Presentation to Economic Regulation Advisory Group (ERAG), May 2010

Economic RegulationOfqual’s Emerging FrameworkPresentation to Economic Regulation Advisory Group (ERAG)

Emma Cochrane27 May 2010

Summary

Introduction

– Overview

– What the legislation says in relation to efficiency

– The qualifications sector in numbers

Our economic regulation strategy

– Regulatory principles

– Framework

– Current milestones

Any Questions?

Overview

To highlight the role of economic regulation

To explain the future direction of Ofqual’s economic regulation strategy; key milestones and current projects

To raise some challenging issues in relation to our efficiency objective and to bring together key stakeholders with an interest in efficiency to debate these issues

What the legislation says – our efficiency objectives

Our efficiency objectives are to secure that:– regulated qualifications are provided efficiently – any relevant sums payable to a body awarding or authenticating a qualification

represent value for moneyIn meeting our objectives, we must have regard to (among others):– the need to ensure that the number of regulated qualifications is appropriate– the reasonable requirements of our stakeholders (industry, commerce, finance, the

professions, other employers and institutions within the higher education sector) regarding education and training

– the desirability of facilitating innovation– aspects of government policy as the Secretary of State may directThe number of regulated qualifications is appropriate if:– there is a reasonable choice for learners in terms of the number and form of

qualifications– the number of qualifications in similar subject areas or serving similar functions is

not excessiveWe must also keep under review any system used by the Secretary of State for allocating values to qualifications (performance points)

The qualifications sector in numbers (1)

There were 144 recognised Awarding Organisations (AOs) in 2009– an increase of 46 since 2002– 6 AOs offer GCSEs; 5 AOs offer A levels – The 7 largest AOs account for 61% of all achievements in ‘other’ qualifications

In 2009, there were 9,708 accredited qualifications– 539 A levels with 2.2m achievements– 691 GCSEs with 5.9m achievements (we expect the number of accredited GCSEs to drop

next year as dual accreditation of old and new specifications ends)– 8,478 other qualifications with 6.1m achievements– Around 40% of qualifications had no achievements– Since 2002-03 the number of achievements has increased from around 10 million to over 14

million driven principally by the growth in qualifications other than GCSEs and A levels

Half of all non-GCSE / A level achievements were covered by just 119 qualifications – less than 2% of the total number of qualifications

The qualifications sector in numbers – (2)

Illustrative view on total cost of procuring all qualifications - £933m– School expenditure on qualifications in England

Qualification Cost (£)

Average cost of a GCSE 25.56

Estimated cost of all GCSEs 150m

Average cost of an A level 76.08

Estimated cost of all A levels 169m

Estimated cost of all other qualifications 614m

– College expenditure on qualifications in 2006 - 07 was £173m– Association of Learning Providers estimate that qualifications spend at the individual provider level

accounts for approximately 13% of the non pay budget– We are working to understand better what is driving the increase in expenditure

Estimated costs for 2008 – 09 were:

2002 - 03 2008 - 09 % Increase

£154m £281m 82%

Our principles for economic regulationThe five principles of good regulation will underpin our approach to economic regulation– proportionality

– consistency

– transparency

– targeted regulation

– accountability

In addition, we want an approach that is

– evidence-based

– credible

This requires us to– develop an approach with robust theoretical underpinnings– balance risks, costs and benefits– potentially reconcile different policy objectives– avoid unintended consequences– develop enforceable / implementable solutions

Economic regulation frameworkWe are implementing a six-step process to meet the efficiency objective

Does not prevent us undertaking targeted interventions if justified

Define objectives

Identify issues for further investigation

Clarify issues

Identify next course of action

Implement remedies

Secure ongoing efficiency

1. What do we mean by efficient qualifications provision?

2. Where are the biggest areas of inefficiency?

3. How do we quantify and assess these inefficiencies?

4. Should we implement any remedies?

5. How do we implement these remedies?

6. How do we secure efficiency on an ongoing basis?

Defining our objectives

In general, efficiency is achieved if

– the desired outcome is achieved at the lowest possible cost, without wasted resources, effort, time or money

The concept of efficiency can be applied across different players in the qualification supply chain

Supply-side (firm level) efficiencies

Demand-side efficiencies

System level efficiencies

Efficient costs (productive efficiency)

Efficient pricing (allocative efficiency)

Efficient investment (dynamic efficiency)

Efficient processes

Financial viability

Efficient purchasingEfficient regulation

Efficient policy

Defining our objectives

Much focus particularly in current climate on Ofqual’s fee capping power

We will be setting out proposed criteria and process for fee-capping for consultation in October this year within a broader framework for economic regulation

However…

– stakeholders have suggested we broaden our focus beyond fee capping

– there are potentially large inefficiencies at the demand and system levels

– demand side and system level issues may have a higher profile in the current political environment

What should we focus on ? – “various efficiency issues” voiced by stakeholders including:

Supply-side

– How do we define the qualifications market?

