ARCHIVED - Number 14: Regulatory Reform through Regulatory Impact Analysis: The Canadian Experience
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Regulatory Reform through Regulatory Impact Analysis:
The Canadian Experience
February 1997
Table of Contents
2. Purpose of Canada's RIA Programme and Historical Background
4. Assessment of the RIA Programme
Appendix A Reforming Canada's Regulatory Process: 1971-1995
Appendix B Impacts Of RIA: Four Case Studies
Executive Summary
Regulatory impact analysis (RIA) is one tool the Canadian government uses for regulatory reform. Requirements for RIA force regulators to think in a structured way before they act and increase the accountability of regulatory departments.
Canada's RIA requirements include benefit-cost analysis, but go much further. Each proposed regulation must have a Regulatory Impact Analysis Statement (RIAS). The RIAS must: demonstrate that the proposed regulation is preferred over other policy tools to achieve the objectives; describe the stakeholder consultations that have taken place; and explain the strategy to ensure compliance and enforcement.
Despite shortcomings in nearly all regulatory impact analyses, anecdotal evidence indicates that RIA has:
- helped develop short-lists of preferred policy tools;
- identified design changes that were built into regulations;
- identified instances in which more stringent standards would yield
higher net benefits;
- raised enough warning signs that the regulation was sent back for
further analysis and verification; and
- helped overcome industry opposition to the proposal by allaying
fears of adverse impacts.
Perhaps the best indicator of the programme's effect is the degree to which regulatory departments have internalized the way of thinking embodied within the RIA requirements. Several departments have implemented regulatory development processes that reflect new approaches to regulating. These processes increase stakeholder consultation early in the process, increase the range of policy tools considered and make explicit the trade-offs between the benefits and costs of possible interventions.
Major lessons learned from Canada's experience with RIA include:
- an effective RIA programme doesn't have to take a strictly
command-and-control approach involving a "gatekeeper" agency with the
power to block regulatory proposals;
- a RIA programme's major benefit can be achieved by changing the culture
within regulatory departments to internalize the principles of RIA;
- a major strength of Canada's RIA programme is that it allows regulatory
departments flexibility to adopt different, but effective, approaches to meeting
RIA requirements;
- encouraging stakeholder consultation early in the process is perhaps the
most important feature of the RIA programme;
- analytical tools, such as the Business Impact Test, training programs and
guidelines are important ways of implementing the RIA requirements; and
- a RIA programme can have significant benefits to regulatory departments,
including providing regulatory support to engage in more meaningful
consultations with stakeholders, providing justification for regulatory
proposals and improving regulatory proposals.
Management's Response
- Regulation is one of the most widely used policy instruments of modern
governance. In its many forms, regulations has played a vital role in serving
and balancing the diverse interests and values of complex societies and
economies.
- For these reasons, regulatory management and reform is important and will
continue to be high on the agenda of governments in coming years.
- Regulatory impact analysis (RIA) is one tool the Canadian government uses
for regulatory reform. Requirements for RIA force regulators to think in a
structured way before they act and increase the accountability of regulatory
departments.
- A Regulatory Impact Analysis Statement (RIAS) is a public document
published along with the text of the regulation, it is required for all
proposals to amend regulations or introduce new ones.
- Canada's RIA requirements include benefit-cost analysis, but go much
further. Each proposed regulation must have a Regulatory Impact Analysis
Statement (RIAS). The RIAS must: demonstrate that the proposed regulation is
preferred over other policy tools to achieve the objectives; describe the
stakeholder consultations that have taken place; and explain the strategy to
ensure compliance and enforcement.
- The study reviewed and evaluated the methodological strengths and
weaknesses of Canada's RIA programme in improving regulatory quality and
identify elements that contribute to its effectiveness.
- The study was an important part of the exchange of information on current
regulatory management and reform activities in OECD countries at the May 1996
meeting.
Major lessons learned from Canada's experience with RIA include:
- an effective RIA programme doesn't have to take a strictly
command-and-control approach involving a "gatekeeper" agency with the
power to block regulatory proposals;
- a RIA programme's major benefit can be achieved by changing the culture
within regulatory departments to internalize the principles of RIA;
- a major strength of Canada's RIA programme is that it allows regulatory
departments flexibility to adopt different, but effective, approaches to meeting
RIA requirements;
- encouraging stakeholder consultation early in the process is perhaps the
most important feature of the RIA programme;
- the quality of analysis varies significantly between regulatory
departments, and between different branches within a department;
- very few "full" benefit-cost analyses are done with the most
significant omissions being benefit estimates, although important costing
categories are frequently neglected, as well;
- relatively little effort is expended in estimating benefits; half of the
RIAS examined did not quantify benefits at all -- in some cases, the lack of
effort at benefit estimation reflects justifiable concerns about the ability to
quantify benefits (i.e., benefits related to the public good and risk
reduction);
- direct costs to industry and government are generally better quantified
then indirect costs (i.e., withdrawal of products from markets, substitution of
non-regulated for regulated goods, displacement of investment, etc.);
- generally the RIAS will focus on the distributional impact of costs and
benefits; seldom are there good estimates of the impact on economic efficiency,
in part because this is very difficult to do (sometimes, regulators are confused
about efficiency and distributional impacts); and
- despite weaknesses, nearly all the RIAS examined contained information
that would be valuable in making regulatory decisions such as: quantification of
direct costs, identification of some distributional impacts, and some discussion
of benefits.
- Treasury Board Secretariat (TBS) will assist regulatory departments
with specific problems in carrying out the RIA requirements by helping design
legislation or management systems;
- Introduction of analytical tools, such as the Business Impact Test (BIT),
training programs and guidelines are important ways of helping regulatory
developments to implement the RIA requirements. Treasury Board Secretariat is
working with Industry Canada to provide training on the BIT;
- Treasury Board Secretariat, in conjunction with regulatory departments
and agencies, facilitated the development of several new training courses to
improve knowledge and skills at the working level; courses developed and
launched in 1994 included Introduction to Regulatory Impact Analysis, Regulatory
Alternatives for Executives, Regulatory Alternatives for Analysts, Benefit/Cost
Analysis of Regulations, and Compliance Strategy. Similarly, a number of new
courses were developed and delivered in 1996: Business Impact Test, Risk
Assessment, Risk Communications, Consultation, Introduction to Plain Language
Writing Workshop, and Plain Language Regulations Drafting Workshop. It is too
early to determine the effects on the quality of RIAS. The training program and
RIAS quality will be monitored to determine needed improvements; and
Treasury Board Secretariat in late 1995 introduced the regulatory process management standards to ensure departments had the management systems in place to adhere to the policy. Treasury Board Secretariat will work with departments to ensure they are in compliance with the new standards.
