A Research Programme for Better Regulation

In this article, I want to tell you about some important developments there have been in recent years in the way that policymaking is conducted in Britain and at the EU level, in particular concerning the devising and fine-tuning of regulation.  Aside from this helping you to understand some useful things, including some issues relating to John Redwood and Alan Duncan's proposals for regulatory budgets, I want to point out to you a few areas in which there could be scope for politically-oriented policy-wonk thinking.  Thus this article is an invitation to you to participate in a political research programme.  It is also intended to suggest some matters than an incoming Conservative administration - e.g. at UK government level, but also at London level, would need to reflect upon.

Most policies, at UK government and regulator level and at EU level are subject to what are called "regulatory impact assessments", or just "impact assessments" (sometimes also called "cost benefit analyses").  I helped develop the training guidelines for the European Commission's impact assessment programme, as well as the training and better regulation guidelines used by Ofcom and Ofgem in the UK, and have led teams carrying out impact assessments (or parts thereof) on many significant regulatory measures, including for example MiFID, HIPs, the Toys Safety Directive, and many others.

What is an impact assessment?

As I conceive of it, and teach others to think of it, an impact assessment is a framework for introducing economic reasoning into the process of policy-making.  Specifically, an impact assessment is the set of answers to five questions (for the European Commission, six, but let's ignore that for now):

1. What is the rationale for state involvement in this area?  (Some regulatory guidelines say "What is The Problem?")  Is there market failure of some kind - monopoly power, asymmetric information problems not addressed by market processes, public goods issues?  Is there regulatory failure - e.g. inadequately defined property rights?
2. What are the objectives of your regulatory intervention on this occasion?  If there is a rationale for state involvement, that is unlikely to be addressed totally with one intervention.  So what (achievable) goal do you have in mind on this occasion?
3. What policy options are there for trying to achieve your goal?  This should always include a "do nothing" option, and at some stage in the process a deregulatory or liberalising option (or, if the main measures to be considered are deregulatory, there should be one increased-regulation option).  Typically the "do nothing" option should be treated as a "counterfactual" versus which the effects of the other options should be measured.
4. What are the impacts of each option?  This might include impacts upon different regions, different stakeholders (e.g. consumers, producers, the old, members of ethnic minorities), impacts upon different goals (perhaps there might be environmental, social, and prosperity goals).  These impacts should be developed from models reflecting the analysis in the original rationale (answer to Question 1).  Weightings of impacts should reflect or guide policy priorities (so, for example, a pound lost by a poor person might have a greater weight than a pound lost by a rich person).
5. Which is the best policy?  Bearing in mind the objectives of intervention, the impacts of the different options, and the risks and uncertainties concerning those impacts, which policy option should be chosen?

Weaknesses in the current process, and how a new Conservative administration should adapt

There is a great deal of cynicism concerning impact assessments.  In my view most of this arises from confusion and misinformation.  For example, many politicians and mid-ranking policymakers are very suspicious of impact assessments, and treat them as an irritating encumbrance, intended to constrain action by subcontracting policy judgement to number-obsessed technocrats.  Technocrats often think of them in the same way.  As a consequence the technocrat does not believe that the policymaker is going to pay any attention and indeed the policymaker treats the impact assessment as either there to endorse what he believes anyway or, at best, as part of a challenge function forcing the policymaker to justify his policy in "non-economic" terms.

But the guidance I urge is that an impact assessment is intended to assist policy judgement, not replace it.  It is for the policymaker to set the weightings of objectives, risks, and impacts on different groups of stakeholder, not for the technocrat, and it is for the policymaker to adjudge the appropriate rationale (the appropriate economic model to use), not for the technocrat.

Thus if Conservatives come into power, among the key things that we will need to do will be develop

• our own sense of what are the set of appropriate rationales, appropriate analyses of how markets work, when they fail and when they do not;
• our own sense of the appropriate weightings to give to different stakeholders, different objectives and different policy risks.

Without having sufficiently concrete ideas on these matters (or without developing them in coordination with relevant experts), on entering government our teams will find it very difficult to make use of the tools of government - of the expert analysis offered - and there is the danger of an extended period of learning, in which either policy becomes captured by bureaucrats or serious mistakes are made because policymakers dogmatically assert their preferred policy wonk ideas without knowing how to make use of the (highly skilled and potentially extremely useful) detailed analysis available.

