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CAPACITY BUILDING ON MODERNISING BUSINESS REGULATION 13 January 2011 Sue Holmes Productivity Commission MODERNISING BUSINESS REGULATION : DAY 2 (1) (2) Elements of Regulation Impact Analysis Exploring Elements of RIA More Fully • Identifying and describing the problem • Identifying options and recommendations (3) Business Burdens Case Study: Oil and Gas (1) Principles and values of the Productivity Commission Productivity Commission 2 Key elements of a RIS • • • • • • • Problem Objective(s) Options Impact analysis Consultation Conclusion and recommended option Implementation and review You need to adequately address each element to draft an adequate RIS Productivity Commission 3 RIA Productivity Commission 4 (1) Preparing a Regulation Impact Statement Productivity Commission 5 Objectives of preparing a RIS • • Provide information to the decision maker Provide evidence of the steps taken in good policy development Productivity Commission 6 Element 1: Identifying the Problem • • What is the problem? • Why should Government intervene? May be • to deal with market failure • to correct a regulatory failure • to attain a social goal • to address an unacceptable risk Is there existing regulation? If there is, why is further action needed? Productivity Commission 7 Element 2: Objectives of government action • What are the objectives of government action? • link it to the identified Problem • do not be too specific (so as to preclude any options) Productivity Commission 8 Element 3: Consider a broad range of Options • • • Include non-regulatory and regulatory options Distinguish feasible options from those that are not feasible • Explain why some options are not feasible (detailed analysis of these options is not required) For the feasible options identify the key elements of each option and clearly explain how each would work Productivity Commission 9 Element 3: Examples of options • Start with the status quo and/or no regulation, then consider • Non-regulatory options • information and education • market instruments (tax/subsidy, tradeable right) • Self regulation • Industry codes of practice • Quasi-regulation • industry/government agreements • Explicit government regulation • Including different regulatory options Productivity Commission 10 Element 4: Impact Analysis • • For each option • Identify who is affected • Analyse costs and benefits (to whom do they accrue?) • Quantify compliance costs - BCC • Quantify other impacts where possible Remember • the level of analysis should be commensurate with the level of impacts • identify key considerations in deciding why one option is ‘better or worse’ than others • restrictions on competition require a higher level of analysis Productivity Commission 11 Element 4: Formal Cost Benefit Analysis • • Formal Cost Benefit Analysis (CBA) provides a quantitative estimation of the net benefits associated with each option • It allows ranking of the options according to their overall benefit to the community • It encourages analysts to think about the size and importance of each cost and benefit • While not mandatory for all proposals it has been strongly encouraged by the Government The OBPR has established a CBA unit to assist departments and agencies • More information can be found on the OBPR website Productivity Commission 12 Element 4: Restrictions on competition • • Regulations that restrict competition may: • govern the entry or exit of businesses into markets • control input or output prices • restrict the quality, quantity or location of goods and services • restrict advertising and promotional activities • provide advantages or impose costs on only some businesses/activities In Australia, for proposals that restrict competition the RIS must demonstrate that restricting competition will result in a net benefit for the community and that the objective of the intervention can not be achieved in any other way Productivity Commission 13 Element 5: Consultation • To meet the consultation requirements the RIS must detail: • Who has been consulted? • How was consultation conducted? • What are their views (highlight dissenting views)? • How did their views affect the outcome? • If their views were not addressed, explain why • If consultation was limited or not undertaken, explain why (if there is a legitimate reason the RIS will still be assessed as adequate) Productivity Commission 14 Element 6: Conclusion / recommended option • • • Provides a summary of the options and their impacts Identifies which option is preferred and why other options are not preferred Reiterates why the benefits of the preferred option outweigh the costs Productivity Commission 15 Element 7: Implementation and review • • • How will the preferred option be implemented? (For instance, will there be transitional arrangements? Who will administer the regulation? How will it be enforced? How will compliance costs be minimised) Will it be subject to sunset provisions? Will it be reviewed? (if so, by whom and according to what criteria) • Remember, if there is no sunsetting provisions the instrument is likely to require review under the government’s five yearly review process Productivity Commission 16 Analysis is the key “ … experience makes clear that the most important contribution to quality decisions is not the precision of calculations, but the action of analysis questioning, understanding real-world impacts, exploring assumptions.” OECD 1995, Control and Management of Government Regulation Productivity Commission 17 Like to know more? • • Visit the OBPR website - www.obpr.gov.au