Gerard Brody on regulatory costs and benefits

This month’s edition of Ceteris Paribus the newsletter of the Victorian Economics Society carried the article below by Gerard Brody on regulatory gatekeeping. I don’t agree with all of it, but it’s general point (highlighting the fact that our regulation review institutions tend to focus much more on minimising the costs of regulation rather than optimising their benefits) is well made, and a cut above your average consumer advocacy on regulatory issues.

Regulatory gate keeping

The direct economic impost of regulation on business has become a hot topic in recent years. In Consumer Actions view, however, sensible and necessary discussion regarding the impact of regulation has been hijacked by a mantra that regulation is always red tape and must be avoided at any cost. We agree that regulation can and should work better after all, costs of regulation are ultimately borne by consumers, generally through higher prices. Effective regulation does not, however, necessarily equate to less regulation.

Rather, it is a matter of balance to ensure that regulation is not overly burdensome, but, where necessary, is effective in meeting its aims. We suggest that focusing on effective regulation allows an improved assessment of the regulations benefits and costs. We are concerned, however, that processes designed on their face to assist in this assessment process in fact impede, rather than contribute to ensuring regulation achieves its objectives.

One of the primary ways in which Governments seek to ensure that only necessary and effective regulation is passed is through the requirement to produce regulatory impact statements (RIS). RISs essentially involve undertaking a cost-benefit analysis, which should ensure regulation achieves its objectives with minimum cost to society. From a consumer point of view, however, there are a number of flaws in the RIS process.

In Victoria, the Victorian Competition and Efficiency Commission (VCEC) requires Victorian Government departments to develop a RIS for any regulation or statutory rule that imposes appreciable burden, and a business impact statement for any regulation that has potentially significant effects for business or competition. These statements emphasise the cost of regulation and as such stipulate that where possible, quantitative measures such as financial and economic costs and benefits should be identified and compared. In other words, a dollar figure should be assigned to costs and benefits, where feasible.

Changes in administrative burden in Victoria also require that any new regulation is met by an offsetting simplification in the same or related area. A Standard Cost Model (SCM) must be used to assess changes in administrative burden. The SCM is an activity-based methodology that estimates the costs of completing administrative activities associated with new or revised regulation. Other financial and compliance costs are required to be measured separately.

The obvious problem with these tools is that they do not, or only superficially, assess benefits of proposed regulation. Further, they provide little if any assistance in measuring less direct costs such as the costs to the economy where consumers are unable to effectively participate in a market or indirect costs imposed on society to redress market failures or exclusion.

Similarly, the processes and language utilised by the Commonwealth Office of Best Practice Regulation (OBPR), focus almost exclusively on costs to business. Indeed the OBPR provides a number of tools to aid in the assessment of these costs, yet provides no tools for undertaking assessment of benefit or the types of less direct costs discussed above an exercise that is more complex and less amenable to quantification.

This is a fatal gap, and may mean that regulation is discarded because it is costly, despite it delivering a possible net benefit to society.

In contrast, the OECD Consumer Policy Committee has developed a comprehensive checklist and toolkit which begins with questions assessing both the supply side and the demand side of the market. The demand-side questions reflect modern understandings of consumer experience and behaviour, including: Is the market sound?, Are consumers enjoying the benefits of a competitive market?, Is there information failure? and Are there behavioural biases affecting consumer decision-making and outcomes?. The next step in the checklist involves analysing whether informational instruments, behavioural instruments or other instruments are required. Importantly, the decision tree recognises that more than one type of tool can be used to address demand-side issues.

If the analysis finds that the benefits of intervention (to empower or protect consumers) would outweigh the costs then a policy response for improving the market for consumers is recommended. If the analysis finds that the costs of intervention would outweigh the benefits, then a further analysis is still required to assess whether costs are falling on vulnerable or disadvantaged groups. If so, then targeted policies to compensate or protect these consumers are recommended.

