Introduction and Principle of Regulatory

Impact Analysis and Issue of RIA in Japan

Introduction
Principle of RIA
Procedure of RIA
Content and toolkit of RIA
Competition Analysis
Issue of RIA introducing Pakistan
Concluding Remark

Takuya Nakaizumi, Professor of Kanto-Gakuin University1

24th Feb-2013

1. Introduction
(1) We define regulation as
Regulation has been defined as a state imposed
limitation on the discretion that may be exercised
by individuals or organizations, which is
supported by the threat of sanction
The Policies to be prescribed in Article 9 of the Act
(i.e. GPEA) and specified by Cabinet Order shall
mean the following:Policy pertaining to
introduction and abolishment of regulation (any
effects of restricting the rights of the public or
imposing obligations on the public
2

1. Introduction
(2)regulation and primal principle

Regulation has been defined as a state imposed

limitation on the discretion that may be exercised by
individuals or organizations, which is supported by
the threat of sanction.

In market oriented economy, competitive market

provide best distribution of resources and allocation
in economy.
It is the primal principle for regulation is not to
interfere any market activity in perfect competition.
Thus there must be no regulation, if the competitive
market would operate perfectly.

1. Introduction (3) We divide

regulation into two category.
Unfortunately economic reality is far from perfect
competition.
In addition, market needs some sorts of regulation
such as property law or contract law that makes
market work.
we can divide regulations two categories,
1. complement for market operation such as
property law or contract law.
2. general regulation that correct market failure or
imperfect competition caused by externality and
natural monopoly that we mainly forces on
4

1. Introduction (4) General

regulation can be divided into
two category further.
1.

economic regulation competition

assessment
Amendment of imperfect competition or natural
monopoly, typically refers to government-imposed
restrictions on firm decisions over price, quantity,
and entry and exit.
2.

social regulation cost benefit analysis

That mainly correct the problem caused by
externality and information asymmetry, typically in
the area of health, safety and environment.

Competition or Anti-trust policy

1. Introduction(5) Principles of

regulation

Accountability

Regulators should be able to justify decisions and

be subject to public scrutiny.

Proportionality

Regulators should intervene only when necessary.

Remedies should be appropriate to the risk
posed, and costs identified and minimized.

Consistency

Government rules and standards must be joined up

and implemented fairly.

1. Introduction (6) Principles of

regulation or regulatory system

Targeting

Regulation should be focused on the problem and

minimize side effects.

Transparency

Regulators should be open, and keep regulations

simple and user-friendly.

Regulation should be simpler:

Producers find it very difficult to comply with the
rules which are quite complex and technical.
7

1.Introduction
(7) what is RIA?
From OECD documents,
Regulatory Impact Analysis (RIA) is a systemic
approach to critically assessing the positive
and negative effects of proposed and existing
regulations and non-regulatory alternatives.
As employed in OECD countries it
encompasses a range of methods.
At its core it is an important element of an
evidence-based approach to policy making.
8

1.Introduction: (8)Implementation
Guidelines of RIA in Japan

It is important to improve the quality of regulations

and to deepen the understanding of regulations
among not only interested parties but also the
general public by releasing the results of Regulatory
ex-ante Evaluation.

For objective evaluation, it is desirable to quantify or

express in monetary value costs and benefits to the
extent possible. If impossible, costs and benefits
shall be explained clearly in a qualitative way.

We set Implementation Guidelines for RIA

(ex-ante Evaluation of Regulations)

(4) RIA became mandatory from 2007

Government Policy Evaluations Act (GPEA)
(Conduct of ex-ante evaluation)
Article 9
The head of an administrative organ shall carry out the ex-ante evaluation when they
intend to take a decision on policy pertaining to individual project of research and
development, public works, or official development assistance, or any other policy
that meets the following conditions, and to be specified by Cabinet Order.
1. It is expected that the policy has considerable impact on the lives of people and/or
society and the economy, or a large amount of expense is incurred before the aims
of the said policy are achieved.
2. It is an established knowledge that the method for acquiring information on policy
effects and other methodology required for the conduct of ex-ante evaluation have
been developed.

