What is the likely net benefit of each option?
In this section of the RIS you must:
- Identify who is likely to be affected by each regulatory option and assess the economic, social and environmental costs and benefits as well as how those costs and benefits are likely to be distributed.
- Quantify the benefits and costs of your policy proposal on businesses, community organisations and individuals to a level of detail commensurate with the impact of the policy proposal.
- Identify and assess the cost of offsetting deregulatory measures.
- Assess the costs and benefits of all proposed options.
- Analyse qualitative impacts as well as quantitative impacts.
- Provide information on applicable international standards and whether the policy proposal differs from or adopts those standards.
Who is affected and what is the impact?
Measuring the net benefit of a policy option requires all of the costs and benefits to be taken into account. The benefits will usually accrue via achievement of the desired policy objective. The costs are those counted using the Regulatory Burden Measurement framework.
Businesses are frequently impacted by regulation, and the impacts can include:
- Paperwork requirements. The administrative cost of complying with or reporting on aspects of business such as a grant, training package or in many cases, simply supplying statistics to government agencies.
- Regulatory stipulations. The cost to business of changes in the design, production, distribution, pricing or marketing of a product or service as a result of government rule-making.
- Market intervention. The cost to business of changed market parameters such as entry rules, banning of products, competition arrangements, capital requirements or sources of supply.
Community organisations can be subject to over-regulation. Governments are a significant source of funding and control over their activities, and burdens can flow from:
- Grant and other funding conditions. Paperwork and other activity associated with applying for, administering and reporting on the use of grants.
- Consequences of policy change. Regulation in sectors where not-for-profit organisations deliver services, for example, welfare, can have far-reaching implications for an organisation’s effectiveness.
Individuals and households experience the impacts of red tape directly and indirectly, for example:
- Increased compliance effort. The behaviour of regulators, whether in day-to-day dealings with the public or the design and delivery of services, can impose a range of costs on people who deal with government.
- Higher input costs for goods and services. Regulation can increase prices through a range of effects, such as through stipulations on product design, marketing or distribution.
- Market intervention. Restrictions on competition, market entry or access can have implications for supply and demand with detrimental impact on prices, choice, quality and availability.
What are the regulatory costs?
New regulations have a cost in—among other things—lost time, compliance burdens, inconvenience, delay, foregone opportunity or threats to competitiveness. All of these costs can be expressed in dollars. The policy maker’s job is to provide the decision maker with a fair and balanced assessment of these costs.
The process of costing requires analysis of each of the following questions.
- What kind of businesses are we talking about? How many are there? What industries are they in? Where are they based?
- How many people do they employ and how long have they been in business? What products or services do they deliver?
- Are they represented by an industry association? How likely is it any new costs will simply be passed on to consumers?
- How well prepared are the business owners to cope with new regulatory requirements?
- Give small business special consideration. Are there special burdens on small business arising from the fact they often lack the required specialist legal, accounting or HR skills in-house? Are the regulatory costs disproportionately burdensome on small business? Does the analysis adequately take into account the different impacts on small businesses of different sizes, types and locations?
Community organisation impacts
- What sectors do they operate in? Are they large or small?
- What kinds of activities do they undertake? Do they deliver services on behalf of government?
- Are they represented by a peak body?
- Who are the people or households affected? How many are there?
- Why are they affected? Will the burden fall on those who can least afford it?
- What type of households do they live in? Where do they live and work?
- How old are they? Are there cultural issues you need to take into consideration?
- What understanding do they have of the policy issue you are dealing with?
- Are they organised into any representative entity?
Estimating regulatory burden
Regulatory compliance burdens should be calculated using the Regulatory Burden measurement tool available at www.cuttingredtape.gov.au or using an equivalent method agreed by OBPR. Remember, your analysis of net benefit should go beyond compliance burdens and take account of other regulatory costs such as opportunity costs, indirect costs (and benefits) and the costs (or savings) to government of administering new (or eliminating old) regulation.
As you work through your cost estimates, keep these points in mind:
- Ensure your data sources and calculation methods are transparent, that any gaps or limitations in the data are discussed and your assumptions are disclosed in every case.
- Regulatory obligations to transfer money to government—such as taxes and levies—should not be included in your estimate of regulatory burden.
- When estimating costs for business, make sure you consider the likelihood of those costs being passed on to consumers. If regulatory burden is able to be passed on through price increases, avoid over estimating costs by only counting the final net burden.
Here are some questions to consider as you seek to estimate regulatory costs:
- Have you checked your costings with industry associations or peak bodies to see if they support your estimates?
- Do you have examples of costs of previous, similar regulation? Are there any academic, consultant studies or audits to provide further support for your costings?
- What are the drivers of cost? Are there ways of designing or implementing the policy to minimise the impact on those drivers?
- Are there any other hard-to-quantify costs the decision maker should be taking into account? For example, regulation can be used to allocate risk to those in society best placed to manage it. Regulation can be used to clarify rights and responsibilities. Concepts of fairness and equality can be difficult to evaluate in dollar terms, but if they are significant, you should find a place in your overall analysis to assess their contribution to net benefit.
