ifc regulatory transformation in australia italy and uk 2008(2)

8/14/2019 Ifc Regulatory Transformation in Australia Italy and Uk 2008(2)

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REGULATORY TRANSFORMATIONIN AUSTRALIA, ITALY, AND

THE UNITED KINGDOMCASE STUDIES ON REFORM

IMPLEMENTATION EXPERIENCE


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Copyright 2008The World Bank Group1818 H Street, NW

Washington, DC 20433

All rights reservedDecember 2008

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The World Bank Groups Investment Climate Department (CIC) is the operational center for the International FinanceCorporations (IFCs) Business Enabling Environment Advisory Services and FIAS, the multi-donor investment climateadvisory service. CIC assists the governments of developing countries and transitional economies in reforming their businessenvironments, with emphasis on regulatory simplication and investment generation. CIC relies on close collaboration withits donors and World Bank Group partnersIFC, the Multilateral Investment Guarantee Agency (MIGA), and the WorldBank (IBRD)to leverage value and deliver tangible results for client governments.

The Organizations (IFC, MIGA, and IBRD), through FIAS, endeavor, using their best efforts in the time available, to providehigh quality services hereunder and have relied on information provided to them by a wide range of other sources. However,they do not make any representations or warranties regarding the completeness or accuracy of the information included in this

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Cover photo credits: globePatricia Hord Design (also appears on chapter opening pages); photo inserts (left to right)SimonMorris/stock.xchng; Agata Urbaniak/stock.xchng; Mark Fallander/IFC.


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REGULATORY

TRANSFORMATION INAUSTRALIA, ITALY, ANDTHE UNITED KINGDOMCASE STUDIES ON REFORM

IMPLEMENTATION EXPERIENCE

December 2008


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AcknowledgementsThis case study was written by Carlone Varley,Rex Deighton-Smith, Luigi Carbone, and Scott

Jacobs (Jacobs and Associates) based on atemplate developed by FIAS, the multi-donorbusiness environment advisory service of the

World Bank Group. The study beneted fromthe inputs of Laszlo Csaba, Zso a Czoma, ImreVerebelyi, and Hungarian refugees who wish toremain anonymous. The publication benetedfrom the valuable comments and supportof Vincent Palmade, Gokhan Akinci, PeterLadegaard, and Delia Rodrigo Enriquez.Florentina Mulaj, Doriana Basamakova, andPatricia Steele provided key comments andeditorial assistance in nalizing the draft forpublication.


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ContentsExecutive Summary .............................................................................1

1. Introduction .................................................................................... 5

2. Context of Reforms ......................................................................... 7

3. Regulatory Reform in Three Countries ............................................ 9Australia 9Italy 14The United Kingdom 19

4. Impact of Reforms ....................................................................... 24Cutting Red Tape and Business Costs 25Removing Regulatory Barriers to Competition 26Increasing Capacity for Quality Regulation 27

5. Cross-Country Assessment of the Reform Processand Institutional Design ................................................................ 28Government Leadership and Strategy 28Institutional Arrangements 29Changes in the Civil Service 30Legal Reform 30Management and Involvement of Stakeholders 30Resource Issues 31Monitoring and Evaluation of Reform Impacts 32

6. Lessons of Reform ........................................................................ 33

Bibliography ...................................................................................... 37


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Tables1 Timetable and Context for Regulatory Reforms in Australia ...............................102 Timetable and Context for Regulatory Reforms in Italy......................................153 Timetable and Context for Regulatory Reforms in the United Kingdom ...............19

4 Success Factors and Shortcomings of Reform in Australia, Italy,and the United Kingdom ..............................................................................34

Figure1 Comparative Benchmarks of Product Market Regulation

in OECD Countries, 2003 ................................................................................. 25

Boxes1 Are There Preconditions for Regulatory Reform? ..................................................... 82 The Role of Reform Plans ................................................................................... 29

3 The Roots of Resistance to Reform ....................................................................... 31


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EXECUTIVE SUMMARY

dynamic markets. One of this papers most positivendings is that enduring reforms of longstandingregulatory practices can be developed in a variety of legal, institutional, and cultural settings.

Specically, this paper considers:

The components of regulatory reform atthe core of Australias ambitious NationalCompetition Policy (introduced in 1994and still under way). The Australianreforms seek to promote competition inthe economy through broad regulatory reviews, regulatory impact analysis, andnew forms of institutional cooperationbetween levels of government. Reformshave been based on the assumption thatthe highest costs of regulation are due tomarket distortionsthat is, limits on anddistortions of competition.

Italys Bassanini reforms (19962001), whichfocused on improving the governmentscapacity to regulate a market economy andon reducing the host of administrative

One of the greatest challenges for governmentsis organizing, implementing, and sustaininggovernment-wide, multiyear regulatory reforms.Such efforts are more likely to achieve intendedoutcomes if governments understand the institu-tional and political economy mechanisms of

successful reforms elsewhere. This paper assesses,compares, and draws lessons from ambitiousregulatory reform programs in three high-incomecountries: Australia, Italy, and the UnitedKingdom.

These countries took similar approaches to regula-tory reforms, designing them not as ad hocderegulation programs but as broad institutionaland procedural reforms extending 525 years (withsome still ongoing). Their reforms addressed entire

elds of regulation and sought to permanently change how regulators functioned by buildingsustainable capacities for good regulatory gover-nance into the public sector. Although institutionsin these countries are highly developed, the lessonsfrom their experiences can help developing coun-tries encumbered by costly regulatory legacies thatare now building new capacities to regulate open,


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institutions and incentives are highly resistant tochange and easily revert to former habits. Italysexperience shows that not all reforms launchedon the back of a crisis are sustainable. The crisismentality in the United Kingdom passed before

reforms were institutionalized, and it took many more years of effort to make enduring progress. Australia shows that nothing speaks louder thanresults. Its second round of reformsthe Na-tional Competition Policy reforms that are thefocus of this studywas accepted due to theclear benets of the rst.

The periods covered by these case studies werechosen to encompass the various phases of reforms: deciding to launch them, designing

and implementing them, producing results, andsustaining them. In that sense each case study has a coherent storyline. But reforms on thisscale cannot be neatly contained, particularly since regulatory reform is a permanent featureof modern governance. In Australia and theUnited Kingdom reforms are ongoing. AustraliasNational Competition Policy reforms areabout to enter a new phase, while the UnitedKingdoms reforms continue to seek moreeffective approaches. Hence, the case study

approach requires some simplication of thestoryline.

The limitations of the case study approachshould not suggest that regulatory reforms areone-off adventures. On the contrary, the successof reforms seems closely correlated with theamount of time that they are under way, with-out any clear endpoint. Sustained implementa-tion and commitment seem as important as theinitial reform planwhich is logical, since

regulatory reforms are aimed at highly resistantinstitutions that have developed over many years.The broad success of the Australian and U.K.reforms can be linked to the more than 20-yearlength of the reform process, although countriesdo not necessarily have to wait even a decade tosee results. Australia and the United Kingdomsaw results within a few years, and Italys re-formsconducted over just 5 yearsachieved

procedures through which the public sectorintervened in the private sector.

The coherent regulatory reforms built step by step in the United Kingdom (launched in

1979 and still under way). The U.K. reformsinclude changes to regulatory governance innational ministries, reinforced by broadereconomic policy reforms to reduce the statesrole in the economy.

All these reforms had a broad scope consistent with the international consensus on regulatory reform that has emerged over the past 10 years.They sought to improve the instruments,processes, and institutions of all forms of regula-

tion through integrated strategies of deregula-tion, re-regulation, and enhanced capacities forhigher-quality regulation that meet social needsconsistent with open, competitive markets.

These reforms did not arise by accident. They allaimed to reverse persistent trends of poor eco-nomic performance and governance failures. In allthree countries, regulatory reform was a way of responding to growing social dissatisfaction witheconomic and government performance. Broad

reform was correlated with broad consensus thatthe status quo was unsustainable, but specicreforms still required strong political leadershipready to make structural changes.

Italy and the United Kingdom used political andeconomic crises to launch their reforms, and hadpolitical leaders farsighted enough to movebeyond short-term xes into regulatory reformsthat attacked underlying structural causes.

