On closer inspection, by Jamie Cowling

10 Mar 05
As the political parties compete for the most radical cuts to red tape before the election, they are turning their magnifying glasses on to regulation and inspection. While a pruning is overdue, it will need to be done strategically, not just to save money, warns Jamie Cowling

11 March 2005

As the political parties compete for the most radical cuts to red tape before the election, they are turning their magnifying glasses on to regulation and inspection. While a pruning is overdue, it will need to be done strategically, not just to save money, warns Jamie Cowling

Panic. 'Pot Noodle Shocker'. Students from Cornwall to Caernafon spluttered over their morning Pot, as headlines about the carcinogenic effects of the illegal Sudan-1 dye whizzed around the world. Who would have thought Worcestershire sauce could be found in so many places? Thankfully, the Food Standards Agency. But what has this latest food scare got to do with the future of independent regulation?

The answer is that it hits at the heart of the fundamental challenge for regulators. How can we balance the need to maintain public trust in the system with the requirement for independent regulators to be both efficient and effective?

In many ways, this is the Goldilocks question for regulation – too much, too little, or just right? It is a conundrum that is unlikely to excite TV audiences enough to attack the prime minister any time soon. But it should. As the race to see who can cut the most red tape becomes a central theme of the election campaign, the question of the quango state is right at the top of the political agenda.

The rhetoric of slashing and burning is never far from politicians' lips when the purse strings are tight. While this is to be expected, there are signs that this time it's serious. There are more independent regulators and inspectorates than ever before. The problem is that while working out the cost of regulation is relatively easy, getting a hold on the benefits is fiendishly difficult. Nevertheless, the challenge of balancing efficiency and effectiveness with the need to maintain public reassurance in services is going to become more important, not less.

Both the Conservatives' James Review and the government's Gershon Review focus on shifting resources away from the bureaucrats and back to the Elysian fields of the front line. Even the independent regulators are getting in on the act themselves. James Strachan, chair of the Audit Commission, is positively messianic about cutting the burden of regulation. The commission's new move to 'strategic regulation' is expected to save £24m over the next two years.

But, as any public sector manager will tell you, this might be a tough task. A meticulous new report from the Centre for Policy Studies think-tank, The essential guide to British quangos, shows that far from there having been a bonfire of the quangos, 111 have been established since 1997. Not all of these have a regulatory function, but why does it seem that new regulators are to a politician like sweets to children?

There are three key drivers. The first is prosaic. Announcing the creation of a new body or task force, rather than deploying Whitehall to tackle a problem, provides a quick win. Something must be done and now it has. This is coupled with the trumpeted independence of the new regulator – it isn't tainted by party politics; it can be trusted to act in all citizens' interests.

The second is that, in many instances, independent regulators have been visibly successful in driving reform. For example, the National Audit Office and the Audit Commission are respected and justifiably proud of their reputations.

The third is the changing role of government from top-down provider of public services to an enabler of citizens and consumers that tackles market failures.

As regulation and inspection have become more common, taking stock of the costs and benefits of the regulators is overdue. Some economists argue that regulators have a tendency to 'gold-plate' regulation, as the costs fall on those being inspected not on the regulator themselves. This in turn leads to the private sector's never-ending calls to reduce the 'burden' of regulation. When the prime minister promised, in a speech to the CBI business lobby, that he would make regulatory reform the centrepiece of the UK's presidency of the European Union, it was probably the private sector he had in mind. But there are bigger wins to be had for public sector managers.

Managing the burden of regulation is a fundamental problem. Government has acknowledged this with the introduction of mandatory Regulatory Impact Assessments for the private, voluntary and community sectors (since extended to include proposals with a major impact on the public sector) and guidance to government departments on how to measure the costs and benefits of regulation.

It has also set up the Better Regulation Taskforce, which is trying to assess the cost of regulation as a proportion of gross domestic product, as they do in the US and the Netherlands (for both countries, it is approximately 10–12%). Another recent idea from the task force has been the proposed one-in, one-out system. For every new regulation, you need to cut another. While much of this work is traditionally of greater interest to the private sector, the signs are that government is applying private sector thinking to public services.

But the real impetus for slashing public sector regulators has come from the government's own efficiency review. Politicians realise that they cannot demand billions of pounds worth of savings from departments, yet allow inspectorates and regulators to multiply and spend with such abandon.

Health Secretary John Reid, like Alan Milburn before him, was said to be apoplectic when he discovered that each NHS hospital answers to more than 40 'regulators'. As a result, the Department of Health is leading the urge to merge across government, with a 50% cut planned in the number of arm's-length bodies. The department expects £500m in efficiency savings and will demand further cuts from the merged bodies. The prime minister has personally ordered a cut of up to 50% in the burden of inspection across public services.

Central government realises that joined-up services must mean joined-up regulation. It is actively pursuing a proposal to merge more than a dozen public sector inspectorates into just four – for health and social care; criminal justice; local government; and education. Ofsted and the Commission for Social Care Inspection (CSCI) will be working together in the future as part of the new Every Child Matters programme.