As well as the need, in office, for us to learn how best to employ economic reasoning (how best to make use of impact assessments), as currently practiced there are a number of important weaknesses to the impact assessment framework.  The most significant of these relates to the rationale, the identification of The Problem.  Rationale analysis is almost always very weak, and it is very rare for rationale analysis to lead to the conclusion that, because we can identify no satisfactory rationale for government involvement, we therefore conclude that our previous involvement was a mistake and therefore withdraw.

This is not to say that such things never happen.  The FSA, for example, not so long ago published an excellent document concerning (its analogue of) rationale analysis.  In other settings, some regulators have decided to remove price controls.  But overall, one could certainly imagine a Conservative Government adopting a significantly different attitude to the rationale question, giving it a much higher weighting than it has had thus far.  There should also be scope for systematic review of the rationale question for existing regulation, as a mechanism for cutting away what will presumably be much dead wood after thirteen (?) years of a government that for obvious reasons will find it hard to renounce and reverse its own measures.

The other significant weakness in the current process is that benefits are extremely difficult to quantify in practice, and benefits estimates are other either purely illustrative or frankly fanciful.  Only a very small number of specialist firms have, at this stage, the necessary skills to provide anything useful in the way of benefits estimation.  As a consequence the vast majority of regulation is enacted without serious benefits analysis.  Indeed, UK government guidelines in a number of areas now require only that the benefits felt to justify the costs of regulation be spelt out, rather than any evidence being offered that these benefits (even when appropriately weighted by stakeholders, objectives and risks) outweigh the costs.  This is surely an area in which there is scope for further policy wonk thinking.

Regulatory budgets

John Redwood (and then Alan Duncan at the 2007 Conference) proposed the introduction of regulatory budgets.  Setting New Zealand aside for now, the most relevant European example is perhaps the Netherlands, in which commitments to reduce the administrative burden of regulation (as measured by something called the Standard Cost Model) have been made.  The Labour government here has made moves down a similar path.

Reducing the administrative burden of regulation is, doubtless, in its own way a valuable task.  But we should understand that the "administrative burden" relates specifically to the resources taken in form-filling and the like.  Thus controlling the administrative burden will not address the substance of misguided regulation provided only that that regulation is enacted in a bureaucratically-efficient manner (with the minimum necessary form-filling).

An alternative thought might be to have budgets for the total cost of regulation, as estimated in theimpact assessments.  A problem with that, of course, is that there is the chance that some very useful regulation might be excluded whilst very inefficient regulations already enacted survive.  Nonetheless, one could imagine such budgets providing a useful discipline if bureaucratic tendencies to over-regulate are thought sufficiently severe.

Another way to go, combining with the issue of the uncertainty concerning benefits, might be to have budgets for "unsupported costs", by which I mean costs for which explicit benefits have not been calculated.  So, it might be perfectly legitimate, in considering any one measure, not to demonstrate that (appropriately weighted) benefits outweigh the costs before enacting a regulation.  But we might feel that only a certain amount of such woolly justification for regulation should be permitted.  One could imagine requiring always that costs be explicitly quantified, and then saying that only a certain aggregate amount of regulatory cost can be imposed without corresponding explicit benefit calculation.

Summing up

I've sketched for you one of the key tools of current policymaking that has largely come in since the Conservatives were last in power, and about which many readers might be unaware, "impact assessment".  It is a tool that can be made to serve whatever political preferences you have, and should drive you to need to be more explicit in your thinking.  But there is considerable scope and need for Conservative thinking to be developed, between now and 2010, on how we would make use of impact assessments if and when we come to power.  Our incoming administration in London also needs to have answers.  In particular:

• What rationales for government intervention in markets do we think most relevant?  How are our views different on this matter from those of the Labour Party and its appointees in Regulatory Authorities?
• If rationales for past measures appear inadequate, do we consider that a good reason for removing these regulations?
• Would we consider reviewing the rationales of existing measures with a view to deleting a number of them?
• What weightings do we consider it appropriate to give to different policy objectives?  How do green objectives rate against crime-reduction, educational attainment, competition promotion, prosperity?  Do we want to have a Conservative government-wide set of such weightings? or department-wide? or is it best left to the judgement of each junior minister in each specific case?
• What is our attitude to impacts on different stakeholders?  Is a pound to a poor person more important than a pound to a rich person?  Is so, how much?  Twice? Ten times? One hundred times?  Is a pound to a woman more important than a pound to a man?  A pound to a pensioner more or less important than a pound to a child?  When we come into office, our views on these matters will make an important difference to the policies we enact through the impact assessment process, so would it not be good to debate what a Conservative attitude to such matters should be in advance?
• What is to be our attitude to the benefits of regulation?  Are we to be more sceptical than Labour?  Are we to insist on more explicit quantification?
• If we are to have regulatory budgets, in what dimension are these budgets to apply?  Is it merely to the administrative burden, or is it to the total cost of regulation?  Or would it be better if there were, instead, just budgets in respect of the costs of regulation that were not explicitly supported by quantitative (weighted) estimates of benefits?

