Regulatory Change Measurement (RCM) Calculating Delay Costs

Regulatory Change Measurement (RCM) Calculating Delay Costs These slides available at: www.dtf.vic.gov.au/betterregulation Questions to: betterregulationunit@dtf.vic.gov.au Version 1.0 dated June 2010

Contact the Better Regulation Unit (BRU) • If you expect to measure the cost of delays, please contact BRU in the first instance • BRU will take you through the key steps of the methodology and agree to the methodology and formula to be used • These slides are intended to be an introduction

What are delay costs? • Delay costs are the expenses and loss of income incurred by a regulated entity through: • an application delay and/or • an approval delay

Application delay • This refers to the time taken by a regulated entity to complete an application (e.g. for a licence or permit) • To be counted as a delay, an application delay must: • prevent operations from commencing • not coincide with a parallel process during the course of application, including business processes normally undertaken during that period

Approval delay • This 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 • To be counted as a delay, an approval delay must: • prevent operations from commencing • not coincide with a parallel process during the course of application, including business processes normally undertaken during that period • not double count parallel processes of re-work during the approval process

Examples of Delay Costs • Holding costs of land while waiting to commence operations • interest on loans for land, and • opportunity cost of capital (equity) blocked in land • Standby costs of capital (plant and machinery of machinery) not able to be used due to a regulatory process • interest on loans for plant and machinery, • opportunity cost of equity in plant and machinery, and • rental costs

Examples of Delay Costs (contd) • Standby costs of labour unable to be put to use due to a regulatory process • wages and overheads • Lost business opportunities • loss of reputation due to late deliveries • reduced flexibility to respond to market conditions • more difficult to obtain finance

Mapping the delays Reference: Toolkit 1

Key question: Does an obligation delay the activities of a regulated entity? • Will removing a regulation or obligation allow the regulated entity to commence operations earlier? • then such obligation could potentially be a cause of delay • To precisely identify whether the obligation causes a delay, a project management GANTT chart is useful • Are the activities to comply with an obligation part of the critical time pathof a business project?

Identification of delay – GANTT chart • In this figure the red dotted lines during the application process represent the actual time that could be saved by a regulated entity if the relevant obligation was removed (i.e. these portions are on the critical path) • See next slide for detailed explanation

Identification of delay – illustration • For example, if a building company is no longer required to prepare the building fire plan during the application process, this will remove the Regulatory Process 2 (RP2) in the figure above. However, as it must also demonstrate at the same time why its buildings meet the environmental requirements (RP1), the reduction in the length of the application process is only equal to the dark blue section of RP2. Regulatory process 1 Over-lapping time period with Process 1 Regulatory process 2 0 1 2 TIME

Identification of delay – illustration (cont’d.) • Re-iteration: The reduction in the length of the application process by removing RP2 is only equal to the dark blue section Regulatory process 1 Time saved by removing Regulatory Process 2 Regulatory process 2 0 1 2 TIME

Identification of delay – another illustration • In the case below, if RP4 is removed, then re-work for RP4 is also removed. • However, as this re-work is completed within the same time as re-work for RP2 (a separate, parallel process) the length of the approval process is not reduced in this case.

Calculating Delay Costs Reference: Toolkit 2

Regulatory costs(total $) RCM formula for costs Price (P) Quantity (Q) Cost per business Number of businesses/ total ‘quantity of assets’ X In this case this translates to: Delay Cost = Price × Quantity = {(costs incurred + opportunity cost) × delay period} × (population)

Example: Cost of delays caused by planning application process • The example below provides a formula for delays during a planning application process • Note: There can be many other examples of delay costs, and different ways to assess them Discussed in next slides

Price variables for delay costs • The cost incurred by each business is the holding costs of the asset (land) minus any rents received if the asset is rented out during the period in which the project is delayed • Note: The term C x i also captures the return that could have been obtained on equity in the absence of the delay

Price variables for delay costs • The opportunity cost – the best alternative use for the capital (net total cost of the alternative investment over the life of the original project multiplied by the return on investment) • Time (duration) of the delay

Quantity variables for delay costs • Population: refers to the number of entities affected by a particular regulatory obligation. In this case:

Worked out example - delay costs from a planning process • A normally efficient business wants to open a new manufacturing plant but is facing delays from the need to complete an application that requires it to document the impact of its proposed plant on the environment. • These are its costs: • the company buys ten hectares of land on which to build the plant • the total land cost per hectare is $50 000 • the interest rate per annum charged by the lender is 10 per cent • the land tax per annum is 2 per cent • the council rates per annum are 2 per cent • during the application delay period the company rents out 50 per cent of its land to farmers who use it as grazing land for $4 000 per annum per hectare

Worked out example - delay costs from a planning process (cont’d) • Data relevant to calculating returns that the business is losing through the delay • the total cost of the manufacturing project is $250 000 per hectare • total interest and taxes paid out on the project (excluding interest payments on land which have been separately counted) is $100 000 per hectare • the originally planned project duration is 20 years and the return on that investment is 7 per cent per annum

Worked out example - delay costs from a planning process (cont’d) • If the cause of delay is removed, the company is able to commence its operations 18 months earlier • Therefore, as a result of removing that piece of regulation, the reduction in delay cost is $82 875 (see below) • If this regulation affects 100 businesses, the total delay cost of this regulation is = $8 287 500 per annum (see below)

Other examples • As indicated earlier, there can be many other examples of delay costs, and different ways to assess them • Please therefore contact BRU for a discussion of the specific methodology applicable in your case

Regulatory Change Measurement (RCM) Calculating Delay Costs