Scope and Direction of the Review
19. The Review will involve work in the following areas:
- Establishing a "Fast Track" Process;
- Regulatory Frameworks - Implementation and Interaction;
- Sector Studies; and
- Regulatory Process Disciplines
Establishing a "Fast Track" Process
20. The Ministerial Group has directed the Quality Regulation Taskforce to ensure that there is an effective process for collecting and analysing issues that are put forward during the Review and in particular to ensure that decisions are translated into action, be that in the form of administrative relief or legislative amendment. There are already examples where industry has brought specific issues to the government's attention and these will be investigated as a matter of priority, namely those relating to:
- Gaming rules
- Transport Rules
- Enforcement of product Standards at the border
21. Departments have been asked to report to the Minister for Small Business by 30 June 2006 on the recommendations of the Second Annual Report of the Small Business Advisory Group, and to provide an update on the implementation of the government response to their First Annual Report. Any opportunities for this work to be incorporated into the fast track process will be considered.
22. The existence of the Review will excite businesses and others to propose regulatory changes. These ought to be able to be addressed, provided that appropriate solutions are presented along with the problems. Some of the proposals for change will result from the Review itself and therefore I consider that it would be optimal to have vehicles to progress these changes as promptly and as efficiently as possible. This is particularly relevant where the amendments to legislation or regulation are necessary to ensure that the original policy intent or objective of the regulatory framework is being met. But it is also relevant where there is an awareness of the problem, an obvious solution and Parliamentary support for addressing the problem as a priority.
23. I have therefore asked officials to assess the available options for fast tracking legislative amendments and report back to me by 30 June 2006. The immediate options include either designing a special type of Omnibus Bill or adopting the UK model of Regulatory Reform Orders. I have already written to the Speaker of the House (in another capacity) on the option of introducing greater flexibility to the rules on Omnibus Bills. Officials will be discussing these and any other available options with the Law Commission, the Parliamentary Counsel Office, the Legislation Advisory Committee, the Ministry of Justice and the Office of the Clerk of the House of Representatives.
Quality Regulatory Frameworks - Implementation and Interaction
24. The Review will support the Economic Transformation agenda by:
- Ensuring that New Zealand's regulatory environment is one that promotes economic growth, business confidence, globally competitive firms and social wellbeing, by:
- identifying clearly the objectives of the individual regulatory frameworks;
- ensuring that the legal framework is "fit for purpose" in that the nature and level of intervention meets the tests of proportionality, clarity, consistency, transparency, effectiveness and equity;
- ensuring that there is an appropriate level of self-regulation;
- identifying whether the framework needs to be (and if so can be) flexible to cater for the different characteristics of businesses within the framework;
- ensuring that the enforcement of the legal framework is focused on the objectives and proportionate to the risks of non-compliance (both likelihood and consequences); and
- coordinating and integrating centrally any information collection or dissemination, enforcement and other requirements of more than one regulatory framework applying to a single business.
- Review the interaction of particular regulatory frameworks to:
- identify problems and implement solutions that minimise compliance requirements for businesses, with a separate consideration of the impacts on SMEs when multiple frameworks intersect at the firm/product level, for example:
- HSE, ACC and HSNO requirements;
- The practical issues surrounding the implementation of District and Regional Plans and relevant resource consent processes, Building Act, Building Code, territory authority building consent and inspection requirements; and
- Accreditation or Quality Assurance requirements and contract compliance requirements for public funding.
- Identify adjustments that could provide that compliance with one regulator would automatically mean that compliance requirements of another regulator were met, in order to reduce compliance costs to business in a significant way, without increasing risks to any of the objectives of the frameworks or the regulators.
- consider the appropriate role of Standards, and the use of the existing Standards development process in regulatory frameworks.
- consider whether "safe harbour" provisions should be provided in legislation so that businesses, which have worked proactively with the relevant regulator and been approved as complying, can be given real comfort that they have achieved an appropriate standard and will not be "punished" for genuine error or mishap.
- Undertake research to explore the ways in which enforcement strategies can be subject to a sufficient level of scrutiny to ensure that they are optimal in the particular circumstances in which they are used, i.e. the rules, and the enforcement of the rules, should be proportionate to risk.
- Invite business to participate in the Review by utilising the www.businessconsultation.govt.nz website as a mechanism for business to identify specific regulatory barriers and potential solutions to government. Issues that have already been identified relate to gaming rules, transport rules and the enforcement of product standards at the border.
