2004GIR Government-Business Relations

Lecture 5: Regulation

Regulation
- A rule or law that is made and maintained by an authority.
- A rule of order having the force of law, prescribed by a superior or competent authority, relating
to the actions of those under the authority's control. Regulations are issued by various
federal government.

Why should I care about Regulation?

Public Policy Options

Non-intervention:
- Ignore, allow to continue unhindered

Prohibition:
-
Supply:
- Public provision

Allow private provision but in a controlled way:

- Regulation

Non-Intervention
Foreign policy that holds that political rulers should minimize relations with other nations but still retain
diplomacy and trade, while avoiding wars unless related to direct self-defence

Prohibition
Is the act or practice of forbidding something by law; more particularly the term refers to the banning of
the manufacture, storage (whether in barrels or bottles), transportation, sale, possession, and
consumption of alcoholic beverages

Pros of Prohibition: Cons of Prohibition:

- -
- -
- -
- -
- -
- -

State Provision
- Favored for much of 20th Century especially in Europe & Australasia (less in US)
- Fell into disfavor toward end of 20th Centaury
- Resulted in govt divestment (asset sales)
- Replaced by market provision
Market Provision meaning: Commitment Letter whereby the Borrower agrees not to issue any new debt,
equity or other securities during the Syndication process that would compete with the syndication of the
loans.

What are the challenges of relying on the market?

- Public goods
- Externalities
- Imperfect information
- Anti-competitive behaviours
- Natural monopolies
Economist call this ‘Market Failure’
What form can regulation take?
- Targeted rules (narrow)
- General state intervention
Eg. Tax, Subsidies
- Mechanisms of social control (very broad)
e.g. self-regulation
‘State sponsored intervention designed to shape the behaviour of groups and individuals’ (Hollander,
2013, 221).

Why Regulate?
Regulation as protection, compensation for market failure
- Consumers
- Investors
- Workers
- Industry
- Environment

How to Regulate
Tobacco:

Targeted rules:
- Sales
- Advertising
- Consumption
General intervention:
- Taxes & duties
- Public Health campaigns
Social control:
- Attitudes of friends and family
- Image, social acceptability

Regulatory Instruments
Command & Control
‘Government literally commands industry to meet specific … standards … and controls its behaviour
through the threat of negative sanctions’ (Sinclair 1997: 534)
Strengths:
- Universality
- Incorruptibility
- Strong legal position
Limitations:
- Expensive
- Inflexible, stifles innovation
- Encourages minimum standards

Responsive Regulation
Argues:
- command & control can be too heavy handed
- regulators need to be responsive to attitudes of regulated as well as environmental factors:
- Assumes most want to ‘do the right thing’
- Adopts graduated penalties

Enforcement Pyramid
Negative Licensing
Excludes those failing to meet min. standards, focuses on qualifications
Eg. Hairdressing SA, Tobacco Sales, Scotland
- Light handed, limited intervention
- Cheap for govt & industry, costs carried by consumers

Other:
- Education
- Economic prompts
- Subsidies, tax credits, etc
- Knowledge based instruments
- Registers
Instruments often used in combination

Market Regulation
Assumes competition can deal with market failure
- Solution is to improve the workings of the market
- Deregulation i.e. removing anti-competitive elements eg barriers to entry such as
licensing
- Promote competition e.g. ACCC

Self Regulation
Either by firm or industry
Examples:
- Press Council
- Advertising
- Coles
Advantages:
- Flexibility
- Speed
- Relevance
- Expertise
Requirements:
- Adequate information
- Compliance with basic ground rules
- Adequate provision for redress/dispute resolution
 - Accountability
- Public participation/input

Enforcement Options
- Public Inspection
- User pays
- 3rd party monitoring
- Self-reporting

Smart Regulation
A way of choosing which approach to take
Focuses on outcomes:
- How likely are adverse outcomes?

- What are the consequences?

Taxi Regulation and Uber

What are the risks to consumers?
- Safety
- Quality
- Price gouging
Traditional approaches to taxi regulation involved:
- Restricting entry (licensing)
- Regulating fares
Outcomes
- Shortages
- High prices
- High profitability for dispatching services (e.g. cab charge)

Reform and Change

- Taxi industry tightly regulated
- 1990s-2000s: industry resists pressures to change
- 2012 Uber launches in Sydney, spreads across Australia; illegal but simply pays fines incurred
by drivers; value of taxi licenses plummets
- Public policy solutions
- License buy back
- Uniform regulatory regime applies to all ‘commercial passenger vehicles’
- Get a license Victoria
- Limited regulation of fares (unbooked only) Booking service providers Uniform
regulatory regime applies to all ‘commercial passenger vehicles’

Bank Regulation
Banks are central to the
economy, vulnerability
highlighted in 1930s
- Tightly regulated during the
long boom
- Business separation
 - Credit ratios
- Institutional formation
Resulted in
- Credit shortages
- Growth of non-bank financial institutions
Encouraged deregulation
- New banks
- Loosening of restrictions
- Belief that competition was key, maintained by ACCC and ‘Four pillars’ policy
- Oversight provided by

Regulatory Agencies
Australian Securities and Investments Commission (ASIC):
- Oversees business and company registrations and functions, including
financial advice companies, stock exchange and market supervision
(corporate watchdog)
- Funded by Commonwealth govt

Australian Prudential Regulatory Authority (APRA):

- Oversees banks, credit unions, building societies, insurance companies and
superannuation funds
- Commonwealth authority but funded by the industries it supervises (user pays)

What the Royal Commission Found

Banks didn’t adhere to their own Code; compliance monitoring was too narrow and inaccessible.
Regulators were relatively ineffective
- Problems of ‘capture’ & ‘too big to fail’
- Penalties acted as inadequate deterrent

Regulatory Failure: 373 Max 8

- What went wrong with Boeing 373 Max 8?
- Market Conditions
- Role of regulators
Did the FAA’s deference to Boeing compromise safety

Summary
- Regulation is a key way in which government and business engage
- Tendency to go for light handed approaches with extensive industry input as opposed to old
fashioned ‘command and control’
- Need to be aware of the risks of regulatory failure.