Transcript Slide 1

Regulatory Impact Assessments
The UK approach
Helen McColm, June 2014
Structure of the session
• My aim is to explain the main features of the UK
approach to Impact Assessment (IA)
• I will talk first about (a) the basics and main steps
and (b) organisation
• If we have time, I’ll talk about methods and
measuring the impact on SMEs
• I have supplied extra information on UK Best
Practices and case studies – for you to read
afterwards
Context of regulation and IAs in UK
I want us to be the first government in modern
history to leave office having reduced the
overall burden of regulation, rather than
increasing it.”
Prime Minister’s letter to all Cabinet Ministers, 6 April 2011
The fundamentals; what is an IA
• An Impact Assessment is:
– A continuous process to help think through the reasons
for government intervention
– A tool to be used to help develop policy
– Stakeholder management
• An Impact Assessment summarises the rationale for
Government intervention; the options considered and the
expected costs and benefits
• Available guidance provides some consistency:
– “Green Book” (methods for all Government analysis)
– Better Regulation Manual (main IA rules)
– Impact Assessment Toolkit (extra advice on Ias)
Why are IAs important?
Better results
•
•
Coordination, transparency
Designing new policy interventions is
tricky (..failed regulations in the past)
A good IA helps get better outcomes
– ensuring there is a clear rationale
for intervention
– using evidence to properly
understand the policy impacts (cost,
benefits, and risks)
– supporting growth by minimising
and offsetting burdens on business,
particularly SMEs
– ensuring that new policy
interventions achieve their
objectives and (where possible)
are improved
• The IA process can help
with policy consistency,
and promotes
consultation
• An IA can inform
debates in and out of
Government
• An IA records the
reasons for choices,
and the way public
inputs were used
Failed Regulation - Peltzman effect
• “Peltzman effect” – the tendency of individuals to
respond to safety regulations by engaging in
more dangerous behaviour;
– Example of seatbelt laws being introduced in America.
Rather than reducing road deaths, Peltzman found no
change in auto-related deaths as the seatbelt laws
changes the incentives drivers faced.
– The perceived safety provided by the seatbelt reduced
the cost of driving recklessly, so more drivers drove
more dangerously. The increase in reckless driving not
only increased risks for other drivers, but also for
pedestrians and cyclists.
– Overall seatbelts saved lives in accidents, but the total
number of auto-related fatalities did not change.
When IA is used
• The UK uses IAs for regulatory proposals (we use other
analysis documents for spending and tax measures)
• Government Ministries and agencies must create IAs
(and some public agencies that are independent of
Ministers also do IAs by choice)
• Currently, proposals that could cost over £1 million need
a standard IA. We also do limited-scope analyses for lowcost or deregulation proposals (called “triage
statements”), and these get lighter checks.
• In 2013, 333 final IAs were published alongside legislative
proposals, plus some “consultation” and evaluation IAs
(see http://www.legislation.gov.uk/search/impacts)
Two recent Ias; 1
• IA on energy bills (EU)
• Green RPC opinion
• Net cost to business
of £1.5 million a year
• 10 replies to
consultation
• Relies on cost data
• 19 pages
Two recent IAs; 2
• IA on night flights to
London airports
• Green RPC opinion
• Net impact was not
quantified, but the IA
does gives data on
number of flights
• 23 pages
• Consultation got 800
replies, then 1,200
replies
Domestic Policies: IA Steps
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Policy Cycle - ROAMEF
Step 1: Identify the problem
• Identify ‘market failure’ or socially undesirable
outcome that calls for regulatory intervention
– Economic theory is useful at this stage
– BUT market failure alone does not justify
intervention
• Use evidence to understand scale of problem
• Consider if problem is real or a perception issue
• Ultimately, decision to intervene is political
Step 1: Rationale for intervention
Step 2:Specify Objectives
• Identify what the policy intends to achieve
• Objectives should be
–
–
–
–
–
Specific
Measurable
Achievable
Relevant
Time-bound
• Particularly important for external stakeholders
Why is this important?
