Regulatory Enforcement and Inspections Reform:

Improving the Quality of Business Environment

Andrei MIKHNEVFlorentin BLANCWorld Bank GroupAmman, 2 June 2014

Quality of business regulatory environment

Regulatory quality at entry

Continuous improvement

Regulatory quality at enforcement

Delivery of regulatory services

♦ Modern and business-friendly regulations are important, but not sufficient for good business environment

♦ “How regulations are implemented/delivered” is an important dimension of the overall quality of business regulation and is much more important for businesses than “what is on the books”

♦ World Bank Group supports reform efforts to design and implement an effective inspections regime

Business inspections – a particular burden in many developing countries and emerging markets

• Superfluous inspections impose significant costs for the state and burden for businesses

• Opaque requirements, uncertainty, discretion lead to rent-seeking opportunities, creates distortion and deter investment

• Inefficient inspections regimes do not reach regulatory objectives of ensuring compliance with needed regulations

I was inspected

World Bank Group support

Asia Europe America Africa0

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Ineffective and burdensome inspections – interconnected problems leading to reform

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• Research and practice have shown that when enforcement is seen as excessive and unfair, and even law-abiding citizens are targeted as would-be criminals, compliance is strongly discouraged

• Lack of targeting means inspectors try to cover too many objects – in too little depth – and lack of guidelines on how to check means the key issues are not always verified during inspection

• Unclear requirements, and/or absence clear guidance for businesses, mean that in any case compliance is made difficult

• Uncoordinated checks by many institutions on the same topic mean resources are wasted as information is not shared

• Regulations are not always adequately designed to reach positive outcomes

Why do more inspections not improve compliance and outcomes?

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• Many inspecting agencies, inspectors, and inspection visits – frequent overlaps, duplications, lack of coordination

• Insufficient risk-focus – many businesses get inspected, even though their risk level is low or moderate

• Lack of consistency, coordination and coherence between agencies – lack of uniform guidelines and approaches Frequent focus on finding violations rather than improving compliance and outcomes

• Not every country or institution has these issues – and not all at the same level – but the pattern is frequently there…

• Causes are complex and combined (institutions, cultures, incentives etc.)

Different contexts, somewhat similar issues

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• Rely on “cutting” to a limited extent only – many inspection functions are needed – the issue is how they work

• Inspections reform requires in-depth engagement with the question of how regulatory agencies conduct their work

• Public/consumers often quite worried about “less inspections” and “less control” – strong opposition to reform is possible

• If practices are what matters, how do you change practices? Legal instruments won’t be enough…question of cultures, governance, institutions, incentives etc.

Inspections and regulatory delivery – reforms face a number of challenges

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A vision of reform

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• Framework process reform: legal provisions setting general rules and guidelines, in more or less detail depending on context

• ‘Responsive Enforcement’ – differentiate approach based on history and behaviour of each establishment

• Make regulatory enforcement clear and predictable – through check-lists and transparency requirements

• Review scope of regulation and inspections - rely on private sector and consumers themselves to be “enforcers” whenever possible

• Adjust staffing levels, compensation, training and governance of institutions to ensure professionalism and focus on outcomes

• Basing inspections targeting on risk – focus on the most hazardous businesses, and alleviate burden for others

• Consolidate structures to reduce duplication

• Coordinate inspections and share information (in part. through IT)

“How to reform inspections” – frequently used tools and approaches

Defining risk and risk factors

Risk = probability and magnitude of potential hazard (magnitude: severity x number affected)

Three fundamental “risk dimensions”:

Type of activity / sector

Scope / size of activity – scope of potential impact

History of the business or of the establishment

All three aspects need to be combined to do proper risk rating – and determine right frequency of inspections

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Source: Ayres and Braithwaite, Responsive Regulation, 1992

Promoting compliance – the enforcement pyramid

Shut down facility/business

Suspend operations temporarily

Fine if violation not addressed

Explain, warn, give time and come back to check

Governance and performance management

• Changing objectives and performance measurement: not targeting volume of activity (controls) or identification of violations and sanctions (which means that non-compliance is valued as “positive” result) – but outcomes (safety, health, pollution decrease, state revenue etc.)

• Transforming governance:

Putting management at “arm’s length” from political level – ensuring that political decision-makers are involved at strategic level, but not day-to-day operational level

Ensuring increased stability, professionalism, transparency etc. by limiting power of top management / introducing collegial governance (management board etc.)

