Regulatory Impact Analysis and Case Studies

Regulatory Impact Analysis and Case Studies Seán Lyons (sean.lyons@esri.ie), ESRI & TCD 18 November 2011 PS6: Economic & Legal Aspects of Competition & Regulation

Agenda • Part A: The economic background to regulatory impact analysis (RIA) • Part B: Applying economics in regulatory impact analysis • Part C: Assessing the likely effects of regulation on competition

Part A: The economic background to regulatory impact analysis

Types of regulation Broadly, regulation is a government-imposed limitation on the behaviour of individuals or firms. • Economic regulation • Entry restrictions • Price controls • Social regulation • Environment, safety, health, consumer protection, broadcasting content, etc. 4

Administrative regulation • Some administrative measures are not regulation in the economic sense, e.g. “Hypothetical Example 1: Improvements to Health and Safety Protection Arrangements The four options being considered are: • Do-nothing; • Merge Health and Safety Bodies on a Regional Basis; • Establish a National Health and Safety Body; • Make health and safety a direct departmental responsibility.” (From Department of the Taoiseach, 2009, Revised RIA Guidelines.)

Mechanisms for regulatory “quality assurance” • Transparency and consultation rules • Independent regulators used in some cases, normally reporting to Oireachtas • Right of appeal/judicial review • Review/sunset measures • Ex post reviews of regulatory impact and • Ex ante Regulatory impact analysis

Why evaluate regulation? • Evaluation involves an investment in information about possible measures: • It increases the expected payoff from public policy • May reduce uncertainty about regulatory outcomes: important if policymakers or citizen-consumers are risk averse • Other forms of state intervention tend to be subject to formal evaluation; regulation historically is not • May impact a bias to regulate – it seems a costless alternative to policymakers

The economics of RIA • RIA should be undertaken only up to the point where its marginal cost equals the marginal net social benefit of better regulation • Benefits of RIA: lower policy costs, avoidance of bad measures (or at least delay to them, if deliberation is imperfect), and welfare gains from adoption of more effective regulations • Costs of RIA: administrative costs, delay to good measures that are eventually approved

Part B: Applying economics in regulatory impact analysis

The Irish Model • Current model: Dept. of the Taoiseach, Revised RIA Guidelines, 2009 • Most primary legislation requires a RIA, secondary legislation covered more selectively • RIA for proposed EU Directives to be done prior to enactment • RIAs should be published • No systematic ex post review

Steps in a typical RIA • Describe policy context, objective and options (incl. different forms of regulation) • Identify costs, benefits and other impacts of each option which is being considered • Apply significance filter • Further analysis of costs and benefits if required • Consultation • Enforcement & compliance issues • Review provisions

1. Describe policy context, objective and options • Why are we considering intervention? • What is the market failure? • What policy options are available to address it? • Including ‘no action’ and non-regulatory options where relevant • When assessing these options, what is the “counterfactual”

Matching type of regulation to source of market failure For more on this see Honohan, P., (ed), 1997, EU Structural Funds in Ireland, A Mid-Term Evaluation of the CSF, 1994 –99, ESRI Policy Research Series Paper 31.

Some possible alternative interventions • No action • Deregulation • Legal liability/tort • Fiscal measures • Incentives (e.g. subsidies) • Voluntary measures • Self-regulation • Co-regulation

Example 1: Levy on incinerators Prior assumptions in terms of reference may determine the results of the RIA: 1) …any proposed change to the levy applying to landfill must be structured with an appropriate differential for the incineration of waste such that no competitive advantage is given to incineration from any proposed change. 2) …a differential for the landfill of suitably stabilised biowaste is to be suggested that would, in conjunction with the change in the landfill levy, support and encourage the development of Mechanical Biological Treatment (MBT) plants within Ireland. The boundaries outlined by the Department in the initial briefing form the overriding boundaries of all assessments within this RIA. [emphasis added] AP EnvEcon, 2008, Regulatory Impact Analysis on Proposed Legislation to Increase Levies on Plastic Shopping bags and Certain Waste Facilities, pp. 30-31)

2. Identify costs, benefits and other impacts of each option • Main likely sources of benefits and costs • Correction of market failures (static or dynamic efficiency gains) • Policy costs (+/-) • Compliance costs (+/-) • Administrative costs (+/-) • Effects on competition (+/-) • Distributional effects (+/-) • Unintended effects

Example 2: Regulation of analgesics • Example: Should there be regulation of pack sizes for paracetamol tablets? • Policy problem: people die of poisoning from this class of drugs (4-10 per year from ’87-’90). Risk of liver damage from paracetamol if too much taken • Why are markets failing? • Restrictions: max. pack size of 24 for pharmacies and 12 for other retailers, plus information and packaging rules Example taken from Medicinal Products (Prescription and Control of Supply) Regulations 2003

Example 2 continued • Potential alternatives? • Benefits, costs and other impacts • Benefits? • Costs? • Possible unintended effects? • Enforcement, compliance and review

3. Significance filter to help make analysis level proportionate • Some “significant” measures will need more scrutiny than others • Overall impact expected to be substantial • Measure is likely to be controversial • Impact in a specific area or sector may be disproportionate

Specific effects to consider - Ireland • National competitiveness; • The socially excluded and vulnerable groups; • The environment; • Whether there is a significant policy change in an economic market, including consumer and competition impacts; • The rights of citizens; • Compliance Burdens, including Administrative Burdens; • North-South and East-West Relations. Source: Department of the Taoiseach, 2005, Report on the Introduction of Regulatory Impact Analysis, p.36.

