Brighter and Darker Sides of Intermediation

Intermediaries in rule development

Regulatory intermediaries fulfill key functions in the development of building codes and planning legislation. This type of regulation seeks to achieve safe, healthy, and environmentally sustainable buildings. ¹ While it is typically introduced by governments, governments often lack the expertise to express exactly what safe, healthy, or environmentally sustainable buildings are like. Often governments set broad goals such as these and commission external organizations to provide expertise on how the goals can be captured by regulation. Particularly with the move from prescriptive regulation to goal- and performance-based regulation, in the governance of buildings, as in other domains, regulators are becoming ever more reliant on specialist intermediaries to develop rules and to provide the expertise they lack (see further, May 2011). A typical example is The Energy and Resource Institute (TERI) ² in India, which has a long history of being commissioned by the Government of India to provide technical knowledge about whether and how best to regulate various aspects of environmentally sustainable buildings (van der Heijden 2014).

However, it is not only regulators that seek support from intermediaries in rule-making; targets do, too. In the United States, for example, buildings and city planning are subject to state and local regulation. For a long time this resulted in a situation in which different local jurisdictions had in place different building codes and planning legislation. This hampered the construction industry, as it had to comply with different regulatory regimes in different jurisdictions. In response, the industry pushed for standardized requirements throughout the country (Garvin 2014). In 1994, the International Codes Council (ICC) ³ was formed to develop building codes without regional limitations. The ICC develops model codes that can be—and are—widely adopted by states and municipalities in the United States as mandatory construction codes. Similar processes have been documented in Australia and Europe (Lovegrove 1991; van der Heijden 2014).

Intermediaries in rule implementation

Regulatory intermediaries also perform key functions in the implementation of building codes and planning legislation. Regulators often involve intermediaries to translate broad or abstract legal requirements into workable standards (cf. Auld and Renckens, this volume). Typical examples are the DIN in Germany (the German Institute for Standardization) and the NEN in the Netherlands (the Netherlands Institute for Standardization). ⁴ The NEN, for example, is normally commissioned by the Dutch government to develop standards that specify the exact conditions for compliance with building codes—in the terminology of Abbott, Levi-Faur, and Snidal (this volume), it is a “secondary regulator.” In developing these standards, the NEN works with stakeholders in the construction industry, academia, and government.

Both the DIN and the NEN were founded in about 1915 to develop national standards, but they are now nonprofit organizations independent of government—and they have both begun to operate at a global level. They do not only work on behalf of regulators, however. Targets also approach them to translate broad regulation into specific standards. This gives targets an opportunity to influence the implementation of building codes, and it is particularly relevant because the construction and property sectors are characterized by rapid technological change and innovation. By allowing targets to pursue standards that show the compliance of their innovations with broad regulations, the sectors are not hampered by the relatively slow process of changing building codes.

In rule implementation, intermediaries also play other important roles for targets. They provide targets with education or advice on compliance and assist them in complaint processes. A typical example is the Owner-Building Compliance training in Australia provided by TAFE (Technical and Further Education) institutions. ⁵ TAFE institutions are financed by state and territory governments in Australia, in contrast to the university sector, which is predominantly financed by the federal government. Australians who want to construct their own homes are required to pass the Owner-Building Compliance training course to obtain an owner-builder permit. They are free to choose where they take the course, and different TAFE institutions provide slightly different courses (NSW Government 2015).

In a similar vein, for-profit and nonprofit knowledge centers around the world are dedicated to providing advice on building codes and planning legislation. BRIS ⁶ in the Netherlands, for example, is a for-profit organization that provides online support and advice to building regulatory authorities involved in the enforcement of Dutch built-environment regulation, as well as to targets that wish to comply with this regulation. BRIS has developed software that allows targets to carry out a preassessment of their building plans against Dutch building codes. This preassessment indicates whether the plans comply, and it can be added to a building permit application to ease the formal assessment process carried out by the municipal building control authority.

