Risk based approaches to regulation

1. Risk based approaches to regulation Rex Deighton-Smith Director Jaguar Consulting Pty Ltd Challenges in Cutting Red Tape Rotterdam, 1 March 2007

2. Risk based approaches to regulation

3. The OECD Recommendation “Including risk analysis in this process of adjusting the responsibilities and roles of the public and private sectors as may follow from a change in the content of regulations.” “Development of a risk based approach will be essential as part of any redistribution of responsibilities between the state, the private sector and civil society in an overall effort to produce effective responsible regulation.”

4. Practice in OECD Countries • Risk assessment formally required to be used in RIA in most OECD countries • But widely varying amounts/types of guidance on performing risk assessments • A lack of clear decision-rules or guidelines

5. Threshold test • Most RIA guidelines require this step • It is a longstanding (1995) OECD “best practice” • Its use recognises the limits to govt action • But how is it to be conducted in practice? What rules to apply? • This is a risk based test – but, • Quantitative “acceptable risk” thresholds are almost unknown to govt policy

6. An exception – the UK • Fatality risks of 1 in 1 million years “broadly acceptable”. • Fatality risks of 1 in 10 000 years “at the boundary between tolerable and unacceptable risks for members of the public who have a risk imposed upon them in the broader interests of society”. • Fatality risks of one in 1 000 years “the boundary between tolerable and unacceptable risks for workers who voluntarily assume a risk”. Source: HSE (2001), pp 44-5.

7. Value of a statistical life (VSL) • A fundamental element of benefit/cost analysis for health/safety based regulation • Can be seen as implicitly setting an acceptable risk threshold : • Setting a given VSL limits the ability to pursue small risk reductions because BCA outcomes will usually be negative • But relatively few countries provide explicit guidance on VSL

8. VSL - examples • EC: Base case €1 million, sensitivity testing at €2.5m and €0.65m • US: “Most values are in the range $1 million to $10 million” • Canada: ditto • UK: BCA guide cites Dept. of Transport figure of £1.145 million

9. Results of the lack of detailed risk assessment rules • Hahn, Viscusi, etc point out losses of regulatory effectiveness: • Widely varying “cost per life saved” (-$8bn to +$36bn!) • Scope to both improve regulatory effectiveness and reduce costs by better targeting regulatory activity • Will also improve regulatory credibility

10. Some conclusions • Hahn concludes the VSL figure used has little influence on proportion of regulations passing a BCA • Similarly, the discount rate chosen has limited impact • Rather, the key is ensuring that some figure is adopted and quantification occurs

11. Conclusions • Neither formal requirements for risk analysis nor RIA have substantially moved practice toward consistent, rational approaches to risk • Partly due to continued lack of quantification in RIA • But Hahn shows that inconsistency is rife even in US, where more quantification occurs

12. Explaining the lack of progress • Government is essentially responsive to “subjective” risk perceptions • But subjective and objective risk can differ: • Voluntary assumption • individual control • “outrage” (risk less acceptable if associated with negligent behaviour) • Understanding of risk • “Social amplification” • Risk perceptions (reality vs perception) • Differences in risk acceptance (voluntary assumption of risk vs policy rules) (workers vs bikers?? 1:1000 risk)

13. Explaining the lack of progress (2) • Political imperatives (organised lobbying, narrow perspectives) • Views on the “reach” of government (How much can govt do? Is it desirable?) • Uncertainty (What is the real size/nature of the risk? How to respond to lack of knowledge?)

14. Implementing the OECD recommendation • Better implementing risk perspectives in regulatory design, implementation & enforcement, by: • Establishing a detailed risk policy; • Includes setting VSL, acceptable risk threshold & discount rate figures that are broadly acceptable • Seeking broad support for it; • Active dialogue on risk & regulation to establish legitimacy (e.g. Better Regulation Commission “Whose Risk is it Anyway”)

15. Implementing the OECD recommendation • Addressing risk perceptions (Aligning subjective & objective risk) • Policies on dealing with uncertainty - How much conservative bias/safety margin? • Integrating risk assessment with RIA • Requires improved RIA guidance/quality control • Addressing risk issues in compliance/enforcement policies • Esp. targeted inspections, resourcing in line with risk levels (see Hampton).

16. Conclusions • The role of risk assessment is widely recognised • But comprehensive policies to ensure implementation are largely absent • Both political and technical impediments exist • But co-ordinated action to address these offers the possibility of major improvements • Gains in greater regulatory effectiveness, reduced cost, enhanced legitimacy are potentially massive.