Australia shows that it is possible to start reforms

without a short-term crisis if there is a widely held view that the status quo is insufcient. Therst round of Australian reforms, in the 1980s,

was driven by growing acceptance that thecountrys two-decade economic decline relativeto other OECD countries had to be reversed.

Sustaining reform over the long term is a sepa-rate challenge, caused by the fact that regulatory


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aging point is that the studies identify no singleinstitutional precondition for reform. Australia isa decentralized federation, Italy is highly central-ized but has strengthening regional structures,and the United Kingdom is unitary but has

strong regions. All three are parliamentary systems, but with very different historical andpolitical traditions of governance. Italy, forexample, has a tradition of weaker, shorter-livedgovernments (which partly explains why regula-tory reform was less sustainable). All threecountries are distinguished by civil law andcommon law (indeed, Italy invented civil law and the United Kingdom invented commonlaw). Italy and the United Kingdom are mem-bers of a regional group (the European Union)

that is driving some types of regulatory reform, while Australia is not. Thus, successful reformcan be conducted by quite different political andlegal institutions.

Australias reforms have been the most success-ful. Their success seems to be due to a conver-gence of factors familiar to reformers in bothdeveloped and developing countries:

A clear, comprehensive, well-designed

reform plan, exible enough to evolve asopportunities emerged for further reform.

Strong political leadership and bipartisansupport, built on a durable consensus.

Adoption of bold, explicit targets that couldbe monitored.

Relatively quick results that created new supporters of reform.

Strong, supportive institutions in thebureaucracy.

Monitoring and evaluation processes builtin from the start.

Successful reform does not necessarily include allthese elements. But they are consistent with otherstudies of successful reform and likely contribute

important and lasting benets. Indeed, Italy reformed more regulations in those 5 years thanin the previous 50, and in doing so caught up

with the regulatory reform mainstream elsewhere in Western Europe.

Results of the ReformsThe impacts of regulatory reforms are morevaried than can be captured by a single indicatorof cost reductions. They include effects that aredynamic and static, diffused and concentrated,short-term and long-term, direct and indirect.Reforms of government capacities try to inuencecomplex systems in ways that may not be directly linked to outcomes.

Still, it is clear that reforms aimed at cuttingregulatory costs and stimulating market competi-tion have been directly linked to positive eco-nomic developments in Australia and the UnitedKingdom. Both countries pursued broader, moresustained economic reforms than did Italy, andboth have shown much better growth andproductivity performance. By contrast, in Italy per capita GDP growth slowed to 1.3 percent in2003. This slowdown suggests that its reforms

were too supercial and short-term to have a last-ing effect on economic structures, productioncosts, and commercial decisions.

It is easier to link microeconomic reforms tomicroeconomic performance. Here, all threecountries have seen improvements from reforms.Indicators of product market regulation show

Australia moving to rst place among OECDmembers, the United Kingdom maintaining astrong lead, and Italy moving up ve rungs fromlast place.

Lessons from the Case StudiesSimilarities in reform dynamics and processesamong the three case studies suggest usefullessons for other countrieseven those with

weaker institutional endowments. One encour-


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Sustaining Reform

Reformers should prepare for the long haul,as reform on the scale needed to achievemajor results takes many years and is adynamic, ongoing process.

In all three countries, sustaining reform (evenover ve years) required building momentumthat was not easily dissipated or dependenton the energies of a champion. This was donein three ways in Australia and the UnitedKingdom, and to a lesser extent in Italy. First,supporting institutions were developed in thepublic administration and civil society tosustain reform even when political will

waned. Each country invested heavily inbuilding a supportive bureaucracy with helpand direction from central ministries.

Second, the reform process was opened toparticipation and oversight by stakeholders.Building durable consensus requires spread-ing ownership of reform. These case studiesshow how important it is for governmentsto communicate the purpose and achieve-ments of reform to citizens and businesses.Publicizing results helps sustain momentumand should be done continuouslynot just

when reforms are launched. Though thismay seem obvious, it is not easy to buildconsensus and communicate when ministriesare used to working behind closed doors.

Third, the reform programs produced visibleearly results, creating reform allies andallowing them to expand. When imple-mented effectively, increasing the supply of reform increases the demand for it.

Monitoring and evaluation keep costs andbenets in perspective, keep players ontrack, and sustain coherence.

to the probability of success. Ideally, a reformprogram would be designed to focus on as many of these areas as possible. Other lessons for reformsuggested by the cross-country analysis in thispaper are discussed below.

The Political Economyof Launching Reform

Regulatory reform should be based on clearmarket principles that redene the govern-ments role in private sector development.Regulatory reform is more likely to becoherent and sustained if it is integrated with a wider program of structural eco-nomic reforms. This suggests that a social

commitment to market-led growth isneeded to sustain reforms.

High-level political leadership and (if possible) bipartisan support should be builtfrom a crisis or economic decline, andlocked in through formal agreements.Reform cannot be sustained for long on theback of a single champion. It also cannot belaunched by technocrats, though reformersmust be built into the machinery of govern-

ment to keep reform on course.

Designing and Implementing Reform

The process should be driven by a clear,comprehensive, well-designed reform plan,and have room to evolve over time.

Implementation requires explicit allocationof commitments and responsibilities in thepublic administration. This must be done by introducing new incentives, institutions, andskills, rather than trying to reform theadministration from the outside throughmandates and directives.


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1. INTRODUCTION

to implement multiyear, economy-wide regulatory reform programs that were fairly coherent (ingeneral strategy if not always in detail):

Taking unprecedented joint action, in 1994the heads of Australias federal, state, and

territory governments adopted the NationalCompetition Policyessentially a massiveregulatory reform program based on compe-tition principles. This policy sought toaccelerate and broaden microeconomicreforms to support higher, sustainableeconomic and employment growth. Thepolicy, initially envisaged as a six-yearprogram but still in place more than adecade later, represents a long-term commit-ment. It builds on microeconomic reform

that had been gathering pace since the early 1980s due to anxiety over Australias long-term decline in economic performancerelative to other OECD members. Impor-tantly, the National Competition Policy wasdesigned as an integrated strategy that wouldapply consistent competition principlesacross an extremely wide range of regula-tions, policy areas, and levels of government.

Managing broad economic and regulatory reforms over several yearseven over severaladministrationsis one of the most difculttasks facing governments. This paper examinesthe strategies used by Australia, Italy, and theUnited Kingdom, three high-income countries

that have implemented ambitious regulatory reforms affecting hundreds or thousands of regulations and administrative formalities acrossthe entire government.

The scope of these reforms was unusual evenfor developed countries, as each country aimedto reform not only rules but also administrativecapacities, incentives, and cultures of regula-tion that had built up over decades. Thereforms sought to change regulatory practices

to meet the needs of more dynamic, competi-tive, and open market economies. Pursuing thisgoal required each government to challengebehaviors and procedures that were deeply entrenched in both the public and privatesectors.

The combination of the broad context and specicreform approaches in these countries enabled them


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it was essential. Following the macroeconomicstabilization program of the early 1990s,regulatory reform was designed to attack underlying structural problems in the econ-omy and public administration.

Since the late 1970s, regulatory reform hasbeen a key part of economic structuralreforms implemented by successive adminis-trations in the United Kingdom. In parallel

with reforms of macroeconomic manage-ment, these microeconomic reforms wereintended to strengthen competition, innova-tion, and public sector performance.

It aimed to embed a presumption in allregulatory processes that competition willnot be restricted without good cause andthat a single open market exists for goodsand services across Australia.

Starting later than many countries, Italy devoted the 1990s to catching up with leadingOECD countries in terms of economic andgovernance reforms. The scope, speed, andconsistency of structural reforms implementedby multiple administrations were remarkable(OECD 2001). Regulatory reform was justone of many changes in Italy in the 1990s, but


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2. CONTEXT OF REFORMS

The civil services in Australia and the UnitedKingdom are essentially nonpolitical, whileItalys political and administrative sphereshave traditionally overlapped. This probably also contributed to the lack of reformsustainability in Italy.

Corruption appears to be less of an issue for Australia and the United Kingdom (8th and11th, respectively, of 133 countries inTransparency Internationals 2003 Corrup-tion Perceptions Index) than for Italy (35th). These differences have no clearimplications for reform.

