Andrea Renda

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Better regulation tools where do we stand?

• Andrea Renda
• Senior Research Fellow, Centre for European
  Policy Studies
• Vienna, 5 May 2008

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The RIA world
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• RIA is seen as a useful tool in support of more
  efficient, effective, transparent and accountable
  policymaking
• Internationally sponsored (OECD) and currently
  adopted in many EU countries and at EU level,
  within broader regulatory reform programmes
• The focus and depth of analysis change remarkably
  from country to country
• RIA requires resources and transparency of
  regulatory processes in many Civil Law countries
  it has failed so far

RIA has been under the spotlight in the past few
years, but the emphasis is now shifting towards
the SCM
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Whats RIA?
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Impact Assessment procedures normally have
similar structures, which entail a cost-benefit
assessment of available policy options
Analysis of status quo
Identification of need for regulation
Analysis of alternative policy options
Consultation
Collection of information
Identification of preferred option
Detailed cost-benefit analysis
Input to drafting
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US the cost-benefit state
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• 1981 Reagan administration creates RIA (EO
  12,291)
• Does not apply to independent agencies (e.g. FTC,
  FCC, SEC)
• Estimated yearly saving 10 billion
• 1985 The grand experiment
• Yearly OMB Report on the costs and benefits of
  Federal regulation
• Council of Competitiveness replaces Task Force on
  Regulatory Relief
• 1993 Clinton launches the NPR (EO 12,866)
• Eliminate 16,000 and modify 31,000 pages in the
  Federal Code
• Threshold for RIA only significant regulatory
  actions (gt 100 mn)
• 2002 RIA under George W. Bush (EO 13,258)
• Removal of Vice-Presidents role in solving
  OIRA-agencies clash
• OIRA Prompt letters from consultant to
  adversarial gatekeeper

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The US RIA model
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Often neglected features
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• In the US, RIA is based on Kaldor-Hicks
  (resourcist) net benefits calculation
• but only government agencies are obliged to
  carry out RIA, i.e. RIA is mandatory only for
  most significant secondary legislation
• The use of Kaldor-Hicks criteria as the sole
  pillar of analysis is not generally accepted in
  Congress, independent agencies, and in common law
  adjudication
• This is also due to law and economics scholars,
  especially economists (Chicago, 1979)

The use of RIA in the US responds to the need to
control agencies, by keeping them aligned with
the government agenda
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Civil law countries?
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• RIA, where existent, serves widely different
  purposes and has different scope and depth
• Often the scope is too ambitious or misunderstood
  (e.g. Italy)
• Every paradigm shift (à la Kuhn) needs a cultural
  shift, and this is lacking in many countries
• A better regulation community is slowly
  emerging no ruling class heroes
• Parliamentary democracies are less prone to RIA
  than presidential ones
• Administrative procedures, decision styles,
  agencies knowledge differ widely
• RIA gives results in the long-term (next
  government?)

In many countries in continental Europe RIA has
so far failed. There is need for a more
holistic better regulation strategy
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RIA in the European Commission
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Year 0
Year 1
Preliminary IAs
Extended IAs
January
February
November
January
months
Preparation of APS
APS decision
Commission Work Prog.
Interservice Consultation
DGs prepare Preliminary IA (from 2005, Impact
Assessment Roadmaps)
Commission chooses proposals that should be
subject to ExIA
All preliminary IAs are annexed to the
Commissions Work Programme for next year (from
2005, Roadmaps are published with the Work
Programme)
The availability of preliminary or extended IAs
is precondition for interservice consultation for
CWP initiatives
Sectoral initiatives
Cross-cutting initiatives
IA is steered by the lead DG
Interdepartmental group chaired by the lead DG,
with other DGs concerned and the SG
Internal quality check by DGs and SG
Second quality check
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Expanding!
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• All EU institutions now share the same obligation
  and the same methodology
• 2003 Inter-institutional agreement on better
  lawmaking and 2005 common approach to impact
  assessment
• RIA is applied also to non-binding initiatives
• White Papers, Communications, etc.
• 2005 IA Guidelines still offer little guidance
  for regulatory appraisal
• Principle of proportionate analysis new binding
  proposals should be analysed more in-depth

