4  Regulatory governance internationally

A number of countries, including New Zealand, have introduced measures to improve the quality of regulation. This section reviews the overseas experience, outlines New Zealand’s regime and discusses mechanisms for improving the design and implementation of regulation.

4.1  Organisation for Economic Co-operation and Development (OECD)

4.1.1  Stages of regulatory reform

The OECD identifies three stages of regulatory reform which can run in parallel - deregulation, regulatory reform, regulatory quality management and regulatory policy (OECD, 1997a). Deregulation, which spread in popularity in the 1970s, was a reaction to a loss of faith in the public interest theory of regulation (see Section 2.1) and a perception that high regulatory costs were impeding innovation and growth. However, deregulation, and the concurrent push for privatisation of state run institutions, were in practice re-regulation as a more permissive regime typically requires more sophisticated regulatory institutions than does a prescriptive approach.

Regulatory reform therefore emerged with a focus on a combination of de-regulation, re-regulation and more effective regulation. This approach retained, however, a one-off or episodic approach which proved untenable given the ongoing creation of new regulation and the impossibility of ever achieving an optimum.

The next stage of reform involved regulatory quality management. This sees reform as a dynamic permanent process within government and evolved into regulatory policy that combines quality management of existing regulation with forward looking quality assurance. Strategies for improving regulatory quality therefore include building a regulatory management system, improving the quality of new regulations, and upgrading the quality of existing regulations. A regulatory management system involves driving regulatory reform policy from the highest political levels, establishing explicit quality standards and decision criteria, building capacities for regulatory management and providing oversight of implementation. Improving the quality of new regulations requires adopting regulatory impact analysis, a comprehensive policy on public consultation, systematic consideration of alternatives to regulation and improved regulatory co-ordination.

Regulatory management in turn has evolved into the concept of regulatory governance, recognising the importance of core governance concepts such as “transparency, accountability, efficiency, adaptability and coherence” to high quality regulation (OECD, 2001:5)

The OECD is now focusing on (1) sub-national, supra-national and inter-governmental regulation making, (2) improving controls over “grey” and “quasi” regulation, (3) building the institutions of regulatory reform and (4) promoting understanding of the economic importance of regulation (OECD, 2001).

4.1.2  Mechanisms and tools

In 2001 the OCED reviewed the progress of its regulatory policy agenda (OECD, 2001). The highest level component involves regulatory policies such standardised appraisal systems and guiding principles of good regulation. Practical application involves tools to use in assessing regulatory proposals such as Regulatory Impact Analysis (RIA) and mechanisms for consultation and accountability. There are strong similarities and increasingly rigorous application in the area of regulatory tools across jurisdictions.

The final component is the establishment and embedding of institutions which can develop and promote both policies and tools. The power and resources of such units are highly variable across countries.

The OECD have also reviewed the use of RIA specifically (OECD, 1997b). Most OECD countries now apply it in some form. It has been found to improve the efficiency and effectiveness of governments if properly designed and applied. The OECD has also instituted a series of voluntary country reviews through the Regulatory Reform Programme.

Table 4 – Regulatory impact analysis

What is it?

(RIA) at its most basic level involves asking a set of questions (see a sample below) to determine the robustness of a regulatory proposal. Asking, or even disseminating, the questions can itself improve awareness of regulatory design issues and hence the quality of outcomes. Ultimately, however, the effectiveness of RIA depends on how it is performed and how the results are used.

What does it ask?

• What is the objective?
• What is the problem?
• Why is Government action required?
• What are the options?
• What are the costs and benefits of each option, and the associated risks and probability of success?
• Why is the preferred option the best choice?
• Have affected parties been consulted?
• How will the regime affect the incentives of affected parties?
• What enforcement mechanisms are required?[7]
• How will the regime be monitored and evaluated?

The OECD notes that regulatory impact analysis is based on elements of public choice theory. Best practice requires maximum political commitment, clear allocation of responsibilities including a central oversight body, training, consistent but flexible analysis, good data collection strategies, targeting of effort, integration with policy making process as early as possible, clear communication of results, public involvement and coverage of both new and existing regulation.

The advantages of RIA stem mainly from the requirement to explicitly demonstrate that there is a real problem, that a range of options have been considered of which regulation is the preferred choice, that the benefits of regulating exceed the costs and that consultation has occurred. Its effectiveness is affected by the nature of external scrutiny of the RIA, and by the relevance of cost-benefit analysis (CBA) to the question at hand. Publicity of the results of the RIA can improve the incentives of those carrying it out. Central oversight also provides an independent perspective, quality control and specialised expertise (Bailey, 2001).

Regulatory review involves the application of RIA and other tools to existing regulations and is often focused on general goals such as reducing red tape and government formalities.

Strategies for regulatory review include (1) a zero-based reinvention at significant cost, (2) a review of a number of regimes against general criteria (such as the Australian National Competition Policy noted in Section 4.2), (3) sunset or automatic review clauses (commonly used for state regulation in Australia and now for local bylaws in New Zealand, see Section 4.3.2) and (4) equivalence rules which allow use of lower cost compliance methods if they are as effective as a prescribed regulatory approach.

Reviews involve a trade-off between the benefits of up-dating current arrangements and the use of resources and expertise which could be used to assess new proposals before sub-standard practices become embedded. Smaller countries have difficulty resourcing a regulatory quality regime on its own and may not be able to undertake significant regulatory review work.