All three countries are highly integrated withthe world economy, so none reformed in isolation:

external forces were signicant inuences. Indeed,a demonstration effect was important in strength-ening reforms. Deregulation in the United Statesand its perceived benets for competitionhelpedsustain the Australian and U.K. drives to developmore competitive market economies. In addition,the OECD was inuential in all three countries,providing international benchmarks and expedit-ing learning on good practices.

Although Australia, Italy, and the UnitedKingdom shared broad reform goals and successfactors, the differing political, legal and culturaltraditions of the three countries inuenced thedesigns of their reform processes:

Australia is a federal state, the UnitedKingdom is a unitary state, and Italy is aregional state (combining elements of thefederal and unitary models). Australiasreforms faced the added challenge of work-ing across constitutional boundaries thatrequired entirely new institutions, while Italy had to work with more than 8,000 munici-palities to address administrative burdens.

Australia and the United Kingdom have

common law legal systems and essentially two-party political systems, while Italy has acodied civil law system and a multiparty political system ruled by coalition govern-ments. The weakness of Italys coalitiongovernments has probably underminedsustainability, but the distinction betweencommon law and civil law systems has hadno obvious impact on reforms.


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competition regimes also helped persuadethe United Kingdomwhich had beendragging its feet for decadesto modernizecompetition legislation in line with EU law.

All of the above policymaking processes andmarket developments and institutions strongly inuenced the design of reforms. Understandingthese starting points can help in developingeffective reforms that take into account acountrys heritage and so run less risk of beingderailed (Box 1). These starting points do notdene results, which are largely determined by reform strategiesas suggested by these casestudies and the cross-country work of organiza-tions such as the OECD. Still, this paper

identies many features of successful reformsthat can be translated across a wide range of country contexts and starting points.

In Italy and the United Kingdom the developmentof the European Union and the growing volumeof EU single market legislation also drove reform:

An important factor behind reform in Italy

was the need to meet economic conditionsto join the Eurozone. Other EU initiatives,such as the high-level Mandelkern report onbetter regulation, were often used to pushfor new reforms.

The United Kingdom strongly supportedthe development of the single market, whichrequired adopting a raft of EU harmoniza-tion laws and open trade in the region. U.K.reforms were helped by an active European

Commission legislating for the removal of barriers to the free movement of goods,services, and people. EU reforms to

BOX 1

Are There Preconditions for Regulatory Reform?

At least one of the following factors may be needed to support the launch of regulatory reform: Perception of economic crisis or serious economic decline.Capable politicians can channel national

awareness of economic drift and decline into support for deep reform. Economic crisis was a crucial trigger

in the launch of the Italian and U.K. reforms. Australia did not face a deep crisis, but its economic declinewas severe: between 1960 and 1992 it fell from being the 3rd to the 15th richest OECD country. External pressures.Reform that for its impetus relies solely on support from within the country does

not seem suf cient. External support or even pressure or threats can help swing the balance in favorof action. Italy had to put its economic house in order to qualify to join the Eurozone. In the face ofhostile European attitudes to regulatory and structural change, it helped the United Kingdom that in the1970s the United States had initiated major deregulation that was showing positive results. The UnitedKingdom later found common ground with the European Commission on the development of the singleEuropean market. Australia, a small (in population) and geographically isolated country, was deeplyaware of the importance of not being bypassed by global economic trends and of the competitivenessthreats posed by globalization.

Political will.Reform is hard to launch without strong political will. The election of Prime Minister Margaret

Thatcher in 1979 gave the United Kingdom a political leader determined to reverse the countrys eco-nomic decline. Similarly, reform in Italy was supported by strong leadership from the center of governmentand successive prime ministers. In Australia Prime Minister Paul Keating, a former nance minister, wascommitted to adopting the National Competition Policy.

A rolling series of reforms.Past success helps launch further reform, but such opportunities must be proactivelyseized. Australia is the clearest example. The National Competition Policy reforms were encouraged by thevisible economic benets of an earlier round of reforms, but it still took considerable effort to reach agreementbefore the reforms could be launched. A similar process can be seen in the United Kingdom, which hasexperienced a rolling succession of reformseach of which sows the seeds for further efforts, which nonethe-less have to be negotiated. This point can also be applied to Italy, in the sense that the failure to reach somereform targets has compromised the speed if not the implementation of further reforms in those areas.


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This section presents detailed examinations of reforms in the three countries.

AustraliaCompared with other OECD countries, Austra-

lias economy declined through the 1960s and1970s, with lagging GDP and productivity growth causing a relative drop in per capita GDP.To counter the decline, substantial microeco-nomic and macroeconomic reforms werelaunched in the early 1980s. The programincluded initiatives such as oating the Austra-lian dollar, deregulating the nancial system,reducing tariffs, and reforming the labor market.Corporatization, privatization, and marketopening occurred at the state level. Thesereforms showed that many Australians hadaccepted that painful reforms were essential toachieving the countrys development goals.

The success of this rst round of reforms wasevident by the time the National CompetitionPolicy was negotiated in the 1990s. Productivity and growth rates were rising to the upper end of the OECD range. Unemployment was in steady

decline. And ination had largely been over-come. At the same time, there was a widely shared view that the gains from the rst roundof reforms would be jeopardized if reform didnot address key areas that had escaped attention.Past successes made it easier for reform-minded

politicians to broaden the regulatory agenda(Table 1).

Reforms Focused on RemovingRegulatory Constraints to Competitionacross the Entire Economy

The reforms associated with the National Compe-tition Policy (introduced in 1994 and still under way) are aimed at strengthening competitionthroughout the economy by changing theregulatory and monopoly roles of the federal andstate governments. The reforms are predicated onthe assumption that the highest costs of regula-tion are those associated with market distor-tionsthat is, limitations and distortions of competition. The National Competition Policy is intended to accelerate and expand microeco-nomic reforms to support higher, sustainableeconomic and employment growth.

3. REGULATORY REFORMIN THREE COUNTRIES


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The National Competition Policy combinesregulatory and competition reforms in a packageof microeconomic policies. It sets out four mainreform areas and precisely denes the processes forachieving them. These reforms and processes weredeveloped nationally through formal agreementsbetween the federal and each state government:1

Regulatory restrictions on competition to be reviewed and eliminated . The NationalCompetition Policy is guided by the prin-ciple that laws should not restrict competi-tion unless there is a net public benet fromthe restriction that could not be achievedsome other, less restrictive, way. This prin-ciple launched a national reform process in which governments identied regulationsthat signicantly restricted competition,

developed schedules for their review, andreformed or eliminated them if needed.Cost-benet analysis is required to justify keeping any constraint on competition.Guidelines emphasize the need for transpar-ency in the regulatory reviews, which appearsto have contributed to their quality. Theprocess also looks to the future, covering allnew legislation and requiring an automaticfurther review of laws within 10 years.

Utilities and other public monopolies to be reviewed, and rules on access to essential facilities developed and implemented.The program setin motion a systematic assessment of opportu-nities to create competitive markets. Mostutility monopolies were publicly owned whenthe National Competition Policy processbegan, and many were subsequently priva-tized. After pro-competitive reforms wereintroduced, rules for access to essentialfacilities were subject to scrutiny and approval

TABLE 1

Timetable and Context for Regulatory Reforms in Australia

Year Development

1994 The National Competition Policy: Report by the Independent Committee of Enquiry, proposes a comprehensiveprogram of pro-competitive reforms.

1995 All federal, state, and territory governments sign the three-part National Competition Policy agreements, bindingall parties to adopt a program based on the Hilmer prescriptions.

1995 National Competition Council created to oversee and report on reform progress. State governments establishcompetition policy units as coordination and reporting bodies at the center of government.

1996 Legislative review program nalized, identifying all legislation to be subject to review and reform.

1997 First progress report on implementation completed by the National Competition Council. (Subsequent progress reportscompleted in 1999, 2001, 2002, 2003, 2004.)

1999 Productivity Commission review of impacts on regional and rural areas concludes that the National Competition

Policy has delivered net benets to all but one region of Australia.

2000 Modest changes made to the National Competition Policy, including extending initial deadline for completion of thelegislative reform program to 2002 and making changes to interpretation of the public interest test underlyinglegislative reviews agreed by participating governments.