The Local Government Ombudsman service ⁷ in the United Kingdom provides another example of a target-oriented intermediary. It is run by the Commission for Local Administration, regulated through the Localism Act 2011, and funded by government grants, but it is independent from government in the services that it provides. One critical service is supporting citizens (as targets) in their complaints about building control by local authorities (as regulators). A related example is the Building Appeals Board of the State of Victoria, Australia. This independent statutory body consists of a panel of building experts; it hears appeals and disputes concerning the monitoring and enforcement of building codes, and can waive or modify the provisions of regulations when it sees fit. ⁸ These intermediaries make visible any shortcomings in the implementation of building codes and planning legislation, which may have a transformative impact on the regulatory process (Allmendinger, Tewdwr-Jones, and Morphet 2003; Schwarcz 2013).

Intermediaries in monitoring and enforcement

A final area of growing intermediary involvement is the monitoring and enforcement of building codes and planning legislation. This process requires broad technological and legal knowledge and expertise, as well as considerable institutional capital and capacity (Evans et al. 2014; Pedro, Meijer, and Visscher 2010). In the 1980s, governments, particularly in developed economies, began to outsource and privatize this part of the regulatory process.

Countries such as Australia, Canada, Germany, and Japan allow private actors to be recognized (i.e., registered or accredited) by statutory agencies to carry out monitoring and enforcement tasks. Once they have been recognized, they can be engaged (hired) by targets. This privatization can be far-reaching: in some states in Australia, private actors not only assess building plans and construction work but even issue building permits, and are sometimes obliged to issue fines when they observe noncompliance. This model allows developers or contractors (targets) to work with the same intermediary in different jurisdictions, reducing their (transaction) costs in the monitoring and enforcement process. It goes without saying that the close relationship between target and intermediary may result in conflicts of interest (van der Heijden 2015a)—an issue I explore in the section on capture.

The discussion in this section has specifically illustrated that it is not only regulators that involve intermediaries, but also targets. While Abbott, Levi-Faur, and Snidal (this volume) discuss this possibility, their unidirectional understanding of the regulatory process leads them to focus on intermediaries engaged by regulators (cf. Havinga and Verbruggen, this volume). This section further illustrates that some intermediaries (e.g., the Local Government Ombudsman) fulfill only target-oriented roles, while others can be brought in by both regulators and targets. This latter situation raises the question of how independent such intermediaries are.

Intermediaries as signifiers of the turn to regulatory governance

The notions of “regulatory governance” and the “regulatory state” (Braithwaite 2000; Levi-Faur 2011, 2013; Scott 2000) provide a partial explanation of the emergence and expansion of intermediation that we have observed. These ideas suggest that governmental actors increasingly rely on regulation, rather than governance instruments such as taxing or spending, as the preferred mode of achieving socially desirable ends. The ends that regulators seek through building codes and planning legislation have expanded rapidly since the 1900s. This can partly be explained by the growth of knowledge and new concerns about how the built environment affects, for example, public health and the natural environment; partly by the solutions provided and the new risks introduced by technological developments; and partly by a decentralization of government (Black 2008; Taylor 2013; van der Heijden 2014).

Growing areas of regulation require more and more regulatory capacity and expertise. Because governmental regulators often lack capacity and expertise, they turn to intermediaries such as the ICC, the NEN, or the DIN for rule development and the setting of standards. More notably in the area of buildings, local governments are often tasked with monitoring and enforcing compliance with building codes and planning legislation. Small local governments in particular (those of small cities, towns, and villages) face considerable shortfalls in their capacity to set up adequate building development authorities and inspectorates. The number of staff they can hire directly relates to the size of their jurisdiction. For small jurisdictions, therefore, only a handful of people can be dedicated to these tasks. In such situations it is likely that a government will hire generalists (with broad, but not necessarily in-depth, knowledge) rather than specialists. The technical complexity of building codes and planning legislation requires, however, specialist knowledge for effective monitoring and enforcement. This is only amplified by the growing scope of regulation, which requires ever more specialized enforcement. This explains why many local governments turn to intermediaries for support in the monitoring and enforcement of building codes (van der Heijden 201).

