Regulatory Impact Analysis:
Results and Practice
Scott Jacobs
Managing Director, Jacobs and Associates
Workshop on Accelerating Economic Regulatory Reform: Indonesia and International Experience
Flow of Regulations (Ministries) Flow of Regulations (Ministries) Stock of Regulations (Ministries) Stock of Regulations (Ministries) Institutions For Better Regulations Institutions For Better Regulations Regulatory Guillotine™ “Doing Business” agenda
Sectoral reviews & re-engineering
WTO convergence strategy
Clear quality standards for new regulations
Central review & quality control
Regulatory Impact Analysis Stakeholder consultation Checks for WTO
conformity Electronic regulatory registry Rationalize inspectorates Silence is consent One stop shops Due process Monitor Results, Business Advisory Council Business Advisory Council Public Consultation Central Unit For regulatory quality Central Unit For regulatory quality RIA Legal controls Reform units in Ministries Reform units in Ministries
Copyright Jacobs and Associates 2007. No reproduction without
The global spread of RIA
0 5 10 15 20 25 30 1971 1975 1980 1985 1990 1995 2000 2007 N um be r of C ount ri e s A dopt ing RI AOECD Countries Non OECD Countries
How do governments learn to solve the
pressing problems facing citizens?
Asking questions
Clarifying multiple goals
Listening
Gathering information
Evaluating
Communicating
Governments use several methods
to make regulatory decisions
Expert Consensus
Political
Benchmarking
Trade rules also call for transparent and
results-based regulations
Empirical justification of regulations is supported by international trade rules
General Agreement on Trade in Services (GATS, also in TBT and SPS) requires that standards be "based on objective and transparent criteria" and be "not more burdensome than necessary toensure the quality of the service"
Such principles establish a more transparent standard for national decision-making.How RIA improves public sector performance
Analysis: Calculating the costs and benefits of
government action
Consultation and
responsiveness to a wider range of interests
Integrating multiple policy goals (social and economic policies)
Change of regulatory
culture to reduce unneeded intervention and symbolic regulation
ÎFaster learning, increasing benefits of government action, finding lowest cost solutions, reducing policy failures
ÎTransparency, building trust, and reducing regulatory risks for private
sector, reduce “information monopolies”
ÎPolicy coherence in a complex world; break down vertical silos and promote horizontal thinking
ÎAccountability for actions and results (within ministries, to the public). Client-oriented, credible, and responsive
RIA is an evidence-based process of deciding if
regulation is needed, and what solution works best
Structurally, RIA is a process of:
asking the right questions in a structured format to support a wider and more transparent policy debate.
systematically and consistently examining selected potential impacts arising from
reasonable options for government action
communicating the information to decision-makers and stakeholders
What are the right questions in the RIA?
What is the precise problem to be solved?
What is the goal of government action?
Should the government act to solve the problem?
What are the costs of various solutions?
What are the benefits of various solutions?
What is the lowest-cost approach to solving the problem? Is regulation the best way to solve the problem?
Is the regulation consistent with other regulations?
Effects of RIA: Lower cost, better regulations
OECD found that RIA improves the style, dynamics, and culture of regulatory decision-making:
Improves the cost-effectiveness of regulations and reduces the number of low-quality and unnecessary regulations.
– 20% of regulatory proposals were modified or retracted as a result of RIA in the Netherlands.
– In Korea, the first year of operation of RIA saw more than 25% of regulatory proposals rejected by the central Regulation Reform Committee.
Improves the transparency of decisions, enhances consultation and participation of affected groups.
Improves government coherence, inter-ministerial communication.
With guidance and training, induces cultural change among regulators.
RIA reduces regulatory costs, not benefits
RIAs by the US Environmental Protection Agency showed that many less costly regulations would achieve the same results, and even that some less costly alternatives would protect the environment better.
¾ Cost of RIA was low – on average, 0.1% of the compliance cost of a rule over five years.
In the UK, costs of new food storage standards were reduced by 41 million pounds annually after a RIA showed that an increase in storage temperatures would not compromise food safety.
The (2006) REACH regulation from the European Commission. Before RIA, €10 billion cost After RIA, €2 billion cost.
¾ The RIA cost about €1 million, producing a social return on investment of 10,000 to one.
Effects of RIA: Macroeconomic
No empirical evidence that RIA by itself produces more growth, jobs or investment…but…
…over time, more efficient microeconomic
interventions produce big positive effects on the macro-economy. RIA should have positive
macroeconomic impacts….
