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Best Practice Regulation Handbook

3. Preparing a Regulation Impact Statement

This chapter provides general advice on how to prepare a RIS. In doing so, the OBPR has tried to offer practical guidance which addresses the wide range of issues covered by Australian Government regulatory proposals. However, developing good quality regulation is a complex undertaking, and the realities of policy development will often not conform to ‘textbook’ examples of policy analysis. As a result, there will be times when agencies will need to exercise their own judgement about how best to give effect to the intent of the RIS requirements in a given situation. OBPR officers are also available to help apply the following guidance to individual circumstances.

3.1 General comments on preparing a RIS

The purpose of a RIS is twofold: to allow decision makers to be informed by a balanced assessment of the best available information; and to inform the community about both the likely impact of the proposal and the information that was taken into account by the decision- maker. As such, it is important that you draft the RIS with these audiences in mind: it should not be overly technical or contain extraneous information, and it needs to provide a balanced assessment of the various options rather than advocate the preferred option.

There is no fixed length for a RIS; the emphasis should be on quality rather than quantity. However, the level of detail included in a RIS needs to be commensurate with the complexity and significance of the problem being addressed. While the RIS should be a stand-alone document, in some cases it could be useful to place technical or detailed background material on the sponsoring agency’s website and cross-reference it in the RIS.

Examples of RISs are available on the OBPR website (www.finance.gov.au/obpr/ris/example-gov-ris.html). If you have any questions or require assistance, please contact the office.

Use of consultants

Some agencies use consultants to prepare RISs, particularly for analysis of highly complex issues where agencies consider that they may not have the required technical skills available. While employing consultants can improve the quality of the analysis in a RIS, it can also reduce the quality of options under consideration. One of the objectives of the RIS process is to encourage you to question the effectiveness and efficiency of the policies being developed; where this role is outsourced to an external consultant there is a risk that agencies may not have a good understanding of the options being presented.

The RIS remains the responsibility of the agency even where consultants are used. The OBPR will primarily deal with the agency responsible for the RIS rather than with the consultants preparing the RIS, and will generally address its comments and concerns with the RIS directly to you.

3.2 Assessing the problem

Early in the RIS, you should describe the problem or issue that has prompted a consideration of government action. You should provide information on the nature and magnitude of the problem and identify what government actions (if any) have been taken in the past to address the problem. Box 5 provides further guidance.

When identifying the nature and size of the problem you should refer to empirical evidence where available, as well as perceptions of the problem. If the problem involves risk to the public, businesses, workers or the environment, you should include a description of the hazard and a discussion of the likelihood that it will occur (see Appendix F for an introduction to risk analysis). This should include assessing the worst and best outcomes that could occur if a ‘do nothing’ approach is taken.

Why is (new) government action needed to correct the problem?

The existence of a problem may justify government regulation or other intervention. However, you need to describe why the government’s involvement is required to deal with the identified problem. In addressing this issue, a number of questions should be considered:

• Is the problem one that the government has the capacity to deal with effectively?

• Is the problem a consequence of existing regulation?

• If the problem involves risk to members of the community, is the risk great enough to warrant intervention, or is the level of risk acceptable if weighed against the costs of correcting for it?

The economic concept of ‘market failure’ can provide a rationale for government action. Market failure refers to situations where markets do not produce economically efficient outcomes and can arise for a number of reasons including: where the existence of a large firm (or firms) restricts competition in a market; where consumers do not have adequate information about a good or service; or where pollution or other factors affect third parties. The types of market failure are discussed in Box 6.

If the justification for government action is based on market failure, you should identify the precise nature of the market failure. For instance, the problem may be that irrigators do not take account in their decision making of the environmental costs, such as salinity resulting from their use of water (an externality). Or the problem may be the inability of consumers to ascertain the quality of services provided by health care professionals before purchase (information asymmetry).

While the existence of market failure indicates that there may be a role for government action to make the community better off, you still need to consider whether the market failure is significant enough to justify government regulation. If the market is well functioning in terms of producers and consumers being able to exchange information on the costs of resources and the value of goods and services, and if there is a reasonable level of competition, then you may have difficulty justifying regulation on efficiency grounds.

Is there relevant regulation already in place?

Governments may previously have taken action to address the underlying problem. Where this is the case, you should document the characteristics of existing regulation at all levels of government (federal, state/territory and local), and identify the responsible regulatory organisations and relevant government policy. You should demonstrate whether or not existing regulation has been effective in addressing the problem.

If it is clear that existing regulation is failing to deal with the problem in an acceptable way, is this because the regulation is flawed, or because there are problems with compliance? Could the situation be dealt with by improving enforcement or encouraging better compliance with the existing regulation?

