Sue Holmes Assistant Commissioner, Productivity Commission

1. CAPACITY BUILDING ON MODERNISING BUSINESS REGULATION Sue Holmes Assistant Commissioner, Productivity Commission 12 January 2011

2. Some preliminaries (1) lots of discussion • RIA = RIS • the course is flexible – let me know what you would like change

3. What is regulation? (1) very different definitions • some countries – subordinate instruments • Australia has taken a very broad definition for its reviews of regulation – anything made with the intention of changing the behaviour of businesses or individuals: from statutes to quasi regulation

4. MODERNISING BUSINESS REGULATION: DAY 1 (1) Benefits of regulation review and reform (2) Compare the roles of the Malaysia Productivity Corporation and the Australian Productivity Commission (3) Elements of regulatory review (4) Australian regulatory review

5. MODERNISING BUSINESS REGULATION : DAY 2 (1) Principles and values of the Productivity Commission (2) Elements of Regulation Impact Analysis (3) Exploring Elements of RIA More Fully • Identifying and describing the problem • Identifying options and recommendations

6. MODERNISING BUSINESS REGULATION : DAY 3 Exploring Elements of RIA More Fully, ctd • Impact Analysis • regulatory burdens on business • Competition • Business Cost Calculator

7. MODERNISING BUSINESS REGULATION : DAY 4 (1) Case Study: Oil and Gas in Australia and Malaysia (2) Instilling Commitment to Regulation Review and reform – Lessons Learned (3) Malaysia’s Regulatory Review System and the Role of the MPC

8. OTHER THINGS WE COULD DISCUSS (1) risk analysis and risk managemeny (2) regulating in a federation • improving administration and enforcement • regulatory budgets and reducing the total regulatory burden • decreasing red tape

9. benefits of reform

10. Review and reform is ongoing

11. 1 Benefits of regulation review and reform: Australian experience (1) Australian economic performance declined during the 1970s (2) Numerous microeconomic and trade reforms since 1983 (3) Marked improvement in economic performance has since taken place

12. Economic performance up to the 1980s • The regime was highly regulated, anticompetitive and redistributive: • trade barriers to protect manufacturing • statutory government monopolies • Relied on our exports of commodities to pay for this.

13. Australia’s terms of trade

14. declining economic performance Australia’s GDP per person ranking had steadily declined: • 1st at the start of the 20th century • 5th in the world in 1950 • 9th by 1973 • 16th in 1990

15. Trade liberalisation came first • Reductions in tariff assistance: • 25% reduction in 1973 • From 1983, gradual abolition of quantitative import controls: • mainly cars, whitegoods and textile, clothing and footwear industries • From 1988, a series of phased reductions in tariffs across most industry sectors • By 1996, virtually all tariffs had fallen to 5 per cent or less. • Effective rate of assistance to manufacturing fell from 35% in the early 1970s to 5% by 2000. • Increased international competition in Australia’s traded goods sector led to pressures for reductions in input costs and greater flexibility. This led to a broad-ranging program of domestic microeconomic reform.

16. Microeconomic and trade reforms Over the last 20 or so years, focus has been on removing policy-related distortions and impediments • Trade liberalisation • Capital markets • Infrastructure • Labour markets • Human services • ‘National Competition Policy’ reforms • Macroeconomic policy • Taxation reform • Better regulation making and review

17. Capital markets • Australian dollar was floated in March 1983 • foreign exchange controls and capital rationing (through interest rate controls) were removed progressively from the early 1980s • foreign-owned banks were allowed to compete.

18. Infrastructure • From the late-1980s partial deregulation and restructuring: • airlines • coastal shipping • telecommunications • waterfront • government business enterprises were progressively: • commercialised • corporatised • privatised.

19. Labour markets • shift from centralised wage fixing to enterprise bargaining, began in the late-1980s • Workplace Relations Act 1996: • individual employment contracts

20. Health, education and community services Reforms included: • competitive tendering and contracting out, performance-based • funding and user charges were introduced in the late-1980s and extended in scope during the 1990s • administrative reforms (for example, financial management and • program budgeting) were introduced in the early 1990s.