• Regular reporting and evaluation based on outcome/performance indicators – linked to governance mechanisms

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Clarifying and focusing missions

Ouctomes and conclusion

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• Burden estimates put the cost of inspections for businesses in countries like Italy or the Netherlands at hundreds of millions of EUR – and this is just the administrative burden, not the cost of uncertainty, investments deterred etc.

• Data from surveys in Lithuania, Georgia, Ukraine etc. show that decreases of 30-60% in admin. burden are possible in a few years – through use of risk-based targeting, process rules etc.

• If targeting and delivery are improved, not necessarily adverse outcomes for safety etc. – possibly even better ones. Depends partly on baseline situation, but general trend is clear (e.g. UK OSH and Environmental inspections numbers down over 10 years but improved outcomes)

Decreased burden – better outcomes?

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• Trust in the effectiveness of regulations and their enforcement is essential to gain or retain access to foreign markets (e.g. food safety regulations, or labour laws and regulations)

• Predictability of regulatory enforcement is crucial to attracting and retaining investors

• Development of local markets (greater differentiation between producers/operators, possibility of securing higher prices for higher quality/safety products etc.) is only possible if consumers trust that regulators effectively ensure transparency and respect of rules

• Inadequate enforcement of rules advantages “rogue traders”, crooks and all those who do not comply – discourage compliance and improvements

Trust – access to markets and investment

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• Much can be done and has already been done

• Generally can yield positive results for the state (budget included) and not only for businesses

• Do not necessarily require to rewrite the whole set of regulations – focus on changing how they are enforced instead

• However many challenges on the way to reform – legal, institutional, political etc.

Consolidate and replicate good practices

Thanks for your attention

Contacts: amikhnev@ifc.org

fblanc@ifc.org

Further information on inspections work in the WBG:

www.wbginvestmentclimate.org/publications

Reference Slides

Making regulatory enforcement clear and predictable

Providing SMEs (and inspectors) with a clear “toolkit” of what to do (or not) and why

• High #of problems in small-scale food business operators + ineffectiveness of inspections => UK Food Standard Agency and local regulators launched “Safer Food, Better Business” toolkit in 2005, available in 16 languages etc.

• The SFBB toolkit is given to all new food SMEs in catering, trade etc.: Guides small businesses step by step, “how” and “why” Includes all points checked by regulators – no “surprise” Goal: safer businesses – less hazards for consumers – better business

(no bureaucracy, no loss of consumers because of contaminations etc.)

• 45% of SMEs reported that SFBB helped make their business more profitable – 87% said it made its management easier

• Countries as diverse as Lithuania, Mongolia, Armenia, Ukraine, Bosnia have made check-lists a requirement for most or all inspections

• Key elements of the approach: • (a) Include only elements that pose significant risks – not all rules• (b) Ensure that questions are worded in a perfectly clear way• (c) Incorporate a “decision making” system so that check-lists results

translate into an inspection decision in a transparent way

Harnessing the private sector’s and consumers’ as “enforcers”

France – contract relationships and civil law as instruments to enforce safety of buildings

• In France, there is essentially (a) no verification of structural safety at the construction permit stage, (b) mostly no inspection of construction sites to verify structural safety (occupational safety is checked in high-risk sites) and (c) only limited verification when objects enter in service (only for very high-risk and/or only on evacuation/access rules for objects with high occupancy)

• Compliance with building safety norms is entirely ensured through a cascade of liability and insurance requirements: Architects and builders have 10-year liability and have

to be insured for it Developers/owners of objects (except private houses

for own use) have to also contract insurance Specific objects/structures (higher risk) require

mandatory private (accredited) technical control (also with liability and insurance)

• System requires solid insurance market and civil law enforcement – but functions for many years already, with satisfactory results

Basing inspections targeting on risk

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Example of risk-based planning matrix

Consolidating structures to reduce duplication

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Fragmentation and excessively broad scope lead to ineffectiveness…

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…Focused control achieves more

Consolidating inspection agencies – what core functions?

• Looking at core functions of control of business activities, list of possible “consolidated” spheres can be proposed (variations of course many, but this is a logical structure):

• Food Safety

• Public health and hygiene

• Occupational Safety and Health / Premises Safety

• Environmental Protection

• Safety of non-food products, market surveillance and consumer protection

• State Revenues (Taxes and Customs)

Coordinating inspections and sharing information

Coordinating inspections

• Solid experience in using coordinating structures to drive reform forward – share positive experiences and good practices – make approaches more similar etc.

