In The Loop: 12/01/09

Companies to get £2,500 for each long-term jobless recruit
"The government is to give firms that recruit people unemployed for more than six months "golden hellos" of up to £2,500, in a move that provides £500m to keep employers hiring.

The unexpected initiative, which will be announced at the government's jobs summit this morning, is the latest effort to tackle rising unemployment, which is predicted to hit 3 million by the end of the year. Last week, the skills secretary, John Denham, announced measures to increase apprenticeships by 35,000 and a system of internships to ensure students unable to find employment still find training." [Guardian]

Plans to increase Britain's gas storage capacity left in tatters by credit crunch
"Plans to build vital facilities to help Britain secure its energy supplies at a time of increasing fears about reliance on Russian gas are in doubt as a result of the credit crunch, energy groups warn.

Stag Energy says the credit crunch is making it harder to raise the £600m for the Gateway project to build a storage facility beneath the Irish Sea. It received planning permission for the project in November." [Guardian]

Click here to read more information on Mr Grimsdale, King Heron and Mobius

What Factors Account For The Pressure To Change Regulation From A “Command And Control” Approach To “Incentive-Based” Regulation?

In the UK the Conservative Government’s large levels of privatisation and its desire to introduce competition to many industries since the 1980s resulted in a wave of regulation in order to ensure competitiveness and welfare. Until recently there has been a slow but steady growth in regulation. However, there was a shift in Government opinion, following Labour’s publication of Modernising Government in 1999. Like many other countries the UK has now accepted that there may have been too much regulation in many areas and that a more relaxed system built upon strong incentives, rather than a more commanding and controlling approach would be optimum. This is because the cost of regulation was spiralling out of control, with very inefficient and uncoordinated policymaking, as a result of old and duplicative regulations. The recent shift has been a relief to many firms who have lobbied heavily to reduce the burdens put upon them in the hope of increased profits. Also, supra-national factors, such as institutions like the European Commission and the European Court of Justice and global competitiveness puts a further impetus for governments to search for alternatives to heavy handed regulation.

Despite the potential benefits of privatisation there has been the spectre of price fixing, lack of investment and the disenfranchising of the poor, as firms may reduce welfare in order to make higher profits. Consequentially the Government created regulators such as OFWAT (water) and OFGAS (gas) to monitor the privatised firms’ industries and place demands on them. Regulators had roles such as enacting price ceilings or investment requirements, encouraging competitiveness and preventing the socially disadvantaged from loosing their services. Regulation also extended to the public sector, with huge guidelines to inspect areas such as education and the NHS and the ability to make changes to correct faults.

However, there are many problems associated with such regulation. An OECD report concluded that “The regulatory task of designing a pro-competitive system of regulation based on the separation of potentially competitive and natural monopoly sections of this type of sector was an unfamiliar one for governments and presented enormous technical and economic difficulties.”[1] Regulation had grown too large, with regulators increasing their organisations excessively as a result of poorly thought out policies which often duplicated costs because of mutual and overlapping interests between regulators. In 1997 there were between 14,000 and 20,000 regulator organisations, with annual costs of between £750m and £1bn.[2] The costs of regulations can be so great that it reaches ten percent or more of GDP in some countries.[3]

An overburdened regulatory network can easily create incoherent and time-wasting policies as a result of complex and uncoordinated procedures. Over time it can get progressively worse. The OECD argued that regulation becomes more complex as “pressures to compete and to coordinate are imposed on regulators at the domestic level” and that it gets worse as governments don’t give enough “attention to reviewing, updating, and eliminating unnecessary or harmful regulation.” [4]

The most striking reform of regulation introduced by Labour was Modernising Government in 1999. In order to address the aforementioned concerns, which even Labour had been previously guilty of, there have been some streamlining of policies and a removal of many burdensome regulations to avoid duplication and enable more effective policy direction. This opinion is backed up by an OECD report in 1997 which found that “reducing red tape and government formalities can produce substantial payoffs in government efficiency and economic cost-savings.”[5] As a result there have been mergers of departments, such as the coordination of electricity and gas regulation and fire safety reforms have been unified so as to create one simple risk-based fire safety regime.

