Regulatory Impact Assessment and SMEs Test

March 16, 2017 - h. 17.00-19.00 Mario MARTELLI, Economist, expert on public policies and regulatory assessment, Italian Presidency of the Council of Ministries (m.martelli@governo.it)

Jean Monnet Module EU Approach to Better regulation

1. (Regulatory) Impact Assessment (and intro to consultation)

Stake-holders, regulation

Increase two-way dialogue

with the outside world

on better regulation;

showing what the govt

are doing and how we

can all work together

to change things

Work with departments and

regulators to simplify

and modernise existing

regulations

Work with regulators

and departments to

change attitudes and

approaches to

regulation to become

more risk based

Work with departments

to improve design of

new regulations and how

they are implemented Flow

Comms

Culture

Stock

Better Regulation – the interlinking Pillars (Berr 2008-09)

Regulation – A flow

Role of RIA

in the light of the programming

objectives

The new regulatory provisions have to be evaluated not

only vis-à-vis their abstract coherence with values

considered worthy to be carried out, but as well, and

especially, with regards to the pros and cons for citizens,

enterprises, and the public sector,

Tools to improve the flow of regulations: Impact Assessment

• IA is a systematic, and comparative appraisal of the impact of proposed rules.

• In short, the IA process moves from the general strategy underlying the logic of intervention (the definition of the problem), to the identification of relevant options, and finally to the in-depth analysis of options that are feasible. Finally, the comparison of the impact of options (including the so called do nothing) is intended to identify a option “preferred” because the benefits outweigh the disadvantages.

The classic Table of Contents of an IA

1 Problem definition

2 Measuring the baseline

3 Options (alternatives)

4 Consultation

5 Decision criteria

6 Data-gathering

7 Analysis of the (economic) impact of different options

8 Choice of an option or presentation of 2-3 options each of them ‘optimal’ according to different criteria

9 Monitoring, evaluation

10 Reporting

• Problems and needs to be tackled by

regulation

• Objectives and expected results

• Regulatory and non regulatory options

• Relevant options: analysis of criticalities

and assumptions

• Economic assessment of feasible options

• Preferred option: the reasons why

Data

Consulta

tion

What is the RIA Process

RIA = Informed decision

Regulatory lmpact Assessment

- Does NOT replace the need for a political decision – rather, it provides some of the factual information essential for a good

policy development process and a well-informed final decision

• Assessment of a specific category of costs affecting a category of stakeholders

• Given the goal set by the political system, IA determines the most effective way to reach that goal

• Assessment of a wide range of costs and benefits affecting different categories of stakeholders

• Assessment of a wide range of costs for the public sector (‘regulation within government’)

Tools to improve the flow of regulations: Impact Assessment 2

Problems identification

OBJECTIVES GENERAL SPECIFIC

EXPECTED RESULTS

ACTIVITY

RELEVANT OPTIONS

FEASIBLE OPTIONS

Ex ante evaluation

ECONOMIC

assessment

(CBA, costs effectiveness)

PREFERRED OPTION

The RIA Strategy

15

Relevant Options

FEASIBLE OPTIONS

Analysis of Assumptions/conditions (organizational and financial, economic, social)

Analysis of criticality

Feasibility

PREFERRED OPTION

Economic analysis

Option choice

Conditions and Assumptions to be Assessed in a RIA

Regulation = Compliance Costs (for the End-Users)

Direct financial costs Substantive

compliance costs Administrative costs

Compliance costs

Monetary transfers to public administration

(taxes, duties, etc.)

Modification of productive process or

output

- Arising from administrative activities businesses would conduct even in the absence of a regulation - Arising from activities businesses realize

simply because there is a regulatory requirement.

Administrative burdens

Opportunity Cost

Is what you give up to get something or to

do something. SCARCITY

Examples:

Keeping cash in closet for one year

Sitting in classroom listening to lecture

Queuing in a Public office dealing with bureaucracy.

IA: Some classic misunderstandings

• It is not cost-benefit analysis. CBA is a component of RIA in

some countries (even in the US CBA is mandated for some

agencies-topics but not others)

• It is used to raise the right questions, it is not an

algorithm which churns out solutions

• It is not a decision-making method, it supports the

process of collective choice together with other

components of decision-making

Audrey Hepburn and Gregory Peck – Lawbreakers

Exercise: Overview

Challenging an Italian icon:

The moped and personal freedom The case concerns the introduction of mandatory

helmet requirements for moped drivers in Italy, a change from the previous legislation that required helmets only for drivers under 18 years.