1. Introduction *
Regulatory reform means different things to different people. Thomas McGarity identifies three "themes" of regulatory reform. Some equate regulatory reform with regulatory relief or, more precisely, deregulation and slowing the growth of new regulations. To others, it means increasing the accountability of and political control over civil servants creating regulations. To yet others, regulatory reform means improving regulatory decisions by ensuring they have a rational analytical basis.
Regulatory impact analysis (RIA) is a tool for regulatory reform that directly relates to the theme of rational analysis. Requirements for RIA force regulators to think in a structured way before they act.
Regulatory impact analysis also relates to the other two themes, assuming that decision-makers and the public heed the analysis, by:
- increasing accountability by opening regulatory departments' analyses
to the scrutiny of politicians, "watchdogs" within the civil service,
industry and public interest groups;
- reducing the quantity of regulations, where critics are correct in the
assertion that regulations cannot pass the test of rigorous analysis.
Skeptics rightly point out, however, that by the choice of methodologies, assumptions and data inputs, a regulatory impact analysis can be shaped to support even a severely flawed regulation. And even if the analysis is valuable, there is no guarantee that decision-makers will take it into account. Regulators can view RIA requirements as simply one last hurdle they face in promulgating their preferred regulation.
Research into other countries' RIA programmes identifies how programme design impacts the ability of the programme to achieve the above three themes. For example, some programmes take a "command-and-control" approach, effectively regulating the regulator by halting any regulation for which the analysis does not clearly show positive net benefits. Other programmes take a less strict approach to enforcing the requirements for each and every regulation, but make more efforts to instill the principles of RIA within the culture of regulatory departments.
Have RIA programmes been effective reform tools? This paper contributes to the debate by describing and assessing the impacts of Canada's RIA programme.
The next section describes the purpose of Canada's RIA programme and its historical background. Subsequent sections characterize the programme features, and identify its effectiveness and weaknesses. We conclude with the major lessons learned from the Canadian experience.
2. Purpose of Canada's RIA Programme and Historical Background
Canada uses regulatory impact analysis as one component of its federal regulatory reform. Canada's Regulatory Impact Analysis (RIA) programme complements other regulatory reform tools, including:
- policy guidance, such as the Citizen's Code of Regulatory Fairness and
the Regulatory Policy;
- regulatory process management standards;
- mandatory public notice and comment for most proposed regulations; and
- regulatory review.
Canada's RIA programme serves three major purposes:
- it provides a framework for the consideration and management of
regulatory initiatives in federal departments and agencies;
- it summarizes the basic information required by ministers to reach a
decision on proposed regulations; and
- it provides the public with information on regulatory proposals.
More specifically, the RIA programme uses Regulatory Impact Analysis Statements (RIAS) as a means by which federal departments demonstrate that proposed regulations meet the requirements of Canada's Regulatory Policy. To ensure that the use of the government's regulatory powers results in the greatest net benefit to Canadian society, regulators must ensure that:
- they can demonstrate that a problem or risk exists, federal government
intervention is justified, and regulation is the best alternative;
- Canadians are consulted and that they have an opportunity to participate
in developing or modifying regulations and regulatory programs;
- the benefits outweigh the costs to Canadians, their governments and
businesses. In particular, when managing risks on behalf of Canadians,
regulatory authorities must ensure that the limited resources available to
government are used where they do the most good;
- adverse impacts on the capacity of the economy to generate wealth and
employment are minimized and no unnecessary regulatory burden is imposed. In
particular, regulatory authorities must ensure that:
- information and administrative requirements are limited to what is
absolutely necessary;
- the special circumstances of small businesses are addressed; and
- parties proposing equivalent means to conform with regulatory
requirements are given positive consideration;
- intergovernmental agreements are respected and full advantage is taken of
opportunities for coordination with other governments and agencies;
- systems are in place to manage regulatory resources effectively. In
particular, regulatory authorities must ensure that:
- the Regulatory Process Management Standards are followed;
- compliance and enforcement policies are articulated, as appropriate; and
- resources have been approved and are adequate to discharge enforcement
responsibilities effectively, and to ensure compliance where the regulation
binds government.
Canada's RIA requirements, therefore, go well beyond benefit-cost analysis (BCA), although BCA is one requirement. Analysis of impacts on international competitiveness, small businesses and other social concerns is required.
Canada's RIA programme has evolved since the first requirements for a professional Socio-Economic Impact Analysis for major regulations were introduced in 1978, supported by a 1976 Treasury Board guide on how to conduct cost-benefit analyses. (See Appendix A for a chronology of regulatory reform in Canada.)
In the early 1980s, regulatory reform focused on specific deregulatory initiatives and on improving citizen access to the process through publication of an Annual Plan describing current regulatory initiatives. By the mid-80s, further progress was made in the processing of specific program changes, a formal government-wide regulatory policy was introduced. In 1986, the requirement for a Regulatory Impact Analysis for all proposals was instituted.
RIA of proposals has continued to evolve in practice with the introduction of new "how-to" guides, training courses and tools such as the Business Impact Test (see below). Regulatory reform remains an essential part of the government's overall economic agenda to promote job creation and economic growth; Cabinet expects regulators to make a persuasive case that the benefits of their regulatory proposals exceed the costs, and therefore enhance the efficiency and effectiveness of Canadian programs.
3. Programme Description
3.1 Questions Answered in the RIAS
The RIA programme is designed to encourage regulators to think through in a structured way the foundations for their regulatory proposals. The RIAS provides a framework for answering questions such as:
- Is the problem one that justifies government intervention?
- If so, is regulation the most effective and efficient means of government
intervention?
- What are the government's specific objectives in intervening?
- Will the proposed regulation result in a reasonable balance of benefits
and costs?
- To whom will the benefits accrue? Who will pay the costs?
- What will the impacts be on international competitiveness, small business
and other relevant factors?
- How were stakeholders consulted, and what do they think of the proposed
regulation and its likely impacts?
