Promoting compliance – the “other side of control”

Promoting compliance – the “other side of control” Effectiveness of preventive measures to reach regulatory goals and compliance – international experience Florentin BLANCVilnius, 13 June 2012

Introduction – What are regulation, inspections, control and enforcement here for?

Regulation, its purposes and instruments • Government regulation of private activities does not exist “for its own sake” – it aims at promoting “public goods”, e.g. safety, health etc. • Compliance with regulations is not a goal unto itself – it only serves as a means to achieve safety, health and other public goods • Control, inspections, enforcement actions should thus be used only inasmuch as they help to promote actual outcomes (safety etc.) and not just “compliance” – their focus should be technical, not “legal” • Key issue - there are circumstances where inspections/control: • Are ineffective at promoting positive outcomes • Are not cost efficient or less cost efficient than alternatives • Even actually deter compliance and safer behaviours…

When are inspections and control ineffective, inefficient or even possibly harmful (to desired public outcomes)? • If requirements and regulations are unrealistic (too costly, complex etc.) more inspections will not make them complied with – it will just create more corruption opportunities, or disrespect towards laws • Controlling every establishment regularly is not a rational use of resources – many objects present insufficient risk to justify the cost of inspections, and other methods should be used to promote safety • Lack of understanding of the regulations’ logic or requirements, and/or of capacity to implement them, result in non-compliance and in possibly hazardous situations – inspections are unable to change this • Inspections and enforcement that are burdensome, excessive, “bureaucratic” and seen as unfair have been shown to decrease compliance with regulations instead of increasing it

…some examples… • In mid 2000s, City of Westminster (UK) food safety inspectors found regular serious violations in their Chinatown restaurants – inspections did not bring any improvement – situation was really hazardous • In Nairobi (Kenya), municipal inspectors say they have to inspect businesses in slums because there are so many serious violations of regulations there – and no improvement, so they inspect again • In France, the introduction of the 2004 Hygiene Package led to a number of small-scale cheese makers closing because they feared they could not fulfill the requirements – but no recent contamination event linked to cheese hascome from such producers… • Research in the Netherlands suggests all observed fire accidents and fatalities were linked to human errors and inspections had no ability to prevent them

Why can this be a problem?

Approaches to promote compliance – prevention, education, making regulations clear and predictable

Canada: compliance promotion strategy • UK: • Helping SMEs to comply with EU Food Safety legislation (“Safer Food, Better Business”) • Giving clarity on compliance and enforcement to larger firms • Supporting self-assessment in environmental issues • Italy: informing businesses clearly on fire safety requirements • France: using civil law, contracts, insurance to enforce safety requirements in construction • Sweden: how information campaigns can change “culture”

Going back in time: Canada and the “compliance strategy” • Canada was one of the first countries (in the 1980s) to review the work of its regulatory agencies and examine their methods, costs and effectiveness • What it found: • Unclear goals • Variation in enforcement in same field • Too much discretion, perceived “unfairness” • Lack of flexibility • Reform: development of “compliance strategies” by all regulators / inspectorates – incorporating: • Clear statement of objectives • Policy and approach to enforcement • Education and information programmes • Incentives for “good performance” in compliance

Providing SMEs (and inspectors) with a clear “toolkit” of what to do (or not) and why – “Safer Food, Better Business” • In reaction to the high number of problems in small-scale food business operators and observed ineffectiveness of inspections, the UK Food Standard Agency and local regulators launched the “Safer Food, Better Business” toolkit in 2005, available in 16 languages etc. • The SFBB toolkit is given to all new food SMEs in catering, trade etc.: • Guides small businesses step by step, explaining not just “how” but “why” this is important • Includes all points checked by regulators – no “surprise”, inspectors will not suddenly penalize due to requirements not covered in the toolkit [it is de facto also a “checklist”] • Goal: safer businesses – less hazards for consumers – better business (no bureaucracy, no loss of consumers because of contaminations etc.)

“Safer Food, Better Business” – self control, explained

“Safer Food, Better Business” – complex regulation, made simple • A small food business operator in the areas covered by the SFBB Toolkit will never need to try and understand the long and complex EU “Hygiene Package” – nor does it need a HACCP consultant or certification • The regulator is providing business with a real tool to achieve safety

“Assured guidance” – how the “Primary Authority” scheme gives confidence and clarity to larger businesses in the UK • Problem: how to give larger businesses with premises/outlets/facilities in several regions confidence that inspections/enforcement will be consistent, in a system where they are decentralized? • Answer = “Primary Authority” – one local authority audits internal procedures of business, discusses/validates them, issues inspections and enforcement guidelines for all others • Applicability: even in a centralized system, there are issues of variability between inspectors etc. – and of potential conflicts on interpretation of rules, between inspectors’ instructions and central management of the business (internal guidelines of a company etc.) • Auditing internal procedures and validating them at the central level gives confidence and is far more effective • Transparency and stability promote investment and growth + effectiveness is higher (better compliance)

