productivity commission sue holmes assistant commissioner, productivity commission 12 january 2011...

Productivity Commission

Sue Holmes

Assistant Commissioner, Productivity Commission

12 January 2011

CAPACITY BUILDING ON MODERNISING BUSINESS REGULATION

Productivity Commission 2

Some preliminaries

(1) lots of discussion

(2) RIA = RIS

(3) the course is flexible – let me know what you would like change


What is regulation?

(1) very different definitions

(2) some countries – subordinate instruments

(3) Australia has taken a very broad definition for its reviews of regulation – anything made with the intention of changing the behaviour of businesses or individuals: from statutes to quasi regulation


MODERNISING BUSINESS REGULATION: DAY 1

(1) Benefits of regulation review and reform

(2) Compare the roles of the Malaysia Productivity Corporation and the Australian Productivity Commission

(3) Elements of regulatory review

(4) Australian regulatory review


MODERNISING BUSINESS REGULATION : DAY 2

(1) Principles and values of the Productivity Commission

(2) Elements of Regulation Impact Analysis

(3) Exploring Elements of RIA More Fully

• Identifying and describing the problem

• Identifying options and recommendations



Exploring Elements of RIA More Fully, ctd

• Impact Analysis

• regulatory burdens on business

• Competition

• Business Cost Calculator



(1) Case Study: Oil and Gas in Australia and Malaysia

(2) Instilling Commitment to Regulation Review and reform – Lessons Learned

(3) Malaysia’s Regulatory Review System and the Role of the MPC


OTHER THINGS WE COULD DISCUSS

(1) risk analysis and risk managemeny

(2) regulating in a federation

(3) improving administration and enforcement

(4) regulatory budgets and reducing the total regulatory burden

(5) decreasing red tape


benefits of reform


Review and reform is ongoing

regulation

review

reform


1 Benefits of regulation review and reform: Australian experience

(1) Australian economic performance declined during the 1970s

(2) Numerous microeconomic and trade reforms since 1983

(3) Marked improvement in economic performance has since taken place


Economic performance up to the 1980s

• The regime was highly regulated, anticompetitive and redistributive:• trade barriers to protect manufacturing• statutory government monopolies

• Relied on our exports of commodities to pay for this.


Australia’s terms of trade

Agriculture

50

100

150

200

250

300

350

400

450

500

1949- 1959- 1969- 1979- 1989- 1999-

All goods

Ter

ms

of t

rade


declining economic performance

Australia’s GDP per person ranking had steadily declined:

• 1st at the start of the 20th century• 5th in the world in 1950 • 9th by 1973 • 16th in 1990


Trade liberalisation came first

• Reductions in tariff assistance:• 25% reduction in 1973

• From 1983, gradual abolition of quantitative import controls:• mainly cars, whitegoods and textile, clothing and footwear

industries • From 1988, a series of phased reductions in tariffs across most

industry sectors • By 1996, virtually all tariffs had fallen to 5 per cent or less.• Effective rate of assistance to manufacturing fell from 35% in the

early 1970s to 5% by 2000.• Increased international competition in Australia’s traded goods

sector led to pressures for reductions in input costs and greater flexibility. This led to a broad-ranging program of domestic microeconomic reform.


Microeconomic and trade reforms

Over the last 20 or so years, focus has been on removing policy-related distortions and impediments

• Trade liberalisation• Capital markets • Infrastructure• Labour markets• Human services• ‘National Competition Policy’ reforms• Macroeconomic policy• Taxation reform• Better regulation making and review


Capital markets

• Australian dollar was floated in March 1983• foreign exchange controls and capital rationing (through

interest rate controls) were removed progressively from the early 1980s

• foreign-owned banks were allowed to compete.


Infrastructure

• From the late-1980s partial deregulation and restructuring:• airlines• coastal shipping• telecommunications • waterfront

• government business enterprises were progressively:• commercialised • corporatised • privatised.


