4

Streamlining regulation

On October 1, 2012, the Government of Canada released the Red Tape Reduction Action Plan. This aims to reduce the regulatory burden on Canadian citizens and businesses.

The plan included the One-for-One Rule, which came into effect on 1 April 2012. This places strict controls on the growth of regulatory red tape for business by requiring regulators to remove a regulation for every new one they introduce.

The Rule did more than control regulatory red tape – it reduced it by about $3 million and eliminated a net of six regulations from the government’s books in 2012–13. It is estimated that application of the Rule during that time has also saved businesses 98,000 hours per year in time spent dealing with regulatory red tape. As of 12 December 2013, a total reduction in administrative burden of almost $20 million and a net reduction of nineteen regulations had been achieved.

Governments regulate. No matter what the ideological position on the size of government or level of regulation, some degree of regulation is required. Regulation is an essential aspect of government policymaking. Complex issues, such as the stability of financial services and environmental protection, cannot be tackled without some degree of government intervention. There are factories that need regulating to protect citizens, retailers that need regulating to protect consumers, financial institutions that need regulating to protect businesses.

The amount of regulation considered appropriate tends to alter over time, almost on a cyclical basis. When regulation is minimized, for example, events occur – consumers are sold inadequate or poor-quality products or are overcharged, employees are injured in the workplace – that are blamed on insufficient regulation. Consequently, there are demands for increased regulation and more regulation is dutifully introduced. Over time, as the regulation takes effect and there are fewer publicity-attracting problems, there are calls for deregulation. Eventually, the regulatory framework is eroded and regulation minimized, whereupon problems begin to emerge again and the cycle starts over.

The recent financial crisis, for example, has been partly attributed to a lengthy erosion of legislation such as the Glass-Steagall Act in the United States. Consequently, there has been a move towards re-regulation in the financial services sector; governments are being pressed to step in again and regulate, where they previously deregulated.

In the financial sector, regulators and their political supporters want the benefits of a vibrant and innovative banking system to be more widespread, and to avoid a repeat of the recent financial crisis and further bank failures. Huge strides have been made in trying to re-regulate finance. Banks will soon be holding a lot more capital than they used to, for example, which is expected to make the system safer.

Elsewhere, in other sectors such as telecoms and energy, a trend towards deregulation continues in most countries.

Making regulation fit for purpose

Wherever a government is in the regulation-deregulation cycle, some regulation will always be necessary. Governments need that regulation to be fit for purpose. Applied ineffectively, without full consideration of the implications, new regulatory policies can run up unforeseen costs and give rise to inefficiencies that outweigh the purported benefits.

As we have seen, the context in which modern governments operate is changing quickly, with priorities changing as a result. Protecting citizens, consumers and the environment have become more pressing issues in the last ten years.

Outdated and inefficient regulatory systems will prevent government from achieving these aims. State regulation has an important role to play in creating a healthy economic environment. Too often, though, attempts at effective regulation fall short and, rather than boosting business and society, regulation has a negative impact.

A poorly functioning and inadequate regulatory system may well put people’s safety at risk. It may undermine trust in government by citizens and businesses. It may limit the potential for people or businesses to access new technologies, whether that is more effective medication or cleaner fuel. It may provide an obstacle to innovation, to productivity and to competitiveness. Countries that fail to reform their regulatory systems will be left behind.

This is why governments need a smart regulatory system, one that:

• keeps up with the different developments in science and technology in the global market;
• protects consumers from risks;
• enables innovation; is flexible and agile enough to address the needs of stakeholders in the current modern context;
• works for the public’s interest, consulting with citizens and businesses.

For example, the UK government anticipated the development of the driverless car market. A review was launched in 2014 looking at current road regulations to establish how the UK could remain at the forefront of driverless car technology, and ensure there was an appropriate regulatory framework for testing driverless cars in the UK. Two areas of driverless technology are covered in the review: cars with a qualified driver who can take over control of the driverless car and fully autonomous vehicles where there is no driver.

Similarly, California regulators made technology-based ride-sharing services legal in the state, providing a regulatory framework for start-ups like Lyft, SideCar, UberX and Tickengo to operate there. The California Public Utilities Commission passed rules that created a new class of ‘transportation network companies’ (TNCs). These rulings made California the first US state to legalize these peer-to-peer services, providing its residents with access to innovative and high-quality services and opening the doors for the further development of the sharing economy.