..and empirical evidence is mounting that reducing regulatory costs and barriers to market entry has important economy-wide effects:
accelerating multifactor productivity growth
reducing the cost of capital
contributing to poverty reduction
Conclusion: The effects of RIA
RIA, when combined with other good regulation tools (stakeholder consultation and quality control) within a general program of regulatory reform, can contribute to a more transparent, lower-cost, more effective, and more market friendly regulatory regime that boosts economic performance.
Significant intermediate results are seen even when the quality of RIA is low in the first years of adoption.
The process of RIA – by asking new questions and engendering a more vigorous public debate – is more important than the empirical precision of the analysis.
10-Step RIA Process:
Build, validate, and justify
Problem Definition and Risk Profiling
Step 1: Define and refine the problem to ensure the broadest possible range of potential solutions
Step 2: Profile the magnitude, risk levels, and distribution of the problem across Member states, demographic groups, economic sectors, and sizes of firms, with trends in a relevant time period
Step 3: Establish a baseline
Step 4: Set the goals for public policy
Options Selection and Impact Assessment
Step 5: Initially and informally consult with sectoral experts in business associations in high-impact Member states to validate problem definition, problem profiling, baseline, and goals, and to identify issues and potential options
Step 6: Select options to be considered
Step 7: Select method, scope, and depth of analysis
Step 8: Collect data on detailed benefits and costs of options through business surveys and other data sources
Prepare analysis, consult, and refine proposal
Step 9: Analyze, compare options, and present impact assessment and proposal to stakeholders
All RIA guides emphasize problem definition
EC IA guide (June 2005):
Key analytical steps in impact assessment 1. Identify the problem.
2. Define the objectives…
UK RIA Guide (2005):
What is the problem, the existing situation and the current legislative framework in place?
Identify the situation that causes harm, what that harm is and the probability that it will occur
US RIA Guide (2003):
Each agency shall identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency
The OECD Recommendation starts with
the most important question:
Is the problem correctly defined? The
problem to be solved should be precisely
stated, giving clear evidence of its nature
and magnitude, and explaining why it has
arisen (identifying the incentives of affected
entities)
Real example: Children are poisoned by
eating pills from bottles in their homes
Problem definition: Children are being poisoned by eating pills.
Goal of regulation: Reduce poisonings of children under 5 who are eating pills
Problem to solved by regulation: It is too easy for children to open medicine bottles.
Regulatory solution: Design bottle
caps that are hard to open – the “child-proof” caps
Regulation adopted
What does the RIA Report look like?
Communicate– Simple, easy to read and non-technical
– Use tables / diagrams to enhance understanding – 10-30 pages – with annexes if needed
Standardized format, such as:
1. Executive summary
2. Problem Definition – why is the regulation needed? 3. Objectives of the regulation
4. Policy options chosen (3-4 options)
5. Impact Analysis and comparison of costs and benefits of options
6. Process and results of stakeholder consultation – how did the regulator respond?
7. Explanation of recommended approach 8. Monitoring & Evaluation strategy
Scope of RIA systems
Ireland: Primary legislation enacted by the Parliament and secondary legislation enacted by Ministers
empowered under primary legislation
European Commission: Formal RIA is required for all regulatory proposals, White Papers, expenditure
programs and negotiating guidelines for international agreements (with an economic, social or
environmental impact)
US: Regulation means an agency statement of general applicability and future effect which the
Who does the RIA? The regulators, with
quality control by a central RIA unit
Regulators themselves must be responsible for
preparing RIA when they start thinking about a new regulation.
improve “ownership”
integrate into decision-making.
NEVER buy a complete RIA from an external
consultant. Regulators can contract out parts of RIA, but preparation of RIA and conclusions must be done by
regulatory staff.
BUT…a central body is needed to oversee the RIA
When is the RIA done? Early
As early as possible in the policy process….
In all cases RIA starts BEFORE a draft is written
Never start a RIA after a solution is chosen. A RIA is not a cost assessment of one option.
Many problems of RIA quality stem from not starting early enough
Central lesson of 25 years of RIA
Decentralized and weak quality control
Tools for quality control of RIA
Earlier timing and preparation of the RIA to permit more discussion
Statement of clear criteria for “good regulation”
Increased ministerial accountability
Challenge from a central RIA watchdog
RIA quality control and monitoring by other institutions
More monitoring and reporting of RIA quality by central institutions followed by public reporting of performance or “name and shame”
The value of early planning
Canada
One-year Report on Plans and Priorities (RPP) to be tabled in Parliament for each department and agency
Detailed Departmental Regulatory Plan placed on a web site
United States
Early RIA summaries are published twice a year on a central web site in the Unified Agenda of Federal Regulations. The Agenda summarizes the rules that each Federal agency expects to issue during the next six months
European Commission
RIAs are integrated into the Commission’s annual Strategic Planning and Programming (SPP)
RIA is based on clear definition of
“good regulation”
What does “good regulation” mean?