Over to you...

Comments

[Paul M]

Am I right in thinking that this is further regulation that is intended to reduce...erm....regulation?

If the best examples of this increased regulation are "MiFID, HIPs, [and] the Toys Safety Directive" then those are good enough examples for binning the concept entirely!

[Acorn]

Andrew, are you talking the likes of the Treasury Green Book?
http://www.hm-treasury.gov.uk/economic_data_and_tools/greenbook/data_greenbook_index.cfm

I don't think they use it anymore. They certainly did not when they did the 10p tax bit of the budget.

[Caroline Hope]

As most of us know, the vast majority of regulation comes from the EU Commission - in your intro you mention MiFid and HIPs (which are a vehicle for the EU's energy performance certificate directive), to name two.
There is not the slightest thing a Tory govt (or Labour one) can do to change even a comma in EU legislation. To pretend otherwise is deluded at best. We in the UK can scrutinise/rationalise/cost assess EU law in much the same way as a fly can scrutinise the windscreen of a speeding Eurostar train.

[David Eyles]

Andrew, there are parts of this that I agree with and others that I think need looking at more closely. There is a tendency in following the protocols that you have laid out, to increase bureaucratic input and justify the use of more consultants than we already have. And that is a big part of the problem.
May I suggest that instead of your five questions, you try the following:

1. Define the problem as precisely as possible.

2. Ask "WHY is interference necessary?"

3. Submit PROOF that any policy or regulation can achieve a solution to the problem.

4. Cost the policy or regulation in its entirety and balance this against the improvements acheived by each and any option.

Defining a problem accurately usually brings you a long way towards solving it. Asking the question "why" at intervals provides logical checks that the process you are undergoing remains justified. Proving that you have a solution, or more than one solution, again stops uneccessary legislation creeping onto the statute book. Costing it helps to maintain a sense of perspective and justifies the proposal. Or not. At any stage, if the proposal fails, then the process must stop because interference is unjustified.

Your protocol contains the assumption that "technocrats" and politicians are the people assessing the problem; and it is the politicians who are deemed to decide upon the criteria for assessment. Bearing in mind that most legislation affects the economy, usually adversely, I am surprised to find little mention of input from the "stakeholders". As these are the people who have to carry the costs of compliance and the competitive disadvantages, do you not think it would be a good idea if they were consulted by asking them the questions as well?

You have hinted that the RIA process is often abused, or at least mistreated. I would put it more strongly: Regulatory Impact Assessment, where it is done at all, is used as a process to justify the intended regulation, regardless of its need or the effects of its implementation. Once consultation on regulation is sought, the fact of a new regulation is virtually a done deal. For those consultees involved, it is usually just a vain attempt to limit or mitigate as much damage as possible.

I will give you an example of a regulation affecting agriculture which has not been subjected to RIA.

On-farm burial of fallen stock was stopped after the 2001 Foot and Mouth disaster. The rationale was a risk assessment - conducted at the height of the the FMD outbreak - based upon the burial of 100 potentially BSE infected cows. It was this that resulted in large numbers of slaughtered animals being transported the length and breadth of the country. The same risk assessment was then used to stop ALL occasional fallen stock from being buried on farm, including sheep. It means that, because of the tiny, tiny risk of BSE being transmitted to a human being as a result of a MASS cull, farmers now have to pay a contractor to remove the occasional dead sheep or cow. There is now a vast transport, handling and incineration industry based around this regulation. The biggest recipients of EU CAP subsidies are the incineration companies. It costs farmers and the taxpayer huge amounts of money and is almost entirely unneccessary. A lorry containing other people's dead and diseased animals rumbling onto farm is also a big risk to on-farm biosecurity. There are lots of similar problems in agriculture and they are getting worse.

