### Regulatory change measurement methodology

```Victorian Regulatory Change Measurement (RCM)
Version 1.0 dated June 2010
These slides are available at: www.dtf.vic.gov.au/betterregulation
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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
-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
Regulatory costs
Financial
costs
Compliance
costs
Substantive
compliance
costs
costs
Other costs
(e.g. market/competition)
Delay costs
Impacts of being prevented by
operations
Costs within the red border are measured through the RCM
RCM formula for costs
Regulatory costs
(total \$)
Price (P)
X
Quantity (Q)
OR
Estimated cost of the regulatory
X
affected
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
Regulatory burden change (+/-)
\$250k/\$500k
Cost of conducting the RCM
Low measurement costs
\$10 m
Medium measurement
costs
Illustrative implications:
Limited
More extensive
Only if needed
Strongly recommend
Effort to gather data
Limited
’Activity’ level only if needed
and resources permit
Detail of mapping (to ‘activity level*)
Limited effort or referencing
More effort to gather data
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:
-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
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
END
RCM not needed
START
Regulatory change
arising from
instruments subject
to BIA/RIS
WAIT up to 3 months
from charge
NO
NO
Is the regulatory
change within
scope of RRBE?
START
Regulatory change
arising from
instruments not
subject to BIA/RIS
YES
S2.1
S2.3
burden alone
\$250 000
per annum
substantive,
compliance costs, and
delay costs
\$500 000
per annum
Is information
available to assess
the magnitude of
change?
S2.2
Understand the
magnitude of
change
S2.4
Is the change
material?
END
RCM not needed
NO
YES
RCM is needed
Consult with BRU on
materiality and further steps
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
Baseline
(case of no regulation)
Government
imposed
regulatory costs
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
 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
-Substantive compliance costs
 Delay costs
Regulatory costs
Financial
costs
Compliance
costs
Substantive
compliance
costs
costs
Other costs
(e.g. market/competition)
Delay costs
Impacts of being prevented by
operations
 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 - discussion
Expenses
 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
Regulatory
Process 1
Over-lapping time period
with Process 1
Regulatory
Process 2
0
1
TIME
2
Identification of delay – slide 2
Regulatory
Process 1
Time saved by removing
Regulatory Process 2
Regulatory
Process 2
0
1
2
TIME
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
Steps 2.2 to 2.5
Before commencing the measurement
Key steps in the process
END
RCM not needed
START
Regulatory change
arising from
instruments subject
to BIA/RIS
START
Regulatory change
arising from
instruments not
subject to BIA/RIS
WAIT up to 3 months
from charge
NO
NO
Is the regulatory
change within
scope of RRBE?
Is information
available to assess
the magnitude of
change?
YES
S2.1
S2.3
burden alone
\$250 000
per annum
substantive,
compliance costs, and
delay costs
\$500 000
per annum
S2.2
Understand the
magnitude of
change
S2.4
Is the change
material?
END
RCM not needed
NO
YES
RCM is needed
Consult with BRU on
materiality and further steps
S2.5
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.
•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
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
Example 1: Initial estimates (costs in \$ million)
Sector/cost
categories
costs
Government
services
Economic
activities of
individuals
Total by cost
categories
NFP
+0.2
-0..6
-0.4
+0.2
-0.4
-0.4
Substantive
compliance costs
Delay costs
Total by sector
Answer: Yes, this is MATERIAL. This will be counted against the
\$256 million administrative burden reduction target.
Materiality test - 2
Example 2: Initial estimates (costs in \$ million)
Sector/cost
categories
costs
Economic
activities of
individuals
Total by cost
categories
+0.2
-0.6
-0.4
+0.2
-0.6
-0.4
NFP
Government
services
Substantive
compliance costs
Delay costs
Total by sector
Answer: No, this is NOT MATERIAL. However, departments may
choose to measure and count against the broader \$500 million
target.
Materiality test - 3
Example 3: Initial estimates (costs in \$ million)
Sector/cost
categories
costs
NFP
Government
services
+0.3
Substantive
compliance costs
Economic
activities of
individuals
Total by cost
categories
-0.3
0.3
0.3
0.3
0
Delay costs
Total by sector
+0.3
Answer: Yes, this is MATERIAL. This will be counted against the
\$256 million administrative burden reduction target.
Materiality test - 4
Example 4: Initial estimates (costs in \$ million)
Sector/cost
categories
costs
NFP
Government
services
+0.1
Substantive
compliance costs
Economic
activities of
individuals
Total by cost
categories
-0.1
-0.3
-0.1
-0.3
-0.4
Delay costs
Total by sector
+0.1
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
Regulatory Instrument
 Mapping involves:
•identifying obligations that
require a regulated entity
to perform a certain action
•identifying the type of
regulatory costs imposed
This should include information on the high level
regulatory instrument down to the specific guidance,
where relevant
Obligation
The legal requirement that affects
a sectors behaviour
Information Obligation
burden of the obligation
Substantive Compliance Obligation
A description of the substantive compliance
burden portion of the obligation
Details of the Delay Cost
A 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
Table: Hypothetical example of mapping to obtain a dairy licence
Information
obligation
Application for
licence

Data requirement
Contact details
Obtain accurate information for
the form.
Milk volume information
Gather the information from
milk statements
Amount of licence fee
payable
X
Calculate the fee payable.
Pay the invoice/make
deduction and file receipt
?
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)
Figure T1.2
Occupational Health and
Safety Regulations 2007
Obligation 1
Requirement to hold a
licence for high-risk work
Information obligation
Substantive compliance
obligation
Preparing and submitting the
licence documentation
Cost of training required to
obtain a licence for high-risk
work
Activity 1:
Fill form
Activity 2:
Make payment
Cause of delay
Potential under-utilised labour
after lodgement of licence
application
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
Regulatory costs
(total \$)
X
Price (P)
Cost
Substantive
Substantiative
Compliance
Compliance
Cost
Cost
Delay cost
population
Labour tariff
and/or
external staff
time
One-off cost of a
physical asset
and/or
Annualised
depreciation
Number of physical
assets
Interest + opportunity
costs
Quantity (Q)
annual frequency
compliance (or
uptake) rate
population
X
Duration of holding
X
compliance (or
uptake) rate
population
X
annual frequency
 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
 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
 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)
 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
-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
recommended
Step 2.6.4 Prepare the draft RCM Report
Executive Summary
1. 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
Table 2: Regulatory change Management Certificate
NFP
Government
services
Economic
activities of
individuals
costs
±\$
±\$
±\$
±\$
±\$
Substantive
compliance costs
±\$
±\$
±\$
±\$
±\$
Delay costs
±\$
±\$
±\$
±\$
±\$
Total by sector
±\$
±\$
±\$
±\$
±\$
Sector/cost
categories
Total by
costs
categories
Step 2.7 Check whether the draft RCM report is
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
```