Essential to explicitly define regulatory quality
Many governments have issued instructions toregulators about the quality of regulatory decisions.
These commonly take the form of checklists and decision criteria.
Regulators must show that their proposed regulations will meet these quality standards BEFORE they adopt them.
The process of ensuring compliance is called theRegulatory Principles:
OECD Checklist for Regulatory Quality, 1995
1. Is the problem correctly defined? 2. Is government action justified?
3. Is regulation the best form of government action? 4. Is there a legal basis for regulation?
5. What is the appropriate level (or levels) of government for this action?
6. Do the benefits of regulation justify the costs?
7. Is the distribution of effects across society transparent?
8. Is the regulation clear, consistent, comprehensible and accessible to users?
9. Have all interested parties had the opportunity to present their views?
Regulatory principles:
European Mandelkern Report, 2001
Necessity
Proportionality
Subsidiarity
Transparency
Accountability
Accessibility
Simplicity
Institutions for RIA:
A Network for Good Regulation
Political and ministerial-level bodies for regulatory reform
A dedicated and expert RIA unit at the center of government
Inter-ministerial working groups that coordinate and advise on major regulatory initiatives.
Ministerial level regulatory reform Ministers and units
who are responsible for carrying out the regulatory policy and RIA quality at the level of the Ministry
Private sector groups, advisory bodies, think tanks, and other research bodies who support the regulatory reform agenda
Quality standards for RIA:
Challenge from a central RIA watchdog
GOOD PRACTICE:
A government should establish the authority of a central quality control unit to require a
minimum level of quality before a RIA goes to ministers.
A process of review by the central unit should be
established.
A ministry unable to comply should explain why it is unable to meet minimum standards.
Is your RIA tasty?
Watchdog institutions in selected countries
Canada: Special Committee of Council, The Regulatory Affairs and Orders in Council Secretariat (RAOICS), all part of the Council of Ministers and Prime Minister’s apparatus (Council decision)
Korea: Presidential Commission on Regulatory Reform, appointed by the President and chaired by the Prime Minister, staffed by 35 civil servants in the Office of the Prime Minister (law)
Mexico: Federal Regulatory Improvement Commission (Commission Federal de Mejora Regulatoria - COFEMER),
independent commission accountable directly to the President (law)
Netherlands: ACTAL Agency, Helpdesk (Ministries of Economic Affairs, Justice and Environment), Ministry of Justice (Government decisions)
United Kingdom: Panel for Regulatory Accountability, Regulatory Impact Unit (RIU), Departmental Regulatory Impact Units,
Regulatory Reform Ministers, Small Business Service (Government decisions)
Ukraine: State Committee on Regulatory Policy and
Entrepreneurship (SCRPE), independent committee reporting to the Council of Ministers (law)
United States: Office of Information and Regulatory Affairs, in the
Office of the President, staffed by 40 professional civil servants (Presidential order)
Functions and staffing of RIA Watchdogs
Core functions include:
¾ Strategic leadership: assessment of regulatory challenges and new initiatives on regulatory reform
¾ Program oversight: central coordination of delivery and implementation of regulatory reform, with monitoring and challenge to ministries on performance
¾ Operational functions: Reviewing RIAs, conducting training, writing guidance, providing help-desk services
Salaries are paid from the annual
government budget, based on civil
service rates.
Examples of the RIA watchdog
Good example: United Kingdom Three challenge units at the center
Better Regulation Executive (BRE) in the Cabinet Office provides central coordination of delivery and implementation of regulatory reforms,
challenges departments on progress with regulatory reform; and works with departments to change regulatory culture and processes.
\Small Business Service reviews proposals that affect small firms.
All regulatory proposals likely to impose a major new burden on business require clearance from the Panel for Regulatory Accountability, chaired by the Prime Minister.
Poor examples: Sweden, Ireland Irish government uses existing processes such
as inter-ministerial coordination and scrutiny by the Ministry of Finance to check the adequacy of RIAs. No single body is responsible for RIA scrutiny.
In Sweden, compliance with RIA is the responsibility of each ministry. No central review and no sanctions for non-compliance with RIA.
Don’t wake me for RIA.