Labour markets

• shift from centralised wage fixing to enterprise bargaining, began in the late-1980s

• Workplace Relations Act 1996:• individual employment contracts


Health, education and community services

Reforms included:• competitive tendering and contracting out, performance-

based• funding and user charges were introduced in the late-1980s

and extended in scope during the 1990s• administrative reforms (for example, financial management

and• program budgeting) were introduced in the early 1990s.


‘National Competition Policy’ reforms

In 1995, a coordinated national program for progressing pro-competitive structural reforms across all states was established. It delivered broad-ranging reforms to:• essential service industries (including energy and road

transport)• government businesses • anticompetitive regulation Legislative Review

Program


Reforms to macroeconomic policy

• inflation targeting was introduced in 1993• from the mid-1980s, fiscal policy targeted higher national

saving (and a lower current account deficit) and, from the mid-1990s, concentrated on reducing government debt, primarily financed through asset sales (privatisation).


Taxation reform

• capital gains tax and the dividend imputation system were introduced in 1985 and 1987

• the company tax rate was lowered progressively from the late-1980s

• a broad-based consumption tax (GST) was implemented in 2000, replacing the narrow wholesale-sales-tax system and a range of inefficient state-based duties. Income-tax rates were lowered at the same time.


Better regulation making and review

• Establishment of the Business Regulations Review Unit (BRRU) and RIA processes (1985)

• renamed Office of Regulation Review (ORR) (1989) • renamed the Office of Best Practice Regulation (2006) • Legislative Review program (1996) (competition policy)• Report of the Small Business Deregulation Taskforce (Bell

Review) (November 1996) • Business Costs Calculator (BCC) (2005) • Legislative Instruments Act 2003 (effective 2005) • Report of the Taskforce on Reducing Regulatory Burdens on

Business (Banks Review) (2006) • Establishment of the COAG Reform Council (2006)


Economic performance in the last 20 years

OECD, Economic Survey of Australia, 2004

‘The Government’s commitment to reform, its willingness to commission expert advice and to heed it, to try new solutions, and to patiently build constituencies that support further reforms, is … something that other countries could learn from.’


Improvements:Australia’s relative productivity performance

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1950-73 1973-90 1990-04

Australia OECD

Ann

ual p

rodu

ctiv

ity g

row

th (

per

cent

)


Economic performance in the last 20 years

• Australia’s GDP grew by 3.5 per cent a year in the 1990s• faster than the United States• a third greater than that achieved by the OECD as

a whole• performed extremely well during external crises:

• the Asian financial crisis of 1997• the bursting of the dot.com bubble• the Global Financial Crisis starting in 2008


Not just Australia:Benefits of regulation reform

There is wide-ranging evidence that considered regulatory reform brings benefits to the economy:• better choices and lower prices for consumers and

businesses• increased productivity• a more flexible economy, capable of adjusting to

changes in demand and circumstances.


Empirical evidence on the gains from modernising regulation

• A number of studies have found that reforms to product regulation to increase competition, have the following positive effects:

• Growth: increases GDP per capita• Encourages innovation • Accelerates multi-factor productivity • May stimulate employment• Improves labour productivity• Encourages domestic and foreign direct investments• Increases investments in and the adoption of information and

communication technology (ICT) services• See Nicoletti and Scarpetta, 2003 study of OECD countries:

• prescriptive product market regulations and lack of regulation reform were likely to explain the relatively poorer productivity performance of some European countries. Considered the same would be found for other countries.


declining economic performance

Australia’s GDP per person ranking started to improve again:

• 1st at the start of the 20th century• 5th in the world in 1950 • 9th by 1973 • 16th in 1990• 8th in 2002• 6th in 2010


Broad effects of reform

Australia’s per capita GDP rankingOECD countries, PPP 1990 US$

Ranked 5thin 1950

Dropped to 15thin 1983

Back to 6thby 1998

0

2

4

6

8

10

12

14

16

1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006


What were the benefits of past reforms?