The Commission completed 21 ExIAs in 2003, 130 in
2007, and 180 are planned for 2008 But IAs on
binding documents have not increased
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Assessing costs
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Assessing benefits
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Comparing costs and benefits
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Percentage of IAs that report net benefits or
cost effectiveness
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Assessing alternatives
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Plateau-ing?
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• Very high initial expectations it should
  guarantee that we know the full costs and
  benefits of future legislation (Verheugen, 2005)
• Some bad episodes (REACH, Roaming regulation,
  Services Directive, 2006 Communication on the
  telecoms review, etc.)
• Degree of quantification is still quite low
• Lack of skills in some Commission DGs
• Emphasis on accounting methods such as the
  Standard Cost Model

The Commission has been successful in introducing
IA, and quantification has increased. But where
do we go from here?
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The SCM revolution
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• The Standard Cost Model is being adopted in many
  countries worldwide for the purpose of measuring
  and reducing administrative burdens on businesses
• A measurement tool, not a reduction tool
• A design tool for new legislation
• Some countries have adopted the SCM on a macro
  basis i.e. for a full baseline measurement
• Netherlands, Denmark, Czech Republic, United
  Kingdom, Germany, Austria, Slovenia etc.
• The SCM promises significant welfare gains
• The Netherlands 1.5 of GDP
• UK BRTF (2005) 16 billion (1)
• Assumption all resources saved are allocated to
  a more productive use

The SCM is currently under the spotlight, even
more than impact assessment. Can the two tools be
reconciled?
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A success story?
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At September 2006
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What does the SCM measure?
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Administrative costs
Business administration costs
Administrative costs from central government
regulation
Administrative activities that businesses may
continue if the regulations were
removed (Business as usual)
Administrative activities that businesses only
conduct because regulation requires it, i.e.
administrative burdens
The SCM measures all administrative costs from
regulation, but aims at reducing only
administrative burdens
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Phases of the SCM (I)
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• Phase 0 (start-up)
• Identification of relevant regulations and
  demarcation
• Start-up meetings/pre-consultation (also for ex
  ante assessment of administrative burdens)
• Identification of appropriate methodology
• Phase 1 (preparatory phase)
• Regulations are broken down into Information
  Obligations, Data Requirements, administrative
  activities
• Population and segments (eg firm size)
• Classification of origin (ABC or more detailed)
• Cost parameters
• Interview guide

The SCM follows the same phases both for ex ante
and ex post measurement, although with some
changes
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IOs, DRs, activities, cost
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Regulation

• Internal costs
• Hourly rate
• Time
• Overhead
• External costs
• Hourly rate
• Time
• Acquisitions (Monetary value)

Information obligation 1
Data requirement 1
Activity 1
Activity 2
Data requirement 2
Information obligation 2
Activity n
Data requirement n
Information obligation n
Cost of each activity Price x time x Quantity
(population x frequency)
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Phases of the SCM (II)
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• Phase 2 (analysis)
• Data collection through empirical techniques
• Phone Interviews
• Face-to-face interviews
• Business panels/focus groups
• Expert assessment
• Standardisation of time and resouce consumption
  per business per segment
• Identification of normally efficient business
• Phase 3 (extrapolation/reporting)
• Validation and extrapolation to national/regional
  level
• Reporting or integration with RIA

The use of empirical techniques is fundamental
for a correct implementation of the SCM
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The EU SCM
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• Operational manual for SCM embedded as Annex X to
  the IA Guidelines in March 2006
• Different classification of origin (EU,
  International, National, Regional)
• Application to businesses, voluntary sector,
  citizens and public authorities
• One-off costs may be taken into account
• Need for extrapolation of data through country
  distributions
• Workload
• 14-40 hours of work over 4-24 weeks per ex ante
  assessment
• 1,600 hours/week per year for the Commissions
  central policy unit(s)

The EU SCM is more ambitious than national
models, and more difficult to implement...
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The Action Programme
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2006
2007
2008
Communication on AC Cost Reduction
Action Programme on Reducing AC
Launch of measurement and reduction exercise
Targets action for decision and implementation
November
February
March
April (???)
December
Measurement

