Regulatory Impact Assessment for Better Regulation Charles-Henri Montin Policy Analyst Regulatory Policy Division OECD / Directorate for Public Governance and Territorial Development

Outline of the presentation Presentation Outline Outline of the presentation The regulatory system Why improve regulatory quality? Regulatory Impact analysis: a fundamental tool to improve regulatory quality

Regulatory management Improving Regulatory Quality: the Regulatory System Regulatory management Institutional arrangements Regulatory Policy Multi-level governance Stock of regulations Flow of regulations Regulatory reform Burden reduction Administrative simplification Coordination Regulatory Impact Analysis (RIA)

Why improve regulatory quality? Improving Regulatory Quality: Rationale Why improve regulatory quality? Economic, social and distributional benefits In a context of tight budgets, option less demanding than fiscal policy Plays a central role in improving both citizen’s and investor confidence in a country Engaging in regulatory reform to improve regulatory quality and establish permanent regulatory oversight has proven a highly effective option in the past Most severe economic crisis in decades. Banking sector has now been stabilised and stimulus packages have had a significant impact… … but have left countries with sizeable deficits - the OECD-wide budget deficit is projected to reach more than 8% of GDP in 2010 - its highest level in 60 years. In the OECD as a whole, gross government debt is projected to exceed 100% of GDP in 2011, about 30 percentage points higher than in 2007 Countries need strategies such as regulatory reform that will stimulate sustainable growth without further increasing deficits While regulatory reform should be maintained as continual and permanent process given ever-changing global economic conditions, it becomes a crucial strategy in a context where countries do not have much room left to stimulate the recovery through fiscal instruments

Case study example: Korea Improving Regulatory Quality: Rationale Case study example: Korea 1997-98 crisis: GDP declined by 7.6% in Q1 1998, but recovered to pre-crisis levels by the end of 1998. Crisis caused by external shock, overleveraged and unprofitable corporate sector and lack of supervision of financial sector At that time wide-ranging and ambitious program of reform, including the elimination of 50% of existing regulations Impact difficult to quantify but evidence of increased FDI level, reduction in compliance costs (4.4 % of GDP) and administrative cost savings of $0.5 bn Korea successfully handled Asian financial crisis and current crisis is less severe than before

Regulatory Impact Analysis (RIA) Improving Regulatory Quality: RIA Regulatory Impact Analysis (RIA) Section Outline: Context Design and Process Scope Implementation Elements

RIA: Context What is RIA? Systematic policy tool and decision process to examine and measure the likely benefits, costs and effects of new or existing regulation In the OECD, used most often to manage the flow of regulation (US, Canada, UK, France, EU, etc.) Role in the development, review and reform of regulations emphasized by the 1995, 1997 and 2005 OECD guiding principles and recommendations for regulatory quality and performance

RIA: Context Why is RIA important? Control the quality of regulation – a step in improving competitiveness Evidence-based policy making Improves transparency – both within Government and Civil Society Simple language understandable for everyone and easily accessible

RIA: OECD Experience Trend in RIA adoption by central governments across OECD countries (1974-2008) As of 2008, all OECD countries require some form of Regulatory Impact Assessment (RIA). So now the question is not whether or not to adopt RIA, but how to improve RIA quality and better integrate RIA in the policy and regulatory planning process.

How does RIA work? The process of Regulatory Impact Analysis RIA: Design and Process How does RIA work? The process of Regulatory Impact Analysis Policy objectives Definition Identification Regulatory Options Assessment Costs Consultation Involving Stakeholders Design Enforcement, Compliance and monitoring mechanisms After RIA is prepared: DECISION MAKING Policy context Benefits Selection Best Option Other impacts

How does RIA fit into the policy-making process? RIA: Design and Process How does RIA fit into the policy-making process? POLICY MAKING PROCESS Consultation Analysis Information Discussion Agreement Policy Implementation RIA

Primary or secondary legislation? RIA: Scope Primary or secondary legislation? Less and less divergence among OECD countries Primary legislation usually has more far reaching impact Secondary regulation (decrees, bylaws) may set technical standards, adoption usually not that transparent It may be easier to constrain delegated regulatory authority

Apply to all proposals or only major ones? RIA: Scope Apply to all proposals or only major ones? Many countries have linked RIA requirements to the magnitude of potential impacts of proposals Difficult to identify suitable threshold Quantitative vs. qualitative thresholds USA – annual costs exceeding $100 mil. Or more Canada: $10 million or more France: no threshold yet

RIA: Implementation Institutional design Dynamic process between the center and sectoral ministries regulators System of checks and balances Need for expertise in sectoral ministries/regulators, Division of tasks Balance between political discretion and need for expertise, Timing The variation in RIA systems: presidential vs parliamentary regimes