The Cabinet Order specifies

Regulation (from October 1st ,2007)

1. Introduction (9) content of RIA

The Japanese Guidelines require that an
evaluation report shall contain

Purpose, contents and necessity of regulations

Analysis of costs and benefits
Setting the Baseline, Analyzing each element of costs and benefits,
and Including secondary or indirect impacts

Analysis of cost-benefit relationship

Cost-benefit Analysis, Cost-effectiveness Analysis, Cost Analysis

Comparison with alternatives (It is desirable.)

View of experts and other related matters
Time or conditions for review
11

(10) Example of RIA : regulation to

check safety of lithium-ion

batteries before shipment
1. Purpose
This is a regulation to prevent fire accident s caused by lithium-ion
batteries which tends to be on the increase recently.

2. Content of regulation
The regulation provides technological standards regarding the
safety of lithium-ion batteries and obliges the firms who have
registered to check the conformity of the batteries before shipment.

3. Necessity
In order to prevent accidents caused by lithium-ion batteries, it is
necessary to set up mandatory rules with unified standards which
must be compulsory for checks undertaken before shipment.
12

Baseline
1. It is estimated that without regulation, there will
be 100 accidents per year.
2. 10% of them will be serious accidents which
will entail compulsory recall.
3. Each recall cost is estimated at 1billion yen
(about 9 million dollars) .

Thus the total costs of accidents each year

would amount to more than 10 billion yen
(about 90million dollars) in a baseline case.
13

Analysis of costs and benefits

Benefits: If regulation accidents are completely
eradicated (100%) , the benefits would amount to
about 10 billion yen.
Costs: Costs are made up mostly of compliance
costs which are anticipated to be 1.4 billion yen
(about 12.6 million dollars) each year, which
includes 0.4 billion yen (about 3.6 million dollars)
of depreciation and 1 billion yen (about 9 million
dollars) of labor costs of the 100 testing facilities
around country.
Net benefits (Benefits minus Costs) amount to 8.6
billion yen (about 78 million dollars)
14

Comparison with alternatives :

self-regulation with
technological
standards
Benefits : with self regulation the compliance rate

is
estimated at 30% which would bring about 3 billion
yen (about 27 million dollars) on benefits.
(Total costs of recalls are estimated to be more than 7 billion
yen (about 63 million dollars) which is less than the baseline
case of about 3 billion yen.)

Total compliance costs amount to 420 million yen

(1.4 billon yen times 30 )
Net benefits are about 2.58 billion yen.
15

2. Principle of RIA

(1) Role of RIA

as an aid to political decision-making

Impact assessment is an aid to political decisionmaking, not a substitute for it. The impact
assessment informs the political decision-makers
of the likely impacts of proposed measures to
tackle an identified problem, but leaves it to them
to decide if and how to proceed.

16

2. Principle of RIA

(2) Proportionate Analysis

It consists of a balanced appraisal of all impacts,

and is underpinned by the principle of
proportionate analysis, whereby the depth and
scope of an impact assessment, and hence the
resources allocated to it, are proportionate to the
expected nature of the proposal and its likely
impacts.

17

2. Principle of RIA

(3) Integration of regulation

making and RIA process

From early stages of policy development,

affected groups should be identified, impacts on
these groups described and order of magnitude
estimates provided. As you progress through the
policy making process, it is expected that the
quality of data being used and depth of analysis
should be refined. If you engage stakeholders
(e.g. formal consultation), quantification and
monetization should be included as far as
possible, even if the numbers are indicative.
18

2. Principle of RIA

(4) Transparency and Consultation

The concept of transparency with regards to the
regulation process ranges from a simple
notification to the public that regulatory decisions
have been taken, to controls on administrative
discretion and corruption.
Among the most important elements of regulatory
transparency that contribute to better RIA are:
consultation with interested parties, plainlanguage drafting, and electronic dissemination of
regulatory material.

19

2. Principle of RIA

(5) Quality control

In order to strengthen quality control of RIA, most

countries introducing RIA have an institution to
supervise or review RIA written by other
department.
In the US, The Office of Information and
Regulatory Affairs (OIRA) of Federal Office of
Management of Budget(OMB) review RIA
conducted by other department.
In Japan, Department of Administrative
Evaluation of Ministry of Internal affair and
communication have a authority to review RIA.

