Benefits Derived from the 2011-2012 Regulatory Burden ......For the 2011-2012 Regulatory Improvement Program (PMR) in Mexico the strategy was based on the reducing the red tape to

1

Benefits Derived from the 2011-2012 Regulatory

Burden Reduction Program

The document was prepared by LATIN-REG in cooperation with the Federal

Commission on Regulatory Improvement of Mexico1

Alfonso Carballo Pérez, Margherita Corina, Rafael Hernández Kotasek & Franco A. Pineda Garduño

November 2012

ABSTRACT

For the 2011-2012 Regulatory Improvement Program (PMR) in Mexico the strategy was

based on the reducing the red tape to increase Productivity and Economic Growth. Based on

the Standard Cost Model (SCM), COFEMER estimated the benefits of the actions taken by

the Federal Government departments and agencies; this was the first measurement carried

out by a country in the Americans. The resource liberation through the various actions

undertaken during the present Federal Administration was estimated in the order of 1.2 % of

the 2009 Gross Domestic Product (GDP) resulting in an effective reduction of the regulatory

burden.

Due to the right legal instruments established in the year 2000, Mexico has now the

adequate tools to carry out a constant evaluation of its regulatory collection at least every two

years. To this end, the main focus was to reduce administrative burdens on productive

activity, so that financial resources, previously dedicated to regulatory compliance, are

released in order to increase productivity in the country. Unlike previous Regulatory

Improvement Programs executed, the strategy designed for the 2011-2012 programs

established the application of the Standard Cost Model methodology in order to quantify the

benefits of the improvements implemented in the federal proceedings, and thereby

identifying the liberated resources generated to benefit individuals.

1 LATIN-REG is the Latin American Network on Regulatory Improvement and Competitiveness. This publication is

available in www.latin-reg.org and www.cofemer.gob.mx.

http://www.latin-reg.org/http://www.cofemer.gob.mx/

2

I. REGULATORY IMPROVEMENT AND ECONOMIC CRISIS

The regulatory improvement process has taken relevance in the past couple of decades

around the world due to several reasons like the current economic situation, strategies for

increasing competitiveness and a citizen-friendly government approach. This is why in the

year 2000, the Mexican congress provided tools for the federal government to lead the

national regulatory agenda to implement regulatory reform actions. As a result form this; the

Federal Commission on Regulatory Improvement (COFEMER) was created that year by

amendments to the Federal Administrative Procedure Act (LFPA)2. The article 69-E of the

Act establishes that the COFEMER’s mandate is to promote transparency in the elaboration

and application of regulations and that they generate benefits that exceed their costs and

maximize society’s benefits.

One of COFEMER’s main attributions requires a constant revision of the regulatory

framework, so for that matter, Article 69-D, Section II, of the LFPA, requires departments and

agencies decentralized federal government to submit a Regulatory Reform Program in order

for COFEMER to review at least every two years. To carry out the review and improvement,

not only in the process of regulatory reform, but in the general procedure for making

regulations, COFEMER’s agenda promoted a significant revision of the regulatory

framework.

The amendments to the LFPA in the year 2000 also established a key organism to the

successful implantation of the regulatory reform strategy; the Federal Regulatory Reform

Council was established in the Article 69-F as an intermediary between the public, social and

private sectors to gather the views of these sectors on regulatory reform. This organism was

designed as a consultative body and regulatory planner, to include the social, academic and

business sectors, as well as the government agencies which issue regulations.

The strategy for the 2011-2012 Regulatory Improvement Programs was a result of the

consensus achieved in the Fourteenth Meeting of the Federal Council for Regulatory Reform,

where it was established that the regulatory improvement programs should be targeted to

increase productivity; in order to review regulatory issues that detonate greater economic

growth.

As it was mentioned above, the Regulatory Improvement Programs were established in the

Federal Administrative Procedure Act from 2000, as the Mexican government was provided

with a number of public policy tools to do a review of the regulatory framework. This means

that this strategy works as a filter to ensure that this regulation meets quality standards in

terms of regulatory impact. Therefore, with the Regulatory Improvement Programs the

2The whole legislation can be found at: http://www.cofemer.gob.mx/documentos/marcojuridico/LEYES/lfpa.pdf

http://www.cofemer.gob.mx/documentos/marcojuridico/LEYES/lfpa.pdf

3

government has a tool with which every two years the decentralized departments and

agencies of the federal government must conduct a regulatory review of their regulatory

collection.

One of the main and innovative aspects derived from this meeting is that the 2011-2012

Regulatory Reform Programs should be motivated within an international methodology,

originally developed by the Dutch finance ministry, which has to do with cost estimates,

known as the Standard Cost Model (SCM). This methodology helps to focus efforts and to

consider proposals with the most impact and provide measurable results regarding the

liberation of resources. The council also decided to set specific targets for reducing

administrative burdens and to fully involve the productive sector given its importance.

Due to the established principles above, the new strategy for the 2011-2012 Regulatory

Improvement Program has focused on: first, measuring the economic cost of regulations, as

well as, having a strategy that really liberates financial resources; and finally, ease of

implementation, particularly that improvements would be carried out through administrative

channels to have immediate effects and the deadline could be met (14 months).

The regulatory reform is essential to trigger higher levels of productivity and economic growth

in an international context in which fiscal and monetary policy has limited impact. Currently,

macroeconomic stability in Mexico allowed having a strong economy that provides certainty

to local markets. However, Mexico has remained very moderate in terms of growth rates over

the past three decades. Similarly, given the international situation, various countries in the

world have regarded the regulatory reform policy as a tool to improve their economic

situation.

