Assessing Impacts – Methodology in Practice

OECD Training Workshop on Regulatory Impact Assessment

November 2014

An impact assessment is both:

A continuous process to help think through the reasons for government intervention, to weigh up various options for achieving an objective and to understand the consequences of a proposed intervention; and

A tool to be used to help develop policy by assessing and presenting the likely costs and benefits and the associated risks of a proposal that might have an impact on the public, business or civil society organisations, the environment and wider society over the long term.

Impact Assessment

“No new primary or secondary UK legislation which imposes costs on business or civil society organisations (‘INs’) can be brought in without identification of existing regulations of equivalent value that can be removed (‘OUTs’)”

Objectives

• Reduce the cost and volume of regulation in the economy

• Encourage implementing regulation only as a last resort

‘One-in, One-out’ and ‘One-in, Two-out’

An independent advisory body to provide external, real-time scrutiny on the quality of evidence and analysis supporting new proposals Help ensure that Ministerial decisions on proposed new regulations are based on a robust, evidence-based policymaking process

Evidence-based policy

Departments send IAs

to RPC for scrutiny

IAs with RPC Opinions

go to RRC for approval

1

3

Opinions issued

to departments2

Departments Develop IA and submit to

RPC before a formal

clearance is requested

from RRC

RRC

Makes final decision on

regulations

RPC Scrutinises IAs:

Red (“Not Fit for Purpose”)

or Amber/Green (“Fit for

Purpose”) flags given

RPC responsibilities for OITO are two-fold:

• Validating the direction of regulatory proposal – an ‘IN’ or an ‘OUT’

• Validating that the size of the ‘IN’ or ‘OUT’ being claimed is robust and credible (in accordance with the OITO Methodology)

Why?:

• If an ‘OUT’ is overestimated, business will be exposed to greater regulatory burdens in the future than it actually has had removed from it today

• If an ‘IN’ is underestimated, business will receive a smaller benefit in the future to compensate for the burden now

‘IN’ or ‘OUT’

Excluding any impacts on the analysis of pension reforms, we estimated that our scrutiny has led to a net difference between numbers initially claimed by departments and those finally published on SNRs of over £400m.

The impact of independent scrutiny

The RPC has 7 recommendations, identified as integral steps in producing a high quality IA:

1. Don’t presume regulation is the answer

2. Take time and effort to consider all options

3. Make sure you have substantive evidence

4. Produce reliable estimates of the costs and benefits

5. Assess non-monetary impacts thoroughly

6. Explain and present results clearly

7. Understand the real cost to business of regulation

7 Recommendations

1. Identifying the Counterfactual

2. Identifying Impacts

3. Quantifying the Costs and Benefits

4. Case Study: Mandatory charge for plastic bags

Assessing Impacts – Methodology in Practice

What would occur if no action is taken?

Acts as a baseline to assess other options against

Example:

Increasing the National Minimum Wage

What is the Counterfactual?

The policy is to increase the UK national minimum wage by 2% in line with general wage growth.

What we know:

• The number of people on minimum wage

• What they are currently paid

• What they will be paid under the new policy

What we need to estimate:

• What will happen to wages in the absence of the new policy

Example – National Minimum Wage

Example – National Minimum Wage

Labour supply

Labour demand

MW2

MW1

Wage rate

Quantity of labour Q2 Q1

Example – National Minimum Wage

Labour supply

Labour demand

MW2

MW1

Wage rate

Quantity of labour Q2 Q1

Labour supply

Labour demand

MW2

MW1

Example – National Minimum Wage

Wage rate

Quantity of labour Q2 Q1

Who will the policy have an impact on and what will that impact be?

Identify who will be impacted:

What is the market? (e.g. agriculture, pensions, banking)

Who are the key players? (e.g. farmers, banks, building companies)

Who are the stakeholders in a policy? (e.g. who will enforce the policy)

Think about the knock-on effects!

Identify impacts by issue type:

Economic / financial (e.g. small businesses, wider economy, competition)

Social (e.g. human rights, equalities)

Environmental (e.g. greenhouse gas)

Who and What?

