the rise of regulation of the public sector in the united kingdom

The rise of regulation of the publicsector in the United Kingdom

La montée en puissance de la régulation du secteurpublic au Royaume-Uni

Oliver James

Department of Politics, School of Historical, Political and Sociological Studies, University of Exeter,Exeter EX4 4RJ – UK

Abstract

Governments not only regulate business and society but also themselves in the form of regulationof publicly owned and/or funded bodies. Regulation of the public sector involves regulators operatingat arms-length from those they regulate using systems of standard setting, monitoring and enforce-ment. In the past three decades in the UK, regulation has become increasingly important both interms of absolute resources devoted to the activity and relative to other forms of control (particularlyself-control by public sector professionals and control within large integrated bureaucratic struc-tures). These trends have, in part, been fuelled by executive politicians’ attempts to control publicservices and demands from citizens and users for better quality and efficiency. In the past decade,more explicit and extensive review of regulation of the public sector has been undertaken. Whilst notas developed as private sector Regulatory Impact Analyses these reviews have promoted the use oftechniques including regulatory enforcement pyramids and risk based regulatory approaches. — Spe-cial issue: New patterns of institutions.© 2005 Elsevier SAS. All rights reserved.

Résumé

L’État exerce un pouvoir de régulation sur le commerce et sur la société mais également sur sespropres institutions. Grâce à l’élaboration et à l’application de normes, les personnes qui exercent cepouvoir dans le secteur public gardent leurs distances avec ceux qui font l’objet de leur régulation.

E-mail address: [email protected] (O. James).

Sociologie du travail 47 (2005) 323–339

http://france.elsevier.com/direct/SOCTRA/

0038-0296/$ - see front matter © 2005 Elsevier SAS. All rights reserved.doi:10.1016/j.soctra.2005.06.011

Pendant les trois dernières décennies, le pouvoir de régulation au Royaume-Uni s’est accru par rap-port au niveau absolu des ressources engagées et aux autres formes de contrôle (notamment le con-trôle du secteur public par ses propres professionnels et le contrôle interne des grandes bureaucratiesintégrées). Ces tendances se trouvent renforcées, d’un côté, par les tentatives des hommes politiquesqui cherchent à contrôler les services publics et, de l’autre côté, par la pression des citoyens et desutilisateurs pour l’amélioration de la qualité et de l’efficacité de ces services. Un bilan des activités derégulation dans le secteur public pendant la dernière décennie a été dressé. Si ce bilan n’est pas aussiélaboré que les Regulatory Impact Analyses conduites dans le secteur privé, il a néanmoins favorisél’emploi de certaines techniques, dont les pyramides d’application des régulations, ainsi qued’approches fondées sur la prise en compte des risques. — Numéro spécial : Les nouveaux formatsde l’institution.© 2005 Elsevier SAS. All rights reserved.

Keywords: Regulation; Public sector; Administrative reform; New public management; Executive agencies; Per-formance targets; Political control; Bureaucracy; Civil service

Mots clés : Régulation ; Secteur public ; Réforme administrative ; Gestion publique ; Contrôle politique ; Bureau-cratie ; Administration publique ; Royaume-Uni

The term regulation is used in a variety of ways in the context of public and privatesector activity.1 Broad definitions are sometimes synonymous with control -the activity ofkeeping the various elements of a system within some set of desired states. However, nar-rower definitions define regulation as a specific form of control that uses rules or standardscombined with monitoring and enforcement activity as a mechanism of control. Often,some form of collective public or formal state based legitimacy for regulation is taken to bea defining feature of regulatory activity but it is not always seen as top down or imposed bythe state. Much attention has focused on self-regulation by organisations involving someform of voluntary co-operation, although usually in the context of public or state interest inthe activities. This article draws on a developing literature which suggests that regulation ofthe public sector, or regulation inside government, is growing in significance in the UK(United Kingdom).2 Regulation is defined relatively narrowly as having three elements.First, the existence of a ‘regulator’ public administration unit (as opposed, for example, toa court or legislative body) with some form of public mandate for its activities. Second,arms length regulation by the regulator based on regulatory standards using monitoring andenforcement action. Third, a degree of organisational separation (of budget, staff and man-agement structures) between the regulator and regulated body.

The features of regulation of the public sector are institutions in two main senses. First,in a formal sense, as officially mandated standards with regulatory bodies monitoring andenforcing standards for those they regulate. Second, in an informal sense, as patterns of

1 Regulation is sometimes used to mean the institutional forms, such as societal norms and patterns of strategicconduct, that seek to contain social conflicts in a capitalist society (Aglietta, 1979), but it is not used in this generalsense here.

2 The literature on regulation of the public sector, on which this paper draws heavily, includes (Hood et al.,1998; Hood et al., 1999; Hood et al., 2000; James, 2000; Boyne et al., 2002; James, 2003; Hood et al., 2004;James, 2004).

324 O. James / Sociologie du travail 47 (2005) 323–339

norms of activity by regulators, regulated bodies and others who participate in such sys-tems. The focus on regulation inside the public sector contrasts with the traditional focuson how parts of the public sector regulate the private sector, including various forms ofregulatory partnership between the state and the private sector, and the private sector’sattempts at self-regulation.

