1. Victorian Regulatory Change Measurement (RCM) Version 1.0 dated June 2010  These slides are available at: www.dtf.vic.gov.au/betterregulationwww.dtf.vic.gov.au/betterregulation  Questions to: betterregulationunit@dtf.vic.gov.aubetterregulationunit@dtf.vic.gov.au

2. Victorian Regulatory Change Measurement (RCM) Rundown Introduction to the RCM methodology Overview of the Reducing the Regulatory Burden (RRB) initiative Step 2.1: Understanding the scope Step 2.2 to 2.5: Before commencing the measurement Step 2.6.1: Mapping the regulatory change Step 2.6.2: Assessing and calculating costs Step 2.6.3 to 2.8: Finalising the measurement

3. What? Introduction to the RCM methodology

4. What is the RCM?  Regulatory Change Measurement (RCM) is a methodology to measure reductions in regulatory burden  RCM refines and replaces the Victorian Standard Cost Model methodology (focused on administrative costs only) from 1 January 2010  RCM is documented in a manual with two technical toolkits, available at: www.dtf.vic.gov.au/betterregulation

5. Regulatory costs measured by RCM methodology  Administrative costs - Costs incurred primarily to demonstrate compliance with the regulation or to allow government to administer the regulation, e.g. filling in forms  Substantive Compliance costs - Costs that directly lead to the regulated outcome, e.g. installing safety device  Delay costs - Expenses and loss of income incurred through having to complete an application requirement or wait for an application approval, e.g. waiting for approval of a building permit Details later

6. Regulatory costs measured by RCM methodology Costs within the red border are measured through the RCM Compliance costs Regulatory costs Financial costs Administrative costs Substantive compliance costs Delay costs Impacts of being prevented by administrative process from conducting operations Other costs (e.g. market/competition)

7. RCM formula for costs Regulatory costs (total $) Price (P) X Quantity (Q) Estimated cost of the regulatory change per businessX Number of businesses affected OR

8. Some key RCM principles  Proportionality of effort - need to keep the cost of measurement in mind  Indicative nature of estimates - not a statistically robust measure  Transparency of assumptions - all relevant documentation to be disclosed

9. Some proportionality considerations Cost of conducting the RCM Illustrative implications: Low measurement costs Medium measurement costs Limited Only if needed Limited effort or referencing Limited More extensive Strongly recommend ’Activity’ level only if needed and resources permit More effort to gather data Detail of mapping (to ‘activity level*) Effort to gather data Business interviews Business engagement $250k/$500k $10 m Regulatory burden change (+/-)

10. Why? Overview of the RRB initiative

11. The Reducing the Regulatory Burden (RRB) initiative  Launched in 2006, the RRB initiative target of $256 million in administrative burden reductions, has been increased to a $500 million per annum in burden reduction by July 2012, including: - administrative costs - substantive compliance costs - costs of delays  The burden reduction will increase productivity and Victoria’s competitiveness by enabling regulated entities to use their time and resources more productively  This will make Victoria a more attractive place to do business

12. How does the RRB initiative deliver its targets? Identify and review regulatory burdens Sources of information: - burden reduction opportunities identified by departments - recommendations from VCEC inquiries - input from business and affected sectors Funding of reviews: - Departmental reviews of sunsetting regulations, and other reforms - by RRU through the RRB Incentive Fund Examples of outputs that reduce burdens - process improvements (e.g. improved forms) - online solutions (e.g. electronic lodgement) - policy review (not mandating ‘risk control plans’) - review of approvals processes (quicker approvals save time) See Treasurer’s report for detailed examples

13. Benefits of measuring regulatory changes  Validate effort to reduce the burden on business  Prove government leadership in cutting the burden  Provides the affected sectors with a transparent measure of the change to burden that is imposed on them

14. Some key processes  Measurement is mandatory for changes in regulation within scope of RRB  RCM is a verification exercise, not related to regulatory gate-keeping - RCM report not to be attached to BIA/RIS  Independent assessment - Department or agency prepares the RCM Report - VCEC or BRU assesses, as appropriate* * Details later