 

3.3 Objectives of government action

What are the objectives, outcomes, goals or targets of government action?

In this step of the RIS you should clearly identify what objectives, outcomes, goals or targets are sought in relation to the identified problem. A common error is to confuse the desired final outcome of a proposal with the outputs, or means of obtaining it. For example, a broad objective of government transport regulation may be ‘to reduce the costs associated with traffic accidents’. This objective differs from a narrower objective of ‘mandating the use of seatbelts’, which is one of many means of attaining the broader objective.

The aim of this part of the RIS is not to pre-justify a preferred solution, but to specify the objective broadly enough so that all relevant alternative solutions can be considered. However, you should avoid making it so broad or general that the range of alternatives becomes too large to assess, or the extent to which the objective has been met becomes too hard to establish.

Other information you could provide at this point includes, if applicable:

• any distinction between the primary and subsidiary objectives of the proposal
• whether outcomes are subject to constraints; for example, if they must be achieved within a certain time frame, and
• whether there is an authoritative basis for the proposal to review regulations; for example, a relevant Cabinet minute or government policy announcement.

3.4 Options that may achieve the objectives

This section of the RIS needs to set out the practical alternative options that could wholly or partly achieve the identified government objectives. You should describe each alternative option and explain how the option, if implemented, would achieve the desired result.

For decisions made by the Cabinet or a committee of the Cabinet, the agency may be directed by the sponsoring minister as to the range of options considered in a RIS, with the agreement of the Prime Minister or the Cabinet Secretary (and copied to the Treasurer and the Minister for Finance and Deregulation). And in the case of specific election commitments, the RIS may focus on the commitment and not consider alternative options. In both cases, you will need to make clear in the RIS that the options considered have been limited and that the appropriate authority has been obtained.

Identify a range of feasible options

The RIS should test the effectiveness and appropriateness of alternative (regulatory and non-regulatory) options for achieving the stated objectives.As it is impractical to assess in detail every possible alternative solution to a problem, you need only cover those options that are reasonably likely to achieve the government’s objectives. Infeasible options do not need to be considered in detail in the RIS, however you may need to explain why these options are not feasible.

If any of the options involve establishing or amending standards in areas where international standards apply, you should indicate whether the standards under consideration deviate from the relevant international standards. If this is the case, you should provide an explanation for the variation and examine the implications of this variation.

Alternative regulatory forms

Self-regulation is generally characterised by industry-formulated rules and codes of conduct, with industry solely responsible for enforcement. You might assess self-regulation as a feasible option if:

• there is no strong public interest concern, in particular no major public health and safety concerns
• the problem is a low-risk event, of low impact or significance, and
• the problem can be fixed by the market itself. For example, there may be an incentive for individuals and groups to develop and comply with self-regulatory arrangements (industry survival, market advantage).

Self-regulation is not likely to be effective if industry has an incentive not to comply with the rules or codes of conduct.

Quasi-regulation includes a wide range of rules or arrangements where governments influence businesses to comply, but which do not form part of explicit government regulation. Some examples of quasi-regulation include industry codes of practice developed with government involvement, guidance notes, industry-government agreements and accreditation schemes.

Co-regulation typically refers to the situation where industry develops and administers its own arrangements, but government provides legislative backing to enable the arrangements to be enforced. This is often referred to as the ‘underpinning’ of codes, standards and so on. Sometimes legislation sets out mandatory government standards, but provides that compliance with an industry code can be deemed to comply with those standards. Legislation may also provide for government-imposed arrangements in the event that industry does not meet its own arrangements.

Explicit government regulation – sometimes referred to as black letter law – comprises primary and subordinate legislation. It is the most commonly used form of regulation.

You could consider explicit government regulation where:

• the problem is high-risk, of high impact or significance; for example, a major public health and safety issue
• the community requires the certainty provided by legal sanctions
• universal application is required (or at least where the coverage of an entire industry sector or more than one industry sector is judged as necessary), or
• there is a systemic compliance problem with a history of intractable disputes and repeated or flagrant breaches of fair trading principles, and no possibility of effective sanctions being applied.

Alternative instruments

Within each form of regulation, you could consider using a number of alternative instruments. Alternative instruments (only some of which will be relevant for a particular type of regulatory form) may include:

• no specific action (that is, relying on the market in conjunction with existing general liability and insurance laws)
• information and education campaigns (including product labelling or media campaigns)
• market-based instruments (including taxes, subsidies, tradeable permits, performance bonds and tradeable property rights)
• pre-market assessment schemes (such as listing, certification and licensing)
• post-market exclusion measures (such as bans, recalls, licence revocation provisions and ‘negative’ licensing)
• service charters
• standards (including voluntary and regulatory, performance-based or prescriptive), and
• other mechanisms, such as public information registers, mandatory audits and quality assurance schemes.