Smart regulation achieves higher standards of protection, and enhances the business confidence and public trust in the system. It helps to create an environment where the regulatory framework provides protection, but at the same time, the system is flexible enough to accommodate new developments in industry.

In addition, smart regulation helps countries position themselves as a market space to do business in. They allow better use of government resources, facilitate the openness of a country’s markets and improve standards. They also help protect the environment where people live.

Regardless of where governments are within the regulatory cycle for a particular set of regulations, it is important that they take the right decisions whenever a regulatory system is set up or reformed. Is it done in a smart way? Does it strike the right balance between protecting people and businesses, yet enabling them to work within the regulatory framework?

Recognizing the need for smart regulation, many governments have been rethinking their approach – to both the structure and scope of regulatory policy – and are looking for ways of improving it.

One clear trend is the strengthening of institutional frameworks through which policies and regulations are set, such as central oversight bodies, and improving policymaking through a more rigorous analysis of the costs and benefits to society of new and proposed policies. Fortunately for governments, there are principles and tools available to help policymakers ensure that the most effective regulatory processes are used.

Strengthening institutional frameworks

There are many things that governments can do to improve institutional arrangements in order to promote smart regulation. So, for example, governments can make a specific minister responsible and accountable for promoting progress on regulatory reform, or they can have a dedicated body responsible for promoting regulatory policy and monitoring regulatory reform, or a body to be consulted when developing or amending regulation. In practice a government might have a number of these.

The proliferation of regulatory bodies across government often leads to duplication of effort, overlapping responsibilities and a lack of consistency in policymaking, implementation and enforcement, and is a good example of where regulatory processes can be improved.

One way to help combat these flaws in the regulatory process is to have a central body responsible for promoting and driving regulatory reform from the centre of government. Indeed, having a central government overseer to monitor regulatory reform is comparatively commonplace.

This body ensures a consistent approach for regulatory reform, imposes, drives, and analyses regulatory impact assessments, and will be consulted before regulation is developed. It checks regularly that regulations are not outdated, and that the regulatory framework is as simple as possible.

By putting in place an oversight body and subjecting proposals to scrutiny, governments can impose strict quality control on new regulation, reduce inconsistencies, mitigate the risk of unintended consequences caused by conflicting political agendas, strengthen policy coherence and gain a bird’s-eye view of the overall regulatory framework.

Governments targeting reform of institutional structures also stand to gain from improved international competitiveness. Improving the quality of regulation, increasing transparency and listening to businesses can help attract greater foreign investment. Visible progress on reforming regulatory structures often translates into more favourable positions on closely watched indices, such as the World Bank’s Doing Business guide.45

Creating this kind of regulatory oversight body is not easy. It needs support at the highest level, at the level of the prime minister or equivalent, or by a minister tasked with the responsibility for regulatory reform.

The oversight body will assume some powers that were previously fragmented and associated with different ministries and other regulation-making bodies, providing a function that cuts across government.

People with the right expertise will be required to drive the work of the central institution. They need to be ahead of the government in terms of identifying areas that need more or less regulation. This means that they will need sufficient knowledge and expertise in the areas that the regulation is aimed at: in biotechnology, for example, there are issues that will touch on the science but also on ethics. They need training programmes to strengthen capabilities and outline the benefits of a new regulatory architecture.

A good understanding of the different complex problems involved in the regulatory process is also essential. This is particularly important at the sub-national level, where there may have been limited exposure to the more formal review processes that are expected (such as regulatory impact assessments).

Processes must also be established to share information and cooperate across regulatory boundaries. The promulgation of guidelines and increased use of standardization can play an important role in facilitating improved cooperation.

Note that the oversight body can act as an overseer and integrator, ensuring that overall regulatory policy is consistent with the objectives of the government, reviewing to prevent unnecessary regulation, and ensuring adequate regulation while checking that the cost of new regulation does not outweigh its benefits. It does not assume the regulatory functions of the individual fragmentary regulatory bodies, nor does it devise regulatory policy.