15. How? Step 2.1 Understanding the scope

16. Is the regulatory change within scope of RRBE? Is information available to assess the magnitude of change? Is the change material? RCM is needed Consult with BRU on materiality and further steps Understand the magnitude of change END RCM not needed WAIT up to 3 months from charge $250 000 per annum $500 000 per annum Administrative burden alone Administrative burden substantive, compliance costs, and delay costs END RCM not needed START Regulatory change arising from instruments not subject to BIA/RIS START Regulatory change arising from instruments subject to BIA/RIS NO YES NO S2.3 S2.1 S2.2 S2.4 S2.5

17. 2.1.1 Regulatory instruments in scope  What is regulation? All legally enforceable obligations imposed by Victorian authorities  What is regulatory burden? Regulatory burden is that burden over and above ‘business as usual’ (BAU) - BAU is what the business would do on its own (i.e. without regulation) - BAU is not a regulatory burden Government imposed regulatory costs Business-as- usual costs Baseline (case of no regulation)

18. BAU: An example  Would a construction business erect a scaffold in the absence of regulation? - Virtually none will work without a scaffold - Virtually none will erect a bamboo scaffold in Australia - Most will use strong steel scaffold  Hence only the increment of safety requirements over and above what business uses on its own would be treated as a regulatory burden

19. Examples of regulation within RRB scope  State Government regulation: Acts of Parliament Regulations (statutory rules under the Subordinate Legislation Act 1994 (SLA) including court rules Subordinate instruments (that are not a statutory rule under the SLA), such as: –Rules, orders, etc by Ministers or agencies –Licences and permits –Codes of Practice/Guidance/Industry Agreements with government backing –State government regulation administered by local government  Local Government by laws: –A local law within the meaning of Part 5 the Local Government Act 1989 Impacts of harmonisation – see details in the Manual

20. Step 2.1.2 Sectors within scope  Business sector  Not-for-profit (NFP) sector  Economic (income-generating) activities of private individuals - such as employment related activities  Government services (a sub-sector of Government) - Direct Government service delivery that is comparable to services delivered by the business or NFP sectors. Examples : –education and training services delivered through public schools; –health services delivered through public hospitals; –ambulance services; –public aged care services; and –public and community housing.

21. Step 2.1.3 Regulatory costs within scope  All compliance costs - Administrative costs (red tape) - Substantive compliance costs  Delay costs Regulatory costs Financial costs Administrative costs Substantive compliance costs Delay costs Impacts of being prevented by administrative process from conducting operations Other costs (e.g. market/competition) Compliance costs

22. Administrative costs (red tape)  Costs incurred by regulated entities primarily to demonstrate compliance with a regulation or to allow the government to administer the regulation Examples: - making, keeping or providing records - preparing plans - conducting tests - making an application - conducting internal audits and inspections - cooperating with Government inspections

23. Substantive compliance costs  Costs that directly lead to the regulated outcomes being sought. These are often capital and production costs. Examples: - training - providing information to third parties - inputs to comply with a plan or test - purchase and maintenance of plant and equipment - operations

24. Delay costs  Delay costs are the expenses and loss of income incurred by a regulated entity through: - an application delay; and/or - an approval delay.  Two types - An application delay refers to the time taken by a regulated entity to complete an application (e.g. for a licence or permit) - An approval delay refers to the average time taken by a regulator to communicate a final decision regarding the application and includes a ‘normal’ level of re-work of the application

25. Delay costs - discussion Expenses  Holding costs of land - Example: Developer holding land for a longer duration than otherwise needed to build  Standby costs of capital - Example: A dredger inside Port Philip Bay waiting for approval to commence dredging  Standby costs of labour (or labour downtime) - Note that routine form filling is unlikely to generate labour downtime (apart from the time take to fill the form) Example: A worker idle on the dredger from the above example waiting to commence operations Loss of income  Lost business opportunities during the delay period

26. Identification of delay – slide 1 TIME Regulatory Process 1 Over-lapping time period with Process 1 Regulatory Process 2 012

