The Regulatory State and Agencies

Helena Ekelund, University of Nottingham

Paper prepared for the UACES Student Forum 8th Annual Conference, Nottingham 19th-20th of April

Agencification and the EU as a Regulatory State: a Framework for the Study of European Community Agencies

Introduction

In recent years we have witnessed a number of changes in the institutional structure and power relations between the various institutions of the European Union (EU). One notable change is the rapid increase in the number of European Community Agencies, henceforth referred to as ‘agencies’.Currently, the EU has some twenty agencies, the majority of which have been established during the 1990s and 2000s. In my PhD project I aim to explain this development. At the conceptual level, this will involve dealing with the concepts and misconceptions of the debates on agencies. At the empirical level, it will involve mapping and comparing of the European Community Agencies. By studying the establishment of agencies we can gain important insights into how the EU actually worksand, hence, my project will also contribute to the debates on the transformation of governance in Europe.

One strand of governance research is the study of the rise regulatory policy-making, which characterizes the EU as a ‘regulatory state’ (c.f. Kohler-Koch and Rittberger 2006:35). In this paper, I will review literature on the regulatory state and agencies. I will elucidate the main components within the regulatory state concept and relate these to the EU and the study of Community Agencies.Particular attention will be given to the normative implications of agency establishment and analytical dimensions to consider in the study of agency creation.

The Regulatory State

The rise of the regulatory state refers to a process through which the regulatory function of the state gain prominence at the expense of redistribution and macroeconomic stabilization. In Europe we can also see how the traditional European model of public ownership have given way for the American model of private ownership subjected to rules created and upheld by regulatory agencies. Whilst acknowledging the fact that there aredifferences between the public administrations of various European countries, it makes sense to speak of an ideological cleavage between the United States and the Europe regarding the principles of public sector management. This cleavage can be attributed to differing ideological views on the functioning of the market. The traditional American view is that the market normally functions well, and that it is only justified to interfere with the market in clear cases of market failure (Majone 1996:50).Subsequently, the management of public utilities has been left largely in private hands, and the threat of market failure has been addressed by subjecting the private owners to regulation, which is developed and upheld by agencies or commissions (Majone 1996:15). In Europe, by contrast, there has been more suspicion against the market.The traditional response has been public ownership, i.e. that the state manages the provision of public utilities. According to Majone (1996:11), it was generally assumed that public ownership gave governments increased ability to regulate their economies and to protect public interests. However, the opinion in Europe changed as public ownership did not seem to deliver the expected benefits, and, in the 1980s, there was a macro-economic paradigm shift from Keynesianism to more neo-liberal solutions (Műller and Wright 1994:2). In practical terms, this led to privatisation of industries, but also “the creation of new instruments of regulation and the establishment of new regulatory authorities” (Levi-Faur 2005:19, c.f.Gilardi 2002; Moran 2001; Thatcher 2002a).However, the regulatory state does not only aim to stop market failure by engaging in economic regulation. Social regulation, such as worker and consumer protection, has become increasingly important (c.f. Moran 2002:394-395).

When studying the regulatory state it may prove useful to break up the concept into smaller parts, which can be operationalised more easily. Minogue (2002:654) reiterates six key variables for the design of an effective regulatory state that Majone outlines in an article from 1999.[1] They are:

(i) the extent to which decisions are delegated to an independent agent rather than taken by the political principal

(ii) the nature of the structure of governance itself, particularly in determining the agent’s degree of independence from the political process

(iii) the rules that specify the procedural framework eg reason giving requirements, consultative processes (sic)

(iv) the scope for political principals to overrule agency decisions

(v) the relative autonomy of financial resources

(vi) the extent of ex post monitoring, eg legislative oversight, judicial review, citizen’s complaints procedure (sic)

The EU as a Regulatory State

In my PhD thesis I intend to systematically analyse the idea of the EU as a regulatory state through the application the concept of the regulatory state to the study of Community Agencies. The idea of the EU as a regulatory state can be attributed to Majone, at the core of whose vision we find the idea of market regulation being a more important task than income redistribution and macroeconomic stabilisation. Majone (1996:63) argues that it is important to distinguish between regulatory policies and non-regulatory policies, for example income redistribution. The key difference between them is that regulatory policy-making is less dependent on budgetary constraints, and states’ budgets are to a large extent dependent on states’ ability to tax and level of tax revenues. The EU budget is rigid and small in comparison to the budgets of member states, and the EU has no independent tax power (Majone 1997:150). Thus, it is very difficult for the EU to engage in non-regulatory policies, and if the Commission wishes to increase its competencies, which Majone (1996; 1997) assumes that it does, it has to do so through increased regulatory activity. The EU can do so because most of the costs that arise from regulatory policy-making are borne not by the regulators but by the regulated, wherefore budgetary considerations only impose soft constraints on regulators (Majone 1996:64). At EU level the distinction between regulatory and non-regulatory policies in terms of costs is further exacerbated by the fact that most costs for implementation of EC rules are directly or indirectly borne by the member states (Majone 1996:64).