For example, the OECD has devoted considerable investment to exploring regulation ofprivate activity (OECD, 1997a; OECD, 1997b). There is a vast academic literature on whathas been in broad terms characterized as the ‘regulatory state’ which notes that states arereducing their relative emphasis on state-owned enterprises and public subsidies and insteadfocusing on regulation using some form of public authority, often in the hands of special-ized agencies, to set and apply rules and standards (Majone, 1994). The regulation of busi-ness, particularly utilities, has attracted much attention (for surveys see Wilson, 1980;Hancher and Moran, 1989; Ogus, 1994; Doern and Wilks, 1998). Much less attention hasbeen paid to the idea of regulation within the public sector, as something one part of gov-ernment does to another part. However, a developing literature has focused on regulationinside government and this article draws extensively on this work.

The nature of public activity, particularly as distinct from private activity, distinguishesregulation of government from that of the private sector. These categories are often distin-guished on the basis of ownership or source of finance. Adopting this convention producesfour regulatory domains as shown in Table 1 (see Table 1), with examples of regulatorsfrom the UK. Some organisations are common to the public and private sectors, for examplein areas of employment, data-protection or safety-at-work regulation. Despite these gen-eral regulators, many are specific to bodies in the public, private or mixed sectors.

Section 1 of this article situates regulation within the historical context of the UK publicsector. Section 2 reviews evidence which suggests that this form has become more impor-tant over the past three decades. The increase has been both in absolute investment ofresources in the activity and in the significance of regulation relative to other forms ofcontrol, particularly the alternatives of integrating activity in large bureaucratic organisa-tions and discretionary self-control by public officials. Section 3 seeks to account for therise of regulation of government, assessing evidence for the official justifications for devel-opments offered by the government which tend to argue that regulatory growth is in the‘public interest’ against evidence that lends support for explanations that are more sceptical

Table 1Domains of regulation, including regulation of the public sector

Public Funding Private FundingPublic Ownership Core public sector regulated by Cabinet

Office, Treasury units and National AuditOffice (for bodies in central government),Audit Commission and inspectorates (forbodies in local government or health)

Remaining nationalized industries andtrading fund executive agencies regulatedby sponsoring central government depart-ments

Private Ownership Some charities and not for profit bodies(eg universities regulated by higher edu-cation funding councils) and privatebodies receiving contacts or subsidies (egTrain Operating Companies and theOffice of Rail Regulator)

Core private sector firms and other bodies(eg regulated by issue regulators such asthe Health and Safety Executive or indus-try specific regulators such as Office ofGas and Electricity Markets)

Source: (Hood et al., 1999, p. 22).

325O. James / Sociologie du travail 47 (2005) 323–339

about the general benefits of regulation. Section 4 draws some conclusions about regula-tion of government and argues that academics and policy makers in the UK are increas-ingly explicitly recognising regulation’s role as an institution having important conse-quences for the conduct of public activity. This recognition has led to growing debatesabout the characteristics of the institutional form, theories about its operation and its designand improvement.

1. The historical context of regulation of the public sector

Regulation has long been an important activity within the traditional UK state, althoughnot commonly presented under this label. The traditional state has been dominated by acore executive, a central political authority for steering and co-ordinating public activitycomposed of the institutions of the Treasury, offices around the Prime Minister, Cabinetand its committees, and the Cabinet Office (Dunleavy and Rhodes, 1990, p. 4; Rhodes,1997, pp. 14–15). This group of bodies has used a range of rule making powers includingorders in council (especially for regulating the civil service), financial and accounting rulesdeveloped by the Treasury, and norms such as collective Cabinet responsibility and com-mittee procedures. Development of these systems has enabled these bodies to exert influ-ence over the public sector and beyond, especially when combined with associated tools ofgiving grants or taking activities into public ownership. More broadly, outside the coreexecutive but within central government, departments have similarly promulgated rulesand procedures for the oversight of public bodies including local government, the NationalHealth Service and nationalised industries. In turn, local bodies have developed their ownregulatory systems that are more limited in scope and are set within the national frame-works of regulation. To a limited degree, these local regulatory systems have some legiti-macy to set, monitor and enforce their own regulations separate from those at the nationallevel. This autonomy has been increased for Scotland, Wales and, in an on/off way, toNorthern Ireland since devolution of responsibilities to these countries in the late 1990s.

As well as regulatory activity associated with the executive, the legislative system hasregulatory bodies associated with it. Whilst the activities of the legislature do not count, onthe definition used here, as regulation per se (which is instead an executive activity), Par-liament has set up a number of regulatory bodies which report to it. Most notable is theregulatory system associated with finance and accounting, including the Exchequer andAudit Department which was originally created in 1866 and exists in its modern incarna-tion (since 1983) in the form of the NAO (National Audit Office). A key activity of the NAOis to investigate whether expenditure is consistent with legislation and properly spent. Theregulators reporting to Parliament were augmented in 1967 when the Parliamentary Com-missioner for Administration was set up to investigate allegations of maladministration.

