Reducing the cost of doing business in NSW

NSW Business Chamber

February 2009

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Executive Summary

The NSW Business Chamber welcomes the opportunity to make this submission: Reducing the cost of doing business in NSW to the NSW Better Regulation Office. This opportunity arose through a dialogue with a policy adviser in the Office of the Minister, who was seeking further information on businesses’ regulatory concerns following the release of the results of the NSW Business Chamber’s Red Tape Survey. The aim of this submission is to offer constructive recommendations for removing unnecessary regulations (deregulating) and minimizing the cost to business of necessary regulations (streamlining). Some of these recommendations raise broad issues of transparency and accountability that extend beyond the remit of the Better Regulation Office itself. Nonetheless, we consider it appropriate to include these broader recommendations, because they are implied in the effective measurement of deregulation and regulatory efficiency, and because the Better Regulation Office sits within the Department of Premier and Cabinet. Deregulation and regulatory efficiency are critical priorities for NSW businesses, who are currently disadvantaged by a large volume of regulation and a high degree of regulatory churn. The Productivity Commission reports that as of 30 June 2007, NSW had over 1,200 Acts – the highest of any State or Territory and nearly 400 more than the ‘runner-up’ Victoria. The Productivity Commission further notes that between 1 July 2006 and 30 June 2007, NSW enacted 653 new Acts and regulatory instruments, more than any other State or Territory and 442 more than Victoria, the next most frequent regulator. On the other hand, as of 30 June 2007, NSW recorded a lower number of pages of Acts than Victoria, Queensland and Western Australia, and a lower number of statutory rules than Victoria, South Australia and Western Australia. But the number of pages of new regulatory instruments introduced between 1 July 2006 and 30 June 2007 was highest in NSW. While these data are ambiguous indicators of regulatory burden, NSW Business Chamber member companies are emphatic about their increasing regulatory costs. The Chamber’s October 2008 Red Tape Survey of around 2,500 businesses revealed that: > 70% of businesses surveyed have been significantly or moderately impacted by red tape; > 20% spend more than 20 hours a week on compliance; > over the past two years, three-quarters of respondents have observed an increase in the cost and time it

takes to comply with regulations. > 60% identified a moderate to high level of red tape in dealing with the WorkCover Authority of NSW; and > one-third of businesses surveyed found that there is inadequate communication about regulatory issues from

the NSW Government, and that they rarely know about new developments and reviews. The negative effects of unnecessary and excessive regulation are well-documented. Red tape and regulatory burdens impede competition, innovation and productivity, and therefore aggregate output, income and employment. The Australian Bureau of Statistics (ABS) reports that 10% of Australian businesses regard government regulations or compliance as a barrier to innovation, and for firms with 5-19 employees, this number rises to 13%. NSW in particular can ill-afford to maintain a total cost of doing business that exceeds other jurisdictions in Australia. According to the latest official figures, NSW has the second-lowest annual rate of State Final Demand,

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the lowest forecast annual rate of Gross State Product, the second-lowest rate of exports of goods, and the second-highest unemployment rate in the country. As the NSW economy further deteriorates and businesses’ cash flows dry up, the need to cut compliance costs becomes even more urgent and important. It is not enough to make regulation better or to arrest its rate of growth. There must ultimately be less regulation if the competitiveness of NSW businesses is to be maintained. The NSW Business Chamber advocates zero net growth in red tape through the adoption of a ‘one in, one out’ approach to regulation. This ensures that when governments create a new regulatory burden, at least one existing burden is removed or reduced. It is important to emphasize that ‘one in, one out’ is not a crude formula, but shorthand for a sustained commitment by government to achieve practical reductions in business red tape and regulatory burden, to make quantitative targets transparent, and to hold departments accountable for meeting those targets. Other jurisdictions – both here and abroad – have shown how to measure the financial cost of regulation to business, and how to construct meaningful quantitative reduction targets. Binding targets are essential to measuring the progress of deregulation and streamlining, and winning the confidence of business. Given its financial and human resources, the Better Regulation Office is well placed to take up the challenge of ensuring a systematic and demonstrable reduction in compliance costs for NSW businesses. The NSW Business Chamber looks forward to working with the Office and helping to make NSW the preferred State in which to do business.

Recommendations

1. NSW Government to commit to deregulation through binding quantitative targets to reduce the overall stock of existing business regulation.

2. NSW Government to adopt the internationally recognized ‘Standard Cost Model’, in order to estimate and report systematically the financial costs incurred by businesses in demonstrating compliance.

3. NSW Government to restrict the net growth of new regulations by implementing a ‘one in, one out’ approach to regulating, similar to that already operating in Victoria and the United Kingdom.

4. NSW Government to explore opportunities to improve management, simplify Budget processes and reduce duplication by extending the process of agency rationalization.

5. NSW Government to make ministries and agencies more transparent and accountable, by specifying in the Budget both the quantity and cost of delivering major services, as well as their quality and timeliness.

6. NSW Government to align its procurement practice with that of the Victorian Government and other jurisdictions, by committing to pay small business suppliers within 30 days. There also needs to be a consistent whole-of-government policy on awarding penalties. The NSW Government should in addition nominate the minister and agency responsible for monitoring and enforcing the timely payment of private suppliers by NSW Government agencies.

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Evidence of regulatory burdens on NSW businesses

Key results of NSW Business Chamber’s Red Tape Survey 2008

NSW Business Chamber’s Red Tape Survey 2008 found that over two-thirds (69.8%) of respondents believe that complying with government regulatory requirements has a moderate to major impact on their business. In the last two years, around three-quarters of the businesses surveyed have noticed an increase in the cost of compliance and the time it takes to comply with regulatory requirements.