2002 Deadline for completion of legislative review program extended again, to 2004.

2004 Productivity Commission report provides a detailed assessment of the National Competition Policys impactsand recommends a second wave of reforms.

1 For simplicity, Australias main jurisdictionscomprisedof six states and two self-governing territoriesarecollectively referred to as states or state governmentsthroughout this paper.


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under the National Competition Policy, based onthe submission of annual reports. The councilalso works with the competition authority toimprove regulatory safeguards for access toessential infrastructure facilities.

Each state government created a competitionpolicy unit, generally in its nance department,to coordinate review and reform activity and toreport to the National Competition Council. Inaddition, competitive neutrality units were set upto deal with complaints on competitive neutral-ity. The establishment of the National Competi-tion Council as a dedicated body helped allay fears of bias in reform. A relationship with therespected competition authority helped easeconcerns that the council lacked a track record.

Although reforms ultimately attracted wide-spread support, the National CompetitionPolicy was initially promoted by the federalgovernment in the face of state reluctancestemming partly from concern that the reforms would cede policy authority to the federalgovernment and thus be asymmetric. Theconcern was that the federal government wouldreap the benets of higher tax revenues from amore efcient economy, while states would havethe most challenging reform tasks. This opposi-tion was defused by including provisions for thefederal government to make competitionpayments to states, contingent on successfulcompletion of reform obligations. These pay-ments, also known as reform dividends, werealso used to provide evidence to state taxpayersof the prospective benets of reform.

But the compensation system had aws andmay be difcult to repeat. First, the federalgovernment underfunded state governments,and some analysts fear that competition pay-ments could be used to expand federal inuenceover state policy responsibilities. Second, stateshave learned that they may face a tradeoff between loss of competition payments and lossof political support for implementing unpopu-lar reforms. Third, tax reform since the rstNational Competition Policy agreement has

by the competition authority (the AustralianCompetition and Consumer Commission).

Competitive neutrality to be established to ensure fair competition between government enterprises and private competitors.These reforms weremeant to ensure that government businessespay equivalent taxes and provide a marketreturn on public capital, and that their pricesreect the full costs of production.

Monopolistic conduct to be eliminated.Stategovernments were to adopt laws mirroring themain federal competition law prohibitingmonopolistic conduct.

The federal government initiated the develop-ment of the National Competition Policy agenda.Prime Minister Paul Keating was committed toadopting the reforms and played a major role insecuring agreement on them. The 1993 Hilmerreport provided a detailed blueprint for reformpolicy in a comprehensive review showing thenature and scope of the regulatory problem.Enthusiastic support from some state premiershelped demonstrate broader support for theprogram within the political structure.

Australias reforms were based on a sophisticateddesign and process. A strong federal bureaucracy and the efforts put into negotiating agreementsamong the nine governments (one federal andeight state) were also important.

Strengthening the institutional architecture wasan important part of the reforms. Some relevantinstitutions, such as the Council of AustralianGovernments and the competition authority,already existed and had long track records But anew institution was needed, with powers andresponsibilities tailored to supporting implemen-tation of the National Competition Policy. So,the federal government created the NationalCompetition Council, which is made up of vecommissioners with business backgrounds andsupported by a small civil service secretariat. Thecouncils main role is to monitor and report onstates progress in implementing their obligations


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Australias reforms as part of the long-term strategy to build and maintain support for the reformprogram, and to promote its dynamic evolution.

The National Competition Policy reforms have

been subjected to a range of ex ante and ex postevaluations. Monitoring and evaluationatstrategic and disaggregated levelswere basedon specic deadlines for meeting preset targetsand often rigorous quantication of costs andbenets. Mechanisms for reporting progress

were included in the initial agreements. A baseline ex ante evaluation was conducted by the Industry Commission (now the Productivity Commission)a statutory body that is thefederal governments main source of independent

advice on microeconomic and regulatory policyto make the case for reform. It estimatedthat full implementation of the National Com-petition Policy would add about 5.5 percentagepoints to annual GDP, with most of the gaincoming from the reforms to be implemented by state governments.2 This was a key input innegotiations on the size of competition payments.

As noted, each state government must providethe National Competition Council with an

annual progress report on implementation of theNational Competition Policy. The councilprovides the federal government with a sum-mary report of progress and provides recom-mendations about competition payments. Thecouncils annual reports are critical sources of information on achievements and weak spots.

The federal governments commitment to quanti-tative measurement of the impact of reform isreected in a recent request to the Productivity

Commission to review the National CompetitionPolicy. The commission will report on the policysimpacts on major economic indicators (such as

undermined the rationale for compensatingstates for reform, as the federal government nolonger receives a disproportionate benet. But itis not clear what other incentive could be used.

Another frequent criticism of Australias reformhas been that the government has been tooreluctant to use scal and other tools to compen-sate economic losers from various reforms. Forexample, a common criticism of the NationalCompetition Policy is that it has beneted urbandwellers at the expense of other citizens, and thatlittle was done to compensate the latter. Thisreects the widespread nature of the reformprogram, and its expectation that all groups insociety will win or lose from broad reforms.

From the perspective of national economicpolicy, compensation for specic losses is mostly considered unnecessary.

Critics of this view argue that a more activeapproach to compensating losers could havesignicantly increased support for the NationalCompetition Policy and enhanced equity. Butthis argument is not borne out by the evidence.

An inquiry by the Productivity Commissionconcluded that all but one regional area had

beneted from the policy. It found that thepolicy was wrongly blamed for some negativerural developments (such as a decline in agricul-tural prices) and recommended that there bebetter communication of the policys benets,increased transparency in reform processes, andenhanced community and stakeholder participa-tion in the reviews.

The converse argument is also heard: in some casescompensation or adjustment assistance for specic

sectors was so generous that all the anticipated con-sumer benets of reforms were ultimately expropri-ated. Reformers have argued that this approachrisks undermining support for reforms sinceconsumers will see no gains in such cases.

These arguments point to the importance of monitoring results. A sustained commitment tomeasuring and reporting impacts was built into

2 There is widespread agreement among internationalobservers (such as the OECD and International Monetary Fund) that the National Competition Policy has made asignicant contribution to Australias GDP growth rate.The ex ante assessment of a 5.5 percent addition to GDP

was a calculation of the likely one-time impact on GDPof selected reforms that were able to be quantied.


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successunderscored by the fact that thepolicy continues to be pursued, despitechanges in government in all jurisdictions.

Financial incentives were used to bring state

governments on board.These incentives wereimportant in the early phase of reform,convincing at least some states to becomeparties to the National Competition Policy.The threat that payments might be withheldif targets were not met (even if it was notused often) persuaded states to implementrecommended reforms in key areas. In somecases, strong positions against reform weremodied only after payments were withheld.

A supportive bureaucracy was led by central ministries, and dedicated institutions were created to support reforms.A supportiveadministration, especially among centralagencies, was a signicant factor for reformsuccess. The active engagement of the nanceministry was especially important. Theestablishment of a dedicated entity to monitorand report on reform (the National Competi-tion Council), with state governments havingsome say in key appointments, provided

assurance that reform was being assessedobjectively. It also ensured consistency andtransparency in reporting. The National Com-petition Council was not directly associated

with any preexisting players in the bureau-cracy; the appointment of commissioners withbusiness backgrounds also counted in its favor.

Clearly articulated principles and a consistent,comprehensive approach provided accountability . The National Competition Policy agree-

ments contain a clear guiding principle of promoting competition, providing an agreedbenchmark for all subsequent reviews andreforms. In addition, reviews and reforms

were assessed by a single body, helping ensurea consistent approach to reform issues.

Clearly dened commitments and responsibilities, adopted at appropriate levels, helped

growth and productivity), distributional impacts,and contributions to other policy goals. Thereview will also identify opportunities for furthereconomic gains from removing impediments toefciency and enhancing competition, which may

give rise to a further legislative review program.

Success Factors

For its scope, Australias National CompetitionPolicy is perhaps the worlds most effectively planned and executed regulatory reform program.

