Summary of SER advisory report on market regulation policy
In November 2008, the Lower Chamber asked the SER to publish an advisory report on
deregulation and liberalisation and safeguarding public interests. In particular, the Lower
Chamber asked the SER to make recommendations on future deregulation or
liberalisation in light of the lessons to be drawn from earlier operations.
The aim of this report is to determine how policy can be improved in future. Experiences
with the liberalisation of sectors in which there had previously been little or no
competition played an important role in the drafting of this report. Those sectors,
referred to here as ‘semi-public sectors’, include energy, health care and the
reintegration sector.
However, the general analyses, lessons and recommendations in the report apply not
only to policies where the role of market coordination is strengthened due to
deregulation and liberalisation. They are relevant for all choices concerning the
respective roles of market coordination and government coordination in a sector; in
other words, to any combination of instruments available to the government to
determine or influence economic decisions on the one hand, and the conscious choice to
give private actors the scope to make their own decisions on the other. After all, the aim
has to be to produce better policies, regardless of whether that is achieved through
liberalisation or regulation.
In principle, the general analyses and recommendations are also relevant for every
sector. After all, the public interest does not only play a role in semi-public sectors, but
also in ‘ordinary’ sectors that have long been subject to some form of competition. In
theory, the instruments described in this report can be employed in any sector, although
the choice of instrument depends on the nature of the good or service concerned and
the relevant public interest. The impact assessment proposed in this report could prove
useful in preparing policy choices concerning market coordination and government
coordination in every sector.
Public interest
The public interest encompasses interests that ought to be protected for the good of
society as a whole and for that reason are adopted by politics. It is ultimately up to the
democratically elected political bodies to determine the public interest.
From a normative perspective, arguments in favour of government intervention can be
divided into three categories:
- there is the inherent risk of market failure in some characteristics of the sector and of
the relevant activities;
- social considerations; and
- situations in which consumers tend not to act in their own best interests.
These are situations where an entirely free market leads to inefficiency or undesirable
results and accordingly some form of government intervention is desirable.
It should be noted here that the opposite can also happen - the possibility of
government failure, in the sense that government intervention has its own limitations
with the result that the envisaged outcome is not entirely achieved. Accordingly, the
public interest should not be identified solely in terms of inefficiencies or undesirable
outcomes in the operation of the market. Whether there is a realistic possibility of
government measures generating an improvement must also be investigated.
In the past, the legislature has found some public interests to be so important – because
they involve serious forms of market failure or important social considerations, for
example – that they have been made the subject of a duty of care under the
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Constitution. International treaties (such as the European Convention on Human Rights
(ECHR)1 and the EU Treaties) also prescribe a number of areas where a duty of care and
fundamental principles apply. These provisions establish a legal framework for
identifying public interests and defining how they should be safeguarded.
Public interests are inherently dynamic; they can change according to shifts in the
context and in political and public opinion and in response to technological
developments. Nevertheless, politicians must also take account of historic choices in
identifying public interests, since the designation of public interests in the past has
caused individuals and companies to change their behaviour. A redefinition of public
interests must therefore not lead to a breach of trust and must therefore be carefully
considered.
As far as European law is concerned, member states must respect the principle of a
properly functioning internal market without disruption of competition. Under certain
conditions, the government may take measures that restrict free movement or
competition in order to protect a particular public interest, as long as those measures
are necessary and proportionate. Article 106, paragraph 2 of the Treaty on the
Functioning of the EU, other relevant treaty provisions and associated case-law provide
the framework for this.
Possible consequences of deregulation and liberalisation
The aim of social and economic policy is to increase public prosperity. The SER adopts a
broad definition of prosperity that encompasses not only material progress (increased
affluence and production), but also social progress (improved welfare and social
cohesion) and a good and clean environment in which to live. Accordingly, public
prosperity is not determined solely by the availability of goods and services that are
traded on markets for a price; the quality of ‘unpriced scarcity’, such as the spatial and
environmental quality of life, is also a factor. Ideally, a change in the form or degree of
government involvement in a sector should be designed in such a way as to increase
public prosperity by adopting the right mix of market coordination and government
coordination. Depending on the circumstances policies that increase competition can
help to promote public prosperity. After all, competition can force companies to reduce
costs and encourage them to introduce new products that are better matched to the
wishes of consumers and design new products and production methods (improvement in
productive, allocative and dynamic efficiency).