• Discussion on the results of the pilot project
  and on targets
• Launch of consultation on Low-Hanging Fruits and
  priority policy areas

• Methodological issues
• Organisational issues
• Identification of policy areas
• Identification of Low-Hanging Fruits

• Council conclusions on Action Programme
• Targets on Low Hanging Fruits
• Launch of measurement and reduction initiative

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The EU Action Programme
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• Goal to reduce administrative burdens by 25 in
  2012 - already in COM(2006)689
• Only EU legislation
• Difficulty in involving Member States
• Ten Fast tracks 2 fastest proposals in 2007
• Focus on Company law in 2008
• Deloitte, CapGemini and Ramboll are measuring
  burdens at EU level
• Appointment of high level group of independent
  stakeholders on administrative burdens (HLGAB)
  s.c. Stoiber group

On 24 January 2007 the Commission presented its
Action Plan to reduce administrative burdens
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Priority areas
1. Company law 2. Pharmaceutical legislation 3.
Working environment/employment relations 4. Tax
law (VAT) 5. Statistics 6. Agriculture and
agricultural subsidises 7. Food safety 8.
Transport 9. Fisheries 10. Financial services 11.
Environment 12. Cohesion policy 13. Public
procurement
Measuring ABs in 10 priority areas means
covering at least 70 of total ABs
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Administrative burdens and IA
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• After a baseline measurement
• Prioritising IOs to be repealed/reduced
• Complexity scales?
• Need to achieve a net target - update the
  baseline
• IOs repealed, IOs added
• Compensation balance (Flanders)
• All proposals to cut red tape should undergo IA
• Need to coordinate SCM with the IA process
• Problems in involving Parliaments and NIMBY
  syndrome

The SCM provides only a limited set of steps to
move from measurement results to reduction
proposals
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Administrative burdens and IA
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• No baseline measurement available
• Need to consult target firms
• Need to build population and segments
• Empirical techniques, desk research or expert
  assessment
• AB are part of the broader category of costs
  arising from the new proposal, to be assessed and
  compared with benefits
• Assessing potential cumulative and interactive
  burdens, synergies, redundancies, etc.

Without a baseline, administrations face more
challenging tasks in separating BAU costs from
actual burdens
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First results
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Results from the IA QAs indicated that in those
cases where a quantification of administrative
burdens was undertaken, the outcome was poor.
This was not due to the methodology of the
Standard Cost Model itself, rather due to
difficulties in the underlying assumptions and
data availability. IA ex post evaluation, p. 96
Source Danish Commerce and Companies Agency, 2007
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Problems (I)
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• Once ABs have been measured, IA is still needed
• Impossible to use SCM as a stand-alone tool
  replacing IA
• The SCM does not consider all costs...
• Investments (Material costs)
• Taxes and charges (Financial costs)
• Opportunity costs
• ...nor does consider benefits!
• third-party IOs (e.g. labelling)
• Efficiency criteria/welfare analysis
• Assessment of cumulative/interactive effects
• Regulatory cascades
• Synergies/inconsistencies and irritation
• Potential overlaps

The SCM has a much narrower focus than a
full-fledged impact assessment
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Problems (II)
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• Accuracy issues
• Revealed/stated preferences
• Choice models/prospect theory
• Empirical techniques are a delicate issue
• Interviews
• Limited samples (3-5 firms)
• Difficult to consider irritation burdens
• How to keep a live baseline?
• Identify IOs repealed
• Identify IOs added
• panta rhei problem

Even looking at the SCM per se, a number of
operational problems emerge
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Conclusion
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• The SCM can be a powerful tool for ex post
  (baseline) measurement of ABs
• Powerful political message
• Very informative tool
• Does not replace IA
• The devil is in the details
• Mainstreaming SCM in the regulatory process
• live baselines or one shot measurement
• Irritation burdens v. direct consultation
• It is necessary to keep the emphasis on IA
• Risk-based approach
• Net benefits calculation
• Holistic view of regulatory costs/benefits

The current emphasis on the SCM in many countries
should not lead to reduced attention for ex ante
IA and ex post evaluation
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andrea.renda_at_ceps.eu