ria0226lahore.ppt

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Introduction and Principle of Regulatory Impact Analysis and Issue of RIA in Japan

Introduction Principle of RIA Procedure of RIA Content and toolkit of RIA Competition Analysis Issue of RIA introducing Pakistan Concluding Remark

Takuya Nakaizumi, Professor of Kanto-Gakuin University 24th Feb-2013

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1. Introduction(1) We define “regulation” as…

Regulation has been defined as “a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by the threat of sanction

The Policies to be prescribed in Article 9 of the Act (i.e. GPEA) and specified by Cabinet Order shall mean the following:Policy pertaining to introduction and abolishment of regulation (any effects of restricting the rights of the public or imposing obligations on the public

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1. Introduction (2)regulation and primal principle

Regulation has been defined as “a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by the threat of sanction.”

In market oriented economy, competitive market provide best distribution of resources and allocation in economy.

It is the primal principle for regulation is not to interfere any market activity in perfect competition.

Thus there must be no regulation, if the competitive market would operate perfectly.

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1. Introduction (3) We divide regulation into two category.

Unfortunately economic reality is far from perfect competition.

In addition, market needs some sorts of regulation such as property law or contract law that makes market work.

we can divide regulations two categories, 1. complement for market operation such as

property law or contract law. 2. general regulation that correct market failure or

imperfect competition caused by externality and natural monopoly that we mainly forces on

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1. Introduction (4) General regulation can be divided into two category further.1. economic regulation 　 →　 competition assessment

Amendment of imperfect competition or natural monopoly, typically refers to government-imposed restrictions on firm decisions over price, quantity, and entry and exit.

2. social regulation → cost benefit analysisThat mainly correct the problem caused by externality and information asymmetry, typically in the area of health, safety and environment.

Competition or Anti-trust policy

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1. Introduction(5) Principles of regulation

Accountability

Regulators should be able to justify decisions and be subject to public scrutiny.

Proportionality

Regulators should intervene only when necessary. Remedies should be appropriate to the risk posed, and costs identified and minimized.

Consistency

Government rules and standards must be joined up and implemented fairly.

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1. Introduction (6) Principles of regulation or regulatory system Targeting

Regulation should be focused on the problem and minimize side effects.

Transparency

Regulators should be open, and keep regulations simple and user-friendly.

Regulation should be simpler:

Producers find it very difficult to comply with the rules which are quite complex and technical.

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1.Introduction (7) what is RIA?

From OECD documents, Regulatory Impact Analysis (RIA) is a systemic

approach to critically assessing the positive and negative effects of proposed and existing regulations and non-regulatory alternatives.

As employed in OECD countries it encompasses a range of methods.

At its core it is an important element of an evidence-based approach to policy making.

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1.Introduction: (8)Implementation Guidelines of RIA in Japan It is important to improve the quality of regulations

and to deepen the understanding of regulations among not only interested parties but also the general public by releasing the results of Regulatory ex-ante Evaluation.

For objective evaluation, it is desirable to quantify or express in monetary value costs and benefits to the extent possible. If impossible, costs and benefits shall be explained clearly in a qualitative way.

→ We set Implementation Guidelines for RIA (ex-ante Evaluation of Regulations)

(4) RIA became mandatory from 2007

The Cabinet Order specifies

Regulation (from October 1st ,2007)

☆Government Policy Evaluations Act (GPEA)(Conduct of ex-ante evaluation)Article 9 The head of an administrative organ shall carry out the ex-ante evaluation when they intend to take a decision on policy pertaining to individual project of research and development, public works, or official development assistance, or any other policy that meets the following conditions, and to be specified by Cabinet Order.

1. It is expected that the policy has considerable impact on the lives of people and/or society and the economy, or a large amount of expense is incurred before the aims of the said policy are achieved.

2. It is an established knowledge that the method for acquiring information on policy effects and other methodology required for the conduct of ex-ante evaluation have been developed.

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1. Introduction (9) content of RIAThe Japanese Guidelines require that an

evaluation report shall contain…

Purpose, contents and necessity of regulations Analysis of costs and benefits Setting the “Baseline”, Analyzing each element of costs and benefits,

and Including secondary or indirect impacts

Analysis of cost-benefit relationship Cost-benefit Analysis, Cost-effectiveness Analysis, Cost Analysis Comparison with alternatives (It is desirable.)

View of experts and other related matters Time or conditions for review

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(10) Example of RIA : regulation to check safety of lithium-ion batteries before shipment1. Purpose

This is a regulation to prevent fire accidents caused by lithium-ion batteries which tends to be on the increase recently.