27. Identification of delay – slide 2 The reduction in the length of the application process by removing RP2 is only equal to the section between time 1 and time 2 More slides on delays: www.dtf.vic.gov.au/betterregulation TIME 012 Regulatory Process 1 Regulatory Process 2 Time saved by removing Regulatory Process 2

28. Steps 2.2 to 2.5 Before commencing the measurement

29. Is the regulatory change within scope of RRBE? Is information available to assess the magnitude of change? Is the change material? RCM is needed Consult with BRU on materiality and further steps Understand the magnitude of change END RCM not needed WAIT up to 3 months from charge $250 000 per annum $500 000 per annum Administrative burden alone Administrative burden substantive, compliance costs, and delay costs END RCM not needed START Regulatory change arising from instruments not subject to BIA/RIS START Regulatory change arising from instruments subject to BIA/RIS NO YES NO S2.3 S2.1 S2.2 S2.4 S2.5 Key steps in the process

30. Step 2.2 Is information to measure the change available?  RCM report to be submitted for assessment within three months of a regulatory change taking effect  Where information that is crucial for estimating the magnitude of change is not available within this period, alternative timeframe with RRU can be negotiated

31. Step 2.3 – Understand the magnitude of change  A broad application of the measurement approach is used to prepare a plausible initial estimate. Some questions to ask Do these changes: - introduce or abolish information or compliance obligations? - significantly increase or reduce the frequency of reporting or compliance obligations? - introduce a new area of regulation? - affect a large number of regulated entities?

32. Step 2.4 – Is the change material?  Materiality test - For administrative burdens on the business and not-for-profit sectors, a change ≥ $250,000 per annum. - For the sum of all regulatory costs within the RRB initiative, a combined change ≥ $500,000 per annum.

33. Step 2.4 – Is the change material?  An RCM is required where there is prima facie evidence that the change in regulatory burden is likely to be material Example : Back-of-the-envelope calculation Where only administrative burden has changed: - 250,000 = Price x Quantity - 250,000 = Time x Tariff ($60/hour) x Quantity - 250,000 / 60 = Time x Quantity - 4167 = Time x Quantity (5000 businesses) - 4167 / 5000 = Time - 0.8334 hours = Time  Therefore, if the regulatory change saves more than 50 minutes per business, the change is likely to be material, and an RCM will be needed

34. Materiality test - 1 Sector/cost categories BusinessNFP Government services Economic activities of individuals Total by cost categories Administrative costs +0.2-0..6-0.4 Substantive compliance costs Delay costs Total by sector+0.2-0.4 Example 1: Initial estimates (costs in $ million ) Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.

35. Materiality test - 2 Sector/cost categories BusinessNFP Government services Economic activities of individuals Total by cost categories Administrative costs +0.2-0.6-0.4 Substantive compliance costs Delay costs Total by sector+0.2-0.6-0.4 Example 2: Initial estimates (costs in $ million ) Answer: No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.

36. Materiality test - 3 Sector/cost categories BusinessNFP Government services Economic activities of individuals Total by cost categories Administrative costs +0.3-0.3 Substantive compliance costs 0.3 Delay costs Total by sector+0.30.30 Example 3: Initial estimates (costs in $ million ) Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.

37. Materiality test - 4 Sector/cost categories BusinessNFP Government services Economic activities of individuals Total by cost categories Administrative costs +0.1-0.1 Substantive compliance costs -0.3-0.1 Delay costs Total by sector+0.1-0.3-0.4 Example 4: Initial estimates (costs in $ million ) Answer: No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.

38. Step 2.5 Contact the Regulation Reform Unit  Provide RRU with the indicative estimate  RRU will provide appropriate advice on next steps

39. Step 2.6.1 Mapping the regulatory change Reference: Toolkit 1

40. An introduction to mapping  Purpose: - To identify what has changed - To understand the drivers of the change - To be able to identify costs of the change  Principles: - Only map the change - Mapping should be conducted at the broadest level feasible - Diagram showing the changes is useful

41. Map the regulation  Mapping involves: identifying obligations that require a regulated entity to perform a certain action identifying the type of regulatory costs imposed Regulatory Instrument This should include information on the high level regulatory instrument down to the specific guidance, where relevant Obligation The legal requirement that affects a sectors behaviour Information Obligation A description of the administrative burden of the obligation Substantive Compliance Obligation A description of the substantive compliance burden portion of the obligation Details of the Delay Cost A description of the delay cost including the reasons for delay and the burden imposed.