• Consumer protection regulation, this was
revised in 2003 and is undergoing a review
currently
• Stakeholders are questioning whether the earlier
review achieved its objectives – apparently it is
very hard to tell since they were not measurable
• Not this time!
Stage 3: Specify Policy Options
• Identify ALL the viable options
– No intervention (do nothing or do minimum)
– Prescriptive regulation
– Alternatives to regulation
• Only present genuine options to stakeholders
– For straight-forward problems where there may be a single,
simple objective to be achieved, consideration of two to three
different options may be deemed appropriate.
– However, more complex problems, with multiple objectives
would require the consideration of a larger number of viable
options.
Step 4: Identify the Impacts
• Identify impacts by issue type:
– Economic / financial (e.g. small businesses,
wider economy, competition)
– Social (e.g. human rights, equalities)
– Environmental (e.g. greenhouse gas)
• Identify groups affected
– Distributional impacts are important
Step 5: Value Costs and Benefits
• Using Green Book methodology & IA Toolkit in
the Better Regulation Manual
• Identify groups affected
• Monetise costs and benefits as far as possible
• Clearly highlight direct costs to business
• Rigorously assess non-monetary costs / benefits
• Explore risks and sensitivities
Step 6: Enforcement
• Identify who is responsible for enforcement
• Consider Principles of Good Regulation and
Hampton Principles
• Outline aims and timetable for implementation
• Identify stakeholders and plan communication
• Consider risk management for delivery
• Consider how this will fit with existing initiatives
Step 7: Evaluation
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•
•
•
•
Plan your evaluation in line with Magenta Book
Establish what data collection is required
Gather data during implementation phase
Evaluate policy using a PIR
Consult with stakeholders re policy effectiveness
Organisation
Reducing Regulation Cabinet sub-Committee (RRC)
Makes final decisions on agreeing new regulations that affect business
(Chaired by Vince Cable)
Regulatory Policy
Committee (RPC)
Provides an independent
assessment of the cost
of new regulation on
business
Scrutinises departmental
impact assessments to
ensure fit for purpose
Departments
(Ministries)
Must follow better reg rules,
inc. meeting OITO
Must prepare impact
assessments setting out cost
of new regulation on business
and get validated by RPC
Must clear all new regulation
with RRC
Better
Regulation
Ministers
Board Level
Champions
Better
Regulation
Units (BRUs)
BRE
Sets the regulatory
Framework rules
Works with departments
to implement Better Reg
principles
Advises Better Reg
Minister on businessfacing regulatory
proposals across Govt
The Regulatory Policy Committee
•
An independent advisory body providing external scrutiny on the quality of
evidence for government regulatory proposals
•
Eight Committee members:
•
‒ Michael Gibbons, Chair
Consultant Energy Sector, Business
‒
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Trades Union Congress, Union Group
British Chambers of Commerce, Business Group
Academic, Professor of Economics
Adviser / Councilman, Public/Private Sector
Institute of Directors, Business Group
CEO of the Institute of Internal Auditors, Business
Consultant, Economist
Sarah Veale
Martin Traynor
David Parker
Jeremy Mayhew
Alex Ehmann
Ian Peters
Ken Warwick
Supported by a Secretariat of civil servants
– Policy officials and economists
RPC opinions
• All Opinions have included a Red, Amber or Green flag;
– RED: The IA is ‘Not Fit for Purpose’. Major concerns over the
quality of the evidence and analysis and overall quality of the IA
that must/need to be addressed.
– AMBER: The IA is ‘Fit for Purpose’. However, we will set out
areas of concern with the IA which should be resolved so as to
improve its contribution to the final decision made. (Only used at
consultation stage)
– GREEN: The IA is ‘Fit for Purpose’. No significant concerns or
some minor issues where the IA that could be improved to deliver
greater clarity or to aid understanding.
Ministers have said that any IA receiving a RED Opinion must be
amended and resubmitted to the RPC for a new ‘Fit for Purpose’
Opinion prior to submission to RRC
1
RPC
Departments send IAs
to RPC for scrutiny
2
Scrutinises IAs:
Red (“Not Fit for Purpose”)
or Amber/Green (“Fit for
Purpose”) flags given
Opinions issued
to departments
Departments
Develop IA and submit to
RPC before a formal
clearance is requested
from RRC
RRC
3
IAs with RPC Opinions
go to RRC for approval
Makes final decision on
regulations
Overview of clearance process for IAs
Does my measure regulate or deregulate business,
or concern the regulation of business ?
Other measures
DEPARTMENTAL TRIAGE
RPC Opinion*
Low Cost
Full IA required*
CONSULTATION
STAGE*
Deregulatory
RPC Confirmation
Red Tape
Challenge
e.g. public sector
Reducing Regulation Committee Clearance*
Full IA required
FINAL STAGE
RPC Opinion
Reducing Regulation Committee Clearance
RPC OITO Validation #
Statement of New Regulation #
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•
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* not applicable if no formal consultation planned / undertaken
# only applies to measures that are in scope of One in, Two out
zone of discretion : departments decide on level of appraisal and ex ante scrutiny required.
Better regulation ‘units’
• Most Ministries have a few staff responsible for
better regulation; better regulation ‘units’ (BRUs)
• They communicate IA rules, and liaise with BRE
• Some, e.g. Environment Ministry BRU, work on
regulation strategy and to improve existing rules
27
Economists in Ministries
• There are currently 22
recognised professions in
Govt, each led by a head
of profession including;
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–
–
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Economists
Statisticians
Social Researchers
Scientists and Engineers
• The analysts and others
have dedicated training,
networking meetings etc
Contact; [email protected]
BRE website:
• https://www.gov.uk/government/policies/reducingthe-impact-of-regulation-on-business
UK guidance on IA (and SMEs, competitiveness)
• https://www.gov.uk/government/publications/bette
r-regulation-framework-manual
UK IAs;
http://www.legislation.gov.uk/search/impacts
Regulatory Policy Committee latest report
https://www.gov.uk/government/publications/regulat
ory-policy-committee-scrutiny-in-2013-improvingthe-evidence-base-for-regulation
Section 2
• Measuring impacts on SMEs
• Measuring impacts
Distributional Impacts and SMEs
• Most policies create winners and losers
• Need to capture distributional effects
• Need to identify affected groups (e.g. small
businesses, specific groups in society)
– Current policies focus on the impact on small
businesses.
• Previously; Small Firms Impact Test, Micro
Business moratorium
• Now; Small and Micro Business Assessments
(SAMBA)
Small Firm Impact Test – old test
• Active consultation with Small firms through a
wide variety of means at every stage of policy
process:
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Focus groups
One to one meetings
Open forums
Estimates of the number of firms impacted
State number of firms responded
• Detailed discussions with representative bodies:
– Proportion of overall burden of regulation on small
business estimated
– Unintended consequences explored
New Small and Micro-Business Assessment
• All measures that come in to force after 31 March 2014
• Because smaller business (up to 49 employees) including micro-businesses (up to 10 employees) - suffer
disproportionately from the burden of regulation
• The default assumption for SaMBA is that where a large
part of the intended benefits can be achieved without
including smaller businesses, an exemption will be
applied.
• The policy should establish whether it is necessary to
extend measure to micros and/or small businesses at the
very outset of policy development
• BRE checked 25 early asssesments and will continue to
monitor
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Small & Medium Business Assessment
(SaMBA)
“Mitigation Menu”
Full Exemption
Partial Exemption
• Policy-makers asked to
consider a range of
mitigating options
Extended Transition Period
– default option is exemption
Reduced requirements (e.g.
reporting, record-keeping)
• Choice must be backed by
analysis of distribution of
costs and benefits
• SaMBA now being checked
Reduced fees
“De minimis” rules
Dedicated support (e.g.
guidance, training)
Direct financial aid
Opt-in / voluntary solutions
When should an exemption be
applied?