However, the move from the more aggressive style of giving demands to firms and public organisations to the “light touch enforcement of regulation”[6] is likely to be more effective. Described by Hood, James and Scott as an aspiration to combine “the iron fist of Draconian central interventionism with the velvet glove of self-regulation,”[7] it involves transferring the main thrust of legislative effort on areas of higher risk and underperformance and allowing areas of low risk or strong performance to have less stringent reviews. For example, in 1997 OFSTEAD (the regulator for education) allowed plans for less stringent inspection of the best performing schools. Also the savings from risk-based audit and inspection of local government by the Audit Commission was reported to save £24m in government expenditure each year.[8]

There has been stronger pressure from the business community than the Government for a relaxation of its heavy-handed approach to some industries, as they have a strong financial incentive for deregulation. For example, the Government suggested that licensing reforms alone could save businesses £1.9bn in costs in the first ten years and an annual saving of £6.5m in court costs dealing with business tenancy reforms.[9] In other countries it can be even more beneficial, such as Mexico where in the late 1990s it could take up to a year and a half to set up a business.[10] It is also believed that price regulation “can restrict competition, or in the case of a monopoly reduce the quality of service,”[11] which would affect levels of investment in the future. Galli and Pelkmans even went on to suggest that the gap in EU and US productivity was as a result of lack of enough incentives in regulation.[12]

There is a constant concern that some regulators get too heavily influenced by the firms they are in charge of. They fall into the regulatory trap, whereby the regulator ends up setting ineffective rules but protects the interests of some firms in the industry. Gabriel Kolko[13] even went on to suggest that US regulation originated in self interested demands by business groups for government action to stabilise market shares, prices and profits rather than in public spirited campaigns to curb those interests. The development of the capture idea may have helped to catalyse the deregulation movement, with captured regulators being described as weak enforcers, being self defeating bureaucrats failing to balance costs of compliance against regulatory benefits and often offering ineffective programme design.[14] For Hood it was surprising that such ideas had failed to strike a chord with the Government by 1994.

Growing economic and legal integration in markets such as the European Union as a result of the European Commission and the European Court of Justice have increased importance on governmental policy and as a result they have modified “the range of options that governments can realistically pursue.”[15] Recent initiatives to improve the regulatory environment in the European Union and creation of a more unified market include the Commission’s White Paper on European Governance in 2001, which outlined an initiative to establish a new, coherent regulatory impact analysis. The European Court of Justice’s ruling in the Cassis de Dijon case in 1979 meant that one Member State’s goods could not be prevented from entering another in the absence of compelling national policy grounds (such as consumer safety). Consequentially there is less heavy regulation over quality standards in some states compared to others as firms have the financial incentive to comply with European standards in order to avoid the possibility of being refused import of goods.

There is a claim that economic interdependence as a result of globalisation and economic integration in the EU would result in countries having to lower their regulatory standards in order to attract (and maintain) capital and highly skilled labour in what is described as a race to the bottom. Using the prisoners dilemma, whereby two governments would end up with the worst outcomes through attempting to counter each other Radaelli cites how “the jurisdictional competition creates a position where everybody is worse off.”[16]

However, this is only a small factor explaining why there may be a desire to deregulate and create more incentives for firms. Radaelli highlights how welfare does not wither away, nor get distorted (by regulatory competition) to the point of the welfare system collapsing. This is backed up by Garret[17] and Swank[18] who also concluded that regulatory competition does not create such a bidding war. Heriter[19] even claimed that in order to assist their own industries governments would attempt to raise European standards to their own level in order to raise the cost of foreign producers so that domestic firms would be more competitive.

Business has been highly influential and the most eager in pressurising the UK Government to reduce its interventionist regulatory style in favour of a more incentive based system which offers leeway to efficient and competitive firms and public authorities. However, for a long time much of this pressure had fallen on deaf ears and was seen by the Government as a simple desire to extract extra revenue or an attempt to capture its regulator. It was a while before the Government came to realise that although regulation is highly important and is probably its strongest tool it had gone too far and that it was affecting its ability to make coherent and effective policy and at a large cost, as well as creating hugely unnecessary costs on business. Supranational institutions such as the EU are creating a more level playing field and have encouraged the reforms further. However, the effect of the race to the bottom for competitive regulatory standards is quite limited.

This report was written by Jonathan McHugh in March 2005

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[1] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002. p100

[2] Quoted from Hood et al. Regulation Inside Government (Oxford University Press) 1999

[3] Quoted from OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002. p22

[4] Ibid. p109

[5] OECD Report on Regulatory Reform, Vol 2, (Paris) 1997

[6] Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.

[7] Hood, James and Scott, Regulation of Government: Has it Increased, is it Increasing, Should It Be Diminished? (Blackwell Publishers Ltd) 2000. p283

[8] Quoted from Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.