This demand for capacity and expertise has resulted in an increased supply of intermediaries. Once they become established, intermediaries begin to explore possibilities to expand their markets. The DIN and the NEN, for example, are actively exploring which areas of the built environment (buildings and cities) require additional regulation, and are actively advocating regulatory expansion. They do not limit these activities to their home countries: they have become international, and provide services to regulators around the globe. It goes without saying that these expanding intermediaries are (or at least hope to be) the parties to which regulators turn when they consider regulatory expansion. More importantly, by exploring novel areas for regulatory governance, these intermediaries help governments to expand their regulatory control, providing motivations and legitimacy for building out the regulatory state.

The main risk in this reliance on intermediaries in regulatory governance is that regulators may lose expertise in the regulated area and become too dependent on intermediaries. They may even face a regulatory vacuum when an intermediary decides to stop assisting them—an issue that I touch on below.

Intermediaries as advocates of the privatization of regulation

A related motivation for involving intermediaries in the regulatory governance of buildings can be found in the growing ideology of entrepreneurial government, the privatization of public service delivery, and new public management (Hodge 2000; Hood 1995). In the 1980s and 1990s, ever-growing regulation and government involvement was often assumed to have burdened the market, and governments were often considered less effective and efficient in the delivery of services and goods than market actors (Wilson 1989). These critiques led to a range of initiatives to contract out or delegate traditional government tasks (such as rule monitoring and enforcement) to private sector agents, or even to privatize these tasks fully. In sectors characterized by technological complexity, in particular, it was often argued that the regulated sector had a much greater knowledge of its own internal workings than a distant regulator could ever have (cf. Gunningham, Kagan, and Thornton 2003).

Indeed, in these decades, countries around the globe introduced forms of the privatized enforcement of building codes—see the examples discussed above. From a public interest point of view, the inclusion of intermediaries might make regulatory enforcement more effective and efficient (by adding capacity and expertise), and help to achieve socially desirable ends. From a private interest point of view, privatized enforcement creates a market for this service. By bringing in paid-for private sector enforcers, targets can build relationships with these intermediaries. They can, for example, hire the same enforcement agent for different projects, rather than relying on different enforcement officers provided by local building control authorities.

In this model, intermediaries face considerable conflicts of interest in situations of noncompliance. They may have to refrain from issuing a permit, notify the local authority of a violation, or even issue a fine. Yet doing so might risk losing their client (the target) for a future job, or becoming known in the construction industry as a difficult intermediary with which to work. This model may also result in “intermediary shopping” by targets—a situation in which a target hires the intermediary that best serves their interests (van der Heijden 2015a).

Seeking to prevent these problems, authorities often regulate who is allowed to act as a private sector enforcer (intermediary) and introduce systems of oversight to ensure that private sector enforcers act in line with the public interest (by means of “meta-intermediaries”—one example is the Building Professions Board that oversees and, if necessary, disciplines private sector building enforcers in the state of New South Wales, Australia ¹⁰ ). This solution comes with its own complications. It reduces efficiency gains because additional layers of supervision slow down the enforcement process, and regulators may not have sufficient capacity and expertise to ensure that particular meta-intermediaries are competent (Power 1999).

The risks of this type of privatization relate to those mentioned above: regulators may lose expertise and become too dependent on intermediaries. In Canada, for example, local councils in certain provinces made their building inspectorate agencies almost fully redundant when private sector inspectors (intermediaries) became dominant in the 1980s. In due course, a small number of large private inspector organizations came to dominate the market for building code enforcement. At this point, the responsible regulators realized that they could not discipline misbehavior by these intermediaries by taking away their licenses to operate. If the private inspectors were to (be forced to) leave the market, then no one could provide building code enforcement services, effectively stalling construction in these provinces (van der Heijden 2015a).

While these risks of privatized building code enforcement are beginning to be recognized in the literature (Pedro, Meijer, and Visscher 2010), the presence of private sector enforcers in certain countries inspires actors in other countries to seek similar forms of privatization. In the Netherlands, for example, private consultants supported by the construction industry have long lobbied for a system of private building code enforcement similar to those in place in Australia and Canada. These consultants often already act as intermediaries, being contracted by local governments to support them in building code enforcement. The consultants who are lobbying for private code enforcement have a strong incentive for doing so: if such a system were adopted, they would be the first to enter the new market (van der Heijden 2013).