The RIS requirements may apply for any standards used for regulatory purposes, even if they have been developed by Standards Australia or other third parties.

3.5 Impact analysis – costs, benefits and risks

The next step in drafting a RIS is to conduct a comprehensive assessment of the expected impact (costs and benefits) of each feasible option. Your objective here is to inform decision-makers on the likely merits of available options, and thereby assist their decision.

When analysing each option, you should consider who would be affected if the option were implemented, what costs, benefits and, where relevant, levels of risk would result, and how significant they would be. Where possible, quantify the impacts; at a minimum, your analysis should attempt to quantify all highly significant costs and benefits. All assessments of costs and benefits, whether quantitative or qualitative, should be based on evidence, with data sources and assumptions clearly identified.

Most RISs use the status quo as the benchmark for assessing the impact of each option. Adopting this approach will allow you to clearly identify the costs and benefits that would result from implementing the preferred option.

To assess the costs, benefits and the level of risk associated with each option, you need to present a clear picture of how each option would change the status quo. Accordingly, your analysis should clearly explain how the actions, obligations and circumstances of different stakeholder groups are likely to change if the option is implemented.

If you have described the options in relatively general terms in the ‘Options’ section of the RIS, you may need to provide a more detailed description of what each option will entail in the ‘Impact Analysis’ section.

Is a formal cost-benefit analysis required?

Not necessarily. The OBPR will provide you with advice on the extent to which the costs and benefits of a particular option need to be quantified. In general, the depth of the impact analysis should be commensurate with the overall effects. For example, a comprehensive and detailed qualitative analysis, supported by quantitative evidence where it is available or readily obtained, may be adequate if the impacts of the proposal are not likely to be highly significant. In such cases, the time and expense involved in additional quantitative analysis may not be justified.

However, for major proposals, you will be required to provide a greater level of quantification in the RIS, and a full cost-benefit analysis may be appropriate. See Appendix E for more information on quantitative cost-benefit analysis.

Who is affected by the problem and who is likely to be affected by proposed solutions?

You will need to clearly identify all groups affected by the problem and its proposed solution, whether directly or indirectly affected. In addition, you should assess the effects on the community as a whole, such as environmental and social impacts.

A common misperception is that a RIS is a ‘business impact statement’. While an impact on business is a trigger for preparing a RIS, you need to consider the impact of an option on all affected groups in the community.

Groups should generally be distinguished as consumers, business and government. Depending on the nature of the proposal these groups may be further subdivided, for instance:

• within the consumer group it may be necessary to distinguish groups according to income, geographical location (regional and rural), age, family unit, cultural background or levels of information held
• within business, distinctions can be made along industry or sectoral lines, by type of activity, or by size of business, and
• within government, whether impacts are at the federal, state/territory and/or local government level.

The extent to which groups need to be separately identified in a RIS will vary according to the problem and option being assessed.

Identify the expected costs and benefits of the options

Costs and benefits are terms used to describe the positive and negative effects of a proposal. A cost is any item that makes someone worse off, or reduces a person’s well-being. Cost items may include ‘opportunities forgone’ because a particular proposal has been adopted. A benefit includes any item that makes any person better off, regardless of whether it can be easily measured or quantified.

Once you have identified the costs and benefits to each of the affected parties, you should assess the net impact of each option on the community as a whole.

Costs

Costs to businesses, including small business, might include:

• ‘paper burden’ or administrative costs to businesses associated with complying with and/or reporting on particular regulatory requirements
• licence fees or other charges levied by government
• changes likely to be required in production, transportation and marketing procedures
• shifts to alternative sources of supply
• higher input prices, and
• restricted access to markets.

In order to help you quantify business compliance costs, the OBPR has developed the Business Cost Calculator (BCC), which is described in Appendix G.

Costs to consumers may include:

• higher prices for goods and services resulting from restrictions on competition
• reduced utility (quality, choice etc) of goods and services, and
• delays in the introduction of goods to the marketplace and/or restrictions in product availability.

Costs to the community and/or the environment may include:

• environmental degradation or pollution
• reduction in health and safety
• undesirable redistribution of income and wealth, and
• lower employment levels or economic growth.

And costs to government may include:

• The costs of developing the regulation
• running education campaigns/providing information
• administration of licensing/inspection services
• collection and collation of business information, and
• enforcement costs, including the costs of litigation.

