Reducing the business costs of regulation*1
A critical feature of this process is that RISs are required to be presented to political decision-makers in time to inform their decisions. The RIS must also accompany bills and subordinate legislation into Parliament, enhancing the scope for a well-informed political debate, and providing transparent accountability to the community.
The Office of Regulation Review (ORR), which is part of the Productivity Commission and shares its statutory independence, is the Commonwealth government’s watchdog over this regulation review process (it also serves a similar role for COAG in relation to national regulatory proposals).
There is a particular emphasis on small business in the requirements on Commonwealth agencies. To quote from the Cabinet-endorsed A Guide to Regulation:
The Government has asked the ORR to ensure that particular effects on small businesses of proposed new and amended legislation and any other regulation are made explicit in the RIS. The RIS should also give full consideration to the Government’s objective … of minimising the paperwork and regulatory burden on small business.
Adequacy criteria for RISs set out in that publication include the following requirements:
In assessing costs, ‘RISs should include estimates of both one-off and ongoing compliance costs.’ In addition ‘ways to minimise compliance and paper burden costs should be discussed’.
Regulatory performance measures and regulatory plans
There are other requirements at the Commonwealth level which deserve mention. With the help of the ORR, the Office of Small Business collects and publishes data against indicators of good regulatory practice. They have been designed as a first step towards enabling benchmarking of government performance in regulatory reform. One of the nine indicators relates to the proportion of regulations for which the relevant RIS adequately justified the compliance burden on business.
In addition, there is a requirement at the Commonwealth level for formal ‘Regulatory Plans’, whereby agencies must record their previous year’s regulatory activity and, more importantly, their intentions for the year ahead. The purpose of the annual Regulatory Plan is to alert stakeholders to upcoming regulatory reviews and changes and, in the longer term, bring a strategic focus to the activities of these agencies. This initiative is designed to improve the transparency of regulation making and put pressure on agencies to make greater use of RISs early in policy development.
Compliance of regulators with the RIS requirements
Clearly there are now systems in place to promote good regulation-making at the Commonwealth level. How well are they serving the (business) community? The short answer is ‘reasonably well, but plenty of room for improvement.’
Of the 145 RISs required in 2001-02, 130 had been prepared for the decision-maker and, of those, 128 were judged to be of an ‘adequate’ standard. This translates to a RIS compliance rate at the crucial decision-making stage of 88 per cent. This represents a significant improvement over earlier years.
However, it is of concern that compliance has tended to be poorest where it matters most. Last year the ORR ranked RISs according to the perceived economic and/or social significance of the regulations concerned. It found that compliance at the decision-making stage was only 70 per cent for the 10 regulatory proposals with the most significant impacts on business or the community.
Such regulatory actions also tend to be the most ‘political’ or urgent. Departments sometimes argue that there is no time in such situations to follow the RIS processes; that the RIS ‘gets in the way’. However it is precisely in such situations, where governments are under great pressure to ‘do something’ and do it quickly (such as in areas like public liability or medical indemnity insurance) that good process is needed to ensure that the potential costs, as well as benefits of proposed regulation are given adequate consideration. Timeliness should not preclude good process.
Some government departments and agencies can clearly do a lot better. As can be seen from the following chart, RIS compliance varied considerably in 2001-02. Indeed, for the major policy-making portfolios, compliance rates ranged from zero to 100 per cent!
RISs which fail to meet minimum standards, usually display the following characteristics:
RIS compliance is variablea,b
a At the decision-making stage, 2001-02 b The Department of the Treasury is counted twice, to separately identify tax RISs which are usually prepared in consultation with the Australian Taxation Office.
There is also considerable scope for improvement in the timing of RISs. If they are to assist decision-making, RISs need to be prepared early in the policy-development process. In too many cases they are being hurriedly prepared after policy decisions have effectively already been made. In those circumstances, the RIS becomes little more than ex-post rationalisation. Its content may end up being adequate, but it is unlikely to make a useful contribution to policy development.
Timeliness in preparation of a RIS is also important to the quality of the analysis contained in it. Many of the RISs that were eventually assessed as adequate by the ORR required a lot of work and a number of revisions to get them over the line. The relatively high overall ‘pass rate’ in 2001-02 is in part a reflection of the effort that the ORR puts into assisting departments and agencies throughout the year (often against excessively tight time frames).
In principle, the early identification and assessment of regulatory proposals should have been facilitated by the requirement for ‘regulatory plans’ (mentioned previously). In practice, the compliance of regulators with this sensible requirement has been patchy, with such plans being hard to find or not available at all.
RISs and compliance costs
On the key issue of the compliance costs of regulatory and tax proposals, RISs typically contain a relatively brief qualitative assessment. Only about 30 per cent of RISs considered by the ORR also contain quantitative assessments, which include estimates of the number of businesses affected or the likely financial cost per business.
