victorian regulatory change measurement (rcm)

Victorian Regulatory Change Measurement (RCM)

Version 1.0 dated June 2010

These slides are available at: www.dtf.vic.gov.au/betterregulation

Questions to: [email protected]

http://www.dtf.vic.gov.au/betterregulation

mailto:[email protected]

Victorian Regulatory Change Measurement (RCM)

Rundown

Introduction to the RCM methodology

Overview of the Reducing the Regulatory Burden (RRB) initiative

Step 2.1: Understanding the scope

Step 2.2 to 2.5: Before commencing the measurement

Step 2.6.1: Mapping the regulatory change

Step 2.6.2: Assessing and calculating costs

Step 2.6.3 to 2.8: Finalising the measurement

What? Introduction to the RCM methodology

What is the RCM?

Regulatory Change Measurement (RCM) is a methodology to measure reductions 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

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

Details later

Regulatory costs measured by RCM methodology

Costs within the red border are measured through the RCM

Compliance costs

Regulatory costs

Financial costs

Administrative costs

Substantive compliance

costs

Delay costsImpacts of being prevented by

administrative process from conducting operations

Other costs (e.g. market/competition)

RCM formula for costs

Regulatory costs(total $)

Price (P) X Quantity (Q)

Estimated cost of the regulatory change per business X

Number of businesses affected

OR

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

Some proportionality considerations

Cost of conducting the RCM

Illustrative implications:

Low measurement costsMedium measurement costs

Limited

Only if needed

Limited effort or referencing

Limited

More extensive

Strongly recommend

’Activity’ level only if needed and resources permit

More effort to gather dataDetail of mapping (to ‘activity level*)

Effort to gather data

Business interviews

Business engagement

$250k/$500k $10 m

Regulatory burden change (+/-)

Why?Overview of the RRB initiative

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

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 RRU 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)

See Treasurer’s report for detailed examples

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

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*

*Details later

How?Step 2.1 Understanding the scope

Is the regulatory change within scope of RRBE?

Is information available to assess the magnitude of

change?

Is the change material?

RCM is neededConsult with BRU on

materiality and further steps

Understand themagnitude of

change

ENDRCM not needed

WAIT up to 3 months from charge

$250 000per annum

$500 000per annum

Administrative burden alone

Administrative burden substantive,

compliance costs, and delay costs

ENDRCM not needed

STARTRegulatory change

arising from instruments not

subject to BIA/RIS


arising from instruments subject

to BIA/RIS

NO NO

YES

YES

NO

S2.3

S2.1 S2.2

S2.4

S2.5

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 Government

imposed regulatory costs

Business-as-usual costs

Baseline(case of no regulation)

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

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 by laws:– A local law within the meaning of Part 5 the Local Government Act 1989

Impacts of harmonisation – see details in the Manual

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.

Step 2.1.3 Regulatory costs within scope

All compliance costs -Administrative costs (red tape) -Substantive compliance costs

Delay costs

Regulatory costs

Financial costs


Substantive compliance

costs

Delay costsImpacts of being prevented by

administrative process from conducting operations

Other costs (e.g. market/competition)

Compliance costs

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 Examples:

-making, keeping or providing records-preparing plans-conducting tests-making an application-conducting internal audits and inspections-cooperating with Government inspections

Substantive compliance costs

Costs that directly lead to the regulated outcomes being sought. These are often capital and production costs.Examples:

-training-providing information to third parties-inputs to comply with a plan or test-purchase and maintenance of plant and equipment-operations

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.

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

Delay costs - discussionExpenses 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

Identification of delay – slide 1

TIME

RegulatoryProcess 1

Over-lapping time periodwith Process 1

RegulatoryProcess 2

0 1 2

Identification of delay – slide 2

The reduction in the length of the application process by removing RP2 is only equal to the section between time 1 and time 2

More slides on delays: www.dtf.vic.gov.au/betterregulation

TIME0 1 2

RegulatoryProcess 1

RegulatoryProcess 2

Time saved by removing Regulatory Process 2

Steps 2.2 to 2.5Before commencing the measurement

Is the regulatory change within scope of RRBE?

Is information available to assess the magnitude of

change?

Is the change material?

RCM is neededConsult with BRU on

materiality and further steps

Understand themagnitude of

change

ENDRCM not needed

WAIT up to 3 months from charge

$250 000per annum

$500 000per annum

Administrative burden alone

Administrative burden substantive,

compliance costs, and delay costs

ENDRCM not needed


arising from instruments not

subject to BIA/RIS


arising from instruments subject

to BIA/RIS

NO NO

YES

YES

NO

S2.3

S2.1 S2.2

S2.4

S2.5

Key steps in the process

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 RRU can be negotiated

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?

