Victorian Regulatory Change Measurement RCM

1. Victorian Regulatory Change Measurement (RCM) These slides are available at: www.dtf.vic.gov.au/betterregulation Questions to: betterregulationunit@dtf.vic.gov.au

2. Victorian Regulatory Change Measurement (RCM)

3. What? Introduction to the RCM methodology

4. What is the RCM? Regulatory Change Measurement (RCM) is a methodology to measure changes (increases and decreases) in regulatory burden RCM refines and replaces the Victorian Standard Cost Model methodology (focused on administrative costs only) from 1 January 2010 RCM is documented in a manual with two technical toolkits, available at: www.dtf.vic.gov.au/betterregulation

5. Regulatory costs measured by RCM methodology Administrative costs Costs incurred primarily to demonstrate compliance with the regulation or to allow government to administer the regulation, e.g. filling in forms Substantive Compliance costs Costs that directly lead to the regulated outcome, e.g. installing safety device Delay costs Expenses and loss of income incurred through having to complete an application requirement or wait for an application approval, e.g. waiting for approval of a building permit

6. Regulatory costs measured by RCM methodology

7. RCM formula for costs

8. Some key RCM principles Proportionality of effort need to keep the cost of measurement in mind Indicative nature of estimates not a statistically robust measure Transparency of assumptions all relevant documentation to be disclosed

9. Some proportionality considerations

10. Why?Overview of the RRB initiative

11. The Reducing the Regulatory Burden (RRB) initiative Launched in 2006, the RRB initiative target of $256 million in administrative burden reductions, has been increased to a $500 million per annum in burden reduction by July 2012, including: administrative costs substantive compliance costs costs of delays The burden reduction will increase productivity and Victoria’s competitiveness by enabling regulated entities to use their time and resources more productively This will make Victoria a more attractive place to do business

12. How does the RRB initiative deliver its targets? Identify and review regulatory burdens Sources of information: burden reduction opportunities identified by departments recommendations from VCEC inquiries input from business and affected sectors Funding of reviews: Departmental reviews of sunsetting regulations, and other reforms by BRU through the RRB Incentive Fund Examples of outputs that reduce burdens process improvements (e.g. improved forms) online solutions (e.g. electronic lodgement) policy review (not mandating ‘risk control plans’) review of approvals processes (quicker approvals save time)

13. Benefits of measuring regulatory changes Validate effort to reduce the burden on business Prove government leadership in cutting the burden Provides the affected sectors with a transparent measure of the change to burden that is imposed on them

14. Some key processes Measurement is mandatory for changes in regulation within scope of RRB RCM is a verification exercise, not related to regulatory gate-keeping RCM report not to be attached to BIA/RIS Independent assessment Department or agency prepares the RCM Report VCEC or BRU assesses, as appropriate*

15. How?Step 2.1 Understanding the scope

16. Key steps in the process

17. 2.1.1 Regulatory instruments in scope What is regulation? All legally enforceable obligations imposed by Victorian authorities What is regulatory burden? Regulatory burden is that burden over and above ‘business as usual’ (BAU) BAU is what the business would do on its own (i.e. without regulation) BAU is not a regulatory burden

18. BAU: An example Would a construction business erect a scaffold in the absence of regulation? Virtually none will work without a scaffold Virtually none will erect a bamboo scaffold in Australia Most will use strong steel scaffold Hence only the increment of safety requirements over and above what business uses on its own would be treated as a regulatory burden

19. Examples of regulation within RRB scope State Government regulation: Acts of Parliament Regulations (statutory rules under the Subordinate Legislation Act 1994 (SLA)) including court rules Subordinate instruments (that are not a statutory rule under the SLA), such as: rules, orders, etc. by Ministers or agencies licences and permits Codes of Practice/Guidance/Industry Agreements with government backing State government regulation administered by local government Local Government bylaws: A local law within the meaning of Part 5 the Local Government Act 1989

20. Step 2.1.2: Sectors within scope Business sector Not-for-profit (NFP) sector Economic (income-generating) activities of private individuals such as employment related activities Government services (a sub-sector of Government) Direct Government service delivery that is comparable to services delivered by the business or NFP sectors. Examples : education and training services delivered through public schools; health services delivered through public hospitals; ambulance services; public aged care services; and public and community housing.

