood – 
using high-speed 
telecommunications. 
This is the first time 
such links have been 
used anywhere in the 
world. 

54 

hour time difference 
gives UK companies 
a real advantage over 
their US competitors. 
A film-maker in 
Hollywood can send 
their film over to the 
UK at the end of a 
day’s shooting in the 
knowledge that the 
finished work will be 
ready and waiting 
when they get back on 
set the next morning. 


competitive modern markets


4.25 Business has expressed concern about the 
cost of leasing the high bandwidth lines needed for 
high-speed multimedia communications, especially 
compared with the US. OFTEL has been conducting 
a competition investigation into the price of leased 
lines in the UK to determine whether or not further 
regulatory action is needed. In addition, the 
Government will work with users and suppliers to 
promote more effective competition in that market. 
4.26 The Government is using market forces to make 
more efficient use of the radio spectrum. In October 
1998 it began consulting on proposals to create a 
market in licences for radio frequencies18. This would 
help those with innovative ideas to get access to 
frequencies quickly. Decisions will be announced after 
consultation closes in February 1999. 
18 
Managing Spectrum through the Market, 
Radiocommunications Agency, October 1998. 

The UK took the lead in Europe in 
developing the standards for the second 
generation of mobile phones (GSM). 
This ground-breaking development has 
established GSM as the pre-eminent 
technology for mobile telephony. 
The UK is again leading the way with third 
generation mobile telecommunications 
(UMTS). UMTS will make it possible for 
mobile handsets to perform a wider range 
of functions than they can at the moment. 
It will be possible to get high speed access 
to the Internet, conduct all kinds of 
electronic commerce and make phone 
calls, all from a single handset. 
The UK expects to be one of the first in the 
world to introduce UMTS. The Government 
is planning to issue licences by auction in 
1999 and services are expected to go live in 
2002. The UK is also playing a leading role 
in developing the international standards 
that will apply to UMTS. 
55 


Essential resources 
4.27 Business relies on essential resources such 
as a secure energy supply, the provision of utility 
services and an efficient transport infrastructure. 
The Government has developed new policies to 
ensure the sustained availability of these resources. 
. 
The Energy White Paper19 published in October 
1998 set out the Government’s policies for ensuring 
there are secure, diverse, and sustainable supplies 
of energy at competitive prices. The Government 
will create a more integrated regulatory framework 
for energy markets and promote undistorted 
competition in these markets. 
. 
The Government set out in July 1998 its plans to 
strengthen the regulation of the utilities20, putting 
consumers – including business consumers – first. 
. 
The Government’s Transport White Paper21 set out a 
framework to improve journey reliability and links 
with international markets, and to promote more 
sustainable transport industries. This will be followed 
by a paper which will set out the Government’s 
strategy for sustainable distribution for the future. 
19 
Conclusions of The Review of Energy Sources for Power 
Generation and Government response to fourth and fifth Reports of 
the Trade and Industry Committee, Cm 4071, DTI, October 1998. 

20 Governments response to the consultation on A Fair Deal for 
Consumers: Modernising the Framework for Utility Regulation, 
DTI, July 1998. 

21 
A New Deal for Transport: better for everyone, 
Cm 3950, DETR, July 1998. 

The IPR Action Plan 
Keep pace with developments in new 
technologies and the way businesses operate 
in the knowledge driven economy. 
l Agree EC Directives on copyright in the 
information society and stronger protection 
for software-related inventions. 
l Introduce a worldwide system for electronic 
trading in IPR. 
Make Intellectual Property Rights affordable 
and accessible. 
l Review the impact of fees charged by the 
UK Patent Office. 
l Consult on proposals to reduce the tax 
compliance costs of IPR transactions. 
l Reform the civil law system for IPR litigation. 
l Push for an EC patent which is affordable 
and easy to enforce. 
l Ensure that EU harmonisation of “second 
tier” or “petty” patents benefits UK firms, 
particularly small businesses. 
Ensure rights are accepted and enforced 
internationally. 
l Ratify the international treaties on copyright 
agreed in the World Intellectual Property 
Organisation. 
l Take action against countries that take a 
soft line on counterfeiting and piracy. 
l Ensure countries seeking membership of 
the EU meet their obligations to protect and 
enforce IPRs. 
l Press the US to introduce a ‘first to file’ 
patent system in line with the rest of the 
world. 
Maximise the return from the knowledge base. 
l Review how IPRs can be used to maximise 
the value we get from publicly-funded 
research. 

Many would-be 
entrepreneurs have 
good ideas and 
specialist knowledge. 
Far fewer have the 
resources or 
knowledge of the 
market that will enable 
them to exploit their 
idea – resources and 
knowledge that 
established businesses 
have at their disposal. 
Put the two together 
and you have a 
partnership that can 
benefit both parties. 

That is the conclusion 
reached by BT, 
who plan to invest 
intellectual property in 
start-up businesses in 
exchange for a share 
of equity. 