Net benefit of inclusion the same for all sizes of
business. No evidence of disproportionate burden on
SMEs ?
Strong case for applying an exemption. Marginal
benefit of extending the regulation to smallest
businesses looks very low
Net
benefit of
regulation
Extreme case : marginal cost of extending regulation
to smaller business actually detracts from overall net
benefit of measure. Very strong case for applying
exemption
Strong case for including all businesses in scope of
regulation. Without inclusion of smaller businesses,
regulation unlikely to achieve majority of intended
benefits
Largest
Size of
Smallest
100%
SaMBA mitigation, 25 early tests
6
5
4
3
2
1
0
Exemption
Extended
tranisition
temporary
transition
less strenuous
requirements
information
training
financial support
opt In
Alternative
Approach to measuring impacts
The Do Nothing option
• Important to establish ‘counterfactual’
• What would realistically occur if no action is
taken
– Different for EU and domestic regulation
– EU: policy options don’t include “do nothing‟
(i.e. not implementing a directive). Rather, the
IA should set out clearly the minimum
required to implement in the UK the decision
taken at EU level.
• Baseline to assess other options against
• Important for post implementation review
Example Do Nothing option
• Road building scheme to maintain the major
highways in UK
• Do nothing option unrealistic to claim that the
benefits of the road network would no longer
occur
• What would be the likely alternative levels of
investment without the program
• Minor investment program
• Investment in a substitute form of transport
Proportionality pyramid
Proportionate analysis
Quantification and monetisation
• Estimate where appropriate and proportionate
• Quantifying the effect - e.g. 1000 planning
applications per year, 100 hours of management
time, 500,000 new houses built per year
• Monetising the effect - putting a value on the
scale of impacts
– For non-market impacts stated preference and
revealed preference techniques
– Standard measures for health impacts (QUALY), time
saved and lives saved (both DfT)
– Non wage labour costs
Standard Cost Model
• The Standard cost model provides a framework
methodology for measuring administrative costs
Standard cost model example
Activity Cost = Price x Quantity
= (tariff x time) x (population x frequency)
Example
• an activity takes 3 hours to complete (time) and the hourly
cost of the member of staff in the business completing it is
£10 (tariff).
• price is therefore 3 x £10 = £30. If this requirement
applied to 100,000 businesses (population) who each had
to comply 2 times per year (frequency), the quantity would
be 200,000.
• Hence the total cost of the activity would be 200,000 x
£30 = £6,000,000.
Net Present Value and EANCB
• NPV is a policy’s total costs and benefits using:
– Appraisal period
– Discount rate
– Profile of costs and benefits
• Equivalent Annual Net Cost to Business:
– Estimation of annual cost of policy in One-In TwoOut (OITO)
– Adjusts business NPV so it appears on an annual
basis
– Rebases the value into 2009 prices (consistent
across government)
Discount Rate
• Based on principle that generally people prefer to
received goods and services now vs. later
• Compares costs and benefits that occur in different time
periods
• Green Book recommends discount rate of 3.5% based on;
– Pure time preference
– Assumption of per capita growth in consumption, resulting in lower
marginal utility
– Catastrophic risk
• Separate concept from inflation
Costs, Benefits – Non-Monetised
• It may be the case that the costs but not benefits
can be monetised. The use of indicators may
help further qualify non-monetised costs and
benefits
• Analysis should use a systematic approach
– Appraisal summary table
– Explicit scoring and weighting
– Multi-criteria decision analysis
Risks and Uncertainty
• Outcome of many policies is uncertain
– Clearly list key areas of uncertainty
– Identify risks so they can be monitored, and
transferred (where possible)
• Adjust for optimism bias
• Conduct sensitivity analysis
– this does not just mean +/-20% of the best
estimate!
• Use pilots for high impact, novel policies
Direct Impacts on Business
• The One-In, Two-Out system focuses on direct
impacts (costs and benefits) to business
– Direct impacts: first order impacts
– Indirect impacts: second round impacts
• Includes expenditure and other adjustments
Direct effects
• Direct: result directly from the implementation or
removal/simplification of the regulation. More
than just direct expenditure. Also restrictions
on how an agent should act / operate e.g.