2. Content of regulationThe regulation provides technological standards regarding the safety of lithium-ion batteries and obliges the firms who have registered to check the conformity of the batteries before shipment.

3. Necessity In order to prevent accidents caused by lithium-ion batteries, it is necessary to set up mandatory rules with unified standards which must be compulsory for checks undertaken before shipment.

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Baseline 1. It is estimated that without regulation, there will

be 100 accidents per year.

2. 10% of them will be serious accidents which will entail compulsory recall.

3. Each recall cost is estimated at 1billion yen (about 9 million dollars) .

Thus the total costs of accidents each year would amount to more than 10 billion yen (about 90million dollars) in a baseline case.

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Analysis of costs and benefitsBenefits: If regulation accidents are completely

eradicated (100%) , the benefits would amount to about 10 billion yen.

Costs: Costs are made up mostly of compliance costs which are anticipated to be 1.4 billion yen (about 12.6 million dollars) each year, which includes 0.4 billion yen (about 3.6 million dollars) of depreciation and 1 billion yen (about 9 million dollars) of labor costs of the 100 testing facilities around country.

Net benefits (Benefits minus Costs) amount to 8.6 billion yen (about 78 million dollars)

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Comparison with alternatives : self-regulation with technological standards

Benefits : with self regulation the compliance rate is estimated at 30% which would bring about 3 billion yen (about 27 million dollars) on benefits.

(Total costs of recalls are estimated to be more than 7 billion yen (about 63 million dollars) which is less than the baseline case of about 3 billion yen.)

Total compliance costs amount to 420 million yen (1.4 billon yen times 30 ％ )

Net benefits are about 2.58 billion yen.

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2. Principle of RIA (1) Role of RIAas an aid to political decision-making

Impact assessment is an aid to political decision-making, not a substitute for it. The impact assessment informs the political decision-makers of the likely impacts of proposed measures to tackle an identified problem, but leaves it to them to decide if and how to proceed.

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2. Principle of RIA (2) Proportionate Analysis

It consists of a balanced appraisal of all impacts, and is underpinned by the principle of proportionate analysis, whereby the depth and scope of an impact assessment, and hence the resources allocated to it, are proportionate to the expected nature of the proposal and its likely impacts.

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2. Principle of RIA (3) Integration of regulation making and RIA process From early stages of policy development,

affected groups should be identified, impacts on these groups described and order of magnitude estimates provided. As you progress through the policy making process, it is expected that the quality of data being used and depth of analysis should be refined. If you engage stakeholders (e.g. formal consultation), quantification and monetization should be included as far as possible, even if the numbers are indicative.

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2. Principle of RIA (4) Transparency and Consultation

The concept of transparency with regards to the regulation process ranges from a simple notification to the public that regulatory decisions have been taken, to controls on administrative discretion and corruption.

Among the most important elements of regulatory transparency that contribute to better RIA are: consultation with interested parties, plain-language drafting, and electronic dissemination of regulatory material.

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2. Principle of RIA (5) Quality control

In order to strengthen quality control of RIA, most countries introducing RIA have an institution to supervise or review RIA written by other department.

In the US, The Office of Information and Regulatory Affairs (OIRA) of Federal Office of Management of Budget(OMB) review RIA conducted by other department.

In Japan, Department of Administrative Evaluation of Ministry of Internal affair and communication have a authority to review RIA.

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2. Principle of RIA (6) Which rule should be mandate with conducting RIA

Which proposals are concerned to conduct RIA depends on each government.

In the US, Department of Executive Office basically conduct RIA for every rules they make, while Congress and Independent regulatory commission made by Congress have no obligation to conduct RIA ex Law.

In Japan and UK, Law is also mandate to RIA.

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3. Process of RIA (Integration of regulation making and RIA process)

In the US executive office of president, process of regulation making is coincident with regulatory impact analysis. See Reg map: http://www.reginfo.gov/public/reginfo/Regmap/index.jsp Executive Order 12866,

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3. Process of RIA (UK Impact Assessment process)

1. Development stage

2. Options stage

3. Consultation stage

4. Final Proposal stage

5. Enactment stage

6. Review stage

See also Impact assessment flowchart

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3. Process of RIA (EU key procedure steps (1))1. plan impact assessment: Roadmap, integration in

the SPP cycle and timetable.

2. Work closely with your IA support unit throughout all steps of the IA process.

3. Set up an Impact Assessment Steering Group and involve it in all IA work phases.

4. Consult interested parties, collect expertise and analyze the results.

5. Carry out the IA analysis.

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3. Process of RIA (EU key procedure steps (2))

6. Present the findings in the IA report.

7. Present the draft IA report together with the executive summary to the Impact Assessment Board (IAB) and take into account the possible time needed to resubmit a revised version.