Real price changes

1990-91 to 2003-04

-40 -20 0 20 40

Business-27%

Households4%

Business-12%

Households13%

Cross-subsidisation in favour of households

removed

Electricity

Gas

Other benefits

• Large reductions in telecommunications(-20%), ports (-50%) and milk (-5%) prices

• Wider choice for consumers: longer shopping hours, new phone providers


What are the potential benefits of future reforms?

• Regulation reforms targeted at:

– reducing compliance costs

– Removing duplication

• Current compliance costs around 4% of GDP

– potential to reduce these by one-fifth

NRA impacts on GDP

0

1

2

Regulation1.31%

Competiton0.43%

Health0.42%


Regulatory design principles

• Provide rewards and incentives for compliance• Nurture compliance capacity• Prefer less intervention to more – minimum necessary to

achieve objectives• Use restorative justice when compliance fails• Use regulatory responsiveness – enforcement pyramid –

when restorative justice fails• Target enforcement efforts to minimise risk


Benefits of regulatory reform cont.

• Increases job creation• Creates new job opportunities and thus reduces fiscal

demands on social security• Reduces risk of crisis due to external shocks• Maintains and increases regulatory protections

• In areas such as health and safety, the environment and consumer interests – by introducing more flexible and efficient regulatory and non-regulatory instruments such as market approaches


Sectoral effects of regulatory reforms

• Price reduction in real terms• Road transport

• Germany 30 France20• Mexico 25 USA 19

• Airlines• UK 33 Spain 30• USA 33 Australia 20


Price reductions in real terms

• Electricity• Norway (spot market) 18-26.2• UK 9-15.3

• Financial services• UK 70.4• USA 30-62.4

• Telecommunications• Finland66.5 Japan 41.6• UK 63.6 Mexico 21.5• Korea 10-30.7


Economy-wide effects of regulatory reform

• GDP, long term effects (%)• USA 0.9• Japan 5.6• Korea 8.6• Germany 4.9• Netherlands 3.5• France 4.8• Greece 9-11• Sweden 3.1• UK 3.5• Spain 5.6


MPC and PC


2 Roles of the Productivity Commission and the MPC

• Mission:

• MPC: productivity enhancement for global competitiveness and innovation to better life.

• PC: undertakes applied economic analysis of policy issues with a focus on helping governments to make better policies in the long term interest of the Australian community with a focus on achieving a more productive economy which is the key to higher living standards.


2 Roles of the Productivity Commission and the MPC

• Means:• MPC: value-added information on productivity,

quality, competitiveness and best practices through research and databases

• PC: independent research and advice on a range of economic, social and environmental issues affecting the welfare of Australians.

• As an advisory body, its influence depends on the power of its arguments and the efficacy of its public processes.


Commission’s broad range of work

• Public reports addressing questions sent to us by the Government, for example:• executive remuneration• gambling• aged care

• Public reports which monitor and compare performance:• government service provision• addressing indigenous disadvantage• particularly regulatory regimes, eg food safety

• Research


Malaysia Productivity Corporation

?


Best practice regulatory

review


Deregulation and simplification

Regulatory quality (RIA)

Regulatory management

(2) Three Stages of Regulatory Reform


OECD regulatory governance principles

• Deregulate where markets work better than governments• Regulate where markets cannot work without government• Establish systems to ensure laws are coherent and well

managed


OECD: Ways to improve government capacities to regulate well

• a) Building regulatory management system • 1. Adopt regulatory reform policy at the highest political level. • 2. Dynamic dimension of regulatory policy. • 3. Establish explicit standards for regulatory quality and principles of

regulatory decision-making. • 4. Build regulatory management capacities. • b) Improving the quality of new regulations • 1. Regulatory Impact Analysis. • 2. Systematic public consultation procedures with affected interests. • 3. Using alternatives to regulation. • 4. Improving regulatory co-ordination. • c) Upgrading the quality of existing regulations • 1. Reviewing and updating existing regulations. • 2. Reducing red tape and government formalities. • 3. Ex post evaluation.