21. All compliance costs Administrative costs (red tape) Substantive compliance costs Delay costs

22. Administrative costs (red tape) costs incurred by regulated entities primarily to demonstrate compliance with a regulation or to allow the government to administer the regulation

23. Substantive compliance costs

24. Delay costs Delay costs are the expenses and loss of income incurred by a regulated entity through: a) an application delay; and/or b) an approval delay. Two types An application delay refers to the time taken by a regulated entity to complete an application (e.g. for a licence or permit) An approval delay refers to the average time taken by a regulator to communicate a final decision regarding the application and includes a ‘normal’ level of re-work of the application

25. Delay Costs – discussion Expenses Holding costs of land Example: Developer holding land for a longer duration than otherwise needed to build Standby costs of capital Example: A dredger inside Port Philip Bay waiting for approval to commence dredging Standby costs of labour (or labour downtime) Note that routine form filling is unlikely to generate labour downtime (apart from the time take to fill the form) Example: A worker idle on the dredger from the above example waiting to commence operations Loss of income Lost business opportunities during the delay period

26. Identification of delay – slide 1

28. Steps 2.2 – 2.5 Before commencing the measurement

29. Key steps in the process

30. Step 2.2 – Is information to measure the change available? RCM report to be submitted for assessment within three months of a regulatory change taking effect Where information that is crucial for estimating the magnitude of change is not available within this period, alternative timeframe with BRU can be negotiated

31. Step 2.3 – Understand the magnitude of change A broad application of the measurement approach is used to prepare a plausible initial estimate Some questions to ask Do these changes: introduce or abolish information or compliance obligations? significantly increase or reduce the frequency of reporting or compliance obligations? introduce a new area of regulation? affect a large number of regulated entities?

32. Step 2.4 – Is the change material? Materiality test For administrative burdens on the business and not-for-profit sectors, a change = $250,000 per annum For the sum of all regulatory costs within the RRB initiative, a combined change = $500,000 per annum

33. Step 2.4 – Is the change material? An RCM is required where there is prima facie evidence that the change in regulatory burden is likely to be material Example – Back-of-the-envelope calculation Where only administrative burden has changed: 250,000 = Price x Quantity 250,000 = Time x Tariff ($60/hour) x Quantity 250,000 / 60 = Time x Quantity 4167 = Time x Quantity (5000 businesses) 4167 / 5000 = Time 0.8334 hours = Time Therefore, if the regulatory change saves more than 50 minutes per business, the change is likely to be material, and an RCM will be needed

34. Materiality test:

35. Materiality test:

36. Materiality test:

37. Materiality test:

38. Step 2.5 – Contact the Better Regulation Unit Provide BRU with the indicative estimate BRU will provide appropriate advice on next steps

39. Step 2.6.1 Mapping the regulatory change

40. An introduction to mapping Purpose: To identify what has changed To understand the drivers of the change To be able to identify costs of the change Principles: Only map the change Mapping should be conducted at the broadest level feasible Diagram showing the changes is useful

41. Map the regulation Mapping involves: identifying obligations that require a regulated entity to perform a certain action identifying the type of regulatory costs imposed

42. Expanded mapping process (where relevant) Three levels (in principle) Mapping can be conducted up to three levels: (1) obligation, (2) requirement and (3) action (or activity) (as with the Standard Cost Model) Mapping to the obligation level is generally sufficient Disaggregation below this level is only necessary when: information can not be collected at the obligation level, and the cost of disaggregation is not excessive ‘Requirement’ level is almost always unnecessary

43. Expanded mapping process: illustration

44. Example: Mapping high risk work licences A ‘requirement to hold a licence for high-risk work’ is one of the obligations under the Occupational Health and Safety Regulations 2007 (Part 3.6, Division 1, Section 3.6.1). Three types of cost categories can exist under this obligation: information obligation: information to be submitted to government as part of the licence application; substantive compliance obligation: cost of obtaining a competency requirement as part of the licence application; and cause of delay is the applicant earning lower wages while waiting for the licence (this imposes an opportunity cost on the applicant).