Graphic 1. GDP growth per worker

Graphic 2. Productivity Evolution in

Mexico

Source: Prepared by COFEMER.

050

100150200250300350400450500

1980 1985 1990 1995 2000 2005 2010

Vietnam Corea Singapur

Hong Kong Malasya Tailandia

México

Korea

Thailand Malaysia

Mexico

Singapore

GDP per capita

GDP per worker

Capital per

worker

TFP

0.8

1.0

1.3

1.5

1.8

2.0

2.3

2.5

2.8

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

4

One of the biggest problems caused by the excessive costs of an administrative regulation is

the informality of firms in developing countries; informality is reflected directly in the

companies’ factor productivity and it stalls their competitiveness. When a regulation is poorly

designed and is very costly for the entrepreneur, there is an incentive to prefer informality.

This causes serious consequences for entrepreneurs and the economy of a country.

Informality restricts companies from a range of opportunities such as access to larger

markets, have legal certainty, guaranteed property rights by the State, or to have access to

credit and financial services in order to grow. Red tape reduction strategies are fundamental

to incentive formality in businesses and increase their productivity. For example, the

relationship between informality and productivity is more evident in various Latin-American

countries. According to McKinsey & Company Colombia, productivity in the formal sector in

Colombia accounted for 41% of the productivity of the United States of America, while in its

informal sector it’s only 6% of U.S. productivity. This means that the productivity of the formal

sector is 7 times higher than the productivity of the informal sector. This creates significant

impacts on economic growth in Colombia, given that on average 58% of the workforces in

this country are in the informal sector.

The economic impact of excessive administrative burden is such that a recent study

requested by the European Commission and carried out by the Dutch consultancy ECORYS,

show that the regulations in the commercial sector cost the European Union up to €122.000

million euros each year. At a time when resources are fundamental to economic recovery,

the study concludes that the disappearance of these regulations, many of them unnecessary,

would provide benefits of €1, 220,000 million per year to the European GDP and an exports

increase of 2.1%3.

It is therefore important to conduct reviews of the regulatory collection or the regulatory

simplification, better known as Red Tape Reduction, allowing governments through the use

of tools such as the Standard Cost Model, to quantify the economic costs imposed by

regulation to subsequently establish measures designed to reduce these economic costs.

That is why COFEMER promotes the review of the regulatory collection in order to quantify

the economic cost of regulation and establish an agenda for reducing administrative burdens.

To achieve the goals set by regulatory reform in which the proceedings that are not beneficial

to a country's economic actions are removed, an internal strategy should be attended in

order to assure compliance with the reform. Considering that in many occasions the main

impediment while conducting a red tape reduction process is the structure and the

governmental apparatus, where the beneficiaries of excessive regulatory burdens are in an

opposing position and willing to sabotage any reform that eliminates their benefits; while on

3 In Holland it was discovered that the administrative burden assumed by business reached an annual amount

equal to 3.6% of GDP of the country.

5

other hand, there is weak support those who doubt the effectiveness of the policy. Therefore,

it is essential to have a set of strategies by policy makers to help implement regulatory

simplification rules despite the resistance from one or more sectors of both the public

administration and the private sector.

A good regulatory simplification process must be designed to overcome passive resistance in

the public sector. Moreover, the political strategy must be supported by a public relations

campaign to show to the public the importance of the reforms, and that the political class

commits to concrete results, and thus as stated by Mark Moore4 these relationships will

legitimize and generate value to the process of simplification.

Figure 1. Moore’s Public Strategy in the 2011-2010 PMR

Source: prepared by COFEMER

On the other side is the legal strategy, which consists in improving legal certainty and

transparency, not legal chaos. The reform of hundreds of government statutes is just one

step that requires legal concepts, tending to ensure that decisions are carried out exactly as

planned, without causing any legal confusion. For example, Mexico included in its regulatory

simplification "all business procedures”, which were defined as all applications for companies

to provide information to the public. Mexico also limited the scope of the red tape reduction to

4 According to Mark Moore (1995), the strategy of the public agencies heads must meet three basic elements:

i. The strategy must have a substantial value (it must generate valuable products at low cost). ii. It must be legitimate and politically sustainable, i.e., it must be capable to attract, continuously, authority

and money from the political environment that it must respond to. iii. It should be achievable from an administrative and operational standpoint. In this sense, the strategy

must be able to be performed by the organization with support from other areas of the government. The elements above make up what is known as the strategic triangle, or also known as the Moore's strategic triangle, without which the strategies of managers of public agencies may not create value for society.

Value.

The Reduction of regulatory costs through

improvemt implemtetions.

Sustainability.

Promotion and support from the

Federal Regulatory

Council.

Achievability.

Cooperation from the

government agencies to

implement the PMR.

6

the ministerial and government statutes, leaving the legislative laws outside the scope of the

first phase of the guillotine.

Finally, the administrative strategy is crucial because of the challenge of carrying out a

reform in government that requires broad participation of hundreds of procedures and

regulations. There are two key elements of the management strategy:

o First, the guillotine’s framework and the institutions should be formally established

and credible. This can be achieved through a government decision, like it was made

in Mexico through the LFPA which established processes, institutions, objectives and

the deadlines for completion.

o Second, the institution or institutions that perform the regulatory simplification process

should be supported by experts that manage its application and carry out a thorough

review process and independent from each of the provisions in the guillotine.

COFEMER took the initiative to review and improve the whole regulatory process to increase

their effectiveness and achieve higher level of social welfare. The review was conducted

from an integral perspective that included policies, institutions and tools used in this process.

This process took into account a horizontal and a vertical approach to include the various

institutions involved in the regulatory process as well as international experience in terms of

the regulatory reduction strategy.