Certainly, I would be only too pleased to engage in a regulatory review if the Conservatives decided to have one (and they really, really should). But the biggest problem of all - as pointed out by Caroline Hope - is how to overcome the unstoppable flow of regulation that is coming from Brussels. Once it reaches this country, the damage is done and often gold plated and multiplied. The UK government is no longer in charge of our own agriculture, fishery or environmental policies.

THAT is the biggest of the elephants-in-the-room that David Cameron has, so far, been unwilling to deal with.

[No_one_of_interest]

Andrew
Are you sure that Impact Assessments weren't in place in 1997? I am sure that they had to be completed for regulations affecting SMEs before that time.

Following David's point about EU legislation, I do believe that the sheer scale of new regs. coming out of Brussels is causing our Civil Service real problems. There are just not enough experienced or qualified personnel to fight for our (or the Dutch and Danish) side.

With regards to setting out the benefits (or dis-benefits) of any new intervention, I think that central Government is trying to get to grips with this but as you noted the skills are not it place yet.

One of the ways of measuring intangible benefits is to use focus groups, and I worry that following the Blair years that these may be seen as valueless, when they can add real value as long as they don't become the dictators of policy.

As for the stakeholders that David mentions, a future Conservative Government has to change the judgement that it makes on responses from centrally funded or NGO bodies. These definitely seem to have an excessive amount of clout compared to the number of people they really represent. Then again some of the people that David mentions could do with getting themselves better representation rather than the Christopher Booker and Richard North types that are as keen on mis-spinning as this present government.

If the above doesn't make sense please excuse me but the strawberry and pineapple daiquiris I have just learnt to make are having an affect on this gorgeous sunny Sunday!

[Andrew Lilico]

David@14:44(10/5)

It is often alleged that RIAs are simply a rubber-stamping exercise and never change anything, but it simply isn't true. The firm I work for has, for example, conducted a number of impact assessments that issued in the conclusion that no intervention was necessary. An important reason for this perception is that when the "internal" impact assessment steps suggest that a proposal is a bad idea and cause the bureaucrats to think again, then the analysis is not published - why would it be? It is only once the initial analysis has made the bureaucrats and policy-makers almost certain that they will act that matters proceed to publication.

Even then, it occasionally happens that a measure is withdrawn after the detailed consultation, and again, we have been involved in this - as a minor example consider this:
http://www.in-pharmatechnologist.com/news/ng.asp?id=84001-ipec-europe-excipients-gmp-european-commission

The FSA has also consulted on measures and concluded that there was no case for change.

On EC regulation, I don't believe it is so much either the quality or the quantity of that regulation that is the problem. To me, the problems with EC regulation lie in the principle: there are a number of areas in which I do not believe that the EC ought to have been given competence. But that is not, in any important sense, the Commission's fault. Our ministers and Parliament freely signed up to these measures, and if we don't want the EC to act in these areas then we'd better renegotiate our position.

[Andrew Lilico]

No_one_of_interest@19:40

Regulatory Impact Assessment goes back long before 1997. It was, I think, a concept first developed in the Reagan administration. But recent years have seen an explosion in its importance. The Commission began doing them (seriously) from 2003. And the many quangos of New Labour - Ofcom, FSA, and so on - make much more extensive and central use of them than was ever done before 1997 (and indeed than is done even now in government departments).

To both David and No_one_of_interest, experience suggests that stakeholders are very ill-placed to understand the benefits of regulation or deregulation. The policy process very often does require an element of stakeholder consultation. And indeed that can be useful to gather new and specific data for quantifying particularly costs.

As to the principle: well, I believe in representative democracy. So in general I'm opposed to the principle of consultation-qua-legitimization-device (though, as I say, consultations have in my view an important role in data-gathering and understanding enhancement). Consultation-qua-legitimization-device is an attempt by the Executive to appeal direct to the People over the heads of their elected representatives, and thus is an assault on representative democracy.

[Airstrip One]

Regulatory impact assessment is all good fun and probably a super way to earn a living but, according to the British Chambers of Commerce, 80% of business regulation comes from the EU and there's no way of changing it (though it can be "gold plated" as we know).

You can no more be in the EU and not run by the EU than you can be in Wormwood Scrubs and not run by Wormwood Scrubs. As for "renegotiating our position" - ha ha ha ha ha. The EU is not a buffet. If it were, everyone would be picking and choosing which parts of the acquis communautaire they fancied abiding by and discarding the rest.