Regulatory Impact AssessmentsThe UK approach

Helen McColm, June 2014

• My aim is to explain the main features of the UK approach to Impact Assessment (IA)

• I will talk first about (a) the basics and main steps and (b) organisation

• If we have time, I’ll talk about methods and measuring the impact on SMEs

• I have supplied extra information on UK Best Practices and case studies – for you to read afterwards

Structure of the session

I want us to be the first government in modern history to leave office having reduced the overall burden of regulation, rather than increasing it.”

Prime Minister’s letter to all Cabinet Ministers, 6 April 2011

Context of regulation and IAs in UK

• An Impact Assessment is:– A continuous process to help think through the reasons

for government intervention– A tool to be used to help develop policy– Stakeholder management

• An Impact Assessment summarises the rationale for Government intervention; the options considered and the expected costs and benefits

• Available guidance provides some consistency:– “Green Book” (methods for all Government analysis)– Better Regulation Manual (main IA rules)– Impact Assessment Toolkit (extra advice on Ias)

The fundamentals; what is an IA

Why are IAs important?

Better results• Designing new policy interventions is

tricky (..failed regulations in the past)

• A good IA helps get better outcomes

– ensuring there is a clear rationale for intervention

– using evidence to properly understand the policy impacts (cost, benefits, and risks)

– supporting growth by minimising and offsetting burdens on business, particularly SMEs

– ensuring that new policy interventions achieve their objectives and (where possible) are improved

Coordination, transparency

• The IA process can help with policy consistency, and promotes consultation

• An IA can inform debates in and out of Government

• An IA records the reasons for choices, and the way public inputs were used

• “Peltzman effect” – the tendency of individuals to respond to safety regulations by engaging in more dangerous behaviour; – Example of seatbelt laws being introduced in America.

Rather than reducing road deaths, Peltzman found no change in auto-related deaths as the seatbelt laws changes the incentives drivers faced.

– The perceived safety provided by the seatbelt reduced the cost of driving recklessly, so more drivers drove more dangerously. The increase in reckless driving not only increased risks for other drivers, but also for pedestrians and cyclists.

– Overall seatbelts saved lives in accidents, but the total number of auto-related fatalities did not change.

Failed Regulation - Peltzman effect

When IA is used

• The UK uses IAs for regulatory proposals (we use other analysis documents for spending and tax measures)

• Government Ministries and agencies must create IAs (and some public agencies that are independent of Ministers also do IAs by choice)

• Currently, proposals that could cost over £1 million need a standard IA. We also do limited-scope analyses for low-cost or deregulation proposals (called “triage statements”), and these get lighter checks.

• In 2013, 333 final IAs were published alongside legislative proposals, plus some “consultation” and evaluation IAs (see http://www.legislation.gov.uk/search/impacts)

Two recent Ias; 1

• IA on energy bills (EU)• Green RPC opinion• Net cost to business

of £1.5 million a year• 10 replies to

consultation • Relies on cost data• 19 pages

Two recent IAs; 2

• IA on night flights to London airports

• Green RPC opinion• Net impact was not

quantified, but the IA does gives data on number of flights

• 23 pages• Consultation got 800

replies, then 1,200 replies

Domestic Policies: IA Steps

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7

Policy Cycle - ROAMEF

• Identify ‘market failure’ or socially undesirable outcome that calls for regulatory intervention– Economic theory is useful at this stage

– BUT market failure alone does not justify intervention

• Use evidence to understand scale of problem• Consider if problem is real or a perception issue• Ultimately, decision to intervene is political

Step 1: Identify the problem

Step 1: Rationale for intervention

• Identify what the policy intends to achieve• Objectives should be

– Specific

– Measurable

– Achievable

– Relevant

– Time-bound

• Particularly important for external stakeholders

Step 2:Specify Objectives

• Consumer protection regulation, this was revised in 2003 and is undergoing a review currently

• Stakeholders are questioning whether the earlier review achieved its objectives – apparently it is very hard to tell since they were not measurable

• Not this time!

Why is this important?

• Identify ALL the viable options– No intervention (do nothing or do minimum)

– Prescriptive regulation

– Alternatives to regulation

• Only present genuine options to stakeholders– For straight-forward problems where there may be a single,

simple objective to be achieved, consideration of two to three different options may be deemed appropriate.

– However, more complex problems, with multiple objectives would require the consideration of a larger number of viable options.