As with any form of regulatory policy, however, the government can also make mistakes
when introducing deregulation or liberalisation. For example, it can allow too much free
competition and intervene too little. It can also choose an unsuitable instrument, for
example a form of regulation that leads to the adoption of prices that are too high in
relation to the costs. After all, the type and degree of government involvement is not a
straightforward choice between ‘market’ on the one hand and ‘government’ on the
other. Rather it involves choosing from a mix of instruments with a role for both market
coordination and government coordination. A survey of market liberalisation policies
clearly shows that a wide variety of instruments are used, actually embracing the entire
arsenal of instruments of regulatory policy. There are some markets where the role of
government coordination is relatively limited, but there are probably no markets in
which there is no form of sector-specific government intervention at all.
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European Convention on Human Rights.
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The consequences of regulation and competition depend heavily on the characteristics
of a particular sector, which complicates efforts to make any general observations
covering all sectors.
Potentially negative consequences of regulatory policies due to inadequate or
inappropriate government intervention can be divided into at least three categories
(analogous to the arguments given above concerning the identification of public
interests):

they could reduce efficiency (productive, allocative or dynamic) in the sector;

they could cause a distribution of income or capital that is regarded as socially
inequitable; and

the outcome could be undesirable for political reasons (merit goods).
A further distinction can be made between problems in the design of the regulation and
problems in the transition phase.
Safeguarding public interests
The Council stresses the importance of carrying out a thorough impact analysis before
implementing new policies regarding government intervention in a sector, starting with
an analysis of the existing situation and the identification of public interests.
Identification of public interests
It is important to explicitly define the public interests in the relevant legislation in order
to provide guidance for supervisory authorities and the relevant market actors in their
activities. It is also important to identify in advance the indicators that can be used to
measure the development of public interests. The experiences with the Study into
Market Liberalisation (Onderzoek Marktwerkingsbeleid) have shown that it is essential to
identify and operationalise public interests in advance so that the public interests can be
monitored and the market regulation policies can be evaluated. The body that monitors
the development of public interests must therefore have the powers to gather the
necessary information. In order to identify the specific information that is needed, and
hence the necessary powers, the public interests (and the indicators for them) for which
information can and must be collected have to be specifically identified. The need to
gather this information and the administrative burden arising from that process must be
assessed.
From the perspective of European law, it is important to explicitly define and record
public interests at such time as government intervention concerns an economic activity.
European law permits member states to restrict free movement or competition or
provide state aid under certain circumstances, as long as the measures are necessary
and proportionate with a view to safeguarding public interests. However, it must be
clear in advance what those public interests are and why the measures are necessary
and proportionate.
There may be reasons to lay down explicit minimum standards in the legislation, for
example where there is a threat that market failure will erode public interests. This
might occur, for example, if customers are unaware of differences in quality between
suppliers and therefore choose mainly on the basis of price, thus causing quality
standards to decline. In that case, a statutory minimum level of quality might increase
public prosperity as a whole. Social considerations might also play a role; for example
because politicians want everyone to be offered a minimum level of quality regardless of
their income or where they live. In semi-public sectors, either or both of these reasons
often apply. It is important to weigh the risk of an unacceptable decline in the level of
public interests against the risk that establishing minimum standards will cause too
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much rigidity and prevent the adjustment of the supply to the wishes of consumers and
users.
Instruments for safeguarding public interests
Depending on the nature of the good or service, the reason for government intervention
and the nature of the relevant public interest, the government has a choice of various
instruments with which to safeguard the public interest.
The nature of these instruments varies significantly:

provision by public authorities (for example by departments or government
agencies)

procurement

setting standards (legislation, regulation, licensing, enforcement)

supervision

levies (taxes, duties)

subsidies

exercising influence, providing information.
In some cases, government instruments are supplemented by self-regulation, for
example through standards, quality labels or governance codes, something that is
frequently encouraged by the government.
A common feature of these instruments is that they all influence how economic decisions
are made in the sector and the freedom of action of the various market actors.