- How will compliance with the regulation be monitored and enforced?
To facilitate consistency between each RIAS and the Regulatory Policy, the Treasury Board Secretariat has developed a standard format for all RIAS. The format consists of six headings, as follows:
- Description: to explain why the proposal is being made.
- Alternatives: to demonstrate that the proposed regulation is
preferred over other means (such as voluntary programs, market-based instruments
and other types of regulations) to achieve the objectives.
- Benefits and Costs: to identify and quantify the benefits and
costs resulting from the regulation and qualitative assessments of benefits and
costs if quantitative analysis is not feasible or possible.
- Consultation: to summarize the interdepartmental,
intergovernmental and private-sector consultation that has taken place in
identifying and characterizing the problem, developing the regulation, and
assessing benefits and costs.
- Compliance and Enforcement: to explain the strategy being
adopted to ensure compliance, and to describe the enforcement mechanisms in
place or anticipated.
- Contact: to identify who can be contacted for more information.
The requirement for stakeholder consultation is a very important aspect of the RIA programme. Stakeholder consultations strengthen and provide a reality check for the analysis contained under the other headings of the RIAS.
3.3 Methods and Degree of Analysis
The methods and degree of analysis in a RIAS vary in proportion to the significance and likely impact of the regulatory proposal. An initial screening of regulatory proposals classifies each proposed regulation as a low-cost initiative, intermediate-cost initiative or major initiative, based on the anticipated cost and degree of stakeholder acceptance or support of the proposed regulation (see table below).
TABLE 1
CLASSIFICATION OF REGULATORY PROPOSALS
|
ANTICIPATED COST (present value of all costs |
DEGREE OF ACCEPTANCE High Low |
|
|
< $100,000 |
Low-cost Initiative |
Low-cost Initiative |
|
$100,000 to $50 million |
Intermediate-cost Initiative |
Major Initiative |
|
> $50 million |
Major Initiative |
Major Initiative |
About 10 percent of regulatory proposals approved by Cabinet have anticipated costs exceeding $50 million. Half of these are tax or program expenditure authorities and not really regulatory in nature. The remaining major regulatory initiatives require detailed quantitative analysis of costs and benefits.
About 30 percent of regulations are administrative in nature and have almost no economic impact. The initial screening typically provides all the information needed to complete the RIAS. The economic analysis usually consists of qualitative justification outlining why costs are expected to be negligible and a description of the benefits.
Sixty percent of regulatory proposals fall somewhere between these two extremes, with small to medium impacts (costs of $100,000 to $50 million). Since this class covers a wide range of cost impacts, the required analysis varies from detailed quantitative analysis to less rigorous qualitative assessments.
A streamlined process can be used for assessing the impacts of certain regulatory proposals, namely:
- repetitive regulations: those that are replicated in
essentially the same form on a regular basis (e.g., regulations naming members
to boards of various agencies);
- minor regulations: those that have no policy implications (e.g.,
minor amendments to existing regulations); and
- minor types of external user fee regulations (e.g., small
amendments to existing fee schedules).
The streamlined process allows pro forma RIAS with some standardized boilerplate material, as well as exemption from prepublication or shortened prepublication periods.
To help sponsoring departments in selecting appropriate analytical methods, guides exist for various tasks in preparing RIAS, including:
- writing the RIAS,
- undertaking benefit-cost analysis,
- assessing regulatory alternatives, and
- designing regulations to minimize adverse impacts on competitiveness.
The guides are necessarily general, given the diversity of regulations subject to the RIAS requirement (standards for environmental performance, energy efficiency, occupational safety and consumer safety; programs for approving pharmaceutical drugs, medical devices, new chemical substances and pesticides; economic regulations; cost recovery regulations; administrative regulations; etc.).
The department or agency sponsoring the regulation (hereafter called the "sponsoring department") is responsible for the content of the RIAS, which is signed by the Minister.
The actual drafting of the RIAS is almost always done by staff working in the sponsoring department. Depending on the department, the RIAS may be prepared by economists, technical staff or legal staff.
In drafting the RIAS, staff rely on inputs such as assessments of alternatives, cost-benefit analyses, risk-cost analyses and socio-economic impact assessments. Background analysis may be conducted in-house or by outside consultants, depending on the internal resources available at the time, the timeline for the proposal, the amount of analysis required, departmental practice and other factors.
In preparing the RIAS, staff also rely on consultations with stakeholders. In at least one case, industry participation has gone so far as to include seconding business representatives to government for the duration of the analysis.
Each RIAS undergoes a staged review. Some stages are prescribed by Canada's
federal regulatory process. Other stages may be used depending on the sponsoring
department's practices and the classification of the regulation.
The common review steps are as follows:
- Typically, the draft RIAS is reviewed internally by technical,
economic and legal staff, as well as senior managers.
- Sponsoring departments have generally implemented external stakeholder
review processes, particularly for major initiatives. Stakeholders are usually
asked to comment, or in some cases to help develop, background technical and
economic assessments that are inputs to the RIAS. In addition to providing a
reality check for the regulatory impact analysis, stakeholder review also helps
satisfy the Regulatory Policy's requirements for consultation with parties that
would be affected by the proposed regulation.
- The Regulatory Affairs Directorate of TBS is the central agency
responsible for reviewing each regulatory proposal and RIAS in draft form. The
review verifies that the proposal is consistent with the Regulatory Policy and
that the potential impacts of the proposal have been adequately considered and
drawn out in the RIAS. A sponsoring department does not need formal approval
from TBS to proceed with a proposed regulation.
- The Privy Council Office also reviews each draft regulation and RIAS for
consistency with overall government policy and constitutional and legislative
authority.
- In order to elicit comments from the public, the RIAS is then published
for a 30-day period in the Canada Gazette, Part I, along with the
proposed regulation. When required by legislation or international trade
agreements, this period is extended.
- If, after public comment, the proposal goes ahead, the final regulation
and RIAS incorporating any revisions are published again, this time in the Canada Gazette,
Part II.
3.6 Support for Regulatory Departments
The Regulatory Affairs Directorate of TBS provides support in various forms to departments and agencies sponsoring regulatory proposals.