RIA units in the United Kingdom
Panel for Regulatory Accountability
RIA Units in Korea
Regulatory Reform Committee
Office of the Vice Minister in charge of
regulatory reform
Secretary to RRC in the Office of the Prime Minister
Regulatory Reform Groups within each
central government agency
Ministry of Government and Home Affairs Expert committee members
and research personnel Expert Advisory Group
Regulatory Reform Groups within each provincial & local
RIA units in Mexico
Ministries Regulatory agencies Official gazette President’s Office Council/Task forces(Government, academia, business, unions, consumers)
Cofemer
Support & Consultation Oversight
Congress
Public
Notice & comment
Proposal & RIA development
Specific liaison officers (vice ministers)
Publication restrictions and sanctions
How do the central offices control bad RIA?
UK: Panel for Regulatory Accountability may reject regulatory proposals if it concludes that RIA is not satisfactory
US: OMB asks for improvement, then returns regulation to regulator with public letter criticizing its quality
New Zealand: A statement is included in the Cabinet paper and RIAU briefs the Minister of Commerce on problems
Canada: If there are RIA problems, RAD may request additional information from the regulator and ensures that all questions are answered before the regulation goes to Ministers.
Checklist for choosing the location of
the RIA unit
Have a longer-term agenda and mandate. Sustained focus and influence over several years.
Have an active inter-ministerial component to coordinate the parts of the public administration that will have to actually implement reforms.
Be authorized, connected, and accountable for results to the centre of government to strengthen policy coordination and oversight capacities.
Have strong relations and an active involvement with the private sector, and include those parts of the government who are champions of private sector development.
Command the resources needed to get the job done, including a dedicated secretariat with the right skills and financing to move reform forward.
Five analytical methods used in RIA
Benefit-cost analysis, integrated impact analysis (IIA) and
sustainability impact analysis (SIA) to integrate issues into broad analytical frameworks that can demonstrate links and trade-offs among multiple policy objectives;
Cost-effectiveness analysis based on comparison of alternatives to find lowest cost solutions to produce specific outcomes;
Partial analyses such as SME tests, administrative burden
estimates, business impact tests and other analyses of effects on specified groups and stemming from certain kinds of regulatory costs;
Risk assessment to show the probability of outcomes as a result of specified inputs
Various forms of sensitivity or uncertainty analysis that project the likelihood of a range of possible outcomes due to estimation
Principle of proportionate analysis:
Avoiding paralysis by analysis
Successful RIA programs target scarce RIA resources to where they can do the most good
RIA should be widespread AND targeted.
RIA depth and scope is determined by the likely impacts of the proposed action:
Every regulation will undergo sufficient analysis to “allow for informed debate
The more significant an action is likely to be, the greater the quantification and monetisation.
Targeting strategies: Ireland
To ensure that RIA is proportionate and does not become overly burdensome, the RIA model involves a two-phase approach.
Regulations with low impact are subject to a Screening RIA, a preliminary less detailed analysis.
A Full RIA involving more extensive and detailed evaluation is applied to more significant regulations.
A Full RIA is done when the Screening RIA suggests that: There will be significant negative impacts on national competitiveness
There will be significant negative impacts on the socially excluded or vulnerable groups
There will be significant environmental damage
The proposals involve a significant policy change in an economic market or will have a significant impact on competition or consumers
The proposals will disproportionately impinge on the rights of citizens
The proposals will impose a disproportionate compliance burden
The costs to the government or third parties are significant, or are
disproportionately borne by one group or sector. Initial costs of €10 million or cumulative costs of €50 million over ten years (to include both enforcement costs borne by the State and compliance costs on business, consumers, etc) are significant.
Targeting strategies: USA
RIA is required for all regulations to determine that
benefits justify costs and if the rule meets the thresholds.
Full cost-benefit analysis is required when rules:
impose annual costs that are estimated to exceed US$100 million or where rules are likely to impose major increases in costs for a specific sector or region, or have significant adverse effects on competition, employment, investment, productivity or innovation;
Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;
Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients;
Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this
Executive order.
Of 4,500 federal regulatory actions each year, about 500 are ‘significant’ and 70 are ‘economically significant’.
Performance evaluations of RIA quality
Australia ORR annual report, Regulation and Its Review
US annual report “Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities”
estimates the aggregate costs and benefits of the most significant regulations
European Commission annual report “Better Lawmaking”
Mexico COFEMER has implemented a simple internal RIA scoring system and sends two-week reports on RIA compliance to the Comptroller
Topics for Discussion
Topics for Discussion
Is there experience with RIA in Indonesia? What are the results of this RIA?
What benefits can RIA have for Indonesia?
What skills are needed in the public administration to implement RIA?
What RIA quality control process is possible in Indonesia?