Distributional Impacts:

• Most policies create winners and losers

• Need to cover any significant distributional impacts e.g. income, gender, ethnic group, age, geographical location, disability

• ‘Wider impacts’ section in IAs usually includes headings such as “equality” and “environmental”

• Show you have considered these impacts - level of detail as appropriate and proportionate

Winners and Losers

Example: Banning the sale of tobacco from vending machines

Identify the Impacts: example

Who will the policy impact on and what will that impact be? Remember the 2 steps: • Who and what? • Win or lose?

Who? Benefit Cost

Vending machine operators

Lost Profits

Smokers Health benefits Utility loss

Inconvenience cost

Tobacco companies Lost Profits

Other tobacco retailers

Displaced sales

The Exchequer Reduced NHS costs

Lost revenue from duty

Enforcement

Example – Banning the Sale of Tobacco from Vending Machines

Monetise costs and benefits as far as possible (estimate where appropriate and proportionate)

Regulatory costs are made up of two key inputs:

Administrative burdens:

• Costs associated with familiarisation, record keeping and reporting (including inspection)

Policy costs:

• Essential costs of meeting policy objectives

Monetising Costs and Benefits

Example:

Relaxing planning regulations for large housing developments:

Quantifying the effect:

• 1000 additional planning applications per year;

• 10 hours of management time per planning application;

• 1 hour of specialist service e.g. consultancy, quantity surveyors per planning application;

• Average 500 new houses per application;

• 500,000 new houses built per year;

• 5000 additional hours for planning service to review applications

Monetising the effect (putting a value on the scale of impacts):

• Cost of planning application

• Average hourly wage of person completing the planning application

• Cost of specialist services;

• Average profit made on a new house;

• Average hourly wage in planning service to review applications

Quantification and monetisation

Quantity

Price

Monetising the effect

Techniques

Examples of techniques to monetise administrative burdens and policy costs:

Cost Technique

Labour costs

Full time equivalent (FTE) costs should be used to estimate the costs of employees’ time to the employer and should include employers’ pension contribution costs, national insurance contributions and allowances as well as basic salaries. ASHE is a recommended source.

Costs of new equipment or new production processes

Formal / informal consultation with those likely to be affected might provide the best data.

Collecting information and providing proof of compliance

Use labour costs, plus the cost of new equipment required to do this.

Costs of getting licences

Estimate the fees plus administrative burdens. Enforcement authorities should be able to help with providing estimates.

Costs of extra legal, accountancy or other consultancy advice

Consultation or colleagues’ experience might be informative.

Enforcement costs Enforcement activities may generate costs to both regulators and businesses. Such activities could include: inspections, fines and information obligations. These impacts should be explored with the proposed regulator.

Valuing different impacts to allow like for like comparisons:

For non-market impacts stated preference and revealed preference techniques (willingness to pay studies)

• Health impacts: Quality adjusted life years

• Lives saved: Value of a prevented fatality

Standard measures for health impacts (QALY), time saved and lives saved (both DfT)

What about non-market impacts?

Net present value (NPV) –

the difference between the Present Value of a stream of costs and a stream of benefits

(direct and indirect costs and benefits)

NPV vs EANCB

In practice the UK Regulatory Framework means that the RPC considers impacts in two ways:

Equivalent Annual Net Cost to Business (EANCB) –

the annualized value of the present value of net costs to business, calculated with reference to the counterfactual

(direct costs and benefits to business only)

Case Study

Mandatory plastic carrier bags charge

The policy objective is to reduce the number of single use plastic bags used and disposed of in England, to be achieved through the introduction of a mandatory 5p charge paid by consumers at point of sale in large retailers.

Even after accounting for substitution effects (e.g. increased bin liner use), reduced single use plastic bags consumption is expected to reduce litter, greenhouse gas (GHG) emissions, resource use, waste generation and the associated costs of waste treatment. There will be no net cost to business from the policy as retailers will be able to retain a portion of the proceeds of the charge to cover their costs. The remainder of the proceeds is expected to benefit charities.”

