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• 5. Reducing Compliance Costs

• Regulatory Policy

• Policy Guidance Material

• Requirements Guidelines
• Reg. Compliance Guidelines
• Policy Options Guidelines
• BCCSs Guidelines

• Reducing Information Burdens
• Electronic Technology
• Test Panels
• Helping Business Comply
• Regulatory Standards and Compliance Costs
• Types of Regulatory Standards
  • Compliance Costs Implications
  • Combined Approach

Reducing Information Burdens

In some cases, information collection represents a legal obligation to report information to government to verify compliance with government requirements (for example, tax returns) or receive approval to carry on some activity (for example, Resource Management Act consent). Other reporting requirements are for statistical purposes (for example, the monthly Enterprise Survey). Yet other information reporting requirements involve reporting information not to the government, but to third parties.

While information plays a critical role in good government, as we have noted, it also imposes a cost on business. Even when filling out a simple form, the effort required (or time spent) to collect or otherwise generate the information needed to fill out the form often greatly exceeds the time spent answering the questions or checking the boxes. For example, taxpayers usually spend much more time calculating and documenting their deductions than actually entering them on tax forms. Similarly, a firm reporting its inventory of hazardous chemicals will inevitably spend more time monitoring those levels.

It is important that departments strike the right balance between collecting the necessary information to meet their responsibilities to the public, while not requiring information that is unnecessary or unavailable. Departments should collect only information essential to their mission and ensure that they are collecting information only once, not redundantly. This involves periodically reviewing information burdens on business and reassessing why information is necessary, simplifying the content, and streamlining collection processes. Wherever possible, information from different government departments should be co-ordinated.

Electronic Technology

Agencies are encouraged to explore innovative ways to use electronic technology in their information collection activities - "taking the paper out of paper work". This not only reduces the paperwork burden, it also improves the quality, timeliness, and utility of the data received. With search costs constituting an important component of compliance costs, the more information is put online, the more these costs can be reduced for many businesses. An important consideration here is ensuring web sites are easy to use and information on them is easy to locate.

At the same time, some businesses and individuals may not yet be online. Alternative mechanisms for informing businesses and collecting information should still be retained.

There are many initiatives that illustrate the use of electronic technology to make the regulatory process more effective and efficient by improving the data quality, increasing public access to information, and reducing the compliance burden on business.

Test Panels

A useful approach to minimising the compliance costs of proposed regulatory interventions is the use of a "Test Panel". This tool is successfully used in other countries such as Denmark. This involves bringing together a panel of business people, which could include advisors to business, to audit the likely workability and compliance costs of regulatory proposals - assessing how the proposed regulation will work in practice and practical ways in which compliance costs might be reduced. Test Panels could be formed at the time a new regulatory proposal has been designed, but before enactment.

The outcome of this exercise may be suggested improvements to the regulation itself that will reduce compliance costs and/or ways in which the regulation can be introduced that will reduce costs - this may include the sort of explanatory information or training that should be provided to the business sector in reducing the "information costs" of compliance.

Helping Business Comply

Inadequate information available to business about regulatory measures is a frequent source of compliance cost. If entrepreneurs are to focus on driving forward their businesses, the time and therefore the opportunity cost of regulatory compliance must be minimised. The information that businesses need to respond to government requirements includes:

1. why the regulation applies to the business;
2. what it requires the business to do;
3. how the firm should go about fulfilling the requirements;
4. where to obtain further information regarding a regulation; and
5. where to obtain help when difficulties of interpretation arise.