Working Time Regulations, has a direct cost
although this may not necessarily be direct
expenditure. (e.g. adjust allocation of staff or
working processes).
Indirect effects
• Indirect: If the effect happens after something
else happening first (as a result of the regulation).
The impact on the potential demand for the
goods or services of businesses, e.g.
manufacturers of required equipment or providers
of training for staff.
• Market dynamics
Section 3, extra info
• Some examples of how we have conceptualised some of
the these concepts in real policies
• Case studies of some of the concepts
– Direct vs Indirect effects
•
•
•
•
•
•
New entrants
Voluntary measures
Removing inefficient uses of resources
Behavioural change
Displaced economic activity
Pass through
– Deregulation
– Impacts on non-compliant firms
Direct vs Indirect
• New entrants
– Initially impacts on new entrants were considered
to be indirect
– changed to make it clear that impacts on new
entrants should be treated in the same way as
impacts on existing businesses.
– estimates relating to new entrants would normally
only be accepted in respect of historical ‘churn’ in
the industrial sector, drawing upon official data,
rather than more speculative scenarios of growth
in the number of businesses
– Revocation of the Construction (Head
Protection Regulations) 1989
Example
• Revocation of the Construction (Head Protection
Regulations) 1989
• The policy simplified regulations regarding head
protection on construction sites. This is thought of
deregulatory overall but costly to existing
business because of transition costs
• New entrant directly benefited from the reduced
regulation with no transition costs
Voluntary Measures
• Where business is given an option to act
questions often arise as to whether the impacts of
their actions are direct or indirect.
• The principle is that where the regulation was
the only thing preventing the business from
acting, and this is supported by evidence,
then the impacts can be considered direct.
• When both the removal of the regulation and
other factors are required, for example innovation
to take advantage of the new space, then impacts
are indirect
Examples
• Legislative Reform (Industrial and Provident
Societies and Credit Unions) Order 2011
• This policy allowed credit unions to increase
membership and offer more services. It was clear
from the evidence provided that the affected
businesses wished to grow and were only being
prevented from doing so by the regulations.
• The costs and benefits to firms of expanding
were therefore considered direct
Examples
• Orphan Works
• Orphan works are copyrighted works whose
author is unknown. This policy allowed the use of
Orphan works, subject certain safeguards
• One of the main expected benefits of this policy
was from new businesses that might be created
to take advantage of the newly available material
• As these benefits would only arise as a result of
innovation from business they were considered
indirect
Examples
• Gambling Act 2005: Triennial Review of
Stakes and Prize Limits
• There is a limit on the maximum value of stakes
and prizes used in gaming machines. The policy
was to increase this limit, allowing businesses to
make greater profits from higher value machines
• As it would be reasonably straightforward for
businesses to move to higher value machines it
was accepted that the regulation was the only
thing that prevented businesses from gaining
these benefits
• The benefits were therefore considered to be
direct
Removing inefficient use of resources
• Removing regulations means that resources are
no longer used in complying with those
regulations. In some cases this can result in
reduction in work for businesses, e.g. lawyers
and business services firms.
• In these cases it should be assumed that by
removing the regulation the policy allows these
resources to be re-allocated to a more efficient
use, any transition costs of the re-allocation of
these resources should be considered indirect
Behavioural change
• Where a policy works by changing the landscape
such that individuals may chose to alter their
behaviour the impacts of this behavioural change
on businesses should be considered indirect as it
results from the actions of the individuals not
directly from the regulation
Examples
• Amendment to the Energy Act 2008 Powers to
Implement and Direct the Rollout of Smart
Meters
• Smart meters are a new form of gas and electricity meter
that provides the customer with more information about
their energy use.
• The smart meter also provides the supplier with more
information allowing for more targeted tariffs. The policy
was to ensure the roll out of smart meters. If smart meters
result in more efficient use of energy this could have large
benefits for business users.
