My Lords, getting up feels almost like it does at the bell before last orders—I confess that I am insufficiently capable of such a witticism and have to acknowledge my noble friend Lord Beecham for that observation. We welcome the introduction of the Pubs Code etc. Regulations and the Pubs Code (Fees, Costs and Financial Penalties) Regulations.
This has been a very long and drawn-out process, and in fact as I was listening to the Minister I realised that I could mouth half the words of the introduction to her speech because we have been at this for some time. However, I am grateful for all the work that has been done by officials in making sure that we get to this particular place. It has not happened within the timetable that everyone wanted, but it is more important to get the code right than to serve an arbitrary timetable. I will turn to the issues around the timetable in due course.
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One of the most important features of this is that tied tenants have had a particularly difficult time with the pub-owning businesses and the relationship has been fractured for quite some time. This was made considerably worse by the adoption of some rather reckless business models by the pub-owning companies and that has led to the establishment of provisions covering the Pubs Code Adjudicator, so this was done within the context of a worsening situation. As the Minister has said, the construction of the code itself, which comes from the legislation, tries to strike a balance. I want to say at the beginning that while I have a few questions about the statutory instrument, fundamentally our concerns turn on where the balance is struck in relation to the code. The reason for that is the desire not to place undue burdens on businesses while not suggesting that the concerns of tenants are not legitimate.
There are ways in which many businesses are transformed in their method of operation, their businesses processes and even their innovations by regulatory changes. In fact it could even be argued that in many industries, regulatory change has been a much better indicator of productivity than other forms of business reinvention. In this, striking a balance suggests that a
business is static, but as I will come on to later, it is not. As it is established at this moment in time, it is important that the balance is properly struck.
I understand where the Government got to in designing the code and that as far as tenants are concerned, fine-tuning the code is now considered to be more effective with the experience of its operation. So the Government have given a commitment that there will be a review two years after commencement, and I would be grateful if the Minister could give us some idea of what the initial consideration is of what this will cover and how and who conducts it, as well as what reports will be made to and how engagement will take place with Parliament. In addition, I hope that the Minister can confirm that the interpretation issues are now ready to be considered by the Pubs Code Adjudicator and his office. Perhaps she can give some indication of the scope and direction of where they can go and how much they can do in the matter of interpretation as well as whether she and her officials will continue to engage in these issues. If the code proves to be an impediment to how they are interpreted, is there a case for an early amendment to it? The Government have the option to bring forward amendments, so it would be useful to know in what circumstances they might be introduced—and certainly if doing so would address our more general considerations about the problems of companies gaming the system. Although I feel that this is less of a concern, it would still be useful to have some idea about it.
We would also be interested to hear the Minister’s observations about the concerns expressed by the Joint Committee, but as I say, they are less relevant. However, if they call into question the veracity of the code, they will be materially important. Indeed, we also have some concerns about the formula for a significant increase in price, but as that has gone through consultation, no one is feeling particularly happy. It seems rather ill-judged for us to suggest that that presents a problem.
On the issue of the size of the penalties, the Minister made a case saying that penalties for the most egregious examples would attract the highest amount likely to be imposed. Perhaps I may suggest that when she is suggesting that, it is important that we have some indication that because this is down to the discretion of the adjudicator, they could also impose the highest-possible penalty for something less important and egregious. It is only in those circumstances that the necessary message can be sent to companies to encourage them to change their ways and to make the potential impact of a material impairment of their financial results possible. You have to be willing to use a bit more stick rather than offer some sort of carrot. I have had a look at LTIP arrangements of the particular companies concerned and I do not think that unless the penalty is materially significant, it will even affect them. Many of these could continue to be conducted, so if the penalty was imposed only on its level of seriousness—there is a variety of ways in which that might be measured—that certainly would not have the impact that penalties probably should.
Could the Minister be very clear on the timings from now and from implementation? This instrument is certainly somewhat unusual in that it does not have
the usual delay, but it is very important that we get this moving as quickly as possible. We have always been concerned about the interregnum and what might happen, and it is very important that we ensure that the statutory instrument is enforceable on approval and that we get the strongest indication when that will be.
I will just return to the original point about the construction of the code striking a balance. I have looked at the interim results of two of the largest pub-owning companies over the last period, and it is very clear that the companies have decided to transform their businesses and been quite successful at it. Not only have they done that in relation to their overhanging debt—all have been able to deleverage their positions—but they have looked at different ways of operating their business and servicing their tenants, and all can report significant EBITDA improvements. The total number is slightly lower as a result of disposals, but it is certainly much improved, and they both have growing commercial letting operations. They now have commercial properties and report on the average rental that they are able to accrue on their estates: for Enterprise Inns the figure is £59,000, and for Punch Taverns it is £72,000.
Both companies devote some paragraphs in their most recent interim results to looking at regulatory changes. Both are able to stress that the changes they have made to their models, service contracts, pricing and to other aspects of their business are now highly advanced. Enterprise Inns says:
“We are confident that our strategic plan provides us with sufficient flexibility to accommodate this legislation and represents the appropriate response to its likely impact”.
Punch says:
“While the take-up of the MRO option will only become clear over time … our current expectations are that the majority of the estate will continue to operate under, and enjoy the benefits of the tied-drinks model”.
Their strategic response has made them ready. The industry has not just changed its models and operations but spent its time preparing for these sorts of changes.
That makes the case for two things: first, for a very speedy implementation, because there is not much time; and secondly, for the Government to keep a keen eye on this. Although a balance has been struck at this stage with what were quite rigid models, over the last period, the pub companies have responded not just to the regulatory changes but to the increased competition that they face from a variety of different forms of leisure activity on the high street and to the continuing problem for them of alcohol pricing and supermarkets. They have made sensible and decent responses which could, in their own words, assist them with reducing the potential impact of the MRO by providing much better options for tenants. In those circumstances, will the Government keep a keen eye on the code and make sure that the balance is not just enshrined today but considered over the coming two years on the basis of an ever-strengthening model of pub ownership?