Consult the Best Practice Regulation Handbook (which includes additional information on what should be included in a RIS as well as the adequacy criteria for each element of a RIS) Productivity Commission 18 problem Productivity Commission 19 Element 1: Identifying the Problem • • What is the problem? • Why should Government intervene? May be • to deal with market failure • to correct a regulatory failure • to attain a social goal • to address an unacceptable risk Is there existing regulation? If there is, why is further action needed? Productivity Commission 20 Market Failures – consumer product safety • Information failures • gaps in knowledge between the producer and the consumer • and not in the interest of the party with the knowledge to share it with the other • the supplier knows more about the hazards of a product than the consumer – delayed on set • the consumer has more knowledge than the supplier about how and in what context the product will be used. • limitations in some groups (such as children) being able to assess and respond to risks realistically – familiarity breeds under-estimation of risks Productivity Commission 21 Market Failures – consumer product safety • Negative spillover effects • where someone gains from costs they impose on others the market does not produce the best outcome: • costs to taxpayers due to subsidised health care • impacts on third parties such as injury incurred by bystanders • a pedestrian may be hit by a motor vehicle • a fire caused by a faulty product may cause substantial collateral loss Productivity Commission 22 Market Failures • Positive spillover effects • where some actions benefit others but receive no payment for it then they are likely to be undersupplied, ie the market undersupplies the action (or product): • vaccinations • forests Productivity Commission 23 Market Failures – airports, dams, telecommunications • Monopoly • sole suppliers can abuse their market power: the market tends to result in them supplying less at a higher price than is optimum Productivity Commission 24 Government failures • • • • over-reaction to a risk adverse side-effects get band-aid responses assess the case for the original regulation • should it be removed rather than add extra regulations? Productivity Commission 25 Pursuing social goals • • • Why regulation? Often direct income redistribution a more effective mechanism with fewer side effects? Explore the underlying reasons for wanting this redistribution. Productivity Commission 26 options Productivity Commission 27 Identifying options and recommendations • no action - rely on the body of existing law • better definition of property rights where they are unspecified or vague • general liability laws - strict liability, negligence or ‘no fault’ • information strategies - product labelling or media campaigns • market-based instruments - taxes, subsidies, tradeable permits, performance bonds • standards and rules - principle-based, outcome-based or prescriptive • schemes for testing products/services before they are supplied to the market - listing, certification, registering and licensing • measures for excluding products/service suppliers after they have been supplied to the market bans, recalls, licence revocation, ‘negative’ licensing and lists of poor suppliers • community right to know • mandatory audits • quality assurance schemes, self-regulation and co-regulation • changing awareness and culture Productivity Commission 28 Regulatory options • prescriptive standards or rules • outcome-based standards or rules • performance standards or rules • systems management – accrediting and auditing processes • changing culture – changing motivations so do need less external regulation Productivity Commission 29 Prescriptive regulations • • • prescriptive rules focus on the inputs and processes of an activity, specifying the technical means used in undertaking an activity (as in the mandatory installation of speed limiters or restrictions on vehicle engine capacity) The temptation for a regulator is to lay down a prescriptive rule that must be adhered to. This encourages certainty, because it can be measured and monitored and there is no uncertainty about compliance. Best where want no room to move for very high cost risks but may still not be the best option. Productivity Commission 30 Outcome-based regulation • Outcome-based rules specify an outcome in precise • terms (as in a speed limit Gives much greater freedom to businesses to find the least cost way of meeting the specified outcome Productivity Commission 31 principle-based standards • • • • • • principle-based standards outline the desired outcomes by specifying the spirit or broad intention of the regulation and require interpretation according to the circumstances (requiring drivers to travel at a speed ‘appropriate to the conditions’ or ‘not in a manner dangerous’) much greater freedom and flexibility to businesses but much greater uncertainty for example, a general duty of care in OHS reduces need to add subsequent bandaid regulations deemed-to-comply provisions Productivity Commission 32 Building code structure Objectives Functional Statements Performance Requirements Guidance Levels Compliance Levels Building Solutions Deemed-to-satisfy provisions Alternative solutions Assessment Methods Documentary evidence Verification methods Expert judgements Comparison to deemed-to-satisfy provisions Productivity Commission 33 Benefits of performance-based regulation • In theory, performance-based regulations have several advantages when compared with the use of prescriptive regulation: • Flexibility — by allowing builders and designers to use any solution that complies with the performance requirement(s) • Innovation — practitioners are at liberty to innovate and use any solution that meets the performance requirements. • Cost savings — practitioners can choose the cheapest option Productivity Commission 34 The Code in practice: gains from performance standards • • • • the Code has encouraged the use of modern and efficient building practices and significantly reduced construction costs. Examples include: Federation Square State Library of Victoria Westfield Hornsby Shopping Centre Productivity Commission 35 The Code in practice: gains from performance standards cont. •Federation Square • structural deck spans Jolimont Railway Yards • could not have been constructed using deemed-tosatisfy provisions • greater flexibility in terms of internal design and a greater amount of useable space • $18 million cheaper Productivity Commission 36 The Code in practice: gains from performance standards cont. •State Library of Victoria • redevelopment sought to preserve heritage aspects of the building and public safety • solution was reduced number of fire stairs and level of fire compartmentalisation, such that much of the old materials (glass, frameworks and balustrades) was retained • cost savings of $2 to $3 million Productivity Commission 37 The Code in practice: gains from performance standards cont. •Westfield Hornsby Shopping Centre Cost savings to this typical suburban mall included: • Fire ratings for floor slabs reduced from 3 hours to 2 • Fire ratings for parking spaces were reduced from 4 hours to 1.5 • Number of fire stairs and emergency exits required was reduced significantly •Saving of 3-4% of project costs •Lower maintenance costs Productivity Commission 38 How to choose? • work with the market • market-based instruments • outcome standards > prescriptive standards • choose the option that provides the greatest net benefit Productivity Commission 39 Identifying options and recommendations • non-regulatory options • smart regulation • greatest net benefit • regulating for risk Productivity Commission 40 Burdens Productivity Commission 41 4. Annual Review of Regulatory Burdens on Business - Background • Building on a broad agenda of work set in train by COAG and individual governments • Regulation Taskforce 2006 • COAG’s National Reform Agenda • Undertake a five-year cycle of reviews • 2007: primary sector • 2008: manufacturing & distributive trades • 2009: social & economic infrastructure services • 2010: business and consumer services • 2011: economy-wide generic regulation Productivity Commission 42 Scope of Task • Focus is the impact on business • Regulation is broadly defined Productivity Commission 43 The Task – terms of reference • Identify regulations that • are unnecessarily burdensome, complex or redundant or • duplicate regulations or the role of regulatory bodies, including in the states and territories • Develop a short list – the greatest productivity gains • For the short list • identify options or recommend ways to alleviate the regulatory burden • identify reforms that will • enhance regulatory consistency across jurisdictions • reduce duplication and overlap in regulation or in the role of regulatory bodies Productivity Commission 44 Scope and approach • • • Primarily about existing Australian Government regulation but includes • areas of overlap and duplication between the Commonwealth and states/territories • national initiatives that involve the Commonwealth Impacts on the primary sector – directly or indirectly The exercise is bottoms up • complaints driven analysis • public submissions received • informal consultations held with governments, peak industry groups and with a number of mining companies and farmers • farm and mine visits Productivity Commission 45 Constraints • In providing recommendations the review needs to have regard to : • other reviews or recent reviews affecting regulatory burdens • the underlying policy intent of the government regulation Productivity Commission 46 Identifying and estimating regulatory burdens • Administration and operational costs • Notification • Education and training • Permission • Record keeping • Cooperation • Publication and documentation • Procedure • Other Productivity Commission 47 Identifying and estimating regulatory burdens cont. • Changing the way things are produced • altering inputs to production • altering production processes • using a less preferred technology • Changing what is produced • altering the characteristics of goods or services • ceasing the production of goods or services • missing opportunities to produce goods or services Productivity Commission 48 Identifying and estimating regulatory burdens cont. • Estimating the size of the burden • materials and equipment purchased to meet requirements • on-going or start-up cost • hours per year used in satisfying the regulatory requirement • value per hour of that labour Productivity Commission 49 Identifying and estimating regulatory burdens cont. • Estimating unnecessary burden • purpose of the regulation • what costs are unnecessary to achieving the policy goal? • unnecessary burdens could result from: • excessive coverage • overlap or inconsistency • unwieldy approval processes • heavy-handed regulators • poorly targeted or too complex regulation • excessive reporting • unduly prescriptive regulations • perverse incentives Productivity Commission 50 Identifying the ‘unnecessary’ part • • • Farmers and miners were asked what proportion of total costs is unnecessary to achieving the