Victorian Regulatory Change Measurement (RCM)

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

2. Victorian Regulatory Change Measurement (RCM)

3. What? Introduction to the RCM methodology

4. 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

5. 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

6. Regulatory costs measured by RCM methodology • Regulatory costs • Financial costs • Compliance costs • Other costs (e.g. market/competition) • Delay costs • Impacts of being prevented by administrative process from conducting operations • Administrative costs • Substantive compliance costs

7. RCM formula for costs • Regulatory costs(total $) • Price (P) • Quantity (Q) • X OR

8. 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

9. Some proportionality considerations Regulatory burden change (+/-) $10 m $250k/$500k Medium measurement costs Cost of conducting the RCM Illustrative implications: Low measurement costs Limited More extensive Business interviews Only if needed Strongly recommend Business engagement ’Activity’ level only if needed and resources permit Limited Effort to gather data Limited effort or referencing More effort to gather data Detail of mapping (to ‘activity level*)

10. Why?Overview of the RRB initiative

11. 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

12. 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

13. 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

14. 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

15. How?Step 2.1 Understanding the scope

16. WAIT up to 3 months from charge ENDRCM not needed STARTRegulatory change arising from instruments subject to BIA/RIS NO NO Is information available to assess the magnitude of change? Is the regulatory change within scope of RRBE? YES STARTRegulatory change arising from instruments not subject to BIA/RIS S2.2 S2.1 Understand themagnitude of change S2.3 S2.4 Administrative burden alone $250 000per annum ENDRCM not needed Is the change material? NO Administrative burden substantive, compliance costs, and delay costs $500 000per annum YES RCM is needed Consult with BRU on materiality and further steps S2.5

17. 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 Baseline(case of no regulation) Business-as-usual costs

18. 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

19. 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

20. 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.

21. Step 2.1.3 Regulatory costs within scope • All compliance costs • Administrative costs (red tape) • Substantive compliance costs • Delay costs • Regulatory costs • Financial costs • Other costs (e.g. market/competition) • Delay costs • Impacts of being prevented by administrative process from conducting operations • Administrative costs • Substantive compliance costs • Compliance costs

22. 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

23. 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

24. 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

25. Delay costs - discussion Expenses • 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

26. Identification of delay – slide 1 Regulatory Process 1 Over-lapping time period with Process 1 Regulatory Process 2 0 1 2 TIME

27. Identification of delay – slide 2 Regulatory Process 1 Time saved by removing Regulatory Process 2 Regulatory Process 2 0 1 2 TIME 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

28. Steps 2.2 to 2.5Before commencing the measurement

29. Key steps in the process WAIT up to 3 months from charge ENDRCM not needed STARTRegulatory change arising from instruments subject to BIA/RIS NO NO Is information available to assess the magnitude of change? Is the regulatory change within scope of RRBE? YES STARTRegulatory change arising from instruments not subject to BIA/RIS S2.1 S2.2 Understand themagnitude of change S2.3 S2.4 Administrative burden alone $250 000per annum ENDRCM not needed Is the change material? NO Administrative burden substantive, compliance costs, and delay costs $500 000per annum YES RCM is needed Consult with BRU on materiality and further steps S2.5

30. 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

31. 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?

32. 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.

33. 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

34. Materiality test - 1 Example 1: Initial estimates (costs in $ million) Answer:Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.

35. Materiality test - 2 Example 2: Initial estimates (costs in $ million) Answer:No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.

36. Materiality test - 3 Example 3: Initial estimates (costs in $ million) Answer:Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.

37. Materiality test - 4 Example 4: Initial estimates (costs in $ million) Answer:No, this is NOT MATERIAL. However, departments may choose to measure and count against the broader $500 million target.

38. Step 2.5 Contact the Regulation Reform Unit • Provide RRU with the indicative estimate • RRU will provide appropriate advice on next steps

39. Step 2.6.1 Mapping the regulatory change Reference: Toolkit 1

40. 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

41. 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 Instrument This should include information on the high level regulatory instrument down to the specific guidance, where relevant Obligation The legal requirement that affects a sectors behaviour Information Obligation A description of the administrative burden of the obligation Substantive Compliance Obligation A description of the substantive compliance burden portion of the obligation Details of the Delay Cost A description of the delay cost including the reasons for delay and the burden imposed.

42. 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

43. Expanded mapping process: illustration Table: Hypothetical example of mapping to obtain a dairy licence ? X 

44. 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).

45. Mapping an obligation into cost categories (example cont’d) Figure T1.2 Activity 1: Fill form Activity 2: Make payment

46. Step 2.6.2 Assessing and calculating costs Reference: Toolkit 2

47. General principles • Durationof 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

48. 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

49. The basic formula for regulatory costs • Regulatory costs(total $) • Price (P) • Quantity (Q) X Administrative cost Labour tariff and/or external staff time population compliance (or uptake) rate annual frequency Administrative Cost Number of physical assets One-off cost of a physical asset and/or Annualised depreciation population compliance (or uptake) rate annual frequency Substantiative Compliance Cost Substantive Compliance Cost X X X Duration of holding Interest + opportunity costs population Delay cost

50. 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