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.

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

Materiality test - 1

Sector/cost categories

Business NFP Government services

Economic activities of individuals

Total by cost categories


+0.2 -0..6 -0.4

Substantive compliance costsDelay costs

Total by sector +0.2 -0.4 -0.4

Example 1: Initial estimates (costs in $ million)

Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.







+0.2 -0.6 -0.4

Substantive compliance costsDelay costs



Answer: No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.







+0.3 -0.3


0.3 0.3

Delay costs

Total by sector +0.3 0.3 0


Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.







+0.1 -0.1


-0.3 -0.1

Delay costs



Answer: No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.

Step 2.5 Contact the Regulation Reform Unit

Provide RRU with the indicative estimate RRU will provide appropriate advice on next steps

Step 2.6.1

Mapping the regulatory change

Reference: Toolkit 1

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

Map the regulation

Mapping involves:• identifying obligations that

require a regulated entity to perform a certain action

• identifying the type of regulatory costs imposed

Regulatory InstrumentThis should include information on the high level

regulatory instrument down to the specific guidance, where relevant

ObligationThe legal requirement that affects

a sectors behaviour

Information ObligationA description of the administrative

burden of the obligation

Substantive Compliance ObligationA description of the substantive compliance

burden portion of the obligation

Details of the Delay CostA description of the delay cost including the reasons for delay and the burden imposed.

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

Expanded mapping process: illustration

Information obligation

Data requirement Administrative activity

Application for licence

Contact details Obtain accurate information for the form.

Milk volume information Gather the information from milk statements

Amount of licence fee payable

Calculate the fee payable.Pay the invoice/make deduction and file receipt

Table: Hypothetical example of mapping to obtain a dairy licence

X ?

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).

Mapping an obligation into cost categories (example cont’d)

Occupational Health and Safety Regulations 2007

Obligation 1Requirement to hold a

licence for high-risk work

Information obligation

Preparing and submitting the licence

documentation

Substantive compliance obligation

Cost of training required to obtain a licence for high-risk

work

Cause of delayPotential under-

utilised labour after lodgement of licence

application

Activity 1:Fill form

Activity 2:Make payment

Figure T1.2

Step 2.6.2

Assessing and calculating costs

Reference: Toolkit 2

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

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

The basic formula for regulatory costs

Administrative cost

Substantiative Compliance Cost

Regulatory costs(total $)

Price (P) Quantity (Q)

Labour tariff and/or

external staff

One-off cost of a physical asset

and/orAnnualised

depreciation

Interest + opportunity costs

time

Number of physical assets

Duration of holding

population

compliance (or uptake) rate

population

compliance (or uptake) rate

population

annual frequency

annual frequencyX X X

Administrative Cost

Substantive Compliance

Cost

Delay cost

X

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

Administrative Cost = Price x Quantity= (tariff x time) x Quantity OR= {internal price (i.e. tariff x time) + external tariff + other significant costs} x Quantity

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%

Administrative Cost = Price x Quantity= Price x (population x annual frequency x compliance rate)

Exercise: Calculating administrative costs

Obligation: Duty to lodge a licence application Information:

-A normally efficient business takes 4 hours to lodge this licence application

-1 000 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

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

Substantive Compliance Cost = Price x Quantity= (tariff x time) x Quantity OR= (one-off price of physical asset x number of assets) x Quantity OR= (annualised depreciation x number of assets) x Quantity

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

Substantive Compliance Cost = Price x Quantity= Price x (population x annual frequency x compliance rate)

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 per cent of building sites already comply with this regulation

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 RRU 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

Delay Cost = Price × Quantity = {(costs incurred + opportunity cost) × delay period} × (population)

Steps 2.6.3 to 2.8

Finalising the measurement

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

Step 2.6.4 Prepare the draft RCM Report

Executive Summary1. 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

Step 2.6.4 Prepare the draft RCM Report (cont’d)

Executive Summary (cont’d)

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.

RCM certificate

Sector/cost categories Business NFP Government

services


Total by costs categories


±$ ±$ ±$ ±$ ±$


±$ ±$ ±$ ±$ ±$

Delay costs ±$ ±$ ±$ ±$ ±$

Total by sector ±$ ±$ ±$ ±$ ±$

Table 2: Regulatory change Management Certificate

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

Step 2.8 Assessment of draft RCM Report

Send the draft Report for assessment to the VCEC who will assess against criteria outlined earlier

Assessing adequacy of the analysis• For estimates of regulatory change $10 million per annum,

submit to VCEC• For estimates of regulatory change $10 million per annum,

submit to 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

victorian regulatory change measurement (rcm)

Documents