Examination of Witness (Questions 229-239)|
WEDNESDAY 26 MARCH 2003
229. Our second witness this afternoon is Dr
Mark Thatcher from the LSE. This is slightly unusual for us in
terms of public evidence. We will have a presentation to us by
overhead projections. I should explain to Dr Thatcher that, by
our standards, this is very much high tech! Perhaps I could mention,
since this is on the public record, it would help if you were
able to explain as you go through the slides. Otherwise, just
appearing on the public record as, "Look at this" may
not be too helpful to subsequent readers. Perhaps I may hand over
to you now to provide the background and speak to the projections.
(Dr Thatcher) I will start by talking
for about 15 to 20 minutes to set some of the background and perhaps
go through some of the figures which I have gathered. I do appreciate
that you are looking at regulators in Britain, but I think that
it is important to see them in a wider context, both in Britain
and comparatively in Europe. I think that one needs to appreciate
that regulators form part of a general set of changes. Privatisation
is one of them. There is then the growth of supranational regulation,
which is very important indeed, notably by the European Community,
European Union, but also the WTO. This is a level of regulation
which is growing rapidly. It may be implemented by national regulators,
but quite a lot of our regulatory decisions and quite a lot of
the parameters are being set elsewhere. Then there is the issue
of how powers have been allocated between governmentsthe
European supranational leveland then between different
types of regulator, because you have sectoral regulators but you
also have general competition authorities. There are issues there
about where you place powers and where you place responsibilities.
The result of this is that we have a much more complex regulatory
game than we had before. We have governments in there, and they
remain crucial players, together with legislatures. We have incumbents,
who have not gone away and still have market power in most regulated
industries. We have a set of new entrants. Some of those new entrants
may be national; some of them may be European; some of them may
be from other countries, notably the US. We have the sectoral
regulators and the general competition authorities; we have international
bodies, the Commission, the Council, the WTO; also informal regulatory
groups, which are very important. They provide advice, guidelines
and learning. Often, you find that in each sector the regulators
that you are looking at form part of a pan-European network which
may be an informal network, meeting regularly, comparing notes,
practices and ideas. Then you have users, who themselves need
to be broken down. You have international companies, domestic
companies, and residential users. This broader framework is important
economically because you have firms, both as suppliers and as
users, who are increasingly international, and because law and
regulation is now coming from several different levels, not just
from the national level. Let me turn now to the focus of what
I will talk about, which is the independent regulators. The table
is particularly dense (Table 1), but its purpose was to
give you some idea as to how independent regulators have spread.
I have taken four countriesBritain, France, Germany and
Italyand you have there the dates of creation. First of
all, these have spread across all European countries. This is
no longer a British phenomenon. Secondly, they tend to have spread
earlier and to a greater extent in Britain than in other countries.
There is therefore a difference in terms of experience, but all
countries now have independent regulators, and that is a useful
comparator for us. Let me say something about what I have included
in here. One needs to make a distinction between a body that is
formally an independent body and one that is independent in practice.
I will look at the second aspect in a moment. In terms of formal
independence, I have used various criteria. First of all, is the
body given powers by law? Secondly, is its head removable at ministerial
wish or does he or she have a defined term of office? Thirdly,
is the body organisationally separated from a ministry? We have
many bodies which can be called an agency. Whether or not they
are independent in formal terms is another matter. Those were
my criteria, therefore, for separating out those which I regard
as independent regulatory agencies and those which I have not
included. That distinction is important in Britain. We have agencies
within Government departments. It is also important in other countries,
where they have called bodies "agencies" which are not
really independent. Let me turn to the next question, which is
how independent are they in practice? You may be called an independent
body; you may legally have independence, but in fact it is not
applied in practice. I should say that independency is a variable.
You can have more or less of it, both in formal terms and in practice.
It is not a straightforward, black-and-white issue. Getting at
the independence of agencies in practice is extremely difficult
methodologically. I have also sent an academic article which goes
into how and why it is difficult, but I will not deal with that
today. You are very welcome to ask questions, which should be
down over my data, but I have tried to collect some figures which
give us some idea as to whether or not these bodies are independent.