Benefits

You should identify and describe the benefits of the options to business, consumers, government, other affected groups and the community at large. Many benefits may not be readily quantifiable. Examples of benefits include:

• improvements in product and service quality
• availability of a wider range of products and services
• reductions in costs or prices
• reductions in workplace accidents and improvements in public health and safety
• improvements in environmental amenity
• reductions in compliance costs for business and administrative costs for government, and
• improvements in the information available to business, the workforce, consumers or the government.

Distribution of costs and benefits

The distributional effects of each option are also important in determining the overall outcomes for the community. For example, while a particular option may generate net benefits in aggregate, significant benefits may go to a small number of people who bear no costs, with the costs being borne by a large number or by those who can least afford it. In considering the net impacts of each option, however, you must be careful to avoid double counting: for example, if a cost to businesses is passed on to consumers, you should count this cost only once when estimating the net impact.

Small business

Regulation can have a disproportionate impact on small businesses. Often, small firms have to divert a greater proportion of their resources to meeting regulatory requirements. In addition, small businesses are less likely to have specialist staff (such as lawyers, accountants or human resources professionals) with detailed knowledge of regulation. While such impacts may be unavoidable (indeed they may be desirable), it is important that decision makers are aware of all impacts on small business.

You could consider the degree of impact on individual small businesses, the number of small businesses affected, and whether the overall impact on small business is in proportion to the impacts on other businesses or groups. It is important that you pay particular attention to the compliance cost impact on small business, and the ability (or inability) of these businesses to absorb such costs. The Small Business Advisory Committee (see Appendix D) can assist you in assessing the impact on small business.

Quantify the impacts where they are significant

You will need to accurately and objectively quantify impacts where this is possible. In general, the standard for quantification is higher for proposals which potentially have a significant impact on business.

Quantification:

• provides comprehensive and comparable information to decision makers
• encourages close examination of the nature and impact of costs and benefits
• encourages reduction in the costs associated with regulation
• clarifies the essential assumptions and judgements that underpin the decision about the preferred option, and
• can provide a basis for consultation with stakeholders.

The accuracy of quantified estimates may often be uncertain, and you may have made a number of assumptions in order to generate quantified estimates. While these can reduce confidence in the estimates, it is important that you still include these in the RIS (to give decision makers as much relevant information as possible). Appropriately qualifying and explaining your approach is important, including why better estimates are not achievable.

Some costs and benefits are difficult to quantify. These impacts still need to be considered; the challenge is to assess unquantified impacts adequately. For example, suppose a regulation is proposed that would have quantifiable costs and benefits in addition to unquantifiable benefits. It may be possible for you to assess the net effect of the quantified impacts and compare this to a qualitative assessment of the remaining (unquantified) benefits; you may be able to make a persuasive argument that these benefits are worth paying the costs.

If a regulatory proposal involves addressing a risk, such as OH&S laws targeted at reducing the risk of workplace injury and death, quantifying the impacts can be done within a risk analysis framework. See Appendix F for an introduction to risk analysis.

Identify the data sources and assumptions used, and any gaps in data

You need to include the sources of data used in the analysis, as well as identify any assumptions made when conducting the impact analysis. In this way, the reasoning behind the conclusions is made transparent.

This applies to both quantitative and qualitative information included in the impact analysis. In the case of quantitative information, you should cite specific sources and explain how data were derived from those sources. Where you have included qualitative assessments of costs and benefits, you should explain the evidence and reasoning on which they are based. All assertions and conclusions in the RIS need to be supported by evidence.

The RIS should clearly flag any gaps in the data underpinning the analysis and any assumptions that have been made. Where there is significant uncertainty about any key data inputs, the RIS will benefit from a sensitivity analysis that considers outcomes for a range of values (see the discussion of sensitivity analysis in Appendix E).

Restrictions on competition

Some existing and proposed regulations restrict competition. Such regulations can restrict consumer choice, raise prices and reduce overall economic productivity by denying the economy the efficiency gains competition provides. Significant restrictions on competition range from legislated monopolies that block competition in entire sectors, to a host of less visible restrictions on starting up and operating businesses, such as quotas on business licences and restrictions on shop opening hours.

For instance, licensing requirements to promote health and safety objectives may also limit the number of people engaged in an industry or occupation, allowing existing practitioners to raise their charges. Similarly, permitting only some producers to use certain terms on their labels can restrict competition, limiting supply and raising prices to consumers.

Where your particular proposal restricts competition, the RIS must demonstrate that it will deliver benefits to the community that outweigh its costs, and that there is no alternative means of achieving the same objective without restricting competition. This is required to meet the Australian Government’s commitments under the intergovernmental Competition Principles Agreement, which is designed to promote competition in the economy and the benefits that it can bring to the community.