Regulatory activity is distinct from other forms of control commonly used in the publicsector, although it is sometimes found in hybrid form in combination with these otherforms (see Hood et al., 1999) for a more extensive discussion). A first alternative form isself-control in which public bodies act alone or in a peer group with freedom from externalregulation. This form of control has been traditionally important for professional groups-especially in education, social services and medicine. These public employees have played


a part in designing standards of conduct for their activities and some of them, particularlythe medical profession, have had a large degree of autonomy in policing these standards.Regulation is distinct from such informal activity but can blur into professional self controlif such control occurs in the shadow of public authority, giving rise to the idea of profes-sional self regulation.

A second form of control is the use of the forces of competition to structure interaction.Whilst competition is often associated with the rise of the ‘NPM’ (New Public Manage-ment), it has also traditionally been part of many control systems, for example in the formof competition amongst individuals for promotion or between organisations for jurisdic-tion in areas of overlapping responsibilities. However, the growth of NPM involved theincreased use of competition between providers of services for funding from purchasingauthorities, for example in the health sector, and increasing competition between publicand private sectors for contracted out work.

A third form of control is direct management involving hierarchical control of subordi-nates within an integrated organisation with common staff and procedures. This form isexemplified by the ideal form of a traditional central government department, with a tieredmanagerial structure and clear procedures for governing administration. Regulation excludesdirect ‘chain of command’management relationships of this kind deployed within an organi-sation. For these reasons internal audit or review does not count as regulation of govern-ment, because it is not conducted by another organisation operating to some degree at‘arms-length’. Some NPM changes increase the use of arms-length regulation, such as inthe executive agency model of a central government department controlling a delivery bodyat arms-length using budget control and performance targets (James, 2001; James, 2003).NPM also changes the character of some arm-length controls, increasing the use of outputmeasures rather than focusing on input controls. However, the distinction between chain ofcommand control within an organisation and arms-length regulation can be blurred: arms-length regulation is sometimes welcomed by chief executives as a tool for influencing theirown organisations, and often works in conjunction activities within departments oragencies.

Regulation has some similarities with court based oversight of laws affecting the publicsector. However, regulators are distinct from judges in lacking the full legal independentstatus of the judiciary and in often being involved in all elements of standard setting, moni-toring and enforcement activity rather than just adjudication. The regulators tend also to beproactive rather than just reacting to complaints which is the mode of working more usu-ally adopted by the judiciary. In the UK context, these distinctions make the dividing linebetween regulators and the judiciary reasonably clear although in countries with an admin-istrative law tradition the overlap in activities is greater. More generally, even though regu-latory administrators may be clearly identifiable, they are often acting in part as the agentsof elected politicians, judges or citizens in undertaking their work. For this reason, regula-tory systems are embedded in broader systems of political executive, judicial and legisla-tive control.

2. The growth of regulation

Recent research on regulation of the public sector suggests that this form of control hasbecome increasingly important over the past thirty years, both as measured in absolute


investment in the form of activity and relative to other ways of controlling the public sector.This change has occurred at the same time as increased regulation of the private sectorwith, for example, the establishment of regulators for utility firms at the time of their pri-vatisation, or the expansion of social and environmental regulation. The regulation of thepublic sector grew since the mid 1970s to cost about £1,000m in direct spending on regu-lators by the mid-1990s. The pattern of growth across the two parts of the core public sectorand the mixed public/private sector are summarised in Table 2 (see Table 2). In many casesthe growth in ‘arms-length’ regulation occurred alongside a reduction in administrativeresources within public organisations as big organisations were split into corporate units(for example with the establishment of local corporate units in health as NHS (NationalHealth Service) trusts were set up (Pollitt et al., 1998). The total staffing of regulatorybodies inside UK government grew by about 90 per cent between 1976 and the mid 1990s.The dramatic staff growth contrasts sharply with what happened to staffing in the publicsector as a whole, with a fall of more than 30 per cent in total civil servants and over 20 percent in local authority staff, although part of this decline arose because of increased use ofprivate sector contractors. The growth in formal regulation also reflects an increased reluc-tance to rely on self-control by those carrying out public activities. In particular, profes-sional groups such as teachers, healthcare workers and social workers have been increas-ingly subject to formal oversight by regulatory bodies rather than simply relying on systemsof professional self regulation.

The trends in regulation differ across parts of the public sector. Taking the first sector inTable 2 as an example, there was a shift to increased reliance on regulatory forms of controlunder the ‘Next Steps’ executive agency revolution in Whitehall during in the late 1980sand 1990s (James, 2003). The Next Steps reform, part of the NPM reform movement whichalso increased the amount of competition and private sector involvement in the public sec-tor, involved a move away from reliance on ‘traditional’ integrated departmental forms ofcentral government provision of public services. Executive functions were handed to agroup of executive agencies, semi-detached from their parent departments, with their ownbudgets, freedom from some departmental regulations, freedom from ad hoc, day to day,intervention by the department, and freedom from some central government-wide regula-tion. This change increased the importance of regulation as a form of control in centralgovernment because executive agencies operate within a regulatory framework that makesthem accountable for the performance of specific operational tasks as corporate units. Theaccountability structures include output focused performance targets set by the parent depart-ment and personal accountability of chief executives for agency performance. These account-ability structures were heavily influenced by reading across an Anglo-American form of