42. Expanded mapping process (where relevant) Three levels (in principle):  Mapping can be conducted up to three levels: (1) obligation, (2) requirement and (3) action (or activity) (as with the Standard Cost Model)  Mapping to the obligation level is generally sufficient  Disaggregation below this level is only necessary when: - information can not be collected at the obligation level, and - the cost of disaggregation is not excessive  ‘Requirement’ level is almost always unnecessary

43. Expanded mapping process: illustration Information obligation Data requirementAdministrative activity Application for licence Contact detailsObtain accurate information for the form. Milk volume informationGather the information from milk statements Amount of licence fee payable Calculate the fee payable. Pay the invoice/make deduction and file receipt Table: Hypothetical example of mapping to obtain a dairy licence X?

44. Example: Mapping high risk work licences  A ‘requirement to hold a licence for high-risk work’ is one of the obligations under the Occupational Health and Safety Regulations 2007 (Part 3.6, Division 1, Section 3.6.1).  Three types of cost categories can exist under this obligation: - information obligation: information to be submitted to government as part of the licence application; - substantive compliance obligation: cost of obtaining a competency requirement as part of the licence application; and - cause of delay is the applicant earning lower wages while waiting for the licence (this imposes an opportunity cost on the applicant).

45. Mapping an obligation into cost categories (example cont’d) Occupational Health and Safety Regulations 2007 Information obligation Preparing and submitting the licence documentation Substantive compliance obligation Cost of training required to obtain a licence for high-risk work Cause of delay Potential under-utilised labour after lodgement of licence application Obligation 1 Requirement to hold a licence for high-risk work Activity 1: Fill form Activity 2: Make payment Figure T1.2

46. Step 2.6.2 Assessing and calculating costs Reference: Toolkit 2

47. General principles  Duration of a regulatory change - Default duration is to be taken as ten years except where the change is implemented over a shorter period  Annualising the cost estimates - The measurement is averaged out over the duration - It is not a discounted present value  Desktop analysis for the most part

48. Prepare data collection strategy  Identify the data required - use the information from mapping exercise, and - consult the relevant cost formulae (details of formulae explained later)  Identify sources of data  Document the approach to normally efficient business - Conceptual of costs experienced by an ‘average’ regulated entity  Collect the data

49. The basic formula for regulatory costs Administrative cost Substantiative Compliance Cost Regulatory costs (total $) Price (P)Quantity (Q) Labour tariff and/or external staff One-off cost of a physical asset and/or Annualised depreciation Interest + opportunity costs time Number of physical assets Duration of holding population compliance (or uptake) rate population compliance (or uptake) rate population annual frequency XXX Administrative Cost Substantive Compliance Cost Delay cost X

50. Price variables for administrative costs  Tariff: wage rate plus overheads and on-costs for activities performed  Time: hours or minutes to complete administrative activity  External tariff: hourly rate or cost of external providers to carry out administrative activities  Other costs: e.g. capital cost specifically incurred to comply with information obligation or activity Administrative Cost = Price x Quantity = (tariff x time) x Quantity OR = {internal price (i.e. tariff x time) + external tariff + other significant costs} x Quantity

51. Quantity variables for administrative costs  Population: refers to the number of entities affected by a particular regulatory obligation.  Frequency: is the number of times an affected business or other entity delivers or complies with a information obligation each year.  Compliance Rate: refers to the rate of affected business that will comply with the information obligation - default = 1, or 100% Administrative Cost = Price x Quantity = Price x (population x annual frequency x compliance rate)

