Quasi-autonomous non-Governmental Organisations (QUANGOS) have been part of the UK public sector for many decades and there are often robust political and managerial debates about the usefulness (or otherwise) of these public bodies. This has been brought into focus recently by the atrocious state of Government finances in the UK and the need for the next Government (whoever it may be) to make real terms reductions of public expenditure in excess of £100 billion.

Not surprisingly when there are threats to front line pubic services such as schools and hospitals many will question whether we really need the large range of QUANGOS which currently exist and also whether we can afford them in the current economic and fiscal climate.

A well-researched document recently produced by the Taxpayers Alliance claimed that in the UK there were a total of 1162 QUANGOS and other agencies which cost the taxpayer a total of £63.5 billion. These figures seem to chime with similar figures used by David Cameron in a recent speech but differ markedly from other claims which put total QUANGO expenditure at £14 billion.

This brings us to the first issue of what do we really mean by a QUANGO. For example, the figure of £124 billion includes in its list of QUANGOS all of the NHS Trusts in the UK which deliver hospital and community services. Few would regard NHS Trusts as being QUANGOS in the usual meaning of the world. Even the TPA report includes in its list of QUANGOS the following organisations:-

• The British Museum
• The BBC
• Kew Gardens
• The National Library for Wales

I am not sure many people would regard since high profile and well known organisations as QUANGOS.

Perhaps QUANGOS can be considered in four main groups:-

• Service providers – some QUANGOS such as the British Museum provide services directly to the general public.
• Funders – some QUANGOS distribute public funds to relevant external organisations. Thus the Arts Councils distribute funds to arts projects and the Higher education Funding Council for England (HEFCE) distributes funds to universities for teaching and research. So it is misleading (as the TPA report does) to claim that HEFCE spends £7billion per annum. The vast bulk of that money, with the exception of £20million for internal administrative costs, is distributed to universities for teaching and research. Also in this category might be included Regional Development Agencies.
• Regulators and Inspectors – some QUANGOS are charged with inspecting and regulating public sector service providers. Thus OFSTED inspects schools and the Healthcare commission inspects hospitals. The Audit Commission audits and inspects a range of public bodies. Also in this category might be included QUANGOS such as the Equalities commission.
• Advisors – there are a myriad of bodies of varying size which provide advisory services to various parts of Government.

There are many questions which will continue to be asked about QUANGOS. These include:-

• What benefit do they actually produce? For example, have schools really improved as a result of OFSTED? Have inequalities really reduced as a consequence of the Equalities Commission? The evidence is often thin. Also the activities of such inspection QUANGOS often place great burdens on the public bodies being inspected.
• Could their work be done by other existing organisations? For example, many of the roles of the Learning and Skills Council (LSC) in funding post-16 education used to be done by local authorities. Also, much economic work is done by local authorities as well as RDAs. Do we therefore need these QUANGOS when local authorities might do the same work for less?
• What public accountability is there for the work of QUANGOS? The Boards of QUANGOS are not elected but appointed by Ministers who seem to closely control what they do in some detail.
• Why are so many QUANGOS based in London when their wok could be just as easily done in other parts of the UK?
• Are there too many QUANGOS? For example do we need a QUANGO to fund higher education (HEFCE) and a QUANGO to fund post 16 education (LSC)?
• Are QUANGOS just devices for Ministers to reduce civil service head count and to avoid direct responsibility?

Overall, the future of QUANGOS probably depends on how much time and energy Ministers can devote to the issue given the vast problems which will face the next Government. Some savings can probably be squeezed out of the QUANGO system but it is probably much less than currently imagined.

Find out more

Malcolm appeared on BBC One's The Politics Show talking about QUANGOs on November 8th

Get under the skin of questions of private and public finance with The Open University Business School

In the latest edition of the Open Finance: Lessons From History series, Martin Upton explains what happened on Black Wednesday - and why, in retrospect, it might not have been all bad:

"From quite early on it became clear that the Bank of England was going to have to intervene quite regularly to keep the pound within its permitted range against the deutschmark within the ERM, and at times  - in terms of the foreign currency intervention which was required - this was costly. In addition, at the time, interest rates in Europe and even in Germany, which was dealing with reunification, were high, and that meant that UK interest rates had to be high because otherwise a differential between the interest rates in Germany and the rest of Europe and in the UK would have led to more pressure in terms of the value of the pound. There would have been downward pressure on the pound if the UK had cut interest rates at the time when European interest rates were high."

Listen to the podcast online
Find out how to subscribe - for free - to the series

One year on from their moment of meltdown, rescued institutions are again riding high, while the politicians who rescued them are paying the electoral price. The scale of the mess suggested, at the time, that banks had got onto their crash course through euphoria, miscalculation and madness. Now, the speed and low private cost with which they escaped that mess raises the equally scary likelihood that they were being rational all along.

The Great Escape

Aside from Lehman, banks have bounced back with their businesses and bonuses intact. Many have already returned to profit, with their investment banking units – whose speculative gambles were at the heart of last year’s problems – now helping to support the commercial side as it writes down its bad mortgage debt.

Lloyds, which looked to have bitten off more than it could chew by acquiring HBOS, is now a legally sanctioned giant that controls around one-third of UK mortgages and current accounts and a quarter of its business banking. Barclays, once viewed as perennially ripe for acquisition by a larger group, has now joined their ranks by cherry-picking Lehman at minimum cost. Fortis, facing bankruptcy a year ago, has announced a major UK expansion in alliance with Tesco. Merrill Lynch and Citibank continue to issue their uncompromising analysis of other firms’ finances, having buried the obituaries that were being written on their own a year ago.