In the next slide (Table 2) the issue is in terms of whether
they are independent in practice. Do elected politicians choose
other elected politicians who might be thought of as less independent
than others, or do they choose different kinds of people? I have
taken two criteria. First of all, I have looked at what happens
if you count those who have stood for office either before or
after their term as a regulator. Then I have taken a slightly
wider criterion, of those who are publicly known to be affiliated
with a party. If we look at the first, we find that a small minority
of regulators have been politically active. Even in Italy it is
less than a quarter. If we take the broader definition, we find
that it is still a minority in three of the four countries but
not in Italy, which has the most politicised set of regulators.
Some of you may wonder why I have one out of 33 in the first and
zero out of 33 in the second. Sir Gordon Borry stood as a candidate
20 or 30 years ago. That is why we have the difference. With the
slight exception of Italy, we have a set of bodies whose members
are not politically active or even particularly politically affiliated.
In the second set of figures (Table 3)the resignationsI
tried to look at whether or not regulators have been forced out.
In the sample I have looked at there is no example of a regulator
being sacked, but there are lots of informal ways of forcing out
regulators. I thought that it would be interesting therefore to
look at what percentage of the regulators have resigned before
the end of their term. They might do so for many reasons, some
of which might be personal but some of which also might be policy.
The first line looks at all the regulators. Again, we see it is
a small minority. Most regulators do not resign before the end
of their term; they go to the end of their term. The second line
tries to deal with the fact that some regulators are very recent
and therefore their members have not had time to resign early.
It does not make much difference. Most regulators do not resign
early. That is reflected in the next table. (Table 4) shows
the average tenure of competition authorities. I took general
competition authorities because, in other sectors, many of the
bodies are more recent and therefore tenure does not have much
meaning. If you look at the body that has been created in 1997,
looking at the average tenure of its members really does not tell
you very much. If we look at this, we see that in all four countries
the average tenure is fairly lengthylonger than most governments
and certainly longer than most ministers. Given the movement of
senior civil servants, it is probably longer than most civil servants
in government ministries. This is therefore a set of people who
stay around for quite a long time, for quite a few years. One
would expect them to have built up a great deal of expertise and
experience. I then looked at resources of the agencies (Table
5), because one way in which you can get at the independence
of agencies would be stifle them of resources. I looked at general
competition authorities and telecoms regulators. I looked at their
expenditure and at their staffing. What we see here is that these
are relatively small bodies in terms of numbers and in terms of
money allocated to them. There are some exceptions. The German
telecoms regulator is a large bodymuch larger than Oftel
and with a much higher level of spending. Basically, however,
these are not bodies that have very much money. This may be a
government attempt to reduce their independence by starving them
of resources. It may also be that these bodies do not need that
many staff and do not need large budgets in order to be effective.
It may be that regulation is a relatively cheap activity in terms
of cash and money for regulators. That remains to be seen. It
certainly has implications for the capacity of regulators to enforce
regulation. The final table (Table 6) is about the use
of ministerial powers to overturn decisions. We hear a lot about
these cases. When the Government does not follow OFT advice about
pharmacies, it makes, if not headline news, at least the Financial
Times. The question is, is this representative? The answer
is no. These are exceptions rather than the rule. I looked at
both Germany, where the economics minister has the power to overturn
the competition authority and, in Britain, the OFT and the Monopolies
and Mergers Commission, now the Competition Commission. These
are really fairly rare events. That set of figures concerned a
relationship between elected politicians and regulators; but there
is another half to these relationships. Those are the relationships
between the regulators and the regulatees. That is the next set
of figures, (Table 7) There is an issue in academic literature
about what is called "the revolving door": a worry that
regulators go from regulatees to becoming regulators, off into
the regulated industries. There is a big debate as to whether
or not that makes regulators more or less independent and effective.
The traditional view was that the revolving door was rather dangerous.
You would get a regulator coming from a regulated industry and
that person would carry through with them a mindset, a set of
values, perhaps a set of social links, perhaps concern about their
former employersa lot of worries about propriety. Then
an equal worry about regulators going off into the regulated industries;
a concern that they have privileged information; that they have
informal links with the regulator; that they know how it operatesand
information is a very important factor. There is an alternative
point of view which says if you have experts from the industry,
they know where the bodies are buried. They have the expertise;
they have the capacity to follow through, and that where you stand
depends much more on where you sit than on your past or future
employment. I do not think we know which one of those is the better
view. I think that the first is one that is more publicly known.