In addition to the numerous guides and manuals mentioned earlier, training workshops are provided periodically for government staff involved in preparing RIAS. The most recent round of workshops provided training in assessing alternatives to regulation, benefit-cost analysis and regulatory impact analysis. The cost of regulatory training varies from workshop to workshop ranging from $350 per participant for a one-day workshop on Regulatory Impact Analysis to $550 per participant for a two-day workshop on Benefit-Cost Analysis for Regulations. In addition, there are free monthly seminars and workshops on regulatory issues and best practices.
Specialized analytical tools have been developed to assist regulatory agencies in assessing specific types of impacts. Two of the most important analytical tools are packages designed to test for specific classes of impacts.
The Business Impact Test, developed by TBS, Industry Canada and the Canadian Manufacturers' Association in consultation with business, is an interactive software-based tool for consultation. It is designed to help governments understand and assess how regulations will have an impact on the private sector by obtaining feedback from business on regulatory proposals. The Business Impact Test identifies direct costs to firms from regulations, as well as how regulations affect the way firms operate, organize and innovate; it provides businesses with an opportunity to suggest how the proposed regulation can be adjusted to reduce the impact on business.
A similar tool to assess workplace impacts is currently under development by TBS and Human Resources Development Canada, in partnership with the Canadian Labour Congress and the Canadian Federation of Labour. The Workplace Impact Tool (WIT) should improve and structure the dialogue between regulators and individuals interested in the workplace. The scope of the WIT is intended to capture any regulatory initiative impacting on the workplace.
4. Assessment of the RIA Programme
Programme effectiveness is defined here as the expectation of "better" regulatory decisions. In the tradition of microeconomic theory, "better" regulatory decisions are defined as decisions that result in greater net benefits to society.
Greater net benefits might be achieved by: not proceeding with any government intervention; intervening with a non-regulatory tool; redesigning the regulation to achieve the same objectives at a lower cost; or altering the objective to be achieved.
Before reviewing a number of indicators of better regulatory decisions resulting from Canada's RIA programme, let's look at design features that influence programme effectiveness.
Design Features Influencing Programme Effectiveness
The Regulatory Policy and the Citizen's Code of Regulatory Fairness, the policy foundations of the RIA programme, apply to regulations made by federal departments or agencies. No department is exempt. Two agencies, the Copyright Board of Canada and the Canadian Radio-Television and Telecommunications Commission are arms-length independent administrative tribunals; technically, they are exempt from the policy, although they participate in several ways in the government's overall programme of regulatory reform and management. These agencies conduct similar analyses in assessing the impacts of their decisions, through the hearing process.
Canada's programme covers regulations promulgated under any statute. There are no inherent statutory limits on departments' authority to take into account regulatory impact analysis when making decisions, although statutes can affect the range of options available to regulators.
All new regulations and amendments to existing regulations are subject to the RIA programme. Periodic regulatory reviews, another component of Canada's overall regulatory reform programme, focus on the impacts of existing regulations.
The RIA programme also applies to statutes establishing new regulatory programmes. However, because much legislation sets out only a framework of objectives and government regulatory powers, it is often more difficult to be precise about impacts.
The RIA programme is an administrative policy directive promulgated under the authority of Section 7 of the Financial Administration Act; policy directives are mandatory but do not have the same legal status as regulations. Federal departments and agencies must follow the policy in developing regulatory proposals; however, once a proposed regulation is sent to Cabinet for approval by the sponsoring Minister, it legally enters the legislative process (as opposed to the administrative process). It is then up to Cabinet to choose to honour their Regulatory Policy.
There is no bureaucratic "gatekeeper" created under the programme; that is, the Regulatory Affairs Directorate (RAD) of the Treasury Board Secretariat that administers the programme does not have the authority to block regulatory proposals that do not conform to the policy. This is a change from the 1986 to 1991 period, when RAD's predecessor had to formally approve all RIAS.
RAD focuses on demonstrating, through training and various communications vehicles, the benefits of conforming to the regulatory policy. This approach, in RAD's view, allows it to achieve its objectives cost effectively; over time, it can also change attitudes and gain "buy-in" for the policy's objectives. It was not clear that the 1986-91 approach was particularly effective.
Some analysts have suggested that lack of statutory backing for the programme (and possibly subjecting regulatory decisions to judicial review), and the few resources allocated to its administration, are major weaknesses in the programme's design. Stanbury, for example, contrasts RAD with regulatory departments that have the clout of legislation behind them, and large staff for administrative and analytical support. The result, he claims, is like "trying to hold back a flood with an index finger."
Although RAD's minister (the President of the Treasury Board) is a major Cabinet player, RAD's efforts have been aimed largely at influencing regulatory proposals prior to their presentation to Cabinet. RAD's approach focuses as much or more on influencing the regulatory culture within sponsoring departments than battling each regulatory proposal that falls short of the full requirements of the regulatory policy. Nevertheless, proposals which clearly violate the regulatory policy are systematically challenged at the Cabinet table. And, in the highly collegial and consensus-oriented world of Ottawa decision-makers, that represents a significant deterrent to regulators.
The impacts on regulatory decisions of this approach are discussed below.
Increases in Net Benefits
A direct empirical measure of the effectiveness of the RIA programme is the increase in net benefits to society arising from regulatory improvements attributable to regulatory impact analysis.
For example, the U.S. Environmental Protection Agency's (EPA's) benefit-cost analyses between 1981 and 1986 were instrumental in revisions to three regulations. Estimated net benefits to society were increased by over $10 billion as a result of the revisions. Since only $8.1 million was spent to conduct the benefit-cost analyses, the EPA's "return on investment" was over 1,000 to 1.
Estimates of increases in net benefits resulting from Canada's RIA programme are not available. This is not surprising considering what would be required to produce such a measure.
First, we would need to know what regulation or policy would have been implemented in the absence of the RIA programme. Without this, there is no "baseline" for evaluating a programme's impacts. Second, we would need an estimate of the net benefits for the baseline intervention. Third, we would have to establish that the RIA was responsible for the revised decision.
This information is rarely available. Regulatory decisions typically evolve rather than leap from one option to another. Many revisions to regulatory proposals are made in the early stages of development - as a result of consideration of alternatives, consultation with those most affected and qualitative assessment of possible effects - before estimates of the benefits and costs are produced. As well, regulatory decisions are political acts and, by their very nature, must take into account many factors that are often impossible to quantify in any meaningful way. When decisions change, therefore, it is rarely possible to conclude that the impact analysis was always the deciding factor that tipped the scales - and it is difficult to measure the impact in quantitative terms.
