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Victorian Regulatory Change Measurement (RCM). Version 1.0 dated June 2010. These slides are available at: www.dtf.vic.gov.au/betterregulation Questions to: [email protected]. Victorian Regulatory Change Measurement (RCM). What? Introduction to the RCM methodology. - PowerPoint PPT Presentation
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Victorian Regulatory Change Measurement (RCM)
Version 1.0 dated June 2010
These slides are available at: www.dtf.vic.gov.au/betterregulation
Questions to: [email protected]
Victorian Regulatory Change Measurement (RCM)
Rundown
Introduction to the RCM methodology
Overview of the Reducing the Regulatory Burden (RRB) initiative
Step 2.1: Understanding the scope
Step 2.2 to 2.5: Before commencing the measurement
Step 2.6.1: Mapping the regulatory change
Step 2.6.2: Assessing and calculating costs
Step 2.6.3 to 2.8: Finalising the measurement
What? Introduction to the RCM methodology
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
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
Regulatory costs measured by RCM methodology
Costs within the red border are measured through the RCM
Compliance costs
Regulatory costs
Financial costs
Administrative costs
Substantive compliance
costs
Delay costsImpacts of being prevented by
administrative process from conducting operations
Other costs (e.g. market/competition)
RCM formula for costs
Regulatory costs(total $)
Price (P) X Quantity (Q)
Estimated cost of the regulatory change per business X
Number of businesses affected
OR
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
Some proportionality considerations
Cost of conducting the RCM
Illustrative implications:
Low measurement costsMedium measurement costs
Limited
Only if needed
Limited effort or referencing
Limited
More extensive
Strongly recommend
’Activity’ level only if needed and resources permit
More effort to gather dataDetail of mapping (to ‘activity level*)
Effort to gather data
Business interviews
Business engagement
$250k/$500k $10 m
Regulatory burden change (+/-)
Why?Overview of the RRB initiative
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
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
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
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
How?Step 2.1 Understanding the scope
Is the regulatory change within scope of RRBE?
Is information available to assess the magnitude of
change?
Is the change material?
RCM is neededConsult with BRU on
materiality and further steps
Understand themagnitude of
change
ENDRCM not needed
WAIT up to 3 months from charge
$250 000per annum
$500 000per annum
Administrative burden alone
Administrative burden substantive,
compliance costs, and delay costs
ENDRCM not needed
STARTRegulatory change
arising from instruments not
subject to BIA/RIS
STARTRegulatory change
arising from instruments subject
to BIA/RIS
NO NO
YES
YES
NO
S2.3
S2.1 S2.2
S2.4
S2.5
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
Business-as-usual costs
Baseline(case of no regulation)
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
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
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.
Step 2.1.3 Regulatory costs within scope
All compliance costs -Administrative costs (red tape) -Substantive compliance costs
Delay costs
Regulatory costs
Financial costs
Administrative costs
Substantive compliance
costs
Delay costsImpacts of being prevented by
administrative process from conducting operations
Other costs (e.g. market/competition)
Compliance costs
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
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
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
Delay costs - discussionExpenses 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
Identification of delay – slide 1
TIME
RegulatoryProcess 1
Over-lapping time periodwith Process 1
RegulatoryProcess 2
0 1 2
Identification of delay – slide 2
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
TIME0 1 2
RegulatoryProcess 1
RegulatoryProcess 2
Time saved by removing Regulatory Process 2
Steps 2.2 to 2.5Before commencing the measurement
Is the regulatory change within scope of RRBE?
Is information available to assess the magnitude of
change?
Is the change material?
RCM is neededConsult with BRU on
materiality and further steps
Understand themagnitude of
change
ENDRCM not needed
WAIT up to 3 months from charge
$250 000per annum
$500 000per annum
Administrative burden alone
Administrative burden substantive,
compliance costs, and delay costs
ENDRCM not needed
STARTRegulatory change
arising from instruments not
subject to BIA/RIS
STARTRegulatory change
arising from instruments subject
to BIA/RIS
NO NO
YES
YES
NO
S2.3
S2.1 S2.2
S2.4
S2.5
Key steps in the process
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
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?