Although most governments are unlikely to havethe same levels of organization, political skills,and sustained social support for such a broadprogram, some lessons from Australiapositive

and negativemay be of wider relevance. Setting a dynamic, long-term course for reform

helped maintain momentum.The long-termnature of deep reform was understood fromthe outset. The National Competition Policy is more than a decade old and looks set tocontinue for a second stage. Reform hasbeen integrated with the machinery of policymaking through regular reviews of existing and new legislation. Regular reviews

can also provide a second chance to securereforms that did not make it the rst time.

Sustained political consensus for reform was underpinned by bipartisan agreements.There

was bipartisan political support for both the1980s microeconomic reforms and the 1990sNational Competition Policy agreements, seenas the next step in the reform process. Thereforms were essentially protected againstsubsequent changes in government. In addi-

tion, political consensus meant that the publicreceived consistent messages about the benetsof reform, which enhanced its credibility.

Building on previous reforms created momentum. Success breeds success. The successful reformsof the 1980s led to the National CompetitionPolicy. Though reforms under the policy areincomplete, there is a strong perception of


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Sustaining the nancial carrot for state governments to continue reforms was difcult, while dealing with losers slowed reforms. Competi-tion payments from the federal to stategovernments were crucial in sustaining

support for reform. But the federal govern-ment is increasingly unwilling to make suchpayments, raising questions about its ability to sustain a second round of reforms. Dealing

with losers has also been difcult, despitesubstantial assistance measures. Some of thesemeasures undermined reform by delaying itsbenets for consumers and other groups.

It has been difcult to focus review activity on the rules that matter most . The legislative

review program involved some 1,800 pieces of legislation selected by various governments.The review revealed that different govern-ments applied the same tests in different ways.One explanation is that state governmentsused the reform process to follow their ownagendas, which were not necessarily aligned

with national market development goals.

ItalyIn Italy reform was triggered by a spiraling publicdecit and radical political change (Table 2).These developments led to a fundamentalappraisal of economic, political, and institutionalstructures and policies that laid the foundationfor reforms challenging 50 years of entrenchedeconomic and administrative interests. The 1992Mani Pulite corruption scandal redrew thepolitical landscape and ended half a century of moderate, relatively corrupt government. A new,

reform-minded government emerged in 1996,strengthened by cross-party support for change.

The political and economic crises went hand inhand. A crippling public decit (9.2 percent of GDP in 1994) and high and rising public debt(which jumped from 58 percent of GDP in 1980to 125 percent in 1994) were attributed to a costly public administration apparatus characterized by

spread reform across stakeholders. The roles of the main players were clear from the start, as were reform milestones. State governmentstook responsibility for their reviews, whichhelped secure their commitment to imple-

menting review recommendations. Systematic, transparent monitoring and evalua-

tion of reformsincluding quantied costs and benetsenhanced transparency and supported allies of reform.Monitoring helped sustainreform momentum at all stages of the process.Recent reviews, for example, highlight theincomplete nature of reforms to date, whichimplies that substantial additional benets canbe achieved through further reforms. Reviews

also point to the long-term nature of reformand the need for a sustained commitment toit. Annual reporting has enhanced transparency and maintains pressure for reform by highlight-ing benets achieved as well as areas of concern.

Shortcomings

Reform was slowed by poor understanding and communication among state governments and major stakeholders. Despite the generally transparent

nature of the National Competition Policy reform process, clear understanding of its impli-cations did not always reach state governments,

which led to some reform blockages. In somecases stakeholder opposition was also due to lack of appreciation for the implications of parts of theprogram. Especially in the early stages, inad-equate efforts were made to communicate the factthat reform would yield public benets and wasnot just competition for competition s sake.

Reform fatigue and backlash were not always anticipated, recognized early enough, or dealt with appropriately .

Mixed incentives and lack of reform pressures in the federal government fragmented reform efforts.The federal governments reform performancelags that of most state governments, mainly due to a lack of nancial incentives.


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TABLE 2

Timetable and Context for Regulatory Reforms in Italy

Year Development

Late 1980s and early1990s

Growing political, economic, and administrative crises undermined the main political parties. Economicproblems included rising public debt, monetary instability, high in ation, and worsening unemployment.

1988 First reform of the center of government. De-legislation mechanism introduced in which a primary lawcan empower a government decree to review or repeal matters previously regulated by a law.

1990 First Administrative Procedure Law enacted, setting out adjudication procedures based on principles ofeffectiveness, transparency, and efciency, using a number of tools and timelines for accountability,participation, transparency, right of access, and the like.

1990 First Competition Law enacted, establishing modern antitrust regulation and creating an independent competi-tion authority. Followed in 1995 by the establishment of sector authorities for energy and communications.

1992 Emergence of currency crisis and Mani Pulite corruption scandal.

19932000 Macroeconomic stabilization program implemented with a wide range of devolution and decentralizationmeasures, including political reforms for direct local elections and development of local nancial autonomy(scal federalism).

1997 First steps taken to e-government, with full legal value granted to electronic contracts and digital signatures.

19982001 Development of a range of regulatory quality initiatives, including regulatory impact analysis on anexperimental basis (where it has stayed), consultation procedures, central unit for better regulation, rollingsimplication program based on annual simplication laws, central register for bureaucratic formalities,and e-government action plan.

2001 Constitutional reform introduced and general legislative powers transferred to regional assemblies (keepinga limited set of powers for central Parliament). Later, though, a new political party took power and somereforms were reversed or dilutedincluding experiments with regulatory impact analysis.

balance of power, and replace statism with pro-competitive policies to position Italy to succeed ina more open European market. The OECDinuenced Italy by providing a framework, peerpressure, and tools for regulatory reforms.

Turning around the Italian statewith itslongstanding socialist traditions and habits of ownership and interventionwas a multifac-eted challenge. Reforms were intertwined and

not always mutually supportive. Decentraliza-tion, for example, complicated regulatory reformsby vastly increasing the number of actors playingregulatory roles. Privatization put more stresson utility regulators and the competitionauthority. The main areas of reform were:

Privatization and liberalization . Reforms triedto refocus government on its core missions in

bureaucracy, interventionism, inefciency, andcentralism. The administration had been accretinglayers for well over a century, and partial reformshad not had any success. Reform was also trig-gered by the rise of a movement (the NorthernLeague) to promote decentralization throughfederalism. The chaotic state of the administration

was a rallying point for the general public in itssupport of reform.

Reforms Focused on the Role of theState, Government Structures,and Regulatory Tools

The Bassanini reforms (19962001) focused onpublic governance and regulatory reform, andcame to be known as reinventing governmentbecause of their broad sweep and radical approach.The key goals were to change the central and local


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ministry play a strong role in reform. Instead, theprocess relied on political support and the dedica-tion of Franco Bassanini, the minister for publicadministration. This carried the program for years,but proved insufcient to sustain reform momen-

tum when the party leading the governmentchanged. The Australian and U.K. experiencessuggest that there needs to be underlying consen-sus on the importance of moving to a market-leddevelopment strategy. Because such consensus didnot exist in Italy, any new institution likely wouldhave found it hard to make an impact.

Prime Minister Romano Prodi gave Bassaninifull powers and responsibilities for coordinatingthe reinventing government policies. To assist, in

1999 a central unit was created to promote andmonitor regulatory reform: the Regulatory Simplication Unit, composed of 25 profession-als with expertise in law, economics, politicalscience, impact analysis, European affairs, andlinguistics. Attached to the prime ministersofce, the units main role was to preparede-legislation decrees and consolidated texts. Italso supported ministries in making regulatory improvements and provided opinions to theCabinet on the quality of regulatory impact

analyses and legal drafting assessments.The prime minister played a key role at strategicdecision points, and there was a steady commit-ment to radical reform by three successivecenter-left prime ministers (Prodi, MassimoDAlema, and Giuliano Amato). But whenleadership changed in 2001 with the election of Silvio Berlusconi, reform momentum was lostbecause reform powers were split among fourministersleading to a failure in coordination

that slowed and even reversed implementation.Excessive reliance on a single reform championmade the program vulnerable to political change.

From the outset, the Italian Parliament agreed tovest the government with powerful tools toimplement reforms. In 1997, the rst Bassanini

Act gave the government the power to adopt a wide range of legislative decrees (primary laws).

the main infrastructure (electricity, naturalgas supply and distribution, telecommunica-tions, railways, postal and telegraph services),banking, and retail sectors.

