Select Committee on Constitution Minutes of Evidence

Examination of Witness (Questions 229-239)




  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 governments—the European supranational level—and 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 countries—Britain, France, Germany and Italy—and 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 resignations—I 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 lengthy—longer 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 body—much 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 employers—a 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 operates—and 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 had—half 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 some questions.

Lord Acton

  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 that—particularly 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 rules.

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?".

Lord Elton

  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 Commission—the Competition Commission as it is now—in 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 correlation between spending and power. In terms of users, it 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 Britain—let 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 question—has 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.

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