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Strengthening Incentives for Compliance through Certification, Ratings, Liability, Insurance requirements A review of possible instruments, strengths,

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Presentation on theme: "Strengthening Incentives for Compliance through Certification, Ratings, Liability, Insurance requirements A review of possible instruments, strengths,"— Presentation transcript:

1 Strengthening Incentives for Compliance through Certification, Ratings, Liability, Insurance requirements A review of possible instruments, strengths, limits, potential pitfalls Florentin Blanc World Bank Group Amman, 3 June 2014

2 2 Reaching the goals of regulations (safety, health, environmental protection etc.) requires operators to comply with rules, norms Key question is: how to improve compliance – in particular from a risk-focused perspective: compliance with crucial norms, in high risk objects etc. Control, inspections cannot be universal – and even when they take place, they cannot always ensure compliance Looking for other drivers of compliance (and drivers of the desired goals: safety, health etc.) is necessary – including looking at leveraging the private sector’s strengths in a “for profit” perspective Strengthening incentives for compliance – goals and outline (1)

3 3 Possible tools/instruments include:  Mandatory certification of processes, machinery, products…  Extended liability (can be combined with mandatory insurance)  Rating schemes (with published ratings)  Voluntary certification and other voluntary “quality schemes” Different tools have different costs, strengths, limits, risks Used generally in different contexts/situations – lessons from existing experience have been insufficiently spread so far Strengthening incentives for compliance – goals and outline (2)

4 4 Heavy instrument: essentially makes controls/inspections far more “universal” on a given type of goods, premises, machinery etc. – by transferring the costs and resources entirely on the private sector Used for instance in the European Union for a range of goods (electrical or pressure equipment, medical devices…), machinery (lifts…) – typically reserved for high-risk situations where large number of facilities/products and significant technical complexity pose a serious challenge in terms of direct control by the state Supposed to yield a high level of confidence in safety outcomes – enabling in particular trade development (-> EU Single Market) Costly/burdensome instrument – with some limitations and important conditions required to be effective Mandatory certification (third-party conformity assessment) (1)

5 5 Cost for private sector (buyers of certification) is significant – it creates a “captive market” for providers of certification Certification providers have an incentive to avoid liability risks by encouraging “gold plating” (“as much safety as possible”) Can give illusion of 100% reliability – which never exists! “sloppy” certification work can happen, and real crooks are hard to catch! Conditions of possibility/effectiveness – both in terms of legal requirements and of “infrastructure” Mandatory certification (third-party conformity assessment) (2)

6 6 Very important “conditions of applicability/effectiveness”  Liability mechanism – both for operators, and certification providers (to give a strong incentive to comply or check)  Insurance requirement – both for operators, and certification providers (to cover losses which exceed their capacity to pay)  Reliable accreditation and authorization of conformity assessment providers  Credible enforcement – can include an effective “2 nd level control” (state institution supervising the conformity assessment providers) – and must include effective implementation by the court system of liability provisions  Strong insurance market – as an underpinning of the system Mandatory certification (third-party conformity assessment) (3)

7 7 Logic: using market mechanisms and not mandatory control – with liability over an extended time period providing the incentive for compliance (economic operator will have to cover the costs) Role of insurance: ensuring that operators do not escape liability through insolvency – providing underpinning and trust in the system Used for instance for construction safety norms in France Offers considerable flexibility, “fluidity” in the market, low implementation costs for the state Requires effective insurance market, enforcement through courts Downsides: need to wait for compensation (or buyers also need insurance…), problems may show up with delays only, “gold plating” possible to avoid liability risks etc. Extended liability – and related insurance

8 8 Logic: using market mechanisms to make control more effective – ratings are given following inspection visits, and their potential impact on consumers (good ratings increase sales, bad ones scare off buyers) means incentive to comply is stronger Mostly used in food safety (Los Angeles, Denmark, UK, China…) – display of scores can be mandatory or not (in the latter case, usually only good scores are displayed, but consumers can access ratings on line) Powerful incentive for compliance – but works only if controls are credible – and can potentially be abused Is more of an additional lever for controlling agencies rather than an alternative – does not change really the costs issue Rating schemes (with published ratings)

9 9 Logic: a recognized “label” or voluntary certificate/rating gives greater recognition to economic operators, which should then result in increased sales (and/or ability to charge higher prices, get more investment etc.) Main issue is credibility and “visibility” of these schemes – if consumers, importers, investors etc. do not know/trust them, they will not be useful Such schemes are often victim of insufficient enforcement which means they can have initial success in terms of market impact but then fail in terms of safety, health etc. and eventually decline Schemes such as “organic” certification for food in the EU, US, which is voluntary but underpinned by regulation could be an interesting example for other sectors/issues Voluntary schemes – certification, ratings, “quality labels”…

10 10 Certification, rating and other schemes can be powerful drivers of compliance and be more flexible or more effective etc. than “usual” inspections in certain circumstances They also can have significant costs – direct costs (certification, insurance) and indirect ones (“gold plating”) These different schemes can only be effective given certain legal and institutional conditions (liability and insurance requirements, insurance markets, enforcement through the court system, credibility of inspectors, reliability of accreditation system, quality of “second level” regulation etc.) Thus they are important instruments but often complex to implement and by no means “one size fits all”, “silver bullets” Elements of conclusion and lessons learned

11 Thanks for your attention Contact: fblanc@ifc.orgfblanc@ifc.org Further information on inspections work in the WBG: www.wbginvestmentclimate.org/publications


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