8. Finalize the IA report in the light of the IAB's recommendations.

9. IA report and IAB opinion(s) go into Inter-Service Consultation alongside the proposal.

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3. Process of RIA (EU key procedure steps (3))

10. Submission of IA report, executive summary, IAB opinion(s) and proposal to the College of Commissioners.

11. Transmission of the IA report and the executive summary with the proposal to the other Institutions.

12. Final IA report and IAB opinion(s) published on European website by SG.

13. In the light of new information or on request from the Council or the EP, the Commission may decide to update the IA report.

.

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4. Content of RIA (1) Necessity of Regulation and Alternative Regulatory Approaches From US guidline (Circular A-4), Necessity of Regulation should be explained

whether the action is intended to address a significant market failure

The major types of market failure include: externality, market power, and inadequate or asymmetric information.but it is not the only reason.

Other possible justifications include improving the functioning of government, removing distributional unfairness, or promoting privacy and personal freedom

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4. Content of RIA (2) Scope of Analysis Your analysis should focus on benefits and costs

that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately. The time frame for your analysis should cover a period long enough to encompass all the important benefits and costs likely to result from the rule.

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4. Content of RIA (3) Developing a BaselineWith and without analysis You need to measure the benefits and costs of a

rule against a baseline. This baseline should be the best assessment of the way the world would look absent the proposed action. The choice of an appropriate baseline may consider

evolution of the market, changes in external factors affecting expected

benefits and costs, changes in regulations promulgated by the

agency or other government entities, and

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4. Content of RIA (4) Evaluation of Alternatives You should describe the alternatives available to

you and the reasons for choosing one alternative over another. As noted previously, alternatives that rely on incentives and offer increased flexibility are often more cost-effective than more prescriptive approaches

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4. Content of RIA (5) . Transparency and Reproducibility of Results

Because of its influential nature and its special role in the rulemaking process, it is appropriate to set minimum quality standards for regulatory analysis. You should provide documentation that the analysis is based on the best reasonably obtainable scientific, technical, and economic information available. To achieve this, you should rely on peer-reviewed literature, where available, and provide the source for all original information.

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4. Content of RIA (6) Assessment of Cost and BenefitIn order to estimate the cost and benefit, (1) benefit-cost analysis (BCA) or (2)cost-

effectiveness analysis (CEA) are used.

1. BCA is that both benefits and costs are expressed in monetary units

2. Cost-effectiveness analysis can provide a rigorous way to identify options that achieve the most effective use of the resources available without requiring monetization of all of relevant benefits or costs.

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4. Content of RIA (6) Assessment of Cost and BenefitDifficulty to monetize the benefit benefit-cost analysis (BCA) is useful tool,

However it is sometimes difficult to estimate the value of benefit.

1. CVM or other tools are used.2. But if it is too difficult to estimate, Cost-

effectiveness analysis might be an alternative.l It is difficult to decide with Cost-effectiveness

analysis when the purpose of regulation is more than two.

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4. Content of RIA (6) Assessment of Cost and BenefitEstimation of value of life Value of life is one of the important value to

estimate.

There are vast literature relating value of life in the US. However there is little research in Japan.

Few exception is as follows http://www8.cao.go.jp/koutu/chou-ken/19html/houkoku.html

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5. Competition analysis in the RIA making (1) What is competition analysis

increased competition contributes to higher economic productivity and growth. In some regulations unduly restrain market activities.

One important step to eliminate these restraints is “competition assessment”: evaluating policies to find those that unnecessarily restrict competition and developing alternative policies that achieve the same objectives, with lesser harm to competition.

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5. (2) Basic Idea of competition analysis From EPA guideline,

Analysis of regulatory impact on Competition is

Does the regulation erect entry barriers that might reduce innovation by impeding new entrants into the market?

Does the regulation tend to create or enhance market power and reduce the economic efficiency of the market?

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5. (2)-2 easier competition analysis From OECD toolkit,

This toolkit introduces two step assessment,

1. “Competition Checklist,” that show when proposed laws or regulations may have significant potential to harm competition.

2. If problem is found within first step, then we go to Step 2. The second step is for governments and decision-makers to revise policies that unduly restrict competition.