Cutting red tape and improving regulatory quality . Reforms made in response to thedemands of citizens and businesses to cut redtape and costs included new approaches toadministrative simplication, such as self-certication and one-stop shops to streamlinelicensing. These reforms developed into abroader policy to promote regulatory quality,including through regulatory impact analysis,following OECD guidelines.

Introducing devolution and decentralization,and reorganizing the central government .Reforms transformed the centrally basedinstitutional architecture to a regional systemby devolving tasks, responsibilities, andresources to regional and local levels, andsetting up elected regional assemblies. Parallelreforms to strengthen the policy and regula-tory functions of the central state includedstrengthening central structures, rationalizingministries, and giving both more freedom to

choose their organizational models. Reforming the civil service . Reforms to

increase the efciency and professionalismof the civil service involved removing itfrom public law and putting workers undercontracts, with the aim of distancing theadministration from politics.

Developing e-government . Reforms wereadopted to promote electronic means of

managing administrative and other docu-ments and procedures such as procurement,tax returns, and land registration.

The Italian experience in creating new reforminstitutions was in many ways the opposite of the

Australian experience, and lacked the organicstrength of the U.K. approach. No single, powerfulnew institution emerged, nor did the nance


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political crises of several years earlier), andreemerged in 2001. Apparently the ve years of reforms did not go deep enough to instill con-dence in the process. Although there are many reasons for this, it is possible that steps could have

been taken to anticipate and counter it.Italys reform process involved little monitoringand evaluation by the government, further weakening its sustainability. There was even lesscost-benet analysis. Still, a 2001 OECDevaluation found that:

Italy continues to move faster than many countries in addressing the substantial reformagenda that is still outstanding. Regulatory reform was only one of many changes inItaly in the 1990s, but it was an essentialone . . . regulatory reform helped attack many of the underlying structural problems in theeconomy and the public administration.

Although it is still early, Italy is beginning tosee concrete benets of regulatory reform, as

well as adjustment costs.

Success Factors

The success factors for Italys reforms need to be

assessed against the background of the backslidein 2001. Although the reform plan was generally sound and the right approach was often taken inthe early stages, the implementation strategy wastoo narrow, with insufcient investment inreform institutions. Thus reforms provedunsustainable. Initial successes included:

A comprehensive, well-designed reform plan persuaded skeptics to support the program . Reforms were radical enough to solve the

problems, as opposed to a piecemealapproach. First, there was a focus on clearly dening the states core mission. A helpfulgoal was for the state to do less but do itbetter. Second, the reforms includeddevolution and decentralization. Thoughtheir execution was handled poorly, theprinciple was right. Third, emphasis wasplaced not only on cutting red tape, but also

Four additional Bassanini Acts (19972000)allowed the government to substitute de-legislationdecrees for primary laws, effectively turninglaws into lower-level instruments that were easierto reform. De-legislation was a clever way of

bypassing parliamentary bottlenecks to reform.The decrees could be adopted only by obtainingapproval from two new committeesa parlia-mentary reform committee and a state commit-tee for regional and local authorities.

Italy used a systematic approach to engagedifferent elements of society (citizens, unions,businesses, consumers, the central and localadministrations) and promote reform ownership.Partnerships were forged with local authorities to

seek a balance between strong central leadershipto sustain common goals and local autonomy toimplement solutions. Similar steps were taken toinvolve stakeholders in other parts of the reformplan. For example, a consultation body (dissolvedin 2001) was established for the administrativesimplication and regulatory review program,bringing together representatives of ministries,independent regulators, social partners, andregional and local authorities. Citizens andbusinesses were wooed by meeting their demands

to cut red tape. These efforts played a key role inthe successful early implementation of reforms.They built consensus for change, encourageddirect involvement by stakeholders who would beaffected by new regulation, and helped identify the most effective approaches.

But consensus for change was short-lived. In2001 ministerial and bureaucratic resistance tofurther reform took hold, leading to reversion tothe status quo. Some social partners changed

their positions radically. For example, the mainItalian business associationwhich had previ-ously supported reformbecame highly critical,alleging that reforms were too abstract and hadnot achieved any real changes.

Similarly, resistance from other stakeholdersappears to have been bubbling below the surface(though held in check by the economic and


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Shortcomings

Although reform momentum started strong, it was lost after just ve years. The main reason isthat many of the factors that ensured initialsuccess disappeared, and reformers failed toadapt to a changing situation:

When the main architect of reform left ofce,central political leadership and cross-party support disappeared . As a result reformmomentum was lost and some reforms werereversed. Reform was overly personalizedaround a single champion (Bassanini), andpolitical change occurred before reformownership could take root among otherleaders. As momentum slowed, resourcesbecame inadequate and reforms could nolonger tackle vested interests. The lesson isthat regulatory reform is not a one-shotpolicy, and must be sustained againstreversal with adequate resources and politi-cal commitment. It also must be managedand shared across all levels and structures of government.

Local resistance was greater than expected .

Liberalization, privatization, and outsourcingmet more resistance from local oligopoliesthan from national monopolies.

Crisis created only a brief, fragile consensus for radical change.The Australian and U.K.experiences suggest that consensus amongkey stakeholders is needed to completeand anchor major reforms. Building andsustaining consensus takes a long timeand requires solid mechanisms andinstitutions.

Implementation weaknesses in civil service reform reduced reform capacity and accountability.Reforms to the civil service were notsupported by the Berlusconi administra-tion, which took power in 2001. Therelationship between civil servants andpoliticians became increasingly blurred,

on improving broader dimensions of regula-tory quality . Cutting red tape and regulatory costs was crucial because of its direct rel-evance to citizens and business. Moreover,this short-term goal was supported by an

array of tools, strategies, and structures(self-certication, one-stop shops, regulatory impact analysis, e-government, a central unitfor regulatory reform) to promote regulatory quality over the medium term. Regulatory reform that increases transparency andaccountability and simplies administrationis a powerful weapon against corruption.Fourth, reforms were made to strengthenthe civil service. Introducing employmentcontracts and linking salaries to performance

were good ideas, as they promoted effective-ness, accountability, and exibility. So wasseparating politicians from the civil service, with politicians setting policies and strategicdirections and the civil service managingthem. Finally, including e-government in thereform plan was a good strategy because it candramatically improve service quality.

Political and government support were main- tained at the highest levels . Prime Minister

Prodi was backed by effective leadershipfrom Minister Bassanini, who was vested with strong powers and the authority to putthe reform plan into actiongetting reformoff to a fast start. The problem for sustain-ability was that political support did notexpand beyond core supporters.

A dual top-down, bottom-up approach to implementation started reforms well . Strongcentral leadership was complemented by

implementation mechanisms that engagedstakeholders and promoted ownership of reform, and increased accountability for results.

Efforts to build consensus were aimed at relevant stakeholders . It helped that unionsrepresented both the public and privatesector workersthat is, potential reformbeneciaries as well as losers.


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place to spread best practicesincludingevaluation mechanisms to track progress.

The United Kingdom

In the United Kingdom, the primary impetusfor reform was the countrys longstandingdecline in relative economic performance and acrisis generated by an unsustainable publicdecit (9.6 percent of GDP in 1975), whichtriggered a humiliating intervention by theInternational Monetary Fund (Table 3). Be-tween 1960 and 1980 economic growth laggedthat of other G-7 countries, averaging just2.3 percent a year compared with 4.6 percentin France, 4.4 percent in Italy, 7.7 percent in

Japan, and 3.5 percent in the United States.

and there was a failure to measure perfor-mance and results.

Slow results were due to a general failure of implementation . The reform plan created a

new legal framework and made headway in other areas, but these achievements werenot consolidated institutionally. As a result,implementation ran into great difculty.Concrete, lasting results can be achieved only through effective implementation thatproduces the visible results needed to sustainallies of reform. Implementation requiresclear, specic, measurable objectives to track progress and avoid criticism that reform is toogeneral and abstract. In addition, a regulatory

quality management system should be in

TABLE 3

Timetable and Context for Regulatory Reforms in the United Kingdom

Year Development

Late 1970s Financial crisis that triggered International Monetary Fund intervention.1979 Conservative party comes to power under Prime Minister Margaret Thatcher.