– Where is competition effective in securing efficient supply side costs?

– Charging structures and late fees?

– When and how Ofqual will exercise its fee-capping power?

Demand-side – Rising examinations expenditure/ the financial pressure on the system– Lack of standardisation of administrative processes and procedures across Awarding

Organisations– Inefficient registration and payment systems– Apparent transfer of responsibility for parts of the assessment process from Awarding

Organisations to centres– Lack of fee transparency and bundling of unwanted services by Awarding Organisations

System issues– Inefficient purchasing by centres– Public confidence in the system– Bureaucracy and regulatory burden– Lack of use of robust impact assessments in developing qualifications policy

We recognise the importance of looking at efficiencies on the supply side however we believe there is considerable merit in broadening our strategy to include the potential to look at demand side and system level inefficiencies

Identifying issues for further investigation

We are currently developing for consultation our approach to identifying issues for further investigation An approach based on – supply side monitoring

»Prices, revenues, volumes, competition, costs– demand side reviews

» to identify demand side constraints on the effective functioning of competition in the qualification sector – system level reviews

»to identify system level constraints on the effective functioning of the sector We are proposing to apply risk criteria to enable us to focus more detailed investigations on areas of greatest potential inefficiencyThis approach is in line with that adopted by other regulators for example the Office of Fair Trading and The Office for Rail RegulationWe will also be gathering evidence to help us understand better the drivers of increasing expenditure on qualifications – volumes? fees? increasing numbers of units? mix of qualifications?

Clarifying the issues

We are proposing a broad approach to clarifying areas of inefficiency in our refreshed economic regulation strategy

Competition studies will form just one part of our process to quantify and assess efficiency

In conjunction with competition studies, we are proposing to work with the monitoring team to make more explicit judgements on the efficiency of Awarding Organisations’ operating processes, fee structures and administrative requirements

We are also proposing to undertake detailed demand-side and system level efficiency studies in key areas.

Supply-side projects Demand-side projects System level projects

Market definition framework Fee transparencyUse of impact assessments

in policy-making

Competition studiesWhat are the drivers of

increasing expenditure on exams?

Internal audit of regulatory burden imposed by Ofqual

Publish fee-capping criteria and process

ProcurementInternational comparison of

qualifications systems

Identifying the next course of action

Before deciding on the next steps, we will need to

– map the range of possible further actions to our powers

This is necessary as other economic regulators who have efficiency objectives have a much wider set of regulatory and competition powers available to secure these objectives

Behavioural remedies and recommendations on regulation and conduct may fit better with Ofqual’s powers

– price controls

– information provision

– price transparency

– removal of regulatory hurdles to market entry

– measures directed at reducing switching costs

Structural remedies will probably require actions by others

Need to understand now we can develop joint working relationship with other regulators; e.g OFT (Office of Fair Trading)

Identifying the next course of action

As part of this we will be establishing the criteria and developing a process for capping fees

We can cap fees if this is necessary to secure value for money and so the criteria will need to specify how Ofqual will apply this concept if it under took a fee-capping exercise

– Value for money is a concept that has been applied to public spending and in health care but not to date in a fee-capping context

– Value for money is closely linked to efficiency but is a distinct concept

– Value for money is often based on the 3Es

» economy: the extent inputs are purchased at minimum cost and the right mix of inputs are in place

» efficiency (typically at the firm level): the extent outputs are maximised for a given set of inputs

» effectiveness: the extent outputs are valued by society i.e. the outcome of the production process (it is notoriously difficult to derive overall measures of cost effectiveness)

The decision to undertake a fee-capping exercise as a remedy for inefficiency, and the process and criteria we adopt must be robust

Remedy Implementation

We can keep under review any connected activities of a recognised body

We can impose general recognition conditions– e.g information requirements, fee transparency

We can impose a fee cap in the recognition conditions – if this is necessary to secure value for money in the provision of qualifications– we are required to set out our reasons for proposing to fee cap– we must establish arrangements for an independent review

If an awarding body fails to comply with a recognition condition, we can – direct the recognised body to take or refrain from taking specified steps– withdraw recognition if the failure to comply would be likely to prejudice

» the proper award or authentication of a qualification » persons who might reasonably be expected to seek to obtain the qualification

We may co-operate or work jointly with other public authorities where it is appropriate for the efficient and effective performance of our functions

Our consultation in October 2010 will set out how we will implement remedies, including a fee cap

Key milestones

Publication of consultants reports on market definition; data collection and fee transparency– June 2010

Improved understanding of drivers of increasing expenditure on qualifications– August 2010

Consultation on economic regulation strategy and fee capping process – Oct 2010

Annual Market Report– March 2011

Publish data requirements for economic regulation– March 2011

Any questions?

Any questions?

http://www.ofqual.gov.uk/files/2010-03-19-Annual-Market-Report.pdf