Safeguarding the public interest calls for a tailored approach and therefore also calls for
precision in the use of the available instruments. How they are used depends on the
form of market failure that has to be corrected or on social considerations in the sector.
But the risk of government failure that might ensue from the use of the various
instruments also has to be taken into account. The choice between the various
instruments – or in many cases between various combinations of instruments – is an
essential element of an impact assessment carried out in advance.
The government might choose to introduce deregulation or liberalisation and therefore
allow more competition. In principle, it will still be possible to use all of the above
instruments in the sector concerned, but the combination of instruments will change. At
the same time, it is crucial that genuine competition for the favour of consumers
emerges as well as to create enough scope for entrepreneurship.
If it is revising policies, the government must also take into account what effects the
change will have on the interests of stakeholders of the policy, such as property rights
and the position of employees, and review whether those effects should have
implications for the policy, and if so what the consequences should be.
Public interests and the position and interest of consumers
Consumer welfare means a good price-quality ratio, the availability of products and
services, freedom of choice and innovation. In many sectors, improving the match
between supply and demand is an important reason for increasing the scope for
competition.
Competition can benefit consumer prosperity because suppliers have to do their best to
win customers and secure their loyalty. Competition is a mechanism that leads to a
demand-driven sector, since the sanction for the failure to meet the demands of the
buyer is that they will switch to a different supplier.
In many sectors the general framework of consumer protection is sufficient to guarantee
effective consumer choice. However, that is not automatically the case when
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competition is first introduced in a sector. The government must have regard to the fact
that competition depends in part on a sufficiently large group of customers switching to
the supplier that offers the best price-quality ratio for them. Customers therefore have
an important function in promoting competition. If they cannot or will not perform this
function, the market fails.
In some sectors, the provision of information to and processing of information by
consumers are significant problems. Consumers do not always act as rationally as is
assumed. In these cases, the government has a responsibility with regard to providing
information (including creating transparency) and consumer protection. Prior to
liberalisation and deregulation, therefore, user groups and the behaviour of users need
to be considered. In the past, this aspect has often received too little attention during
the preparation of policy and corrective measures had to be taken during the transition
phase.
Another aspect requiring attention is the relationship between government tendering
and the wish to create demand-driven markets where supply adapts to the wishes of
consumers. In such cases, the government buys on behalf of the end user. In sectors
where contracts are concluded with only one supplier, it might be necessary to use
complementary mechanisms to achieve a demand-driven market (insofar as that is an
objective). This might mean, for example, that representatives of users are involved in
the procurement process and that the monitoring of public interests includes research
into user satisfaction. For some products or services, the government can opt for a
framework contract with a number of suppliers. The end users then have a choice and
suppliers will have to adapt to their wishes.
The position of employees demands special attention
Public interests are not only determined on the basis of possible inefficiencies in the
market; social considerations also play a role. Some of these socially-driven public
interests relate in part to the position of employees. Safeguarding these public interests
must also be a consideration when changes are being made in market regulation.
Changes in market regulation may be accompanied by changes in the level of
employment and in the legal position, terms of employment and working conditions of
groups of employees. This also applies for deregulation and liberalisation policies,
although it should be noted that relevant developments for employees cannot all be
traced exclusively to changes in the form or degree of government involvement.
External developments, such as technological or macro-economic factors, also often play
a role.
As an employer, the government itself is sometimes involved in policy changes, for
example in the case of privatisation or nationalisation. In the context of good
employment practice, the government has to make agreements on the transfer of staff.
As far as employees (in other words, not civil servants) are concerned, the Transfer of
Undertakings Act may apply. This act regulates the automatic transfer of the employees
with retention of the rights and obligations arising from their employment contracts.
Market liberalisation policies are frequently designed in part to increase efficiency and
reduce costs, and hence also affect the use of labour. Particularly in labour-intensive
sectors, where wage costs account for a large part of the total costs, this can exert
pressure on the legal status of employees and their terms of employment. When the
intention is to create competition in the market, changes in the position of employees
can be seen as a transition from a ‘protected’ status to a situation on ‘market terms’. It
is then necessary to enquire to what extent additional and transitional measures are
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required for the employees concerned during the transition period. Naturally, the social
partners also have a responsibility in that regard.