This is very interesting because, when we look at the figures
here, we see that Britain is the exception. Britain takes a much
higher percentage of its regulators from the private sector, and
a much higher percentage of its regulators go off, back into the
private sector after they have been regulated. That may raise
a number of concerns. If one looks at other countries, one sees
that they tend to draw on a different group of people. Very typically,
in France and Italy they tend to draw on professors. Academics
do not have the same standing perhaps in Britain as they do in
those countries, but professori in Italy are an extremely
powerful group of people. That is not to say that they are politically
neutral, but it is to say that they come from a different background
and they also have a job to go back to; similarly in France. Britain
is an exception in those terms. I then looked at a couple of other
sets of data which might be of interest. The next one is merger
decisions by general competition authorities (Table 8).
What I wanted to do here was to get at how active are these bodies.
We hear about the politically and economically contentious cases,
but how representative are they? What percentage of decisions
are actually being vetted? When we look, we see that it is extremely
small. If we look at mergers and takeovers, the fact of the matter
is that the vast majority of these cases are simply never investigated.
We might think about why that is the case. It might be because
of a lack of resources. We saw that they had small budgets. It
may be that most of them can be passed through without any further
investigation. It may be that the regulators have been so effective
that companies do not ever dare transgress the rules, and so there
is no need to refer them. Certainly the figures show, however,
that only a very small percentage of merger and takeover decisions
are actually looked at by the competition authorities. In the
final set of data (Table 9) we try to get some sense
as to the public perceptions and public contact with the regulators.
One of the ways that regulators have tried to legitimise themselves
is by being much more transparent and offering information. It
is very difficult to get at this, partly because these are immensely
complicated technical issues. The capacity of a member of the
general public to understand the Oftel website is very small.
It is incredibly complicated. I was therefore a little surprised
by what I found. I looked at the number of website visits, which
is a very rough indicator, and I was surprised at just how many
visits they have hadhalf a million for Oftel. That is really
quite a lot. With some of the other regulators, we are talking
about tens and then hundreds of thousands of website hits. It
may be that the regulators share a website address with some more
sexy organisation and they have got there by accident, but it
does not look like it. It looks as if these bodies are attracting
a great deal of interest. That is a set of figures, if you like,
comparatively. It gives you some idea of Britain's place; where
Britain is an exception; where Britain is following, or perhaps
leading, a general trend. I would be happy to stop there and answer
230. This is a very narrow question. I am interested
in the telecom figures, where Britain, France and Italy are pretty
much in line with Germany, which is vast in terms of both money
and employees. As far as I can remember, Deutsche Telekom has
more or less gone bust anyway. I do not know if that is cause
and effect. Is Germany much better regulated? Can you say a little
more about that?
(Dr Thatcher) What happened was that they transferred
almost the entire ministry staff from the ministry to the new
regulator; in fact, the ministry was abolished and there is no
longer a telecoms ministry in Germany.
231. What do they do all day?
(Dr Thatcher) That is a very good question. I think
they have a larger staff in part because they have regional bodies.
They have regional offices. Whether or not they are actually employed
usefully is a good question.
Baroness Gould of Potternewton
232. You mentioned earlier the question of informal
regulating groups. To me, that is almost a contradiction in terms.
I wonder if you can say what is an informal regulatory group?
That is question number one. Question number two is completely
different. On Table 2 and party activism you say, on "percentage
publicly affiliated with party", none for Britain. I do not
know how you identify thatparticularly as you mentioned
Lord Borry earlier on, who is still politically affiliated.
(Dr Thatcher) Those are regulatory networks. These
are not secret as such. The regulators meet regularly. For instance,
there is an electricity forum which meets in Florence. There is
a forum of gas regulators which meets in Madrid. They usually
meet in nice places!
233. So, in a sense, "informal regulatory
groups" is shorthand for regulatory groups meeting informally?
(Dr Thatcher) Yes, but they have a form of linkage.
They have a website. These are not mysterious bodies and they
meet regularly. Going to your second question, that second line
of the table is difficult to draw. At which point do you say this
person is publicly politically affiliated and at which point are
they not? Looking at the evidence, I thought that Sir Gordon Borry
had remained politically very neutral during his time as Director
General for Fair Trading. That is why I did not count him in.