[9] Ibid

[10] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002.

[11] Baldwin and Cave Understanding Regulation: Theory Strategy and Practice (Oxford University Press) 1999. p189

[12] Pelkmans and Galli Regulatory Reform and Competitiveness in Europe, Vol. 1. (Horizontal Issues, Cheltenham) 2000:

[13] Kolko The Triumph of Conservatism (Free Press) 1977

[14] Hood Explaining Policy Reversals (Open University Press) 1994

[15] Radaelli The Puzzle of Regulatory Competition (Journal of Public Policy, Col 23, No 1) 2003. p5

[16] Radaelli The Puzzle of Regulatory Competition (Journal of Public Policy, Col 23, No 1) 2003. p5

[17] Garrett, G Partisan Politics in the Global Economy (Cambridge University Press) 1998

[18] Swank Global Capital, Political Institutions and Policy Change In Developed Welfare States (Cambridge University Press) 2002

[19] Baldwin and Cave Understanding Regulation: Theory Strategy and Practice (Oxford University Press) 1999. p151

Would running government more like a private sector business be a way of improving its performance?

Much has been made of the effects of private sector thinking and its application to the public sector. The scope of this influence has been felt in all areas of political life. From empty rhetoric to actual legislation and implementation and from areas as wide spread as health, prisons and the arts, the influence of the private sector has been massive. Hastened by the fall of socialism, both in the collapse of the communist bloc and by the retreat of socialism politically and academically in the west, the influence of private sector thinking looks as if it only stands to increase in the domain of western domestic politics.

The UK was, under the Thatcher governments of 1979 onwards, at the forefront of embracing private sector ideologies in running the state. What followed were a series of changes that resulted in the biggest shake up of the public sector for some time before and, to this day always.

Before this, Britain was in a stagnating crisis. Unlike the false memory being cultivated of pre-Thatcher Britain of happy communities it was in truth an era of muscular unions with disregard for the public. Consumers where treated with top-down, prescriptive contempt. The civil service was bloated and incompetent and the bureaucracies within its remit failed to deliver the most basic of amenities. Even the private sector was full of independently schooled and long lunched industrial managers who feared competition more than they feared the unions.[1]

The reform of the public sector by the conservative administrations after 1979 was centered on four main points of action; privatisation of state owned industries and services, the introduction of internal or quasi-markets in those sectors of provision which could not be covered by the private sector, the creation of executive agencies in the place of some of the existing bureaucracy (the Next Steps reforms) and the Citizens Charter, a legislative base for the enforcement of appropriate behavior from public services.[2]

These actions where based around, intellectually, Public Choice theory. Public choice theorists blamed the situation in 1970s on public bureaucrats pursuing their own interest and those of their office/department by expanding public services.[3] The solution, they beleived, was to extend the market place. This would allow citizens to become consumers and buy public services, rather than being prescribed them (through mechanisms like health care vouchers). The problem at the time and still experienced is some sectors now, was that the one department was responsible for policy advice, regulation of its sector, service delivery and any commercial trading functions. This meant that departments where setting and achieving their own targets, all under their own regulation, an atmosphere which could only have led to expanding infrastructure and cost, and tumbling standards of delivery.[4] They believe that bureaucracy should be slimmed down, activities returned to the private sector wherever possible and for the influence of the market to be built into systems of prevision where the pure market could not deliver.

Improvements of accountability were to be delivered by the changes too. In pre-Next Steps system, civil servants, especially senior ones, had nearly no accountability. Outside of the political system that elected members of parliament and with no threat of being fired like a private sector worker, the civil service seemed to nurture laziness, corruption and waste.[5] Reforms have come in various forms, mainly centred around the four above. These began with Thatcher but have been successfully continued since under Major and Blair.

The process of privatisation began in 1979 with the British Petroleum. BP already had some shares held in the private sector (done at the request of the IMF). The state sold another proportion of the shares in BP bringing the government’s stake below 50%. Now that the was a minority share holder and BP could behave commercially. Further more, as the government was no longer responsible for BP’s debts, any borrowing was no longer public.[6] The residual shares were sold of later and success of the privatisation of BP is a formality for the history books.