When the government awards contracts through concessions or tenders, the position of
employees can be affected by the battle to win the concession or the tender.
Competition on terms of employment is curtailed by certain statutory minimum
standards, such as the minimum wage. The provisions of collective agreements might
also be applicable. The government’s position as the tendering party is subject to
international treaties such as ILO Convention 94. This convention, which has been
ratified by the Netherlands, is intended to prevent government tenders leading to
competition at the expense of customary wages and working conditions.
Companies can lose a concession or lose their contract in a tendering procedure. Many
tenders are issued by public authorities and companies every year. The loss of a single
concession or contract will often not create any problems for employees. In specific
market conditions, however, it might do so if the loss of a single client puts the jobs of
the employees with their current employer at risk. These specific situations call for
special attention for the position of employees when concessions and tenders change
hands in the preparation of changes in the market regulation. In practice, various
additional measures have been taken to address such situations, as in the case of the
Public Transport Act 2000.
Finally, developments in the labour market and measures relating to employees could
also have consequences for the effects of market regulation policy in a sector. In
preparing policy, therefore, account must be taken of the opportunities and risks that
measures relating to employees present for attaining public interests. An aspect that
demands attention is the consequence of investments in training for the quality of
service, particularly in labour-intensive sectors.
The position and interests of other stakeholders
Public prosperity is the point of departure for assessing policies regarding market
regulation and competition. Consumers and employees are therefore important
stakeholders of these policies, but not the only ones. Another factor in assessing the
effects of policy on public prosperity is the potential consequences for companies,
citizens and future generations. It is also important to identify their interests and
positions at the outset of the policy formulation process. The external effects of
transactions on third parties, such as pollution or the burden of the national debt on
future generations, might indicate a public interest. In the context of sustainable
development, these are issues that need to be addressed.
Group interests naturally do not always correspond with the public interest, but it is
important to take the interests of stakeholders into account in shaping the transition
process. Under certain circumstances, it may be desirable to provide compensation for
the effects of policy changes, for example by providing assistance in the process of
adjustment to the new situation. Furthermore, the choice between various policy options
may depend on the allocation of the effects of particular policies among different groups.
The role and position of supervisory authorities
Supervision plays an important role in every sector, regardless of the form and degree
of government intervention. There should even be a form of supervision for production
or service provision by the government. External supervisors are appointed where the
government safeguards public interests ‘at arm’s length’.
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Public interests are often safeguarded by means of standards laid down in legislation.
Monitoring and enforcing compliance with these standards is a core task of supervisory
authorities, since without supervision and enforcement there is no assurance that the
standards will be complied with, and hence that the public interest will be safeguarded.
In designing policy alternatives, attention should therefore be given to supervision and
enforcement, not only during the transition phase but also in the desired final situation.
Supervisory authorities act according to the standards imposed by law on the
government and private actors to safeguard public interests and on the basis of their
statutory powers, such as the powers to gather information, to compel action and to
impose sanctions. The effectiveness of the supervision therefore depends entirely on the
quality of the standards to be enforced and the instruments available to the supervisory
authority. Accumulation and duplication of supervision must, however, be avoided.
Supervisory authorities can also serve as a watchdog in terms of safeguarding public
interests. Their knowledge of the sector makes them well equipped to monitor it.
However, it must be clear in advance what public interests are at stake in a sector and
which public interests should be monitored by which agency. It is also necessary to
consider what indicators will be used for the development of public interests, since this
could be a factor in determining the instruments the supervisory authority needs to
perform its monitoring tasks. In defining indicators and establishing the monitoring
schedule, the availability of relevant information and the administrative burden involved
in collecting the data must also be taken into account. Monitoring is not a goal in itself
but a means of safeguarding public interests and facilitating evaluations.
In market liberalisation, the enforcement of competition law plays an essential role in
the emergence and protection of competition and in tackling market power The
transition to greater competition does not occur automatically. In some cases, it may be
desirable to introduce sector-specific competition rules with a view to helping to remove
barriers to entry more quickly.
