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Institutional Development, Regulatory Structures and the Better Regulation Agenda

Institutional Development, Regulatory Structures and the Better Regulation Agenda. Paul K Gorecki (paul.gorecki@esri.ie) ESRI & TCD PS6: Economic & Legal Aspects of Competition & Regulation. Some Regulatory Issues Hitting the Headlines.

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Institutional Development, Regulatory Structures and the Better Regulation Agenda

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  1. Institutional Development, Regulatory Structures and the Better Regulation Agenda Paul K Gorecki (paul.gorecki@esri.ie) ESRI & TCD PS6: Economic & Legal Aspects of Competition & Regulation

  2. Some Regulatory Issues Hitting the Headlines • Are taxi fares too low? Is regulation failing to provide proper returns? Should the regulator cap the number of taxi licences? Should only ‘full time’ cabbies be licensed? • Are supermarkets too powerful? Should they be regulated? Should there be a Code of Practice that regulates the relationship between supermarkets and suppliers/farmers?

  3. Structure of Lecture • Why are we interested in regulation? • Major regulatory developments • Mid-1990s onwards • What is regulation? • Economic vs social • Why regulate? • Welfare economics/market failure • Public choice/regulatory capture • How regulate? • Minister vs independent regulator

  4. Why Are We Interested in Regulation? #1 • Regulation & competition boundary • Ex post (competition) vs ex ante (regulation) • Boundary changes (e.g. retail electricity prices) • Regulation more resource intensive • Complement and/or substitute • Instrument Choice • Tax, regulation, direct provision, property right • Costs and benefits of each

  5. Why Are We Interested in Regulation? #2 • Important sectors of the economy are regulated (e.g. energy, transport, professions, telecommunications) • For competitiveness (non-traded sector feeds through to traded sector) • For consumers especially lower income groups • Fuel poverty defn: spending on heat and light accounts for at least 10 % of household income. • Incidence of fuel povery by household income decile • Poorest decile, 61%; 5thdecile, 8%; richest decile, 0%.

  6. Major Regulatory Developments • 1990s +: independent regulatory authorities (e.g.CER, 1999, ComReg, 1997, CAR, 2001, Taxi, 2004, NTA, 2009) • 2000, Governance & Accountability in the Regulatory Process, D/Public Enterprise– relationship between reg. agencies & government. • 2001, Regulatory Reform in Ireland, OECD – major report that recommended sweeping changes in regulation

  7. Major Regulatory Developments cont’d • 2002, Towards Better Regulation, D/Taoiseach – approach to evaluating & screening regs • 2004 + Competition Authority profession reports – engineers (2004); architects (2006); dentists (2007); lawyers (2006); vets (2008) and GPs (2009 & 2010). • 2009, Review of the Regulatory Environment, EIU – better oversight needed of regulators, CER/ComReg merge; independent regulation affirmed.

  8. Major Regulatory Developments cont’d • 2008 Banking crisis (Honohan Report 2010) • 2009 Government Statement on Economic Regulation, D/Taosieach, increase accountability of economic regulators to Ministers • 2010 Better Regulation in Europe: Ireland, OECD – review of progress on regulatory reform – some progress, but low priority, not enough buy in by Departments, BRU lack power to ensure RIAs undertaken

  9. Major Regulatory Developments: Implications • Regulatory function: shift from Ministers to Independent agencies • Greater transparency in regulatory decision-making • Liberalisation of certain sectors: taxis, pharmacies, retail electricity, professions • External Influences • EU • OECD • EU-IMF

  10. What is Regulation? • Economic or Direct Regulation • Regulate important economic variable – price (eg taxis, airport charges, postal rates); investment (eg network utilities), entry (eg radio & TV licenses) • Industry or sector specific • Consumer welfare focus objective, sometimes also promoting industry (e.g. financial sector, airports) • Often combined with public ownership (eg ESB, etc in energy, An Post in postal, DAA in airports) • Regulation & industry structure

  11. Conflicting Regulatory Objectives? • Central Bank & Financial Services Authority of Ireland: “One of the statutory objectives of the CBFSAI was to promote the development of the financial services industry in Ireland (but in such a way as not to affect its objective of contributing to the stability of the financial system)” Honohan Report). (Prior to financial crisis)

  12. Conflicting Regulatory Objectives? • Aviation Regulation Act 2001 s. 33 Objective of regulator in making determinations, “… shall aim to facilitate the development of cost-effective airports which meet the requirements of users …” • State Airports Act 2004 s. 22 adds “… to enable Dublin Airport Authority to operate and develop Dublin Airport in a sustainable and financially viable manner.”

  13. What is Regulation? • Social or New Regulation • Broad social objectives • Health and safety (eg consumer product, occupational, transportation etc) • Environmental (eg air & water pollution, land use, mining) • Fairness (eg consumer protection) • Cultural (eg programme content) • Regulations apply to many sectors • Regulation affects conditions under which goods & services produced and sold

  14. What is Regulation? • Implementing Social Regulation • Information disclosure (eg food labelling; financial disclosure) • Quantitative limits (eg GHG; pollution in water supply) • Attributes of a good or service (quality [eg, pharmaceutical licensing for safety and efficacy], availability [eg minimum coverage health insurance]) • Conditions of Sales or Employment (eg min wage legislation, hours of work, min vacation, antidiscrimination laws)

  15. Why Regulate? • Two views • Welfare Economics - Market failure • Seeks to where regulation ought to occur so as to improve welfare • Where does the market fail? • Necessary but not sufficient conditions since costs of intervention and government failure • Public Choice • Seeks to explain pattern of regulation by applying economic tools (eg demand & supply) • Regulation is treated as a good like any other

  16. Why Regulate? Market Failure • Externalities or Spillovers • Greenhouse gas emissions, other air pollutants, water pollutants • Various local disamenities like noise, smell, congestion • Market power/monopoly • High prices & inhibits innovation

  17. Why Regulate? Market Failure • Inadequate provision of information

  18. Why Regulate? Market Failure • ‘Destructive’ or ‘Over’ Competition • Structurally competitive markets • Service quality suffers due to excessive competition and low returns • Substantial excess capacity • Rigidities retard reallocation of labour & capital • Distinguish cyclical vs structural decline in demand • What is appropriate response – restrict entry and/or product standards

  19. Why Regulate? Market Failure • Case Study: Pharmacy Services, 1996-2001 • Rationale for regulation • ‘Over-competition’ leads to lower quality of service • Not all areas well served esp. rural areas • Solution • Entry where definite public need. • Catchment area new pharmacy urban = 4000 persons • Min distance between pharmacy urban = 250metres • New pharmacy not have an effect on profitability of existing pharmacies • Appeal mechanism

  20. Why Regulate? Market Failure • Outcome • Dramatic reduction in new pharmacy opening • Annual average net change in # pharmacies • 1991-1995, 1.51%; • 1996-2001, 0.71%; • 2002-2007, 4.47% • No evidence quality improved • Why spend more time on patient care? • No monitoring or contractual specification of quality expected • No increase in rural pharmacies

  21. Why Regulate? Market Failure • Capital value of a pharmacy increased by 40 to 60 per cent • Reflects Growth in Demand • Annual average increase in cost of GMS medicines • 1991-1995, 4.88%; • 1996-2001, 10.5%; • 2002-2007, 11.9% • Estimate of increase in capital value of a pharmacy • Survey pharmacists • Event study (pharmacy chain - €152 m to €110 m)

  22. Why Regulate? Market Failure • Regulation of Pharmacy Entry: Does it Stack Up? • No evidence of over competition – on the contrary • High prices & mark ups by EU standards • No sudden rush of entry • No decline in demand • Other existing controls on entry (limited university places and entry of foreign educated pharmacists) • If anything pharmacy in the early to mid 1990s was stable, profitable and growing; not suffering from ‘overcompetition’.

  23. Why Regulate? Market Failure • Entry controls did not solve the quality and lack of rural pharmacies • Better alternatives exist: • Quality • Contract specification by HSE • Pharmaceutical Society of Ireland • Pay premium where a pharmacy desert to resolve issue of lack of pharmacies in rural areas • Conclusions • Carefully specify and inspect the rationale • Choose appropriate intervention form to resolve problem

  24. Why Regulate: Market Failure? • Public good • Non-rivalry – consumption by A does not affect consumption by B, or C … • Non-excludable – cannot excluded a person from consumption of the good • Eg lighthouse (?), defence, air, free to air TV. • Is regulation the relevant instrument of intervention? • Direct provision • Tendering

  25. Why Regulate? Public Choice • Politicians max: likelihood election • Propositions: • Protection will favour concentrated not dispersed groups • Protection awarded where information costs high for victims & low for beneficiaries • Taxation by regulation

  26. Why Regulate? Public choice Transfer from consumers to certain groups • Capital value of licence: circa 2000 • Eg taxi = €101,000; pubs = €140,000; pharmacies = 40% increase in value • Price • Airlines regulation raised prices 18-33% • Cartels • median est 25% price increase (N=770 estimates)