But, while not formulating regulatory policy, sometimes the oversight body will identify gaps in regulation and initiate new regulations to close these holes. The oversight body can authorize and implement studies into the need for regulation in a particular area – such as biotechnology, for example – and ask the department concerned to act on it. In many cases, it will have to report on the progress of its regulatory reform agenda to the highest level of government to ensure implementation by all ministries.

One reason governments need such a body is that they cannot achieve smart regulation through a one-off edict or instruction, because regulation takes place in an ongoing, constantly shifting environment. It is not enough to issue dictats about how the process is to run from now on; it is a continually evolving situation that requires constant monitoring.

Transformation at work: the rise of the overseers

Recognizing the value of having a regulatory oversight body, the majority of OECD countries have established a central overseer in recent years. These have typically been housed towards the centre of government, normally forming part of the prime ministerial or presidential office. In some countries, the ministry of finance or justice takes on this function. Oversight bodies can be fairly large, employing up to a hundred people.

Formal coordination mechanisms are also a growing trend. In Denmark, for example, local and regional government bodies take part in a steering group for cross-national initiatives which helps to strengthen cooperation and promotes coherence across multiple layers of government. Australia has a well-established scheme to encourage cooperation across regulatory bodies. In 2008, this was strengthened by new measures, including incentive payments to facilitate the implementation of agreed policies.

Transformation at work: Australian regulatory reform

In Australia, regulation is set at three different levels of government: the Commonwealth, the six states and two territories. Ensuring that these bodies were setting and implementing regulatory policy in a consistent way was a key objective for a regulatory reform programme introduced by the Australian government in 2007.

Lindsay Tanner, the newly appointed Minister for Finance and Deregulation at the time, had a remit to drive the reform agenda. Tanner said that there would be ‘a culture of continuous improvement in regulatory activity … in which government is always looking for opportunities to streamline regulatory processes … in the same way that manufacturers seek to continuously refine production processes’.

Efforts to coordinate regulation across different levels of government were spearheaded by the Council of Australian Governments (COAG), an intergovernmental forum chaired by the prime minister. In 2008, COAG agreed to a reform agenda covering twenty-seven different areas of regulation and committed to new cooperative working arrangements between the Commonwealth and the states.

Areas of regulation seen as key priorities nationally included occupational health and safety, consumer credit, food regulation, construction, and the reform of directors’ liability laws.

One intriguing aspect of the Australian reform agenda was the use of incentives to encourage cooperation. In November 2008, COAG agreed to a new National Partnership that would allocate funding of A$550 million (US$590 million) to the states and territories over five years to incentivize the implementation of reforms. This was broken down into an initial facilitation payment, followed by a further tranche of performance-dependent payments.

By the middle of 2012, seventeen out of the twenty-seven regulatory reform areas had been completed. According to the Productivity Commission, the completed reforms could lead to a 0.4 per cent increase in GDP per year, or some A$6 billion per year, and a reduction in business costs of A$4 billion per year.46 Towards the end of 2013, the COAG Reform Council published a five-year update. Solid progress had been made, the Reform Council said, but work was still required on accelerating the pace of reform.47

Analysing regulatory impact

In order to improve regulatory decision making, governments are increasingly using a regulatory impact analysis (RIA, also known as a regulatory impact assessment) in addition to central oversight. Typically presented as an analytical report, RIA is a structured way of providing a detailed assessment of the likely effectiveness, benefits and costs of new policy proposals.

Sometimes a state will make conducting a regulatory impact analysis mandatory in law so the regulatory framework will impose a RIA as a formal requirement, but this will depend on a number of factors, such as the level of importance of the regulation. And certainly at the moment, there is no consistent approach or common framework – but it is noticeable that there is increasing use of RIA across OECD countries.

Done well, regulatory impact analysis will provide information that policymakers can use to make key decisions about regulation, such as whether to prevent unnecessary regulations from being enacted. In doing so, it keeps to a minimum those regulations where the costs imposed by a regulation outweigh the benefits. It will also reduce the cost of government intervention and improve the reputation of the regulatory environment, which in turn makes it more attractive for business.

The process contains a number of steps, but the central method is cost-benefit analysis to assess efficiency.