Table 2Growth in regulation of the public sector in the UK 1976–1995

Number ofbodies 1976

Number ofbodies 1995

Percentincrease

Factor of expendituregrowth

1. Core public sector: central government 48 53 10 22. Core public sector: local public bodies 57 71 25 2 to 33. Mixed public/private sector 5 10 100 4Total 110 134 22 2 to 3

Source: (Hood et al., 1999, p. 28).


business sector corporate governance to the public sector, a model which is concernedabout the need to monitor and provide incentives for managers (James, 2001). The NextSteps reform was launched in 1988. By 2001, there were 126 executive agencies with277,000 civil servants, or 57 per cent of the total working in them. The growth of executiveagencies extended and deepened an earlier trend towards use of arms-length bodies in UKgovernment (sometimes called quangos) by bringing this form of organisation to the coreof central government services and by sharpening the regulatory arrangements for theiroversight by introducing the system of performance targets (James, 2003).

There was a substantial increase in spending on regulators in the late 1990s under theLabour administration elected in 1997. About a dozen or so major new organisations werecreated. In particular, substantial new bodies for regulating local government under a regimecalled ‘Best Value’ and for regulating the health service were established. In healthcare, theCommission for Health Improvement (renamed the Healthcare Commission from the endof March 2004), monitors and reports on the quality of services and units. The overalldirect cost of the additional regulators of government appear to add at least around £50mper year to the total for direct cost in the mid 1990s, and probably substantially more thanthis figure. Whilst some of the efforts at decentralising day to day operations of publicbodies to local units (such as individual schools or hospitals) that were started in the 1980sand early 1990s have continued since 1997, more emphasis has been placed on the regula-tory systems in which they operate to protect minimum standards and to provide mecha-nisms for central steering of the systems (Hood et al., 2000).

The new regulatory systems since 1997 have, in particular, been used by the ‘core execu-tive’ in an attempt to increase its influence over the core public sector. The Public ServiceAgreements regime is a new regulatory system operates as part of the Spending Reviewsthat decide the allocation of public expenditure. PSA documents are statements of priori-ties with associated targets that embody the Government’s overall aims and objectives fordepartments or policy sectors (Chief Secretary to the Treasury, 2000, pp. 1–3). The PSAsare particularly being used as part of the so called ‘delivery’ agenda of improving the per-formance of public services including health, education, social welfare and criminal jus-tice. The Public Services and Public Expenditure Cabinet Committee (‘PSX’), formallychaired by the Chancellor with the Deputy Prime Minister and Chief Secretary to the Trea-sury in attendance, discusses the targets suggested by departments. The arrangements entailTreasury authority to intervene to negotiate consistency with the Government’s overallobjectives. The PSX Committee has partially integrated the PSA system with the broaderCabinet and Cabinet Committee arrangements within the core executive, although the PrimeMinister has his own separate systems for examining strategic priorities, with a Prime Min-ister’s Delivery Unit set up in 2001 to ensure that the Government achieved its key deliverypriorities across the key areas of health, education, crime and asylum and transport. TheUnit has strong links with the Treasury but the arrangement offers some potential for con-flict through their separate reporting lines, and reflects an uneasy alliance between TonyBlair as Prime Minster and Gordon Brown as Chancellor that has characterized centralgovernment operations since 1997 (James, 2004).

The PSA system provides some incentives for politicians and officials to undertake activi-ties that are particularly valued by the centre of government. However it is difficult to trackchanges in outcomes because the PSA measures of progress against targets tend to give


only a partial reflection of performance against objectives (National Audit Office, 2001,p. 21). It has been difficult to measure performance in many areas with information drawnfrom a mix of national statistics, academic researchers, public bodies subject to targets andfrom other regulatory bodies. Secretaries of State are individually responsible for perfor-mance against their departments’ targets. In some areas, responsibility is partially del-egated to junior ministers or, in areas of joint working, ministers share responsibility forperformance. The individual responsibility is partially offset by an element of collectiveministerial responsibility for the overall performance of the Government and the systemdoes not suggest that ministers should resign if targets are not met. However, at the veryleast, assessments of performance would appear to have implications for ministers wantingto progress their careers, particularly in so far as they might affect the Prime Minister’srecommendations about ministerial appointments. The relationship between the responsi-bilities of ministers and officials were not set out in great detail at the start of the system’soperation. However, the PSA regime was suggested to be consistent with the convention ofministerial responsibility as set out in ministerial and civil service codes. On this basis,senior officials were allocated individual responsibility for particular objectives and targetswithin the convention of ministerial responsibility. The association between individual offi-cials’ pay and targets was a partial move towards extending the system already in placeprior to the PSA system for executive agencies and their chief executives to the Civil Ser-vice in general (James, 2003, pp. 3–4).

The incentive effects of the PSA structures difficult to assess, but various forms of ‘blamegame’ have emerged. The ‘blame game’ is the set of interactions between the ‘blamed’,consisting of ministers, officials and others involved in public activity, and ‘blamers’ con-sisting of legislatures, courts, citizens including service users, and the media. ‘Blame’, oralternatively credit, is allocated as part of systems of responsibility and involves mecha-nism including providing accounts of performance and being subject to the effects of criti-cism, sanctions, voting or lobbying. As well as avoiding blame by meeting expectations,which in the case of PSAs would involve meeting targets, other strategies for handlingblame are suggested, including managing presentation of performance to avoid blame, blameshifting between groups in the system and changing policies or priorities to avoid the riskof blame (see Ellis, 1994; Hood, 2002).