20

2. Principle of RIA

(6) Which rule should be mandate

with
conducting RIA
Which proposals are concerned to conduct RIA
depends on each government.
In the US, Department of Executive Office
basically conduct RIA for every rules they make,
while Congress and Independent regulatory
commission made by Congress have no
obligation to conduct RIA ex Law.
In Japan and UK, Law is also mandate to RIA.
21

3. Process of RIA

(Integration of regulation making

and RIA process)

In the US executive office of president, process

of regulation making is coincident with regulatory
impact analysis. See Reg map:
http://www.reginfo.gov/public/reginfo/Regmap/ind
ex.jsp
Executive Order 12866,

22

3. Process of RIA

(UK Impact Assessment process)

1.
2.
3.
4.
5.
6.

Development stage
Options stage
Consultation stage
Final Proposal stage
Enactment stage
Review stage
See also Impact assessment flowchart
23

3. Process of RIA

(EU key procedure steps (1))

1. plan impact assessment: Roadmap, integration
in the SPP cycle and timetable.
2. Work closely with your IA support unit throughout
all steps of the IA process.
3. Set up an Impact Assessment Steering Group
and involve it in all IA work phases.
4. Consult interested parties, collect expertise and
analyze the results.
5. Carry out the IA analysis.

24

3. Process of RIA

(EU key procedure steps (2))

6. Present the findings in the IA report.
7. Present the draft IA report together with the
executive summary to the Impact Assessment
Board (IAB) and take into account the possible time
needed to resubmit a revised version.
8. Finalize the IA report in the light of the IAB's
recommendations.
9. IA report and IAB opinion(s) go into Inter-Service
Consultation alongside the proposal.
25

3. Process of RIA

(EU key procedure steps (3))

10. Submission of IA report, executive summary, IAB
opinion(s) and proposal to the College of
Commissioners.
11. Transmission of the IA report and the executive
summary with the proposal to the other Institutions.
12. Final IA report and IAB opinion(s) published on
European website by SG.
13. In the light of new information or on request from
the Council or the EP, the Commission may decide
to update the IA report.
.

26

4. Content of RIA (1) Necessity

of Regulation and Alternative

From
US guidline Approaches
(Circular A-4),
Regulatory

Necessity of Regulation should be explained

whether the action is intended to address a
significant market failure
The major types of market failure include:
externality, market power, and inadequate or
asymmetric information.but it is not the only
reason.
Other possible justifications include improving
the functioning of government, removing
distributional unfairness, or promoting privacy
and personal freedom

27

4. Content of RIA (2) Scope of

Analysis

Your analysis should focus on benefits and costs

that accrue to citizens and residents of the
United States. Where you choose to evaluate a
regulation that is likely to have effects beyond the
borders of the United States, these effects
should be reported separately. The time frame
for your analysis should cover a period long
enough to encompass all the important benefits
and costs likely to result from the rule.

28

4. Content of RIA

(3) Developing a Baseline

With and without analysis
You need to measure the benefits and costs of a
rule against a baseline. This baseline should be
the best assessment of the way the world would
look absent the proposed action. The choice of
an appropriate baseline may consider
evolution of the market,
changes in external factors affecting expected
benefits and costs,
changes in regulations promulgated by the
agency or other government entities, and

29

4. Content of RIA (4) Evaluation

of Alternatives

You should describe the alternatives available to

you and the reasons for choosing one alternative
over another. As noted previously, alternatives
that rely on incentives and offer increased
flexibility are often more cost-effective than more
prescriptive approaches

30

4. Content of RIA

(5) . Transparency and

Reproducibility
of
Results
Because of its influential nature and its special
role in the rulemaking process, it is appropriate
to set minimum quality standards for regulatory
analysis. You should provide documentation that
the analysis is based on the best reasonably
obtainable scientific, technical, and economic
information available. To achieve this, you should
rely on peer-reviewed literature, where available,
and provide the source for all original
information.

31

4. Content of RIA (6) Assessment

of Cost and Benefit

In order to estimate the cost and benefit,

(1) benefit-cost analysis (BCA) or (2)costeffectiveness analysis (CEA) are used.