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Just over two-fifths (41.8%) of respondents spend 1 to 5 hours per week complying with government (Federal, State or Local) regulatory requirements such as filling out forms, applying for permits, reporting business information and other information requirements. In contrast, one-fifth (20%) spend more than 20 hours per week complying with regulatory requirements. Moreover, 60% identified a moderate to high level of red tape in dealing with the WorkCover Authority of NSW; and one-third of businesses surveyed found that there is inadequate communication about regulatory issues from the NSW Government, and that they rarely know about new developments and reviews. These responses accord with data from the Productivity Commission, which reveal that as of 30 June 2007, NSW had over 1,200 Acts – the highest of any State or Territory and nearly 400 more than ‘runner-up’ Victoria.

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The Productivity Commission further notes that between 1 July 2006 and 30 June 2007, NSW enacted 653 new Acts and regulatory instruments, more than any other State or Territory and 442 more than Victoria, the next most frequent regulator.

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On the other hand, as of 30 June 2007, NSW recorded a lower number of pages of Acts than Victoria, Queensland and Western Australia, and a lower number of statutory rules than Victoria, South Australia and Western Australia. But the number of pages of new regulatory instruments introduced between 1 July 2006 and 30 June 2007 was highest in NSW.

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While these data are ambiguous indicators of regulatory burden, NSW Business Chamber member companies are emphatic about their increasing regulatory costs. Respondents to NSW Business Chamber’s Red Tape Survey were given the opportunity to nominate three strategies that government could implement to reduce the cost of compliance. The most selected options were: > reduce the frequency of reporting requirements to a minimum; > encourage agencies to share information and make sure there are no duplicate information requirements;

and > communicate and consult more effectively with businesses when developing new regulations.

1 NSW Business Chamber, Red Tape Survey, October 2008.

<http://www.nswbusinesschamber.com.au/reference/influence_government/submissions/0811_red_tape_survey.pdf> <http://www.nswbusinesschamber.com.au/reference/influence_government/submissions/0811_red_tape_survey.pdf> 2 Commonwealth Productivity Commission, Performance Benchmarking of Australian Business Regulation: Quantity and

Quality, November 2008, p. 32. <http://www.pc.gov.au/__data/assets/pdf_file/0005/84785/quantity-quality.pdf> 3 ibid., p. 34.

4 ibid., pp. 32 and 34.

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Many NSW Business Chamber members consider that the problem does not lie with individual regulations, but with the entire regulatory system. Most governments periodically undertake ‘red tape reviews’, only to provide a one-off cut to regulation without restraining its growth systematically.

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NSW Business Chamber intelligence reinforces the general industry view that it is the cumulative effect of ever-growing regulation, rather than onerous pieces of individual regulation, which is impeding business competiton and growth. This is why businesses seldom respond enthusiastically to calls from government to remove particular regulatory requirements. (We shall return to this point in a later section below.)

Examples of regulatory burden on NSW Business Chamber members

5 NSW Business Chamber, NSW Business Priorities 2007, p. 16.

<http://www.nswbusinesschamber.com.au/reference/influence_government/BP2007_20070129.pdf>

Example 1: Manufacturing (Engineering) Company

Burdensome regulatory requirements are preventing this provincial NSW company from being able to compete internationally. Specifically, regulatory requirements in the area of Worker’s Compensation are the most costly. The company is looking at relocating out of NSW to a jurisdiction that has a more favourable business regulatory environment. The company also notes that the NSW Government does not communicate adequately to rural and provincial businesses.

Example 2: Manufacturing (Apparel) Company

This company is an established Australian brand located in provincial NSW. The frequency and complexity of information requests has increased so much that the company has had to hire a consultant to report on regulatory requirements. Greater regulatory burden has restricted the company’s ability to meet the challenges of employee attraction and training and higher costs of freight and energy. The overall impact of more frequent and arduous compliance obligations has been a decline in the company’s productivity and competitiveness.

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Case studies of NSW Business Chamber members confirm official data showing that red tape and regulatory burdens impede competition, innovation and productivity. The Australian Bureau of Statistics (ABS) reports that 10% of Australian businesses regard government regulations or compliance as a barrier to innovation, and for firms with 5-19 employees, this number rises to 13%. And since innovation is the main driver of economic growth, economies that have relatively burdensome regulatory regimes can expect to have slower rates of aggregate output, income and employment. NSW in particular can ill-afford to maintain a total cost of doing business that exceeds other jurisdictions in Australia. According to the latest official figures, NSW has the second-lowest annual rate of State Final Demand (expenditure), the lowest forecast annual rate of Gross State Product (output), the second-lowest rate of exports of goods, and the second-highest unemployment rate in the country. (See Table 1 below.)

Table 1: Economic performance of NSW compared to that of other jurisdictions, 2008-09

State/Domestic Final Demand (trend % change Sept. 2007 to Sept. 2008)

Exports of goods (trend % change June

to Sept. 2008)

Gross State/Domestic

Product (latest % growth rate forecast

for 2008-09)

Unemployment

rate (% trend estimate Feb.

