Opinion: Saving the Pub – an opportunity for Liberal Democrats in Government

In September, the BIS Select Committee unanimously delivered a devastating verdict on the pubcos for the third time running and lambasted them for repeatedly breaking promises to change their business practices. They also found unambiguously that ‘the tie’, as operated by them, is unfair to licensees, many of whom can’t earn minimum wage despite healthy turnover figures; is bad for pub customers who are overcharged for a pint, due to the hugely inflated prices the licensee has to pay for beer; and it is closing pubs that need not and should not close.

The Committee found that, even after four damning reports in seven years, and having given the industry a period of fourteen months to change, self-regulation had failed, with the industry and the big companies simply not doing what was asked of them by the Committee and by Ministers to avoid intervention. Critically, none of the pub owning companies has introduced a genuine free-of-tie option with an open market rent review. Despite the Committee’s decision, the companies and their representative organisation, the British Beer and Pub Association (BBPA), have said that they will not do this.

The pubco business model is built entirely on a bubble of debt. In good times they gambled on extra borrowing based on inflated prices – the casino business model that has caused so much damage elsewhere. The current debt of Enterprise and Punch combined is £6.5 billion – that’s right, billion – against a property estate valued at little more and falling, just like their share prices. The pubcos had no capital, and no capacity for growth. Sound familiar?

The commonly held alternative to this market failure is to encourage growth rather than stifling it. The list of pubs that have thrived free of tie is growing fast. Entrepreneurial publicans, running pubs free of the racket that 30-60% higher wholesale drinks prices constitute, are turning round pubs that died under a pubco regime of no investment, short-termist management and Rachmanesque practices on lessees. Or as Nick Clegg himself put it, in simple, liberal terms, “I don’t like the big guys beating up the little guys”.

Take the Shurlock Inn. The only pub in a small village outside Reading, under Enterprise ownership it failed and closed. Faced with its loss and a change of use to housing, villagers rallied around. A group of them bought the pub, did it up and focused on good food and good local beer. The place is now thriving. But they are the lucky ones, as the pubcos sit on dead weight assets – increasingly hoping that a non-existent property speculator will show up. The Government’s Community Right to Buy proposals will help, to a very small degree; but they only scratch the surface.

My local publicans – tied and free of tie – reckon that free houses run around one-third cheaper than pubs leased from pubcos. The tie is a restraint of trade; at a time when the small/craft brewing sector is going from strength to strength, the pubco tied model is restrictive and anti-competitive. The excessive take of publicans’ earnings punishes those working for the pubcos and stifles enterprise.

Independent research shows that nine pubs close a week owned by pubcos, compared to five free-of-tie pubs; the research had to be commissioned to correct false claims made by the discredited BBPA – themselves slammed by the Select Committee, who described them as “impotent”. Their claim, believed by some, that the pubs closing were free houses not pubcos has been proved to be false.

When the brewers’ grip on pubs was removed some 20 years ago, nobody foresaw the creation of vast standalone corporations running pubs into the ground while riddled with debt. It’s estimated that 10,000 jobs a year are currently being lost through pub closures. Although the Government’s ‘one in, one out’ policy on regulation will not make this easy, actions must now surely follow the clear instruction of the Select Committee, combined with the stated willingness of our Ministers Vince and Ed to act on the Select Committee’s wishes. Critically, they must not allow the pubcos and BBPA to defy Parliament.

This is an opportunity to save a major part of the pub industry, save jobs and stimulate growth and entrepreneurship. It’s an opportunity that must not be missed.

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7 Comments

  • The Tap-Room, (a room that is only for men, swearing and smokers) It really should be considered and ought to be brought back especially when it is no different than the outside rooms provided now.

  • Andrew Duffield 5th Nov '11 - 8:13pm

    Fortunately, we already have a long-established policy to deal with the speculative rent-seeking of pubcos and similar parasitic property-based “businesses”, namely the replacement of UBR (paid by the tenant) with SVR (paid by the landowner irrespective of whether the site is let and incapable of being passed on as higher rent).

    Unfortunately, the huge potency of this policy to drive sustainable economic growth – simultaneously replacing deadweight taxation on genuine commercial business activities – remains too often unarticulated or ignored.

    Bizzare.

  • Andrew – how is SVR incapable of being passed on as higher rent. Surely you can just charge more rent?

    (and is it a bad thing for a landowner who is putting the land to profitable (in all senses of the word) use by renting it to something else to cover their taxation costs?)

  • Andrew Duffield 6th Nov '11 - 8:13pm

    Hywel – unless landlords are being uncharacteristically charitable and charging less rent than the market will bear it is indeed impossible to pass on SVR (LVT) to a tenant. Almost all economists accept this and have done since Adam Smith.

    Gareth – I know you support SVR, which is why I was surprised you didn’t mention it here – or presumably in your South Central motion. The corruption of capitalism begins and ends with the failure of government to recycle economic rent, sanctioning its continuing privatisation by the privileged and taxing productive enterprise instead – including the wages of publicans and the VAT on the pints they sell, with which we drown our collective sorrows.

    With SVR, many more pubs – beginning with the boarded up ones – would be back on the market asap, resulting in reduced selling prices and lower rents all round. Exactly the same benefits expounded by existing party policy. More pubs trading, more free houses, more competition, more cheery barstaff and less pricey pints. I’ll drink to that!

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