2 Undertaking Regulatory Impact Analysis (continued)
2.6 Identify the full range of feasible options
Identify the full range of policy options that may fully or partially achieve the stated objectives and thereby address the identified problem.[4] This should include, where relevant, both regulatory and non-regulatory options. Within regulatory options, a representative and pertinent spectrum of viable regulatory forms should be considered. New regulation should not conflict with or duplicate existing legislation or regulations. It is therefore important to consider how a regulatory option will interact with the stock of regulation, including whether there is scope to reduce or remove any existing regulations.
Regulatory alternatives
A variety of regulatory and non-regulatory instruments are available to achieve the government's objectives. Selecting the right instrument will depend on the problem to be addressed and the overall policy objective.
Non-regulatory options include education campaigns and subsidies. These options seek to influence individual preferences but do not guarantee that changes in behaviour will occur. Examples include:
- the drink driving advertising campaign that seeks to reduce drink driving rates, and
- the Warm-up New Zealand home insulation subsidies that seeks to encourage home insulation improvements.
Self-regulation options can be used where a group can exert control over its membership, for example an industry body regulating its members. This can include standards used by industry members, for example the Advertising Standards Authority's Code for Advertising to Children, or establish a consumer complaints mechanism, for example the Insurance and Savings Ombudsman.
Regulatory options can also seek to influence behaviour, such as making information disclosure mandatory (eg, nutritional information on food packaging). This does not require consumers to make healthy food decisions but provides more information to assist their decision making.
The government may also use co-regulatory options, which combine elements of self-regulation and government regulation. Co-regulation involves government oversight or ratification of self-regulatory instruments. For example, the New Zealand Stock Exchange (industry body) regulates the activities of the stock market and is overseen by the Securities Commission (government regulator).
Alternatively, the government can directly control outcomes through regulation. For example, occupational licensing could be introduced where only licensed individuals are able to perform particular tasks, such as builders. Or, individuals could be required to be licensed before they are able to work in a particular profession, such as working as a physiotherapist.
Mandatory standards and codes could be introduced to control the outcome or process used. Performance based standards and codes specify the outcome that is to be achieved. In contrast, prescriptive-based standards and codes specify the technical detail around how the outcome is to be achieved. For example, if the government wished to improve vehicle safety it could introduce a standard that drivers must have a 90% survival rate in a head on crash at 50 km/h (performance based). Alternatively, the standard could require that cars have seatbelts and front and side airbags (prescriptive-based).
The government can also regulate directly by prohibiting certain conduct or actions. Drink driving offences are an example of this, where driving with over 80 milligrams of alcohol for every 100mls of blood is prohibited.
In many cases, there will not be one answer and a number of instruments used in conjunction may be the most effective way of addressing the problem. For example, education campaigns can be used to increase compliance with legal requirements such as the blood alcohol limits while driving.
2.7 Analyse the options
Having identified the full range of feasible options, the next step is to analyse the costs, benefits and risks of each option. The analysis needs to show how each option would incrementally alter the status quo.
2.7.1 Identify the full range of impacts
This stage involves identifying the full range of impacts, and providing a qualitative description or explanation. Impacts can be positive or negative (ie, include both costs and benefits), and include economic, fiscal, compliance, social, environmental and cultural impacts. They include both direct and indirect (flow-on) effects; one-off and recurring or on-going impacts.
2.7.2 Quantify to the extent possible
Impacts should be quantified, and expressed in dollar terms (monetised) to the extent practical. This requires determining the number of individuals, firms or groups affected, the size of the impact on each of these, and the total impacts (ie, number affected * size of impact). Quantification helps examine the costs of regulation and tests the assumptions and judgements involved in the formulation of policy advice. Monetisation enables comparison of options against each other and, by providing a common analytical denominator it helps avoid double-counting costs and benefits.
Quantification and monetisation is not always possible. In these cases, the costs and benefits should be described as best as possible, drawing on any available qualitative evidence. Dollar figures should not be “invented” for their own sake.
All assessments of costs and benefits whether quantitative or qualitative, should be based on evidence, with data sources and assumptions clearly identified. If, for example, qualitative benefits are considered to outweigh monetised costs, the basis for this judgement should be explained. The net benefit (or cost) of each option should also be assessed.[5]
Detailed guidance on undertaking cost benefit analysis is provided in Treasury's Cost Benefit Analysis Primer.
2.7.3 Analyse the incidence of impacts
The incidence of the impacts of each option also needs to be assessed, that is, who bears the costs and benefits. The different types of people and groups relevant to the analysis will vary depending on the options being considered. They may include:
- individuals, families and/or households
- consumers
- employees
- businesses
- people who live in particular regions
- members of particular groups of the population (ie, ethnicities, genders, age groups etc)
- users of resources eg, recreational fishers, road-users
- not-for-profit organisations (including charities, voluntary organisations and incorporated societies)
- local government, and/or
- central government agencies.
It may be necessary to further distinguish within these groups (eg, within businesses by firm size or industry sector). The proportionate incidence of costs may be of particular relevance, eg, the impact on small businesses compared to total/average firms. The redistributive effects on income or wealth may also be of concern.
2.7.4 Risk assessment
The risks associated with each option should be identified and assessed. Some important types of risks to consider are set out in the Preliminary Impact and Risk Assessment template.
Any weighting of risks should be made explicit. That is, it should be made clear how trade-offs have been made (eg, between a high-risk/low cost option, and a low-risk/high cost option). It may be relevant to assess the probability of a particular risk occurring against the likely magnitude of its impact if it does occur (ie, probability of risk occurring * size of impact of risk).
For the purposes of RIA (as opposed to general policy advice) the risks are from society's point of view. That is, risk is the probability that the outcomes of the options considered will be better or worse than the expected outcomes under the status quo. It might not be possible to estimate this probability with much degree of reliability. That is, there may be instances of true uncertainty. In that case, a risk analysis should assess the worst-case and best-case scenario, and comment on the likelihood of these extreme events.
2.7.5 Summarising the results
There are various ways of summarising and presenting the outcomes of options analysis. Summary information to convey includes:
- For each option, a summary of the main costs, benefits and risks and overall (net) impacts, in relation to the status quo. This should include aggregates (eg, economy-wide totals).
- Key assumptions underlying estimates of net benefits. For example, the assumptions around expected compliance rates.
Notes
- [4]This means the “full range of policy options within reason”. It is neither necessary nor possible to analyse every combination and permutation of policy options.
- [5]Put simply, net benefit (or cost) is the difference between total costs and total benefits. The “net present value” is the sum of discounted net cashflows, ie, the present value of costs less the present value of benefits. These concepts and how to calculate them are explained in detail in Treasury's Cost benefit analysis primer.