Majone’s ideas find their analytical expression in a supply and demand model of regulation, which borrows from public choice models of bureaucracy and neofunctionalism (c.f.Majone 1996:64-68). On the demand side of the model we find multinational and export-oriented companies, public interest groups and member states. As predicted by neofunctionalists, the functional needs of the single market have required substantial transfer of policy-making power to the EUlevel (Majone 1996:66). Companies tend to favour EUlevel regulations over national ones as they remove the costs resulting from demands to adhere to different national standards. Public interest groups also demand EU level regulation when they are unable to make their national government impose the regulation they wish for. This is typically the case of interest groups, for example environmentalist and consumer protection groups, from countries with low health and safety standards (Majone 1996:67). However, according to Majone (1996:67-68) the strongest demands for EU level regulation come from the member states, whichmay gain by having their national standards incorporated into EU law.For example, a country with high standards of health and safety protection in the work place would see the comparative advantage of countries with low levels of said protection reduced if the EU decides to adopt their high standards.

The main role on the supply side is played by the Commission, which is assumed to have “a utility function, which it attempts to maximize, subject to constraints” (Majone 1996:64). It is assumed that the Commission wishes to maximise its influence, which Majone measures by the scope of Commission competences. Majone argues that the Commission is still a bureaucratic organisation under development and, therefore, “the definition of competences” is the key issue for the Commission (Majone 1996:65).

Normative Implications

The characterisation of the EU as a regulatory state has significant normative implications for our conceptualisation of legitimacy and accountability.

Proponents of the regulatory state are likely to argue that the regulatory state achieves legitimacy through outputs rather than inputs. The difference between input-oriented and output-oriented ideas of legitimacy can be illustrated by the statements ‘government by the people’ and ‘government for the people’. A political system that relies on input legitimacy (government by the people) is a political system where the focus is on participation, and where individuals do not fear majority rule due to the existence of “a pre-existing collective identity” (Scharpf 1999:10). Output-oriented legitimacy, by contrast, can be achieved from a “capacity to solve problems requiring collective solutions because they could not be solved through individual action, through market exchanges, or through voluntary cooperation in civil society” (Scharpf 1999:11). For this to succeed, Scharpf (1999:11) argues, it is sufficient that individuals in the political system perceive to have “a range of common interests that is sufficiently broad and stable to justify institutional arrangements for collective action”. If we accept output legitimacy as sufficient for the EU we have also made a normative stand on the issue of the democratic deficit of the EU.

As Majone (1997:159) argues, the regulatory state, where “technocratic experts” employed by various agencies perform a broad variety of tasks, will undoubtedly suffer from a democratic deficit if democratic legitimacy is defined as “direct responsibility to the voters or to the government expressing the current parliamentary majority”. However, the Madisonian model of democracy, the goal of which is “to protect minorities form the ‘tyranny of the majority’, and the judicial, executive and administrative functions from representative assemblies and from fickle mass opinion” provides an alternative model of democracy where delegation is less problematic from a legitimacy point of view (Majone 1997:160). Here delegation is used as a strategy to restrain rule by the majority by giving authority to non-elected officials, who “have limited or no direct accountability to either political majorities or minorities” (Majone 1997:160).

Moreover, agencies can enjoy “[p]rocedural legitimacy”, which means that they have been created by and following correct procedures (Majone 1997:160). For example it can imply that agencies have been created in accordance with existing rules, that their creation, objectives and legal authority are decided upon by elected officials and that their activities are open to review (c.f. Thatcher 2002b:958). Arguably, the establishment of independent regulatory agencies in many parts of Europe has lead to “increased openness in the practice of decision-making” as decision-making concerning utilities now “remain subject to political and administrative public scrutiny” rather than being “largely closed and private processes” (Thatcher 2002a:966).

However, delegation at the EU-level may upset the norm of “institutional balance” and the “reciprocal duty of loyal cooperation” shared by EU institutions and national authorities (Majone 2002:327). Delegation to yet other bodies than the ones created by the Treaties could be perceived as a violation of “fundamental, and presumably immutable, principles of the communitarian system” (Majone 2002:321).

Definitions of “Agencies” and the “Agency Programme”

The term “agency” is not easily defined because, as Pollitt et al. (2001:273) point out, public law varies between countries, and the institutional design of agencies is “characterized by extreme empirical heterogeneity” (Gilardi 2002:874). Therefore, an important task when developing a framework for the study of Community Agencies is to identify critical dimensions to the “agency concept”. A review of relevant agency literature provides the following definitions.

Thatcher (2002b:956) defines an independent regulatory agency as “a body with its own powers and responsibilities given under public law, which is organizationally separated from ministries and is neither directly elected nor managed by elected officials”. Whilst acknowledging that the formal institutional status of an agency is important, Thatcher (2002b:955) also clearly points out that they are incomplete and do not determine everything about an agency’s behaviour; control mechanisms and powers outlined in the formal documents can be used in a variety of ways.