All the ’blame game’ strategies have been apparent in the case of PSAs to such an extentthat they appear seriously to subvert the intended operation of this part of the system. Indi-vidual ministerial responsibility has largely involved only the provision of accounts aboutparticular levels of performance rather than also taking fuller personal responsibility. Therehas been ambiguity about the implications of failing to meet targets, especially whethertargets were set at a level to ’stretch’ and challenge ministers and departments to improveperformance or as ’pledges’ of minimum levels of acceptable performance. Failing to meettargets has not generally led to pressure on ministers to resign. Beyond Whitehall depart-ments, responsibility for local performance against targets that contribute to achievingnational PSA targets has been allocated to public bodies including hospitals, local authori-ties and schools and for local units managed by executive agencies. The targets have hadsome effect in providing incentives to staff in these bodies, but not always in a way desiredby the central government (with, for example, hospitals attempting to meet patients’ wait-ing time targets by compromising standards of treatment).


The regulators discussed so far in this section have been at least nominally under thesupervision of ministers of the government. However, not all developments in the systemsof regulation have placed the political executive in a position to increase their influential inthe public sector. Instead, some trends have limited the discretion of ministers. A first set ofchanges were specifically designed to limit discretion. These new bodies included theAppointments Commission which limits the Prime Minister’s discretion in appointmentsto the House of Lords and the Judicial Appointments Commission which will be involvedin the appointment of judges. A more general Public Appointments Commissioner attemptsto ensure due process in public appointments more generally and limit the exercise of min-isterial patronage.

There are a further group of regulators which limit executive politicians’ discretion aspart of their broader activities to regulate the public sector in general. In this category is theInformation Commissioner which combines the old Office of the Data Protection Registrarwith regulatory activity arising from the more extensive rules under the new Freedom ofInformation Act. Whilst judicial activity is not strictly regulation (as discussed in Sec-tion 1), it has some of the characteristics of regulatory activity, particularly the evaluationof public sector activity against set standards. There has been a marked increase in judicialreview of the public sector, and clearer specification of administrative review within overalljudicial activities. The Human Rights Act has added impetus by increasing the scope oflegislation affecting public activity. In addition, the traditional position of Civil Servants asservants of the Crown and, as such, regulated under Orders in Council made by the execu-tive without reference to Parliament is under threat. The calls for a Civil Service Act growlouder and louder. Passing of an Act would further limit executive autonomy and increasethe potential for judicial intervention in central government. Legislative politicians havesimilarly not been immune to increased regulation; they are now subject to the Parliamen-tary Standards Commissioner who oversees a set of rules for the conduct of these indivi-duals.

3. Explaining the growth of regulation

The UK Government’s justifications for the reforms are fragmented and do not amountto an overarching, theoretically informed, rationale. However, the dominant official expla-nation for recent regulatory initiatives in UK has been that regulatory developments havebeen in the ‘public interest’, producing benefits for a broad group of taxpayers and serviceusers. Explicating this public interest justification is a worthwhile exercise to try and under-stand the Government’s thinking on its own terms. It is even more significant because,whilst the public interest theory of business regulation has been heavily criticised, the pub-lic interest theory of regulation inside government has not been subject to close scrutiny.The literature on the regulation of business suggests that the potential exists for a numberof regulatory failures which mean that regulation is perhaps not as effective as might beargued by some of its advocates (James, 2000).

The public sector justification for regulation suggests that, in a similar way to regulationof markets being justified to combat ‘market failure’, there is a need for regulation to over-come government failures. On this account, government failure occurs where co-ordination


and control mechanisms in the public sector end up favouring narrow privileged groupsrather than the users of public services and taxpayers. In the public interest account, each ofthe control forms outlined in Section 1 as alternatives to regulation (self-control, competi-tion and hierarchical management in an integrated organisation) are prone to different gov-ernment failures, leading to a need for regulation. Self-control is the least suitable form fordealing with self interested behaviour when these interests clash with the broader interestsof taxpayers or service users. Both self control and competition based quasi-market con-trols have difficulties in dealing with externalities, the incentive in these systems is fororganisations to pursue their own goals regardless of the impact on others. Competition canhelp encourage competition which makes ‘agents’ more keen to please their ‘principals’and can give the ‘principal’ more information about ‘agents’ potential performance, if themarket does not suffer from monopoly provision and information problems. Hierarchy andchain of command control is most successful way to deal with externalities, by internalis-ing them within a single organisation, allowing goals to be harmonised and encouraginginformation sharing, and can allow closer monitoring of agents. However hierarchy imposescosts of its own through reduced flexibility, for example those located in its lower echelonstypically have to refer decisions up the line rather than acting on their own initiative.