A significant case of the merits of conscientious privatisation was the sale of Vickers shipyards in 1986. It was bought by a consortium, lead by management, that included workers, local banks and residents of the local communities. The bid made was the second highest, to that made by Trafalgar House. The consortium bid was however believed to be the most beneficial for the stakeholders involved.[7]

The removal of power over these often centrally critical bodies from the government was certain to arouse controversy and opposition in groups that benefited from the current, central system. Further, public fear of losing their supply of services to something unknown can undermine efforts to decentralise. Ways around this where found by making the the success of the privatisation.

The simple truth is that since privatisation, most prices for utilities have risen bellow the rate of inflation except for in those sectors in need of massive reinvestment.[8] Regulatory bodies have succeeded in maintaining standards in the delivery of services by the private sector. Its is now also true that in privatised sectors the monopoly that may have remained immediately after privatisation has been eroded and competition in areas like utilities and telecommunications is continually increasing. Privatisation has, on the whole worked.

Privatisation is not always appropriate however. In areas where it was felt the private sector would not provide as well as the state, state provision has remained. To introduce the bottom up consumer inputs needed to redirect public services, features of the market have been introduced to areas of public provision. By creating a “purchaser provider split” in an internal market, consumer needs can be met yet the centrally funded service can be delivered “free at the point of consumption”.[9]

In the NHS currently, Primary Care Trusts (PCTs) purchase health care provision from NHS Trusts. Further more, those PCTs and NHS trusts that perform well[10] can be granted “foundation status” allowing far greater autonomy over their management. Despite the conservatives starting many of these reforms, the health service remained chronically under-funded. New Labour maintained and in fact consolidate the internal market and increased far greater competition between health care institutions in the form of published assessment of hospital performance. They also added to the reforms much needed funding to achieve the vast improvements in health care of recent years with ambitious led quality targets being met again and again by the NHS.

However, competitiveness can be dangerous in health care. Before funding was increased, under the competition based system of the conservative years, failing hospitals did just that, they failed. In the private sector, if business fails to achieve income and keep costs down it fails, is liquidised and a competitor takes its place. In areas where the private sector fails to provide, the public sector can not be allowed to fail.

Also, in a competition quasi-market, research has shown that hospitals can show more concern for meeting targets than providing the best quality care for all patients.[11] It didn’t conclude that competition itself was dangerous, but that hospitals should compete for quality, as they do now in league tables, than on price, as happened in the early 1990s. However, some still believe competition in the NHS is destructive:

“The whole concept of trying to raise standards by introducing competition between different parts of the NHS is stupid and damaging”[12]

Frank Dobson, Secretary of State for Health, 1997-1999

However, New Labour continues to reform health care in a direction led primarily, if not entirely on Public Choice theory.

Possible the most critical, private sector inspired, reform was also the least visible.

This essay was written by Jonathan McHugh in March 2005

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[1] Mathew Parris, The Times, 21.12.2002: http://www.timesonline.co.uk/article/0,,482-520219_1,00.html

[2] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:5-8 – Published by ASI (Adam Smith Institute)

[3] Greenwood, Pyper and Wilson, New Public Administration in Britain, Pg10, 3^rd Edition 2002 (First published 1984). Routledge

[4] Robert O’Quinn and Nigel Ashford. The Kiwi Effect. 1996: Adam Smith Institute

[5] Greenwood, Pyper and Wilson, New Public Administration in Britain, Pg10, 3^rd Edition 2002 (First published 1984). Routledge

[6] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:11 – Published by ASI (Adam Smith Institute)

[7] Dr Madsen Pirie, Blueprint for revolution 1993. Pg:14 – Published by ASI (Adam Smith Institute)

[8] Price increases since privatisation and before 1992, from Dr Madsen Pirie, Blueprint for revolution 1993. Pg:23 – Published by ASI (Adam Smith Institute):

Telecom: 17% against inflation of 50%

Gas: 20% against inflation of 40%

Electricity: In line with inflation

Water: 5% above inflation

[9] The NHS in particular has become somewhat of a “sacred cow” politically, with governments defending reform on the grounds of it not being privatisation. It is with the utmost vigour that the British public and the “establishment” believe that the NHS should be, as Aneurin Bevan created it, “free at the point of delivery”

[10] Performance is measured both financially and through ongoing assessment and accreditation schemes. These are much more focused on the quality of care patients receive.

[11] Research conducted by the university of Bristol, cited in a press release by the IPPR, 29.01.2003. It compared death rates from heart attacks in A&E between hospitals with and without competition. It found variation in rates between those with competition after the establishment of the internal market, ratyes being highest in those hospitals that had to compete.

[12] Taken from; Row over foundation hospital plam, BBC News, http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/health/4146181.stm