The Hindu Business Line : Regulatory impact assessment

Regulatory Impact Analysis is a tool that enables the systematic assessment of positive and negative impacts of proposed and existing regulations, with the aim of improving the quality of regulatory policy. Enabling as it does the earlier consideration of a greater variety of solutions, its adoption would greatly benefit the planners and decision-makers.

THERE are calls for a review of the Electricity Act 2003 yet again. The Act, passed by Parliament in June 2003, replaced all the existing legislation in the power sector and sought to bring about a qualitative transformation of the sector. It creates a liberal framework of development for the power sector by distancing the government from regulation.

The deadline for complying with the provisions of the Act has been extended once by the present government. Various States have got more time for unbundling theState Electricity Boards. Now, with the Prime Minister, Dr Manmohan Singh, himself in doubt, there is a question mark on the utility of the Act.

However, one needs to examine first whether the Act actually merits a review or if it is the target of a certain mindset or ideology and the unwillingness to reform? Is the framework visualised by the Act actually unsound? Has anyone made a systematic assessment of its possible impact before deciding that the Act needs a review? Clearly, these questions need to be answered when deciding that the Act needs to be reviewed, if not scrapped.

With the call for reforms in processes of governance by the Prime Minister himself, it is imperative to have sound regulation in all areas of policy-making. This depends on the quality of the decision-making processes and the way policy instruments are chosen. It is time to look at such methods as Regulatory Impact Analysis (RIA) as a tool for effective decision-making.

RIA is a tool that enables the systematic assessment of positive and negative impacts of proposed and existing regulations, with the aim of improving the quality of regulatory policy. It not only encourages decision-makers to think in a structured way before they act, but also increases accountability of regulatory actions. It can be used to analyse existing as well as new regulations.

In an ex-ante analysis, RIA is conducted before the adoption of a proposed regulation. It involves an assessment of alternatives, and an explanation why these alternatives were not selected. On the other hand, an ex-post analysis is conducted on a regulation that is already in existence.

While RIA measures the real impact of a regulation, it offers little information on the situation that might prevail in its absence. Nevertheless, it helps set examples for regulations in future and also provides an opportunity to take corrective action against previous inaccuracies or mistakes.

International experience reveals that RIA is used significantly in a number of countries, where it was developed as a response to the growing volume and complexity of government regulations in the 1980s.

It had also become clear that the `invisible' regulatory compliance costs for businesses and citizens — for example, the costs of administrative formalities — were much higher than the `visible' costs on government budgets, and that these costs could have severe negative effects on businesses, consumers and economic performance, in general.

Thus, RIA programmes were designed and used to systematically identify these costs and benefits and alternative ways to achieve government goals more cost-effectively.

RIA has been adopted in most OECD (Organisation for Economic Co-operation and Development) countries and, at the beginning of 2001, 20 of the 28 member-countries were applying RIA methods, although the extent of use varied.

On the other hand, despite considerable interest in measuring the effectiveness of development policy and in the design and implementation of regulatory measures, it appears that the potential of RIA has neither been explored nor analysed in the developing countries and in their organisations involved in the design and formulation of development policy.

RIA has been undertaken in middle-income developing countries, especially South Korea and Mexico. Although there has been some interest in the concept among the Asia-Pacific Economic Cooperation members and in certain parts of central and eastern Europe, it appears that there has been little progress in adopting RIA in these regions.

In Africa, West Asia, and much of Asia, it seems that RIA has either not been seriously considered within government set-ups or there is no awareness of the method.

There is a near universal agreement that RIA, when executed effectively, improves the effectiveness of regulatory decisions. The success of an RIA programme lies in the increase in a society's net benefits arising from regulatory improvements.

While RIA is necessarily complex and can be costly, it is nevertheless an important tool in developing a more balanced regulatory approach. For example, the cost-benefit analyses conducted by the USEPA (United States Environmental Protection Agency) in 1981-86 led to revisions in three regulations.

The estimated net benefits to society increased by over $10 billion as a result of these revisions. It would be important to note that because only $8.1 million was spent to conduct these analyses, the USEPA's `return on investment' was over 1000 to 1.

RIA facilitates understanding of the impact of regulatory actions, including both benefits and costs of the action. It enables integration of multiple policy objectives, improves transparency and consultation, and enhances accountability of governments and regulators.

It not only brings the actions of decision-makers under public scrutiny and highlights how their decisions impact society as a whole, but also mandates greater information sharing by them.

However, no RIA is free from constraints. The common problems associated with RIA are non-availability of data, complex and costly analytical methods, quantification of intangible benefits, determination of appropriate assumptions on risk levels, difficulty in assessment of indirect effects, resistance from interest groups and regulators towards the new arrangements that may result from RIA, inability of regulators to undertake RIA and comply with its requirements due to lack of skills or resources, lack of quality control, leading to reduction in benefits of RIA, and political and bureaucratic interference.

Another constraint that may impact the quality of the analysis is that RIA tends to be based on theoretical considerations, with limited empirical inputs due to the reasons mentioned above.

An important advantage of impact assessment is that it focusses on the factors relevant tochoosing the best feasible alternative to a policy issue. Impact assessment helps establish the likely magnitude of the costs and benefits of alternative ways of addressing an issue.

It is important that impact assessment be integrated into the decision-making process from the stage of formulation of policies, acts and regulations, instead of later in the process simply to comply with externally imposed requirements.

Among other things, integration would help the earlier consideration of a greater variety of solutions. RIA is the need of the hour in India for it will help ensure that all the important factors and impacts are known when decisions are made.

(Anjali Garg is Area Convener, Regulatory Policy Area, TERI, and Manisha Gulati is Senior Analyst, ICRA Advisory Services.)

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