Talbot (2004:4) shows that “agency” can be defined “by exclusion”. For instance, “state-owned enterprises whose primary existence is within the market (albeit with subsidies) rather than in public services, and which are usually joint stock companies founded in private law” can be excluded as can “social, charitable and voluntary organisations even where their primary funding comes from the state” (Talbot 2004:4-5).

After having specified these exclusions, Talbot (2004:5) sets up five criteria that must be satisfied for an organisation to be considered an “agency”. He specifies that the organisation ought to be:

• at arm’s length (or further) from the main hierarchical ‘spine’ of central ministries/departments of state
• carrying out public tasks (service provision, regulation, adjudication, certification) at a national level
• staffed by public servants (not necessarily ‘civil servants’)
• financed (in principle) by the state budget (in practice some are financed up to 100 per cent from their own revenues, but even here the state remains liable for their financial condition)
• subject to at least some public/administrative law procedures (i.e. they are not predominantly or entirely private law bodies).

Talbot (2004:6) then continues to discuss what he perceives as central elements to “the ‘agency’ programme”. The first idea is the idea of “[s]tructural disaggregation and/or the creation of ‘task specific’ organisations” (Talbot 2004:6). By this, Talbot (2004:7) refers to “the splitting up of larger bodies into a ‘parent’ body and various subordinate ‘agencies’. The following elements can be identified within this structural change (Talbot2004:8.

• Creating an identifiable, separate, organisational structure with its own name.
• Usually the body is given a single, or small set, of functions.
• Usually these functions are primarily about ‘delivery’, ‘execution’ or ‘provision’ and not about policy-making.
• Giving the above body a clear ‘constitution’ – in the form of some sort of legislation, or at least a formal (if not statutory) ‘framework document’ – which sets out its purpose, powers and governance arrangements.
• Making a single, named individual – usually called a Chief Executive (CE) – responsible for managing and reporting on the new body. This person I usually appointed – actually or potentially – through an open process, separate form the normal civil service recruitment.
• Making the staff of the new body different in some way from mainstream civil servants, usually by changing their formal employment status.
• Putting in place formal reporting arrangements, including separate accounts, for the new body.

The second idea is the idea of “[p]erformance ‘contracting’ – some form of performance target setting, monitoring and reporting” (Talbot 2004:6), which refers to “any system of setting targets for, and reporting on (non necessarily publicly) the activities of an agency” (Talbot 2004:14).The targets may be set by the agencies themselves (as is often the case in the US), by the government (typical of the UK) or by the two of them in combination, which is common in Sweden where ministries draw up the broad guidelines and leave the details to the agencies (Talbot 2004:15).

The third idea that Talbot (2004:6) sees as central to agencies is the idea of “[d]eregulation (or more properly reregulation) of controls over personnel, finance and other management matters”.Briefly speaking, this refers to the rules that are set up for how public bodies must function (Talbot 2004:13). The autonomy of agencies in this respect may vary over time. As Talbot (2004:13) writes, one strategy has been to give agencies a certain level of autonomy once and for all. Another strategy is to gradually increase an agency’s autonomy over these matters if the agency proves that it can be trustworthy.

James (2001:235) presents an agency model made up of two “core features” derived from the UK “Next Steps” reform. The first feature is “the use of organizational units called agencies to handle distinct central government activities on behalf of ministries” (James2001:235). The second feature “is the creation of a ‘regulatory’ framework for each agency”. This framework, James (2001:235) continues, consists of “a designated chief executive, who is accountable for performance, and a framework of performance requirements”.The idea behind having a chief executive officer is to ensure that there is one individual who assumes responsibility for the overall performance of the agency (James2001:236). The idea behind the setting of performance targets is to ensure that the interests of those people who are affected by the performance of the agencyare protected (James 2001:238).

Variation in agency design

In this section I will discuss literature related agency design, with a particular focus on how different academics have mapped differences in agency design.

Horn (1995:25-26) lists the following five institutional choices.[2]

1. the extent to which decisions are delegated to the administrative level rather than taken by the legislature; especially the degree of legislative vagueness and the extent of ex post legislative direction to administrators;
2. the governance structure of the administrative agent, especially the way senior personnel are selected, the degree of statutory independence from the legislature, and the jurisdiction of the administrative agent;
3. the rules that specify the procedures that must be followed in administrative decision making, which typically define the rights that constituents have to participate directly in the administrative decision-making process;
4. the nature and degree of legislative monitoring of administrative decision making and the ability to use ex post rewards and sanctions;
5. the “rules” governing the allocation and use of capital and labor, in particular, the extent to which agencies are financed by sales revenues rather than taxes and the administrators’ employment conditions.

Other scholars to map agency design are Bouckaert and Peters (2004:38-43) who present seven different types of activities that are often delegated to agencies. Implementation is the first agency activity that Bouckaert and Peters (2004:38) lists. Agencies within this category can be involved in “direct service delivery” or they could be in charge of “the transfer of funds”, which means that they “make decisions about grants and contracts as a means of insulating these decisions from direct political control” (Bouckaert and Peters 2004:39).