Guide – How to make RIA

By Krassen Stanchev and Martin Dimitrov

 

1/ The Essence of RIA Process

“Regulatory Impact” is a sum of possible effects of a given policy or normative acts implementing it. Regulatory impacts could be both positive and negative. The essence of the impact analysis is to assess whether benefits (expected positive effect) of the policy implementation exceed costs (expected negative effects).

Effects of regulation: “benefits” and “costs”

The “benefits” are foreseeable significant positive effects expected form the adoption, implementation and compliance with the act, including those that can be both qualitative and quantitative and be observed in public life, health, environment, economy and redistribution.

“Costs” are foreseeable significant negative effects expected from the adoption, implementation and compliance with the act, including those that can be both qualitative and quantitative and be observed in public life, health, environment, economy and redistribution.

Benefits and cost constitute side of the same coin. Benefits are measured by values (their monetary expressions) of expected positive effects and the “willingness to pay” in order to achieve these positive effects. The exact measure of costs would be the measure of what it takes to compensate and overcome negative impacts.

Willingness to pay and compensation for negative effects need to be separately expressed as a monetary equivalent of what is needed for the implementation of a policy or a project in order to have all (affected) members of the society being better off that in the period before the adoption/implementation. This is why draft policy/project should not be implemented if costs exceed the benefits.

The requirement to consider the alternatives

Every analysis is based on comparison. In economics comparison of benefits and cost is based on the concept of “opportunity costs” (values). For this reason RIA introduces a requirement to discuss alternative solutions. The concepts of “alternative solution” and “alternative to regulation” help assess both benefits and costs. “Alternative solution” is a possible mechanism to resolve the problem, including a decision not to adopt a regulatory act.

General criteria to take a decision: benefits justify costs

The assessment of the impacts and alternatives constitutes a criterion to adopt or not a proposed regulation or repeal an already enforced normative act. If benefits exceed the costs, policies and acts would make sense. If this criterion refers to an existing regulation and RIA demonstrates that costs exceed the benefits, it would be advisable to amend the reviewed policy or regulation.

Long-term horizon of the impacts

The essence of this criterion is its applicability to the future. It is important to understand that a government policy induces (could induce) multiple, but unevenly distributed, benefits and costs, and not at once but over a more or less lengthy period of time. Since impacts are to be found in the future, they are difficult to determine.

This is why the analysis of benefits and costs, if it is at all possible to monetize and quantify them, attempts to express them as a present value. Such analysis is especially needed if benefits and costs are to be transferred over generations.

However, namely because of the long-tem and undefined nature of the impacts, the “benefits justify costs” criterion is applicable to the assessment of already adopted regulations, to justification of policy reforms, for the goals of regulatory simplification, codification and deregulation.

Simplicity and concrete nature of the analysis

All analytical methods deal with different types of information, put it in order, test it and modify it, in order to present the “reality” in a simplified and comprehensible manner. The cost-benefit analysis is applicable whenever there is choice between different types of behavior, and the majority of political problems correspond to this requirement. Whenever there is no choice, this method is modified into an analysis of cost efficiency.

In both cases the simplicity of the method consists in the possibility to define a clear criterion for decision-making. The decisions are justified if:

a) Benefits justify costs, and

b) Objectives could be achieved at lower cots.

However, as far as general policy and regulatory impacts consist in the aggregated impacts on individuals, the analysis of these impacts cannot be converted into an “automatic decision making”.

The complexity of the impact analysis consists in its concrete nature. It:

Starts with the definition of the problem, which must be resolved;

Proceed through the identification of individual members of the society (groups) and processes that would be a subject of impacts and whose incentives and behavior would determine the eventual outcome; ends by the definition of the ratio between benefits and costs and the decision to implement or not the proposed solution in reality, and if “yes” – how.

No analysis can compensate for a poor problem definition. For example, the impacts of pension policy and regulation of tourism are quite different for different groups of citizens; respectively, the difference between empirical foundations for taking a decision in these two areas ate very much different.

The general criteria for decision making in both areas might be similar (benefits exceed costs, costs associated with one type of decision could be less for an alternative) but the methodology to take respective decision are always specific.

 

2/ Procedural instrument of regulatory analysis

The general character of the impact analysis

This is a learning process. It helps asking the right questions; broaden the responsibility and support innovative decision-making.

This is a peculiar analytical process, which gradually builds up the empirical basis for decision-making and assists consensus on identified solutions and discovers most costs-effective solutions the political process towards identifiable outputs.

This is a process of public consultation; it improves the quality of information and broadens the dialogue on policy objectives and instruments.

This is process of improving accountability, which allows for strict definition of policy and regulatory objectives and helps determining who “wins” and who “looses”, reduces the price of policy mistakes eliminating the most harmful ones.