Stage 3: Specify Policy Options

• Identify impacts by issue type:– Economic / financial (e.g. small businesses,

wider economy, competition)

– Social (e.g. human rights, equalities)

– Environmental (e.g. greenhouse gas)

• Identify groups affected– Distributional impacts are important

Step 4: Identify the Impacts

• Using Green Book methodology & IA Toolkit in the Better Regulation Manual

• Identify groups affected• Monetise costs and benefits as far as possible• Clearly highlight direct costs to business• Rigorously assess non-monetary costs / benefits• Explore risks and sensitivities

Step 5: Value Costs and Benefits

• Identify who is responsible for enforcement• Consider Principles of Good Regulation and

Hampton Principles• Outline aims and timetable for implementation• Identify stakeholders and plan communication• Consider risk management for delivery• Consider how this will fit with existing initiatives

Step 6: Enforcement

• Plan your evaluation in line with Magenta Book• Establish what data collection is required• Gather data during implementation phase• Evaluate policy using a PIR• Consult with stakeholders re policy effectiveness

Step 7: Evaluation

Departments (Ministries)

Must follow better reg rules, inc. meeting OITO

Must prepare impact assessments setting out cost of new regulation on business

and get validated by RPC

Must clear all new regulation with RRC

Reducing Regulation Cabinet sub-Committee (RRC)

Makes final decisions on agreeing new regulations that affect business (Chaired by Vince Cable)

BRE

Sets the regulatory Framework rules

Works with departments to implement Better Reg

principles

Advises Better Reg Minister on business-

facing regulatory proposals across Govt

Board Level Champions

Better Regulation Ministers

Regulatory Policy Committee (RPC)

Provides an independent assessment of the cost

of new regulation on business

Scrutinises departmental impact assessments to ensure fit for purpose

Better Regulation

Units (BRUs)

Organisation

The Regulatory Policy Committee

• An independent advisory body providing external scrutiny on the quality of evidence for government regulatory proposals

• Eight Committee members:

• Supported by a Secretariat of civil servants– Policy officials and economists

‒ Michael Gibbons, Chair

‒ Sarah Veale‒ Martin Traynor‒ David Parker ‒ Jeremy Mayhew ‒ Alex Ehmann ‒ Ian Peters ‒ Ken Warwick

Consultant Energy Sector, Business

Trades Union Congress, Union Group

British Chambers of Commerce, Business Group

Academic, Professor of Economics

Adviser / Councilman, Public/Private Sector

Institute of Directors, Business Group

CEO of the Institute of Internal Auditors, Business

Consultant, Economist

• All Opinions have included a Red, Amber or Green flag;– RED: The IA is ‘Not Fit for Purpose’. Major concerns over the

quality of the evidence and analysis and overall quality of the IA that must/need to be addressed.

– AMBER: The IA is ‘Fit for Purpose’. However, we will set out areas of concern with the IA which should be resolved so as to improve its contribution to the final decision made. (Only used at consultation stage)

– GREEN: The IA is ‘Fit for Purpose’. No significant concerns or some minor issues where the IA that could be improved to deliver greater clarity or to aid understanding.

Ministers have said that any IA receiving a RED Opinion must be amended and resubmitted to the RPC for a new ‘Fit for Purpose’ Opinion prior to submission to RRC

RPC opinions

Departments send IAs to RPC for scrutiny

IAs with RPC Opinions go to RRC for approval

1

3

Opinions issued to departments2

Departments Develop IA and submit to

RPC before a formal clearance is requested

from RRC

RRC

Makes final decision on regulations

RPC Scrutinises IAs:

Red (“Not Fit for Purpose”) or Amber/Green (“Fit for

Purpose”) flags given

Overview of clearance process for IAs

Low

Cos

t

Does my measure regulate or deregulate business, or concern the regulation of business ?

DEPARTMENTAL TRIAGE

De-

regu

lato

ry

Red

Tape

Ch

alle

nge

Statement of New Regulation #

FINAL STAGE

Other measurese.g. public sector

Full IA required

RPC Opinion

Reducing Regulation Committee Clearance

RPC OITO Validation #

Reducing Regulation Committee Clearance*

RPC Opinion*

RPC Confirmation

Full IA required*CONSULTATION

STAGE*

•* not applicable if no formal consultation planned / undertaken•# only applies to measures that are in scope of One in, Two out• zone of discretion : departments decide on level of appraisal and ex ante scrutiny required.