In the public interest account, regulation can help mitigate government failures. Moni-toring by regulators helps penetrate information asymmetry, exposing fraudulent and waste-ful behaviour by external verification of costs and producing evaluations of the quality ofservices. This justification has been an important part of government justifications forexpanding regulation in local government and health. Prime Minister Blair noted that theregulation of local government promotes efficiency and makes sure that a ‘modern’ gov-ernment for the British people is developed (Blair, 1998, pp. 1–3). The regulatory develop-ments sat within a broader ‘centrist’ agenda in which the ‘New Labour’ governmentattempted to steer a ‘third way’ which was neither a return to integrated bureaucratic struc-tures nor a further radical extension of the market (for more on the ‘centrist’ agenda see(Hindmoor, 2004). However, the previous Conservative administration similarly sought toincrease the use of regulation, particularly to challenge traditional producer groups withinthe public sector. The education profession were particularly noted as requiring externalpressure to drive up quality and were subject to a new formal and comprehensive cycle ofinspections of every state school centred on the activities of the OFSTED (Office for Stan-dards in Education).

As well as pressures within the state, the desire for more rigorous regulatory monitoringof public sector activities appeared to reflect rising public concern with the operation of thepublic sector. Between 1981 and 1990 confidence in the education system declined from60 per cent to 47 per cent, confidence in the police declined from 86 per cent to 77 per cent,whilst confidence in the Civil Service exhibited a smaller decline from 48 per cent to 44 percent (Listaug and Wiberg, 1995, pp. 304–305). The relationship between these figures andthe rise in regulation is not straightforward but appears at least to show that the public wereincreasingly skeptical of the traditional public sector —and the largest increases in formalregulation occurred in education which exhibited the greatest decline in confidence. Inaddition, there were specific incidents in which public professionals were heavily criticizedin the media for acting with too great a degree of autonomy and without sufficient regard tothe concerns of service users. These cases were notably in health-care, where doctors were


criticized for retaining the organs of patients in hospitals, for poor standards of care—especially in a scandal relating to heart surgery at the Bristol Royal Infirmary in the late1980s and early 1990s, and in social services —where children were taken into care on thebasis of interpretations of abuse by social services professionals. In each case, not only didthe public, media and politicians express dissatisfaction with the conduct of public workersbut demands were made for stricter regulation as a solution.

A second justification for increased regulation of government in the ‘public interest’account is to improve the treatment of externalities by regulators introducing rules to encour-age organisations to take account of their activities on other bodies and through regulatorsspreading information about the effects of different bodies’ actions on other parts of thepublic sector. The Labour administration developed a strategy to reign in some of the unde-sirable effects created by the previous administration’s embrace of competition as part ofNPM reform. This issue became a key theme of the Modernizing Government White Paperof 1999 and the Treasury Comprehensive Spending Review of 2000. The Government arguedthat the Commission for Health Improvement would contribute to a ’one nation’ healthservice where the concerns of the whole system rather than just individual hospitals wouldbe taken into account (DoH, 1998). Similarly, the PSA system was intended to create anover-arching framework for coordinating regulatory systems and regulated bodies to ensure’joined-up’ working that takes account of the need for public bodies to work collabora-tively to solve policy problems.

A third justification for regulation in the ‘public interest’ account is cases where hierar-chy is undesirable because of the associated inflexibility. This justification for reform wasused in the case of Next Steps, where reformers suggested that they were trying to combinethe flexibility of giving agencies freedom to manage with the strategic direction offered bysystems of performance targets set by the department (James, 2003). The same rationaleappears to be invoked by the more recent efforts in the Treasury to set up the system ofPSAs. In this case, the Treasury is trying to establish overall direction of the public sectorsystem using a few key targets whilst leaving day to day activities to the discretion ofindividual public bodies.

There are good reasons to question the public interest account of regulation of the publicsector. The analogous account of the regulation of business has been strongly attacked.Studies of the regulation of business suggest that, rather than producing benefits for thepublic interest, the growth of regulation is often the result of sectional interests and it pro-duces undesirable consequences for general welfare. These critiques suggest three maintypes of regulatory failure: regulation in the interest of regulated bodies, regulation in theinterest in regulators and regulation as a costly enterprise even if attempts are made topursue the public interest. The failures are not fully mutually exclusive; in particular, thebenefits for both regulators and regulated bodies from collusion against the public interestare possible.

Theories of regulatory ‘capture’ suggests the first kind of failure, with the interests of theregulated bodies causing regulation to develop and grow (Stigler, 1971). Demand for regu-lation inside government is characterised as coming from incumbent producers supplyingpublic services. On this basis, regulation will reflect cosy cartels rather than a challenge topublic sector workers to improve performance. This model was perhaps consistent withsystems in which members of the same profession or specialist group were regulating as


well as being subject to regulation. Such system existed in the traditional model of govern-ment inspection that existed in education, social services, the fire service, police and thehealth sector prior to the 1980s. However, the model does not appear consistent with morerecent developments in the UK, where new regulatory initiatives have tended to be viewedwith hostility by those subject to them (such as the more formal system of schools inspec-tion).

