Finance: Time to rein in the watchdogs

For creatures who hold other bodies to account, the public regulators' own performance remains largely unassessed. By Paul Gosling.

There are as many public service regulators as there are taxi drivers, but their productivity may be even lower, a new study of "bureaucratic gamekeepers" suggests. While the last government increased their number, it failed to ensure that anyone was properly regulating the regulators, say the researchers from the London School of Economics.

"It is an industry which seems to have grown topsy-like, with no overall rationalisation or consistent practice," the report concludes. "It is not so much a world within a world as several unrelated worlds. And it is itself regulated at best patchily, little exposed to the kinds of disciplines it imposes on its regulatory clients."

Paradoxically, while the number of public servants has decreased, the number of people auditing and regulating them has increased. "Northcote Parkinson built his famous `law' on the observation that in the early 20th century the number of clerks in the British Admiralty increased as the number of warships decreased. Something similar seems to have been happening in the world of internal regulation of UK government in the last two decades," the report explains.

Consciously or not, as power has been devolved lower in the chain of public-sector command, so the decisions made have been studied ever more closely by the watchdogs. And the cost of doing so has doubled. In local government, the cost of regulation by district auditors and the Audit Commission is equivalent to 0.3 per cent of income - with the compliance costs as great again. And the trend is to greater centralisation of observation and control.

There has been a 20 per cent increase in the number of regulatory bodies in the public sector in the past two decades, so that there are now 134 separate regulators, employing 14,000 staff, and costing pounds 766m a year to run. There is an irony, the authors argue, that while the public sector was getting leaner, their watchdogs were getting fatter. One of the most worrying concerns is that many of the public watchdogs have overlapping roles.

It is about time that the regulators' own performance was better assessed, the report suggests. "There is a big question mark over the effectiveness of these organisations," says Oliver James, one of the authors and a research officer at the LSE. "No one is really judging them, which is ironic given they are performance-setters, but their performance is subject to less evaluation. It is do as I say, rather than do as I do.

"There are exceptions - the National Audit Office says it saves seven times more than it spends. The Audit Commission was evaluated by the Butler review two years ago." But even here, there are question marks over the method of assessing their work. "The accountability of the Audit Commission is quite interesting," Mr James suggests. "It says it is accountable to government departments, to its stakeholders, and the public. So it is difficult to see who is holding it to account, but it is one of the more dynamic of the regulators. The NAO is very much caught up in the system of working with the Public Accounts Committee, so it is more adversarial."

Observers have suggested that the commission and the NAO should amalgamate, as their roles are similar. "Merger of the Audit Commission and the NAO might make sense for economies of scale, but it might have constitutional implications," says Mr James. "It would be interesting to have the Audit Commission look at more central government functions. It could look at the implications of government policy on local government - as it did with the youth justice system. The Audit Commission might feel better able to be critical in that way.

"Down the line staff do see themselves as rival organisations. There is a case for a review of these systems. Whether that would result in rationalisation, I don't know."

Inevitably, the range and functions of the regulators will be reviewed by the new government, especially as more regional administration is introduced. But while the details may change, the general trend will be confirmed, Mr James predicts. "There is political consensus on this. We can't see this dynamic being reversed."

The Labour Party is known to be sympathetic to strengthening the NAO, and has hinted that it expects the Audit Commission to take a tougher line on badly performing councils. But the dual role of overseeing the audit and suggesting improvements does cause tension with client bodies, the LSE found.

"There are also issues in the private sector about tension between role of watchdog and consultant," says Mr James. "This goes to the heart of the role of the NAO and the Audit Commission."

Taken to its logical conclusion, the report says, there will be twice as many regulators as doers in the public services by the end of the next century - as has happened in the abattoir industry. Happily, the authors do not believe the trend will last indefinitely.

`Waste Watchers, Quality Checkers and Sleazebusters: the Internal Regulation of UK Government', discussion paper number six, by Christopher Hood, Oliver James, George Jones, Colin Scott and Tony Travers is published by the London School of Economics, and will form part of a book of the same name to be published by the Oxford University Press.