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.
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
Materiality test - 1
Sector/cost categories
Business NFP Government services
Economic activities of individuals
Total by cost categories
Administrative costs
+0.2 -0..6 -0.4
Substantive compliance costsDelay costs
Total by sector +0.2 -0.4 -0.4
Example 1: Initial estimates (costs in $ million)
Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.
Materiality test - 2
Sector/cost categories
Business NFP Government services
Economic activities of individuals
Total by cost categories
Administrative costs
+0.2 -0.6 -0.4
Substantive compliance costsDelay costs
Total by sector +0.2 -0.6 -0.4
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.
Materiality test - 3
Sector/cost categories
Business NFP Government services
Economic activities of individuals
Total by cost categories
Administrative costs
+0.3 -0.3
Substantive compliance costs
0.3 0.3
Delay costs
Total by sector +0.3 0.3 0
Example 3: Initial estimates (costs in $ million)
Answer: Yes, this is MATERIAL. This will be counted against the $256 million administrative burden reduction target.
Materiality test - 4
Sector/cost categories
Business NFP Government services
Economic activities of individuals
Total by cost categories
Administrative costs
+0.1 -0.1
Substantive compliance costs
-0.3 -0.1
Delay costs
Total by sector +0.1 -0.3 -0.4
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.
Step 2.5 Contact the Regulation Reform Unit
Provide RRU with the indicative estimate RRU will provide appropriate advice on next steps
Step 2.6.1
Mapping the regulatory change
Reference: Toolkit 1
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
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 InstrumentThis should include information on the high level
regulatory instrument down to the specific guidance, where relevant
ObligationThe legal requirement that affects
a sectors behaviour
Information ObligationA description of the administrative
burden of the obligation
Substantive Compliance ObligationA description of the substantive compliance
burden portion of the obligation
Details of the Delay CostA description of the delay cost including the reasons for delay and the burden imposed.
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
Expanded mapping process: illustration
Information obligation
Data requirement Administrative activity
Application for licence
Contact details Obtain accurate information for the form.
Milk volume information Gather the information from milk statements
Amount of licence fee payable
Calculate the fee payable.Pay the invoice/make deduction and file receipt
Table: Hypothetical example of mapping to obtain a dairy licence
X ?
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).
Mapping an obligation into cost categories (example cont’d)
Occupational Health and Safety Regulations 2007
Obligation 1Requirement to hold a
licence for high-risk work
Information obligation
Preparing and submitting the licence
documentation
Substantive compliance obligation
Cost of training required to obtain a licence for high-risk
work
Cause of delayPotential under-
utilised labour after lodgement of licence
application
Activity 1:Fill form
Activity 2:Make payment
Figure T1.2
Step 2.6.2
Assessing and calculating costs
Reference: Toolkit 2
General principles
Duration of 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
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
The basic formula for regulatory costs
Administrative cost
Substantiative Compliance Cost
Regulatory costs(total $)
Price (P) Quantity (Q)
Labour tariff and/or
external staff
One-off cost of a physical asset
and/orAnnualised
depreciation
Interest + opportunity costs
time
Number of physical assets
Duration of holding
population
compliance (or uptake) rate
population
compliance (or uptake) rate
population
annual frequency
annual frequencyX X X
Administrative Cost
Substantive Compliance
Cost
Delay cost
X
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
Quantity variables for administrative costs
Population: refers to the number of entities affected by a particular regulatory obligation.
Frequency: is the number of times an affected business or other entity delivers or complies with a information obligation each year.