II. INTERNATIONAL EXPERIENCE AND STRATEGIES DEVELOPED WHILE

IMPLEMENTING A RED TAPE REDUCTION STRATEGY

The design for the 2011-2012 Regulatory Improvement Program was planned carried out

through an analysis of international experience, which had as its main axis reducing

administrative burdens on business; in order to understand and apply good practices and

avoid the mistakes that were taken by the design of the malpractices.

In this regard, not only Mexico has benefited from this strategy; countries facing economic

crises use the red tape reduction strategy to promote development, eliminate barriers to

business and quickly recover from the crisis:

7

Table 1. International Regulatory Red Tape Reduction

Country Reform objective

Number of

Regulations

Before the

Guillotine

% of

Regulations

Eliminated in

the Reform

% of

Regulations

Simplified in the

Reform

Korea

(11 months) Regulations 11,125

48.80

% 21.70%

Mexico

(9 months) Procedures 2,038 54% 27%

Moldavia

( 6 months)

Procedures 1,130 45% 13%

Permits 400 68% 20%

Ukraine

(12 weeks) Regulations 14,000 36% 7,2%

Bosnia

(4 months)

Procedures 331 21% 23%

Inspections/

Regulations 2,473 58% -

Croatia

(9 months) Business Regulations 2,683 27% 30%

Source: Jacobs & Associates

According to international best practices, reducing the administrative burdens could reduce

business costs; in particular, if a government succeeds in removing at least 25% of the cost

of the administrative burden and simplify most of the remainder. The economic impact of the

cost reduction could be enormous; it could result in an increase in GDP between 1% and 3%.

In this regard, the Dutch Bureau of Economic Policy Analysis estimates that a 25% reduction

in the cost of administrative burdens would lead to a 1.7% increase of GDP in Europe.

Thus, reducing the administrative burden should not be done in small doses; to obtain a

successful regulatory reform it is necessary to focus on obtaining large positive impacts. It is

therefore important to undertake substantial reductions in unnecessary and inefficient

bureaucracy, because otherwise, small changes would lead to the failure of the objective, as

governments continually create more bureaucracy.

Many countries have implemented several regulatory reforms, but most have struggled to

achieve solid results, the difficulties are represented by problems in design and

implementation, including coordination between ministries and stakeholder participation. In

this sense, international best practices highlight the importance prioritizing the objectives,

identify practical solutions, implement reforms as scheduled and monitor the results. Thus,

there are three main tasks for reforming the regulation:

8

Figure 2. Main tasks for regulatory reform

Source: Prepared by COFEMER

The reform effort must control the "flow" of new regulations and the "stock" of the old rules.

To achieve the objectives, according to international best practice, an applied checklist

should be established, through the following stages:

Figure 3. Checklist

Source: Prepared by COFEMER based on Jacobs, Cordova & Associates information.

After these three stages, each government prepares a list of what regulations to eliminate or

simplify, each public agency evaluates each policy in a written document, using a simple and

standardized checklist.

Modernize the existing regulatory actions to remove barriers to entry, reduce regulatory costs and fill gaps in the regulation.

Control the regulatory flow, better tools for monitoring and evaluating the quality of new laws and regulations, and strengthen the capacity of institutions to develop and implement regulatory

instruments.

Provide institutions the capability to reform, by adopting medium-term strategies, eliminate unnecessary regulations and strengthen the capacity of institutions to encourage the

participation of private actors in the reform..

1. The government sets the scope of the guillotine. Its range may vary from narrow to wide. For example, Mexico, restricted the guillotine to procedures, which were the main source of regulatory burden on the public.

2. The government adopts a legal instrument for the guillotine, to create the processes, institutions and the schedule for the guillotine. This can be done either by law or by government decree.

3. In the decree, the government calls on all public bodies to establish, on a certain date - usually a couple of weeks - a complete list of the provisions included in the aplication of the guillotine.

9

One of the biggest problems caused by poorly designed administrative regulation is that it

generates high regulatory burdens that impose high costs to society. In almost all countries,

their governments for decades issued administrative regulations to address particular

problems. However, while designing regulations, governments did not establish mechanisms

for periodic review of the effectiveness and efficiency of such administrative regulations. To

illustrate this, the cases of South Korea and Ukraine are useful:

South Korea5 had its first efforts to boost regulatory review of its stock in 1980. However, the

results were limited in scope, as it focused on the implementation of "soft" reforms. So they

had business as allies, but the bureaucrats as enemies, and the implementation of the

approach of "bottom up "was not the best strategy. Later, in 1998, derived from the Asian

crisis, the public interest in promoting economic growth increased in Korea, so the lack of

flexibility of the economic sectors, over-regulation of business and the need to get more

foreign direct investment were emphasized. Therefore, ministers were instituted in 1998 to

eliminate 50% of each ministry regulations by the end of the year. The results were: i) from

the current regulations (11.125), 5.430 (48.8%) were eliminated, however, by 2002; the new

regulations began to increase, so that the reduction was only 33% compared with 1998. In

addition, from 1992 to 2001, the barriers to entry in the industry had dropped from 45% to

35%. Importantly, one of the most costly problems of regulation in Korea was the lack of

clarity and room for interpretation of many standards and regulatory procedures.