Intermediaries as accelerators of the professionalization of regulation

The growth of intermediaries in the regulatory governance of buildings also reflects another trend: regulation has become an industry in itself, in which many regulatory intermediaries undertake business activities. The notion of “regulatory capitalism” (Levi-Faur 2005) best captures the emergence of regulation as an industry; but the ongoing specialization and professionalization of the regulatory industry also fits the broader trend of the transformation of manufacturing economies into service economies (Buera and Kaboski 2012).

Broadly speaking, until the 1980s regulation was considered to be a binary instrument (Hawkins 1984; Scholz 1984): regulators sought to achieve their regulatory goals either by making targets fear the consequences of noncompliance (a deterrence-based strategy) or by making targets change their moral stance toward noncompliance (a compliance-based strategy). Since the 1980s, insights on regulation have changed rapidly, resulting in ongoing suggestions of alternatives for the design and implementation of regulation. Regulation is considered a “craft” that requires craftspeople for its development and implementation (Sparrow 2000).

Seeking partly to follow changes in regulatory practice and partly to influence them, research institutes dedicated to studying regulation have emerged. ¹¹ Educators now provide degrees in regulation. ¹² Dedicated journals have been established. ¹³ The world’s largest and most prestigious consultancy firms have branches dedicated to providing advice in regulatory matters—and, in their slipstream, smaller consultancies (such as BRIS), dedicated to providing regulatory advice, have emerged. Associations of regulatory professionals, such as the Australian Institute of Building Surveyors (AIBS), ¹⁴ have been established to influence the professional conduct of regulators. There seems to be no way of stopping the growth of the regulatory industry.

It can be argued that the professionalization and specialization of regulatory intermediaries are particularly appropriate for the construction and property industries. These industries are characterized by high levels of specialization (and fragmentation), making it evident that specialists are needed to deal with specialist regulators and intermediaries. While specialization and professionalization are often considered to improve regulatory effectiveness and efficiency, especially in areas characterized by high levels of technological sophistication (Baldwin and Cave 1999), they also come with risks.

A general risk is that intermediaries seek ever more specialization and professionalization as a way to raise barriers against competitors entering or operating in the market for regulatory services (Davis 2007). A specific risk is that intermediaries may seek to crowd out the government provision of services. Under the system of private building code enforcement in Australia, private organizations (intermediaries) can often offer higher wages and better terms of employment to inspectors than can municipal building control authorities, but they are only interested in hiring people with years of experience, as their clients (targets) request experienced inspectors. After some years under this model, municipal building control authorities realized that they had become the “breeding ground” for young inspectors who would be “bought” by private organizations once they had gained enough experience. Effectively, this implied that municipal building control authorities could not provide the same level of service (experienced inspectors) as private organizations, and so could not compete with them in the market for building code enforcement (van der Heijden 2015a).

The USGBC as a multifaceted regulatory intermediary

The USGBC was established in 1993 and was intended to fill a gap in building regulation: the absence of requirements for improved environmental sustainability in building codes in the United States. It has developed and implemented a voluntary regulatory regime for environmentally sustainable building development: the certification program Leadership in Energy and Environmental Design (LEED). Under the program, buildings and city development projects can be certified as meeting higher levels of environmental sustainability than are required by mandatory building codes. The program consists of a set of rules that a target (a building developer) must meet; compliance with these rules is assessed by an LEED assessor (a regulatory intermediary); and if compliance is observed, an LEED certificate is issued that can be used by building developers or owners for commercial purposes. The establishment of the USGBC and the development of LEED were strongly driven by targets (van der Heijden 2015b).

While the USGBC itself is a private regulator with no formal ties to government, it has taken on roles related to many of the types of intermediaries described in this article. It works with the ICC to develop the International Green Construction Code, a model building code for environmentally sustainable construction that can be adopted by local governments as a binding regulation. Through its affiliates, such as the Urban Green Council in New York, it provides (paid-for) advice to city governments on the development and implementation of local building codes and planning legislation for environmental sustainability. Through (online) courses, workshops, and conferences, it educates regulators, developers, contractors, and others in the construction and development industries about regulation for environmentally sustainable building and city development. In addition, more than 200 local governments, 34 states, and 14 federal departments and agencies require LEED certification for government-funded building projects. Many city governments have adopted LEED as their mandatory building code for environmental sustainability or provide incentives such as tax breaks or accelerated building permit assessment for targets that commit to LEED (van der Heijden 2015b).

