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


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
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Why are we interested in regulation?
Major regulatory developments

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What is regulation?
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Economic vs social
Why regulate?
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Mid-1990s onwards
Welfare economics/market failure
Public choice/regulatory capture
How regulate?

Minister vs independent regulator
Why Are We Interested in Regulation?
#1

Regulation & competition boundary
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Ex post (competition) vs ex ante (regulation)
Boundary changes (e.g. retail electricity prices)
Regulation more resource intensive
Complement and/or substitute
Instrument Choice

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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)
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For competitiveness (non-traded sector feeds
through to traded sector)
For consumers especially lower income groups
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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

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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
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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

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Regulatory function: shift from Ministers to
Independent agencies
Greater transparency in regulatory decisionmaking
Liberalisation of certain sectors: taxis,
pharmacies, retail electricity, professions
External Influences
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EU
OECD
EU-IMF
What is Regulation?

Economic or Direct Regulation
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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
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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

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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
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Greenhouse gas emissions, other air
pollutants, water pollutants
Various local disamenities like noise,
smell, congestion
Market power/monopoly
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High prices & inhibits innovation
Why Regulate? Market Failure

Inadequate provision of information
Why Regulate? Market Failure

‘Destructive’ or ‘Over’ Competition
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Structurally competitive markets
Service quality suffers due to excessive
competition and low returns

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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
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‘Over-competition’ leads to lower quality of service
Not all areas well served esp. rural areas
Solution
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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
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Dramatic reduction in new pharmacy opening
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No evidence quality improved
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Annual average net change in # pharmacies
1991-1995, 1.51%;
1996-2001, 0.71%;
2002-2007, 4.47%
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
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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?
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No evidence of over competition – on the contrary
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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

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Entry controls did not solve the quality and lack of
rural pharmacies
Better alternatives exist:
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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
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Carefully specify and inspect the rationale
Choose appropriate intervention form to resolve problem
Why Regulate: Market Failure?
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Public good
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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?

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Direct provision
Tendering
Why Regulate? Public Choice
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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
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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 Choice
Taxi License Value, Dublin
 Year
 Value € 1980
 1980
 € 4,400
 1985
 € 5,100
 1990
 € 26,000
 1995
 € 37,400
 2000
 € 42,300
3 Questions/2 Approaches
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
Independent Regulator: Definition
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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
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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?
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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?
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
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?
1.
Two Sets of Reasons
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 government
OECD-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
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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