Ukraine6 is another country that focused on the review of its regulatory collection. The initial

motive for that country to improve its regulation was to improve relations with Western

Europe. In this sense, one of the biggest challenges was dusting the economic apparatus

and thus regulations that hindered economic development. Regulatory reform in Ukraine is

divided into three stages: i) 1998-2000, which represents the first attempt to improve the

regulatory situation, but whose implementation was weak and faced significant resistance

from local authorities and bureaucracy benefited from the deregulation ii) 2000-2004, the

plan intensified legal and practical reforms, but the bureaucratic conservatism remained and

it was impossible to implement the Regulatory Impact Assessment (RIA) correctly, SMEs

failed to join forces effectively to form a pressure group and there was an identified misuse of

authority and corruption in the executive branch, and iii) 2005, the regulatory climate

revolution with the "regulatory guillotine”, where a presidential decree ordered a quick review

5 The World Bank Group, (2008), Regulatory transformation in the republic of Korea: Case studies of reform

implementation experience, and Ha, Byung Ki, and others. (1999), The Economic Effects of Korea’s Regulatory

Reform. Seoul: Korea Institute for Industrial Economics and Trade. 6 Scott Jacobs, Astrakhan Irina. (2006) Effective and Sustainable Regulatory Reform: The Regulatory Guillotine in

Three Transition and Developing Countries, and World Bank, IFC. (2008) The State and Business: Time to remove barriers that hamper growth.

10

of existing regulations, which identified that more than half of burdensome rules and

regulations were unfriendly to entrepreneurs, thus more than 4,900 were repealed.

In this regard, in recent years, the Standard Cost Model has been adopted by a growing

number of countries such as Austria, Belgium, Czech Republic, Denmark, Estonia, France,

Germany, Italy, Latvia, Netherlands, Norway, Poland, Slovenia, Spain, Sweden, United

Kingdom, Romania, Ireland, Portugal, Turkey, Cyprus, Greece, Lithuania, Finland and

Australia.

These countries have adopted this methodology to map and measure the administrative

burdens derived from regulation, from which it was possible to define a quantitative target

and measure progress in reducing administrative burdens.

Graphic 3. Countries that have implemented a regulatory burden reduction

Source: Prepared by COFEMER based on the International Standard Cost Model Manual and the European

Press Release: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/06/425&format=HTML&aged=1&language=EN&guiLanguage=en

0.0% 2.0% 4.0% 6.0% 8.0%

Finlandia

Reino…

Suecia

Dinamarca

Irlanda

Bélgica*

República…

Alemania

Francia

Paises…

Eslovenia

Austria

Eslovaquia

España

Italia

Portugal

Polonia

Grecia

Hungria

Costs of Regulación% of GDP

0% 10% 20% 30% 40%

Finlandia

Reino…

Suecia

Dinamarca

Irlanda

Bélgica*

República…

Alemania

Francia

Paises Bajos

Eslovenia

Austria

Eslovaquia

España

Italia

Portugal

Polonia

Grecia

Hungria

Administrative burden goal 2012

0.0% 2.0% 4.0%

Suecia

Reino Unido

Finlandia

Dinamarca

Irlanda

Bélgica*

República…

Paises Bajos

Alemania

Francia

Eslovenia

Portugal

Italia

España

Austria

Polonia

Eslovaquia

México

Grecia

Hungria

GDP estimated increase for 2025

2.2%

3.8% of

GDP on

average

for

countries

25% of

costs on

average 1.4% of GDP

on average

Hungary

Greece

Poland

Portugal

Italy

Spain

Slovakia

Austria

Slovenia Netherlands

France Germany

Czech Republic

Belgium*

Ireland

Denmark

Sweden

UK

Finland

Hungary Greece Poland

Portugal Italy

Spain Slovakia

Austria Slovenia

Netherlands France

Germany Czech Republic

Belgium* Ireland

Denmark Sweden

UK Finland

Hungary Greece

Poland

Portugal

Italy

Spain

Slovakia

Austria

Slovenia

Netherlands

France

Germany

Czech Republic

Belgium*

Ireland

Denmark

Sweden

UK

Finland

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/06/425&format=HTML&aged=1&language=EN&guiLanguage=en

11

Once the quantification of the administrative burden (which was equivalent to 3.8% of GDP in

these countries), it provided the basis for implementing comprehensive strategies of

"trimming" these costs (goals of 25% on average) and boosting their economic growth (with

increases of 1.4% on average of GDP in the long run). Knowing the amount of burdens in

their countries has allowed them to establish a reduction target; they also have been able to

identify priority areas, deadlines and the types of actions that will allow them to achieve their

goals. However, a tool to measure the burden reduction is needed; in this case, the selected

tool was the SCM because it had been already used in a first effort to measure the costs of

regulation.

III. METHODOLOGY USED BY COFEMER TO MEASURE THE BENEFITS FROM

THE PMR

The Standard Cost Model is a regulatory impact assessment methodology used to estimate

administrative costs faced by businesses and citizens that are generated by regulations

imposed by governments. This model provides a simple and consistent method that can be

used by anyone responsible for managing and improving regulation to implement the

analysis, review and improve its regulatory collection.

There are numerous advantages in adopting the Standard Cost Model in the simplification

process:

Using the Standard Cost Model it is possible to identify those specific parts of the

regulation that generate the greatest burdens whose compliance is considered by

companies as especially burdensome.

The measurements reveal the life cycle stages in which companies incur in higher

administrative expenses; it is possible to identify the areas where the simplification

process can be promoted with greater effects;

The ranking shows where efforts should be focused to simplify regulations;

The Standard Cost Model helps ministries to identify the full costs of their

administrative burdens, contributing in directing resources within a process of

simplification;

Quantitative results can significantly help identify which loads generate greater

nuisance to businesses or what are the policy areas that companies find

inappropriate or difficult to meet.

Because of its advantages, the Standard Cost Model has been adopted by a growing

number of countries as a basic tool for regulatory revisions to their collections, and to

12

generate accurate information on their regulations to support them in the implementation of

substantial improvements. Even the Standard Cost Model has been used to implement

programs with a greater reach in order to boost productivity and economic growth.