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5. (2)-2 easier competition analysis From OECD toolkit(2),

“Competition Checklist,” probes three kinds of question,

1. Restrictions on starting new businesses

2. Regulations that affect the ability of businesses to compete

3. Regulations that affect business behaviour by changing the incentive of businesses to act as vigorous rivals.

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5. (3) Summery of the Research (4) US Competition analysis in the RIA making

Although E.O. 12866 and Circular A-4 require to specify the impact of benefit and cost, competition analysis (assessing the impact on competition) is not required.

→ Then how the impact of competition is considered? I try to explain that within the RIA process. It also include important issue in RIA.

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5.(4) US Competition analysis in the RIA makingEPA: To estimate total surplus considering

the impact of competition → progress of RIA in EPA.

DOT: Choice of adequate alternatives in regulation making to minimize the impact on competition and Public comment and Regulatory flexibility analysis

→ importance of alternatives

IRC: check the market condition as competition policy

→ qualitative disparity of analysis among IRC

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5. (5) competition analysis in EPA Basically competition

analysis has important part in RIA in calculating total surplus.

Total Surplus, which consists of consumer surplus and producer surplus, is one of the benefit of regulation.

PS

D

P*

P’ CS

PS

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5.(5) competition analysis in EPA (2)

Total Surplus should be calculated considering market condition including competition.

→In the monopoly case, price go up above the supply curve. It is also true as the number of the firm in the market decreases.

EPA often use total surplus to show the benefit!

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5.(6) competition analysis in DOT1. Importance of alternatives

→Importance to Choice of adequate alternatives in regulation making to minimize the impact on competition

Ex: Performance Standards vs. than Design Standards

2. Amendment though Public comment3. Regulatory flexibility analysis

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5. (7) importance of consideration of alternatives

Alternative consideration has two roles.1. One is that it makes it easier to compare

the results of the impact by regulation with various alternatives.

2. The other, which is more important, is that to promote to consider better regulation from the viewpoint to decrease the economic burden on competition.

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5.(8) Regulatory flexibility analysis

The RFA (Small Business Administration) requires federal agencies to consider the impact of regulations on small entities in developing the proposed and final regulations. →Regulatory flexibility analysis

That is prepared in order to ensure that the agency has considered all reasonable regulatory alternatives that would minimize the rule's economic burdens or increase its benefits for the affected small entities

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5. (8) Regulatory flexibility Analysis describes:

(1) reasons why the agency is considering the action,

(2) the objectives and legal basis for the proposed rule,

(3) the kind and number of small entities to which the proposed rule will apply

(4) the projected reporting, recordkeeping and other compliance

(5) all federal rules that may duplicate, overlap or conflict with the proposed rule.

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5. (9) political issue of competition analysis

From the discussion of Jim Laity, who is senior analyst of OMB:

Main focus by Executive branch is to deal with externality. Thus cost benefit analysis is essential.

Too many consideration of impact on competition may prevent the introduction of regulation because of the opposition by industry.

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5.(9) Competition analysis in the US Independent Regulatory commission

Independent Regulatory Commission such as FCC, SEC, FERC is not mandate to conduct RIA and OMB has no authority to check the RIA by IRC.

Thus the quality of Economic analysis by IRC( Independent Regulatory Commission) may be lower than Executive Branch.

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5. (9) RIA in Independent Regulatory commission

From Symposium in Resource for the Future “Can Greater Use of Economic Analysis Improve Regulatory Policy at Independent Regulatory Agencies?”,http://www.rff.org/events/pages/can-greater-use-of-economic-analysis-improve-regulatory-policy-at-independent-regulatory-agencies.aspx They show that is true, except NRC.

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5. (10)RIA in Independent Regulatory commissionNRC( Nuclear Regulatory Commission)

conduct RIA as high quality as Department.Some other IRC, such as FCC, SEC, FERC is

mandate to conduct market analysis based on Administrative Procedures Act and entity law.

Ex. SEC: Securities Exchange Act of 1934 section 3(f) :Whenever pursuant to this title the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

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5. (11)economic analysis in FCC( Federal Communication Commission)

FCC has an authority to issue the spectrum license.

Analysis started from monopoly. Now they make an ex-post competition policy and analysis such as mergers after the deregulation and introduction of competition.

FCC makes an prior approval of the Merger in telecommunication and broadcast industry.

(DOJ and FTC have jurisdiction to review mergers)

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5. (12)economic analysis in FERC( Federal Energy Regulatory Commission)

(Basically Agency regulates interstate sales of electricity and gas wholesale market.)FERC must check the electrical power market condition using several test.

Electrical power market has complicated structure, found after California Energy Crisis.After unbundling: Electrical transmission company is monopoly and regulated by cost-base regulation, But many power supply company was thought as competitive.