Common challenges Related to the tool: RIA: Implementation Common challenges Related to the tool: Problem identification, Consultation and data Considering alternatives, “Proportionate analysis” Quantification, Risk assessment Related to the structure/process Scope of application / selection of proposals Quality control (oversight) Presentation / Communication Integrate RIA up-stream (early in decision-making) Integrate RIA down-stream (“closing the loop”) Training, Multi-level context

RIA: Implementation OECD good practices (1) 1. Political commitment and endorsement at the highest levels Legal basis for RIA Clear ministerial accountability 2. Allocate responsibilities for the RIA programme Operational responsibilities with the services Inter-service coordination Central quality oversight

OECD good practices (2) 3. Target and prioritise RIA efforts RIA: Implementation OECD good practices (2) 3. Target and prioritise RIA efforts Scope of application / thresholds for when to do RIAs Sectoral impacts 4. Develop comprehensive guidelines Mandatory Both on process and on technical aspects 5. Carry out sound analysis Strategies for data collection Consistent but flexible methodologies

OECD good practices (3) 6. Consultation / Transparency / Communication RIA: Implementation OECD good practices (3) 6. Consultation / Transparency / Communication 7. Training, training, training 8. Apply RIA to both new and existing regulation

Elements of RIA: Overview RIA Elements Elements of RIA: Overview 1. Problem definition 2. Selection of alternatives 3. Consultation 4. International Regulatory Coordination 5. Analysis of Costs and Benefits 6. Compliance / Enforcement 7. Post-Implementation Review and Evaluation

What is the problem? Is government action justified? RIA Elements 1. Problem definition What is the problem? Is government action justified? Many regulatory failures stem from an ill-defined or too narrow problem Countries have increasingly sought to justify government intervention Problem / Objective setting is an essential step for effective performance measurement

Requirements of the RIA process RIA Elements 2. Alternatives Requirements of the RIA process Clearly determine policy objectives Case for regulation / Market failure / Policy goals Consideration of full range of available alternatives Regulatory / Non regulatory Evaluate likely possibilities of success Consider the role of government / characteristics of the sector Discard unworkable proposals Cost benefit analysis of alternatives Identify the alternative with the highest net benefit

Assessment of alternative policy instruments OECD countries, 2008 RIA Elements 2. Alternatives Assessment of alternative policy instruments OECD countries, 2008 Notes: Data presented for the 30 OECD member countries and the European Union. Source: OECD Regulatory Management Systems’ Indicators Survey 2008, www.oecd.org/regreform/indicators.

Alternatives to what? Command and control regulation RIA Elements 2. Alternatives Alternatives to what? Command and control regulation Prescriptive Black letter law May not promote good regulation Efficiency reducing Dynamic/ allocative/ technical Prevents innovation Can create market distortions/ barriers Potentially Ineffective Costly to business and the government May not ensure compliance A product of habit?

What alternatives to consider? RIA Elements 2. Alternatives What alternatives to consider? Regulatory alternatives Performance based regulation / Co-regulation / Economic instruments - market incentives Non regulatory alternatives Voluntary codes / self regulation / information campaigns Spectrum of regulatory instruments:

Performance based regulation RIA Elements 2. Alternatives Performance based regulation Specifies outcomes or objectives and allows parties to choose means of compliance Flexible, promotes innovation, lowers compliance costs May create uncertainty, favor large companies, difficult to monitor compliance, detailed guidance can become de facto law Use when rate of technical change is high, incentives for compliance are strong and a clear understanding of the problem to be addressed Example of safety case regulation – duty of care requirement

RIA Elements 2. Alternatives Co-regulation The regulatory role is shared between government and an industry or occupational body which can enforce breaches of an industry code Utilises expertise of the industry or professional association and promotes accountability Reduces requirements for government resources May raise barriers to entry and unintended monopoly power which may restrict competition Best used when industry is strongly homogenous, professional independence is important and self enforcement is possible. Example of legal and accounting professions

RIA Elements 2. Alternatives Market incentives Economic incentives can be used to modify behavior, for example through creating a market, taxing activities which generate negative externalities, or subsidizing positive activities Can be less costly than regulation, promote flexibility, innovation and be largely self enforcing Can be difficult to target and may generate unintended market distortions, structurally difficult to remove when no longer required Useful when behavioral change is required across the community and sensitive to price signals Examples of carbon tax, tradable permits, introduction of privatization and contestability

Voluntary codes / Self Regulation RIA Elements 2. Alternatives Voluntary codes / Self Regulation Industry self regulation uses voluntary codes to describe the types of activities that they agree to comply with to ensure acceptable standards Voluntary codes have no legal authority: compliance is achieved through the participants desire to uphold the reputation of the industry Provides a market based solution to regulate ethical behavior – operationally practical Relies on sufficient market power to deter non-compliance Compliance may be low, can create barriers to entry Examples of media code of ethics, supermarket code

