Regulatory Change Measurement (RCM)
Calculating Delay Costs
Version 1.0 dated June 2010
These slides available at: www.dtf.vic.gov.au/betterregulation
Questions to: betterregulationunit@dtf.vic.gov.au
Contact the Better Regulation Unit (BRU)
 If you expect to measure the cost of delays, please
contact BRU in the first instance
 BRU will take you through the key steps of the
methodology and agree to the methodology and
formula to be used
 These slides are intended to be an introduction
What are delay costs?
 Delay costs are the expenses and loss of income
incurred by a regulated entity through:
-an application delay and/or
-an approval delay
Application delay
This refers to the time taken by a regulated entity to
complete an application (e.g. for a licence or permit)
 To be counted as a delay, an application delay must:
-prevent operations from commencing
-not coincide with a parallel process during the course of application,
including business processes normally undertaken during that period
Approval delay
 This refers to the average time taken by a regulator to
communicate a final decision regarding the application,
and includes a ‘normal’ level of re-work of the
application
 To be counted as a delay, an approval delay must:
- prevent operations from commencing
- not coincide with a parallel process during the course of application,
including business processes normally undertaken during that period
- not double count parallel processes of re-work during the approval
process
Examples of Delay Costs
 Holding costs of land while waiting to commence
operations
- interest on loans for land, and
- opportunity cost of capital (equity) blocked in land
 Standby costs of capital (plant and machinery of
machinery) not able to be used due to a regulatory
process
-interest on loans for plant and machinery,
-opportunity cost of equity in plant and machinery, and
-rental costs
Examples of Delay Costs (contd)
 Standby costs of labour unable to be put to use due to a
regulatory process
-wages and overheads
 Lost business opportunities
-loss of reputation due to late deliveries
-reduced flexibility to respond to market conditions
-more difficult to obtain finance
Mapping the delays
Reference: Toolkit 1
Key question: Does an obligation delay the
activities of a regulated entity?
 Will removing a regulation or obligation allow the
regulated entity to commence operations earlier?
– then such obligation could potentially be a cause of delay
 To precisely identify whether the obligation causes a
delay, a project management GANTT chart is useful
– Are the activities to comply with an obligation part of the critical time
path of a business project?
Identification of delay – GANTT chart
In this figure the red dotted lines during the application process
represent the actual time that could be saved by a regulated entity
if the relevant obligation was removed (i.e. these portions are on
the critical path)
See next slide for detailed explanation
Identification of delay – illustration
Regulatory
process 1
Over-lapping time
period with Process 1
Regulatory
process 2
0
1
TIME
2
For example, if a building company is no longer required to
prepare the building fire plan during the application process, this
will remove the Regulatory Process 2 (RP2) in the figure above.
However, as it must also demonstrate at the same time why its
buildings meet the environmental requirements (RP1), the
reduction in the length of the application process is only equal to
the dark blue section of RP2.
Identification of delay – illustration (cont’d.)
Regulatory
process 1
Time saved by removing
Regulatory Process 2
Regulatory
process 2
0
1
TIME
2
Re-iteration: The reduction in the length of the application process
by removing RP2 is only equal to the dark blue section
Identification of delay – another illustration
 In the case below, if RP4 is removed, then re-work for
RP4 is also removed.
 However, as this re-work is completed within the same
time as re-work for RP2 (a separate, parallel process)
the length of the approval process is not reduced in this
case.
Identification of delay – another illustration
 In the case below, if RP4 is removed, then re-work
for RP4 is also removed.
 However, as this re-work is completed within the
same time as re-work for RP2 (a separate, parallel
process) the length of the approval process is not
reduced in this case.
RP2
Re-work RP2
RP3
Re-work RP3
RP1
Re-work RP4
RP4
Re-work RP5
RP5
Submit
T=1
Start
T=0
Application Process
Approved
T=2
Government Approval Process
Calculating Delay Costs
Reference: Toolkit 2
RCM formula for costs
Regulatory costs
(total $)
Price (P)
Quantity (Q)
X
Cost per business
Number of businesses/
total ‘quantity of assets’
In this case this translates to:
Delay Cost = Price × Quantity
= {(costs incurred + opportunity cost) × delay period} × (population)
Example: Cost of delays caused by planning
application process
 The example below provides a formula for delays
during a planning application process


 TC  IT

C  i  τ  r  θ  R    D  ROI

 t  L
Delay costs 
12
Discussed in next slides
Note: There can be many other examples of delay costs, and different ways to
assess them
Price variables for delay costs
 The cost incurred by each business is the holding costs
of the asset (land) minus any rents received if the asset
is rented out during the period in which the project is
delayed
C  i  τ

 r  θ  R 
where
C  T otalland cost per hectare
i  interestrate,in percentper annum,at themarketrateof interest
  tax,in percentper annum
r  Council rates,in percentper annum
  Proportionrentedout (if any)during application process
R  Rents,in dollars per annum
Note: The term C x i also captures the return that could have
been obtained on equity in the absence of the delay
Price variables for delay costs
 The opportunity cost – the best alternative use for the
capital (net total cost of the alternative investment over
the life of the original project multiplied by the return
on investment)
 TC  IT


ROI
 D



T C  T otalcost of theinvestmentproject,including capital,raw material,wages
IT  T otalinterestand taxespaid out on theinvestmentproject,(excludinginterest
paymentson capitalwhich havebeen separatelycounted)
D  Originallyplannedprojectduration,in years
ROI  Return on investmentof theinvestmentproject,percentper annum
t  Reductionin timein theapprovalprocess,as mapped
 Time (duration) of the delay
Quantity variables for delay costs
 Population: refers to the number of entities affected by
a particular regulatory obligation. In this case:
L  T otalland/populationaffected
Worked out example - delay costs from a
planning process
 A normally efficient business wants to open a new
manufacturing plant but is facing delays from the need
to complete an application that requires it to document
the impact of its proposed plant on the environment.
These are its costs:
-the company buys ten hectares of land on which to build the plant
-the total land cost per hectare is $50 000
-the interest rate per annum charged by the lender is 10 per cent
-the land tax per annum is 2 per cent
-the council rates per annum are 2 per cent
-during the application delay period the company rents out 50 per cent
of its land to farmers who use it as grazing land for $4 000 per annum
per hectare
Worked out example - delay costs from a
planning process (cont’d)
 Data relevant to calculating returns that the business is
losing through the delay
-the total cost of the manufacturing project is $250 000 per hectare
-total interest and taxes paid out on the project (excluding interest
payments on land which have been separately counted) is $100 000
per hectare
-the originally planned project duration is 20 years and the return on
that investment is 7 per cent per annum
Worked out example - delay costs from a
planning process (cont’d)
 If the cause of delay is removed, the company is able to
commence its operations 18 months earlier
 Therefore, as a result of removing that piece of
regulation, the reduction in delay cost is $82 875 (see
below)
 If this regulation affects 100 businesses, the total delay
cost of this regulation is = $8 287 500 per annum (see
below)
C  i  

 TC  IT

 r    R   
 ROI 
 D
 t  L
Delay cost 
12
 100000

50000  0.1  0.02  0.02  0.5  4000   25000020
 0.07

 18100
Delay cost 
12
 $ 8, 287,500 per annum


Other examples
 As indicated earlier, there can be many other examples
of delay costs, and different ways to assess them
 Please therefore contact BRU for a discussion of the
specific methodology applicable in your case