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5. (13)economic analysis in FERC( Federal Energy Regulatory Commission)

Electrical power market is not elastic in short term.Thus some electrical power companies may have market power even with large share such as 30%.Such market power of Enron cause California Energy Crisis.

FERC must check the electrical power market condition using several test.

1st step) Pivotal supply screen,Wholesale market screen

2nd step) Delivered Price Test (more detailed)

→ Failure of DPT requires the seller tomitigate the market power.

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5. (14) RIA by IRC and check from OMB

From Dr. Mancini of OMB, IRC don’t have unlimited discretion:1.Under the congressional review act, rules with more than $100 million impact have to be reported to Congress. OMB actually does these determinations – so even independent agencies must provide OMB enough information for OMB to decide.2.Under Administrative Procedures Act, agencies have to provide a reasonable basis for their rule-makings.

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5. (15) Role of DOJ or FTC in Competition Analysis

OMB reviews RIA by the agencies of Executive Office.

implicit, not formal coordination and cooperation between OMB and DOJ or FTC.

DOJ or FTC make an comment through public comment process of RIA as well as implicit cooperation among agencies conducting RIA.

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6. Toward a better Introduction of effective RIA

The following key elements are based on good practices identified in OECD countries:

1. Maximize political commitment to RIA.

2. Allocate responsibilities for RIA program elements carefully.

3. Train the regulators.

4. Use a consistent but flexible analytical method.

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6. Toward a better Introduction of effective RIA(2)

5. Develop and implement data collection strategies.

6. Target RIA efforts.

7. Integrate RIA with the policy-making process, beginning as early as possible.

8. Communicate the results.

9. Involve the public extensively.

10. Apply RIA to existing as well as new regulation.

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6. Issue of introducing RIA to Pakistan (1) political Issue in the US

1. Regarding VSL( Value of Statistical Life) OMB try to introduce different VSL

among ages.( VSL of aging people should be lower than younger people) But they cannot, opposed by aging people.

2. Political pressure to extend the budget with effective demand policy by Keynesian perspective

→ they opposed to minimize the cost.

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6. Issue of introducing RIA to Pakistan (2)Issues of RIA in Japan(1)

Regulation making process in Japanese Government so far

Ministries often establish councils or study groups (permanent or ad hoc on specific issue) consist of academics, stakeholders to make the agreement for policy orientation.

Such councils were criticized for being the cover for the ministries, and aggravating competing jurisdictions.

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Regulation making process in Japanese Government so far

So, Japanese Government made the “Public Comment Procedures” mandatory when making the orders in 2005 in order to consider the public opinions.

Now Japanese Government make effort to make policy development process more transparent and accountable. Regulatory Impact Analysis will be an effective tool.

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Regulation development process in Japanese Government so far

Some ministries have used quantification methods, especially in developing the economic regulation.

But many ministries don’t have sufficient resources and capacities. It is essential for the development of RIA to train and foster the experts in each ministry (especially related to safety, environment and health).

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6. Issue of introducing RIA to Pakistan (4)comparison in RIA among OECD countryJapan began to policy evaluation in 2000. However introduction of RIA is one of the latest among OECD countries.

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What kinds of regulation should be accompanied by RIA?

In the US: important regulation (impact more than $100million ）　 is mandate to conduct RIA but law is exempt because law is just outline.

In Japan: however, most regulation is written in 　law. Thus even law, except lawmaker-initiated legislation and cabinet order must be with RIA.

Although ministerial order is exempt mainly because it is considered to be unimportant.

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RIA is important document in Public Involvement Referenda　and　Cost　Benefit　Analyses　

is　complement　(c.f.　Osborne　and　Turner[2010]　consider　when both are substitute).

→ RIA provide the important information and analysis in policy making. And even draft RIA is under Public comment in US or other OECD country.

But in Japan it is published just before the regulation issued.

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6. conclusion RIA is important document in Public

Involvement Japanese government has been

opposite side the goal of RIA-public involvement. In such a country, implementing RIA is a long-term process until it becomes a systematic part of a country’s political and administrative cultures.

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6. conclusion Designing and applying a comprehensive

RIA program is not easy. But It can make decisions more transparent and encourage consultation and the participation of affected groups, and it contributes to improving governmental coherence and intra-ministerial communication.

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6. Conclusion: special consideration In the case of developing countries

1. methodological and operational difficulties can easily arise in the decision-making processes of developing countries

2. the use of regulatory tools requires a high level of expertise and access to extensive resources and information.

3. common political practices can make better political oversight and more attention to consultation a challenge.