6  Improving regulatory incentives – alternatives to compensation

The discussions above have illustrated the difficulties in general of using compensation to improve incentives regarding regulatory action by governments to limit existing property rights, in particular the difficulty of determining which rights are compensable, and the perverse incentives that compensation can create for property owners to invest.

There are also problems regarding the transactions costs of extending compensation eligibility (which is likely to be one factor behind the current position of the compensation boundary) and the fiscal cost of doing so.

The above does not exclude the possibility of addressing specific cases where the benefits of a compensation approach exceeded the costs, but identifying candidates for such treatment is beyond the scope of this paper which focuses on the general situation.

The fallback is to rely on existing structures such as parliamentary decision-making and judicial review, regulatory processes within government and specifically limiting the legal scope for takings to occur. This section discusses these, not mutually exclusive, options.

6.1  Role of parliament and the courts

It can be argued that specific takings determined by parliament, rather than through administrative means, are more generally accepted due to the representative nature of the parliamentary process and the ability of parliament to provide for compensation. Likewise, as long as courts are seen as impartial, their application and interpretation of the law is generally accepted as not arbitrarily changing, and therefore undermining, property rights structures.[42]

There is a question here of whether there is a public presumption of due process in the courts which allows greater discretion for changes in property rights than would be acceptable in a political process? Under such a presumption, political review of judicial decisions could be considered less acceptable than the converse.

The relative and absolute acceptability of parliamentary and judicial decisions regarding property rights may also be influenced by the existence or not of an overriding constitutional framework, such as applies in the United States where much takings jurisprudence arises. In such a framework, there is likely to be more trust by property rights holders that their interests will not be unreasonably overridden (which may or may not be well founded – the constraints within an unwritten constitution can be highly effective).

The time and expense involved in parliamentary and judicial processes limit, however, their applicability. Inevitably much authority will be delegated and New Zealand has rules for when such delegations should occur and what constraints should be put in place (Legislation Advisory Committee, 2001).

There is no obvious need, or means, to strengthen current arrangements in this area in New Zealand.

6.2  Improving regulatory quality

The primary regulatory option for constraining takings behaviour is to improve the decision-making processes under which takings are considered. This involves generally adopting more rigorous regimes for improving the quality of new and existing regulation; ie, stricter regulatory governance. The OECD has explored this approach in depth (OECD 1997a, 1997b, 2001).[43] New Zealand has also adopted its own regime based closely on OECD principles and UK and Australian experience.

These regimes include regulatory policies, instruments and institutions. Key policy questions include problem definition, justification for government regulatory action, extent of consultation undertaken, compliance strategy, and an assessment of the costs vs the benefits of the proposal and the feasible alternatives.

The usefulness of cost-benefit analysis in this context has been challenged recently (Wilkinson, 2002), particularly with reference to its dependence on significant and controversial value judgements. Wilkinson also suggests a sequence of tests in two steps. The first step would determine whether a proposal increased individual freedoms of action, contract and exchange, preserved common law causes of action, and preserved existing legal rights and other elements of the rule of law. The second step would check that any violations were essential to pubic well-being, assess whether compensation was required, ensure that any surpluses were distributed proportionately, and eliminate any tying of taxes to permits without explicit parliamentary scrutiny. Such criticisms and suggestions would presumably have to be part of any review of the effectiveness of recent changes to New Zealand’s regulatory quality regime. Those changes followed independent reviews (Ministry of Economic Development, 2001b and 2001c, Tasman Economics, 2001).

In theoretical terms, improving regulatory quality requires re-evaluating both the institutions and instruments involved in making regulation. In this context regulatory institutions include formal governmental bodies at trans-national, national and local level and behavioural constraints such as constitutional principles and the regulatory quality regime.

Regulatory instruments are the tools available for institutions to apply, and include: treaties, primary (statute), secondary (regulation or Order in Council) and tertiary (notices and guidelines) legislation, national instruments for directing local government such as national policy statements or national environmental standards, and regulatory takings. Regulatory impact statements are an instrument used to monitor decisions made in choosing which of the above to apply, and how to do so.

As well as distinguishing institutions from instruments, in order to improve our understanding of how the design of institutions and the choice of regulatory instruments affect incentives on regulators and the quality of the resulting regulatory structures, we need to clearly distinguish upstream and downstream regulatory design.

Upstream regulatory design is about how institutions and instruments create incentives on regulators to design an optimal regulatory structure. Downstream regulatory design is about how that regulatory structure then creates incentives for individuals or firms to act in a manner that achieves a socially efficient outcome. While a discussion of takings involves both perspectives, regulatory quality regimes are an upstream concept.

Regulatory quality regimes in practice tend to involve requiring evidence that consideration has been given to particular factors such as the available alternatives and the wider costs and benefits of the proposal. In New Zealand, this is achieved through requiring preparation of a Regulatory Impact Statement (RIS), or more recently a combined Regulatory Impact Statement/Business Compliance Cost Statement (RIS/BCCS) when primary (statute) or secondary (regulations or Orders-in Council) legislation is proposed. Guidelines on preparing these statements are published (Ministry of Commerce 1996, 1997, 1999 and Ministry of Economic Development, 2001a).

In some cases independent bodies are set up to monitor and enforce regulatory quality regimes, and performance is measured and publicised.[44] New Zealand has moved to increase the transparency of its process by releasing all RISs that contain a BCCS. Regulatory policy quality is also part of the regular assessment of departmental performance in New Zealand by Ministers and Central Agencies.

The key factor in making a regulatory quality regime effective is transparency. If the basis for a regulation and the manner in which it is to be implemented have to be laid out in detail, and those interested in a regulation are able to review and challenge that material, then the outcome is improved incentives on regulators and greater empowerment of the regulated.

Regulatory quality regimes, if effective, act to improve the consideration of the full costs and benefits of proposed regulatory actions, thereby reducing the effect of fiscal illusion on decision-making and increasing the likelihood that only necessary takings will occur. Effectiveness, however, requires robust institutions, which place efficient incentives on the parties involved, and ongoing political commitment.

Avenues for improving the effectiveness of the New Zealand regime could include a stronger oversight role, specifically around monitoring and enforcement, and greater transparency.

6.3  Limiting the use of takings

A more specific regulatory approach is to target specific cases where takings can occur and impose stricter limits on the ability of government to carry out takings where non-essential. Examples of this would include limiting takings of land to site-specific projects clearly in the public interest, [45] or constraining what types of activities required permission to undertake, or what conditions could be attached to such permission.

Carrying out such an approach would require forming an overall view of what constituted essentiality, identifying the situations to which that definition might be applied, and then working through the implications case by case. A starting point could be to examine situations in New Zealand where adopting a takings perspective from the beginning could have reduced the total costs of achieving a policy objective.

This type of approach would if successful limit the total potential for over-regulation through takings. It does not, however, address whether or not compensation would be appropriate for those activities where takings can still occur (or restrict existing regimes in this area), or restrain the use of other forms of regulation to achieve the same objective (an issue for an overall regulatory quality regime).