Aspects of good regulatory governance

• explicit regulatory reform policy

• explicit standards for regulatory quality

• consider regulatory and non-regulatory alternatives

• administrative simplification and reduced compliance costs

• mechanisms for managing and coordinating regulation

• greatest net-benefit from government intervention

• transparent impacts (regulatory impact analysis)

• avoid capture by specific interest groups


Aspects of good regulatory governance cont.

adoption and enforcement to the optimum degree transparent, non-discriminatory and efficiently applied

• clearly articulate goals and strategies• public consultation procedures• domestic and foreign businesses know what regulations apply to

them• appeals process; no undue delay to business decisions

systematic review and update• ensure they continue to meet intended objectives• regulation impact analysis• target regulations• use automatic review methods

evaluate results


Australia’s regulatory

review


(4) Structure of Australian Regulation Review and Management


New regulation

• Adopted RIA in 1985• Small Business Deregulation Task Force 1996• the Legislative Instruments Act 2003


Review and reform old regulation

• National Legislative Review of regulation if it restricted competition from 1996

• reviews of regulatory burdens by sector:• based on business complaint

• benchmarking studies of particular regulatory regimes with focus on comparing compliance costs to business

• Report of the Taskforce on Reducing Regulatory Burdens on Business (Banks Review) 2006

• National Reform Agenda starting in 2006


Regulatory Management System

• training of public servants to understand good regulation

• Productivity Commission as reform advocate• Cabinet miniser responsible for regulation

reform from 2006• a commitment from the Federal Governemnt to

work in partnerships with the state governments to harmonise regulations in key areas


Core elements of regulatory reform

• Deregulation, clearer wording and reducing red tape

• Regulatory Impact Analysis• Consultation• Using non-regulatory alternatives

• Systematic review of existing regulation• Improving administration and enforcement• Build a regulatory management system


Design issues for the RIA assessor

• coverage: what regulation• what triggers needing to do a RIA• who assesses?• who is the gatekeeper?• consequences for non-compliance• training public servants• ensuring the assessor is consistent• when is the RIA made public• just advice to the decision-maker?


Major national reform streams in Australia

National Competition Policy (1995)

1995 2005 2006 2007 2008

PC review of NCP (2005)

NCP largely achieved

PC reports on potential benefits

of NRA

National Reform Agenda

announced

COAG Reform Agenda evolving

Ongoing PC reports on

COAG agenda


Productivity Commission origins

• The Tariff Board was established in 1927

• the Industries Assistance Commission in 1973• Industries Commission 1990 • Productivity Commission 1998

• Since 1973, 3 important features:

• • Independence • • Openness • • Economy-wide mandate


Independence

• established by an Act of Parliament

• only provides advice

• no judicial, executive or administrative functions

• Commissioners appointed by the Governor-General for up to five years and cannot be removed by the government


Open and transparent

• public hearings • draft reports for public comments• annual report analysing the• structure of assistance to Australian

industry and its effects• government was obliged to release

publicly all inquiry reports


Economy-wide

• concerned with improving the efficiency with which the economy uses its resources

• take account of the interests of consumers and users of products and services not just the producer of them.


Over time

• Independence, openness and economy-wide mandate continue

• Progressive changes

• coverage extended beyond industry assistance matters

• structural reform issues across all sectors of the economy

• social and environmental spheres as well as economic.


Where the Commission fits it

concerns review department Cabinet Parliament

(Productivity (confidential (public

Commission) RIA) RIA)


Our role

The Productivity Commission is the Government’s principal

review and advisory body on microeconomic policy reform

and regulation

Our role is to achieve better informed policy decisions

through independent, published analysis and advice


Core design features of the Commission

1. Independent• Underpinned by Act of Parliament• Operates separately from the Executive

2. Transparent• Open and public process• Published reports

3. Economy-wide perspective• ‘... to achieve higher living standards for all

Australians ...’


Much of our work impacts on regulation

Recommending and analysing the impact of proposed reforms

1. Most reviews of particular issues, eg gambling, make recommendations for changing relevant regulation

2. On a number of occasions we have been asked to assess how regulation reform will affect the economy, eg in 1995 the Commission modelled significant gains in growth and govt revenue from widespread competition reform.


Much of our work impacts on regulation, ctd

Analysing the impact of existing regulation1. Periodic overviews of the state of regulation,

highlighting where improvements are needed: “Banks Report”

2. Stocktakes of Commonwealth regulation which impacts on particular sectors, eg manufacturing

3. Benchmarking particular regulatory regimes across all levels of Australian government, eg food safety, OH&S


Five broad categories of work ….

Outputs in the form of ….

Outcomes• Better informed policy decisions• Enhanced public awareness

Government -commissioned performance

reporting, benchmarking

to governments/

COAG

Government -commissioned

regulation review

activities for governments/

COAG

Government -commissioned

projects

•inquiries•studies

Supporting research and

annual reporting on assistance

Competitive neutrality

complaints activities


Benchmarking program

• All governments adopted a common framework for benchmarking, measuring and reporting on regulatory burdens.

• Reviews so far:• 2007: feasibility study• 2008: business registrations

quantity and quality of regulation• 2009: food safety (current)

occupational health and safety (current)

• 2010: expect 2 other areas – not yet announced


Constraints

• The focus is on the impact on business and not the wellbeing of all citizens.

• We cannot make recommendations.

• We cannot question the underlying objectives of the government regulation.

• Risk of ‘review fatigue’.


Scope of Task

• Regulation is broadly defined

• Involves existing regulation • post analysis of impacts versus ex ante analysis via RIA

• Is about regulation from all levels of government in Australia:• local government• states/territories• Commonwealth (plus New Zealand for food safety).

• Either involves regulatory regimes pursuing the same broad objectives (eg OHS) or a burden that stretches across a number of regulatory regimes (eg business registrations).


Important features of this benchmarking exercise

• ex post impact analysis – testing outcomes of the regulation making processes

• regulators as well as regulation• uses ‘smart’ principles for promoting compliance

• compares states and territories


Commission’s broad range of work

• Public reports addressing questions sent to us by the Government, for example:• executive remuneration• gambling• aged care

• Public reports which monitor and compare performance:• government service provision• addressing indigenous disadvantage• particularly regulatory regimes, eg food safety

• Research


Benchmarking Regulatory Burdens on Business

• Part of the Council of Australian Governments’s National Reform Agenda• to reduce regulatory burdens• especially unnecessary compliance costs• reduce regulatory duplication and overlap• concerned about regulations and regulators

• Includes New Zealand


The Task

• Comparing governments.

• Devise indicators which are likely to show which regulations/regulators impose greater burdens on business.

• Analyse whether the higher costs are associated with better outcomes or if are unjustified.


The exercise is consultative

• complaints driven

• public submissions

• consultations held with governments, peak industry groups and companies

• surveys

• synthetic construction of compliance costs


Broad findings: food safety (final)

• Broadly regulators are doing a good job:• use enforcement pyramid – responsive regulation• apply risk management• mindful of reducing business burdens.

• Increasingly in Australia, regulation focuses on raising awareness of food safety issues, with training, supervisors and risk management, rather than prescriptive input regulations, such as specifying what people should wear while preparing food.


Broad findings: food safety regulation (ctd)

• The core food safety regulators differ over:• taxpayer versus business funding• appeal mechanisms• transparency • the level of coordination of council activities

achieved.

• At local government level there are significant differences in councils’ fees and charges, inspection rates, risk ratings, enforcement instruments and transparency.


Broad findings: food safety regulation (ctd)

• In the regulation of internationally traded food, compared to New Zealand, Australia:• has higher fees • greater duplication• does not use electronic processing.

productivity commission sue holmes assistant commissioner, productivity commission 12 january 2011...

Documents

quasi regulation slide

benefits of regulation

benefits of reform slide

place slide

mpc slide

change slide

reviews of regulation

elements of regulatory