An alternative set of theories about regulatory failure suggest that regulation may developin the interests of regulators. A model suggesting ways in which regulators benefit fromregulatory developments is Majone’s (Majone, 1994) account of the rise of the regulatorystate in Europe. Majone suggested that the increase in the scope and complexity of EUregulation was partly the result of it being one of the few available channels for ambitiousofficials in the Commission seeking to build their careers. Tight restraints on policies invol-ving spending means expansion regulation is one of the few ways for the EU Commissionto increase its role. There is some evidence for similar processes existing in the UK, withnew spending initiatives being especially under attack during the 1980s. In the 1990s, theincoming Labour government’s concern with wanting to ameliorate some of the problemswith structures they inherited from the previous Conservative administration were addressedby proposals from their officials to undertake regulatory initiatives. The notion of a ‘regu-lated public sector’ is an accurate characterisation of the UK government’s policy positionsince 1997.

The third type of regulatory failure suggests high costs in running the regulatory regimes.In regulation of business, Scholz (Scholz, 1991) models enforcement and compliancebetween a regulator and regulated firm as a ‘Prisoner’s Dilemma’ game. The relationshipbetween regulator and regulated body takes the form of a ‘deterrence’equilibrium (with theregulator adopting a harsh enforcement policy and regulated bodies adopting a minimalcompliance policy) or a ‘voluntary compliance’ equilibrium (with flexible enforcementand compliance policies adopted). Under some conditions of repeated ‘plays’ of the game,the regulator and regulated body may be able to agree ‘voluntary compliance’ strategies.The temptation for one or both players to ‘defect’ to their individually preferred strategies,which tend towards the costly deterrence equilibrium, will still remain. However, this modeldoes not seem to fit regulation of government in the UK. Most parts of the public sectorregulatory system seem to exhibit a voluntary compliance equilibrium with something of aculture of compliance in many areas. Whilst some bodies fail to comply, with a few roguelocal authorities, hospitals or schools, must public sector workers act in ways consistentwith regulation. In fact, regulated bodies may almost be too keen to comply with whatmight be regulations that limit their ability to provide services to users in the most effectiveway. The current concern about the cost and effectiveness of the regulatory systems, ratherthan being centred on problems of compliance, is more about whether compliance with theregulations leads to improvements (in other words, whether the regulations are the correctones) and whether regulation as a form of control is the most suitable for the circumstancesrelative to other ways of exercising control.

4. Conclusion: reflexive regulation

The discussion of the reasons for the growth of regulation inside the public sector sug-gests that the simple ‘public interest’ account should be viewed with some scepticism and


that regulation in the public sector is inherently political –involving conflict between manystakeholders. However, there are some grounds for thinking that UK governments may bedeveloping a more nuanced understanding of how to improve regulation and how to improveprocesses for considering regulatory reform. Historically, the systems for assessing regu-lation inside government have been fragmented. There has been no central point for assess-ing the overall system (for example, to identify gaps and overlaps, to challenge regulatorsto justify their actions, to promote learning). However, greater awareness has recently devel-oped and this has been reflected in new projects to evaluate regulatory systems (for examplesee the Public Services Productivity Panel, 2001; Martin et al., 2003) and the developmentof principles for the regulation of government. The increased self-awareness of those run-ning regulatory systems has lead to several attempts to streamline regulation. The Regula-tory Reform Act of 2001 enables ministers, subject to scrutiny by Parliamentary Commit-tees, to remove or reduce regulatory burdens in both the public and private sectors. Thischange potentially acts as a challenge for regulators to justify the use of regulation in par-ticular contexts.

Units within the government that normally focus on regulation of the private sector havealso turned their attention to regulation within the public sector. The Regulatory ImpactUnit created a Public Sector Team to assess regulation of the public sector. This team hasdeveloped some analogues to RIA (Regulatory Impact Analyses) which is widely acknowl-edged as being desirable for initiatives that introduce new regulatory requirements for busi-ness. The RIA is a form of broad cost benefit analysis within a structure that allows theinvolvement of relevant stakeholders and continuing review. The guide for RIA in the con-text of the public sector was set out as the Policy Effects Framework. The framework wasdeveloped under a number of different titles (including the ‘regulatory effects framework’)and was adopted in Summer 2002 as a voluntary measure for departments dealing with thepublic sector. The aim is stated as assisting the development of policies at an early stage bya consideration of how aims of policy can be achieved within the minimum possible burdenon those affected by it. The framework introduces ex ante consideration of regulatory bur-dens and benefits of legislation (both primary and secondary), administrative rules andprocedures and requests for information. The initial use of the framework has been in edu-cation and the police, although it is hoped to expand its scope. However, much of the PublicSector Team’s time has been spent on a narrower analysis of reducing ‘unnecessary’ paper-work for so called ‘front-line’staff. Reports have examined ways of reducing police, school,and General Practitioner (local doctor) paperwork, and burdens in local government, hos-pitals, the criminal justice system and railways (Regulatory Impact Unit, 2002). However,a focus on the costs of regulation risks an analysis that is incomplete because it fails toconsider costs alongside benefits, and it is still true to say that regulation of the publicsector is still subject to less formal scrutiny than regulation of the private sector.