The lack of empirical estimates of increases in net benefits should not be interpreted as a sign of programme ineffectiveness. As long as regulators are seriously considering costs, benefits and alternatives early in the regulatory development process, "bad" proposals will be weeded out and the RIA programme's objectives will be achieved.
Anecdotal Evidence of Better Regulatory Decisions
We interviewed regulators and decision-makers in five major regulatory departments. The purpose of the interviews was to gather anecdotal evidence of specific revisions to regulatory proposals resulting from impact analysis.
Overall, these regulators and decision-makers indicated that the RIA process had been effective. They identified some of the positive impacts of the process. (Specific examples are given in the appendix.) They are:
- helped to develop short lists of good intervention options;
- identified design changes that were subsequently built into the
regulation;
- identified instances in which different (sometimes more stringent)
standards would yield higher net benefits;
- raised enough warning signs that the regulation was sent back for further
analysis and verification; and
- helped to overcome industry opposition to the proposal by allaying fears
of adverse regulatory impacts.
The substantial positive impacts of the RIA process have been achieved despite intrinsic constraints. Some of these constraints could be eliminated, but the costs of doing so would be substantial and it is unclear whether doing so would achieve significantly better results. These constraints fall into five categories.
First, enabling legislation constrains the forms of government intervention available to regulatory departments. For instance, the Canadian Environmental Protection Act (CEPA) contains few powers that would allow Environment Canada to implement economic instruments. Nevertheless, Environment Canada continues to examine economic instruments when assessing alternatives, believing that accumulated evidence regarding these economic instruments has long-term importance in implementing more efficient environmental protection tools.
Second, good analysis requires resources. Because of limited budgets, innovative alternatives to regulation are frequently dismissed without exploring the detailed design options that would overcome initial concerns about their implementation.
Third, timing is a constraint when there is a need, real or perceived, to respond quickly. This is not the case for the large majority of proposed regulations.
Fourth, the well-known limitations of benefit-cost analysis frequently constrain the usefulness of some RIAS. Limitations include inadequate data, inadequate models, inability to quantify or place monetary values on many types of risk reductions, and significant uncertainties in the underlying assumptions.
Fifth, in some cases cost-benefit analyses cannot cope well with non-quantifiable criteria which may be the most important. To take a non-regulatory real example from Ottawa, an unusually large number of cases of meningococcal infections created considerable public fear about the safety of school children. This led local public health authorities to commit resources to an inoculation programme that, from the perspective of pure risk reduction, was not cost-effective. The decision was taken on the basis that it was necessary to reduce the near-panic situation among parents. One could have attempted to develop a quantitative proxy for "peace of mind," but not within the time frame that decisions had to be taken.
Quality of Information Produced for RIAS
Rarely do regulatory impact analyses live up to the theoretical ideals developed in academia. It is easy to find shortcomings when such standards are used.
Our goal is more practical: to assess whether regulatory impact analyses have provided valuable information in making regulatory decisions. A RIA programme cannot be effective unless the information provided is valuable. If valuable information is available but not used, the decision-making process needs to be revised.
We examined regulatory impact analyses for a sample of regulations. The regulations spanned different fields (environment, agriculture, transportation, consumer safety, etc.), types of regulations (standards, cost recovery, etc.) and magnitude of impact (low-cost, intermediate and major initiatives).
The major findings are summarized below.
The quality of analysis varies significantly between regulatory departments, and between different branches within a department.
More significant variations are evident across different types of regulations. Usually, these are consistent with the three classes of regulations (low-cost, intermediate and major initiatives).
Very few "full" benefit-cost analyses are done. The most significant omissions are benefit estimates, although important costing categories are frequently neglected, as well.
Impact analysis is usually conducted for only one proposal. Rarely are benefits and costs estimated and compared across a wider range of proposals. However, this is changing. Several departments are starting to estimate benefits and costs for a short list of alternatives, and for different levels of stringency.
The initial screening of alternatives typically involves qualitative assessment criteria that span much more than economic costs and benefits. Commonly applied criteria include statutory authority, consistency with policy objectives such as the polluter pays principle, public acceptability, and fairness/equity.
Relatively little effort is expended in estimating benefits. Indeed, half of the RIAS examined did not quantify benefits at all. For example, no benefits were estimated for Environment Canada's 1992 Pulp and Paper Effluent Regulation, a regulation with a price tag of nearly $3 billion in capital costs and over $200 million in operating costs. However, consensus was achieved on the regulation (the industry supported the proposal) without estimates of net benefits.
In some cases, the lack of effort at benefit estimation reflects justifiable concerns about the ability to quantify benefits. This is particularly true for benefits related to the public good and risk reduction. For example, regulations to implement the Canadian Environmental Assessment Act did not attempt to quantify uncertain benefits such as protection of endangered species and "biosphere effects."
A small percentage of RIAS quantify benefits without setting a monetary value on them. This is particularly true for regulations aimed at risk reduction, where "body counts" and estimates of human morbidity are rarely valued in monetary terms. Reasons cited include the inability to ascribe values to risk reductions. Some staff in regulatory departments remain adamant that reductions in risk cannot be assessed in monetary terms.
Direct costs to industry and government are generally better quantified. But this is not always the case. For example, Health Canada's RIAS to implement cost recovery fees for drug evaluation did not quantify costs to industry, even though a background study of the Department's first fee proposal estimated that the industry's start-up administrative costs would top $17 million. However, it did describe in detail the consultation process, including the Business Impact Test for the initial fee proposal, and the ways in which the fee structure was revised to account for industry's concerns. And, on the basis of the impact analysis, the fee structure was revised and accepted by both industry and government.
Analyses of indirect cost impacts are very weak. Rarely are costs estimated for withdrawal of products from markets, substitution of non-regulated for regulated goods, displacement of investment, etc.
Analyses of impacts on small businesses and international competitiveness are rare. A major problem in assessing impacts on competitiveness is the lack of operational measures and analytical methods. As mentioned earlier, the Business Impact Test was developed to identify costs to firms resulting from regulations and, in particular, how the proposed regulation is likely to impact on the way firms operate and new or improved products or services are introduced.
RIAS generally focus on the distributional impact of costs and benefits. Seldom are there good estimates of the impact on economic efficiency, in part because this is very difficult to do. Sometimes, regulators are confused about efficiency and distributional impacts.
