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1 Assessing the impact of regulation
1.1 The definition of Regulatory Impact Analysis
The definition of RIA - a policy instrument widely used in OECD countries - is not univocal. It
“encompasses a range of methods aimed at systematically assessing the negative and positive
impacts of proposed and existing regulation” (OECD 1997a: 7). Indeed, the methodology varies
depending on policy objectives, the evolution of regulation, and even traditions and cultures of
public administration in different countries. RIA can be used to assess the impact on business
and social welfare; administrative and paperwork burdens; regulatory burdens on small
businesses; and the consequences on international trade and employment (Jacobs 1997:13).
Put differently, “it is a flexible tool. Its objectives, design and role in administrative processes
differ among countries and even among regulatory policy areas”
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(Ibid.: 14).
As Jacobs (ibid.: 14) clearly puts it:
“RIA is a decision tool, a method of a) systematically and consistently examining
selected potential impacts arising from government action and of b) communicating the
information to decision-makers”
In short, RIA is an instrument of analysis and communication that assumes the form of “a short,
structured document which is published with regulatory proposal and new legislation” (Better
Regulation Unit 1998: 28).
Mainly, two elements should always be present in an RIA:
1. the description of the issue raised about the need for regulation, assessing the
risk of the absence of any kind of intervention;
2. an economic appraisal of regulatory alternatives.
1
See also Virani and Graham (1998)
6
According to Viscusi (1997: 175), the methodological approaches used to appraise regulation
stem from economics and the potential of this discipline in terms of achieving ‘better’ regulation.
Hence, analytical techniques imported from economics would help regulators avoid casual and
rough decisions not buttressed by empirical analysis. Especially for economists, RIA is a tool
used to enhance the empirical foundations of political decision-making, as will be argued
below. At this stage, however, it should be observed that the notion of 'better' regulation is
problematic: for economists it would mean 'more efficient' whereas for a political scientist
considerations of fairness and accountability would also matter. But at this point it is worth
analysing the technical characteristics of RIA first, before we proceed to the appraisal of the
political implications of 'better' regulation. It is to the techniques of RIA that we now turn.
The most common techniques experimented in OECD countries are portrayed in table one.
They can be described as follows:
• cost and benefit analysis (CBA),
• cost-effectiveness analysis (CEA),
• risk-risk analysis (RRA), and
• cost assessment (CA).
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Table 1. Alternative approaches for regulatory analysis
Concept Description Advantages Disavantages
Benefit-cost analysis Regulation is desirable if
estimated benefits
exceed the costs.
Reflects both favourable
and adverse effects of a
regulation and the need
to ensure that, on
balance, policies are in
society’s best interest.
Some important benefit
components may not be
quantified and
consequently given less
weight. Criterion is less
compelling if those
adversely affected by a
policy are not
compensated.
Cost-effectiveness
analysis
Calculation of cost per
unit benefit achieved.
Policies that can
generate the same or
greater benefits at no
greater cost are
preferred.
Eliminates the clearly
inefficient policies from
consideration and
provides an index of the
relative efficacy of
policies in generating
benefits.
Does not resolve the
choice of the optimal level
of benefits. Criterion is
inconclusive when
different benefit levels are
generated and one policy
does not produce greater
benefits at less cost.
Risk-risk analysis Comprehensive
assessment of all risk
effects of a policy,
including those in
response to costs, to
ensure that, on balance,
policy reduces risk.
Serves as a more
complete form of risk
analysis and provides a
limited recognition of
other regulatory effects
insofar as they influence
costs.
Does not recognize other
effects of regulation that
ultimately do not affect
risk: risk impact may be
diverse and not
commensurate.
Cost assessment Assessment of the costs
of regulation on
businesses, consumers,
and workers. May
include attempt to
ensure that cost levels
are not too high
Attempts to
comprehensively
determine the total price
society is paying for the
regulation and provides
insight into its economic
feasibility.
Does not address the
benefits of the regulation
or ascertain the extent to
which particular levels of
costs are warranted by
the favourable effects of
the regulation.
Source: Viscusi K. V., (1997: 176)
The choice of a specific technique is a consequence of regulatory policy objectives: CBA
should be adopted if a government aims at improving the net well-being of society. On the
contrary, if a government focuses on the reduction of business burdens, CCA would be the
most appropriate analytical tool. And risk-risk analysis is used in specific regulatory areas such
as environment, health, and safety in the workplace.
It is worth noting that these techniques are only the 'backbone' on which to set up an RIA. A
key proposition in this dissertation is that the mere transfer of economic techniques to the
policy making process is not possible and not desirable. However, it is useful to acknowledge
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that the backbone of RIA techniques is provided by economics in various guises. Real-world
regulatory decisions go well beyond RIA techniques. There are various methods used in every
regulatory decision (Jacobs 1997: 14):
A. Expert – the decision is based on a professional judgment;
B. Consensus – “the decision is reached by a group of stakeholders who reach a common
position that balances their interests” (Ibid.);
C. Political – the decision is reached through political representatives;
D. Benchmarking – therre is some reliance on an outside model;
E. Empirical – the decision is based on fact-finding and analysis.
Consequently, RIA is a method which supports the decision-making process without aiming to
substitute decisions with technocratic tools (see also below). How does RIA support the
decision-making process? Simply by enhancing the empirical basis of decisions. As such, RIA
strengthens decisions by working on point E in the list presented above.
Moreover, RIA is characterised by the presence of consultations with interested parties and
experts to gather information about the foreseeable impact of regulation. Foreign regulatory
models (for example, best practice), consensus among stakeholders and even political
deliberation
2
are not excluded from the RIA process. In short, one could argue that RIA itself is
composed of different methods with a single aim: to provide information on the likely impact of
regulatory alternatives (including the option of not regulating).
2
An example can be the signature of a minister in the British RIA as well as the ministerial meeting in the Cabinet
Office among the Regulatory Ministries of each department to discuss the draft of a bill before that proposal is
tabled to the House.
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1.2 The potential of RIA
According to Scott Jacobs (1997: 16-17) - the former head of the regulatory programme of the
OECD - RIA has potential to enhance the quality of decision-making process.
Firstly, RIA forces governments to evaluate their decisions by raising the issue of whether
decisions are as cost-effective as possible. Thus, a comparison of strengths and weaknesses
of each possible policy alternative is essential in the RIA process.
Moreover - Jacobs (1997: 16) argues - :
“A role for RIA that has great promise is that, by improving the basis for comparing
costs and benefits of different regulations, it can help establish regulatory priorities
across regulations and regulatory areas. Allocating resources from less efficient
regulations to more efficient regulations will improve effectiveness and reduce the cost
of government action”.
Empirical methodologies should be used in the regulatory policy in the same way as they are
employed in budgetary policy to control the amount of public financial expenditure. All in all, the
proposal of RIA and the budget is the same: to achieve a better allocation of resources (Jacobs
1997; Morrall III 1992). In fact, some analytical mechanism is required to ensure that society is
obtaining as much benefit as it can from the cost (to society, the economy, and-or public
administration) imposed by regulation (Majone 1996).
Secondly, RIA allows regulators to consider and integrate multiple policy objectives. In the real
world, regulators should consider consequences and effects inter-linked to their decisions,
taken to reach specific objectives. “RIA attempts to broaden the mission of regulators from
highly-focused problem-solving to balanced decisions that trade off problems against wider
economic and distributional goals” (Jacobs 1997: 15).
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Thirdly, experiences of many OECD countries have shown that RIA calls for public
consultation, thus enhancing the transparency of regulatory processes. Transparency must be
pursued also through the public disclosure of RIA at the earliest stage of redaction (Ibid.: 16).
Finally, by demonstrating that regulatory outcomes benefit society and by giving broad
information and account on the analytical procedure of their decisions, governments can
improve their accountability (ibid.: 16 - 17). This issue has been raised in all European political
systems due to the wide delegation of legislative power from parliament to government in many
western countries. At this point it should be clear that RIA goes beyond the use of techniques
produced by economics. RIA is an instrument with a very ambitious goal, that is, to reform and
transform regulatory governance. Unsurprisingly then, on the one hand RIA has been in the
firing line because of its (allegedly) political distortions. On the other, the advocates of RIA point
to its democratic virtues. It is to the political debate on the pros and cons of RIA that we now
turn.
1.3 The limitations of RIA
The major political concerns about integrating RIA into the decision-making process relate to
equity, the political distortions induced by economic valuation of assets such as the
environment, the methodology of gathering data, and implementation problems (Virani and
Graham 1998: 60).
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Equity and Fairness
Although CBA and CEA are considered the most inclusive tools
3
, they “are designed to
consider the net social impact of policy options from an economic efficiency stance” (Virani and
Graham 1998: 60). These methods tend to assume that the present distribution of wealth is
acceptable and that regulation or deregulation has an insignificant distributional effect (Baldwin
and Cave 1999: 91). On the contrary, those who receive the benefits of a proposal may not
incur any of the costs. Thus, an unequal distribution of costs and benefits may be an outcome
of the assessment (Virani and Graham 1998: 60; House 2000). It may not account for a policy’s
impact on the equity and fairness with which the costs and benefits of a proposal may be
distributed.
However, many RIA guidelines, including the OECD checklist, require that effects on the wealth
distribution are explicated in the appraisal and weighing factors to be used in CBA and CEA in
order to reflect different levels of concern in line with equity and distributional considerations
(Virani and Graham 1998: 60).
Political distortions of economic valuation
This criticism has been raised in relation to environmental valuation but more generally it
covers the issue of what to do in the presence of 'priceless' goods. Following Thiele (2000),
one can list four problems. Firstly, the attempt to measure the value of assets such as
wilderness and intact nature may reduce what is priceless to some arbitrary price. Secondly,
although RIA includes the reparative costs of environmental hazards, it does not go as far as to
measure the infringement of rights of those who are harmed. Even if some money is allocated
to treat a disease or to compensate a family for the loss of a life, the welfare of those harmed is
not the same as the welfare obtained by preventing the hazard in the first place. Benefit
quantification appears very difficult when it concerns human health and environmental
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conditions because of the absence of relevant data (Ibid.) and possible monetary valuation in
these areas can be considered unreliable or even invalid and immoral (Virani and Graham
1998: 61; House 2000): “economic framework builds in a wealth bias in the form of preference
satisfaction as the measure of welfare and ignores issues of fairness in bargaining and justice
in distribution” (House 2000: 81).
Thirdly, there is no virtual simulation which can really capture the preference of future
generations in environmental RIA and address the issue of the participation of future
generations in current regulatory choices. Fourthly, RIA may well measure threats to the
physical health of humans, but it typically ignores 'threats to other species, to biodiversity, and
to other components of human welfare, such as mental health, spiritual well-being, and social
stability' (Thiele 2000:554).
These four objections seem to reiterate the mantra of deep ecology and ignore the fact that RIA
officers in all major OECD countries are trying to produce answers to objectively difficult
problems, for example by taking the implementation of the precautionary principle seriously. To
dismiss this work as 'trying to measure what is priceless' seems a bold assertion leading to the
conclusion that regulatory choices have to be arbitrary because they involve 'priceless goods'.
However, courts and lawyers measure every day in every democratic nation the price of
'priceless goods' when taking decisions on compensation and the consequences of
environmental hazards. Why should RIA not aim at the same result? Having said that, some of
the issues raised by environmental valuation are extremely difficult to tackle. But the response
to these issues should be a refinement of RIA models, rather than the dismissal of RIA.
Otherwise one could throw away the baby with the bath water!
3
Other economic appraisal methodologies are applied to protect specific interests: CCA is the most useful
methodology to assess the negative impact on business (Jacobs 1997)
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Data Constraints and Measurement.
Economic appraisal of regulation can be a difficult task because of the presence of adaptive
responses to the risk reduction pursued through regulation (Baldwin and Cave 1999: 91).
Moreover, the costs and benefits depend on the degree of enforcement that the future
regulation will be able to achieve. “Predicting enforcement and compliance behaviour gives rise
to serious quantification difficulties” (ibid.).
Data on regulatory costs, often related to burdens of adapting industries to regulations, stems
usually from business consultation (Virani and Graham 1998: 61). This information is often
treated with mistrust by other interest groups and concern is raised on their reality. Basing the
evaluation on only one information source may give rise to the risk of the ‘capture of the
appraiser’ due to information asymmetry. So it is essential that data and sources be published
in an auditable and standardised form to be scrutinised by all affected parties.
Implementation Problems
An economic appraisal of public management requires a bureaucratic and oversight
mechanism that may be costly to taxpayers as well as a burden on governmental action
(Baldwin and Cave 1999: 92-93). In particular, CBA and CEA, which are resource intensive,
have been criticised for slowing down regulatory activity instead of improving the quality of
regulation (Ibid.: 93).
Consequently, a high-level political commitment is necessary in the implementation of the
regulatory oversight because of the financial resources needed to be allocated. Political
commitment should even be able to promote a cultural change in the public sector activities
and to overcome vested interest in the private sector, since both sectors may benefit from the
status quo and resist beneficial change (OECD 1997b).
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Technocratic tool
Concern has been raised about the substitution of political decision by an empirical tool.
RIA has been criticised for enforcing the technocratic trend present in western governments
policy action. Radical political scientists such as John Dryzek (1997) have argued that RIA is
not democratic because it legitimises the idea that public policy is a matter for experts, not for
the general public and the 'generalist' elected officials. Actually, this objection describes how
RIA may fail. RIA typically fails when it is treated as an issue for experts, and it achieves results
when it widens the scope for consultation and public participation in regulatory choices.
Although the qualification of costs and benefits facilitates regulators in taking more rational
decisions, RIA is broader than a simple list of numbers. It encompasses issues and regulatory
principles, i.e. consistency, equity, fairness, transparency, accountability, feasibility,
enforcement, etc, that cannot be dealt with through simple economic appraisal. Moreover, RIA
itself is only one component of the decision-making procedure. Its main function is to inform
decision-makers on existing options to solve policy problems.
