7
Reducing the regulatory burden
7.1
Introduction
The terms of reference require the Commission to inquire into and report on a
framework for achieving the largest net reductions in Victoria’s ‘red tape’ burden
on businesses, including small businesses, with indicative estimates of potential
cost savings where possible.
Reducing unnecessary regulatory burdens frees up resources, enabling firms to
boost their productivity and make Victoria a more attractive place to do business.
Resources previously used to fill in forms and comply with regulation can instead
contribute directly to production. And building Victoria’s reputation as a place
where it is easy to do business attracts firms to the State. This is particularly
important for Victoria. While Victoria has advantages such as a skilled labour
force and a relatively large consumer market, it does not have the rich mineral
resources that attract some firms to some other Australian states.
A well-designed regulatory management system is likely to produce, over time, a
body of regulations that delivers net social benefits that include consideration of
the costs and burdens on business and not-for-profit organisations (NFPs). This
outcome is the predictable outcome of rigorous assessment, evaluation,
continuous improvement by regulators, and high levels of transparency and
proportionality.
In practice regulatory management systems are imperfect, sometimes very
significantly so. There may be little evaluation, low levels of verification and poor
understanding of impact assessment, for example.
Other considerations include:
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the incentives for ministers, departments and regulators to support
additional regulation when problems arise are much stronger than the
pressures to repeal or reform existing regulation (Helm 2006, p. 173)
regulatory impact assessment processes are imperfect (chapter 3)
the effort devoted to evaluating how well regulation is working is patchy
(chapter 6)
implementation of regulation can have shortcomings (chapter 4)
the cumulative effects of individual regulations are difficult to factor into
case-by-case assessments of individual regulatory proposals.
Victorian governments have addressed the need to manage, and reduce,
unnecessary burdens on business and NFPs from regulation. Generally this has
proceeded from an agenda of improving competitiveness, increasing productivity
and innovation, and making Victoria a more attractive destination. This is of
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course a narrow approach to regulatory reform rather than on the net benefits
regulation is intended to achieve. This focus on reducing costs can strengthen
broader approaches such as regulatory impact assessment, if it reinforces
attention to important cost impacts that have been neglected, but it:
… will degrade RIA quality if it is not integrated into a wider analytical
framework, and therefore is given undue weight in the policy decision. This
approach fragments RIA into special interests, and renders it useless as a general
policy tool. (Jacobs 2006, p. 84)
It may also result in a transfer of cost from regulated parties onto taxpayers, if
cost reductions are achieved by moving tasks ‘in house’ to the regulator,
increasing the costs of administering the regulation.
Red tape reduction programs therefore need to be seen as a contributor to,
rather than a substitute for, a broader approach to regulatory impact assessment,
which focuses on the benefits, and the costs of regulation. If instead red tape
reduction programs become the focus of regulatory reform, there is a risk that
the trade-offs needed to weigh policy objectives and regulatory costs would be
given insufficient attention and the quality of public policy formation would
decline.
The Coalition Government has indicated its policy commitment to cut red tape
by 25 per cent by an ‘independent verified method delivering millions of dollars
value to business’ (Victorian Liberal Nationals Coalition 2010, p. 10). It will need
to choose whether to continue the approach that was used by its predecessor —
drawing on any lessons from that approach — or adopt a different approach.
The Commission has decided not to recommend a particular type of target —
whether a net or gross regulatory burden — as it understands that such a policy
is currently under development. However, the Commission has offered some
views on the possible coverage of the target and the definition of regulatory
burden which could be subject to the target.
Given the broad purpose of a target for reducing regulatory burden on business,
the Commission considers that the credibility with stakeholders is a critical
requirement. To that end, what ever burden target is chosen the Commission
considers it critical that there be independent and transparent reporting of
performance against the target.
7.2
Coverage of burden reduction target
Although not recommending a particular burden reduction target, the
Commission considers that the following issues be given explicit consideration in
developing a future burden reduction target for Victoria:
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which sectors should be included in the target?
which regulatory costs should be included in the target?
7.2.1
Which sectors should be included in the target?
The expanded target of the Regulatory Burden Reduction Initiative included
regulations that are imposed on business, NFPs, government services and the
economic activities of individuals. One omission from this list is regulation
imposed on individuals other than those that affect their economic activities.
The NFP sector, government services and the economic activity of individuals
are significant contributors to Victoria’s economy and community. Because of
this contribution, there is a strong argument for continuing to include these
sectors in the areas targeted for reducing regulatory burden.
7.2.2
Which regulatory costs should be included in the
target?
Victoria began by targeting administrative costs but then expanded its program
to include substantive compliance and delay costs, as well as including
government services and the income generating activities of individuals.
Arguments for a broader target include:
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compliance and delay costs are large, often larger than administrative costs
focusing only on administrative costs could create incentives to achieve
reductions in these costs by increasing compliance and delay costs (for
example, reducing the information requirements at the start of an approval
process could delay the time required to provide approval, if regulators
decided that they needed more information later on)
a similar argument applies to fees, as administrative activities could be
moved into the regulator, and recovered through fees, which were not
included in the target
a more comprehensive target is more likely to encourage cultural changes
within departments and agencies.