1.
2.

BCA is that both benefits and costs are

expressed in monetary units
Cost-effectiveness analysis can provide a
rigorous way to identify options that achieve the
most effective use of the resources available
without requiring monetization of all of relevant
benefits or costs.
32

4. Content of RIA (6) Assessment

of Cost and Benefit

Difficulty to monetize the benefit
benefit-cost analysis (BCA) is useful tool,
However it is sometimes difficult to estimate the
value of benefit.
CVM or other tools are used.
But if it is too difficult to estimate, Costeffectiveness analysis might be an alternative.

1.
2.
l

It is difficult to decide with Cost-effectiveness

analysis when the purpose of regulation is more
than two.
33

4. Content of RIA (6) Assessment

of Cost and Benefit

Estimation of value of life
Value of life is one of the important value to
estimate.
There are vast literature relating value of life in the
US. However there is little research in Japan.
Few exception is as follows
http://www8.cao.go.jp/koutu/chou-ken/19html/h
oukoku.html

34

5. Competition analysis in the RIA

making (1) What is competition analysis
increased competition contributes to higher
economic productivity and growth. In some
regulations unduly restrain market activities.
One important step to eliminate these restraints
is competition assessment: evaluating
policies to find those that unnecessarily
restrict competition and developing alternative
policies that achieve the same objectives, with
lesser harm to competition.
35

5. (2) Basic Idea of competition

analysis From EPA guideline,
Analysis of regulatory impact on Competition
is
Does the regulation erect entry barriers
that might reduce innovation by impeding
new entrants into the market?
Does the regulation tend to create or
enhance market power and reduce the
economic efficiency of the market?
36

5. (2)-2 easier competition

analysis From OECD toolkit,
This toolkit introduces two step assessment,
1. Competition Checklist, that show when
proposed laws or regulations may have
significant potential to harm competition.
2. If problem is found within first step, then
we go to Step 2. The second step is for
governments and decision-makers to
revise policies that unduly restrict
competition.

37

5. (2)-2 easier competition

analysis From OECD toolkit(2),
Competition Checklist, probes three kinds
of question,
1. Restrictions on starting new businesses
2. Regulations that affect the ability of
businesses to compete
3. Regulations that affect business
behaviour by changing the incentive of
businesses to act as vigorous rivals.
38

5. (3) Summery of the Research (4) US

Competition analysis in the RIA making
Although E.O. 12866 and Circular A-4
require to specify the impact of benefit and
cost, competition analysis (assessing the
impact on competition) is not required.
Then how the impact of competition is
considered?
I try to explain that within the RIA process. It
also include important issue in RIA.

39

5.(4) US Competition analysis in the RIA

making
EPA: To estimate total surplus considering
the impact of competition
progress of RIA in EPA.

DOT: Choice of adequate alternatives in

regulation making to minimize the impact
on competition and Public comment and
Regulatory flexibility analysis
importance of alternatives

IRC: check the market condition as

competition policy
qualitative disparity of analysis among IRC

40

5. (5) competition analysis in EPA

Basically competition
analysis has important
part in RIA in calculating
total surplus.
Total Surplus, which
consists of consumer
surplus and producer
surplus, is one of the
benefit of regulation.

CS

P*
PS
D

41

5.(5) competition analysis in EPA (2)

Total Surplus should be calculated
considering market condition including
competition.
In the monopoly case, price go up above the
supply curve. It is also true as the number
of the firm in the market decreases.

EPA often use total surplus to show the

benefit!
42

5.(6) competition analysis in DOT

1.

Importance of alternatives
Importance to Choice of adequate
alternatives in regulation making to
minimize the impact on competition
Ex: Performance Standards vs. than

Design Standards

2.
3.

Amendment though Public comment

Regulatory flexibility analysis
43

5. (7) importance of

consideration of alternatives
Alternative consideration has two roles.
1. One is that it makes it easier to compare
the results of the impact by regulation with
various alternatives.
2.

