Presentation by Cara Maguire, Regulatory Improvement Committee, United Kingdom, at the Workshop on the Elaboration and Evaluation of RIA at sub-national Level, Cuernavaca Morelos, Mexico, 11-12 November 2014, Session 5. Further information is available at http://www.oecd.org/gov/regulatory-policy/

1. Assessing Impacts – Methodology in Practice
OECD Training Workshop on Regulatory Impact Assessment
November 2014

2. 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

3. “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’

4. 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 approval13 Opinions issued to departments2Departments Develop IA and submit to RPC before a formal clearance is requested from RRCRRCMakes final decision on regulationsRPC Scrutinises IAs: Red (“Not Fit for Purpose”) or Amber/Green (“Fit for Purpose”) flags given

5. 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’

6. 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

7. 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

8. 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

9. 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?

10. 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

11. Example – National Minimum Wage
Labour supply
Labour demand
MW2
MW1
Wage rate
Quantity of labour
Q2
Q1

12. Example – National Minimum Wage
Labour supply
Labour demand
MW2
MW1
Wage rate
Quantity of labour
Q2
Q1

13. Labour supply
Labour demand
MW2
MW1
Example – National Minimum Wage
Wage rate
Quantity of labour
Q2
Q1

14. 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?

15. 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

16. 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?

17. 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

18. 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

19. 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

20. 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.

21. 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?

22. 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)

23. 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.”

24. 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)

25. Case Study
Mandatory plastic carrier bags charge -
Who are the winners and losers?
Losers
Winners

26. 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

27. 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)

28. 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/government/uploads/system/uploads/attachment_data/file/211981/bis-13-1038-better- regulation-framework- manual-guidance-for- officials.pdf

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