From a business perspective, it does not matter whether regulatory costs are the
result of administrative burden, compliance costs, delays or fees and charges. All
add to business costs. In the survey of business perceptions conducted for the
Commission, compliance costs, paperwork and fees and charges were the main
tasks associated with burdensome regulation (figure 7.1). Therefore, a burden
reduction target that includes administrative burden, compliance costs, delay
costs and fees and charges would cover those issues that impact on business
competitiveness.
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Figure 7.1
Tasks involved when dealing with burdensome
regulation
Complying with the regulatory requirements
Completing paperwork, reporting and follow-up with regulator
Paying a fee
Applying for licences, permits or gaining other approvals
Inspections, audits and compliance monitoring
Waiting for a decision
Keeping up-to-date with changes
Finding information
0
5
10
15
20
25
30
35
per cent
Source: Wallis 2011c, p. 25.
An argument against a more comprehensive target is that because it is more
difficult to measure costs such as delay costs, including them would open up
possibilities of ‘gaming’ targets by claiming cost savings at the upper bound of
confidence ranges. The Department of Treasury and Finance (DTF) has
developed a methodology for measuring these costs that may, as experience
increases, reduce this risk. The risk of gaming would also be reduced by credible
ex post evaluation of cost reduction initiatives.
In the case of fees and charges, there are some complexities in measuring the
regulatory burden, as it is the increase in charges above inflation that would have
a real long-term impact on business competitiveness. The regulatory impact
statement (RIS) system already recognises this distinction, as RISs are only
required for fee increases above the annual rate approved by the Treasurer in the
relevant State Budget (Government of Victoria 2007a, p. 4-23). In addition, past
policies on setting fees and charges have encouraged full cost recovery. There is a
risk that including fees and charges in the target may work against the objective
of full cost recovery. The Commission considers, however, that other pressures
on agencies, such as budget and funding constraints, will reduce this risk.
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Recommendation 7.1
That the Victorian Government’s regulatory burden reduction target:
include burdens imposed on businesses, the not-for-profit sector,
government services and the economic activity of individuals
adopt a broad definition of regulatory burden to include administrative
burdens, compliance costs, delays costs, and fees and charges.
7.3
Independent verification
The Government has specified that red tape should be cut ‘by an independent
verified method’. The OECD has pointed out why this is so important.
Many countries have acquired several years of experience with launching and
implementing their administrative burden measurement and reduction
programmes, but the same cannot be said for the ex post evaluation of these
programmes … Despite their popularity and political attractiveness, and the
considerable resources invested in them, programmes have not been perceived
as bringing sufficient concrete relief. There is broad dissatisfaction with the
effectiveness of the programmes, and the “value for money” of the overall
agenda is put into question. (OECD 2010c, p. 75)
Independent verification can be decomposed into at least three issues:
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the methodology used to measure reductions in costs
institutional arrangements to ensure that the methodology is applied in a way
that can be independently verified
whether there is a credible process for ensuring that anticipated reductions in
costs are delivered.
DTF has developed the Regulatory Change Management (RCM) methodology
for measuring cost reductions, based on international approaches. The
Commission believes that this methodology is adequate.
Turning to the institutional arrangements, the Commission believes that the
rigour of independent verification could be increased by:
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publishing departments’ RCM measurements
more RCM measurements being assessed by the Commission (as an
independent verifier)
through reducing the threshold for its involvement from proposals
measuring more than $10 million in annual cost savings to $5 million
requiring the Commission to publish its assessment letters.
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In relation to process, the Commission proposes that the Government publish
its plan for achieving the target (however defined), followed by a report verifying
its progress in delivering the plan.
The plan would include departments’ proposals for reducing the regulatory
burden over a specified period, with provision for the costs of new regulation
that may be unknown at the start of the planning period.
Performance against the plan would be revealed through credible, complete and
regular measurement and reporting of progress. This report would need to
include verified reductions in burden, the costs of new regulations within the
period, and cost savings from itemised offsets. RCMs can indicate the achieved
reduction, provided that it is undertaken after the cost reduction project has been
implemented. This is already the case for most RCM assessments as accurate
data to assess the savings is often not available until after the initiative has been
implemented. RCMs would also need to be prepared to verify the costs savings
of offsets and the cost increases from new regulation. Publication of all RCMs
and of the independent assessments of them, as suggested above, would enhance
the credibility of the process.
The Commission believes that a process such as this would satisfy the
Government’s commitment to independent verification and in doing so would:
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ensure that the proposed reductions in costs are actually achieved
build the credibility of the program as a whole.
Recommendation 7.2
That the Victorian Government:
publish all Regulatory Change Measurements (RCMs), reduce the
threshold above which the Commission assesses RCMs to those with
cost savings above $5 million per year, and require the Commission to
publish all RCM assessment letters
publish an annual plan outlining the cost reduction proposals that will
contribute to the target during that year
publish an annual report on the verified progress, through assessed RCMs,
of cost reduction projects, projects that have increased regulatory costs.
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