• Initially, policymakers need to get a full understanding of the problem they are trying to address and use that to define the policy context and objectives.
• The next step is usually to list all regulatory and non-regulatory policy options that meet the policy objectives.
• This is where cost-benefit analysis comes in: the quantifiable impacts of each policy are identified and compared, taking into account any distributional effects (perhaps favouring one social group over another).
• At this point, a RIA may also consider the ‘operational cost’ of each policy, requiring policymakers to plan compliance and enforcement strategies for evaluation.
• Finally, the people tasked with doing the RIA should design a method for measuring and benchmarking policy success (perhaps a set of numerical indicators), so that future policymaking may be better informed. A RIA is often conducted in consultation with other government bodies and external stakeholders and can be an important decision-making aid, together with existing regulation and proposals.

Although there is no single institutional ‘right way’ for conducting a RIA, most countries rely on one of two approaches:

• A centralized institutional framework that relies on an oversight body for regulatory reform located at the centre of government.
• A decentralized institutional framework, where coordination between regulators is essential to ensure that policy objectives are achieved.

Teams should be cross-functional, with members coming from a range of different backgrounds in terms of work experience, expertise and skills, and with strengths across multiple disciplines, including economics, politics, the law and communications.

It can be difficult to find people with the capabilities required to conduct a regulatory impact analysis exercise. This is especially true with regard to accurately identifying the costs attached to implementing regulations. There may be hidden types of cost, ones not immediately apparent from analysis. Specialized expertise and strong analytical skills are required to identify the implications for everyone affected by regulation, whether directly or indirectly.

A formal RIA should also include a very robust consultation process that identifies all the stakeholders – inside and outside the government – that are involved with, and affected by, the regulation. By entering into a consultation process with affected parties, governments can build a clearer picture of the impact of a regulatory proposal. This evidence-based approach helps to foster debate and ensure that the voices of affected parties are heard and taken into account. By putting a public face on the regulatory decision-making process, RIA also helps to increase government accountability. This can, in turn, encourage the formation of policies that benefit society as a whole rather than serving the interests of particular groups.

Consistency is another challenge. It is important to follow a consistent framework, specifically set by the central regulatory oversight body, to make sure that alternative regulations can be compared in a coherent and meaningful way.

As government bodies are responsible for regulation, they should own the RIA process. Successful RIA processes tend to have high-level political support. A legal requirement for a RIA can add authority to the regulatory decision-making process. As described earlier, central overseers play a vital role in questioning and challenging the outcomes of a RIA produced by different regulatory agencies. They also establish guidelines and promote best practice. If there is no central overseer, governments must ensure constant coordination between regulatory institutions.

Measurement is an issue, too. Although a regulatory impact analysis is largely quantitative, some assessment is inherently qualitative. If you take a regulatory benefit, such as consumer protection, it is not easy to measure quantitatively. To address this, the assessment may try to estimate what the effect would be in the absence of a regulation – what the financial impact would be on consumers, for example – at which point it is possible to extrapolate a benefit. So while a regulatory impact analysis is often a very quantitative exercise, it might also require a rough assessment of the benefits involved.

The costs, on the other hand, should be quantitatively assessed. With regulations that affect a broad range of stakeholders, a very robust quantitative assessment will be necessary.

The value and the depth of a regulatory impact analysis will depend to a degree on the actual level and importance of the regulation. So if it is a regulation that affects a broad group of stakeholders, or a lot of stakeholders in a particular group, it probably warrants a detailed regulatory impact analysis.

For all the challenges, there are very good reasons for conducting a regulatory impact analysis. The broader consideration of the costs, benefits and impact of regulation can have a positive effect on competitiveness and growth. By reducing the chances of regulatory failure, an effective RIA system can help to promote entrepreneurial and investment activity, and improve a country’s reputation in the eyes of potential overseas investors and international institutions.

There is also a benefit to the efficiency of regulatory systems. By encouraging the migration of resources away from less effective regulations and towards more effective ones, RIA can help to establish priorities and reduce the cost of government intervention.

Transformation at work: initiating RIA

In the 1980s, just a handful of countries conducted a RIA in any kind of systematic way. Over the last couple of decades, however, the exercise has become increasingly common, and many OECD jurisdictions now routinely conduct some form of RIA (see Diagram 4).