Despite limitations of some of the analysis, the reviews of regulatory systems haveinvolved the development of new models for regulating the public sector. Issues of designand improvement have focused on the merits of different techniques of regulation and theuse of regulation relative to alternative forms of control. This latter debate has been domi-nated by a schism between those seeing regulation as a remedy for ‘failure’ in the publicsector and those suggesting that ‘regulatory failure’ is itself a substantial problem. Thereare a large number of sub-debates exploring these issues in different parts of the public


sector with occasional ‘crises’ involving intense discussion and reform of regulatory sys-tems. However, whilst there is increased recognition of some of the general issues aroundthe use of regulatory forms there is little evidence of a general ‘crisis’ of confidence in theuse of regulation as a form of control.

A more systemic approach to regulation has been developed arising from the recogni-tion that individual regulatory systems have often grown in an ad hoc way without suffi-cient regard to the consequences for individual public sector units that find themselvesfaced with an array of regulators. At the same time, it has been noted that some regulatorysystems have not been sufficiently developed and have tended to concentrate regulatedbodies on too narrow a set of tasks. The undesirable systemic effects of some executiveagencies’ performance targets, which had given the agencies too narrow a view of theirremits, were increasingly recognized towards the end of the 1990s (James, 2003). Theregime of Public Service Agreements in part reflected this concern by bringing all of cen-tral government under a system-wide performance regime to reduce fragmentation and’join-up’ systems for different departments and agencies.

The use of ‘enforced self-regulation’ has been explored as an alternative to conventionaldirect regulation. In this system (set out in Fig. 1), different forms of regulation are arrangedin the form of a pyramid, with self-regulation at the bottom, more interventionist forms ofregulation at higher levels and the most interventionist forms at the apex. Bodies that areseen as persistent poor performers meet forms at the top of the pyramid, whereas goodperformers are rewarded with lighter oversight regimes. The use of this model has beennoted in the regulation of the private sector (Ayers and Braithwaite, 1992). The UK expe-rienced a trend towards greater formality in regulation of many public bodies in the 1980sand 1990s (especially for local government and the health sector), in the sense of lessinvolvement of regulated bodies in regulatory decision making and more formal sanction-ing rather than persuasion (Hood et al., 1999, pp. 194–197). However, Government hasmore recently sought partly to moderate this trend. The Modernizing Government WhitePaper stated a desire to intervene in inverse proportion to public bodies’ success and tostrike an appropriate balance between intervening where services are failing and giving

Fig. 1. The regulation inside government pyramid.


successful organisations freedom to manage. The aspiration of ’enforced self-regulation’was incorporated in the BestValue regime for regulating local authorities. Under this regime,poor performers are subject to direct intervention whilst good performers are given someexemptions from regulatory systems.

Another recent initiative has sought to increase the use of risk assessment in regulatorysystems as a way of identifying potentially poor performers. including the use of risk assess-ment as part of the enforcement pyramid. The risk based regulatory system identifies moreor less risky organisations (in terms of the likelihood of them failing to deliver aspects of apublic service) to enable bodies to be classified as requiring different levels of monitoringor intervention. These assessments can include how organisations subject to regulationthemselves manage risk. This risk based approach enables a prospective rather than just abackward looking approach and allows a differentiated treatment for regulated bodies. Inthe context of local government, authorities given an excellent score as part of the Com-prehensive Performance Assessment process (a process which draws on a range of scoresand measures from the Best Value system) were promised more freedom to carry out theirtasks than average or poor performers. Although there has been some disappointment withthe limited freedoms that have emerged in practice the regulatory system is slowly movingtowards a more differentiated approach.

The trend towards greater analysis of, and reflection about, regulation of the public sec-tor has clarified some of the trade-offs involved in the use of different regulatory systems(for example, involving different degrees of formality of external oversight). However, theincreased assessment of regulation has been conducted at the same time as an opening upof the debate from one conducted by technicians within the system to one including othergroups, notably opposition politicians, public sector staff involved in delivery, service users,citizens and the media. There is now much more interest in the question of ‘who regulatesthe regulators?’ and the accountability of regulatory system. The publication of perfor-mance information gathered by the regulatory system has further increased the interest ofnon-state actors in the operation of regulatory regimes. The PSAs were described by theGovernment as ‘a contract with the people’ because ‘by making clear what is expectedfrom each of our public services the PSAs add a new dimension to public accountability’especially for the ‘delivery’ of public services (Chief Secretary to the Treasury, 1999).Whilst the Government’s presentation of its performance against these targets might beviewed with some scepticism, the public’s interest in regulatory systems seems unlikely todiminish.

It is perhaps unsurprising that the debate about regulation has not led to a clear consen-sus on which way systems should develop because the stakeholders have frequently haddifferent interests about outcomes of the system. In particular, a tension has developedbetween executive politicians wanting to keep control over regulators and demands fromlegislative politicians and some service users and regulated bodies to make the regulatorsmore independent. The regulated bodies fear political intervention in an ad hoc mannermaking their task of achieving previously set goals more difficult. Legislative politiciansand service users fear that the information published by regulators about public servicesmay not reveal the true picture because elected politicians may seek to put a positive ‘spin’on performance. Such developments appear to be undermining the credibility of the systemof targets and measures in Public Service Agreements, many of which are seen as too easily


manipulated by politicians. Research on regulation as a phenomenon in the public sector atleast offers the hope of enabling the discussion of these issues to proceed in a way that isinformed by some basic concepts, measures, understanding of processes and the effects ofdifferent forms of regulation.

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