In practice measuring compliance costs is not a simple task. At this point in time, there is no generally agreed methodology, although progress is being made on a number of fronts, including work by the OECD. In its current review of compliance and administrative costs incurred by doctors in general practice, the Commission has identified ways of better measuring such costs. Summing the outlays on equipment and systems and the time costs of the people involved, the Commission estimated these costs at some $230 million at the Commonwealth level. In principle, we should also include the intangible costs — notably frustration and stress — that we have been told about, but those are particularly difficult to estimate.
The fact the Commission was given this task by Government indicates that there is growing recognition of the need to better account for compliance costs in regulation-making. As noted, this was reflected in the Government’s response to the report of the Small Business Deregulation Taskforce. Most recently, the report into small business employment, by the Senate Employment, Workplace Relations and Education References Committee has recommended that work be undertaken to better measure such costs.
The reality is that, in many cases, departments and agencies appear not to have sufficient internal expertise to adequately perform an assessment. This is not an insurmountable problem in itself. But there also appears to be a lack of recognition of the importance of considering compliance cost burdens associated with new or amended regulation. These problems were highlighted in the Small Business Coalition’s pre-budget submission. I find it hard to disagree with the conclusion in that document that:
There are large cultural barriers within certain Federal Departments and Agencies … that need addressing.
While Australia has generally been at the forefront internationally in instituting ‘quality control systems’ for regulation, this has so far not extended to assessments of compliance costs.
In countries such as the United States, United Kingdom and New Zealand, departments and agencies routinely provide considered assessments of regulatory compliance costs in RISs.
The ORR has recognised this deficiency and has been attempting to raise the standards in Australia through its training programs for officials, and by requiring a greater level of analysis about compliance costs in RISs before they can be assessed as adequate.
Cost recovery by regulators
Many businesses see regulatory agencies as adding insult to injury by imposing a regulatory burden on them and then charging them for the privilege. In its recent review of agencies’ cost recovery practices, the Productivity Commission found them to be ad hoc and opaque, with poor accountability and review mechanisms. The Commission found legitimate reasons for some cost recovery, but recommended that all such measures be tested against formal guidelines which require them to have a sound economic rationale (rather than simply a revenue-raising objective). The Government has now released such guidelines, including a requirement to bring any proposed regulation with a cost-recovery dimension within the RIS framework.
Looked at in the broad, it is apparent that regulatory reform over the last decade has achieved a great deal. Regulations are now often explicitly pro-competitive and outcome focused. And there is growing evidence that this has paid off in Australia’s relatively strong economic performance.
However, it is equally clear that more needs to be done at the detailed level to improve the quality of regulations and, in particular, to reduce compliance costs. Notwithstanding the initiatives implemented in recent years, Australian governments can do more to ensure that regulations do not impose unnecessary costs on business and the community.
At the Commonwealth level, the necessary procedural infrastructure is now largely in place, at least for the sorts of regulation that get Parliamentary scrutiny. It simply needs to be better utilised, especially for more significant or contentious regulatory initiatives. The exposure of detailed information about the compliance of individual departments and agencies with the RIS process may already be concentrating bureaucratic minds in this respect.
Processes within the States and Territories suffer from being more limited in coverage and from not having independent status for their review bodies. However, a number of States do better than the Commonwealth when it comes to subjecting subordinate or delegated legislation to RIS-type disciplines and exposure. The Commonwealth has identified a need to get better procedures for the making of such regulation, but has struggled to make headway. Since 1994 various bills have been prepared, but have been blocked in the Senate. The Government is currently preparing a revised bill for the Parliament.
An essential complement to more rigorous processes for making new regulation is the periodic review of existing regulation — particularly that which may impose substantial adverse impacts on business (or indeed other sections of the community). There is an advantage in having such reviews conducted at arms-length from the government bureaucracy, to enable a fresh and independent assessment. This is the Productivity Commission’s niche and it has been active in this area. Its current work program includes reviews of such key areas of regulation as the TCF assistance regime, GP redtape, disability discrimination laws, native vegetation regulation and workers’ compensation/OH&S. In all such reviews, the Commission seeks to find ways of meeting regulatory objectives in ways that take account of all the costs as well as the benefits.
Further progress in reducing the business costs of regulation will not only require the diligence and commitment of governments, it will also need the active support of business. It must be said that such support is not always forthcoming. For example, the Commission’s attempts to assess the costs of red tape for medical practitioners has been impeded by GPs’ unwillingness to provide the information (which only they can do). And, while business has expressed concerns about government cost recovery practices — and the ACCI was instrumental in getting the Productivity Commission inquiry into these — another key business lobby neglected that important opportunity to participate and press its own views on this matter.
At the end of the day, regulation is unavoidable and indeed much of it is desirable. Some compliance costs, unfortunately, are also inevitable – they represent the price of the benefits which regulation brings. The trick is to get the balance right. That will require continued effort and vigilance by both governments and business.
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1* Address to the Small Business Coalition, Brassey House, Canberra, 20 March 2003
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