The RIA revolution

Business Line, November 20, 2015
Globally, regulatory impact assessments help create laws that are pro-growth and transparent. It’s time India tuned in

India’s current economic dynamism, due in part to recent policy reforms, gives the country a good opportunity to tackle a major challenge: the quality of laws and regulations. Governments the world over are asking the same questions: What is a good law? Why do laws fail? When is a law needed? How, exactly, should a law be designed? What kind of market intervention works best in improving outcomes and quality of life for citizens?

The Indian federal government has no systematic method to answer these questions. But there is such a method. Since 1980, regulatory impact assessment (RIA) has become a global phenomenon in response to widespread pressures for more effective and efficient legal governance.

In the European Commission, for instance, impact assessment is done for all major policy decisions, including even treaty negotiations and budget changes. In the US, RIA is done for thousands of rules each year, and the most important are reviewed for accuracy by an expert team in the office of the president. Some 18 US States have also adopted RIA. The Australian government uses RIA at federal level and in all States. Today, over 65 countries have adopted some form of RIA in making new laws and rules.

What is RIA?
RIA is a method of estimating the likely impacts of government policy ‘before’ it is adopted, and comparing different policy designs to determine which produces the best result. The impacts calculated in RIA are the benefits (improvements for human life or environment), and the costs (what the country has to pay to get those benefits).

The central goal of RIA is to ensure that laws and rules efficiently produce economic, social, and environmental benefits, that is, that benefits justify costs. RIA is based on both a process and a method.

The process of RIA ensures that the assessment is open and transparent, that the information used is reliable and not biased. The process also makes sure that the assumptions and approaches are consistent across the government, stakeholders have a chance to challenge the RIA and the data, and an independent RIA body reviews RIAs to ensure that they are honest.

The method of RIA is highly flexible. Over 20 different methods are used in RIAs around the world to examine various economic, social, and environmental impacts. However, most RIAs have favoured some form of benefit-cost analysis (BCA) as the most inclusive and socially responsible method of public decision-making, because it ensures that we consider both benefits to everyone in society, and costs to everyone. That kind of flexible approach can work quite well in India, where a wide range of social, environmental and economic impacts must be balanced within each rule.

The benefits
The economic benefits of better regulation are substantial, since in countries similar to India the annual cost of government regulation accounts for 10-20 per cent of GDP. This means even small improvements in regulatory efficiency can have large payoffs in national income.

The returns on investment for RIA in reducing regulatory costs are increasingly well documented. The US Office of Management and Budget reports that the cost-effectiveness of federal regulations is increasing over time; each dollar spent on complying with regulations produces more benefits. RIA is the main tool used to examine how to best design laws to get good results at lowest cost.

The REACH regulation from the European Commission would have imposed €10 billion in costs on the European chemicals industry, as it was first written. The regulation was revised to make it easier to comply, without significantly changing benefits. The final cost was €2 billion. The RIA cost the Commission about €1 million, producing a social return on investment of 8,000 to one and saving thousands of jobs.

A study of 15 RIAs by the US Environmental Protection Agency showed RIA increased net benefits to society from environmental regulations. Three of the RIAs showed that the net benefits from recommended improvements in the regulations would exceed $10 billion. The total cost of preparing all of the 15 RIAs studied was approximately $10 million.

In Victoria State, Australia, a recent evaluation of RIA showed that between 2005-06 and 2009-10, the RIA process achieved estimated gross savings of A$902 million over the 10 year life of the regulations. For every dollar invested in the RIA process, gross savings to the private sector and government of between A$28 and A$56 were identified.

The OECD estimated in Vietnam that each full RIA is estimated to cost nearly $500 (due to very low labour costs in the public sector), but the introduction of RIA is expected to save the private sector 100,000 times that amount through a reduced or more efficient regulatory regime.

The benefits are likely to be similar or even larger in India than in the US or the EU because the negative effects of high regulatory costs, risks, and entry barriers are likely to be higher in India.

The World Bank has pointed out that “smart regulation” tools seem particularly relevant for developing countries where businesses compete in thin capital markets; face fierce price competition in exports and pressures from low-cost imports, among other reasons.

RIA also increases transparency. Almost everywhere, RIA is used in stakeholder consultation at earlier stages of policy development. Because of the increased transparency, RIA makes government decision makers more accountable to the public and to Parliament. Where politics are difficult, RIA can assist in finding solutions. As we have seen in Europe and the US, RIA helps manage intense political conflicts more constructively by channelling internal and public discussions around ways of integrating policies and managing trade-offs rather than zero-sum, lose-lose discussions.

Implementing it
RIA is new to most regulators in India, and time is needed for full implementation. RIA is a transformational reform, which aims to affect how regulators think about their role, introduce new actors into policy procedures, and foster more open and competitive policy dialogue. This, in the long run, is intended to improve the quality of regulatory content, design and implementation.

To reach a sustainable level of RIA quality, India will need a clear strategy aimed at the institutionalisation of RIA capacities and incentives within the government machinery. Such a strategy rests on a series of RIA practices: clear targeting strategies, development of multi-level consultation strategies, more attention to data collection and quality, investment in training, effective quality control through central RIA units and ministerial accountability, better use of scarce scientific resources, and technical RIA manuals.

RIA is the most popular “smart regulation” tool in the world to help governments make difficult choices and do more with fewer resources. While RIA is not a panacea for failed law, it should be part of a larger good governance strategy aimed at improving the effectiveness of government in changing societies, technologies and markets. The Indian government, faced with critical daily decisions that change the lives of millions of people, should join this global trend, and adopt RIA in policy development.

The writer is Managing Director, Jacobs, Cordova & Associates

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