52. Exercise: Calculating administrative costs  Obligation: Duty to lodge a licence application  Information: - A normally efficient business takes 4 hours to lodge this licence application - 1 000 businesses are affected by this obligation - Businesses are required to lodge this application twice a year - Wage is equal to $55 per hour including overheads and on-costs

53. Price variables for substantive compliance costs  Tariff x time: (similar to administrative costs)  Price of physical asset: one-off purchase price of a physical asset  Annualised depreciation: ongoing cost of the relevant asset  Number of assets Substantive Compliance Cost = Price x Quantity = (tariff x time) x Quantity OR = (one-off price of physical asset x number of assets) x Quantity OR = (annualised depreciation x number of assets) x Quantity

54. Quantity variables for substantive compliance costs  Population: similar to administrative cost  Annual Frequency: similar to administrative cost  Compliance Rate: similar to administrative cost Substantive Compliance Cost = Price x Quantity = Price x (population x annual frequency x compliance rate)

55. Exercise: Calculating substantive compliance costs  Obligation: Duty to provide safe ladders at all building worksites  Information available: - one-off purchase price of safe ladder is $200 - each site requires one ladder - 10 000 worksites are affected - 40 per cent of building sites already comply with this regulation

56. Delay costs  Key issues: - mapping the delay is crucial (discussed earlier) - identifying opportunity costs is another key issue  If you expect to measure the cost of delays, please contact RRU and agree to the methodology and formula to be used  More slides on delay costs are available on the DTF website, www.dtf.vic.gov.au/betterregulation Delay Cost = Price × Quantity = {(costs incurred + opportunity cost) × delay period} × (population)

57. Steps 2.6.3 to 2.8 Finalising the measurement

58. Step 2.6.3 Verify the costs After initial desktop estimation: Consult departmental experts - In all cases consult with relevant regulators and departmental experts to confirm that the data and assumptions used, and the preliminary results, are plausible. - Refer to such consultation in the RCM report (without naming people). Consult the affected sector - Where necessary consult the affected sector to verify estimates. - The level of engagement should be appropriate to the magnitude of regulatory change (proportionality). - Where initial estimates or subsequent analysis point to a regulatory change equal to or greater than $10 million per annum, consultation with business (such as through business interviews) is strongly recommended

59. Step 2.6.4 Prepare the draft RCM Report Executive Summary 1. The regulatory change - The change should be identified and specified, including the date when it takes effect (or took effect); and the duration of the regulation 2. Mapping the regulatory change - preferably through a diagram 3. Data strategy and data sources - strategy for desktop analysis and data collection - main sources of data - approach taken to a normally efficient business - approach taken to determine BAU costs - the approach taken to verify data

60. Step 2.6.4 Prepare the draft RCM Report (cont’d) Executive Summary (cont’d) 4. Results - This section must outline and report the main quantitative results in the form of a certificate (table) as shown in the next slide. Attachments - Provides underlying data and working calculations, including assumptions.

61. RCM certificate Sector/cost categories BusinessNFP Government services Economic activities of individuals Total by costs categories Administrative costs ±$ Substantive compliance costs ±$ Delay costs±$ Total by sector±$ Table 2: Regulatory change Management Certificate

62. Step 2.7 Check whether the draft RCM report is adequate (internal assessment by department) Assess its adequacy against the criteria below: the RCM complies with the methodology in the manual - where a department elects not to undertake a particular recommended action (such as business engagement through interviews for large measurements), reasons should be documented - the RCM report is written in plain English the assumptions are adequately documented and sources of data appropriately cited the calculations are accurate the estimates are likely to be perceived by the affected sectors of the public as being indicative of the true cost of the regulatory change

63. Step 2.8 Assessment of draft RCM Report  Send the draft Report for assessment to the VCEC who will assess against criteria outlined earlier  Assessing adequacy of the analysis For estimates of regulatory change  $10 million per annum, submit to VCEC For estimates of regulatory change  $10 million per annum, submit to BRU Where a draft RCM report is prepared during the conduct of a BIA or RIS (which are always assessed by the VCEC) departments may elect to have the associated RCM report assessed by the VCEC