David Walden, director of strategy at the CSCI, says that this will benefit users as well as cut costs. 'If inspectors operate in their silos, they will capture only a slice of what happens to the users, not their full experience.'

But the move towards better partnership working is not limited to children's services. The CSCI, Ofsted, the Healthcare Commission and the Audit Commission are all edging towards greater partnership working.

The Audit Commission is moving fastest to try to prove that better regulation need not mean more regulation. The commitment to strategic regulation is about to kick in (see box). This will lead to an as-yet-unspecified reduction in the number of inspections and the loss of around 50 commission staff. Chief executive Steve Bundred says: 'The previous focus over-emphasised the quality rather than the value-for-money element of regulation.'

Simon Milton, chair of the Local Government Association's improvement board, welcomes the move but sounds a cautionary note: 'The jury is still out, none of this has been implemented yet.' Nevertheless, there is agreement that the commission is committed to confounding the cynics who believe in the inevitability of increasing regulation.

The problem is that, in the heat of a general election campaign, politicians go for the blunt instrument rather than the stiletto of regulatory reform. There is little doubt that some regulators are more equal than others and some functions could and probably should either be transferred to other bodies or abolished. A review should be a top priority for any government following the general election.

But just merging boring old regulators into a new body with a fancy logo isn't going to be the solution. 'Fewer regulators might just impose the same burdens,' Walden points out. It is also far from clear that mergers always cut costs. Ofcom, the newly converged communications regulator, currently costs more than the five regulators it replaced. Simply establishing targets for speed of process (ie, cutting red tape) can have perverse consequences by undermining public trust in the regulatory system.

For example, there is concern that the US Food and Drug Administration failed to test the drug Vioxx adequately in its rush to hit its target. The antiarthritis and pain relief drug was voluntarily withdrawn by maker Merck after it found evidence of increased risk of heart attacks and strokes. And, with public anxiety about health hazards such as the hospital superbug MRSA running at an all-time high, ministers can't afford to be accused of letting inspectorates take their eye off the ball.

Compounding the problem of value-for-money in regulation is the difficulty of establishing sufficiency without excess. As London School of Economics professor Tony Travers has argued, measuring value-for-money in public services such as the NHS is tough. It is similarly very difficult to measure the benefits of the regulation and inspection process itself. In a classic understatement, the Treasury's guidance, Assessing the costs and benefits of government inspection activity, states that measuring the benefits is a 'more difficult and challenging task'. Success is often measured by an absence of something: whether poor councils, infected hospitals or dishonest democracy.

However, arguments about the burden of regulation can mean little to public sector managers. To the government, regulation is a technical term that means a statutory instrument, for the public sector it is synonymous with audit, inspection and paperwork. The real prize when seeking to reduce its burden is a culture change in the regulators themselves and in the behaviour of inspectors. Milton says that just having 'fewer regulators is ultimately irrelevant. From a customer perspective, it doesn't matter who pays their wages, everything depends on the quality of the inspector.'

The Audit Commission agrees. 'The classic categorisation of the past is inspectors saying what's gone wrong,' says Steve Bundred, rather than how to put it right. Bodies will need to do more to regulate themselves, with the regulator retaining a great big stick, or 'backstop powers of enforcement'. The process itself will use more peer review and self-assessment where possible. The regulators' role will become one of helping to transfer best practice from the good to the bad and the plain ugly.

According to government strategists, lessons from elsewhere around the world suggest that in managed markets, such as health and education, where failures are so endemic that the disciplines associated with a competitive market will never be present, regulators become more important, not less. The old assumption that government and professionals know best has sensibly given way to a customer-focused model. But there is recognition that citizens need independent, high-quality information to make informed choices. This is the regulators' emerging role for the future. No longer just to enforce targets and secure minimum standards but to provide independent information to citizens in managed markets.

The best way to answer the Goldilocks question is through public scrutiny and accountability. Given the increasing importance of the regulators, their boards need to be held to high standards of accountability. These should adopt the CIPFA Good Governance Code (and Regulatory Impact Assessments) on a 'comply or explain' basis. The lines of accountability upwards for regulators are often blurry: some are to Parliament, some to the secretary of state, some to the Crown – and some, like former rail regulator Tom 'l'etat c'est moi' Winsor, feel accountable only to themselves. These need to be clarified.

The focus on the customer should mean a commitment to openness and transparency to members of the public. But, just as with Parliament, being open isn't enough – you need someone to watch over you. Some regulators have independent consumer panels and these are one way of ensuring that the public's voice is heard in the boardroom. Best of all is the truly independent scrutiny provided by interested citizens and the media. Citizen interest groups such as Ofcomwatch.co.uk can play an important role.

Getting the regulatory reform right is essential to the success of public services in the future. While everyone agrees on the principles of better regulation, the problem is in the implementation. What the next occupants of Numbers 10 and 11 need to realise is that merging bodies and cutting budgets and staff in a race to the bottom line will not deliver better public services or even Pot Noodle without a clear strategic overview.

Jamie Cowling is a research fellow at the Institute for Public Policy Research


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