RIA Elements 2. Alternatives Negative Licensing Individuals and business that have demonstrated past bad behavior are precluded from operating in a particular industry Practical when governments seek to exclude persons with particular characteristics (eg criminals) rather than specify positive requirements Relatively low cost, does not require registration Exclusionary criteria may be difficult to specify and enforcement costs may be high Examples of real estate sub agents

Information campaigns RIA Elements 2. Alternatives Information campaigns An education program can be appropriate in cases where the market failure is an information problem. Depends on whether the target group can be identified and reached economically Can be very light handed May reduce costs of regulation and increase compliance May be conducted by government or business May not be successful in changing behavior Examples of advertising the effects of speeding, smoking or exercise

Some criteria for assessing alternatives RIA Elements 2. Alternatives Some criteria for assessing alternatives For all options, how does it rate on… Effectiveness Promote compliance and meet objectives? Efficiency Deliver a positive net benefit at lowest opportunity cost? Equity and Fairness Transparent, inclusive, promote competition?

Conclusion Case by case approach Clearly linked to policy objectives. RIA Elements 2. Alternatives Conclusion Case by case approach Consideration of characteristics of industry sector Clearly linked to policy objectives. Will it achieve its policy aims? Incentives and institutional issues. Do the approaches ‘work with’ existing incentives? Can they be effectively monitored and enforced? Evaluation of risks. Likelihood and consequences of regulatory failure Possibility for return to status quo Be creative Adapt to human behaviour, new technology, new tricks, opportunity for policy learning

Why consult? Valuable source of ideas and data RIA Elements 3. Consultation Why consult? Valuable source of ideas and data Intrinsic and instrumental value Increased transparency (increased trust) Draw upon collective intelligence of society: better outputs and outcomes at a lower cost People are more likely to accept and comply with policies they feel they have shaped Ensuring that regulatory processes take into consideration the views of all groups in society is a major challenge to governments Participation of stakeholders in the regulatory process ensures that: feedback about the design and effects of regulation is taken into account when developing the regulation increases the likelihood of compliance by building legitimacy in regulatory proposals and may therefore improve the effect of regulation and reduce the cost of enforcement. Hence, formalised consultation processes are an important feature of regulatory transparency and a key factor in strengthening regulatory management systems. Consultation with stakeholder groups is one of the most cost-effective ways of obtaining data to support RIA. In addition, consultation helps to establish the legitimacy of regulation, by allowing people to raise concerns and participate in the regulatory process before regulation is implemented. This, in turn, can improve the extent of voluntary compliance with regulation.

Consultation is a central element of RIA RIA Elements 3. Consultation Consultation is a central element of RIA Form of quality assurance Means of ensuring data fully gathered and refining methodologies gives affected parties the opportunity to identify and correct faulty assumptions and reasoning Regulatory oversight bodies need to play a role in enhancing and refining consultation practices Consultation is a key pillar of good regulation, and mandated by the Regional Charter RIA should always be integrated with public consultation as it provides better information to underpin the analysis and gives affected parties the opportunity to identify and correct faulty assumptions and reasoning.

Why coordinate? Collaborative identification of a regulatory agenda RIA Elements 4. International Regulatory Coordination Why coordinate? Collaborative identification of a regulatory agenda Increasing integration of international markets magnifies the salience of global systemic risks

Benefit-Cost Analysis (BCA) RIA Elements 5. Costs and Benefits Benefit-Cost Analysis (BCA) OECD recommends that the BCA should be used where feasible in conducting RIA BCA, when applied appropriately in the regulatory context, attempts to take account of the full range of impacts, including environmental and social impacts, as well as economic impacts. Should serve as a basis for decision-making (choose the option that maximises net benefits) Benefit-Cost Analysis is a general framework and process to weigh the total expected costs against the total expected benefits of one or more actions in order to choose the best option. In the regulatory context, this is the option that maximises net benefits. Typically BCAs are published separately, and a summary is presented in the RIA. The same BCA can be conducted as an underpinning for a large number of regulatory initiatives, and updated as necessary.