Despite its rapid uptake, the scope and application of a RIA varies considerably across countries. For example, OECD figures show that around 70 per cent of OECD countries have a requirement in place to quantify the costs of new regulations. Yet only 47 per cent have to quantify the benefits of regulations.

Given the volume of regulation most governments have to deal with, it wouldn’t be practical or cost effective to subject every regulation to a RIA. Consequently, in order to decide whether a new regulation should be subject to a RIA, many OECD countries apply a two-tier filtering system based on whether the costs of the proposed regulation exceed a certain threshold. These thresholds are often a combination of quantitative and qualitative factors. In the US, for example, regulations are subject to a full RIA if they are ‘major regulations’ likely to impose annual costs exceeding US$100 million, or ‘adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities’.48

In addition to applying a quantitative threshold, South Korea requires a full RIA to be undertaken if the proposed regulation affects more than a million people.

Although a RIA is typically used to assess new regulatory proposals, some countries, including Australia, Canada, Germany and the UK, are extending their use of RIA to cover existing regulation. This process can be easier than performing a RIA on new regulation, because there is often more data available.

Diagram 4. Trends in RIA adoption by central governments

Source: OECD, Government at a Glance, 2009

Transformation at work: regulatory triage in Canada

One of the countries which has made a serious attempt to improve its regulatory impact analysis is Canada. It put in place several measures that help to develop, implement, evaluate and review regulations to ensure that the intended benefits of policies materialize.

A Regulatory Impact Analysis Statement (RIAs) must now be submitted with the proposed regulation. The RIAs provides ‘a cogent, non-technical synthesis of information that allows the various RIAs audiences to understand the issue that is being regulated, the reason the issue is being regulated, the government’s objectives, and the costs and benefits of the regulation and who will be affected, who was consulted in developing the regulation, and how the government will evaluate and measure the performance of the regulation against its stated objectives’.49

A RIA anticipates the impact of the proposed regulation on the quality of the environment, health, safety and economic well-being of all citizens. It also helps regulators qualify the impact of their policies on consumers, competitiveness and small businesses.

To make the regulatory system more effective and efficient, the Canadian government initiated an evaluation guide. This initiative, called the ‘Triage Statement’, assesses the impact of a proposal and prompts the policymaker to identify processes that could be streamlined so that resources can be focused accordingly.

The statement has a number of related purposes, such as:

• reducing submission delays by involving the Treasury Board of Canada in the regulatory process;
• choosing the proper requirements and analysis level needed for the regulatory submission;
• directing the focus of regulatory organizations on medium- or high-impact proposals; and
• encouraging the use of the required RIA templates in submissions.

Canada’s work on streamlining legislation emphasizes the need for policymakers to maximize the net benefits of their regulations to society. Departments and agencies must demonstrate how they will improve the economic, environmental and social well-being of citizens, businesses and the government. At the same time, the distribution of costs and benefits across all influenced bodies and sectors in Canada must be recognized.

A guide to cost-benefit analysis has been given to regulatory officials to ensure that they apply consistent analysis of the highest standards, as relevant as possible to their policy proposals. This describes how risk and monetized benefits should be treated, along with support on many other issues.

In a nutshell: streamlining regulation

Regulations are essential to safeguard citizens and businesses, protect the environment, and harness economic growth and development. Regulatory failures were a contributory factor to the global financial crisis, emphasizing the necessity of strong regulatory governance to manage risk and promote resilient growth.

The approach of many governments tends to run in repeating cycles of regulation followed by deregulation. Regardless of where a government is in this cycle, some governments have demonstrated that there are still opportunities to adopt a smarter, more focused, approach to regulation. Smart regulation ensures that regulations are fit for purpose and there is a natural cascade of policy objectives while achieving transparency in the regulatory system and securing compliance and enforcement.

Regulatory institutions play a vital role in ensuring the quality of regulations. Regulatory oversight bodies within the centre of government promote regular government-wide regulatory reform and advocate the consistent application of regulatory policy across government, often challenging regulatory proposals from ministries.

Key to this are regulatory impact assessments. They are important enablers of the smart regulatory approach, as they examine and measure the likely benefits, costs and effects of new or existing regulation and assist decision makers in choosing the best policy options while improving the empirical basis for regulatory decisions.