Regulatory impact analysis (RIA)

 

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10.3. To what extent are regulatory impact assessments used to evaluate the consequences of economic regulations on the investment environment? Are the results of these assessments made public on a timely basis?


Rationale for the question

Regulatory Impact Analysis (RIA) is a policy tool widely used in OECD countries. RIA examines and measures the likely benefits, costs and effects of new or changed regulations. It provides decision-makers with valuable empirical data and a comprehensive framework to assess options and the possible economic, social and environmental consequences of their decisions. RIA is used to define problems and to ensure that government action is justified and appropriate. A poor understanding of the problems at hand, or of the side effects of government action, can undermine regulatory efforts and result in regulatory failures. Many countries rely on RIAs to avoid regulations that impose unnecessary restrictions on investment. In the absence of a requirement to assess the impacts of a proposed regulation on market openness (or indeed an explicit requirement to select a regulatory approach based on market openness considerations), RIAs offer a potentially useful tool for considering the impacts of regulation on investment decisions.

 

Related PFI questions:

Question 2.1 on an investment climate strategy
Question 6.1 on a regulatory framework for corporate governance


Related PFI questions
Various aspects of cost-benefit analyses are discussed in the following questions:
 Question 1.6 on discrimination against foreign investors
 Question 2.6 on investment incentives
 Question 3.4 on targeted trade policies
 Question 4.5 on industrial policies


Key considerations

RIAs are applied differently in each regulatory system, depending on policy priorities and context. There are, however, certain basic elements that should be part of a complete process of impact analysis:

  • Define the policy context and objectives and identify the problem that triggers action by government.

  • Identify and define all possible regulatory and non-regulatory options that could achieve the policy objective, including doing nothing.

  • Identify and quantify costs, benefits and distributional effects for the options considered.

  • Design enforcement and compliance strategies for each option, including an evaluation of their effectiveness and efficiency.

  • Develop monitoring mechanisms to evaluate the success of the policy proposal in achieving its objectives and feed that information into the development of future regulatory responses. Prior to evaluation, RIA should assess the impact of non-compliance.
  • Consult the public systematically to provide the opportunity for all stakeholders to participate in the regulatory process. This provides important information on the costs and benefits of alternatives, including their effectiveness.

The OECD has developed 10 good practices for RIA that might provide the baseline reference for PFI users. They should not be interpreted as guidelines for a unique model of RIA but rather as  a flexible approach that must be adapted to the specificities and needs of each regulatory system.

  • Maximise political commitment to RIA. Reform principles and the use of RIA should be endorsed at the highest levels of government in a broad context of regulatory reform. RIA should be supported by clear ministerial accountability for compliance.

  • Allocate responsibilities for RIA programme elements carefully. Locating responsibility for RIA with regulators improves ‘‘ownership’’ and integration into decision-making. A central body is needed to oversee and assess the RIA process and ensure consistency, credibility and quality (as discussed in the previous section).

  • Train the regulators. A regulator is a person or an organisation controlling the content of regulation. Formal and properly designed training builds the necessary skills to do high quality RIA. The training and development of RIA should be supported by guidelines.

  • Use a consistent but flexible analytical method. Analytical methods can vary as long as RIA identifies and weighs all significant positive and negative effects and integrates qualitative and quantitative analyses. Mandatory guidelines should be issued to maximise consistency. The best analytical methods provide little benefit if the RIA system design is inadequate.

  • Develop and implement data collection strategies. Data quality is essential to effective analysis. An explicit policy should clarify quality standards for acceptable data and suggest strategies for collecting high quality data at minimum cost within time constraints. The goal is to maximise objectivity and comparability of data and analysis. But even in cases when information is scarce and data not easily available, RIA might nevertheless be very useful for policy makers.

  • Target RIA efforts. Resources should be applied to those regulations where impacts are most significant and where the prospects are best for altering regulatory outcomes (screening RIA to allocate resources wisely). This should be done in a realistic manner, after prior assessment of available resources for RIA and establishing clear priorities in advance.

  • Integrate RIA with the policy-making process, beginning as early as possible. Regulators should see RIA insights as integral to policy decisions, rather than as another bureaucratic ‘‘add-on’’ for external consumption. Excessive routine has been found to hamper the quality of results.

  • Communicate the results. Results of RIA must be communicated clearly with concrete implications and options explicitly identified.

  • Involve the public extensively. Effectively including this tool in the regulatory processes requires general acceptance within the government and from the private sector. Clear incentives for developing RIA should be put in place: rewarding systems, promoting simplification and improvement of the RIA process, training programmes, and support to professional staff development. Inputs from outsiders improve the quality of analysis by clearly manifesting concrete benefits or costs  (see Question 10.4.).

  • Apply RIA to existing, as well as new, regulation.

 

Policy practices to scrutinise

The PFI user might employ the following elements to assess how RIA helps to understand better the consequences of economic regulation on investment:

  • Are there methods to assess regulatory proposals from a legal, social and economic perspective? Do they include the main elements explained above and the 10 good practices (including the use of clear guidelines and oversight mechanisms)?

  • Which issues are included in the analysis (impact on businesses, environment, social equality, etc)? Is the impact on investment one of them?

  • Who is responsible and who is involved in undertaking these assessments?

  • Are there any supervision mechanisms to ensure quality standards?

  • Are technical assistance and support provided through the process?

  • Is public consultation part of these assessments?

  • Are there evaluation mechanisms to determine if the assessments were used during the policy making process?

 

Resources

The OECD has been a pioneer in the field of regulatory reform, including in developing a knowledge framework for RIA (www.oecd.org/regreform). This work is reflected in the following publications:

The European Network for Better Regulation aims to expand and disseminate the current knowledge of regulatory processes as well as the degree and mode of implementation of impact assessment procedures in EU member states. ENBR is developing a database of impact assessments in EU member countries.

 

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