Environment Agency (England and Wales) – supporting self-assessment of businesses • Problem for businesses: knowing whether they are compliant or not, what problems need to be addressed and how etc. • Particularly critical when regulated issues are potentially serious (e.g. significant pollution) and possible penalties equally high • Environment Agency of England and Wales promotes self-assessment through making available the tools it uses to audit and monitor establishments, in particular: • OPRA (Operational Risk Assessment) http://www.environment-agency.gov.uk/business/regulation/31827.aspx [businesses can use it themselves to know what to expect] • OMA (Operator Monitoring Assessment, audit of internal controls) http://www.environment-agency.gov.uk/business/regulation/38777.aspx [businesses can prepare for this assessment]

Italy – Fire Safety – making it possible to understand the rules… • Over the years: gradual proliferation of additional rules, requirements etc. issued by various regulatory bodies mean that fire safety, operational safety, building safety rules are impossible to fully comprehend – regulators were not giving clear guidance because of this complexity • Simplification of permit procedures (with gradation for low- and medium-risk objects) was to a large extent not used because all businesses called upon consultants to help them know what to do, and consultants had no interest in informing about simplification • Fire Safety service and Regulatory Simplification programme developed information tool “less paper, more safety” http://www.cnpi.it/file/file/Commissioni2008-2013/Sicurezza/vademecum.pdf • Note: same issues observed in the UK in relation to Occupational Safety and Health (consultants advice exaggerates considerably what is required)

France – contract relationships and civil law as instruments to enforce safety of buildings • In France, there is essentially (a) no verification of structural safety at the construction permit stage, (b) mostly no inspection of construction sites to verify structural safety (occupational safety is checked in high-risk sites) and (c) only limited verification when objects enter in service (only for very high-risk and/or only on evacuation/access rules for objects with high occupancy) • Compliance with building safety norms is entirely ensured through a cascade of liability and insurance requirements: • Architects and builders have 10-year liability and have to be insured for it • Developers/owners of objects (except private houses for own use) have to also contract insurance • Specific objects/structures (higher risk) require mandatory private (accredited) technical control (also with liability and insurance) • System requires solid insurance market and civil law enforcement – but functions for many years already, with satisfactory results

Culture can change – Sweden and the “tax experiment” – and examples from history… • Sweden: observed decreasing levels of compliance in particular amoung young people (employed and self-employed) – negative change in culture • Launched (early 2000s) taxpayer education programme, explaining why taxes were needed, what for, how they were collected, how enforcement worked etc. • Large scale survey showed real improvement in compliance => explaining and educating is effective (see study by Lennart Wittberg in book: Managing and Maintaining Compliance) • Other examples of changing culture – in the 19th/early 20th century, English travellers judged that: • Germans were lazy, untrustworthy, cheating etc. • Japanese were indolent, did not understand productivity and time… • [quoted by Ha-Joon Chang http://www.scribd.com/doc/86811438/70/Lazy-Japanese-and-thieving-Germans]

Conclusion – emphasizing prevention to improve effectiveness and reduce burden

There does not need to be a trade off between more effectiveness and less burden • Lithuania still inspects its businesses far more than other EU countries – survey data indicates over 60% checked each year, vs. only 35% in Italy (and far lower estimates in UK, for instance) • Situation in Lithuania in terms of inspections coverage, frequency closer to Former Soviet countries like Ukraine (75% inspected each year) than to EU or OECD “good practice” • Considerable shift towards more preventive and educational work needed – change the balance • Means also reallocating resources: staff, budgets need to be used more for education and information (incl. developing specific “toolkits” etc.), also on planning and analysis • More focus, more prevention => also better results – example:UK Health and Safety Executive decreased inspections by over 50% in last 10 years but # of work-related deaths, injuries etc. decreased markedly

Compliance and safety are in the hands of the operators, workers, consumers, citizens etc. – therefore education is key • Crucial to remember – e.g.: • Food safety: even if product is safe when sold, if consumers don’t have appropriate hygiene/storage etc. practices, food will be unsafe • Occupational and buildings safety: many accidents happen because of human errors and inattention – key is to convince all of the importance of these issues, not just to inspect premises • Give everyone (including inspectors in other branches…) an active role in safety, rather than relying on “responsible inspector” to check (true story: locked emergency doors and “I am not responsible” answer) • Not enough to say “education and prevention are important” – developing effective campaigns needs specific skills (=> recruitment/training accordingly) and also resources (=> staff/budget allocations)

Possible priorities for Lithuania • Inspecting everything is impossible – key is to identify which requirements, points, aspects are crucial to safety • Each inspecting agency to have a plan for resources allocation (staff and budget) with a specific share for education/outreach, analysis and planning • Tools for SMEs to be developed in all spheres to clearly explain requirements – these tools to be used by inspectors also as they should correspond to check-lists (create trust: will be checked what is in this toolkit!) • Specific guidance to be provided (if necessary with cost-recovery) for large businesses that seek to validate their internal procedures • Significantly reduce frequency of checks by cutting on the « lower risk » ones

Thanks for your attention fblanc@ifc.org www.wbginvestmentclimate.org

Promoting compliance – the “other side of control”