2009)

NSW 2.6 -0.8 1.25 5.3

ACT 1.5 3.0 2.5 2.6

Victoria 2.8 – 1.5 4.6

Tasmania 4.8 0.8 2.25* 4.5

SA 4.1 1.8 2 5.6

WA 7.9 0.2 6.0 3.0

NT 11.1 -4.6 4.5 5.0

Queensland 5.2 1.0 3.0 4.1

Australia 4.1 1.5 -0.2 – 1 4.6

Sources: ABS Cats. 5206.0 and 6202.0; RBA; IMF World Economic Outlook; Commonwealth Mid-Year Economic and Fiscal Outlook; State and Territory Budget Papers and Mid-Year Economic and Fiscal Reviews 2008-09. *This figure represents the growth rate of ‘gross economic activity’ in Tasmania, an index not intended to be consistent with the Australian Bureau of Statistics’ measure of Gross State Product.

Example 3: Manufacturing (Vehicles-Buses and Coaches) Company

The company manufactures buses for clients across Australia. One of the main obstacles encountered is the variation in motor design rules across the States, who each have added their own regulations to the Federal Motor Vehicles Act. For instance, NSW alone requires an entry door obstacle detection test for minibuses, which costs a prohibitive $7,500 per test. This requirement prevents the manufacturer from selling minibuses at all.

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As the NSW economy further deteriorates and businesses’ cash flows dry up, the need to cut compliance costs becomes even more urgent and important. It is not enough to make regulation better or to arrest its rate of growth. There must ultimately be less regulation if the competitiveness of NSW businesses is to be maintained.

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Unnecessary regulations must be removed, not just streamlined

The aim should be to reduce the total stock of burdensome laws and regulations

The Better Regulation Office’s 2008 Annual Update: Removing Red Tape in NSW, rightly distinguishes between regulatory burdens and red tape. Regulatory burdens are costs imposed by regulatory requirements, while red tape denotes all those regulatory costs arising from requirements that are irrelevant, unnecessary, duplicative or inconsistent.

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The distinction between regulatory burden and red tape is significant, because it points to two distinct policy goals: streamlining and deregulation. The intention of streamlining is to retain compliance obligations with least administrative cost to business and government. In contrast, the objective of deregulation is to enhance competition and productivity by removing burdensome laws and regulations completely.

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British business academics Tim Ambler and Francis Chittenden have observed that European governments tend to focus on managing regulation, rather than making less of it. They reason that governments are ‘regulatory machines’ and that public servants have a strong propensity to regulate, even when the goal is deregulation. Ambler and Chittenden note that there was a philosophical shift away from deregulation in the UK, when the Blair Labour Government replaced a search for deregulation with a search for ‘better’ regulation.

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Ambler and Chittenden also point out that public servants generally equate announcements of policy change with the implementation of regulatory reform. However, the agreement of new policy positions is no guarantee of a reduction in businesses’ regulatory burden. Part of the problem is that public servants are assessed on lawmaking and statements of intent, not on achieving practical outcomes for business.

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If governments do not set binding targets for reducing total regulatory costs, then there is a high risk that time and resources will be wasted making the unnecessary efficient. Targets applied solely to administrative costs can allow officials creatively to structure policies to fulfil their immediate objectives, at the expense of elements that are not subject to monitoring.

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NSW Business Chamber acknowledges the efforts of the NSW Better Regulation Office to meet the State Plan’s target of conducting and implementing three industry specific red tape reviews of existing regulation per annum over the next three years. We also welcome the Staged Repeal Program, which has reduced the volume of subordinate legislation since 2000 by 126 instruments and 688 pages.

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The Better Regulation Office has responded to NSW Business Chamber’s call for quantitative deregulation targets by claiming that the staged repeal programme is already enabling ‘significant reductions in the stock of existing business regulation’. There are three problems with this argument.

6 NSW Better Regulation Office, Annual Update: Removing Red Tape in NSW, October 2008, p. 1.

7 Tim Ambler and Francis Chittenden, Deregulation or Déjà Vu? UK Deregulation Initiatives 1987/2006, January 2007, The

British Chambers of Commerce, p. 7. <http://www.britishchambers.org.uk/6798219245461475725/deregulation_report_2007.pdf> 8 ibid., pp. 8, 10, 18f.

9 ibid., pp. 11, 29.

10 ibid., pp. 10, 22.

11 NSW Better Regulation Office, op. cit., pp. 7f.

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First, the staged repeal programme cannot be regarded as a special regulatory reduction activity. Rather, it is a routine activity that predates the establishment of the Better Regulation Office. Secondly, the existence of a staged repeal programme by no means guarantees a net reduction in the stock of existing business regulation. While regulations due for appeal may be allowed to lapse, they may equally be remade or their repeal postponed. So the best that can be hoped of the staged repeal programme is that it partly arrests the flow of regulation. Thirdly, even if the total number of regulatory instruments or the total number of pages of regulation were acceptable measures of regulatory burden, the figures provided by the Better Regulation Office are not encouraging. The reduction in instruments amounts to 3% per annum, and the reduction in the number of pages of regulation – which the Office says is more important – amounts to a mere 1% per annum. In contrast, the Victorian Government has committed to reducing the administrative burden of regulation by 15% by July 2009 and 25 per cent in five years.

12 Critically, progress against these targets is measured and reported in

financial terms. The Victorian Government has also committed to reduce the number of principal Acts of Parliament by 20% by July 2010.