policy goal Asked for estimates of the additional time, skills and materials required to fulfil these unnecessary burdens or the size of the missed opportunities Guided on how to estimate the costs • materials and equipment • hours spent X value of the time • opportunity costs: value of foregone sales; extra costs from using less preferred technology or inputs, etc. Productivity Commission 51 Quantitative evidence • • • From farmers • stories of burdens which not only included burdens from • all three levels of government, • but also included • Banking, accounting and legal costs Little identification of which parts were unnecessary From miners • statements about where we should go in the future but little about what was specifically wrong with existing regulation Productivity Commission 52 Output • The report delivered lists for reform based on our best judgements, with little quantification of • the size of the unnecessary burden • potential gains in productivity to the whole economy • the number of recent, current and prospective reviews was surprising • once filtered, not as much left as expected Productivity Commission 53 Findings: Some actions can be taken now • • • • • Remove duplication in applying for drought assistance Amend Part IIIA of the Trade Practices Act to make public the reasons for all decisions Consolidate the assessment of environmental export approvals for uranium into the Environment Protection and Biodiversity Conservation Act Ensure the technical capacity of visa verification systems Improve environmental risk assessment of the imports of live animals under the Environmental Protection and Biodiversity Conservation Act Productivity Commission 54 Some changes are taking too long • In some cases, where the need for reform has been agreed, implementation is taking too long • bilateral agreements on environmental approvals under the EPBC Act • National Mine Safety Framework • barriers to the recognition of skills acquired under the vocational education framework and across borders • water rights and trading • inter-jurisdictional inconsistencies in road transport Productivity Commission 55 Areas where policy review is needed • Some regulatory burdens can only be removed after a full policy and framework review • market arrangements for wheat • onshore and offshore petroleum • coastal shipping as part of COAG’s national transport reform • science-based assessment of risks of uranium mining • aspects of the National Pollutant Inventory Productivity Commission 56 Take no action • no lower-cost alternative to achieve the regulatory objective: • barriers to attracting overseas workers to work on farms near metropolitan areas • role of the Gene Technology Regulator in relation to moratoria on GM products in some states and territories • the testing regime relating to on-farm production and use of bio-diesel fuel • using waste wood for power generation. Productivity Commission 57 Federalism issues • Some complaints were about state-based regulation, not under reference • Many businesses operate in more than one jurisdiction • Regulatory inconsistencies and duplication across state borders persist • hinders achieving economies of scale • Recent COAG reforms to bolster adoption of uniform regulatory models may assist Productivity Commission 58 Regulatory issues facing the sector • • • • • Some regulatory changes reduce property values Inadequate use of scientific assessment of hazards & risks in some cases Overuse of regulation to manage risk High costs when decision-making is slow • policy development and implementation (water, carbon emissions trading, national mine safety) • regulatory actions (environmental approvals, water allocations) Regional differences in administration and enforcement Productivity Commission 59 Looking forward • • • • An opportunity to avoid unnecessary regulatory burdens when developing new national frameworks for • water • greenhouse gas emissions trading and reporting Remove existing piecemeal ad hoc state schemes These should facilitate market transactions to establish prices to encourage the allocation of scarce resources to their highest value uses Avoid exemptions without full justification against national interest criteria Productivity Commission 60 Big issues were the effect of federalism and the capacity of regulators • Many complaints were about inter-jurisdictional differences • A particular problem for businesses operating in more than one jurisdiction • Various models of harmonisation have been employed in the quest for a national approach but many appear to be failing to realise their objectives • Resource inadequacy particularly state enforcement of nationally agreed regulations Productivity Commission 61 Common concerns with risk management through regulation • Minimisation of risk through regulation is a common theme • Overuse of regulation – ‘risk elimination’ • excessive and duplicative reporting requirements • overly prescriptive regulations • narrow interpretation of regulations by regulators • regulation in response to isolated adverse events applied across the whole sector – not targeted at high risk areas alone. Productivity Commission 62 PC’s principles and values Productivity Commission 63 (1) Principles and values of the Productivity Commission • • • • • • • • • • • • • history Act resources independence transparency whole community focus competition and a level playing field economy, society and environment economic framework interpreted broadly interdependence evidence based wide consultation strong analytical tradition – skilled staff Productivity Commission 64