RIA Elements 5. Costs and Benefits: OECD RIA Requirements: Analysis of Costs, Benefits and Public Accessibility in OECD countries (2005 and 2008) While a majority of OECD countries require that the benefits and costs of new regulation be identified in regulatory impact assessments, a much lower proportion require that these costs and benefits be quantified and publicly released. There is scope for improvement in this area and the importance of effectively communicating the benefits of reform should not be overlooked. Effective communication requires broad efforts towards advocacy, clearly highlighting the rationale for reform strategies, and engaging in the public debate to win constituencies and stakeholders. New initiatives for open government and web-based consultation and communication are also likely to transform the relationship between the regulators and the regulated, making regulation user-centred. Note: This figure is based on country responses to the OECD Survey of regulatory management systems conducted in 2005 and 2008. Each column is the sum of country responses “always” and “for major regulations only”. Source: OECD Regulatory Management Systems’ Indicators Survey 1998, 2005 and 2008, www.oecd.org/regreform/indicators.

Compliance and enforcement RIA Elements 6. Compliance and Enforcement Compliance and enforcement OECD 2005 principles: regulations should be efficiently applied with non-discriminatory and transparent procedures for enforcing regulations and with fair appeal processes Achieving a high level of compliance is a key factor in the effectiveness of regulations. How to influence the awareness, willingness and ability of regulated groups to comply? One way in which countries have promoted the rigour of regulatory quality initiatives is to allow for regulations to be challenged if requirements with respect to RIA or consultation are not met. To illustrate, the Spanish Supreme Court has established that if consultation procedures have not been met, the law/royal decree can be invalidated. In the United States the Administrative Procedure Act (APA) of 1946 also provides such a possibility: it requires that agencies go through a notice and comment process open to all members of the public. The information in the public record, including the RIA, and agencies‟ use of this information are used by the courts in settling any challenges to regulation brought by the public. In In Luxembourg, if a professional chamber has not been consulted according to process requirements for subordinate legislation, the regulation is considered invalid.

Compliance and enforcement issues, 2005 and 2008 RIA Elements 6. Compliance and Enforcement: OECD Compliance and enforcement issues, 2005 and 2008 Requirements for compliance and enforcement issues were specifically required to be considered when developing new regulations in more than two thirds of the countries in 2008, an increase over the last years About half of the OECD countries now have specific policies on compliance friendly regulation and have produced written guidance on compliance and enforcement issues for use by regulators While most countries have some form of a requirement to consider compliance and enforcement issues when developing new regulation, guidelines in this area and policies on risk based enforcement are less common, though growing in number This may be partly explained by the fact that those responsible for designing regulatory policies are not themselves regulators, and therefore may be more preoccupied by designing regulations and defining regulatory options than enforcing them. Enforcement tends to be left to individual departments and Ministries, and methods vary. This is an area that needs to be reinforced; after all, what good can a perfectly designed regulation do if it is not properly enforced? Notes: Data for 2005 and 2008 are presented for the 30 OECD member countries and the European Union. (*) No data are available prior to 2008. Source: OECD Regulatory Management Systems’ Indicators Survey 2005 and 2008. www.oecd.org/regreform/indicators.

Performance measurement & evaluation RIA Elements 7. Post-implementation Review Performance measurement & evaluation Develop standardised evaluation techniques or criteria Report on performance Review / Repeal regulation if necessary Automatic reviewing or repealing clauses may be considered, such as sunsetting

Regulatory review and evaluation in OECD countries 1998, 2005 and 2008 RIA Elements 7. Post-implementation Review Regulatory review and evaluation in OECD countries 1998, 2005 and 2008 More and more countries have been adopting mechanisms for regulatory review and evaluation over the last decade Most OECD member countries now have mandatory periodic evaluation of existing regulation, automatic review requirements for specific primary laws and mechanisms by which the public can make recommendations to modify existing regulation. Sunsetting clauses are less popular, though still growing. An example of ex post evaluation and update can be found in Korea. In Korea, any citizen or business can make suggestions and demand regulatory improvements on all Korean regulations on the website of the Regulatory Reform Committee Notes: Data for 1998 are not available for the European Union, Luxembourg, Poland and the Slovak Republic. This means that this figure is based on data for 27 countries in 1998 and for 30 countries and the EU in 2005/2008. (*) No data are available prior to 2005. Source: OECD Regulatory Management Systems’ Indicators Survey 1998, 2005 and 2008, www.oecd.org/regreform/indicators.

For more information: Reading List OECD country reviews on regulatory reform are available at www.oecd.org/regreform OECD (2002), Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance OECD (2006), Alternatives to Traditional Regulation OECD (2008), Building an Institutional Framework for Regulatory Impact Analysis (RIA): Guidance for Policy Makers OECD (2009), Better Regulation in Europe: An Assessment of Regulatory Capacity in 15 Member States of the European Union OECD (2009), Regulatory Impact Analysis: A Tool for Policy Coherence

Thank you for your attention! Charles-Henri Montin Policy Analyst Regulatory Policy Division OECD / Directorate for Public Governance and Territorial Development charles-henri.montin@oecd.org