We could argue, but I think that the figures for Britain are pretty
clear. One might guess at the political views of the regulators,
but they are not publicly paraded. It is very different, say,
in Italy, where one person is clearly a person who belongs to
party X, another person has been nominated by party Y. They have
very clear affiliations.
234. That line refers to public affiliation
to the party during the period of their tenure as regulators.
(Dr Thatcher) Yes.
235. As a first answer to Baroness Gould, although
they come together almost in a formal way, they are not created,
if you like, by statute. There is no particular instrument that
sets up the bodies, and I presume that was the distinction that
was being drawn.
(Dr Thatcher) Yes, there are no legal rules or procedural
Baroness Gould of Potternewton
236. What do they do at these meetings? What
is the purpose of these groupings? Do they take decisions? What
sort of responsibilities do they have? Why do they meet?
(Dr Thatcher) I think it is much more nebulous than
that. Usually, European Commission officials are there. So they
are swapping information in both directions. They are saying to
the Commission, "This is what we would like to see. This
is what we think should be done". The Commission is passing
information to them. It is one reason why I started off with my
first slide. One needs to be aware of how the regulator game is
being played. It is not just being played within Member States;
it is being played between Member States, between certain actors
at the national level and at the European level.
237. Is that a good thing?
(Dr Thatcher) I think it raises issues of transparency.
It might give you better policies. They might well be swapping
best practices, but it certainly raises issues of transparency.
That is absolutely right. They are also learning from each other.
They say, "We have a problem with the cost of capital. How
do you do it?". Sometimes they are using the fora to try
to gain support for domestic changes. They can go back to their
governments and say, "This is how it is done in Britain.
In Britain they have a proper independent regulator. What are
we doing here? Why are we not a proper independent regulator?".
238. Can I ask you to comment on the difference
in the cost of general competition authorities in this country
and in France, Germany and Italy, and whether that is reflected
in any way in the experience of consumers or of providers?
(Dr Thatcher) There is a paradox here. In France the
Conseil de la Concurrence is not a particularly strong
body. It is becoming stronger but it is not nearly as strong as,
say, the Monopolies and Mergers Commissionthe Competition
Commission as it is nowin Britain. In Germany, however,
the Bundeskartellampt is an extremely strong regulator.
It is the main regulator; it has a long history and has been much
more significant than the regulators in Britain. In terms of their
power, therefore, your question is a difficult one. I do not think
that there is a straightforward answer. There may not be a straightforward
is very difficult.
239. These organisations are there to benefit
the users, are they not? It is therefore a question of some importance.
(Dr Thatcher) Yes. I am not sure I can answer the
question that directly, because I think you have to look at the
nature of the regulatory game. Let us take the country which I
know best, France, and compare it with Britainlet us say,
French telecom. You do not just have the ART in there; you have
the fact that France Télécom is still publicly
owned, a majority publicly owned; you have the political repercussions
of that public ownership, and you have the repercussions of past
years of investment. So, very typically, until fairly recently
I think I would say, French telecom users had a better deal than
British ones, because there had been much higher levels of investment.
More recently there has been a problem, in the sense that France
Télécom has had enormous debt through overseas
expansion. Whereas BT has had to deal with it in a private way,
France Télécom has had to deal with it in
part through turning to the state, because it is majority publicly
owned and they have not been able to privatise it. So in that
respect I think that users have had a worse deal. Prices have
gone up for certain things; France Télécom has
tried to recover some of its losses. If one were to look at some
of the other episodes, it is a good questionhas the user
had a better or worse deal? With 3G mobile, in Britain Oftel pushed
absolutely for competition and for gaining the maximum amount
of revenue. We have therefore had extremely expensive licences.
Only in Germany are they more expensive. In France the regulator
pressed to have lower-cost licences, and eventually that happened.
Is that better or worse for the consumer? I do not know. The taxpayer
has done well in Britain, but whether or not the high cost of
licences will damage 3G in Britain remains to be seen. In France
the taxpayer has done less well, but the lower cost of licences
may mean that its groups are better placed to roll out 3G and
to develop it.