Early 1980s Development of EU single market program, to which the United Kingdomcontributed heavily.

1985 First development of principles of good regulation.

1988 Next Steps initiative, which moved public service delivery functions from ministriesto agencies.

Mid-1980s to mid-1990s Privatization and liberalization of key infrastructure and other sectors.

Late 1980s to 1992 Implementation of rst wave of EU single market program.

Early 1990s Further initiatives to improve the delivery and efciency of public services.

1997 Labour Party comes to power under Prime Minister Tony Blair.

1999 Regulatory quality unit created in the Cabinet Ofce at the center of government,developed from Department of Trade and Industry ministry deregulation unit.Regulatory reform ministers established in each ministry.

2000 Competition Act updates competition legislation and brings it in line with EU competition legislation.Small Business Service established (evolution from earlier structures, with greater powers).

2001 Regulatory Reform Act introduced to expedite amendment of burdensome legislation.

2003 Enterprise Act completes process of modernizing competition legislation.


26/4520

reduce the states role in the economy anddevelop competitive markets in sectorspreviously characterized by monopolies.These efforts were quickly accompanied by an ambitious re-regulation program, in

which a bevy of new sectoral regulators wereset up at arms length from government toregulate the prices of privatized utilities andprevent abuses by incumbents.

Improving capacities for quality regulation. Reforms of utilities broadened into economy-

wide reforms aimed at reducing overallregulatory costs. To accomplish this, theemphasis shifted from deregulation to betterregulation, as recommended by the OECD.

Reforms aimed at improving governmentcapacities to produce efcient, effectiveregulations and at reducing administrativeburdens on citizens and businesses. Incremen-tal efforts to develop principles of goodregulation that began in 1985 gathered speedin the late 1990s. Institutional aspects of regulatory reform were integrated with publicsector reform with the 1999 publication of alandmark white paper, Modernizing Govern-ment, which marked a new drive to remove

unnecessary regulation. The paper reinforcedthe requirement for departments to implementregulatory impact analysis for policies thatimpose new regulatory burdens. A comprehen-sive guide to such analysis followed in 2000.The 2001 Regulatory Reform Act providedthe government with a streamlined approachfor amending burdensome legislation.

Promotion of small rms and reduction of burdens on business.Regulatory reforms to

improve the enabling environment forbusinesses, especially small and medium-sizeenterprises, became politically popular. Theimportance of promoting such enterprisesgrew as traditional industries contracted and

jobs were lost. A new impetus was given withthe establishment of the Small BusinessService in 2000, which plays an importantrole in regulatory impact analysis.

Productivity growth was also relatively low, andunemployment high.

The 1979 elections brought the Conservativeparty to power under the leadership of Margaret

Thatcher, a prime minister with a personaldetermination to reverse the United Kingdomseconomic decline and an ideological aversion tostate economic controls. This started a reformprocess that has essentially been ongoing eversince, surviving a change of political party in1997 when the Labour party came to powerunder Tony Blair. As in Australia, the U.K.reforms were based on recognition of the failuresof the existing development model, whichgenerated broad social movement toward more

liberal consensus on the roles of the state andthe market.

Macroeconomic, Regulatory,Competition, and Public GovernanceReforms Laid the Foundations forSustained Market Growth

The U.K. reforms have spanned more than20 years. Unlike in Australia and Italy, no clearreform strategy marked this period. Rather, linked

efforts were made to improve macroeconomic andmicroeconomic management, strengthen publicgovernance, and improve the regulatory environ-ment. The broad initial strategy that drove reform

was based on a belief in the merits of free marketsand the monetarist theories of Milton Friedman.The strategy was given practical effect through aseries of evolving reform targets, starting withprivatization and leading quickly to more efcientdelivery of public services and promotion of regulatory quality, among others. Unlike the

more structured Australian approach, the U.K.approach was opportunist and evolutionary.

The key features of U.K. regulatory reforminitiatives were:

Privatization, market opening, and independent sectoral regulation.Classic privatizationand deregulation efforts were intended to


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out across a broad front and had many champi-ons: a dedicated unit at the center of govern-ment responsible for overseeing regulatory quality, taskforces and other partnerships withfocused responsibilities for promoting reform,

and the emergence of the National Audit Ofceas an inuential advocate of reform.

Today the Regulatory Impact Unit in the CabinetOfce (scrutiny and advice), the Better RegulationTask Force (advocacy), and the Panel for Regula-tory Accountability (accountability and awareness)provide driving forces from the center of govern-ment for regulatory quality and reform. A minis-ter has been given responsibility for reform in eachkey regulatory department. A system of satellite

units, departmental regulatory impact units, hasbeen established in each government departmentto coordinate regulatory activities and adviseregulators. The Small Business Service, with itsstrong institutionalized position in the regulatory process, provides a voice for small rms withingovernment. Over time some of these institutionshave developed the legal authority and bureau-cratic strength to advance reform even whenpolitical commitment wavers.

These institutions grew organically from bothnew and old. For example, the Regulatory Impact Unit at the center of government is new,but has been evolving from its beginnings as thederegulation unit in an outlying ministry. TheNational Audit Ofce has, over time, found anew role as a challenger of rules that appear notto be achieving their goals, a role that developednaturally from its statutory and independent roleas auditor of government affairs. Businessanatural ally of reformparticipates in inuential

new entities such as the Better Regulation Task Force. The distinctive U.K. political culture hasenabled these developments, so other countriescannot draw too heavily on the lesson of organicdevelopment. This approach has also come at aprice: a relatively slow and complex reformprocess, and increased regulatory costs. Thecomplexity of the institutional architecture raisesthe costs of coordination, while overlap between

Improving the delivery of public services. Starting with the 1988 Next Steps initiative,public service delivery functions weremoved out of ministries and into specializedagencies with performance targets and

delegated management responsibilities. This was followed by quality enhancementinitiatives (Charter Mark, Citizens Charter,and Service First). In 1999, a dedicatedreform team was established at the center of government. Recent initiatives have focusedon reducing administrative burdens onfrontline staff (in schools, hospitals, thepolice force, and so on).

Political leadership from Prime Minister Thatcher

was critical in the launch of a reform process thatmarked a radical break with the postWorld WarII political consensus on social and economicpolicy. At the time the changes were little shortof revolutionary. Thatchers successor, John Major,achieved relatively little beyond maintainingreform momentum. The next big reform pushcame with a change in government and politicalparty: the Labour partys rst term in ofce saw further signicant reforms. Although externalevents distracted from reform during Labours

second term, this was partly compensated by established pro-reform institutional structures.Still, Prime Minister Tony Blair remained commit-ted to modernizing government, and his backing

was important to the success of key initiativessuch as the Better Regulation Task Force.

Although the party in power in the U.K. systemcan usually implement legislation without many problems, Parliament became a bottleneck tothe scale of planned reforms. The 2001 Regula-

tory Reform Act was devised to resolve this,creating a fast-track approach that gives minis-ters the power to repeal and amend with second-ary legislation provisions in primary legislationthat impose burdens.

U.K. reforms were characterized by intenseinstitution building, with a rapid buildup of bodies to support reform. Reform was carried


28/4522

areas, and the institutional architecture hasdeveloped an evaluation capacity, albeit dis-persed and disaggregated. Evaluations of regulatory tools such as regulatory impactanalysis and consultation have led to adjust-

ments and improvements. The Regulatory Impact Units annual reports indicate the resultsof reforms in sectors covered by its work program, monitoring progress against a pub-lished Regulatory Reform Action Plan. The unitalso reviews areas of reduced burdens and moni-tors reform implementation based on expectedoutcomes. Overall, U.K. reform evaluation ispiecemeal, with no central strategy and no bigpicture.

Success FactorsThe U.K. reformsevolutionary, opportunistic,

without a grand strategylook more familiar tomost countries than do Australias highly organized reforms. Although the rst type of reforms might be easier to launch, as in Australiathey require active political and institutionalmanagement to exploit successes and sustain theprogram. Lessons from the United Kingdominclude:

Strong political leadership overcame hostility to reforms . The progress of reform can becharted by the strength of political leader-shipstrong under the early Thatcher years,

weak under Major, strong again in the early Blair years. Political leadership was impor-tant because of a general cultural hostility tothe development of systematic approachesacross government.

