Faisal Naru, Bill Below, Filippo Cavassini, and Anna Pietikainen, OECD Directorate for Public Governance and Territorial Development
The “Men in Black” are a special unit charged with regulating Alien activity on planet Earth (at least so it is in the film with Will Smith and Tommy Lee Jones). Their job is to operate incognito, working behind the scenes to avoid an intergalactic apocalypse. When uncovered, special technology allows them to eradicate all knowledge of themselves and their function.
At least to most of us, regulators are a lot like the “Men in Black,” ensuring that trains will run on time, there is clean water in the tap, lights switch on, the broadband is working and there is cash in the ATM machines, largely going unnoticed, that is, until something goes wrong, stops working or crashes.
Unlike the “Men in Black,” regulatory agencies do not operate incognito—at least they shouldn’t. They must be part of a well-functioning and transparent governance ecosystem that provides these important public services and is held accountable for the performance of its different actors. Being part of this ecosystem, however, carries a number of risks.
Different stakeholders—whether the regulated industry, government, politicians, consumers or other interest groups—have powerful incentives to influence, or capture, regulatory policies. The danger of capture is all the more present because of the proximity of regulator and the regulated. We need regulators to be independent, just as we need our judges and referees to be independent. Independence cannot come at the price of accountability or engagement, and regulators need to keep their fingers on the pulse of the market through interaction with industry and consumers. Autonomy should still be compatible with maintaining helpful feedback loops between the regulator and its governmental executive overseers.
The challenge for regulators is this: they must be engaged but not enmeshed, insulated but not insular.
Not easy to achieve when you consider that the life of a regulatory agency is fraught with potential entry points for undue influence. These “pinch points” are specific to the regulator’s environment and are amplified when two or more events occur at the same time. An example might be a political election coinciding with a rise in crude oil prices and a change in the head of the agency. Successfully navigating these powerful forces can be accomplished with good governance and clear regulatory policies addressing such issues as agency finances, staff behaviour, the appointment and removal of leadership, the way in which agency intersects with political cycles, and the interaction with the various actors in the regulatory sphere.
Given the challenging context within which regulators operate, the question is how to limit undue influence in practice and create a strong culture of independence. Independence is not a static state achieved once and for all by statute, but an active objective that the regulatory agency must be prepared to approach proactively and continuously. While institutional design is one part of optimizing independence, it is not sufficient. A regulator can be part of a ministry and yet be more “independent” than a regulator in a separate body.
The OECD has set out to understand how regulatory agencies around the world are structured to be protected from undue influence. The OECD has developed a unique dataset of the formal arrangements for independence of regulators across 33 OECD countries, complemented by detailed case studies showing what holds regulators accountable for their performance.
A follow-up study, recently published as ‘Being an Independent Regulator,’ has filled in many of the gaps in our understanding of how de facto independence plays out in the daily life of regulators, differing from other research on independence, which tends to focus only on formal (de jure) institutional arrangements. Forty-eight regulators from around the world participated, representing institutional arrangements including formally independent regulatory institutions, ministerial regulators, and single- and multi-sector regulators.
A key conclusion of this work is that regulatory independence is not an end in itself, and that it should be seen as a means of ensuring effective and efficient public service delivery by the different market players. Developing a culture of independence is just another way of saying nurturing better performance.
Being an independent regulator cannot mean adopting the cloak of invisibility and working behind the scenes like the Tommy Lee Jones and Will Smith characters. Regulators must fully engage with all stakeholders. Maintaining independence in the midst of significant pressure from all sides requires governance structures aimed at cultivating and maintaining a culture of independence.
It may not keep the galaxy safe, but it will ensure that regulatory agencies better meet their mandates to serve the public good.
For more information, follow this link.
OECD (2016), Being an Independent Regulator, The Governance of Regulators, OECD Publishing, Paris
OECD. (2016), Governance of Regulators’ Practices: Accountability, Transparency and Co-ordination, The Governance of Regulators, OECD Publishing, Paris.
Koske,I., Naru.F, et al. (2016), “Regulatory management practices in OECD countries“, OECD Economics Department Working Papers, No. 1296, OECD Publishing, Paris.