Better regulation ‘units’

• Most Ministries have a few staff responsible for better regulation; better regulation ‘units’ (BRUs)

• They communicate IA rules, and liaise with BRE • Some, e.g. Environment Ministry BRU, work on

regulation strategy and to improve existing rules

27

Economists in Ministries

• There are currently 22 recognised professions in Govt, each led by a head of profession including;– Economists

– Statisticians

– Social Researchers

– Scientists and Engineers

• The analysts and others have dedicated training, networking meetings etc

Contact; helen.mccolm@bis.gsi.gov.ukBRE website: •https://www.gov.uk/government/policies/reducing-the-impact-of-regulation-on-businessUK guidance on IA (and SMEs, competitiveness)•https://www.gov.uk/government/publications/better-regulation-framework-manual UK IAs; http://www.legislation.gov.uk/search/impacts Regulatory Policy Committee latest reporthttps://www.gov.uk/government/publications/regulatory-policy-committee-scrutiny-in-2013-improving-the-evidence-base-for-regulation

• Measuring impacts on SMEs

• Measuring impacts

Section 2

• Most policies create winners and losers• Need to capture distributional effects• Need to identify affected groups (e.g. small

businesses, specific groups in society)– Current policies focus on the impact on small

businesses.• Previously; Small Firms Impact Test, Micro

Business moratorium• Now; Small and Micro Business Assessments

(SAMBA)

Distributional Impacts and SMEs

• Active consultation with Small firms through a wide variety of means at every stage of policy process:– Focus groups– One to one meetings– Open forums– Estimates of the number of firms impacted– State number of firms responded

• Detailed discussions with representative bodies: – Proportion of overall burden of regulation on small

business estimated– Unintended consequences explored

Small Firm Impact Test – old test

• All measures that come in to force after 31 March 2014• Because smaller business (up to 49 employees) -

including micro-businesses (up to 10 employees) - suffer disproportionately from the burden of regulation

• The default assumption for SaMBA is that where a large part of the intended benefits can be achieved without including smaller businesses, an exemption will be applied.

• The policy should establish whether it is necessary to extend measure to micros and/or small businesses at the very outset of policy development

• BRE checked 25 early asssesments and will continue to monitor

New Small and Micro-Business Assessment

33

Small & Medium Business Assessment (SaMBA)

• Policy-makers asked to consider a range of mitigating options– default option is exemption

• Choice must be backed by analysis of distribution of costs and benefits

• SaMBA now being checked

“Mitigation Menu”

Full Exemption

Partial Exemption

Extended Transition Period

Reduced requirements (e.g. reporting, record-keeping)

Reduced fees

“De minimis” rules

Dedicated support (e.g. guidance, training)

Direct financial aid

Opt-in / voluntary solutions

When should an exemption be applied?

LargestSmallest

100%

Extreme case : marginal cost of extending regulation to smaller business actually detracts from overall net

benefit of measure. Very strong case for applying exemption

Strong case for including all businesses in scope of regulation. Without inclusion of smaller businesses,

regulation unlikely to achieve majority of intended benefits

Net benefit of inclusion the same for all sizes of business. No evidence of disproportionate burden on

SMEs ?

Strong case for applying an exemption. Marginal benefit of extending the regulation to smallest

businesses looks very low

Size of business

Net benefit of regulation

SaMBA mitigation, 25 early tests

Approach to measuring impacts

• Important to establish ‘counterfactual’• What would realistically occur if no action is

taken– Different for EU and domestic regulation

– EU: policy options don’t include “do nothing‟ (i.e. not implementing a directive). Rather, the IA should set out clearly the minimum required to implement in the UK the decision taken at EU level.

• Baseline to assess other options against• Important for post implementation review

The Do Nothing option

• Road building scheme to maintain the major highways in UK

• Do nothing option unrealistic to claim that the benefits of the road network would no longer occur

• What would be the likely alternative levels of investment without the program

• Minor investment program• Investment in a substitute form of transport

Example Do Nothing option

Proportionality pyramid

Proportionate analysis

• Estimate where appropriate and proportionate• Quantifying the effect - e.g. 1000 planning

applications per year, 100 hours of management time, 500,000 new houses built per year

• Monetising the effect - putting a value on the scale of impacts – For non-market impacts stated preference and

revealed preference techniques – Standard measures for health impacts (QUALY), time

saved and lives saved (both DfT)– Non wage labour costs

Quantification and monetisation

• The Standard cost model provides a framework methodology for measuring administrative costs

Standard Cost Model

Activity Cost = Price x Quantity

= (tariff x time) x (population x frequency)

Example•an activity takes 3 hours to complete (time) and the hourly cost of the member of staff in the business completing it is £10 (tariff). •price is therefore 3 x £10 = £30. If this requirement applied to 100,000 businesses (population) who each had to comply 2 times per year (frequency), the quantity would be 200,000. •Hence the total cost of the activity would be 200,000 x £30 = £6,000,000.