Local Government
25. The Review's initial focus on local government implementation will be within the context of the particular regulatory frameworks of health and safety, building and resource consents. The desirability of a more generic analysis of issues relating to local government implementation of government frameworks may become apparent through this work. Irrespective of this, adjustments to frameworks or associated programmes to address identified issues need to be consistent and coherent across government, and to recognise the separate constitutional and legal status of local authorities. The involvement of the Minister of Local Government in the review, and the Department of Internal Affairs in considering local government implementation issues for particular regulatory frameworks, will enable this to occur.
Enforcement Strategies
26. How regulators enforce the law is critical to the efficacy of any regulatory regime. Key dimensions of any enforcement strategy are:
- How much investment is made in setting standards, providing information, education and persuasion i.e. encouraging voluntary compliance by informed individuals or organisations; relative to investment in monitoring and the more punitive forms of enforcement such as fines and prosecutions;
- The extent to which the regulator seeks to build relationships within the regulated sector, and promote and facilitate self-regulation, relative to a more centralised `command and control' approach; and
- The extent to which the regulator takes a risk-based approach to determining the level of intervention, as well as more formal cost/benefit analysis.
27. Government can have some influence over how regulators enforce the law, either because the regulator is a government department, or through the various accountability measures if the regulator is a Crown entity, without crossing the line of independence. With local government implementation, influence is often limited to the content of the regulatory framework itself. However, as part of the review of regulatory frameworks it is proposed that the government explores ways in which enforcement strategies can be subject to a sufficient level of scrutiny to ensure that they are optimal in the particular circumstances in which they are used.
Regulatory Flexibility
28. Most often laws are based on the assumption that "one size fits all". In many cases this is the most sensible approach. In some situations, however, regulatory flexibility, or the use of a differentiated approach, may offer greater benefits where there are particular characteristics or circumstances at a firm or sector level, for example, different risks or consequences of failure.
29. Without careful design, regulatory flexibility could lead to regulatory arbitrage, and changes to industry structures at the margin as firms gravitate to what they see as a more favourable regulatory environment. Nevertheless, a number of examples of regulatory flexibility exist in New Zealand, including:
- The differential financial reporting framework for SMEs;
- The risk-based framework under the Building Act for differentiating between dams, which results in a differential level of regulatory intensity; and
- Exemption-making powers under a number of statutes, including the Securities Act.
30. I have asked my officials to assess the merits of alternative fees structures for SMEs, as well as a corporate governance regime tailored to the needs of closely-held companies. These examples will be fed into a wider study of regulatory flexibility as a tool to improve regulatory outcomes for business.
31. This study will initially consider two approaches: a generic law that enables a flexible approach to be taken across a range of laws; and identifying a menu of options for introducing regulatory flexibility into specific statutes.
Sector Studies
32. There is scope for a greater consideration of the cumulative impact of regulation on business. It is clear that the set of laws, and the impacts that they have, differ from sector to sector.
33. The initial sectors selected for study will be the food and beverage (including wine as a sub-sector), hospitality and retailing sectors.
34. The study into the food and beverage sector will have valuable linkages with a number of other government initiatives; namely, the current sector strategy centred around the Food and Beverage Taskforce, the forthcoming trans-Tasman Food and Beverage dialogue (part of the CER Ministerial scheduled for September) and Export 2007.
35. The sectors have already provided officials with an extensive list of issues they would like considered. As I have noted above, the scope of the studies must remain mindful of the international obligations underpinning aspects of the regulatory frameworks in place.
36. The analysis will take a bottom-up approach and will start at the level of the product or firm. The partnership aspect and action-orientated approach will be crucial to the success of these studies. Shifting solutions that arise from these studies to the fast track system, where this is practicable, will also be a key performance indicator for the Review.
Quality Regulatory Process Disciplines
Regulatory Impact Analysis (RIA) Is a Key Tool to Encourage Quality Regulation
37. Most OECD countries have introduced RIA requirements as the means to ensure that proposed regulation is assessed for its need and net impact on society before it is put forward to decision-makers. RIA requires a series of steps to be followed - from clearly defining the policy problem and setting objectives, to assessing all feasible options, analysing the impacts arising from these options and consulting with stakeholders. The results of this analysis are detailed in the Regulatory Impact Statement (RIS) presented to Cabinet. The Regulatory Impact Analysis Unit (RIAU) within MED provides training on writing RISs and undertaking RIA.
38. While progress has been made since 1998 in embedding RIA into policy development processes, it is clear that there is still much room for improvement. In many cases, RIA is still treated as an add-on to policy development rather than a framework to employ within the policy development process.
Problems with the Current RIA Requirements
39. The key reasons why we are not seeing greater benefits from having the RIA requirements in place are as follows:
- The timing of the requirement to prepare a RIS (as a summary of the RIA undertaken) is at the end of the policy development process, i.e. submission to Cabinet. It is usually too late at this point to consider alternative options (that may be less costly) and undertake further consultation to obtain better estimates of costs and benefits. In short, it is too late to correct poor analysis.