• Among most important examples: Inspection Council in the Netherlands, gathering all State Inspectorates with a Bureau in charge of reform support

• Other examples include Latvia (2000-2002 in particular), Armenia (since 2009), Lithuania (“Expert Group” since 2010-2011) etc.

• More difficult to coordinate actual inspection visits except through a unified information system – some experiments:

• “Delegated Inspections” in the Netherlands when the “lead” inspectorate for a given sector can act as “eyes and ears” for others

• Inter-ministerial departments at local level in France, gathering staff from different national directorates with related fields of competence

Using information technology to unify planning, consolidate information, improve targeting

• “Optimal” solution: integrated system connected with registration/licensing systems (so that data is populated directly), incorporating all risk dimensions of establishments, used by all (or all except Revenue) inspectorates, allowing planning, process/staff management, recording of results (directly through check-lists, for instance), and automatic update of risk profiles on this basis

• Full implementation of all these features so far not existing – but some systems are close or very close e.g. Bosnia (Republika Srpska), Nova Scotia (Canada), Colombia (Bogota, Bucaramanga, Cali etc.)

• Many countries (Lithuania, Armenia, Mongolia etc.) interested in unified IT solutions – World Bank Group soon to publish note on this topic

• Overall very important area with lots of opportunities for progress – can lead to major savings, efficiency and effectiveness gains – even with only a partial implementation of the above “model” – and it is less difficult and less costly to do than is generally believed

Adjusting staffing, improving compensation and professionalism, transforming governance

Governance and performance management

• Changing objectives and performance measurement: not targeting volume of activity (controls) or identification of violations and sanctions (which means that non-compliance is valued as “positive” result) – but outcomes (safety, health, pollution decrease, state revenue etc.)

• Transforming governance:

Putting management at “arm’s length” from political level – ensuring that political decision-makers are involved at strategic level, but not day-to-day operational level

Ensuring increased stability, professionalism, transparency etc. by limiting power of top management / introducing collegial governance (management board etc.)

• Regular reporting and evaluation based on outcome/performance indicators – linked to governance mechanisms

Staffing, compensation, professionalism

• Staffing levels to be re-evaluated in view of priorities (risks), resources, availability of competent personnel etc. => result should often be “less but better” (less staff, higher competences, better pay)

• Compensation (salary, career evolution…) is essential to attract and retain good staff – but is not sufficient – it needs to be combined with changes in governance, recruitment, training, performance evaluation

• Professionalism: needs to be founded on a combination of “core skills” (fostering compliance, managing risks, investigating etc.) and “technical skills” (sector speficic) – assessed upon recruitment and regularly – initial and on the job training – and link to evaluation

• Changes in staffing and in governance should be linked to institutional changes – merging agencies/structures or redefining their missions will have limited results if there is no change in governance and human resources

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• Major examples within the OECD: Mexico (1995), UK (Hampton Review 2005), Netherlands (Inspections Renewal Programme starting 2006), Slovenia (2007), Italy (since 2011) – also many “targeted” reforms e.g. on food safety inspections (Canada Food Safety 1997 – Estonia Food Safety 2000 etc.)

• Other countries in Central/Eastern Europe (Croatia 1999, Latvia 2000, Bosnia and Herzegovina 2004), Colombia (2008) etc.

• Many countries in Former Soviet Union - Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan (varying degrees of success/implementation)

• Beyond: Jordan, Mongolia, Kenya, Liberia, Peru…

• Many countries w support of World Bank Group

For reference: a growing trend across many countries…

For reference: examples of consolidation of inspection agencies

• Netherlands 2002-2012 went from 25 to 12 inspection agencies (to which Tax Office should be added – not counted as “inspectorate” because has more than just control functions) – also 25% reduction in staff (tax not counted)

• Croatia 1999 created State Inspectorate to merge inspectorates under 4 different ministries – mostly focusing on market surveillance, OHS, tourism and consumer-focused premises

• Bosnia and Herzegovina 2004 – State Inspectorate gathering all inspection functions except tax/customs and controls focusing on state (same in Mongolia 2003 onwards – being internally consolidated now)

• Creation of food safety inspectorates with consolidated functions in a number of countries – e.g. Canada (1997), Estonia (2000), Lithuania etc.

• Creating single list of inspecting agencies (e.g. Slovenia 2007) is a good step, even without strong decrease in numbers…