Despite weaknesses, nearly all the RIAS we examined contained information that would be valuable in making regulatory decisions. The information included quantification of direct costs, identification of some distributional impacts, and at least some discussion of benefits. Some RIAS went further and discussed the ability of regulated companies to absorb and/or pass through compliance costs.
4.2 Costs of the RIA Programme
Analysis used as inputs to the RIAS are undertaken for many reasons, not just to meet the requirements of the RIA programme. To that extent, programme costs are difficult to estimate.
The major costs, however, can be identified as:
- costs to industry and other stakeholders to participate in greater
consultations through meetings, reviewing analyses, use of the Business
Impact Test, etc.;
- costs to regulatory departments for in-house and external (consultants')
analysis; and
- costs to the Regulatory Affairs Directorate to administer the programme,
including reviewing draft RIAS and developing analytical tools, training
workshops, guides, etc.
A final indicator of the programme's impacts is the degree to which regulatory departments have "internalized" the new way of thinking embodied in the RIA programme. Is the analysis being conducted because it is required by the regulatory policy, or are regulators really questioning the need for government regulation and how best to design a regulation to maximize net benefits and minimize competitiveness impacts?
In general, all regulatory departments appear to have accepted in principle that economic impacts of proposed regulations must be examined prior to promulgation, and that a range of alternatives should be evaluated before deciding on regulatory interventions. Nonetheless, some regulatory decisions still appear to precede the regulatory impact analysis.
While the need for impact analysis is not disputed, there are different views among and within regulatory departments on the value of formal benefit-cost analysis. Some departments claim they have replaced benefit-cost analysis with forms of analysis that address a broader range of impacts. Some staff also believe benefit-cost analysis is inappropriate when it involves placing a monetary value on human life or health.
Perhaps the most important sign of the programme's impact is that, in at least two cases, regulatory departments have implemented new regulatory development processes that reflect a new approach to regulating. Both processes increase stakeholder consultation early in the process, increase the range of possible government interventions examined, and make explicit the trade-offs in benefits and costs of the possible interventions. In addition, the regulatory process management standards, developed in 1995 by the Treasury Board Secretariat in consultation with departments, are mandatory "quality assurance" standards for the regulatory process. Regulatory authorities are responsible for having management systems in place that meet the standards by the end of 1996, and must review their performance periodically and report to the President of the Treasury Board.
The new approaches developed and adopted by two regulatory departments, Agriculture and Agri-Food Canada and Environment Canada, are summarized below.
AGRICULTURE AND AGRI-FOOD CANADA'S REGULATORY PROPOSAL ASSESSMENT
|
Agriculture and Agri-Food Canada developed the Regulatory Process Assessment ("Regtool") to ensure that the department complies with the Regulatory Process Management Standards. The Regtool is a checklist and list of questions designed to help policy analysts assess the need for government intervention and, if required, the most appropriate means of intervening. More specifically, the Regtool provides analysts with - guidance on assessing issues of international trade and
consistency with international agreements; After completing the Regulatory Proposal Assessment, analysts have much of the information needed to complete a RIAS. |
ENVIRONMENT CANADA'S STRATEGIC OPTIONS PROCESS
|
Since 1994, Environment Canada has been using the Strategic Options Process (SOP) to develop regulatory proposals. The SOP is a time-limited process to: - establish environmental and health objectives; Background technical and economic studies feed into the evaluation of strategic options. Typically, the evaluation is conducted in two phases: a preliminary screening of strategic options; and detailed benefit-cost analysis of a short-list of promising strategic options. All key stakeholders are invited to participate in a SOP, either as members of an "Issue Table" that develops the recommendations, or as part of the stakeholders team validating and challenging the recommendations. |
5. Lessons Learned
The Canadian experience with regulatory impact analysis has been very positive. The specific costs and benefits attributable to a RIA programme are not easy to estimate, since regulatory proposals are analyzed for many reasons, not just to provide inputs to a RIAS. Nonetheless, we have learned some significant lessons.
To improve regulatory decisions, a RIA programme doesn't have to take a strictly command-and-control approach involving a "gatekeeper" agency with the power to block regulatory proposals. A central policy review, however, is necessary. It is, however, difficult to say whether Canada's RIA programme would be more effective if regulatory impact analysis was a legislated requirement.
How well the principles of a RIA programme are accepted by regulatory departments is the most important long-term measure of success. One can argue that an effective RIA programme will likely modify the regulatory culture within departments.
The flexibility of Canada's RIA programme is a significant strength. Different departments are adopting effective - albeit different - approaches in assessing regulatory impacts. Departments also need the flexibility to focus analytical resources on the most important regulatory proposals and the most important impacts of their proposals.
Making stakeholder consultations a requirement of the RIA programme is perhaps its most important feature. Stakeholder consultations help ensure that the "best" regulations or alternatives are selected, and that all regulatory impacts are identified and assessed appropriately.
A RIA programme should go well beyond the requirements for benefit-cost analysis. Benefit-cost analysis, if focused exclusively on the measurable, will pass over some factors that should be considered in regulatory decisions.
Other topics that should be addressed in RIAS include: impacts on competitiveness and small business; the ability to monitor and enforce compliance with the proposed regulation; and stakeholder buy-in.
Regulatory departments usually need help in assessing impacts beyond direct benefits and costs. Analytical tools, such as the Business Impact Test, training programs and guidelines, are needed to improve the quality of analysis.
A RIA programme can benefit regulatory departments. Benefits include providing analytical support to engage in more informed consultation with stakeholders, providing justification for regulatory proposals, and improving regulatory proposals.
Appendix A Reforming Canada's Regulatory Process: 1971-1995
1971
Law Reform Commission of Canada (LRC) proposed to study "the broader problems associated with procedures before administrative tribunals."
The Minister of Consumer and Corporate Affairs asked the Canadian Consumer Council to undertake a series of studies of consumer interest in regulatory agencies, including marketing boards and so-called self-governing professions and government monopolies.
1972
Parliament passed the Statutory Instruments Act and created the Standing Joint Committee of the House of Commons and Senate on Regulations and Other Statutory Instruments.
1973
The Canadian Consumer Council, funded by the federal government, published its report on regulatory agencies.