13 The latest Budget papers reveal that Victoria is likely to achieve these

targets.14

So compared to NSW, Victoria is achieving more demonstrable results at a faster rate (5% per annum). Accordingly, the NSW Businesses Chamber would encourage the NSW Better Regulation Office to pursue more ambitious initiatives than qualitative assessments of industry-specific red tape and the routine review of regulations due for repeal. The competitiveness of NSW businesses requires an ongoing and systemic reduction of red tape and regulatory burden across all industries; and business confidence in the process requires that definite and measurable reductions are targeted in advance, not just estimated after the fact. Indeed, Appendix A of the Better Regulation Office’s 2008 Annual Update suggests that the NSW Government is not actively committed to deregulation. Of the 59 reforms listed as being beneficial for business, 32 relate to streamlining administrative compliance costs, 13 to removing duplicative or inconsistent requirements, 10 to reducing indirect costs and 4 to influencing financial costs. Not one refers to the repeal of a principal Act or the complete removal of a discrete set of obligations.

In contrast, the Victorian Government repealed 70 principal Acts between July 2006 and June 2008.15

It might be objected that the NSW Better Regulation Office has removed regulations through granting partial exemptions and ending duplication. Yet neither exemptions from certain requirements nor measures to reduce duplication can properly be described as deregulation; for in both cases an underlying regulation remains in force. Furthermore, some of the reforms listed are not beneficial to business at all. For instance, ‘Incentives to reduce liquid waste’ entails an extension of the waste and environmental levy to liquid waste, and therefore an increase

12

Victorian Department of Treasury and Finance, Reducing the Regulatory Burden: The Victorian Government’s Plan to Reduce Red Tape, 2007-08 Progress Report, p. 7. <http://www.dtf.vic.gov.au/CA25713E0002EF43/WebObj/ReducingtheRegulatoryBurden_2007-08ProgressReport/$File/Reducing%20the%20Regulatory%20Burden_2007-08%20Progress%20Report.pdf> 13

Victorian Department of Treasury and Finance, 2008-09 Budget Paper No. 2: Strategy and Outlook, Chapter 5: Economic Reform Agenda, p. 77. <http://www.budget.vic.gov.au/CA257401000ED28B/WebObj/BP2Ch5/$File/BP2Ch5.pdf> 14

ibid., p. 77. 15

ibid., p. 77.

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in the financial cost of regulation.16

The same is true for ‘a trial of new charges for road use by heavy vehicles’.17

These measures may help advance the NSW Government’s policy programme, but their immediate impact is to increase the financial cost of regulation for businesses operating in NSW. Similarly, the Better Regulation Office’s Annual Update includes as benefits for business the signing of an intergovernmental agreement to harmonize occupational health and safety laws, and the formation of a steering committee to respond to a review of the Sydney Convention and Exhibition Centres.

18 To classify these

statements of intent as achievements of regulatory reform is to mistake ongoing bureaucratic processes for final business outcomes. While such processes may be necessary conditions of regulatory reform, they are decidedly not benefits for business and should not be reported as such. The above cases exemplify the limits of qualitative assessments and the need for binding quantitative targets. As mentioned above, such targets are already in force in Victoria. The Victorian Government estimates that its regulatory reduction targets will save Victorian private organizations $154 million per annum by July 2009 and $256 million per annum by July 2011.

19 (Victoria’s method of costing these reforms is discussed in the next

subsection below.) Victoria is also reducing the overall stock of regulation by ensuring the administrative burden of any new regulation is met by an ‘offsetting simplification’ in the same or related area.

20 The Victorian Treasurer has

declared that ‘ministers are required to actively pursue offsets that contribute to an overall reduction in the regulatory burden.’

21

Similarly, the NSW Opposition has committed to reducing total regulatory costs on NSW businesses by 20% over four years, by making red tape and regulatory reduction a key performance indicator for each agency and CEO. The Opposition has also promised to hold a single State minister accountable for reducing red tape and regulation.

22

In commenting on a draft of this submission, the Better Regulation Office maintained that the level of efficiency, simplicity, and effectiveness of regulation is more important than the total volume of regulation. Yet this statement only reinforces NSW Business Chamber’s substantive recommendation that the NSW Government commit to identifying and removing unnecessary regulations, as well as to transparent reporting of its progress.

16

NSW Better Regulation Office, Annual Update: Removing Red Tape in NSW, October 2008, p. 51. 17

ibid., p. 54. 18

ibid., pp. 52, 54. 19

Victorian Department of Treasury and Finance, Reducing the Regulatory Burden: The Victorian Government’s Plan to Reduce Red Tape, 2007-08 Progress Report, p. 8. 20

ibid., p. 7. 21

ibid., p. 9. 22

NSW Liberal-National Coalition, Getting on with Business: Reducing Business Regulation in NSW, 2007, p. 2f.

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The NSW Better Regulation Office should aim to be the national leader in ensuring a systematic and demonstrable reduction in compliance costs for NSW businesses. The adoption of binding quantitative targets is the only objective way to track the performance of the Better Regulation Office, and to persuade business operators and investors that the NSW Government is consistently delivering regulatory reforms of direct benefit to them.

Deriving a meaningful measure of total regulatory burden

It is sometimes claimed that setting quantifiable targets for reducing regulatory burden is a futile exercise, because of the difficulty in measuring the costs incurred by businesses to demonstrate compliance with government regulation. However, other jurisdictions both in Australia and overseas have demonstrated that it is possible to develop a meaningful measure for the cost of regulation. The Standard Cost Model (SCM) is an activity-based costing methodology, which focuses on measuring the cost of regulation from the regulated organizations’ perspective.