The other, which is more important, is that

to promote to consider better regulation
from the viewpoint to decrease the
economic burden on competition.
44

5.(8) Regulatory flexibility analysis

The RFA (Small Business Administration)

requires federal agencies to consider the
impact of regulations on small entities in
developing the proposed and final
regulations. Regulatory flexibility analysis
That is prepared in order to ensure that the
agency has considered all reasonable
regulatory alternatives that would minimize
the rule's economic burdens or increase its
benefits for the affected small entities

45

5. (8) Regulatory flexibility Analysis

describes:
(1)

(2)

(3)

(4)

(5)

reasons why the agency is considering the

action,
the objectives and legal basis for the
proposed rule,
the kind and number of small entities to
which the proposed rule will apply
the projected reporting, recordkeeping and
other compliance
all federal rules that may duplicate, overlap
or conflict with the proposed rule.

46

5. (9) political issue of competition

analysis
From the discussion of Jim Laity, who is
senior analyst of OMB:
Main focus by Executive branch is to deal
with externality. Thus cost benefit
analysis is essential.
Too many consideration of impact on
competition may prevent the introduction
of regulation because of the opposition
by industry.
47

5.(9) Competition analysis in the US

Independent Regulatory commission

Independent Regulatory Commission

such as FCC, SEC, FERC is not
mandate to conduct RIA and OMB has
no authority to check the RIA by IRC.

Thus the quality of Economic analysis by

IRC( Independent Regulatory
Commission) may be lower than
Executive Branch.
48

5. (9) RIA in Independent Regulatory

commission
From Symposium in Resource for the Future
Can Greater Use of Economic Analysis
Improve Regulatory Policy at Independent
Regulatory Agencies?,
http://www.rff.org/events/pages/can-greater
-use-of-economic-analysis-improve-regulator
y-policy-at-independent-regulatory-agencies
.aspx
They show that is true, except NRC.

49

5. (10)RIA in Independent Regulatory

commission
NRC( Nuclear Regulatory Commission)
conduct RIA as high quality as Department.
Some other IRC, such as FCC, SEC, FERC is
mandate to conduct market analysis based on
Administrative Procedures Act and entity law.
Ex. SEC: Securities Exchange Act of 1934 section
3(f) :Whenever pursuant to this title the Commission is engaged in

rulemaking, or in the review of a rule of a self-regulatory organization, and is

required to consider or determine whether an action is necessary or
appropriate in the public interest, the Commission shall also consider, in
addition to the protection of investors, whether the action will promote
50
efficiency, competition, and capital formation.

5. (11)economic analysis in FCC( Federal

Communication Commission)
FCC

has an authority to issue the spectrum license.

Analysis started from monopoly. Now they make an ex-post

competition policy and analysis such as mergers after the
deregulation and introduction of competition.
FCC

makes an prior approval of the Merger in

telecommunication and broadcast industry.
(DOJ and FTC have jurisdiction to review mergers)

51

5. (12)economic analysis in FERC( Federal

Energy Regulatory Commission)
(Basically Agency regulates interstate sales of
electricity and gas wholesale market.)
FERC must check the electrical power market
condition using several test.
Electrical

power market has complicated structure, found after

California Energy Crisis.
After unbundling: Electrical transmission company is
monopoly and regulated by cost-base regulation, But many
power supply company was thought as competitive.

52

5. (13)economic analysis in FERC( Federal

Energy Regulatory Commission)
Electrical power market is not elastic in short term.
Thus some electrical power companies may have market power even with
large share such as 30%.
Such market power of Enron cause California Energy Crisis.

FERC must check the electrical power market condition using

several test.
1st step) Pivotal supply screen,
Wholesale market screen
2nd step) Delivered Price Test (more detailed)

Failure of DPT requires the seller to

mitigate the market power.

53

5. (14) RIA by IRC and check from OMB

From Dr. Mancini of OMB,
IRC dont have unlimited discretion:
1.Under

the congressional review act, rules with

more than $100 million impact have to be reported
to Congress. OMB actually does these
determinations so even independent agencies
must provide OMB enough information for OMB to
decide.
2.Under Administrative Procedures Act, agencies
have to provide a reasonable basis for their rulemakings.