With this perspective, the Standard Cost Model allows us to identify common or standard

activities to be held to perform a duty, which are determined by hours spent by activity and

monetize the average hourly cost. In the case of the model implemented by COFEMER, the

twelve standard activities from the original model were condensed in only eight to simplify the

process.

Table 2. Standard Activities

Standard Activities

1. Identification and

understanding of

requirements (understanding

of regulation).

Quantifies the time spent

reading the entire regulation, so

that the citizen can build an

action plan to comply with the

regulation.

2. Generation of new

information in order to

comply with red tape.

Quantifies the time that the

citizen spend in gathering new

information7.

3. Collection of pre-existing

information (information

already owned by the

individual and is not required

to get or generate).

Quantifies the time that the

citizen dedicates to submit, in a

timely manner, the information

in his possession.

4. Meetings with internal

staff (meetings with the staff

involved in comply with a

procedure).

Measures the time the citizen

dedicates to meetings with

public officials to comply with

the regulation.

5. Filling forms and reports

Measures the time spent by the

citizen in managing the

process.

6. Meeting with external Measures the time dedicated by

7 Red tape information requirements are classified in two categories: new information and pre-existing

information. The new information is that which must be obtained by the citizen through additional actions.

13

Standard Activities

services (meetings with

consultants hired by the

entrepreneur to meet the

regulation)

the citizen in meetings with

experts to help him to comply

with the procedure.

7. Generation of backup files

Allows measuring the time

spent by the citizen in

generating information backup,

from physical files to electronic

files.

8. Transportation to

government offices, waiting

times and time dedicated to

make payments

Measure the time that a citizen

dedicates to the process

management by the time spent

on transportation (return),

waiting times in banks and

government offices.

Source: Prepared by the Federal Regulatory Commission based on the International Standard Cost Model

Manual.

As already mentioned the Standard Cost Model is based on measuring the average time to

perform activities to comply with the regulation and also estimate its cost. The parameters

used in this measurement are:

Price: The monetary unit basis for the measurement, considered as a rate per unit of

time. Mostly, the price is determined by the wages of the people involved in the

administrative burden, and in the case of outsourcing, it is understood as the generated

cost per hour of service.

Time: Amount of time spent on regulatory compliance.

Quantity: Size of the population affected by the regulation, i.e. number of firms and

individuals comprising the "target population" of the regulation in a year.

Combining these elements, it is possible to obtain the basic foundation of the Standard Cost

Model: (Time) x (price) x (quantity)8. With these parameters it is also possible to estimate the

8 World Bank, “Here is Your Money: Using the Standard Cost Model to Measure Regulatory Compliance Costs in

Developing Countries”, 2010.

14

average cost of complying with regulations for businesses and citizens, and makes easier to

identify areas of opportunity in specific regulations.

In this way it is possible to identify which regulatory actions have a greater impact for the

entrepreneur, and significantly helps to know which activity is more costly. For example, if

fulfilling a certain business process requires the presence of the company´s CEO in the

government office; the procedure has a high cost, because, as we saw, the Standard Cost

Model is based on the measurement of wages (price).

The Standard Cost Model implemented by COFEMER supposed that compliance with

business regulation involve primarily four types of labor specialization: secretarial, technical,

professional and managerial. This means that the more complicated the regulation, people

with a higher degree of specialization is needed to fulfill the requirements, therefore the cost

of compliance increases for business.

The last stage of the process of reducing administrative burdens posed by Standard Cost

Model is the identification of the simplification measures. Once the activity where the cost is

relevant is located, a number of measures are posed to focus on simplifying the process of

complying with the regulation.

As mentioned before, an advantage of this model is that it allows to "carefully aim" in order to

achieve a mayor economic impact with the implementation of measures design to reduce

administrative burden. Because the Standard Cost Model disaggregates administrative

activities, we can also identify which activity "hurts more" to the entrepreneurs and pursue

reforms that generate the greatest benefits.

It is important to mention that the Standard Cost Model sets a "minimum standard" that is,

the estimates reflect the average of reality. With this setup, regulators can evaluate the

average impact of their actions, there will be cases where the cost is well above or well

below average; at least, the SCM allows us to dimension a part of the reality of the local

economic environment.

COFEMER designed a methodology in which it is possible to identify common or standard

activities that must be done in order to comply with a federal regulation, these activities are

determined by the hours spent by type of activity and are monetized by the average cost per

hour. The methodology developed by COFEMER takes into account the life cycle stages of

firms (Opening, Operation and Closure) and red tape imposed to citizens and

nongovernmental organizations (NGOs). Also, the classification was based on the

procedures that ministries and government agencies have discharged in the Federal Registry

of Procedures and Services.

15

In the Standard Cost Model developed by COFEMER, according to the procedure being

analyzed, the benefits are measured as follows:

Resource Liberation. It is the release of resources generated in the economy caused by the

simplification of procedures and the reduction in resolution times by the authority. The

release has two components: first, monetary resources are released and second, time in

man-hours is also released.

The release of monetary resources is the difference between the Aggregated Administrative

Cost prior the improvement proposals ( and the Aggregated Administrative Cost after

the improvement proposals ( .

The release in hours is obtained from the difference between the Total Time spent by

standard activity before the proposed improvements ( and the Total Time spent by

standard activity after the proposed improvements ( .

Aggregated Administrative Cost . Is the product of the sum of administrative costs

by standard activity of each procedure , times the frequency of use of the procedure,

with 𝑡=0,1. Where 0 denotes the period before the proposed improvement and 1 denotes the

period after the proposed improvements.