23 It provides government with a strong understanding

of the drivers of these costs, allowing for better policy development to combat the growing number of regulatory requirements. The Victorian Government is the only Australian government to set up a detailed framework with specific targets and measurement requirements to reduce regulatory burden. Its Reducing the Regulatory Burden Progress Report states that:

The Victorian Standard Cost Model has been developed to provide a transparent methodology for measuring material changes in administrative burden. The Victorian Standard Cost Model is based on the methodology originally developed by the Dutch Government which has been adopted by more than 20 countries to date, including the United Kingdom, Germany and Austria.

24

Victoria is a member of Standard Cost Model Network – an international working group committed to tackling administrative burdens with the Standard Cost Model as the common approach.

25 Victoria is the only member

that is a subnational government; the other participants are nation-states like the Netherlands, the United Kingdom and France. Victoria’s participation in this international working group demonstrates its initiative and commitment to simplifying regulations and reducing administrative burdens.

23

Victorian Department of Treasury and Finance, Reducing the Regulatory Burden – The Victorian Government’s Plan to Reduce Red Tape, 2006-07 Progress Report, p. 11. <http://www.dtf.vic.gov.au/CA25713E0002EF43/WebObj/RRBProgressReportfor200607/$File/RRB%20Progress%20Report%20for%20200607.pdf> 24

ibid., p. 4. 25

SCM Network, About the SCM Network. <http://www.administrative-burdens.com/default.asp?page=196>

Recommendation 1:

NSW Government to commit to deregulation through binding quantitative targets to reduce the overall stock of existing business regulation.

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Through the Victorian Standard Cost Model, the Victorian Government has been able to estimate the administrative burden imposed by State regulation and set targets for achieving reductions. The targets that have been set translate into a net reduction to savings to business and not-for-profit organisations of $154 million a year by July 2009 and $256 million a year by July 2011. The productivity boost from reducing red tape has the potential to expand Victoria’s economy by up to $747 million a year by 2016.

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The NSW Better Regulation Office has drawn NSW Business Chamber’s attention to the NSW Government guidance tool ‘Measuring the Costs of Regulation’.

27 This document provides detailed advice to agencies on how

to quantify the costs of regulation and suggests the use of either the Standard Cost Model or the Business Cost Calculator (where appropriate) for the proposal. The Office considers that a focus on Standard Cost Modelling alone carries the risk that other compliance costs (such equipment and training) will be neglected because Standard Cost Modelling focuses on administrative costs only. However, the NSW Government’s guidance tool ‘Measuring the Costs of Regulation’ involves only Government agencies, and the outcomes its generates are not subject to public scrutiny. Conversely, the estimates generated by Standard Cost Modelling are derived from direct consultations with businesses, and capture key business administrative burdens such as paperwork and record keeping. The results of Standard Cost Modelling are also expressed in financial terms and (in Victoria) reported publicly in the Budget papers. NSW Business Chamber notes that Standard Cost Modelling is driving regulatory reform in over 20 countries, and is being applied successfully by both the Victorian Labor Government and the British Labour Government. If the NSW Government believes that it has a superior approach to measuring the cost of regulation, then it should be reporting the resultant savings to business publicly and sharing its insights with the international Standard Cost Model Network. The NSW Government needs to be more active in making NSW competitive by reducing the cost of doing business in NSW. It needs to get more involved domestically and internationally to refine regulatory measurements and simplifications, boost transparency and apply this knowledge to generate greater compliance savings for NSW businesses.

26

Commonwealth Productivity Commission, Performance Benchmarking of Australian Business Regulation: Quantity and Quality, November 2008, p. 111. 27

NSW Better Regulation Office, Measuring the Costs of Regulation, June 2008. <http://www.betterregulation.nsw.gov.au/__data/assets/pdf_file/0003/23979/02_Measuring_the_Costs_of_Regulation.pdf>

Recommendation 2:

NSW Government to adopt the internationally recognized ‘Standard Cost Model’, in order to estimate and report systematically the financial costs incurred by businesses in demonstrating compliance.

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‘One in, one out’ approach – lessons from Victoria and the United Kingdom

As noted above, businesses’ repeated complaint is that there is ‘too much regulation’, both in stock and flow terms. NSW Business Chamber advocates zero net growth in red tape through the adoption of a ‘one in, one out’ approach to regulation. This ensures that when governments create a new regulatory burden, at least one existing burden is removed or reduced. It is important to emphasize that ‘one in, one out’ is not a crude formula, but shorthand for a sustained commitment by government to achieve practical reductions in business red tape and regulatory burden, to make quantiative targets transparent, and to hold departments accountable for meeting those targets. The ‘one in, one out’ approach is already in force in the United Kingdom and Victoria. In its report to the British Prime Minister, the Better Regulation Task Force (BRTF) advised that the British Government should adopt the ‘one in, one out’ approach to regulation, so if ministers want to introduce new laws, they first have to either reschedule and/or abandon other proposals (thus stemming the flow of new regulation), or agree to repeal existing laws (thus reducing the stock of existing regulation). The BRTF highlighted that ‘one in, one out’ provides a good balance between the creation of new measures and the simplification of existing rules and regulations. The Government was advised to cost and publicize the regulatory measures removed.

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The British Government accepted all the BRTF’s recommendations – including the ‘one in, one out’ approach – and agreed that this will help release entrepreneurial energy, promote innovation and improve productivity.

29

The British Government declared that:

In order to ensure that the burden of regulation on business continues to be kept to the minimum necessary, the guidance on preparing RIAs [Regulatory Impact Statements] is being amended to require departments to actively consider offsetting simplification measures. The scope for compulsory simplification will have to be set out in an RIA and the justification for the proposed approach explained, particularly in cases where there are no immediate plans to offset.