Effects of deregulation and liberalisation in specific sectors
The Ministry of Economic Affairs’ Study into Market Liberalisation in 2008 provides the
most extensive overview of existing studies of trends in sectors where deregulation or
liberalisation have been introduced. However, in the course of that study the ministry
did encounter a number of methodological problems that made it impossible to measure
the effects of policies. Accordingly, that report reached no conclusions about the effects
of deregulation and liberalisation. The SER recognises these methodological obstacles,
which probably prevent any evaluation of liberalisation policy in the past.
The operationalisation of public interests in reports such as the Study into Market
Liberalisation will remain disputable as long as politicians have not clearly identified and
operationalised public interests before the policy change. Until they have been, the post
facto measurement of the development of public interests will remain to a certain extent
arbitrary. The danger is that the indicators of public interests that are used will be
determined by the availability of data rather than the relevance of the data for
establishing the development of the relevant public interest. This is another hiatus that
constitutes a potential obstacle to any evaluation of past market liberalisation policies.
One conclusion to be drawn from this, in any case, is that in the preparation of policies
insufficient attention has been devoted to the identification and operationalisation of
public interests and the preparation of monitoring and evaluation of the policies.
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In its request for advice, the Lower Chamber in fact calls for an evaluation of
liberalisation and deregulation in a number of sectors. The SER has incorporated specific
experiences with liberalisation policies in its analysis. However, the Council has been
unable to surmount the aforementioned methodological problems.
Based on the conclusion that too little attention was apparently devoted to the prior
identification of public interests and the requirements for monitoring and evaluation, but
also because of the impression that policy changes occur frequently and rapidly, the SER
investigated whether market liberalisation policies have been prepared with due care in
the past.
For this purpose, using the Impact Assessment developed by the European Commission,
the SER identified the analytical steps to be taken and the questions that have to be
addressed in every market regulation policy. The Council studied the published policy
documents on deregulation and liberalisation in four sectors (fixed telephony, electricity,
household help and reintegration) to investigate whether those analytical steps had
been taken and the accompanying questions were addressed. It also enquired how these
questions ought to be answered on the basis of the current state of the art as set out in
reports, articles, monitors and policy documents.
As already mentioned, the purpose of this exercise was not to evaluate the effects of
liberalisation and deregulation in those sectors, but it did provide some insight into the
extent to which public interests, the likely effects and the underlying mechanisms were
clearly identified in advance and to what extent the expectations were met. On that
basis, the SER drew eight lessons:
1. Decisions on the form and degree of government intervention must be based on
an analysis of public interests, information about the effects of a legislative
proposal, the safeguarding of public interests and the benefits in relation to
alternatives.
2. Greater attention should be devoted to the competitive process.
3. Greater attention should be devoted to the behaviour of consumers.
4. More explicit attention should be devoted to the desired quality.
5. Government share ownership cannot automatically be expected to safeguard
public interests.
6. In the transition phase, there must be a balance between continuity of policy on
the one hand and the possibility of intervening on the basis of lessons learned on
the other.
7. The safeguarding of public interests must be permanently monitored.
8. Most changes in sector policies are not pure win/win situations, but also
encompass allocation issues. Attention should be devoted in advance to the
allocation of positive and negative effects of policy variants among different
groups, such as employees.
Possibilities for deregulation and liberalisation in the future
It is the task of politicians to identify and safeguard public interests. There are various
instruments available to them. The instruments used should sometimes be revised, for
example because of changes in public opinion, technological developments or negative
experiences with existing policy. The policy change should on balance provide better
safeguards for public interests. Whether the review of instruments ultimately
strengthens the role of market coordination, leads to a strong role for government
coordination or leaves the balance between these two forms of coordination as it is, is
irrelevant – what counts is the result. Deregulation and liberalisation is not a goal in
itself, it is only a tool.
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In the SER’s opinion, it is therefore not effective to look for sectors where deregulation
or liberalisation could be introduced. The question should actually be addressed from the
other direction: if the results of existing sector policies are unsatisfactory, it is necessary
to investigate and compare the likely effects of other potential solutions. This could
ultimately lead to a change in the form and degree of government involvement in the
sector.
A recommendation to introduce more competition in a particular sector would also
provide little guidance for policymakers, since there are various ways of introducing
more competition and it is the choice of instruments and their precise design – from the
identification of public interests up to and including the supervision of compliance with
statutory standards – that will determine the results.