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1.4 The three stages of governing regulation
RIA is an instrument of regulatory reform. Its role and potential have to be assessed in the
context of this wider process of reform. Accordingly, this Section will briefly overview the
'philosophy' and policy principles underpinning regulatory reform in advanced countries.
According to OECD, an “effective regulatory reform requires a multi-part strategy aimed at: i)
improving the quality of new regulations that are introduced, ii) deregulating where rules are
unnecessary or harmful, combined with iii) institutional and procedural changes, and creation of
new management capacities to promote reform and oversee cross-cutting issue” (OECD
1997b: 201).
To explain this concept, OECD utilised the following graph (OECD 1997b: 203):
Deregulation
Regulatory Quality
Regulatory
Management
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1.4.1 Deregulation
At the base of the pyramid there are fundamentally the elements that characterised regulatory
reform in OECD countries during the 1980s and 1990s: liberalisation, privatisation and
economic deregulation. The retrenchment of state intervention should therefore be based on
broader principles that guide the reform (Jacobs and Malgarini 1998: 161). Firstly, the
enforcement of competition law guarantees that the market conditions reached by the
liberalisation or deregulation of markets will be respected also in the future (Breyer 1990). A
rigorous application of the competition principles can impede that market abuses nullify the
potential reform benefits (Jacobs and Malgarini 1998: 161). Secondly, reducing barriers to
investment and trade, consumers will benefit from more efficient and innovative markets.
Finally, public servants should innovate in order to issue regulation in a more market-oriented
way (ibid.). Public management must not only receive but also take note of comments and
feedback from a large group of interested parties in order to achieve an outcome approaching
social consensus (Peters 1996: 7).
The “New public management”, that is, letting public-choice economics and private
management principles influence the public sector, eliminated the well marked distinction
between public and private spheres, through a mixing up of different management culture and
methodologies (Peters 1996; Ferlie et al 1996). The objective of this public sector reform has
been to increase efficiency and accountability, inserting expenditure control and value for
money standards, i.e. an evaluation culture so indispensable for the management of an
organisation as complex as that of the public sector (Ferlie et al 1996).
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Recognising that efficient functioning of the market stems also from low impact of
administrative rules on business (Galli and Pelkmans 2000: 14), OECD countries
complemented their economic deregulation by administrative streamlining.
In short, the deregulation layer of regulatory reform appears to involve economic and
administrative regulation. Nevertheless, deregulation is not enough to assure efficiency of
markets.
1.4.2 Regulatory quality
Recently, economic regulation has been subject to a certain degree of stabilisation. For
instance, even at EU level, where the necessity of regulation was essential to establish a
common market and a level playing field, the main part of regulatory activities has been
focused on the social regulation (La Spina and Majone 2000). Social regulation has grown for a
series of reasons such as “modern society’s intolerance of risk, to entrepreneurial politics on
the part of its politicians and agencies, or to the growth of the welfare state and a
corresponding development of interest groups who have been repeatedly placated by
governments through the introduction of regulation” (Weiler 1995).
4
For instance, in the U.S, it was estimated that the compliance costs stemming from
environmental and other social regulations increased consistently, while compliance costs of
economic regulation were stable after a rapid decline (see table 1) (Viscusi et al 1995).
4
See also OECD 1997b: 198
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Table 1
Annual cost of Federal Regulation (Billion of 1991 Dollars)
1977 1988 1991 2000
Environmental regulation 42 87 115 178
Other social regulation 29 30 36 61
Economic regulation-efficiency 120 73 73 73
Process regulation 122 153 189 221
Sub total 313 343 413 533
Economic regulation transfer 228 130 130 130
Total costs 541 473 543 663
Source: Thomas D. Hopkins, “Cost of Regulation: Filling the Gaps.” Report prepared for regulatory
Information Service Center, August 1992. Quoted in Viscusi et al 1995: 34.
Since the need for social regulation has never been under discussion as a way to protect public
interest, governments have focused on the way to improve the quality of regulation.
“The deregulatory movement has found it more difficult to achieve significant change in
classical regulatory programmes governing health and safety and the environment,
areas where the economic rationale for government intervention is stronger, and free
market alternatives to classical regulation less obviously superior. In the latter areas,
‘regulatory reform pressure’ has taken the form of advocating, not total deregulation,
but rather less restrictive or less burdensome method of governmental intervention
aimed at achieving the relevant regulatory end” (Breyer 1990: 17).
In other words, the slogan applied to social regulation is not less, but better regulation, i.e.
choosing a more efficient, flexible, and simple policy instrument (OECD 1997b: 203-204).
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