Compliance Rate: refers to the rate of affected business that will comply with the information obligation
-default = 1, or 100%
Administrative Cost = Price x Quantity= Price x (population x annual frequency x compliance rate)
Exercise: Calculating administrative costs
Obligation: Duty to lodge a licence application Information:
-A normally efficient business takes 4 hours to lodge this licence application
-1 000 businesses are affected by this obligation-Businesses are required to lodge this application twice a year-Wage is equal to $55 per hour including overheads and on-costs
Price variables for substantive compliance costs
Tariff x time: (similar to administrative costs) Price of physical asset: one-off purchase price of a
physical asset Annualised depreciation: ongoing cost of the relevant
asset Number of assets
Substantive Compliance Cost = Price x Quantity= (tariff x time) x Quantity OR= (one-off price of physical asset x number of assets) x Quantity OR= (annualised depreciation x number of assets) x Quantity
Quantity variables for substantive compliance costs Population: similar to administrative cost Annual Frequency: similar to administrative cost Compliance Rate: similar to administrative cost
Substantive Compliance Cost = Price x Quantity= Price x (population x annual frequency x compliance rate)
Exercise: Calculating substantive compliance costs
Obligation: Duty to provide safe ladders at all building worksites
Information available: -one-off purchase price of safe ladder is $200 -each site requires one ladder -10 000 worksites are affected-40 per cent of building sites already comply with this regulation
Delay costs
Key issues:-mapping the delay is crucial (discussed earlier)-identifying opportunity costs is another key issue
If you expect to measure the cost of delays, please contact RRU and agree to the methodology and formula to be used
More slides on delay costs are available on the DTF website, www.dtf.vic.gov.au/betterregulation
Delay Cost = Price × Quantity = {(costs incurred + opportunity cost) × delay period} × (population)
Steps 2.6.3 to 2.8
Finalising the measurement
Step 2.6.3 Verify the costs
After initial desktop estimation:• Consult departmental experts
-In all cases consult with relevant regulators and departmental experts to confirm that the data and assumptions used, and the preliminary results, are plausible.
-Refer to such consultation in the RCM report (without naming people).• Consult the affected sector
-Where necessary consult the affected sector to verify estimates. -The level of engagement should be appropriate to the magnitude of
regulatory change (proportionality). -Where initial estimates or subsequent analysis point to a regulatory
change equal to or greater than $10 million per annum, consultation with business (such as through business interviews) is strongly recommended
Step 2.6.4 Prepare the draft RCM Report
Executive Summary1. The regulatory change
-The change should be identified and specified, including the date when it takes effect (or took effect); and the duration of the regulation
2. Mapping the regulatory change-preferably through a diagram
3. Data strategy and data sources-strategy for desktop analysis and data collection-main sources of data-approach taken to a normally efficient business-approach taken to determine BAU costs -the approach taken to verify data
Step 2.6.4 Prepare the draft RCM Report (cont’d)
Executive Summary (cont’d)
4. Results-This section must outline and report the main quantitative results in
the form of a certificate (table) as shown in the next slide.
Attachments-Provides underlying data and working calculations, including
assumptions.
RCM certificate
Sector/cost categories Business NFP Government
services
Economic activities of individuals
Total by costs categories
Administrative costs
±$ ±$ ±$ ±$ ±$
Substantive compliance costs
±$ ±$ ±$ ±$ ±$
Delay costs ±$ ±$ ±$ ±$ ±$
Total by sector ±$ ±$ ±$ ±$ ±$
Table 2: Regulatory change Management Certificate
Step 2.7 Check whether the draft RCM report is adequate (internal assessment by department)Assess its adequacy against the criteria below:
• the RCM complies with the methodology in the manual -where a department elects not to undertake a particular
recommended action (such as business engagement through interviews for large measurements), reasons should be documented
-the RCM report is written in plain English• the assumptions are adequately documented and sources of
data appropriately cited • the calculations are accurate• the estimates are likely to be perceived by the affected sectors
of the public as being indicative of the true cost of the regulatory change
Step 2.8 Assessment of draft RCM Report
Send the draft Report for assessment to the VCEC who will assess against criteria outlined earlier
Assessing adequacy of the analysis• For estimates of regulatory change $10 million per annum,
submit to VCEC• For estimates of regulatory change $10 million per annum,
submit to BRU• Where a draft RCM report is prepared during the conduct of a
BIA or RIS (which are always assessed by the VCEC) departments may elect to have the associated RCM report assessed by the VCEC