A pro-reform international environment eased the task of making controversial reforms . Con-verging views within the European Unionabout free markets, privatization, structuralreforms, and (later) EU impetus for changesto competition policy provided argumentsand allies for change. This process was aidedby benchmarking reforms with the UnitedStates, a leader in market liberalization.

new and old initiatives and structures raisesregulatory costs for businesses.

Changing the culture of the civil service hasbeen among the most difcult challenges of this

process. Margaret Thatcher brought in politicaladvisers to ght the conservative tendencies of the career civil service and promote change.Performance-related pay and civil servicecontracts were later introduced, and some postsopened to the private sector. Today, although theprinciples of regulatory quality management arepermeating into policymaking, further effortsare needed. Change is slowed by the fact thatregulatory quality management is resourceintensive, and ministries face budget pressures.

The buildup of advocates for reform was animportant feature of the U.K. reform process,and this effort accelerated over time. Ad hoccommittees and taskforces were created tospread ownership of reform and communicateits importance and benets. Business, a naturalally of many reforms, was especially solicited. A good example is the 1997 Better RegulationTask Force. Its members come from a variety of backgrounds (business large and small, citizen

and consumer groups, unions, and those respon-sible for enforcement) and were appointed by the prime minister to advise on governmentaction and ensure that reform stays on course.

The government has not made an overall evalua-tion of the impact of regulatory reform, whichcan be partly explained by the fact that reform inthe United Kingdom covers so many targets andissues and has never been brought together as oneinitiative. Unlike in Australia, no specic proce-

dures were built in at a strategic level. Disaggre-gated monitoring and reliance on outsiders lledthe gap. Evaluation tends to be left to outsiderssuch as international agencies or academics.

That said, individual players in the U.K. systemnotably ministries, regulators, the Regulatory Impact Unit, Better Regulation Task Force, andNational Audit Ofcehave reviewed certain


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reforms) to work better; and competitionpolicy overhaul, which ensured that morereform gains were passed on to consumers.

Shortcomings

An ad hoc approach increased reform costs and slowed visible results . The lack of an over-arching strategy slowed parts of the U.K.reform and the emergence of results. Theaccumulation of new initiatives, big andsmall, was often difcult to digest andcoordinate for stakeholdersincluding thegovernmentand contributed to reformfatigue. Changes were often made topolicies that had not yet run their course,complicating business decisions and makingit hard to administer and evaluate themeasures. And the policy environment wasexcessively unstable, despite a positivegeneral direction.

Lack of systematic evaluation of the big picture weakened reform coherence and sequencing .

Certain aspects of the U.K. regulatory regime complicated evaluation, includingmultiple objectives, incremental changes,and different structures.

Failure to address some important parallel reforms at an early stage delayed results . The economy took time to stabilize before settling into astable growth path, partly because importantscal and other reforms were not in place. Theearly privatization program tended to transfermonopoly structures from the public to theprivate sector without signicant changes inthe competitive environment, complicating

regulatory oversight. Reform of competitionpolicy is only a recent development.

Burdens on government were high and not predicted or managed . A proliferation of institutions and initiatives without clear centralmanagement and strategy put a strain on thegovernment and inated regulatory costs.

Development of a cross-party consensus sustained change.Impetus for reform lastedbeyond the economic crisis that rst pro-pelled it, as well as through the ups anddowns of subsequent economic perfor-

mance. It was difcult to unwind thedeep-seated changes implemented by PrimeMinister Thatcher, and the momentum wassuch that it was easier to keep advancingthan to reverse reforms. Initial reforms hadtackled some of the most difcult politicalissues, and successor governments couldpocket this advantage. This contrasts withItalys experience, discussed below.

Having an effective, professional bureaucracy

and engaging central ministries underpinned the reform process, while developing a web of pro-reform institutions sustained momentum .Though the strength of political directionvaried, it was never lost or reversed, eventhrough successive political cycles. Whenpolitical momentum faltered, bureaucraticinstitutions took over and ensured thatreform continued. An effective civil serviceand relatively uncorrupt administrative andpolitical system, led by an engaged nance

ministry, helped produce results. Stakeholders developed a sense of ownership of

reforms due to participatory arrangements .

Businesses and consumers were progressively made part of the reform processinstead of opposing it, or debating whether it shouldoccur at all.

Broad reforms improved the chances of success for the overall process . Emphasizing certain issues

and failing to address others would not haveachieved the same positive results. Regulatory reform would have had much less effect if theUnited Kingdom had not addressed two bigissues: scal and macroeconomic managementreforms (including central bank indepen-dence) that provided economic stability formicroeconomic reforms (such as regulatory


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It is difcult to draw direct connections betweenmicroeconomic reforms and macroeconomicoutcomes.3 Still, it appears that in two of the threecountries studied, reforms aimed at cutting regula-tory costs and stimulating market competition weredirectly linked to positive economic developments.

Australia and the United Kingdom pursuedbroader, more sustained economic reforms than didItalyand the results reect the difference.

Australias economic performance since theadoption of the National Competition Policy has been increasingly strong, with continuousgrowth and growth and productivity ratesamong the highest in the OECD. Theserates, in addition to being substantially higher than in the 1960s and 1970s, also

improved on the rates achieved in the rst wave of reforms. International observers suchas the International Monetary Fund and

4. IMPACT OF REFORMS

3 Although microeconomic reforms can have a very broadshape and reachas in Australiathey are still microeco-nomic reforms in the sense that they are aimed at changingthe behavior of rms and consumers, rather than ataggregate targets such as unemployment or GDP.

OECD have consistently linked the strengthand resilience of the Australian economy tothe adoption of wide-ranging structuralreforms, of which the National CompetitionPolicy reforms are the centerpiece. A 2004report by the Australian Productivity Com-

mission conrms this picture, noting amongother achievements 13 years of uninterruptedoutput growth, unemployment at a 23-yearlow, and productivity rates in the mid- andlate 1990s at their highest in at least 40 years.

U.K. economic performance has improvedsignicantly, particularly since the mid-1990s, and the gap in per capita GDP withmajor Western European countries hasclosed. Since the late 1980s unemployment

has been well below that of the Eurozoneand the public decit has been relatively low. Many reformsnotably structuralreforms and improvements to the businessenvironment for small and medium-sizeenterpriseshave contributed signicantly to these achievements. Still, an important

weakness remains: a continuing gap in


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moved to second, maintaining its relative positionamong other OECD countries, which were alsoimplementing regulatory reforms.

Italy had moved up four places, from last to fthfrom last. Italian reforms were most successful atprivatization, administrative simplication, and inthe nancial sector. In addition, framework laws were adopted that changed the institutionallandscape. But Italys experience differs from thoseof Australia and the United Kingdom primarily because many reforms lasted only until the 2001change in governmentwhen bipartisan supportfor reform disappeared, central leadership crum-bled, and reform momentum was lost.

Cutting Red Tape and Business CostsReforms in this area have had the greatestimpacts on businesses.

Australias National Competition Policy focused on barriers to competition and entry,

which should have reduced red tape, though

productivity growth relative to major OECDcompetitors. Thus, more reform is needed.

Economic performance in Italy, by contrast,has not improved, with per capita GDP

growth slowing to 1.3 percent in 2003. Thissuggests that regulatory and reinventinggovernment reforms were too supercialand short term to have lasting effects oneconomic structures, production costs, andcommercial decisions.

It is easier to establish links between microeco-nomic reforms and microeconomic performance.Here all three countries have seen improvement.In 1997, the rst year that the OECD issuedcomparative indicators of product market regula-tion, the United Kingdom was ranked rst and

Australia third. Italy was last, the most overregu-lated OECD country. By 2003 the picture hadchanged slightly (Figure 1). Australia had movedinto rst place, largely due to the extraordinary breadth and sustained implementation of itsregulatory reforms. The United Kingdom had

FIGURE 1

Comparative Benchmarks of Product Market Regulationin OECD Countries, 2003

Source:Paul Conway, Vronique Janod, Giuseppe Nicoletti, 2005. Product Market Regulation in OECD Countries: 1998 to 2003.Note: 2003 values.The scale of indicators is 0-6 from least to most restrictive.

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ifc regulatory transformation in australia italy and uk 2008(2)

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