1974
The Consumer Research Council (successor to the Canadian Consumer Council) published a report on regulatory agencies, dealing with both substantive and process issues.
1976
The Way Ahead document was issued by the federal government after wage and price controls had been introduced in October 1975. The paper indicated the government was undertaking a "fundamental examination of the major structural components of our economy and our society." It proposed that cost benefit analysis be applied to government regulation.
1977
Ontario established the Professional Organizations Committee.
The Treasury Board Secretariat required federal departments and agencies to evaluate the effectiveness and efficiency of all federal regulatory and expenditure programs at least once every three to five years.
The Institute for Research on Public Policy established its Regulation and Government Intervention Program, which produced a number of studies of regulation put in place in Canada between 1978 and 1982; some of these studies were done jointly with the Economic Council.
1978
The Province of Ontario appointed an Agency Review Committee to examine statutes and regulations; the aim was to reduce "red tape." Later in the year, the Committee proposed to eliminate 46 agencies.
A Regulation Reference was given to the Economic Council of Canada (ECC) based on the First Ministers' meeting.
Treasury Board imposed the requirement for a Socio-economic Impact Analysis (SEIA) of all major new regulations in the areas of health, safety and fairness.
Ontario Economic Council's Issues and Alternatives volume focused on ways of reforming the regulatory process.
The federal government established the Office for the Reduction of Paperburden in the Treasury Board; its mandate was to reduce the cost to small businesses of complying with a wide variety of government intervention (e.g., taxes, UIC, Statistics Canada, etc.) It was transferred to the Ministry of State for Small Business in 1980.
1979
The Final Report of the Royal Commission on Financial Management and Accountability recommended changes in regulatory agencies and the regulation-making process.
The Clark Government established the Office of the Coordinator, Regulatory Reform (OCRR), in the Treasury Board Secretariat. It was the "parent" of the present Regulatory Affairs Directorate in the Treasury Board Secretariat.
The interim report of the ECC's reference, Responsible Regulation, was published. It proposed extensive changes to the regulatory process, including a regulatory calendar and Regulatory Impact Analysis Statement. The former was later adopted by the Trudeau government and the latter was adopted by the Mulroney government.
1980
The Parliamentary Task Force on Regulatory Reform (Peterson Committee) issued a 23-page "Discussion Paper" listing 28 suggestions for improving the regulatory process.
The OCRR "work plan" was approved by Cabinet. It focused on improving the regulatory process and reducing the regulatory burden.
The Parliamentary Task Force's (Peterson Committee) Final Report made 29 recommendations, most involving the regulatory process. No changes were made, however.
The Law Reform Commission published its working paper, Independent Administrative Agencies, which contained many recommendations for changes in regulatory agencies.
1982
Bill C-119 was introduced to repeal 124 unused and unnecessary federal statutes.
The federal Access to Information Act was enacted.
Federal legislation was enacted to standardize and simplify records retention (savings to the private sector were estimated at $100 million a year).
1983
OCRR required major regulatory departments and agencies to publish a Regulatory Agenda twice a year in May and November.
1984
The Ministerial Task Force on Program Review, under Deputy Prime Minister Erik Nielsen, was announced one day after the Progressive Conservatives under Brian Mulroney took office.
1985
The Office of the Controller General published Evaluating Regulatory Programs (the final version was published a year later).
Twenty-one reports by the Ministerial Task Force on Program Review study teams were submitted to the federal government; two studies on regulatory programs and agencies were also submitted.
1986
Cabinet confirmed that the Office of the Controller General was to undertake the evaluation and review of existing regulatory programs.
The first elements of the Mulroney Government's Regulatory Reform Strategy were announced: (1) a formal federal regulatory policy; (2) appointment of a Minister for Regulatory Affairs; (3) a Citizens' Code of Regulatory Fairness; (4) 43 specific regulatory reform initiatives, half of which dealt with process ; and (5) "Guiding Principles of Regulatory Policy."
The reports of the Nielsen Task Force on Program Review (Nielsen Task Force) were released.
OCRR, created in late 1979, was abolished and replaced by the Privy Council Secretariat for the Cabinet Committee on Privatization, Regulatory Affairs and Operations, until August 1986.
The "Regulatory Process Action Plan" was announced.
The PCO Secretariat was replaced (six months after its creation) by the Regulatory Affairs Branch (RAB) of the Office of Privatization and Regulatory Affairs, under a Minister of Privatization and Regulatory Affairs.
RAB put into effect the new Regulatory Process Action Plan consisting of five elements: an annual Federal Regulatory Plan; a Regulatory Impact Analysis Statement for new regulations; public consultation and information on all draft regulations and amendments; review of all regulatory statutes on a 10-year cycle; review of all regulations over a seven-year period; and evaluation of all regulatory programs at least once every seven years.
The federal Regulatory Agendas became the annual Regulatory Plan. The first one, for 1987, was published in December 1986.
1988
The Mulroney Government re-elected, but with a smaller majority.
1991
The Budget Speech announced the dissolution of OPRA. Regulatory Affairs became the Regulatory Affairs Directorate in the Treasury Board Secretariat (with half the staff of RAB).
Treasury Board modified its 1977 policy statement on the evaluation of government programs.
1992
The Minister of Finance in his Budget Speech announced a department-by-department review of existing regulations to ascertain their effects on Canadians' prosperity, reflecting concerns about international competitiveness. The House of Commons Standing Committee on Finance was to review existing federal regulatory programs to determine Canada's international competitiveness, and suggest ways of improving such programs, the regulatory process and inter-governmental coordination.
Treasury Board turned the federal government's regulatory policy into a formal Treasury Board Directive to regulatory departments and agencies.
The House of Commons Standing Committee on Finance received a letter from the President of the Treasury Board suggesting how the Committee might fulfill its responsibility for the review of the impact of regulation on competitiveness.
The private sector advisory group, the Steering Group on Prosperity, recommended: (1) a competitiveness impact assessment for existing and proposed laws and regulations; and (2) a regulatory budget to analyze and report on the economic impact and overall burden of regulations.
1993
The Sub-committee on Regulations and Competitiveness submitted its report to Parliament.
Regulatory reviews were completed by regulatory departments, which will ultimately lead to 835 modifications to, or revocation of, regulatory requirements.