The competition checklist set out in Box 7 provides a guide to assess whether a proposal will restrict competition.

If a proposal is likely to restrict competition, the RIS should examine its impact on the following:

• Incumbent businesses. Will the proposed regulation affect incumbent firms differently, altering competitive relations between them in a way that would reduce the intensity of competition in the market as a whole?
• Entry of new businesses. Will the proposed regulation restrict entry for all (or particular types of) new businesses? What is the likely degree of this restriction and is it likely to significantly reduce competitive pressures in the longer term?
• Prices and production. Will the regulation raise prices by imposing new costs on producers? Will it facilitate information exchange among producers or lead to the exit of some incumbent firms in a way that raises the prospect of collusion?
• Quality and variety of goods and services. Does the regulation include minimum standards requirements 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?
• Market growth. Is the regulation likely to limit market growth, either by increasing costs to all producers or by limiting the possibility of entry by new firms?
• Related markets. Does the regulation in one market also have anti-competitive effects in upstream markets (those that supply inputs to the market in question), or in downstream markets (those to which the market in question supplies inputs)?

3.6 Consultation

When developing the RIS, you need to outline the process and outcomes from consultation undertaken during the policy development process. Relevant information includes:

• the main views of the stakeholders
• areas of agreement as well as areas of difference
• information on intergovernmental consultation, and
• how the proposal has been modified to take account of stakeholders’ views. If the proposal has not been modified, the RIS should explain why dissenting views have not been accepted

In general, any policy development process, including proposed new regulation or changes to regulation, will involve consultation with relevant stakeholders, including the main parties affected by the proposal: business, the not-for-profit sector, the community, regulators and other government agencies. Consultation helps to ensure that the full range of impacts is taken into account when assessing how best to solve a problem and the transparency it fosters helps to build trust in the policy process.

It is important that consultation be conducted with the attitude that the stakeholders’ views will be listened to and taken seriously, rather than conducted as a ‘box-ticking’ exercise after the policy decision has effectively been made.

The following set of best practice consultation principles should be considered by all agencies when developing regulation:

• Continuity – Consultation should be continuous, and start early in the policy development process.
• Targeting – Consultation should be widely based to ensure it captures the diversity of stakeholders affected by the proposed changes. This includes state, territory and local governments, as appropriate, and relevant Australian Government agencies.
• Timeliness – Consultation should start when policy objectives and options are being identified. Throughout the consultation process, stakeholders should be given sufficient time to provide considered responses.
• Accessibility – Stakeholder groups should be informed of proposed consultation and be provided with information about proposals through a range of means appropriate to these groups. Agencies should be aware of the opportunities to consult jointly with other agencies to minimise the burden on stakeholders.
• Transparency – Policy agencies need to explain clearly the objectives of the consultation process and the regulation policy framework within which consultations will take place, and provide feedback on how they have taken consultation responses into consideration.
• Consistency and flexibility – Consistent consultation procedures can make it easier for stakeholders to participate. However, this must be balanced with the need for consultation arrangements to be designed to suit the circumstances of the particular proposal under consideration.
• Evaluation and review – Policy agencies should evaluate consultation processes and continue to examine ways of making them more effective.

Appendix C provides guidance to help you incorporate these principles into your consultations.

3.7 Conclusion

In the conclusion you will ideally: provide a clear statement identifying the preferred option; indicate the costs and benefits of this option for the range of groups that are affected; and highlight any areas of uncertainty.

Your conclusion must be supported by the preceding analysis. This provision does not prevent you from recommending an option that does not have the highest estimated net benefit to the community. What it means, however, is that you cannot claim that such an option has the highest net benefit, and you will need to explain why you prefer this option.

3.8 Implementation and review

Having identified the preferred option to meet the objectives stated at the beginning of the RIS, it is necessary to consider how the option will be implemented and enforced, and to establish a review strategy that will allow the option to be evaluated after it has been in place for some time.

It is important that you consider some practical implementation issues (if they have not yet been considered) before the option is adopted. These include:

• administrative issues, such as which authority will implement and enforce the proposed option, and the resource requirements and costs involved
• actions regulated parties are required to take, such as maintaining extra information, completing forms, or proving experience, expertise or educational achievements
• transitional arrangements to minimise the impact on stakeholders, for example delayed or gradual introduction of new requirements, and provision of information and other assistance to businesses affected, and
• how the option would be enforced.

The RIS needs to outline how the regulation will be reviewed. This part should set out when the review is to be carried out, and information on how the review will be conducted; for example, if special data is required to be collected.

Previous 2. The Government’s regulatory impact analysis requirements

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