Using cost-benefit analysis in RIA • Defining the counterfactual • Identifying and estimating costs • Identifying and estimating benefits • Assessing the expected net impact • The role of uncertainty

Example 3: ComReg introduction of full mobile number portability • Should all mobile operators be required to offer portable phone numbers? • Competition and numbering resource benefits • Two options examined • Full CBA carried out by consultants, but no mandatory link to policy development • Clear statement of options • Expected costs and benefits quantified; incl. some guesses • Details of NPV calculations given • Sensitivity analysis of main sources of uncertainty Ref: www.comreg.ie/_fileupload/Publications/jcd50.pdf, odtr0136 and odtr0156.

Example 4: control of noise in theworkplace – UK • UK Health & Safety Executive - transposition of EC directive intended to protect workers from excessive noise • Excessive noise leads to hearing damage; a factor in 80% of occupational disease claims in UK up to 1997 • Data provided on number of people at various avg. weekly exposure levels (excluding effects of hearing protection measures) • Measures include tighter limits on noise and a system of risk assessments and monitoring by firms UK HSE, Final Regulatory Impact Assessment of the Control Of Noise At Work Regulations 2005

Control of noise in the workplace ctd. • Options relate to areas where Dept. had discretion over how to transpose: • Weekly exposure averaging allowed? (4 opt.) • When will measurement of compliance be required (3 opt.) • How often will reassessments be required (2 opt.) • What will trigger hearing checks? (3 opt.) • Precise health surveillance requirement (2 opt.) • Role of doctors (as needed or mandatory) (2 opt.) • Transition period for music & entertainment? (2 opt.) • Definition of music & entertainment sector (4 opt.)

Control of noise in the workplace ctd. • Quality-adjusted Life Years (QALYs) used to estimate value of benefits

Control of noise in the workplace ctd. • Many options costed in comparison to relevant preferred option • Costs expressed in Present Value terms • Compliance costs=noise reduction measures, familiarisation, noise assessments, info & training for workers

Example 5: Hypothetical regulation requiring banks to pass through base rate changes into retail mortgage rates • Policy problem? • Market failure? • Alternatives? • Main costs/benefits • Policy costs (+/-) • Compliance costs (+/-) • Administrative costs (+/-) • Effects on competition (+/-) • Distributional effects (+/-) • Unintended effects?

Part C: The impact of regulation on competition • Regulation is alleged to have a significant effect on competition in many sectors. • If a measure does limit competition, it may be more difficult to remove ex post due to creation of rents • Determining whether a measure is likely to affect competition may require detailed economic analysis • Specialised analysis is costly • A specific test may help policymakers focus scarce analytical resources on the riskiest cases

Why are competition-reducing regulations adopted? Competing explanations… • Policymakers try to maximise welfare, but may accept harm to competition in order to attain competing goals; sometimes make mistakes • Public policy is an arena in which interest groups compete for rents (e.g. Stigler, Peltzman, Becker) • Synthesis: institutions matter, but both welfare-improving regulation and capture may occur some of the time

How regulation can harm competition and welfare • Raising barriers to entry, expansion or exit • Direct quantitative restrictions • Higher costs, esp. asymmetric ones • Distortion of prices • Weakening rivalry • Direct effects: e.g. behavioural restrictions • Indirect effects via information: fostering coordinated behaviour

Competition filter – UK version In any affected market, would the proposal: • Directly limit the number or range of suppliers? • Indirectly limit the number or range of suppliers • Limit the ability of suppliers to compete? • Reduce suppliers' incentives to compete vigorously?

Example of a “serial” competition filter

1. Restrictions on dentistry profession • UK imposed tight limits on what ancillary professions (e.g. dental hygienists) could do and restricted many dentists from adopting corporate structures • OFT found that these restrictions “had the effect of ’limit[ing] choice, competition and the potential to develop and deliver innovative and better services.” Source: OFT, 2003, The control of entry regulations and retail pharmacy services in the UK, A report of an OFT market investigation, OFT 609

2. Price controls on retail banks • Section 149 of Ireland’s Consumer Credit Act imposes price controls on credit institutions • To introduce a service or increase a price, regulator’s prior approval must be obtained • A study carried out for the Competition Authority suggested that this measure damages competition and innovation, and thus reduces consumer welfare LECG, 2005, Study of Competition in the Provision of Non-investment Banking Services in Ireland: Report and Recommendations

Other examples • Non-Irish qualified pharmacist may not own, operate or manage an Irish pharmacy <3 yrs old • New pharmacies may only get GMS contracts if >250m/5km from nearest competitor and no adverse impact on viability • Insurance firms must share a common database of claims cost information • Detailed annual compliance statement to be completed by directors of all firms • The Groceries Order

Designing regulatory measures - summary • Define the problem clearly • Consider choice of regulatory instruments in light of expected costs and benefits, taking into account • All direct and indirect costs and benefits, whether quantifiable or not, across time and different classes of affected parties • Potential interaction with existing instruments • Uncertainty associated with likely impact and compliance • Specific effects, e.g. on competition and small firms • Gather and use all available evidence, keeping in mind incentives of parties supplying it • But remember that deliberation has costs too

Some references • Dept. of the Taoiseach, 2009, Revised RIA Guidelines. • Goggin & Lauder, 2008, Review of the operation of regulatory impact analysis. • UK National Audit Office, 2009, Delivering High Quality Impact Assessments. • Lyons, 2006, Testing which proposed regulations need “competition-proofing”, Journal of the Statistical & Social Inquiry Society of Ireland. • OFT, 2007, Completing competition assessments in Impact Assessments: Guideline for policy makers, OFT876.

Regulatory Impact Analysis and Case Studies