In their first foray into 
this type of venture, BT 
have just completed 
negotiations with 
Kymata Ltd and 3i 
Group plc, who will 
provide venture capital. 
Kymata has set up a 
product development 
team in Scotland to 
manufacture and 
supply components 
for use in optical 
processing, switching 
and routing equipment 

– a market estimated 
to be worth 
US$1 billion by 2003. 
casestudycasestudySharing knowledge 
BT will licence some 
of their patents and 
transfer technology 
know-how to Kymata 
and, in addition, 
provide Kymata with 
a source of strategic 
advice, credibility 
through association 
with the BT brand, and 
access to the research 
Mike Harlow, BT Labs. 
Intellectual Property Rights 
4.28 Intellectual Property Rights (IPRs) are 
fundamental to an innovative economy. They give 
businesses and individuals confidence to exploit their 
ideas commercially and undertake further innovation. 
The IPR system should reflect fully the demands of 
the knowledge driven economy. This means we 
need to keep pace with developments in new 
technologies and the way businesses operate, for 
example, information and communications technology; 
make Intellectual Property Rights affordable and 
accessible; ensure rights are accepted and enforced 
internationally; and maximise the return from the 
knowledge base. The Government’s action plan 
is set out in the box on page 56. 
and development 
resource at BT Labs. 
In exchange BT stands 
to gain a fresh insight 
into technological 
developments and 
a competitive UK 
components market, 
as well as any direct 
financial benefit which 
might result. 

57 


Standards 
4.29 Technical standards accelerate the spread 
of best practice and innovation through industry, 
especially to small businesses, and help to open 
markets in Europe and internationally. Yet traditional 
methods of preparing standards are too slow for 
shorter product lifecycles. The Government is 
reviewing with the British Standards Institution what 
can be done to accelerate standards setting. 
4.30 In a recent European Commission study22, 
business said that one of the main remaining barriers 
to trade in Europe was the cost of meeting national 
specifications and unusual conformity assessment 
requirements. In response, the Government is 
promoting a review of standards policy in the EU. 
Knowledgeable investment 
4.31 Intangible and intellectual assets are increasing 
in significance. However, company accounts mainly 
report hard financial information on physical assets. 
To give a more complete picture of a company’s true 
worth its accounts need to be supplemented by 
information on intangible assets. 
4.32 The Government would like to see better 
guidance for companies of all sizes on assessing the 
strengths and weaknesses of their intangible assets. 
This could lead to guidance on disclosure of these 
assets in the Operating and Financial Review. It has 
asked the Accounting Standards Board, in consultation 
with others, to take a fresh look at this issue. 
4.33 Short-termism within the investment community 
is still widely perceived as a problem. The Government 
is working with smaller listed companies and fund 
managers on ways of improving their co-operation 
on longer term investment. This builds on the Myners 
Group’s best practice recommendations23. These 
were addressed to larger listed companies and 
institutional investors, and were subsequently endorsed 
by the Committee on Corporate Governance led by 
Sir Ronald Hampel24. 
Modernising company law 
4.34 The current system of company law dates 
back to the middle of the last century. We need 
to have confidence that the system will promote 
competitiveness in the next century. So the 
Government has announced a major review of 
company law25. The strategy for the review will 
be published early in 1999. This will be followed 
by a series of consultation papers on specific areas, 
leading to a White Paper in 2001, and legislation in 
the next Parliament. 
22 Single Market Scoreboard No.3, 
European Commission, October 1998. 
23 Developing a Winning Partnership – the recommendations 
of a joint City/Industry working group, September 1996. 
24 Committee on Corporate Governance, Final Report, 
Gee Publishing Ltd, January 1998. 
25 Modern Company Law for a Competitive Economy, 
DTI, March 1998. 


competitive modern markets


Financial markets 
4.35 The Government will introduce a Bill in the 
1998/99 Parliamentary Session to improve the 
regulation of financial services. It will replace the current 
diverse, sectoral regulatory system with a single 
regulator, the Financial Services Authority (FSA). 
4.36 Reducing the number of regulators will improve 
consistency and reduce the amount of regulation. 
The draft Bill requires the FSA to follow some key 
regulatory principles. These include the need to ensure 
that the costs of regulation are proportionate to the 
benefits, to facilitate innovation in financial services, to 
maintain the competitive position of the UK, and not to 
distort or impede competition unnecessarily. The FSA 
will also be required to publish cost-benefit analyses 
for consultation whenever it proposes to change its 
regulatory requirements. 
The Government has increased funding to 
the National Association of Citizens Advice 
Bureaux by an extra £1.4 million this year. 
With this money, the Association will be 
able to support a nationwide IT project 
which will allow better quality advice to be 
delivered more quickly to more people in 
a more direct manner. The project should 
allow at least half a million extra people 
a year to be helped. 
Knowledgeable consumers 
4.37 Knowledgeable consumers are a huge asset 
for business. Businesses have to innovate to meet 
their customers’ expectations. Consumers need good 
information on products, services and their rights. 
In Spring 1999, the Government will publish a 
comprehensive consumer strategy. It will radically 
improve advice to consumers on their rights and be 
more effective in putting rogue traders out of business. 

59