21. ‘National Competition Policy’ reforms In 1995, a coordinated national program for progressing pro-competitive structural reforms across all states was established. It delivered broad-ranging reforms to: • essential service industries (including energy and road transport) • government businesses • anticompetitive regulation  Legislative Review Program

22. Reforms to macroeconomic policy • inflation targeting was introduced in 1993 • from the mid-1980s, fiscal policy targeted higher national saving (and a lower current account deficit) and, from the mid-1990s, concentrated on reducing government debt, primarily financed through asset sales (privatisation).

23. Taxation reform • capital gains tax and the dividend imputation system were introduced in 1985 and 1987 • the company tax rate was lowered progressively from the late-1980s • a broad-based consumption tax (GST) was implemented in 2000, replacing the narrow wholesale-sales-tax system and a range of inefficient state-based duties. Income-tax rates were lowered at the same time.

24. Better regulation making and review • Establishment of the Business Regulations Review Unit (BRRU) and RIA processes (1985) •  renamed Office of Regulation Review (ORR) (1989) •  renamed the Office of Best Practice Regulation (2006) • Legislative Review program (1996) (competition policy) • Report of the Small Business Deregulation Taskforce (Bell Review) (November 1996) • Business Costs Calculator (BCC) (2005) • Legislative Instruments Act 2003 (effective 2005) • Report of the Taskforce on Reducing Regulatory Burdens on Business (Banks Review) (2006) • Establishment of the COAG Reform Council (2006)

25. Economic performance in the last 20 years OECD, Economic Survey of Australia, 2004 ‘The Government’s commitment to reform, its willingness to commission expert advice and to heed it, to try new solutions, and to patiently build constituencies that support further reforms, is … something that other countries could learn from.’

26. Improvements:Australia’s relative productivity performance

27. Economic performance in the last 20 years • Australia’s GDP grew by 3.5 per cent a year in the 1990s • faster than the United States • a third greater than that achieved by the OECD as a whole • performed extremely well during external crises: • the Asian financial crisis of 1997 • the bursting of the dot.com bubble • the Global Financial Crisis starting in 2008

28. Not just Australia:Benefits of regulation reform There is wide-ranging evidence that considered regulatory reform brings benefits to the economy: • better choices and lower prices for consumers and businesses • increased productivity • a more flexible economy, capable of adjusting to changes in demand and circumstances.

29. Empirical evidence on the gains from modernising regulation • A number of studies have found that reforms to product regulation to increase competition, have the following positive effects: • Growth: increases GDP per capita • Encourages innovation • Accelerates multi-factor productivity • May stimulate employment • Improves labour productivity • Encourages domestic and foreign direct investments • Increases investments in and the adoption of information and communication technology (ICT) services • See Nicoletti and Scarpetta, 2003 study of OECD countries: • prescriptive product market regulations and lack of regulation reform were likely to explain the relatively poorer productivity performance of some European countries. Considered the same would be found for other countries.

30. declining economic performance Australia’s GDP per person ranking started to improve again: • 1st at the start of the 20th century • 5th in the world in 1950 • 9th by 1973 • 16th in 1990 • 8th in 2002 • 6th in 2010

31. Broad effects of reform Australia’s per capita GDP rankingOECD countries, PPP 1990 US$

32. What were the benefits of past reforms? Real price changes Cross-subsidisation in favour of households removed Electricity Other benefits • Large reductions in telecommunications(-20%), ports (-50%) and milk (-5%) prices • Wider choice for consumers: longer shopping hours, new phone providers Gas

33. What are the potential benefits of future reforms? • Regulation reforms targeted at: • reducing compliance costs • Removing duplication • Current compliance costs around 4% of GDP • potential to reduce these by one-fifth