• However these benefits were considered indirect as they
only result if business customers chose to change their
energy use not as a direct result of having a smart meter
Example
• Proposed changes to Part L of the Building
Regulations 2013
• The policy amended the building regulations to increase
energy efficiency standards. The measure imposed a cost
to builders but a benefit to the eventual occupants of
buildings of lower heating costs
• As the lower costs would be an automatic result of the
more efficient buildings and not require a change in
behaviour they were considered to be direct
• The policy was therefore zero net cost as the energy
savings to non-domestic consumers were expected to
exceed the costs to developers
Displaced economic activity
• If a policy bans, severely restricts or makes more
expensive a particular economic activity then this
may result in an increase in other, substitute,
activities. There may therefore be some
increased profits in other areas of the economy.
• These benefits are considered to be indirect while
the lost profits from the economic activity that has
been banned are considered direct
Example
• Prohibition on the sale of tobacco from
vending machines
• This policy banned the sale of tobacco products
from vending machines. This resulted in a loss of
profits that would have been gained from these
sales. This cost was considered direct.
• Consumers unable to purchase tobacco from
vending machines may now choose to purchase
more tobacco from retailers or to consumer more
of other products. Any additional profits from
either of these activities were considered indirect
Pass through
• When a regulatory burden is placed on a
business they will have to decide how to respond.
They may increase prices, cut wages, reduce
investment or reduce dividends.
• In reality they will regularly change all of these
and it will be impossible to relate changes to
specific regulations.
• Agreed position that when a cost is paid by an
agent on behalf of a principle this should be
considered a cost on the principle not a cost on
an agent that is passed through
Deregulation
• To have the effect of reducing the scope of
government regulation, including the removal of
existing regulation, or amendment / recasting that
reduces the scope of existing regulation
• The definition of deregulation is based on the
outcome of a policy and not the legislative vehicle
used to enact it. As such if a new piece of
legislation removes a regulatory burden from
business then this is still considered deregulatory
Increasing a maximum regulated price
• When legislation sets a maximum price
businesses can charge for a good or service but
allows business to freely charge less than this
then an increase in the price can be considered
deregulatory.
• This change increases business freedom as they
may choose to charge a higher price but may
also choose to continue charging the same price.
This does not apply if the price is fixed and
businesses are forced to increase charges as a
result of the change.
Example
• MoT Fee Review
• The maximum amount a firm can charge is fixed
by legislation. Businesses are free to charge any
amount they wish below the maximum. The
policy was to increase the maximum.
• This was considered deregulatory as MoT
providers could choose to continue charging the
current price
Impacts on non-compliant actors
• When calculating both the NPV and EANCB of a
policy any costs that are incurred as a direct
result of non-complaint activity should not be
included.
• This includes both costs from non-compliant
activity that is now prevented (e.g. lost revenue
from prevented theft) and costs of punishments
(e.g. fines).
• These impacts should still be discussed within
the IA and monetised where possible
Fines and penalties
• When a policy results in an increase in the level
of fines and penalties incurred the cost to noncompliant businesses of paying these fines
should not be included in the NPV and EANCB.
• The revenue from the fines should be treated in
the same was as any other benefit. The cost
should still be monetised and discussed in the IA.
• This only applies in cases where there is strong
evidence of under compliance, normally when the
policy specifically relates to fines and penalties
• Usually assume 100% compliance with any policy
Insurance
• Businesses often take out insurance against liability
cases. Any costs these firms are forced to pay as a result
of non-compliance, including legal costs, will ultimately be
passed on to insurance companies. This is best
understood by breaking down the transfers into separate
costs and benefits.
• There is a cost to the business as a result of noncompliance; this should not be included in either the NPV
or the EANCB. The insurance then pays out resulting in a
benefit to the business and an equal cost to the insurance
company.
• This cost is not included in the EANCB because it is
indirect (see pass through) and is not included in the NPV
because it is a transfer and not a true resource cost