30

The BRTF also emphasized that the ‘one in, one out’ does not need to elaborate new regimes or procedures; instead the Government needs to make a number of important changes to the existing machinery for managing its regulatory programme.

31 Trade-offs are identified and ministers must choose which regulation is more

important. Victoria has emulated the British Government’s approach to reduce regulation. As noted above, the Victorian Government has committed to: > Cutting the existing administrative burden of regulation by 15% over three years and 25% over five years. > Ensuring the administrative burden of any new regulation is met by an ‘offsetting simplification’ in the same

or related area.

28

UK Better Regulation Task Force, Regulation – Less is More. Reducing Burdens, Improving Outcomes, 2005, p. 7. <http://archive.cabinetoffice.gov.uk/brc/upload/assets/www.brc.gov.uk/lessismore.pdf> 29

UK Better Regulation Executive, Formal Government Response to Better Regulation Task Force Report, 2005, p. 10. <http://archive.cabinetoffice.gov.uk/brc/upload/assets/www.brc.gov.uk/lessismore_response.pdf> 30

ibid., p. 10. 31

UK Better Regulation Task Force, op. cit., p. 33.

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> Undertaking a program of reviews to identify the necessary actions to reduce compliance burdens.32

Victoria is well on the way to meeting its three-year target of achieving annual savings for business of around $256 million by July 2011. All departments now have three-year administrative-burden reduction plans in place and the Victorian Government is making progress on its commitment to reduce the number of principal Acts of Parliament by 20% by 2010.

33

International experience suggests that the ‘one in, one out’ approach works best when executed by seasoned public servants and accompanied by a system of regulatory budgets, whereby department funding is contingent on keeping regulatory burdens on business within a specified limit. This is the system that the NSW Opposition has pledged to introduce. What has been proven not to work is the ‘put up or shut up’ approach, whereby governments call on the private sector to nominate particular regulations to be abolished. Businesses generally fail to come up with substantial examples. This is because it is not isolated regulations that are the problem, but the cumulative effect of many interconnected ones. As Ambler and Chittenden remark:

The call for examples has always been where the system falls down in the past … [I]t is really very difficult to pick out from the complexity of modern business life those particular laws that could be removed without causing the rest to collapse. They all had some reason when they were created and some, often vague, ‘right’ to protect.

34

Those regulations which businesses do nominate are usually subject to lengthy analysis by public servants, before being designated as either necessary, able to be axed, or requiring further study. Eventually, the process loses impetus and the government cites this as evidence that there is no significant regulatory burden on business. The whole cycle is repeated when calls for deregulation again become strong enough to elicit an official response.

35

The complexity of modern regulatory systems means that it is not realistic to assume that ‘It is up to business to bang on the door if opportunities to cut red tape are not being taken up’.

36 The majority of business people in

NSW struggle to find time to understand and fulfil their own compliance obligations, let alone to comprehend the State’s regulatory system and offer detailed solutions. The onus to reduce red tape ultimately lies with the government ministers and agencies that create it in the first place.

32

Victorian Department of Treasury and Finance, Reducing the Regulatory Burden: The Victorian Government’s Plan to Reduce Red Tape, 2007-08 Progress Report, p. 7. 33

Commonwealth Productivity Commission, Performance Benchmarking of Australian Business Regulation: Quantity and Quality, November 2008, p. 111. <http://www.pc.gov.au/__data/assets/pdf_file/0005/84785/quantity-quality.pdf> 34

Tim Ambler and Francis Chittenden, Deregulation or Déjà Vu? UK Deregulation Initiatives 1987/2006, January 2007, The British Chambers of Commerce, p. 21. 35

ibid., pp. 11, 14, 21. 36

NSW Better Regulation Office, Annual Update: Removing Red Tape in NSW, October 2008, p. iii.

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The NSW Better Regulation Office has nine full-time executive and policy staff. Given these resources, it is not unreasonable for businesses to expect the Office to implement a deregulation strategy that incorporates both international and local knowledge, and achieves results to rival Victoria and every other jurisdiction in Australia.

Recommendation 3:

NSW Government to restrict the net growth of new regulations by implementing a ‘one in, one out’ approach to regulating, similar to that already operating in Victoria and the United Kingdom.

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Regulatory functions should be rationalized

In their 2006 New South Wales Audit of Expenditure and Assets, Michael Vertigan and Nigel Stokes drew attention to the large number of agencies in NSW compared to other States. While Victoria has only 11 Budget-dependent agencies, NSW has over 60. Vertigan and Stokes argued that there are ‘significant opportunities for NSW to improve management, simplify budget processes and to reduce duplication’ by extending the process of agency rationalization.

37

Vertigan and Stokes identified ten functional groupings that illustrate possible synergies from combining agencies that produce similar outputs. The intent of their recommendations is not to create unwieldy super-departments, but to retain the identity of smaller agencies while integrating them within larger and stronger administrative structures.

38

Looking at the June 2008 Budget papers, it is evident that the NSW Government has partly implemented Vertigan and Stokes’s recommendations by rationalizing the functions of: > central agency control (one minister); > government services (two ministers); > economic development (two ministers); and > culture, sport and recreation (three ministers). Conversely, the greatest opportunities for NSW Government rationalization appear to be in the following areas: > commercial regulation (currently managed by seven ministers); > human services (five ministers); and > justice and emergency services (four ministers). In addition, the three agencies responsible for natural resources management are spread across three ministers. Appendix A contains a table summarizing the NSW Government’s progress against Vertigan and Stokes’s 2006 recommendations for the rationalization of NSW Budget-dependent agencies. The first two columns present Vertigan and Stokes’s ten suggested agency groupings by function. Columns 3 and 4 compare the current arrangement of Ministries and Agencies against Vertigan and Stokes’s recommendations. Columns 5 and 6 indicate how far each functional grouping is spread across ministers and agencies.