Aggregated Opportunity Cost ( . Is the product of natural day response from the

authority, times a measure of the cost structure of the subsector which is affected by the

process, times the interest rate.

The model was fed with the information contained in the procedures listed in the Federal

Registry of Procedures and Services at December 5, 2010. The red tape was classified into

three categories: business, citizens and associations and organizations (the cost estimation

programming was done according to the life cycle of the firm: costs for opening procedures

were estimated first, operation procedures after, then closing, and ultimately citizens):

Procedures by Category: Business (Opening, Operation and Closure), Citizens and

NGOs.

Ministry and Administrative Unit.

Instrument Type: Approval, authorization, notice, cancellation, granting,

preservation, financing, registration, license, contract model, modification, permit,

extension, registration, renewal, transfer and application.

Subsector of Economic Impact: Those found in the Reference System of 2009

Economic Census.

16

Subsequently, requirements of each procedure were classified into two categories: first, pre-

existing are those requirements that entrepreneurs or citizens already have in their

possession and do not require additional activities to get and submit them to the agency;

second, new requirements, which imply that entrepreneurs or citizens should incur in

additional activities to obtain the required information. An approximation is also made for the

distribution of working hours per participant in the completion of the procedure with respect to

the type of data and standard activities that have nothing to do with data. This exercise is

done both before and after the proposed improvements. In this sense it is important to note

that all information requirements and response times by the authority was taken from the

information recorded by government agencies in the Federal Registry of Procedures and

Services.

Based on the Standard Cost Model, standard activities and their relation with data

classification are as follows:

Table 3. Relation between Data and Standard Activities

Standard Activity Data Classification

1. Identification and

understanding of requirements New y Pre-existing

2. Generation of new information New

3. Collection of pre-existing

information Pre-existing

4. Meetings with internal staff New and Pre-existing

5. Filling forms and reports New y Pre-existing

6. Meeting with external services

Without relation to

data type

7. Generation of backup files

Without relation to

data type

8. Transportation, waiting and

payments

Without relation to

data type

Source: Prepared by COFEMER based on the International Standard Cost Model Manual.

The Opportunity Cost is the amount of resources stop flowing in the economy since the

authority takes a certain period of time to give a resolution to the entrepreneur when the

procedure is analyzed to start a business. For the process i at time t, the Opportunity Cost is

calculated as follow:

(

)

17

Donde:

: Gross capital formation in the economic subsector

: Fixed costs in the economic subsector

: Average revenue of the investors

: Red tape response time

: Economic units by economic subsector

: Annualized daily rate of return on CETES to 28 days

For procedures classified as citizen red tape, the Opportunity Cost calculation is as follows:

Given the particularities of the citizen red tape, not every procedure of this type has an

Opportunity Cost ( ). From this it was concluded that all those procedures that represent

the fulfillment of an obligation, this is due to the delay of the authority to address the potential

impacts of access to employment and thus generates a cost to citizens.

Finally the Total Economic Cost ( ), is calculated as follows:

This mean that the model from COFEMER adds a measure of the opportunity cost of the

administrative burden, originally measured by the Standard Cost Model of the Dutch Ministry

of Finance, to finally estimate the Total Economic Cost of the Procedure.

In addition, each of the measurements obtained times the frequency of use allows us to

obtain their aggregated values, being as follows:

Aggregated Total Economic Cost ( . Is the product of the sum of the Aggregated

Administrative Cost and the Aggregated Opportunity Cost , both in period t, with

t=0 (where 0 denotes the current status of the procedures).

Aggregated Administrative Cost ). Is the product of the sum of administrative costs

per standard activity for each procedure , times the procedures frequency of use, with

t=0.

Aggregated Opportunity Cost . It is the product of natural days times the daily

response by the authority times GDP per capita.

18

IV. THE REGULATORY IMPROVEMENT PROGRAMS

Regulatory simplification strategy aims to review a large number of regulations, eliminating

those that are no longer needed, without the need for lengthy and expensive legal actions for

each regulation. It is a systematic and transparent approach to review, remove, and

rationalize business regulations, which provides a quick solution to the most critical problems

of unnecessary and inefficient regulation, and creates an opportunity to build a permanent

system of quality control for new business regulations in order to prevent the recurrence of

the same problems.

Overall, the strategy of red tape reduction is guided by the answers to three key questions:

Graphic 4. Strategy Guide for the red tape reduction

Source: Prepared by COFEMER based on Jacobs, Cordova & Associates information.

Any regulation that passes the three tests is placed in the "Keep" category. If the regulation

does not pass the first two tests, it is placed in the "Remove" category. Finally, the

regulation that passes the first two tests but fails the third is placed in the "Review" category.

Then the questions that arise are: when to proceed with the removal of regulation? And when

to proceed with a simplification?

Table 4. Regulation Elimination and Simplification Criteria

1.- Is it necessary?

2.- Is it legal?

3.- Is it pro-business?

19

Elimination Criteria Simplification Criteria

When there is not a clear

purpose for the regulation within

the government structure.

When the regulation is obsolete.

When there are duplicated

regulations or the contradict each

other.

When regulations are not being

applied correctly and does not

generate added value.

When the regulation generates

little added value to the

government.

When the regulation violates the

consumer’s choice about goods

and services quality.

When regulation is not

compatible with the needs of the

market or international

agreements.

When criteria for elimination is

not met.

When forms and formats can be

reduced or clarified and that

comply with the government’s

needs.

When an authorization can be

replaced by a notification.

When an Information requirement

can be replaced by a general

rule.