45. Figure T1.2: Mapping an obligation into cost categories (example cont’d)

46. Step 2.6.2Assessing and calculating costs

47. General Principles Duration of a regulatory change Default duration is to be taken as ten years except where the change is implemented over a shorter period Annualising the cost estimates The measurement is averaged out over the duration It is not a discounted present value Desktop analysis for the most part

48. Prepare data collection strategy Identify the data required use the information from mapping exercise, and consult the relevant cost formulae (details of formulae explained later) Identify sources of data Document the approach to normally efficient business Conceptual of costs experienced by an ‘average’ regulated entity Collect the data

49. The basic formula for regulatory costs

50. Price variables for administrative costs Tariff: wage rate plus overheads and on-costs for activities performed Time: hours or minutes to complete administrative activity External tariff: hourly rate or cost of external providers to carry out administrative activities Other Costs: e.g. capital cost specifically incurred to comply with information obligation or activity

51. Quantity variables for administrative costs Population: refers to the number of entities affected by a particular regulatory obligation. Frequency: is the number of times an affected business or other entity delivers or complies with a information obligation each year. Compliance Rate: refers to the rate of affected business that will comply with the information obligation default = 1, or 100%

52. Exercise: Calculating administrative costs Obligation: Duty to lodge a licence application Information: A normally efficient business takes 4 hours to lodge this licence application 1000 businesses are affected by this obligation Businesses are required to lodge this application twice a year Wage is equal to $55 per hour including overheads and on-costs

53. Price variables for substantive compliance costs Tariff x time: (similar to administrative costs) Price of physical asset: one-off purchase price of a physical asset Annualised depreciation: ongoing cost of the relevant asset Number of assets

54. Quantity variables for substantive compliance costs Population: similar to administrative cost Annual Frequency: similar to administrative cost Compliance Rate: similar to administrative cost

55. Exercise: Calculating substantive compliance costs Obligation: Duty to provide safe ladders at all building worksites Information available: one-off purchase price of safe ladder is $200 Each site requires one ladder 10,000 worksites are affected 40 percent of building sites already comply with this regulation

56. Delay costs Key issues: Mapping the delay is crucial (discussed earlier) Identifying opportunity costs is another key issue If you expect to measure the cost of delays, please contact BRU and agree to the methodology and formula to be used More slides on delay costs are available on the DTF website, www.dtf.vic.gov.au/betterregulation

57. Steps 2.6.3 – 2.8Finalising the measurement

58. Step 2.6.3 Verify the costs After initial desktop estimation: Consult departmental experts In all cases consult with relevant regulators and departmental experts to confirm that the data and assumptions used, and the preliminary results, are plausible. Refer to such consultation in the RCM report (without naming people). Consult the affected sector Where necessary consult the affected sector to verify estimates. The level of engagement should be appropriate to the magnitude of regulatory change (proportionality). Where initial estimates or subsequent analysis point to a regulatory change equal to or greater than $10 million per annum, consultation with business (such as through business interviews) is strongly recommended

59. Step 2.6.4 Prepare the draft RCM Report Executive Summary 1. The regulatory change The change should be identified and specified, including the date when it takes effect (or took effect); and the duration of the regulation 2. Mapping the regulatory change preferably through a diagram 3. Data strategy and data sources strategy for desktop analysis and data collection main sources of data approach taken to a normally efficient business approach taken to determine BAU costs the approach taken to verify data

60. Step 2.6.4 Prepare the draft RCM Report (contd) Executive Summary 4. Results This section must outline and report the main quantitative results in the form of a certificate (table) as shown in the next slide. Attachments Provides underlying data and working calculations, including assumptions.

61. RCM Certificate

62. Step 2.7 Check whether the draft RCM report is adequate (internal assessment by department) Assess its adequacy against the criteria below: the RCM complies with the methodology in the manual Where a department elects not to undertake a particular recommended action (such as business engagement through interviews for large measurements), reasons should be documented the RCM report is written in plain English the assumptions are adequately documented and sources of data appropriately cited the calculations are accurate the estimates are likely to be perceived by the affected sectors of the public as being indicative of the true cost of the regulatory change

63. Step 2.8 Assessment of draft RCM Report Send the draft Report for assessment to the relevant assessor who will assess against criteria outlined earlier Assessing adequacy of the analysis For estimates of regulatory change = $10 million per annum, submit to the VCEC For estimates of regulatory change < $10 million per annum, submit to the BRU Where a draft RCM report is prepared during the conduct of a BIA or RIS (which are always assessed by the VCEC) departments may elect to have the associated RCM report assessed by the VCEC