The capture of intermediaries

While the “client capture” of intermediaries in privatized Australian building code enforcement is straightforward and easy to observe (targets have been found to shop for intermediaries that best suit their needs), other forms of the capture of intermediaries are less obvious. One of these is “revolving door capture,” in which employees of intermediaries move between an intermediary and a target (cf. Makkai and Braithwaite 1992). If one looks at the membership of USGBC boards, working groups, and committees, it becomes clear that the construction industry is disproportionally represented. Because LEED is the dominant standard for environmentally sustainable building regulation in the United States, industry members of these bodies have strong financial interests in capturing the USGBC. In practice, they can influence the specific building solutions that LEED stipulates as “preferred solutions” (for a candid discussion by one of these representatives, see Papadopoulos 2015).

Capture of intermediaries can have far-reaching impact. A telling example is that of the carpet industry in the United States, particularly the Carpet and Rug Institute (CRI)—a small player in the construction and property industries. Seeking to advance its interests (and those of the firms it represents), the CRI introduced a voluntary labeling program for environmentally sustainable carpet products in 1992—Green Label Plus. It was, however, not successful in having governments include this standard in mandatory building codes (McDonough 2004). With the introduction of LEED, which receives wide support from governments throughout the United States, the CRI found an indirect way to influence regulators. It succeeded in having Green Label Plus adopted by the USGBC as a means of showing compliance with a specific LEED regulation. One salient detail here is that, at the time of adoption, the chairman of the USGBC’s board of directors worked for a multinational carpet company (Wargo 2010). Another detail is that Green Label Plus has been repeatedly criticized for providing a means to “greenwash” poor environmental performance; and there is evidence that the CRI lobbied fiercely in favor of its own interests over environmental considerations when it sought to get Green Label Plus adopted by the USGBC (McDonough 2004; Perinotto 2014).

This example indicates how a (dominant) regulatory intermediary can become a vehicle that allows a small player in the industry to have a major impact on regulators—the small player uses its resources to capture an individual intermediary, rather than spreading itself thinly trying to capture numerous regulators. This can be highly problematic, as can be seen with the CRI episode, because it is not clear whether government regulators that mandate LEED in their jurisdictions are aware—or can be aware—of all the actors involved in LEED and its third-party regulatory requirements.

Of course, where some win from capturing the USGBC, others lose. This has resulted in an intriguing process of “counter-capture,” where representatives of industries that have not managed to capture the USGBC seek to capture government regulators in order to prevent the use of LEED in their jurisdiction. Organizations of timber and chemical firms whose products are not included as LEED “preferred solutions” actively lobby state and local governments to adopt regulations that restrict developers from seeking LEED certification, or that fully prohibit it. They have been successful in states including Ohio, Maine, and Georgia, all of which restrict the use of LEED in some way (Badger 2013).

Capture by intermediaries

It goes without saying that intermediaries may also be motivated to capture regulators (Abbott, Levi-Faur, and Snidal, this volume). For example, rule development and standard-setting organizations such as the ICC, the NEN, and the DIN have a strong financial interest in the growth and amendment of regulation. They profit not only from the development of regulations and standards but also—because they hold the copyright on the standards they develop—from the sale of printed copies and online access to targets. These organizations have a unique monopoly: targets are legally required to comply with their standards, have no free access to them, and can only obtain them from a single organization. The more often the regulations change, the more income the organizations make from selling these documents. This clearly provides a perverse incentive to advocate regulatory change (Martini 2003).

In a similar vein, the USGBC has a huge financial interest in seeing LEED adopted by state and local governments as part of mandatory building codes. In 2014 it collected close to $40 million in registration and certification fees (USGBC 2015). Thus, the greater the number of regulators that adopt LEED, the greater the income of the USGBC, simply because targets have no choice other than to seek certification from the USGBC. The USGBC now seeks to influence regulators in other countries as well. It has for a long time sought to influence the Government of India.