The Regulatory Improvement Program in México (PMR)

For the 2011-2012 programs, it was established that the Regulatory Improvement Program

would be based on the Red Tape Reduction Strategy in order to increase Productivity and

Economic Growth. To this end, the main focus was to reduce administrative burdens on

productive activities, in order to free up financial resources previously devoted to regulatory

compliance, so they are directed to increase productivity in the country. For programming

and implementation, COFEMER considered the following characteristics in the 2011-2012

Regulatory Improvement Program:

• Targeted improvements

• Ease of implementation

• High impact improvements

Within the objectives of the PMR and with a previous analysis of the administrative burdens

from the measurements of 2010, a goal to reduce the regulatory cost was set. It was found

20

that by improving 25% of the federal procedures liberation of resources equivalent to 1.2% of

the national GDP was achievable.

In addition, through a public inquiry about the Regulatory Improvement Programs 2011-2012,

the participation of citizens and business was included; which completed two sections, one

for procedures and the other for regulations. Proposals for procedures serve the following

criteria:

I. Eliminate procedure.

II. Transforming the procedure in a notice.

III. Elimination of requirements.

IV. Establish or shorten deadlines.

V. Establishing silent-consent approval.

VI. Procedure automatization.

VII. Decrease the Frequency in which the procedure is required.

VIII. Extend the procedure’s validity

Along with the legal mandate that empowers COFEMER to implement, coordinate and

develop the regulatory reform process in Mexico, in recent years it has become essential to

improve the quality of regulation in the various levels of government to improve productivity,

competitiveness and the welfare of the society they represent. So to comply with

COFEMER’s mandate, a strategy of public consultation was implemented to gather

information about the public’s perception on specific regulations. During the whole process of

public consultation, 1028 opinions were received on specific regulations and they were

incorporated to the PMR procedure improvements.

Regulatory simplification through the PMR is an approach that can provide short-term

results. It is designed to reduce the costs of regulatory reform within a political and legal

system that is already overloaded with difficult reforms. The regulatory simplification process

is also known as a Red Tape Reduction Strategy. The red tape reduction can be an effective

way to reduce unnecessary bureaucracy and thereby meet a more carefully regulated

system. The combination of simplicity and speed, and the results already obtained, provide a

relatively promising basis for regulatory reform.

21

Organizational Structure for measurement and simplification of regulatory burdens

The previous programs were characterized by a schedule of actions in terms of procedures,

in order to comply with the registration requirements of the Federal Registry of Procedures

and Services and to set the agenda for expected regulations. However, these efforts were

not oriented to promote specific actions that generate improvements for business and

citizens. Therefore, it was established that the 2011-2012 Regulatory Improvement Program

would be based on the red tape reduction with the main goal of increasing productivity and

economic growth.

To that end, a technical group focused on the implementation of the methodology of

Standard Cost Model was formed to complete the measurement of burdens involved in

federal regulation and thereby identify two aspects: first identify the country´s most costly

procedures in order to carry out a process of simplification of legislation or regulatory cuts

and thus, at the end of red tape reduction calculate its impact in monetary terms, highlighting

not only the creation of public value by the program, but also show it, make it available to

society and thereby gain its support and legitimacy.

Senior and junior level economists integrated the groups organized in COFEMER. The red

tape analysis was organized by sector of expertise to which economists had been exposed

for several years. Thus, according to the subject that was analyzed, there was a senior

economist who coordinated and supervised the work performed by junior economists. Also,

the Economic Intelligence Unit was responsible for coordinating the methodology for

estimating regulatory burdens.

V. REGULATORY BURDEN MEASUREMENT RESULTS OF THE 2011-2012 PMR

The 1.2% of GDP goal of savings due to the reduction in administrative burden

proposed by the Ministries was successfully achieved. This was possible thanks to the

commitment of most of the Ministries and agencies of the Federal Public Administration and

to the compliance, over the last six years, with most of the measures on high-impact

procedures.

22

Graphic 5. Results Analysis


Based on the above, objectives originally proposed in the Strategy to raise Productivity and

Economic Growth (regulatory guillotine of 2nd generation) are achieved. The strategy was

presented at the XIV Regular meeting of the Federal Council for Regulatory Reform on 14

July 2011.

Graphic 6. Institutions with more actions in red tape

1. Ministry of Economy (SE, Secretaría de Economía)

2. Ministry of Communications and Transportation (SCT, Secretaría de Comunicaciones y Transportes)

3. Ministry of Health (SSA, Secretaría de Salud)

4. Secretariat of Public Education (SEP, Secretaría de Educación Pública)

5. Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA, Secretaría de Agricultura, Ganadería,

Desarrollo Rural, Pesca y Alimentación)

6. Agrarian Reform Secretariat (SRA, Secretaría de la Reforma Agraria)

7. Ministry of Finance and Public Credit (SHCP, Secretaría de Hacienda y Crédito Público)

8. Social Development Secretariat (SEDESOL, Secretaría de Desarrollo Social)

9. State´s Employee´s Social Security and Social Services Institute (ISSSTE, Instituto de Seguridad y Servicios Sociales de los

Trabajadores del Estado)

10. Foreign Ministry (SRE, Secretaría de Relaciones Exteriores)


FRPS Total High Cost Procedures

$566,536.43

$371,846.80

4.8% of GDP

3.1% of GDP

4,649 Procedures

511 Procedures

537

294 258

207 188 187 160 122 99

69

SE SCT SSA SEP SAGARPA SRA SHCP SEDESOL ISSSTE SRE

23

The institutions committed with more red tape reduction actions were the Ministry of

Economy (SE), the Ministry of Communications and Transportation (SCT), the Ministry of

Health (SSA), the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food

(SAGARPA) and the Agrarian Reform Secretariat (SRA).