Standard cost model example

• NPV is a policy’s total costs and benefits using:– Appraisal period

– Discount rate

– Profile of costs and benefits

• Equivalent Annual Net Cost to Business:– Estimation of annual cost of policy in One-In Two-

Out (OITO)– Adjusts business NPV so it appears on an annual

basis– Rebases the value into 2009 prices (consistent

across government)

Net Present Value and EANCB

• Based on principle that generally people prefer to received goods and services now vs. later

• Compares costs and benefits that occur in different time periods

• Green Book recommends discount rate of 3.5% based on;– Pure time preference – Assumption of per capita growth in consumption, resulting in

lower marginal utility– Catastrophic risk

• Separate concept from inflation

Discount Rate

• It may be the case that the costs but not benefits can be monetised. The use of indicators may help further qualify non-monetised costs and benefits

• Analysis should use a systematic approach– Appraisal summary table

– Explicit scoring and weighting

– Multi-criteria decision analysis

Costs, Benefits – Non-Monetised

• Outcome of many policies is uncertain– Clearly list key areas of uncertainty

– Identify risks so they can be monitored, and transferred (where possible)

• Adjust for optimism bias• Conduct sensitivity analysis

– this does not just mean +/-20% of the best estimate!

• Use pilots for high impact, novel policies

Risks and Uncertainty

• The One-In, Two-Out system focuses on direct impacts (costs and benefits) to business– Direct impacts: first order impacts

– Indirect impacts: second round impacts

• Includes expenditure and other adjustments

Direct Impacts on Business

• Direct: result directly from the implementation or removal/simplification of the regulation. More than just direct expenditure. Also restrictions on how an agent should act / operate e.g. Working Time Regulations, has a direct cost although this may not necessarily be direct expenditure. (e.g. adjust allocation of staff or working processes).

Direct effects

• Indirect: If the effect happens after something else happening first (as a result of the regulation). The impact on the potential demand for the goods or services of businesses, e.g. manufacturers of required equipment or providers of training for staff.

• Market dynamics

Indirect effects

• Some examples of how we have conceptualised some of the these concepts in real policies

• Case studies of some of the concepts– Direct vs Indirect effects

• New entrants• Voluntary measures• Removing inefficient uses of resources• Behavioural change• Displaced economic activity• Pass through

– Deregulation– Impacts on non-compliant firms

Section 3, extra info

• New entrants– Initially impacts on new entrants were considered

to be indirect– changed to make it clear that impacts on new

entrants should be treated in the same way as impacts on existing businesses.

– estimates relating to new entrants would normally only be accepted in respect of historical ‘churn’ in the industrial sector, drawing upon official data, rather than more speculative scenarios of growth in the number of businesses

– Revocation of the Construction (Head Protection Regulations) 1989

Direct vs Indirect

• Revocation of the Construction (Head Protection Regulations) 1989

• The policy simplified regulations regarding head protection on construction sites. This is thought of deregulatory overall but costly to existing business because of transition costs

• New entrant directly benefited from the reduced regulation with no transition costs

Example

• Where business is given an option to act questions often arise as to whether the impacts of their actions are direct or indirect.

• The principle is that where the regulation was the only thing preventing the business from acting, and this is supported by evidence, then the impacts can be considered direct.

• When both the removal of the regulation and other factors are required, for example innovation to take advantage of the new space, then impacts are indirect

Voluntary Measures

• Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2011

• This policy allowed credit unions to increase membership and offer more services. It was clear from the evidence provided that the affected businesses wished to grow and were only being prevented from doing so by the regulations.

• The costs and benefits to firms of expanding were therefore considered direct

Examples

• Orphan Works• Orphan works are copyrighted works whose

author is unknown. This policy allowed the use of Orphan works, subject certain safeguards

• One of the main expected benefits of this policy was from new businesses that might be created to take advantage of the newly available material

• As these benefits would only arise as a result of innovation from business they were considered indirect

Examples

• Gambling Act 2005: Triennial Review of Stakes and Prize Limits

• There is a limit on the maximum value of stakes and prizes used in gaming machines. The policy was to increase this limit, allowing businesses to make greater profits from higher value machines

• As it would be reasonably straightforward for businesses to move to higher value machines it was accepted that the regulation was the only thing that prevented businesses from gaining these benefits

• The benefits were therefore considered to be direct

Examples

• Removing regulations means that resources are no longer used in complying with those regulations. In some cases this can result in reduction in work for businesses, e.g. lawyers and business services firms.