In the late 1990s, the USGBC actively supported the Government of India and the Confederation of Indian Industry in establishing the Indian Green Building Council (IGBC). ¹⁶ There are no mandatory building codes for environmental sustainability in India, and with the creation of the IGBC, the Government of India hoped to accelerate a transition to environmentally sustainable buildings. The main task of the IGBC was to develop and implement a voluntary certification regime for environmentally sustainable building and city development (van der Heijden 2016). The USGBC acknowledges that its interest in promoting LEED in India was a reason for it to support the development of the IGBC: India is among the world’s largest markets for new construction.

For more than a decade the IGBC has issued LEED certifications under license from the USGBC. In 2015, however, the IGBC decided to phase out LEED certification in India in favor of its own voluntary certification program. In response, the USGBC has entered a strategic alliance with TERI, another regulatory intermediary in India (see above). By doing this, the USGBC has realized an even closer relationship with the Government of India. It now actively influences a voluntary certification program developed by TERI, Green Rating for Integrated Habitat (GRIHA), ¹⁷ which is the Government of India’s preferred certification program for environmentally sustainable buildings. In addition, it gains support from GRIHA in expanding its market, which it considers to be “crucial in regionalizing LEED in India and Southeast Asia” (USGBC 2014).

This example indicates that intermediaries can capture regulators well beyond their geographical and organizational boundaries—and can even make capture a global process. This makes it even more difficult for regulators or targets to act against capture. If they wish to take legal action, where can they do so? In the “home” jurisdiction of the intermediary, where they themselves are not based; or in their own jurisdiction, where the intermediary is not based?

Intermediary capture: Is it problematic?

These examples illustrate that intermediation may have a far-reaching impact on regulatory capture, especially when amplified by the self-interest of intermediaries that makes intermediation less visible and more complex than under a traditional R→T model. Capture may happen well out of sight of regulators and targets, making it difficult for them to respond to it. But to what extent are these forms of intermediary capture problematic? This question resonates with a key observation of Carpenter and Moss (2013) in their book Preventing Regulatory Capture: “Perhaps the deepest problem with much of the research on regulatory capture is not merely its tendency to overstate the evidence for capture, but its lack of nuance in describing how and to what degree capture works in particular settings (Carpenter and Moss 2013, 9).

The RIT model helps to provide nuanced descriptions of capture, and this aids in understanding the operation of regulation in specific settings. The example of the CRI piggybacking on the USGBC to “capture” local governments is a nuanced narrative, in which the then-chairman of the USGBC board seems to have played a key role. Yet, while nuanced, the narrative does not give an insight into the concrete impact of capture. How much more “unsustainable” carpet has the industry sold because Green Label Plus was adopted as part of LEED? How much has the USGBC’s influence on governments ultimately helped the CRI? What about the USGBC’s own attempts to capture regulators? Is it all equally problematic?

Here Carpenter and Moss provide another intriguing insight: “regulatory capture is not an all-or-nothing affair” (Carpenter and Moss 2013, 452). They suggest that we should think in terms of “strong capture” and “weak capture.” In a situation of strong capture, the public interest is violated to such an extent that the public would be better off without a particular regulation, or with a comprehensive replacement of that regulation and those that administer it. In a situation of weak capture, the public interest is compromised by special interests, but “the public is still being served by regulation, relative to the baseline of no regulation” (Carpenter and Moss 2013, 12).

This distinction is also valuable for the conceptualization of intermediary capture. In some cases, it could be argued that the public interest is still better served with LEED than without it. ¹⁸ In 2015, for example, energy use in federal government buildings in the United States was at a 40-year low. That result has in part been attributed to the 1,500 or so LEED-certified government buildings (United States Government Accountability Office 2015). This may be considered an example of weak intermediary capture. One may question why the federal government mandates only LEED, and none of the dozens of other similar certification programs available (Fowler and Rauch 2006), but its commitment to LEED is still better—from an environmental sustainability perspective—than no commitment to a certification program at all. The example of the “client capture” of privatized Australian building code enforcement, in contrast, is more akin to strong intermediary capture: the public might be better off if the captured intermediaries were taken out of the system. The same could be argued for the capture of the USGBC by the CRI.