- Enforcement has a narrow focus on disclosure rather than analysis.
- The current RIS framework omits explicit reference to how the proposal will be implemented, monitored and reviewed.
- Other problems include a degree of duplication between the information presented in Cabinet papers and RISs, and that the coverage of the RIA requirements is only partial, with a number of rules falling outside the scope of the current Cabinet requirements.
40. I consider, as do my colleagues in the Ministerial Group, that a number of changes should be made to our RIA requirements to overcome these issues. These changes include:
- Introducing a requirement to prepare a draft RIS for consultation purposes, providing an opportunity for stakeholders to contribute at an early stage in the policy development process.
- Focusing the RIAU on those proposals with significant impacts on economic growth.
- Allowing the RIAU to deem a RIS inadequate if it:
- Fails to explain why existing regulations would not suffice to deal with the problem being addressed;
- Fails to include an appropriate cost-benefit analysis, risk assessment and statement of compliance costs; and
- Has been subject to manifestly inadequate consultation.
- Inclusion of a new section within the RIS framework to focus on implementation and review strategies for new regulatory proposals.
41. I also propose that in order to further strengthen the quality of the process going forward, all government agencies with the power to create and/or enforce regulatory frameworks or any aspects thereof should confirm in the RIS that the principles of the Code of Good Regulatory Practice (namely, efficiency, effectiveness, transparency, clarity and equity) have been complied with and that the regulatory impact analysis (RIA) has been undertaken in accordance with the new requirements.
42. These changes are in line with movements in Australia to strengthen its Federal and Council of Australian Governments (COAG) RIS requirements. COAG agreed in February to improving the quality of regulatory impact analysis through the use of cost-benefit analysis, and the Australian Federal Government has endorsed recommendations made by the Taskforce on Regulatory Burdens on strengthening RIS requirements.1
43. While I recommend that these changes be endorsed as the future direction of our RIA system, I note that consideration is to be given to the precise implementation details (for example, the criteria to determine the significance of proposals). Other refinements may be also necessary to address the issues noted at the end of paragraph 39 above. MED Officials will undertake this work in consultation with the Treasury, the Department of Prime Minister and Cabinet and the State Services Commission, and will report back to Cabinet by 31 July 2006.
Implementing a "Business Cost Calculator" to Better Measure the Costs of Regulation
44. Australia has developed a "Business Cost Calculator", based on the Dutch Standard Cost Model (SCM) for measuring certain compliance costs. Both tools assist a user to consider, at a reasonable level of detail, the compliance activities that businesses undertake and to formulate a view of the cost impact of those activities.
45. MED is in the latter stages of a feasibility study into the application of the Dutch SCM, the Australian Business Cost Calculator, or some variation of either. This study has been informed by a trial measurement using both models against the Schedules to the Securities Regulations 1983. The main preliminary findings of this exercise are that:
- The Australian model appears better suited to New Zealand conditions and has the potential to add value to the government's regulation making processes;
- The model offers a means to obtain better quantitative and qualitative information about the compliance costs falling on business;
- The model could also facilitate better engagement by government with the business community;
- The model can only complement other policy development tools such as RIA and cost-benefit analysis; and
- Consideration should be given to how the model is to be implemented within agencies, particularly given the resource requirements, data availability and scope for design changes to be made to proposals based on the results of applying the model. If businesses are asked to spend time contributing to the application of the model, they will want to see tangible benefits to their regulatory environment.
46. Based on these findings, I consider that there is a strong case to introduce the Business Cost Calculator in New Zealand. I propose that the model be implemented through a two year pilot programme within agencies, with training support to be provided by MED. Agencies will be responsible for identifying proposals to run through the costing model, and the results of this process should be included within the RIS/BCCS presented to Cabinet. The appropriateness of the tool in the New Zealand environment will be evaluated over two complete years with a report back to Cabinet at the end of 2008.
Stand-Alone Group on Implementation Issues
47. The establishment of a stand-alone group comprising trade unions, business representatives, academics and government officials to look specifically at compliance issues was raised in the context of a recommendation made by the Small Business Advisory Group in its first annual report released in August 2004 "that the government measure and publish the cumulative effects of the costs of compliance with regulations passed in the previous six months"
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48. Given the role that implementation practices can play on how effective a regulatory framework is in meeting the objectives of both government and business, it would appear sensible to focus any such group on these specific issues as well as the compliance costs arising. As noted in the government's response to the SBAG report, Ministry of Economic Development is to prepare a report for the Minister for Small Business on the establishment of such a group by 30 June 2006.
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