The impact assessment according to the SER
The role of the government in the economy and public appreciation of its role and of the
role of competition moves in waves. There were high expectations for deregulation and
liberalisation at the end of the last century. However, the complexity of the transition
process and of safeguarding public interests in liberalised semi-public sectors is often
underestimated.
In the Council’s opinion, the discussion about regulation and competition should enter a
new phase. The focus should be on a thorough consideration of the effects of various
policy alternatives for public interests and for social prosperity. As a contribution to this,
the Council has developed an impact assessment that could help in finding the right
questions to ask. Asking the right questions at the right time, in addition to a systematic
comparison of alternatives, could play an important role.
Apart from its usefulness in the policy formulation process, an impact assessment can
also be a useful tool for communication by highlighting the most important
considerations for the Lower Chamber and other stakeholders. This calls for it to be
properly anchored in procedures in order to guarantee proportionality and to ensure that
an impact assessment is actually implemented at an appropriately detailed level and
communicated transparently.
Experiences with liberalisation and deregulation have shown the importance of preparing
policies thoroughly. In the Council’s view, the criteria for an analysis of the likely effects
of market regulation policy should be that it is:
- Mandatory
- Proportional
- Timely
- Transparent
- Conducted with experts and stakeholders, including social partners and users
- Thorough analysis of all the relevant facts and effects.
Building on the European Commission’s model, an impact assessment for choices
regarding the mix of coordination mechanisms in a sector should contain a number of
analytical steps, which are shown in the following table together with principal relevant
questions.
Impact assessment for coordination mechanisms
A. Analysis of the existing situation and identification of public interests
1. What problems exist /are anticipated in the existing sector policy and what are
the underlying causes?
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2. What are the market features of the relevant activities and sectors/subsectors?
3. What public interests play a role, how are they safeguarded?
4. Who are the stakeholders of the policy and what are their interests (for example,
employees, consumers, companies, future generations)?
B. Definition of the targets
5. Formulation of objectives in relation to the problem and the causes; will a change
occur in relation to the (original) public interest?
6. Specification of the objectives (SMART, if possible)
7. The relationship between the objectives and other policies
C. Development of policy variants, desired final situation and transition
8. What policy variants with which instruments are possible, what changes will occur
(for example subsidies, standards, supervision and control), what additional
measures are possible/desirable (for example, for employees)?
9. How will the public interests be safeguarded with the variants/instruments?
10. What is the relationship between variants/instruments and proportionality and
subsidiarity?
11. Do the variants/instruments mesh with existing legislation, can legislation be
amended?
12. What transition path do the variants/instruments require (for example, timing
of steps in the transition, transitional measures for employees, intervention
measures)?
D. Analysis of the effects of the policy variants
13. How will the variants affect the public interests?
14. What are the other effects (costs and benefits) of the variants (economic,
social, environmental, position of consumer, position of employees, for
example)?
15. What are the effects for regulations, regulatory pressure, enforcement,
supervision and what are the associated costs?
16. Who is affected (for example, groups of employees, groups of consumers) and
how, to what extent?
17. How will these effects be caused, what are the underlying theories and
assumptions?
18. What are the risks (economic, legal, etc.)?
E. Comparison of policy variants
19. Ranking of the different variants on the basis of the net effects on the
objectives and public prosperity or other criteria.
20. Presentation of the distribution of effects among different social groups.
21. Other criteria that are not or cannot be included in the ranking (for example,
the reversibility of policy changes if the evaluation shows the effect is
negative).
F. Development of monitoring and evaluation
22. Defining indicators for public interests, for the attainment of objectives and for
other aspects for which monitoring may be regarded as necessary
23. Possibilities of/for monitoring
24. Planning of the evaluation.
The first step is the analysis of the existing situation and the identification of public
interests. When the objectives have been defined, various policy variants are
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formulated, with the focus on both the desired final situation and the transition. The
effects of policy variants are then identified and the costs and benefits of policy variants
are compared. Finally, a system for monitoring and evaluation is developed.
This impact assessment does not have to be applied for each incremental change in the
sector policy. As the change in the policy instruments and the respective roles of
market coordination and government coordination becomes more fundamental,
however, the Council does recommend that the six steps be followed, including all the
specific aspects.
Translated by Balance, Maastricht