Case Study

Mandatory plastic carrier bags charge What is the counterfactual? The IA estimated current levels of bag use, what changes would be likely to occur in the absence of a charge and the associated costs and benefits. Evidence on bag use was drawn from a range of sources including responses to the Department’s call for evidence on the plastic bags charge, WRAP data and impact assessments from other nations. The counterfactual took account of annually increasing plastic bag use by large retailers (as opposed to using ‘today’s level’ only. Single use plastic bag use was estimated for all types of retailer as this was the main focus of the policy. Bags for life were also considered to establish the extent to which the likely increase in their use following a charge offsets the benefits of reduced Single use plastic bag use. Paper bag use was also estimated because some increase in their use was expected as they are exempt from the charge. Finally, sales of bin liners were also considered likely to rise after the introduction of a charge so their current usage patterns were considered. *WRAP (Waste and Resources Action Programme) is Defra’s principal delivery body for the provision of advice and technical and financial support on waste reduction and resource efficiency in England (www.wrap.org.uk)

Case Study

Mandatory plastic carrier bags charge -

Who are the winners and losers?

Losers Winners

Case Study

Mandatory plastic carrier bags charge - Quantifying the impact

Assumption Central estimate Rationale

% increase in supermarket SUPB use (without charge and after its introduction)

2% Based on trends in supermarket SUPB use and supermarket sales growth

Number of bags on high street in UK 3,499m (85% plastic bags, 10% paper, 5% bag for life)

Based on WRAP data from 2008 and Retail Week data

Recycled content of SUPB 0% Assumption made by Environment Agency in life-cycle analysis

Retailer pass through to consumers of cost of SUPB

100% for all retailers Based on competitive nature of retail sector

Cost of SUPB to retailers 1.9p for all retailers AEA 2005 report and IAs for Scotland and Wales

% of LA street cleaning costs associated with litter

70% Based on list of activities covered in ‘street cleaning’ and an estimate of share of litter

Level at which PE BFL use settles after charge introduced

100% higher than pre-charge level for supermarkets (and SMEs in option 1), 70% for high street

Based on initial observed increase in Welsh supermarkets and judgement that this will fall after an initial spike

Increase in paper bag use (high street) 10% Based on anecdotal evidence from Ireland that there was some switch to paper; and judgement that only a small switch is likely due to the extra cost of paper bags

Retailer costs £26m in option 2 (PV) over 10 years

Based on average of per bag and per retail outlet estimates of monitoring/reporting costs; and estimate of transition costs

Fall in supermarket SUPB use 80% Reliable data from UK supermarkets in Wales (via WRAP)

Fall in high street SUPB use 70% Welsh government data for some kinds of high street store

Donation to charity by retailers 100% of net proceeds of charge Based on supermarket behaviour in Wales

Case Study

Mandatory plastic carrier bags charge - Monetising the impact

Costs Benefits

Consumers 5p x number of bags consumed after charge introduced Cost of bags for life x number of bags consumed after charge introduced Cost of bin liners x number of bags consumed after charge introduced

Consumers Value of retailers revenue that covers the ‘hidden cost’ of plastic bags

Government (exchequer) Value of VAT per plastic bag used x reduced number of plastic bags used

Retailers Reduced cost of plastic bag purchase and transport

Government (implementation) Transition costs (IT systems) Cost of enforcement

Environment Reduced CO2 emissions from lower number of bags x value of CO2 Cost of waste management per bag x reduced number of bags

Charities Revenue from 5p charge (after allowing for cost of plastic bag to retailer and admin)

Sources of Guidance

The Greenbook

Guidance on:

• Rationale for intervention

• Identifying options

• Cost benefit analysis (appraising options)

• Valuing non-market impacts

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220541/green_book_complete.pdf

Better Regulation

Framework Manual

Guidance on:

• Part 2 is the Impact

Assessment Toolkit,

providing more

detailed guidance for

those undertaking

impact assessments.

https://www.gov.uk/govern

ment/uploads/system/uplo

ads/attachment_data/file/2

11981/bis-13-1038-better-

regulation-framework-

manual-guidance-for-

officials.pdf

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Tel: 020 7215 1460

E-mail: regulatoryenquiries@rpc.gsi.gov.uk

www.independent.gov.uk/RegulatoryPolicyCommittee

RPC Contact details