54

5. (15) Role of DOJ or FTC in

Competition Analysis
OMB reviews RIA by the agencies of Executive
Office.
implicit, not formal coordination and
cooperation between OMB and DOJ or FTC.
DOJ or FTC make an comment through
public comment process of RIA as well as
implicit cooperation among agencies
conducting RIA.
55

6. Toward a better Introduction of

effective RIA
The following key elements are based on good
practices identified in OECD countries:
1. Maximize political commitment to RIA.
2. Allocate responsibilities for RIA program
elements carefully.
3. Train the regulators.
4. Use a consistent but flexible analytical
method.
56

6. Toward a better Introduction of

effective RIA(2)
5. Develop and implement data collection
strategies.
6. Target RIA efforts.
7. Integrate RIA with the policy-making
process, beginning as early as possible.
8. Communicate the results.
9. Involve the public extensively.
10. Apply RIA to existing as well as new
regulation.

57

6. Issue of introducing RIA to Pakistan

(1) political Issue in the US
1.

Regarding VSL( Value of Statistical Life)

2.

OMB try to introduce different VSL among

ages.( VSL of aging people should be
lower than younger people) But they
cannot, opposed by aging people.

Political pressure to extend the budget

with effective demand policy by
Keynesian perspective
they opposed to minimize the cost.

58

6. Issue of introducing RIA to

Pakistan (2)Issues of RIA in Japan(1)
Regulation making process in
Japanese Government so far

Ministries often establish councils or study

groups (permanent or ad hoc on specific
issue) consist of academics, stakeholders to
make the agreement for policy orientation.
Such councils were criticized for being the
cover for the ministries, and aggravating
competing jurisdictions.
59

6. Issue of introducing RIA to Pakistan

(3)Issues of RIA in Japan(2)

Regulation making process in

Japanese Government so far

So, Japanese Government made the Public

Comment Procedures mandatory when
making the orders in 2005 in order to
consider the public opinions.
Now Japanese Government make effort to
make policy development process more
transparent and accountable. Regulatory
Impact Analysis will be an effective tool.
60

6. Issue of introducing RIA to Pakistan

(3)Issues of RIA in Japan(2)
Regulation development process
in Japanese Government so far

Some ministries have used quantification

methods, especially in developing the
economic regulation.
But many ministries dont have sufficient
resources and capacities. It is essential for the
development of RIA to train and foster the
experts in each ministry (especially related to
safety, environment and health).
61

6. Issue of introducing RIA to

Pakistan (4)comparison in RIA

among OECD country

Japan began to policy evaluation in 2000.
However introduction of RIA is one of the latest
among OECD countries.

62

6. Issue of introducing RIA to Pakistan

(4)Issues of RIA in Japan(5)
What kinds of regulation should be accompanied by
RIA?
In the US: important regulation (impact more than
$100million is mandate to conduct RIA but
law is exempt because law is just outline.
In Japan: however, most regulation is written in
law. Thus even law, except lawmaker-initiated
legislation and cabinet order must be with RIA.
Although ministerial order is exempt mainly
because it is considered to be unimportant.

63

6. Issue of introducing RIA to

Pakistan (4)Issues of RIA in Japan(6)

RIA is important document in Public Involvement

Referenda and Cost Benefit Analyses is

complement (c.f. Osborne and
Turner[2010] consider when both are

substitute).
RIA provide the important information and analysis
in policy making. And even draft RIA is under
Public comment in US or other OECD country.
But in Japan it is published just before the regulation
issued.
64

6. conclusion

RIA is important document in Public

Involvement
Japanese government has been
opposite side the goal of RIA-public
involvement. In such a country,
implementing RIA is a long-term process
until it becomes a systematic part of a
countrys political and administrative
cultures.
65

6. conclusion

Designing and applying a comprehensive

RIA program is not easy. But It can make
decisions more transparent and
encourage consultation and the
participation of affected groups, and it
contributes to improving governmental
coherence and intra-ministerial
communication.
66

6. Conclusion: special consideration

In the case of developing countries
1.

2.

3.

methodological and operational difficulties

can easily arise in the decision-making
processes of developing countries
the use of regulatory tools requires a high
level of expertise and access to extensive
resources and information.
common political practices can make
better political oversight and more
attention to consultation a challenge.
67