Houses of Parliament at dusk.

Most of the management teams that presided over near-bankruptcy are still in place, enjoying undiminished performance and retention bonuses. Many of those dramatically turfed out of their Canary Wharf offices in September 2008 already have their feet under a comparable desk on someone else’s trading floor. And of the bosses who bet their banks and lost, there is none whose golden parachute failed to open. Even Lehman ex-CEO Dick Fuld is on hire as a consultant, just round the corner from Wall Street. Sir Fred Goodwin’s RBS pension, big enough to be a one-man stimulus package, attracts powerless resentment but continues to flow.

Meanwhile, the governments whose quick thinking made this possible are condemned, for the budgetary cost and for the scale on which their bailouts and loan guarantees seem to have feathered high-financial nests. Ironically, the more successful their rescue plans and the faster the financial world returns to normal, the worse is the electoral fallout. Gordon Brown, architect of last September’s global rescue, enjoyed a ‘bounce’ when turmoil and recession were at their worst and now sees his ratings fall with every sign of economic recovery.

Incumbents are being punished without regard to political stripe, so the by-election reversals are as bad for Angela Merkel’s Christian Democrats as for Brown’s New Labour. Bankers have become, like Ronald Biggs and Abdelbaset al-Megrahi, once unspeakable prisoners who walked out of jail, leaving condemnation raining down on those who let them out.

Sowing the Sense of False Security

Were bankers just lucky? Sadly, past crises showed a similar pattern. The biggest banks basked in the knowledge that they were ‘too big to fail’, even before the recent deepening and widening of their global interconnections. Many were emboldened in their retrospectively reckless gambles – on mortgages, securitisations and derivatives – by assurance that the state and its regulators would step in if their luck ran out.

emboldened in their retrospectively reckless gambles

With their deposits insured, their liquidity underpinned by a central bank, and their riskier loans apparently underwritten by credit default swaps, banks would have been foolish if they hadn’t taken increasing risks in pursuit of higher returns. Indeed, the management of HSBC – the only ‘Big Four’ bank to ride serenely through last year’s storms – had endured years of onslaught from activist shareholders aghast at its refusal to run down its capital, raise its leverage and gamble like the rest.

Bicycle helmets can prevent head injuries in many common accident situations. Yet their increased use is not associated with a reduction in such injuries – because helmet wearers take more risks, and are treated less carefully by other road users. Similarly, traditional banking safeguards encourage borrowers and lenders to take more risks. We’re usually grateful that they do. There were few more reckless gambles than building the first horseless carriage, microcomputer or oil-well, but lives were transformed for the better by those who did.

In most sectors, however, competition puts limits on risk-taking. Customers will go elsewhere if the firm’s product becomes too dangerous, and shareholders will desert it if the way it makes profit becomes too dangerous. Tragically, competition in financial services seems to have the opposite effect, driving companies to take more punts and fewer precautions. Customers flocked to Ice-Save because of its improbably high interest rates, shareholders to Lehman because of its impressive rates of return.

Counterproductive Competition

Alerted in 2000 (by the Cruickshank Report) to banks’ unusually high and consistent profitability, the UK government made a fundamental and possibly fatal choice. It didn’t want to regulate banks’ rates of return, as it traditionally did with highly concentrated, highly profitable utilities like electricity, gas and telecommunication. So it decided to make banking more competitive; and to encourage the combination of commercial banking, investment banking, brokerage and insurance so that big financial groups could compete along more dimensions.

In retail banking, competition meant narrowing the gap between savers’ and borrowers’ interest rates, and making up for the consequent loss of profit by offering more commission- and fee-based services. From this came banks’ substantially increased use of wholesale financial markets to raise funds, using collateralised debt as security, and the high-pressure selling tactics that led to serial mis-selling episodes. In investment banking, competition meant an erosion of low-risk trading profits, based on identifying and amending asset price misalignments. It led banks to preserve those profits by borrowing (‘leveraging’) more heavily to multiply the diminishing margin, and to supplement them with more investment in purely speculative asset-price movements.

no government can afford to jeopardise the financial sector’s profit recoveryno government can afford to jeopardise the financial sector’s profit recovery

Competition in insurance, and derivative markets, meant that bankers could often buy cover for adverse price movements. They didn’t realise (or didn’t like to mention) that the cover was ultimately underwritten by another part of the same group, or that it couldn’t possibly pay out if a general asset-price downturn caused the risks to become systemic.

Competition for the apparent expertise required to design and trade these exotic new instruments led to a steep inflation of banking and insurance salaries, topped by an even greater explosion in performance bonuses and executive share options. So banks’ profits underwent the desired moderation – but due less to competition than to the diversion of cashflow from shareholders to bonuses, and the large sums that had to be set aside for potentially non-performing investments and debts.

With banks still in delicate health until their mortgagees recover, and businesses under strain until banks can resume normal lending, no government can afford to jeopardise the financial sector’s profit recovery. So the grand regulatory schemes of a year ago, to change the rules and rebuild firewalls between financial activities, have been quietly put aside.

Banks that once, as a cosy cartel, enjoyed big private profits and got the state to subsidise their losses, have now shown that they can pull off the trick even more successfully as a competitive, deregulated industry. No wonder the politicians who pulled the world back from the brink, a year ago, are now being pilloried for letting those who pushed it there off-the-hook.

Take it further

• The "cardiac arrest" 
• Is the financial sector too big for its bonus?
• What the US Treasury did...

Courses

• You and Your Money
• Personal Investment in an Uncertain World
• Foundation Degree in Financial Services

About the author

Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

Subscribe to Alan Shipman's posts