- Will there be indirect effects? If you impose obligations on one group, will they simply pass those costs on to others or impose their obligations on customers or suppliers? If so, how will these indirect impacts alter the net benefit?
What are the benefits of regulating?
The point of imposing regulatory costs is to achieve some form of desirable social outcome. It’s critical you estimate these beneficial outcomes as part of your analysis. Regulatory benefits can often be harder to measure, but it’s critical you have a workable and valid estimate to support your analysis. For example, your policy proposal might involve a road safety initiative where the benefit is the avoidance of lives lost: hard to estimate, but important nonetheless. Examples of other potential benefits are too numerous to list here, but in assessing the positive impacts of various policy options, consider questions like these:
- Does your proposed policy result in a better or wider range of government services, even though they might come at a greater cost?
- Will your proposed policy result in improved competition, lower prices, availability of better products, improved productivity or the creation of new jobs?
- Does the resultant reduction in risk or improvement in safety of your regulation have an economic benefit that will be felt in the community? Is the benefit likely to be immediate or will it only emerge over the long term? Have these benefits been modelled and have the models been independently reviewed or tested?
- Who do the regulations benefit? Are the benefits real, tangible and meaningful or are they unimportant to the affected groups?
- Are there windfall gains to any group that you need to note in the analysis? Are the identified benefits distributed fairly or are there equity issues to be considered?
- Do the proposed options represent such a significant saving to government that business and the community will regard the costs as worth bearing?
What is the net impact?
At its core, the RIS process challenges you to answer two important questions:
- Is it better to do something rather than nothing? Will a policy intervention improve the situation significantly or will the cost of intervening outweigh the advantages?
- Is the recommended policy option better than the other ones proposed? Provided you have identified all the available and viable options, will this one deliver the best net outcome?
Comparing the costs and benefits of each proposed option requires rigorous and logical analysis in support of your conclusion. Assess the net benefit—overall benefit minus regulatory burden—to the current status quo. Ensure the effort and expense required is commensurate and proportionate to the problem you are trying to solve.
Keep in mind, many studies have shown the capacity of humans to habitually over-estimate potential benefits and under-estimate potential costs.
Are there any competition considerations?
If your proposal is likely to restrict competition, your RIS must demonstrate benefits that outweigh the costs and that no alternative means of achieving the same objective is available. This is required to meet the Commonwealth’s commitments under the intergovernmental Competition Principles Agreement, designed to promote competition and established by COAG in 1995.
Incumbent businesses and entry of new business
Will your proposed regulation affect existing firms differently, altering competitive relations between them in a way that would reduce the intensity of competition in the market as a whole?
Will it restrict entry for certain new businesses? What is the likely degree of this restriction and is it likely to significantly reduce competitive pressures in the longer term?
- Would your proposed regulation result in changes to:
- the ability of businesses to provide a good or service?
- requirements for a licence or permit as a condition of operation?
- the ability of some types of firms to participate in government procurement?
- costs of entry to, or exit from, an industry?
- geographic barriers for businesses?
Prices and production
Will the regulation raise prices by imposing new costs on producers? Will it facilitate information exchange among producers, raising the prospect of collusion?
Would your proposed regulation:
- control or substantially influence the price at which a good or service is sold?
- alter the ability of businesses to advertise or market their products?
- set significantly different standards for product/service quality?
- significantly alter the competitiveness of some industry sectors?
The quality and variety of goods and services
Does the regulation include minimum standards that will reduce the range of price–quality combinations available in the market? Is it likely to reduce product variety by restricting the entry of new firms?
Will it place limits on:
- the ability of consumers to decide from whom they can purchase goods or services?
- the mobility of customers to move between suppliers of goods or services
by imposing high ‘switching’ costs?
- information available to consumers that decreases their ability to choose effectively between competing businesses?
Have you identified offsets?
Offsets must be provided in the event there is a regulatory burden cost to your proposed policy. They must also be costed using the Regulatory Burden Measurement tool.
In some instances, an offset will itself require a RIS to ensure the identified costs are valid. While it seems counter-intuitive, a reduction in regulation can impose its own transitional burdens in the form of changes to IT systems, payroll or administration.
Have your offsets been costed thoroughly and with as much care as your proposed regulatory impact costings?
Offsets may be from any area of your portfolio, though ideally they should assist those directly affected by any new regulation you introduce. They should be achievable and coincide as much as possible with your new regulation. Remember
to identify where the new burden and offset impacts will overlap.
What if the issue is market-sensitive?
As you consider some of the questions about cost and benefit, you may encounter sensitive issues that may limit your capacity to consult openly with affected groups. In most cases, transparency and openness is paramount, however some policy questions require sensitivity. Think carefully about how and when consultation takes place and how much information you can share—and with whom.
Further guidance material on cost-benefit analysis can be found at www.cuttingredtape.gov.au