This case study examines an impact assessment developed in 2000 within the ‘Special RIA Project’ organized by the Italian Presidency of the Council of Ministers. The special RIA Project introduced RIA for the first time in Italy.

Exercise: The End of Freedom: Content of the Helmet Law

The regulation mandating helmets for everybody (Law 472/99) became effective on 1 April 2000.

Consumers

Fines for those who drive without a helmet range from €0 to € 120. The driver is responsible for the passenger. If the driver is a minor, the vehicle is seized for 30 days

Producers

Fines are possible for those importing and selling ‘non compliant helmets’: from € 600 to € 2400

Exercise: What was the problem? The cost of accidents…

• Total cost of road accidents (estimated 1997) was equal to 22 billion Euros per year

• Medical costs of road accidents, estimating ordinary hospitalization expenses, in 1994 found an average cost of ITL 5.3 million (Euro 2,700) per injured

Also counted:

• Society’s total costs and expenses due to fatality, injuries and damages to property caused by road accidents

• “Parameters adopted by countries with mobility and road accident conditions not different from Italian ones, corrected on the basis of sanitary cost analysis by the Italian Health Institute and of data relative to total number of the accidents”

… particularly head injuries.

(Source, The Italian Health Institute exploratory studies on the hospitalization cost estimates [on a

sample of 396 cranial traumatized during the period 1984-92]

The medical costs for head-injuries on mopeds were estimated at 131 billion Liras a year (or 65

million Euro), while indirect costs (based ‘on epidemiologic data of head-injured mortality and invalidity from road accidents on mopeds’), were

estimated at 700 billions Liras, a year at minimum (or 350 million Euro)

AIR nov. '02

24

Options: Relevant

OPTIONS: Feasible

OPTION: PREFERRED

Regulatory Options and RIA

Options and RIA

Objectives/ Expected Results

Relevant Options

Do-nothing option

Deregulation and simplification

Voluntary options

Self-regulation

Market-based options

Information disclosure

Command and control regulation

A RIA Process: The Typical 4 Steps

Think!

Identify policy options to meet the objectives.

Consider the most appropriate delivery mechanisms (regulatory/non-regulatory approaches).

Begin to narrow the range by means of screening for technical and other constraints, and by measuring against criteria of effectiveness, efficiency and consistency.

Draw up a shortlist of potentially valid options for further analysis.

Assess Alternatives

• We have less experience with alternatives in most fields, so anticipating the reaction of consumers and businesses to different incentives is difficult to do empirically.

• Alternatives often require the involvement of new or unfamiliar institutions and agents whose past performance is not clear.

• Alternatives often involve more uncertainty than “commands” (although in practice the degree of uncertainty is not likely to be very different).

Exercise: Other Evidence Considered

There is empirical evidence from other countries that

indicate similarities to the Italy’s experience that

demonstrates the effectiveness of requirements for

helmet use.

In the USA, mandatory helmet use

brought a 30% decrease in fatal

road accidents.

Smart regulation: policy mix and regulatory pyramids

It is rarely based on one option, but on the combination of different options that produce a coherent, self-reinforcing policy mix

It is often responsive, based on an escalation of options on scales of threat or reward:

“the regulator offers trust, if the regulatee complies she is given reward, if not there is the threat of command and control regulation up to criminal enforcement of the law for the bad apples”

Exercise: Coercive Regulation ... Appeared to be the Best

• “Direct regulation” seemed to regulators to be the best choice. The rule provided for mandatory helmet use for all moped and motorcycle drivers, regardless of age and vehicle cylinder capacity, as well as for possible passengers, with fines to promote compliance.

• Coercion appeared to be a suitable tool to reach the objectives.

The choice to impose mandatory helmets is also based on the assumption that, in this case (the contrary of what is done for many other dangerous activities) the ‘freedom to take risks’, and the personal freedom of choice should be reduced for public purposes. The inconvenience arising from drivers’ change of behaviour was not included in relevant costs. Was this the correct approach?

Assess Alternatives – consultation ...

Do not switch off your brain here: you can always learn details about alternatives…

... and even re-consider the order of options further to the results of the consultation exercise

... Finally, consultation may reveal options that were not considered initially or suggest breaking down one option into two different ways to go about the option

Regulator

Citizens, Business, Representatives of regulatees

Representatives of regulatees

1) INFORMATION

2) CONSULTATION

3) NEGOTIATION

Citizens

REgRef – public consultation

Decision

Decision

Regulator

Decision

Regulator

Why does consultation matter/1?