37

Michael Vertigan and Nigel Stokes, New South Wales Audit of Expenditure and Assets, February 2006, p. 29. 38

ibid., p. 29.

Recommendation 4:

NSW Government to explore opportunities to improve management, simplify Budget processes and reduce duplication by extending the process of agency rationalization.

16

Government ministries and agencies must be made more transparent and accountable

Regulatory improvements can be made by more effective measurement of services

The absence of binding regulatory reduction targets in NSW is indicative of a wider Government reluctance to adopt a fully services-based Budget. In their 2006 New South Wales Audit of Expenditure and Assets, Michael Vertigan and Nigel Stokes observed a long-term tendency for the State’s actual expenses to exceed budgeted expenses by at least $1 billion a year. They argued that this fiscal indiscipline is largely due to Results and Services Plans not being fully integrated financial and operating plans for agencies, and not being advanced in a form that can significantly influence the Budget allocation process.

39

Vertigan and Stokes recommended that the NSW Government focus on service delivery, by adopting a form of budgeting in which services are defined broadly, but with sufficient detail to specify the quantity and cost of a service, as well as its quality and timeliness. They emphasized that quantity and cost are conventional elements of any management accounting system, and quality and timeliness are necessary performance indicators for products or services.

40

Vertigan and Stokes stressed that:

The monitoring process should be transparent and rely on agencies’ own reporting as much as possible. Reporting should be against targets produced through the budgeting process … Full performance reporting should occur through financial statements supplemented by quality and timeliness measure reporting … An important underlying principle is that revenue should be measured on actual services, not on a time-based share of the annual appropriation, and an agency’s operating statement should show this.

41

And

[E]very agency should have a qualified chief financial officer as part of the agency’s senior management team.

42

Moreover, unlike other States, NSW does not publish quarterly reports on agency expenditures against Budget allocations in its Government Gazette. It is instructive to compare the Budget papers of NSW and Victoria for 2008-09. The Victorian Budget papers outline major outputs or performance measures, their unit of measurement, the current financial year target, and the expected and actual outcomes for previous financial years. There are also notes to account for discrepancies between targets and outcomes. For instance, the Budget statement for the Victorian Competition and Efficiency Commission (which reviews all regulatory impact statements and advises on the economic impact of significant new legislation) contains all four reporting elements recommended by Vertigan and Stokes for NSW (see Table 2 on p. 18 below). The quantity of

39

Michael Vertigan and Nigel Stokes, New South Wales Audit of Expenditure and Assets, February 2006, p. 20f. 40

ibid., p. 22. 41

ibid., p. 23. 42

ibid., p. 27.

17

the Commission’s services is measured by the number of regulatory impact statements (RIS), business impact assessments (BIA) and Standard Cost Model (SCM) assessments that it performs. Quality is estimated by a service provision rating based on the Commissioner’s assessment of Secretariat performance, where an 80% rating is the common goal across the Department of Treasury and Finance. Timely delivery of the Victorian Competition and Efficiency Commission’s services is targeted through a 100% completion of inquiry reports by the due date, and a 90% completion of the initial assessment phase of regulatory impact statements, business impact assessments and Standard Cost Model estimates within ten working days of receipt. Finally, the total monetary cost of the Commission’s activities is targeted and reported. Similarly, the Victorian Budget papers report on the Better Regulation Unit’s progress in meeting its targets of cutting the existing administrative burden by 15% by July 2009 and 25% by July 2011, and of reducing the number of principal Acts by 20% by 2010. The Budget papers indicate that Victoria is on track to meet its 2009 burden reduction target and that 70 principal Acts have already been repealed.

43

In contrast, the NSW Budget papers for 2008-09 do not focus on service delivery in the manner recommended by Vertigan and Stokes and practiced by the Victorian Government. The 2008-09 Budget papers do take a step in the right direction, by replacing programme statements with ones featuring service measures and summary operating statements drawn from agencies’ Results and Services Plans, which in turn integrate State priorities.

44

However, there remains a lack of clarity and accountability regarding agency performance, because the timeliness of government service delivery is not reported, and agencies’ budget allocations are not linked directly to their efficiency in meeting State Plan priorities and targets. Tables 3 and 4 show the 2008-09 Budget statements for the service group assisting agency implementation of the NSW Government’s State Plan (financials and key result indicators, respectively). It is difficult to discern from these statements which agencies are responsible for the final delivery of State Plan priorities, or how effectively these priorities are being implemented. The State Plan priority of cutting red tape is mentioned, but no service delivery targets, outcomes or estimates are reported against this priority, despite a year of operation of the Better Regulation Office. The only red tape achievement reported in the 2008-09 Budget papers is the establishment of the Office itself.

45

The lack of meaningful red tape reporting in the Budget papers can be traced back to the unambitious targets for reducing red tape set forth in the State Plan. All that the NSW Government required of itself was to: > establish a Better Regulation Office to implement an effective and transparent gate keeping process; and > conduct and implement the findings of three industry specific red tape reviews of existing regulation per

annum over the next five years.46

As noted in a previous section, these targets only commit the Government to a process, not to the achievement of real, measureable cost savings for business.