Departments and government agencies are therefore encouraged to give particular attention to the preparation and provision of information on regulations and on communication with business and new entrants. There is often scope for improvement in the following areas:

• ensuring that information is available in a form that is suited to the needs of the businesses involved, and is readily accessible. Business needs to be given easily digestible and tailored (sector and size specific) regulatory information in a variety of media;
• providing adequate explanation of the rationale for regulations, information gathering, and other obligations;
• fostering a client culture in the provision of information and in contact with businesses concerning regulatory matters;
• ensuring that businesses are consulted when guidance material on regulations is being developed. This can be tested with small firms to ensure that it is in Plain English and is free of jargon.
• ensuring that front line staff are knowledgeable about the matters on which they are communicating with businesses and that they have the necessary skills to deal effectively with the business;
• ensuring consistency - avoiding differences in the interpretation of rules by staff in different regions;
• encouraging clients to provide feedback on compliance issues and the service they receive;
• ensuring that information retention requirements imposed on business are not excessive;
• encouraging the adoption of "user friendly" practices such as pre-printing as much information as possible on forms or including on forms the information provided by the business in the previous period; and
• maximum practicable use of after hours, direct dial, and toll free numbers.

Regulatory Standards and Compliance Costs

Different regulatory standards generate different compliance costs for business. It is worthwhile to identify these and point to their compliance implications.

Types of Regulatory Standards

Regulatory quality standards can be divided into three categories, each representing different degrees of intervention and cost:

Principle-based standardsdescribe the objective sought in general terms and require interpretation according to the circumstances. For example, an environmental goal may be that all factory emissions be at a safe level. Here, the firm is left free to decide when the regulatory goal has been achieved.

Performance-based standards specify that certain conditions or parameters of quality be met at the point of supply but allow the regulated parties to determine their own technique for achieving the outcome. This could involve, for example, restricting emissions from a factory to a level of not more than n per hour, but again leaving the firm free to achieve the required level by whatever (least-cost) technique it prefers.

Prescriptive-based standardsspecify the technical means for attaining the specified outcome. They can exist in either a positive or negative form. It compels the firm to employ certain production methods or materials, or prohibits the use of certain production methods or materials. These may be appropriate where there are stable problems requiring a high level of certainty. Using the above emissions example, a specification standard may look to mandate the factory use only ore with a specified low sulphur content, or that certain pollution reducing technologies be used in the production process.

Compliance Costs Implications

Performance and principle-based standards promote flexibility and responsiveness as they allow regulated parties to work out the most cost-effective way of achieving the desired objective. This promotes innovation in a world characterised by rapid technological change and vigorous competition.

On the other hand, prescriptive standards do not account for the variability of compliance costs across regulated parties. They also focus on one means of solving a problem while other factors which may have a significant impact in achieving the objective are overlooked. Prescriptive standards can become obsolete if the problem or technology changes, which can impose substantial costs on businesses by restricting their ability to adapt.

That said, however, prescriptive standards may be appropriate where there are limited ways of achieving a desired objective and when the problem that the standard addresses is a static one. It may also be more cost-effective (from an economy wide perspective) for the prescribed standard to be determined by the regulator, thereby trading off compliance costs for administration costs. Prescriptive standards may also be appropriate where the level of harm from non-compliance is unacceptable and a level of certainty is desirable.

Principle and performance based standards impose a cost to firms of acquiring and processing information in developing least-cost techniques in achieving the regulatory goal. The formulation cost for business are likely to be higher for these compared with prescriptive standards as the firm has the task of relating different levels in the quality of performance to the regulatory goal. This may be particularly onerous for SMEs who have relatively limited resources and capability.

Principle based standards, while highly flexible, involve a high degree of uncertainty for businesses as to what comprises adequate compliance, particularly if the consequences of non-compliance are serious. This can result in additional costs, such as buying-in expert advice on this issue. While this cost may be outweighed by the advantages of flexibility for many, particularly large firms, smaller firms may not be able to bear this cost.

Combined Approach

Regulators can usefully combine principle-based and performance-based standards and prescriptive "deemed to comply" standards to capture the best features of all. Smaller companies could be expected to adhere to prescriptive standards (where the compliance costs involved with performance standards would make up a large portion of their revenue), while larger companies could be expected to comply with performance standards (where it is anticipated efficiency gains would outweigh the costs of compliance). An effective way of implementing this approach would be to provide different compliance options, and allow businesses to select which is best suited to their situation.