Institutional Development, Regulatory Structures and

the Better Regulation Agenda

Paul K Gorecki (paul.gorecki@esri.ie)

ESRI & TCDPS6: Economic & Legal Aspects of

Competition & Regulation

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?

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

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

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%; 5th decile, 8%; richest decile, 0%.

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

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.

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

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

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

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)

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.”

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

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)

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

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

Why Regulate? Market Failure

Inadequate provision of information

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

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

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

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)

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’.

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

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

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

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)

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 +

Why Regulate? Public ChoiceTaxi License Value, Dublin

Year19801985199019952000

Value € 1980€ 4,400€ 5,100€ 26,000€ 37,400€ 42,300

3 Questions/2 Approaches

Public ChoiceQ1 Why? Political

benefits> costsQ2 Which instrument?Regulation/competition;

not budgetaryQ3 Consequences?Concentrated groups

benefit, benefits ephemeral

Welfare EconomicsQ1 Why? Market failure

Q2 Which instrument? Preference for more transparent

Q3 Consequences?Facilitates recovery,

improves welfare

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

Independent Regulators: Why?

Independent Regulator cp to Minister 1. Reduces conflict of interest. Minister is

politician, regulator, & owner (sometimes).2. Lessens regulatory capture.3. Pre-commitment - creates greater regulatory

certainty (esp. for large irreversible investments, with sunk costs)

4. Transparent & procedurally fair

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

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)

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.

Why Greater Political Control of Regulators?

Two Sets of Reasons1. Independent regulators are anomalous

- Ireland centralised State- executive control- taxes

- Need to rein this exceptionalism under greater political control

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.

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).

Conclusion: Better Regulation?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

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?

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