43

Victorian Department of Treasury and Finance, 2008-09 Budget Paper No. 2: Strategy and Outlook, Chapter 5: Economic Reform Agenda, p. 77. 44

NSW Treasury, Budget Statement, Budget Paper No. 2, p. 3 - 4. 45

NSW Treasury, Budget Estimates, Budget Paper No. 3, Vol. 1, p. 2 - 4. 46

NSW Government, State Plan: Reporting Progress: Growing Prosperity Across NSW: Priority P3: Cutting Red Tape, last updated 26 June 2008. <http://www.nsw.gov.au/stateplan/index.aspx?id=fafcfbf5-569f-48d2-939e-d7cc76265da7>

18

Table 2: Victorian Government Budget 2008-09: Service Delivery Statement for the Victorian Competition and Efficiency Commission, Department of Treasury and Finance

19

Table 3: NSW Government Budget 2008-09: Budget estimates for service group assisting agency implementation of the State Plan – financials

20

Table 4: NSW Government Budget 2008-09: Budget estimates for service group assisting agency implementation of the State Plan – key result indicators

The 2008-09 NSW Budget papers announced that new processes and systems will be implemented to drive accountability for service delivery and improvement, and to strengthen the monitoring of agency performance by the Cabinet Standing Committee on Agency Review and the Performance Review Unit within the Department of Premier and Cabinet.

47

In order to ensure more transparent reporting and greater ministerial accountability, any reforms of Budget processes must include the adoption of a fully services-based Budget, with performance targets that are both regularly tracked and publicly assessed. In terms of the activities of the NSW Better Regulation Office, Budget reporting should include an adequate service delivery report of both regulatory impact measures and regulatory streamlining and deregulation initiatives.

47

NSW Treasury, Budget Statement, Budget Paper No. 2, p. 3 - 4.

Recommendation 5:

NSW Government to make ministries and agencies more transparent and accountable, by specifying in the Budget both the quantity and cost of delivering major services, as well as their quality and timeliness.

21

Business suppliers to the NSW Government must be paid on time

Another area requiring greater transparency and accountability is the payment of business suppliers to the NSW Government. Several member companies of NSW Business Chamber are currently owed millions of dollars by NSW Government agencies, who have delayed payments as long as 60 to 120 days. These members have been unable to ascertain from relevant agency officials or ministers when they will receive the monies owing to them or to whom they can appeal for redress. Naturally, the lack of Government responsiveness around late payments is intensely frustrating for NSW businesses, especially as they are currently struggling with trickling cash flows, devalued land assets and limited access to loan capital. NSW Business Chamber has sought clarification on Government procedures regarding late payments from the NSW Treasury, because that department is responsible for maintaining and monitoring Procurement Policy. We were referred to the rules of payment contained in Public Finance and Audit Regulation 2005, NSW Treasurer’s Direction 219.01 and NSW Treasury Circular 06/26. These documents stipulate that unpaid suppliers can take the matter up with the nominated complaints officer for the authority, and that the Head of the authority may award penalty interest if the payment is not made by the end of the month following that month when an invoice is received. But while NSW Government regulations indicate that Heads of authorities may award late penalties, it remains unclear who is ultimately responsible for ensuring payments are made within reasonable timeframes. NSW Business Chamber subsequently put the following questions to the NSW Treasury: (1) Is it NSW Government policy that agencies which have not paid suppliers for satisfactory work are

required to do so only by the end of the month following that month when an invoice was received (if the contract does not specify a time of payment)? In other words, is it consistent with NSW Government policy that a small business supplier submit an invoice on 1 November and not be paid the due amount until 31 December?

(2) Is the decision to pay (or not pay) penalty interest on the outstanding amount solely at the discretion of the Head of the relevant authority (or his or her appointee)?

(3) Are accounts complaints officers governed by common rules of procedure, or does each agency determine how they deal with payment complaints?

(4) To whom does the supplier appeal if he or she is dissatisfied with the accounts complaints officer’s handling of the problem?

To date, NSW Business Chamber has received no answer to these questions, either from the NSW Treasury or the Office of the Treasurer. We therefore call on the Better Regulation Office to take up this issue, as part of its responsibility to support regulatory reform and advocate best practice regulation-making across Government.

22

With a slowing State economy, NSW businesses would much rather be paid now than to be paid later with interest. NSW Business Chamber members would especially welcome the NSW Government matching the Victorian Government’s ‘fair payments clause’, which has been in effect since 1 July 2007. This clause requires government departments to pay small business suppliers under contracts up to the value of $3 million within 30 days, and to pay penalty interest rates on late payments. The Federal Government has recently matched this commitment for contracts up to the value of $1 million. Conversely, any failure by the NSW Government to address the problem of delayed payments will only reinforce the perception that NSW is a costly place in which to do business.

.

Recommendation 6:

NSW Government to align its procurement practice with that of the Victorian Government and other jurisdictions, by committing to pay small business suppliers within 30 days. There also needs to be a consistent whole-of-government policy on the awarding of late penalties. The NSW Government should in addition nominate the minister and agency responsible for monitoring and enforcing the timely payment of private suppliers by NSW Government agencies.

Contacts Dr Matthew Steen – Policy Adviser Tax & Competitiveness 02 9458 7259 matthew.steen@nswbc.com.au Aldina Aljukic – Policy Analyst 02 9458 7576 aldina.aljukic@nswbc.com.au