• In these cases it should be assumed that by removing the regulation the policy allows these resources to be re-allocated to a more efficient use, any transition costs of the re-allocation of these resources should be considered indirect

Removing inefficient use of resources

• Where a policy works by changing the landscape such that individuals may chose to alter their behaviour the impacts of this behavioural change on businesses should be considered indirect as it results from the actions of the individuals not directly from the regulation

Behavioural change

• Amendment to the Energy Act 2008 Powers to Implement and Direct the Rollout of Smart Meters

• Smart meters are a new form of gas and electricity meter that provides the customer with more information about their energy use.

• The smart meter also provides the supplier with more information allowing for more targeted tariffs. The policy was to ensure the roll out of smart meters. If smart meters result in more efficient use of energy this could have large benefits for business users.

• However these benefits were considered indirect as they only result if business customers chose to change their energy use not as a direct result of having a smart meter

Examples

• Proposed changes to Part L of the Building Regulations 2013

• The policy amended the building regulations to increase energy efficiency standards. The measure imposed a cost to builders but a benefit to the eventual occupants of buildings of lower heating costs

• As the lower costs would be an automatic result of the more efficient buildings and not require a change in behaviour they were considered to be direct

• The policy was therefore zero net cost as the energy savings to non-domestic consumers were expected to exceed the costs to developers

Example

• If a policy bans, severely restricts or makes more expensive a particular economic activity then this may result in an increase in other, substitute, activities. There may therefore be some increased profits in other areas of the economy.

• These benefits are considered to be indirect while the lost profits from the economic activity that has been banned are considered direct

Displaced economic activity

• Prohibition on the sale of tobacco from vending machines

• This policy banned the sale of tobacco products from vending machines. This resulted in a loss of profits that would have been gained from these sales. This cost was considered direct.

• Consumers unable to purchase tobacco from vending machines may now choose to purchase more tobacco from retailers or to consumer more of other products. Any additional profits from either of these activities were considered indirect

Example

• When a regulatory burden is placed on a business they will have to decide how to respond. They may increase prices, cut wages, reduce investment or reduce dividends.

• In reality they will regularly change all of these and it will be impossible to relate changes to specific regulations.

• Agreed position that when a cost is paid by an agent on behalf of a principle this should be considered a cost on the principle not a cost on an agent that is passed through

Pass through

• To have the effect of reducing the scope of government regulation, including the removal of existing regulation, or amendment / recasting that reduces the scope of existing regulation

• The definition of deregulation is based on the outcome of a policy and not the legislative vehicle used to enact it. As such if a new piece of legislation removes a regulatory burden from business then this is still considered deregulatory

Deregulation

• When legislation sets a maximum price businesses can charge for a good or service but allows business to freely charge less than this then an increase in the price can be considered deregulatory.

• This change increases business freedom as they may choose to charge a higher price but may also choose to continue charging the same price. This does not apply if the price is fixed and businesses are forced to increase charges as a result of the change.

Increasing a maximum regulated price

• MoT Fee Review • The maximum amount a firm can charge is fixed

by legislation. Businesses are free to charge any amount they wish below the maximum. The policy was to increase the maximum.

• This was considered deregulatory as MoT providers could choose to continue charging the current price

Example

• When calculating both the NPV and EANCB of a policy any costs that are incurred as a direct result of non-complaint activity should not be included.

• This includes both costs from non-compliant activity that is now prevented (e.g. lost revenue from prevented theft) and costs of punishments (e.g. fines).

• These impacts should still be discussed within the IA and monetised where possible

Impacts on non-compliant actors

• When a policy results in an increase in the level of fines and penalties incurred the cost to non-compliant businesses of paying these fines should not be included in the NPV and EANCB.

• The revenue from the fines should be treated in the same was as any other benefit. The cost should still be monetised and discussed in the IA.

• This only applies in cases where there is strong evidence of under compliance, normally when the policy specifically relates to fines and penalties

• Usually assume 100% compliance with any policy

Fines and penalties

• Businesses often take out insurance against liability cases. Any costs these firms are forced to pay as a result of non-compliance, including legal costs, will ultimately be passed on to insurance companies. This is best understood by breaking down the transfers into separate costs and benefits.

• There is a cost to the business as a result of non-compliance; this should not be included in either the NPV or the EANCB. The insurance then pays out resulting in a benefit to the business and an equal cost to the insurance company.

• This cost is not included in the EANCB because it is indirect (see pass through) and is not included in the NPV because it is a transfer and not a true resource cost

Insurance