The Liberal Government was elected and put forward its position regarding further regulatory change. The Liberal Party's election platform, laid out in the booklet Creating Opportunity, stated that a Liberal government will enhance the regulatory reform exercises currently under way in several key federal departments, ensuring that these reforms result in maximum efficiency without any comprise in Canadian standards.
1994
The 1994 Budget clearly identified regulatory burden as an issue, and promised to reduce the regulatory and paper burden for business.
In late 1994, the government published Building a More Innovative Economy, a strategy to promote job creation and economic growth. It featured a package of regulatory reform initiatives emphasizing the need for partnerships with other governments and the private sector. The package outlined legislative initiatives, management initiatives, completion of earlier promised actions (1992-93 regulatory review outcomes), and a review of regulation in six key sectors of the economy.
The Regulatory Affairs Directorate of the Treasury Board Secretariat, in conjunction with regulatory departments and agencies, facilitated the development of several new training courses to improve knowledge and skills at the working level; this was done to facilitate implementation of innovative approaches throughout regulatory departments and agencies.
Courses developed and launched in 1994 included Introduction to Regulatory Impact Analysis, Regulatory Alternatives for Executives, Regulatory Alternatives for Analysts, Benefit/Cost Analysis of Regulations, and Compliance Strategy.
1995
Treasury Board updated its regulatory policy, introducing the regulatory process management standards to ensure departments had the management systems in place to adhere to the policy.
1996
A number of new courses were developed and delivered in 1996: Business Impact Test, Risk Assessment, Risk Communications, Consultation, Introduction to Plain Language Writing Workshop, and Plain Language Regulations Drafting Workshop.
Sources: Stanbury, W.T. (1992), "Reforming the Regulatory Process in Canada, 1971-1992," Minutes of Proceedings and Evidence of the Sub-committee on Regulations and Competitiveness of the Standing Committee on Finance, House of Commons, Issue no. 23, November 17-December 10.
Updated by Regulatory Affairs Directorate, Treasury Board Secretariat.
Appendix B Impacts Of RIA: Four Case Studies
Drug Evaluation Fees Regulation
|
Sponsoring Department: |
Health Canada |
|---|---|
|
Purpose: |
To recover program costs by establishing fees for reviewing applications for approval of new drugs |
|
Estimated Cost: |
$65 million per year to industry, plus administrative cost to government |
|
Estimated Benefit: |
None quantified |
Impact of the Regulatory Impact Analysis :
The RIA identified industry's major concerns regarding the proposal's disincentives to introduce new products into a relatively small market like Canada. Application of the Business Impact Test played an important role in the impact analysis.
Three major changes to the proposed fee structure resulted from the analysis:
- domestic R&D;
- additional fee reductions were implemented for products with very low
sales; and
- companies were allowed to stagger payment of the fees instead of bearing
the entire cost prior to product approval.
On the basis of the impact analysis, the proposal was revised and accepted by both industry and government.
New Substance Notification Regulation
|
Sponsoring Department: |
Environment Canada |
|---|---|
|
Purpose: |
To establish an evaluation and approval system for all |
|
Estimated Cost: |
$10 million per year to industry and government |
|
Estimated Benefit: |
None quantified. Assessed "offsetting benefits," i.e., |
Impact of the Regulatory Impact Analysis :
Consultation and development of the regulation occurred over an eight-year period. Given the relatively small size of the Canadian market for many new substances, chemical suppliers were very concerned about the impact of the regulation on innovation.
A study to assess regulatory impacts was commissioned jointly by Industry Canada and Environment Canada. The Canadian Chemical Producers' Association seconded a staff member to Industry Canada for the duration of the study.
The study conducted case studies of over 1,000 chemicals and polymers introduced during the period 1987-1992 by chemical companies participating in the study. Using an analytical framework agreed upon with industry representatives, it was found that nearly all substances would have been introduced had the notification regulation been in place during that period.
The study reduced industry opposition and the regulation was promulgated shortly after its completion.
Minimum Energy Efficiency Regulations
|
Sponsoring Department: |
Natural Resources Canada |
|---|---|
|
Purpose: |
To reduce energy consumption |
|
Estimated Cost: |
see below |
|
Estimated Benefit: |
see below |
Impact of the Regulatory Impact Analysis:
Under the Energy Efficiency Act, Natural Resources Canada is promulgating a series of standards for numerous types of energy-using equipment. Successive rounds of regulatory development processes will look at a group of similar energy-using equipment. To date, requirements for about 25 products have been prescribed.
An initial regulation harmonized with existing provincial requirements. Three representative products affected by those requirements were selected for benefit-cost analysis. For each subsequent requirement, a separate benefit-cost analysis is being conducted to take into account industry's costs of compliance and the economic benefits from reduced energy consumption. Cost of compliance here is the cost incurred by firms in installing the technology necessary to bring the product up to standard; costs to administer the program are not included. Where applicable, estimates in tonnes of greenhouse gas emissions are included, though no monetary value is being placed on reducing these emissions.
In the most recent requirements for fluorescent and incandescent reflector lamps, in the preponderance of product applications the benefit-cost ratios exceeded one and the standards were promulgated. The cost-benefit analyses have identified several instances in which more stringent standards would lead to higher net benefits; these are under review and a decision will be made on whether or not to proceed.
As well, the analyses identified five standards for which costs exceeded benefits. These five standards are not being promulgated in this round of regulations. Instead, further analysis will be conducted.
Ozone-depleting Substances Regulation - Methyl Bromide
|
Sponsoring Department: |
Environment Canada |
|---|---|
|
Purpose: |
To reduce methyl bromide consumption to meet national commitments under the Montreal Protocol |
|
Estimated Cost: |
$10 million per year to industry and government |
|
Estimated Benefit: |
None quantified. Assessed "offsetting benefits," i.e., reductions in cancer-related health care costs and number of lives saved to offset costs |
Impact of the Regulatory Impact Analysis :
The analysis identified a design change, eventually incorporated into the final regulation, that reduced the potential to significantly alter the market structure of the pest-control industry.
The regulation establishes a system of tradable allowances for the consumption of methyl bromide. The allowances are capped, thereby controlling total consumption.
The design issue in question was who should receive the tradable allowances: methyl bromide producers/importers, or methyl bromide consumers. The analysis identified that production/import allowances would have provided a significant advantage for one company.
To avoid risking major changes in the structure of the markets for methyl
bromide, the decision was made to implement consumption allowances.