The goal accomplishment represented a resource release equivalent to $ 141,270.44 million

pesos; this represents 25% savings on the total cost of all procedures registered in the

Federal Registry of Procedures and Services, which is $ 566,536.43 million pesos. This

implies that, to date, the costs imposed by the procedures registered in the Federal Registry

of Procedures and Services are close to 3.6% of the national GDP, or $ 425,065.99 million,

fulfilling the purpose of the 2011-2012 Regulatory Improvement Program to reduce

unnecessary costs to individuals and promote economic growth. As it was noted before, the

released resources are intended for productive activities rather than in regulatory compliance

costs. As the next graphic shows, the performance of the SCT, the IMSS, the SEP, the SE

and the SRA as ministries with higher contribution to resource release by concentrating 72%

of the resources released by the strategy:

Graphic 7. Institutions with greater release of resources (Millions of pesos)

1. Ministry of Communications and Transportation (SCT, Secretaría de Comunicaciones y Transportes)

2. Mexican Institute of Social Security (IMSS, Instituto Mexicano del Seguro Social)

3. Secretariat of Public Education (SEP, Secretaría de Educación Pública)

4. Ministry of Economy (SE, Secretaría de Economía)

5. Agrarian Reform Secretariat (SRA, Secretaría de la Reforma Agraria)

6. Social Development Secretariat (SEDESOL, Secretaría de Desarrollo Social)

7. Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA, Secretaría de Agricultura, Ganadería,

Desarrollo Rural, Pesca y Alimentación)

8. Ministry of Finance and Public Credit (SHCP, Secretaría de Hacienda y Crédito Público)

9. Mexican Institute of Industrial Property (IMPI, Instituto Mexicano de la Propiedad Industrial)

10. Foreign Ministry (SRE, Secretaría de Relaciones Exteriores)


31,808

25,886

21,158

13,319 10,332 8,816 8,435

6,249 3,111 2,934

24

In particular, high impact red tape and regulation improvements were implemented, resulting

high release of administrative burdens to society, for example:

Table 5. Regulatory Improvement Actions with Outstanding Results

Ministry Policy improvement Improvement actions Liberation of

administrative burden

Ministry of Communications and Transportation

87 actions to improve 62 procedures in aviation, trucking, shipping, ports, rail and multimodal transportation.

Response time reduction.

25,407 millions of pesos

Implementation of silent-consent rules.

Requirement reductions.

Ministry of Health Simplifying medical devices registration and marketing.

Registries elimination and 1.695 extensions for safe products.


Import permits elimination for these 1.695 products.

Simplified registration for 98 products in a new class of low-risk IA.

Ministry of Economy Foreign Trade Procedures.

Presentation through electronic means (Single Window for Foreign Trade).

2,663 millions of pesos Federal Government trade procedures simplification.


Ministry of Environment and Natural Resources

Red tape simplification for establishments considered stationary sources of emission to the atmosphere, that discharge wastewater, waste generators and service providers for waste management.



Impact on big industries (chemical, petrochemical, automotive, paper, metal, glass, power generation, asbestos, cement and hazardous waste).

Mexican Institute of Social Security

Facilitating IMSS pension systems procedures.


5,270 millions of pesos It benefits to 3 million 172 thousand pensioners.

More facilities for obtaining pension account loans.

25

Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food

Issuance of Animal Health Mobilization Certificate.



Requirement gathering in real time, according to health needs, through electronic means.

Health safety in meat flows is maintained.


VI. FINAL REMARKS AND LESSONS FROM THE PMR

The red tape reduction strategy proved to be an effective way to increase the society welfare

through short-term measures that can increase productivity and economic growth for the

country. Unlike previous Regulatory Improvement Programs executed, the strategy designed

for the 2011-2012 programs was based on the application of the SCM methodology in order

to quantify the benefits of the improvements implemented in the federal proceedings and

thereby identify the resource release generated to benefit individuals.

As it was mentioned before, the funds released through the various actions implemented

during the present Federal Administration were estimated in the order of $ 141,270.44 million

pesos, resulting in an effective reduction of the regulatory burden (due to administrative

burden savings) equivalent to 1.2 % of the GDP.

Graphic 10. Regulatory Improvement Program Objectives

Source: Prepared by COFEMER.

The Regulatory Improvement Programs are a key tool for the regulation´s continuous

evaluation. The main lesson from this strategy is the conjunction of two relevant tools for

25% reduction inthe Total EconomicCost out of the4,649 procedures inthe RFTyS.

$566,536.43

$424,902.3

Agregate Economic Impact Analisis(Thousands of pesos)

Total Economic Cost

Total Economic Cost with Proposals

3.6% del PIB

1.2% of GDP

Impact over the TOTALnumber of proceduresenrolled in the RFTyS .

TOTAL Proceedures

TOTAL Proceedures

4.8% del PIB

26

regulatory improvement; the PMR and the SCM represent a major improvement in the

process of evaluating regulation and provide a different approach to the regulatory

improvement policy. It is necessary to promote a horizontal coordination between

government agencies to identify areas of opportunity to make the improvement process more

dynamic and specific.

Therefore, the conjunction between these programs and the SCM methodology has become

an important tool to measure and keep track of the regulation´s evolution. Finally, the public

consultation represented a centerpiece to reveal the views of individuals and from these

opinions additional strategies that would provide greater benefits to society where generated.

Furthermore, the effectiveness of the 2011-2012 Regulatory Improvement Program

represents a key strategy in the regulatory reform process because the benefits have a direct

impact on the individuals’ welfare.

Documents

Benefits Derived from the 2011-2012 Regulatory Burden ......For the 2011-2012 Regulatory Improvement Program (PMR) in Mexico the strategy was based on the reducing the red tape to