34. Regulatory design principles Provide rewards and incentives for compliance Nurture compliance capacity Prefer less intervention to more – minimum necessary to achieve objectives Use restorative justice when compliance fails Use regulatory responsiveness – enforcement pyramid – when restorative justice fails Target enforcement efforts to minimise risk

35. Benefits of regulatory reform cont. Increases job creation Creates new job opportunities and thus reduces fiscal demands on social security Reduces risk of crisis due to external shocks Maintains and increases regulatory protections In areas such as health and safety, the environment and consumer interests – by introducing more flexible and efficient regulatory and non-regulatory instruments such as market approaches

36. Sectoral effects of regulatory reforms Price reduction in real terms Road transport Germany 30 France 20 Mexico 25 USA 19 Airlines UK 33 Spain 30 USA 33 Australia 20

37. Price reductions in real terms Electricity Norway (spot market) 18-26.2 UK 9-15.3 Financial services UK 70.4 USA 30-62.4 Telecommunications Finland 66.5 Japan 41.6 UK 63.6 Mexico 21.5 Korea 10-30.7

38. Economy-wide effects of regulatory reform GDP, long term effects (%) USA 0.9 Japan 5.6 Korea 8.6 Germany 4.9 Netherlands 3.5 France 4.8 Greece 9-11 Sweden 3.1 UK 3.5 Spain 5.6

39. MPC and PC

40. 2 Roles of the Productivity Commission and the MPC • Mission: • MPC: productivity enhancement for global competitiveness and innovation to better life. • PC: undertakes applied economic analysis of policy issues with a focus on helping governments to make better policies in the long term interest of the Australian community with a focus on achieving a more productive economy which is the key to higher living standards.

41. 2 Roles of the Productivity Commission and the MPC • Means: • MPC: value-added information on productivity, quality, competitiveness and best practices through research and databases • PC: independent research and advice on a range of economic, social and environmental issues affecting the welfare of Australians. • As an advisory body, its influence depends on the power of its arguments and the efficacy of its public processes.

42. Commission’s broad range of work • Public reports addressing questions sent to us by the Government, for example: • executive remuneration • gambling • aged care • Public reports which monitor and compare performance: • government service provision • addressing indigenous disadvantage • particularly regulatory regimes, eg food safety • Research

43. Malaysia Productivity Corporation ?

44. Best practice regulatory review

45. (2) Three Stages of Regulatory Reform Regulatory management Regulatory quality (RIA) Deregulation and simplification

46. OECD regulatory governance principles Deregulate where markets work better than governments Regulate where markets cannot work without government Establish systems to ensure laws are coherent and well managed

47. OECD: Ways to improve government capacities to regulate well • a) Building regulatory management system • 1. Adopt regulatory reform policy at the highest political level. • 2. Dynamic dimension of regulatory policy. • 3. Establish explicit standards for regulatory quality and principles of regulatory decision-making. • 4. Build regulatory management capacities. • b) Improving the quality of new regulations • 1. Regulatory Impact Analysis. • 2. Systematic public consultation procedures with affected interests. • 3. Using alternatives to regulation. • 4. Improving regulatory co-ordination. • c) Upgrading the quality of existing regulations • 1. Reviewing and updating existing regulations. • 2. Reducing red tape and government formalities. • 3. Ex post evaluation.

48. Aspects of good regulatory governance • explicit regulatory reform policy • explicit standards for regulatory quality • consider regulatory and non-regulatory alternatives • administrative simplification and reduced compliance costs • mechanisms for managing and coordinating regulation • greatest net-benefit from government intervention • transparent impacts (regulatory impact analysis) • avoid capture by specific interest groups

49. Aspects of good regulatory governance cont. • adoption and enforcement to the optimum degree • transparent, non-discriminatory and efficiently applied • clearly articulate goals and strategies • public consultation procedures • domestic and foreign businesses know what regulations apply to them • appeals process; no undue delay to business decisions • systematic review and update • ensure they continue to meet intended objectives • regulation impact analysis • target regulations • use automatic review methods • evaluate results

50. Australia’s regulatory review