The approach recommended by the OECD Consumer Policy Committee clearly expands on the ambit of analysis on the effects of regulatory change. Unlike the approaches required by the VCEC (and the requirements of the Office of Best Practice Regulation at the federal level), the OECD method explicitly considers the potential impact of regulation on consumers, including vulnerable and disadvantaged consumers. In our view, this approach would be far more likely to deliver effective regulation rather than red tape.

This article is based upon discussion in Consumer Actions submission to the Productivity Commissions Inquiry into Consumer Policy Framework. For more information, contact Gerard Brody Director, Policy & Campaigns at gerard [at] consumeraction[dot]org[dot]au.

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Jonno
Jonno
14 years ago

That’s a good point – we public servants work under the regime that numbers rule everything and have to make up appropriate numbers as required. Reading actual RISs would be very informative if compellingly boring. I suspect the average quality is pretty low.

My experience is limited to one policy field – an 80s set of regulations justified every regulation where possible with links to policy back up – not perfect but it was nice as a public servant trying to interpret them later on being able to read why they had been put there. The 90s revision was a step backwards (more due to internal lack of vision than anything else) and it was very hard to see any justification. By the time the RIS was written, the public servants were exhausted and it was a ‘tick the box’ approach.

I wonder what can be done earlier in the process of policy development underlying the regulations – the RIS does add a gatekeeper role at the end but how can you support the whole process to improve it?

Bill Posters
Bill Posters
14 years ago

Generally it takes a catastrophe to ratchet up the level of regulation/consumer protection. And then the protections are gradually whittled away over the years, until disaster strikes again.

Tom N.
Tom N.
14 years ago

STRAW ECONOMIC MEN

While Gerard Brody makes some valid points, he also misconstrues a number of elements of the RIS process. For instance, the Victorian “appreciable burdens” and “significant burdens on business” tests is only a trigger for further analysis: they are not a criteria for approving or disapproving of a regulation. (At the Commonwealth level, the trigger involves a burden on not just business but also individuals or competition, so burdens on consumers are in fact relevant for triggering RISs.) In any case, it can be argued that there are good reasons for RIS triggers to focus on business costs, along the lines that governments face strong incentives to regulate as a visible response to media’s social/environmental crisis-of-the-moment, without considering either the real need for regulation, its effectiveness or the compliance costs to business.

Regarding Brody’s assertion that “sensible and necessary discussion regarding the impact of regulation has been hijacked by a mantra that regulation is always ‘red tape’ and must be avoided at any cost”, I think this is just polemical nonsense. Certainly, a careful reading (or even, for that matter, a quick scan) of the statements and guidelines promulgated by Australian governments and their regulatory review bodies reveals that these bodies recognise that there are many legitimate rationales for regulation, and their focus in relation to compliance costs is on minimising unnecessary compliance costs; not on minimising compliance costs per se, let alone on minimising regulation.

Bill Posters
Bill Posters
14 years ago

Nicholas, the law around corporate fundraising (equity and debt) springs to mind.

Patrick
Patrick
14 years ago

I would have said investor protection rules, director’s duties and auditing independance standards were all potential candidates, particularly in the US.

I would be pretty surprised if there was any ‘whittling away’ of the debt/equity rules! At any rate I am not aware of it.

Andrew Reynolds
14 years ago

Bill,
I deal with this area fairly regularly – and my experience is very different to what you seem to believe. With any major problems he regulation do get ramped up, mostly to absurd heights – in the US the Sarbanes-Oxley regulations are a prime example. Far from dropping during the intervening period they either stay static or, more commonly, continue their upward climb, just more gradually.
Whether the original problems were caused by the existing regulations is also typically not examined and the solution to any problem is immediately assessed as being yet more regulations.
If you are in any doubt that the regulatory burden is increasing markedly you just need to look at the sheer weight of paper moving through Parliament and being churned out by the federal, state and local bureaucracies.