The stage of policy introduction and initiation of bill drafting: preliminary (ex-ante) analysis

As mentioned above, the attempt to calculate benefits and costs on this stage helps bring about benefits, identify cost-effective solutions and reduces rates of political failures. After the decision to follow certain policy, objectives and tasks is taken, the analysis of impacts could be used to elaborate and select from different policy implementation options, choosing most appropriate instruments to achieve the goals.

As an ideal, at this stage the impact politicians and specialist who initiate the policy perform analysis. If the policy direction is already agreed upon, the group of experts to conduct RIA should include economists, lawyers and specialist on the issues to be regulated, representing, if possible, the staff of the agency initiating the drafting of the bill.

According to their respective background, the group members shall:

• Determine the problem and formulate the desired policy outcome in as concrete form as possible;

• Attempt determine the range of possible behavioral options of people who might influence the effect and consider the alternative behavior and alternatives to regulation; consult those people on whom the future act would have an impact;

• Assess different regulatory approaches and how they could influence incentive, choices and behaviors, taking into account that regulations could have both positive and negative impacts; consider other policy (and law) areas where regulation has already taken place or on which implementation of different regulatory approaches could depend;

• Apply different analytical methods that allow for comparing of choices, in order to reveal the net effects of a regulation;

• Determine a combined approach that utilizes set of incentives and helps changing behavior for maximum output at minimum cots.

A follow-up (ex post) assessment

After the implementation of the regulatory instrument begins, after an envisaged period of time, the impact assessment must and could be used to test, confirm and verify the actual and still provisional impacts and their effects. In this sense, this is an assessment to check to what extend original objectives have been accomplished and whether there is a need to repeal, amend or supplement a policy or a regulatory norm.

Experts involved in RIA, irrespectively this is a preliminary or follow-up analysis, could and should receive additional information from other government agencies (e.g. the statistical office, specialized departments of other agencies, etc.) and from independent (non-government) experts (for instance, academia, journalist, associations, etc.).

With both ex-ante and ex-post RIA, at a given stage, preferably as early as possible, the experts should consult those that would be provisionally or are already actually effected by the act (policy).

After the preliminary internal impact assessment is prepared by the initiator(s) it should become a part of a dossier, which constitute a foundation for alternative assessment, along with information sources and consultation comments, should be publicly available for all interested parties, including businesses.

RIA questions

The minimum list of questions RIA process should answer is the following:

• What is the problem the proposed/given act should resolve, what are the benefits of the proposed solution?

• What are the costs of compliance with the norm (regulation) to be introduced, including “invisible” costs in time and in-kind resources that, otherwise would be devoted to achieving other goals?

• Who “wins”, who “looses”, where from the needed resource come in order to implement the proposed solution?

• What are the alternative way to resolve the problem and why they do not work, what are the benefits and costs of different solutions? Do benefits exceed the costs?

 

3/ Activities to Apply the General RIA Guide

General technical instruction to apply regulatory analysis

As mentioned above in the context of general discussion, the analysis of benefits and costs is based on the assumption that social impact consist, eventually, of an aggregate individual impacts and that impacts on the society as a whole is impossible to be accounted for without information on these individual impacts. Also, this requirement to conduct the analysis on a concrete level emerges also when RIA attempts to take into account the expectations, provisional patterns of behavior necessitated by a given policy or regulation. This is because expectations are characteristic to individual members of society, e.g. to individual entrepreneurs, and only then – to individual social groups (which, in turn, could shape and shape expectations of the members). In short: the RIA process requires adjustment of the general methodology for the needs of individual policy and regulatory case.

Taking into account the nature of the cost benefit analysis, there is a need to underline and always consider the key methodological peculiarity of RIA in comparison to statistical and macroeconomic analysis: the RIA always go from the individual to the general. (Of course impact analysis often is based on an accumulated information for given period of time and utilizes this information taking it for granted.) With the exception of some specific types of regulation e.g regulations of in the area of monetary policies, emission of money etc., the regulatory acts, reflecting all possible cases due to the very impersonal nature of law is such, exercises impacts first of all on those to whom rights duties and norms of behavior are being prescribe. For this reason RIA proceeds as if via concentric circles, from the micro level of the individual impact to calculations (assessment) of probable impacts on the whole, on the economy and society.

Resolving the uncertainty issues

The complexity of social processes require an analysis of uncertainty and sensibility of the analytical findings, an assessment of whether their subject to change if original assumptions and data is changed.

Whenever there is an uncertainly of assumptions and data, it is needed to use full publicity, disclosed method and sources of information and attract as many as possible representatives of the provisional effective parties, specialists and representatives of institutions from which the implementation of the policy would depend upon.

It is also necessary to draft separate development scenario even if it is not possible to determine their probability in a quantitative manner. It will help the years of possible divers information, which will help assessing the likelihood of the outlined scenarios.

If the uncertainty significantly affects the analysis and its conclusions, it is necessary to conduct additional consultations and surveys before rushing into political and regulatory decisions.