  27. Why Regulate? Public Choice Regulatory protection tends to be long lasting • Road freight 54 yrs • Taxis 22 yrs • Airlines 54 yrs • Cement 67 yrs • Pharmacies 6 yrs • Bus – Dublin 78 yrs + • Pubs 99 yrs +

  28. Year 1980 1985 1990 1995 2000 Value € 1980 € 4,400 € 5,100 € 26,000 € 37,400 € 42,300 Why Regulate? Public ChoiceTaxi License Value, Dublin

  29. Public Choice Q1 Why? Political benefits> costs Q2 Which instrument? Regulation/competition; not budgetary Q3 Consequences? Concentrated groups benefit, benefits ephemeral Welfare Economics Q1 Why? Market failure Q2 Which instrument? Preference for more transparent Q3 Consequences? Facilitates recovery, improves welfare 3 Questions/2 Approaches

  30. Independent Regulator: Definition • Senior appt’s by Minister on merit after open competition (eg Competition Authority) • Very narrow grounds for removal (eg ill health, stated misbehaviour) • Appt for a number of years (eg 5 to 10) • Clear internally consistent regulatory goals • Impartial reasoned published decisions • Secure funding • Minister’s role – policy directives

  31. Independent Regulators: Why? Independent Regulator cp to Minister • Reduces conflict of interest. Minister is politician, regulator, & owner (sometimes). • Lessens regulatory capture. • Pre-commitment - creates greater regulatory certainty (esp. for large irreversible investments, with sunk costs) • Transparent & procedurally fair

  32. Government Statement on Economic Regulation Accountability vs Independence • Regulators to take into a/c Gov’t’s “changing priorities”, thus “addressing the need for greater flexibility in the regulatory process in the light of changing global markets and economic and technological conditions.” • Annual Economic Forum gov’t can “communicate evolving priorities” • Greater gov’t oversight of regulators

  33. Gov’t Statement: Consistent EIU Report? EIU Background Report • “The independent status of the regulators is a strength and should be retained. Any attempt to change this would undermine regulatory credibility” (p. 12). • Ministerial Policy Directives “not invoked as a pretext for influencing or changing regulatory decisions” (p. 4). • “We recommend that the independent status [of the regulators] remain unchanged.” (p. 163)

  34. Gov’t Statement: Consistent With EU Directives? EU Energy & Telecom Directives • Stress independence of regulators • National regulators “do not … take instructions from any government when carrying out the regulatory tasks.” Electricity Directive.

  35. Why Greater Political Control of Regulators? Two Sets of Reasons • Independent regulators are anomalous - Ireland centralised State - executive control - taxes - Need to rein this exceptionalismunder greater political control

  36. The tax burden share by level of governmentOECD-30, as a proportion of total taxation revenue, 2003 Note: For a large number of countries, the OECD has not allocated a large proportion of social security contributions to any particular level of government. For the purpose of this analysis, these contributions have been assigned to the national government. Consequently, caution should be exercised in interpreting these data. Source: Australian Treasury estimates reported in Warburton, R.F.E. and P.Hendy, 2006, International Comparison of Australia’s Taxes, Canberra: Commonwealth of Australia.

  37. Conflict with Social Partnership Model • Social partnership interest group accommodation model of economic governance. • Trade-offs, opaque process • Regulators complicate delivery by gov’t • Eg Re-profiling electricity prices “is not without risk, as it deviates from established regulatory process creating market uncertainty and introducing unpredictability into regulatory decisions” (CER, 2009).

  38. The regulatory system in Ireland is seen as accessible and agile and part of the country’s positive environment for business.  It needs to be continually adjusted to reflect the changing markets, new technological developments, the climate change agenda and international regulatory environment.  It must also support new and green technology and industries in line with the Government’s Framework for Economic Renewal (Building Ireland’s Smart Economy).“ Press Release, 26/02/2010, Annual Forum Mtg Regulators & Government Conclusion: Better Regulation?

  39. Some Regulatory Issues Hitting the Headlines • Are taxi fares too low? Is regulation failing to provide proper returns? Should the regulator cap the number of taxi licences? Should only ‘full time’ cabbies be licensed? • Are supermarkets too powerful? Should they be regulated? Should there be a Code of Practice that regulates the relationship between supermarkets and suppliers/farmers?

  40. Taxi Issues • Why regulate? • Taxi rank Vs pre-booked • What regulate? • Record since liberalisation in 2000 • Taxi representatives criticism of regulation • Insufficient enforcement of standards • Earnings too low • Need to maintain standards • Solution recommended by taxi representatives • Limit entry, full time drivers only

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