Info about problems, alternatives, impacts

Affected stakeholders (for new or existing rules)

Input for rulemaking

Why does consultation matter/2?

•

Consultation

Brings into the discussion the

expertise, perspectives, and

ideas of those directly affected

Helps regulators to

balance opposing interests Increases

citizens’ participation

Improves implementation

: a) “sense of ownership”; b)

reduces enforcement

problems Reduces

unintended consequences

Raises transparency of decision-

making

Exercise: Some People will be Harmed by the Regulation

e.g. Some stakeholders who fall under the category of ‘sick people on a waiting list for organ transplants’: for them, the PROS of the direct beneficiaries are to be considered CONS.

Different stakeholders will have different opinions and points of view about costs

and benefits

Exercise: Are There Other Relevant Stakeholders?

Motorbike and motorcycle dealers, importers or producers

Motor vehicles (3/four wheels) dealers, importers or producers (remarkable ex-post unforeseen effect on this category after the new regulation)

Building companies active in public works (roads)

PR and publicity agencies (regulation through information for a public campaign)

Insurance companies (huge decrease in disbursements)

Associations of civil society representing ‘victims for road accidents’

Persons and entities representing biomedical research and special medical services

Exercise: Summarizing Costs and Benefits

Regulatory costs are composed of direct compliance costs from the purchase of the protective helmet (with the exclusion of motorcycle drivers already obliged by the previously enforced norm), and the increase of supervision costs by authorities.

Direct benefits are the decrease of fatality, morbidity and invalidity caused by head injuries in moped road accidents, with a consequent relative cost decrease for the people.

Indirect benefits are the decrease of health costs borne by the National Health System, as well as rehabilitation costs for social assistance and social/labour reintegration of the disabled.

2. IA: The SMEs Test

OCSE – Proportionality, IA: risk

When framing regulations, the burdens imposed and penalties for non-compliance are proportionate to the risks.

It is useful to consider whether the costs for a particular group (e.g. SMEs) of complying with an administrative procedure are proportionate to the benefits to

society resulting from the new procedure.

Implementing regulation with particular reference to business (controls and audit). This implies particular attention to low risk firms which are usually the majority of the regulated population (J. Black, 2008)

Italian IA – DPCM 170/2008

Needs

Do Nothing

Objectives

Definizione dell’ambito di intervento

Impact Assessment

Options (Alternatives)

Co

nsu

ltat

ion

Preferred Option

Relazione AIR

3 Issues to be considered:

1. Regulatees – the SMEs

2. Impacts on the SMEs

3.Alternatives wich mitigate impact on SMEs

Over the whole process: Consultation

1. Preliminary Assessment of the End Users: SMEs

Needs – Regulatees From the beginning, the analyst need to check wheter or not SMEs will be affected by the regulation to be, no matter if apparently they are not official regulatees. Focus on:

No. of companies and dimension

Work-force

Relevance of the SMEs for the area of regulation

Inter-connections with other sectors, subcontracting

Basic analysis and then in depth analysis if a SMEs risk (regulatory options) arises

SMART Regulation - ‘end-user’. Anyone affected by the foreseen regulation.

2. Measurement of the impact on SMEs

IA with particular focus on

REGULATORY COSTS

Regulatory costs (see slide 16) are regressive

Emphasis over administrative burdens

Competition assessment: credit availability, behaviour of competitors, barriers.

3. Impact of the analysis: mitigating options for SMEs

Esenzione totale/parziale per le PMI da certi obblighi/costi della regolazione

Riduzione/esenzione temporanea da certi obblighi/costi della regolazione (intervalli temporali più lunghi

Riduzione fiscali o aiuti finanziari diretti per compensare costi di regolazione (in compatibilità con articoli del Trattato CE)

Riduzione della parte di costi finanziari (ad esempio, diritti che hanno una base di costo fisso elevato che quindi costano più per i piccoli)

Rendicontazione contabile/amm.va semplificata per microimprese e PMI

Campagne di informazione, formazione e Help-Desk dedicati alle PMI

Ispezioni e controlli semplificati, basati su considerazioni legate al rischio regolatorio

If previous steps show a SMEs risk, then PROPORTIONALITY. In the

Italian scenario: