Introducing Regulatory Impact Analysis into the Turkish Legal Framework “Training the Trainers” November 2008 Session 8 Basic RIA concepts and methods (Assessing Impacts)

Objectives By the end of this session participants should be able to Identify impacts Select and use impact assessment methods Gather evidence for impact assessment Measure and analyse impacts Present results and recommend intervention options

Stages of Impact Analysis Identify Impacts Chose Method Gather Evidence Measure Impacts Recommend Option

Positive or negative (costs and benefits) Large or small Long term or short term Economic, Social, Environmental Implementation & Compliance Direct or Indirect Distributional & on vulnerable groups Identify Impacts – Impact Indicators

Identify Impacts – Economic, Social and Environmental Economic: Business Investment Employment Environmental: Environmental quality Renewable resources Biodiversity Social: Health Gender Rural Education Livelihoods

Identify Impacts – Implementation & Compliance Voluntary Compliance: –Education –Persuasion –Incentives Enforced Compliance Inspections Administrative resources

Identify Impacts – Direct & Indirect Impacts Direct impacts result directly from intervention Indirect impacts are other impacts, sometimes unintended For example: The ban on using reequipped minibuses for transportation of passengers: The direct impacts are on transportation firms / owners of buses. Indirect impacts are on car repair firms, specialized in reequipping buses and their repair.

Distributional Impacts & Impacts on Vulnerable Groups Competition SMEs Economic Sectors (Tourism, Transportation, etc.) Groups of Society (Disabled, Women, Poor, etc.)

Identify Impacts – Criteria for Selecting Indicators Relevant (linked to the objectives) Accepted (by stakeholders and staff) Credible (unambiguous and easy to interpret by non- experts) Easy to monitor (data collected at reasonable cost) Quantifiable (valuing impacts in monetary terms allows impacts to be added together and provides single measure of size of impacts)

Methods Threshold Criteria Cost-Effectiveness Least-Cost Risk-Risk SCM Cost-Benefit

Methods – Threshold Criteria Threshold sets the limits of damage or risk beyond which the government must take action at any cost. It can be also used to avoid an action which can potentially generate damage or risk which would exceed certain limits Thresholds can be also used in carrying RIA in several stages or applying proportionality principle

Methods – Threshold Criteria Examples of Threshold Criteria questions for Pre-RIA: Will the annual proposed cost on business exceed X lei? Will the proposal have a disproportionate impact on a particular sector or group? Will the regulatory act cost X lei to public services front- line staff? Is the regulatory act politically sensitive? Pre-RIA – just advantages and disadvantages

Methods – Cost-Effectiveness Where: Costs in monetary terms Effectiveness in physical units, e.g. lives saved, accidents reduced, level of pollution reduced It answers the question: What is the Lowest Cost Solution? Cost-Effectiveness = Cost Effectiveness

Methods – Least-Cost TargetOptionsCost 1 Fixed for all options 2 n It answers the question: What is the Lowest Cost Solution?

Method – Risk-Risk Analysis Risk-Risk analysis – An intervention can create more risks than it prevent. Example: A ban on using reequipped minibuses would cause shortage of minibuses and more injuries (as accidents increase from overcrowded buses and streets) than it would prevent (as injuries because of less adjusted buses) It answers the question: Does the risk of action outweigh the risk of non-action?

Methods – Cost-Benefit Analysis (CBA) Where: Benefits in monetary terms Costs in monetary terms It answers the question: Do Benefits justify the Costs? (CBA) Net Benefits = CostsBenefits –

Evidence Gathering – Sources of Evidence Your own knowledge and experience (including making assumptions) Knowledge and experience of your colleagues, including from other institutions Consultation with those that are likely to be affected Consultation with experts Market reports, official statistics, internet sources, including sources from other countries

Evidence Gathering – Proportionality Dedicate more effort of evidence gathering when impacts are likely to be higher Provide limitations in time and recourses If RIA is done in several stages, Preliminary RIA will reveal the level of needed detail and need for to continue with next stage

Measuring & Analysis: Three elements of CBA Identification of potential benefits and costs Evaluation of costs and benefits to allow for adding them Spread of costs and benefits in time

Measuring & Analysis: Identification of costs and benefits Set Baseline Consider ‘Do nothing option’ Avoid double counting

Measuring & Analysis: Example Issue: Reequipped Minibuses causing injuries and discomfort Option: Do nothingOption: Quality requirements Benefits: None Benefits: Decrease in healthcare expenses Increase in productivity of passengers Costs: High healthcare expenses Lost productivity of passengers Costs: Investment in new minibuses

Measuring & Analysis: Example Option: Ban of smoking in public places Benefits: Health Benefits Productivity Benefits Costs: Decrease in sales of importers Decrease in sales of producers Decrease in sales of bars

Measuring & Analysis: Quantification and Valuation Quantify (measures) impacts using different metrics (kilos, metres etc) Value impacts in a single metric to enable adding them together (monetary valuation which is also referred to as ‘market valuation’ or ‘economic valuation’) Use different scenarios whenever appropriate

Measuring & Analysis: Estimating Prices Market Value – willingness to Pay However sometimes there is market disequilibrium Use ‘shadow prices’ which are estimates of what the market equilibrium price would have been if there were no market failures Some prices do not have market value: –Health benefits –Time savings –Environmental benefits and costs –Human life The basic approach is to estimate the ‘willingness to pay’ (or ‘willingness to accept compensation’) for a particular outcome / opportunity cost

Measuring & Analysis: Methods for Estimating Prices 1. Use Market Prices Information Change in productivity Human capital cost valuation 2. Valuation using information on individuals’ preferences Replacement cost or preventive expenditure method Contingent valuation method Surrogate market valuation method 3. Benefit Transfer (use estimates of shadow prices from other studies)

Measuring & Analysis: Spread of costs and benefits in time The value of $1 received tomorrow is less than the value of 1$ received today Individuals expect to receive a rate of interest on savings to compensate for giving up consumption today Therefore, the rate of interest gives us a measure of an individual’s rate of time preference Using rate of time preference to convert future value into equivalent value today is called discounting. It enables comparing benefits and costs that occur in different time periods

Measuring & Analysis: Discounting Present value of benefits and present value of costs are compared to give the ‘net present value’ (NPV) Benefits justify the costs if the NPV is positive (NPV>0) Benefits does not the cost if NPV is negative (NPV<0)

Measuring & Analysis: Calculating Net Present Value NPV = B 0 – C 0 (1+i) 0 + B 1 – C 1 (1+i) 1 + B n – C n (1+i) n …+ Where: NPV – Net Present Value B 0 – benefits in year 0 C 0 – costs in year 0 i – discount rate (rate of interest) n – life of the project (no. of years) 1 (1+i) n – Discount factor for year n

Measuring & Analysis: Example of NPV calculation Year01234 Benefits Costs Net Benefits Discount Factor (for 10%) Discounted Net Present Value Cumulative Net Benefits = – 1500 – 300 – = 300 Net Present Value = – 1500 – – = – 299.7

Measuring & Analysis: Choice of Discount Rate Individual time preference rate vs. social time preference rate Public sector usually sets the discount rate to be used in public projects (3.5% in UK) Use discount tables / discount factors to calculate the PV

Measuring & Analysis: Risk Assessment In assessment of impacts, consider risks and likelihood of their occurrence Describe the consequences of the risks – could they stop the regulation from meeting its objectives? Precautionary principle – precautionary action may be justified where the risk is low, but the outcome would be very harmful (example: effect on human health of new drugs or food products)

Measuring & Analysis: Risk Assessment Types of Risk Business risk Supply risk Demand risk Compliance risk Environmental risk Etc.

Measuring & Analysis: Risk Assessment Risk Assessment provides an overall judgement on whether the risk-adjusted benefits exceed the risk-adjusted costs, or whether the costs of a possible adverse outcome are so great that precautionary action needs to be taken to obtain a cost-effective solution. Use different scenarios whenever appropriate You can also use Sensitivity Analysis to calculate how sensitive the outcome is to a change in the value of the key benefits and costs.

Example: Risk adjusted impacts

Presenting Results and Recommendation: Decision Criteria Assessment of costs and benefits informs decision Do the Benefits justify the Costs? Is the approach the least costly option for achieving the objective?

Presenting Results and Recommendation Result of the assessment should be described and explained in RIA document Sources of evidence should be provided to ensure credibility Quantify as many impacts (costs and benefits) as possible Present results in tabular form, where positive impacts (benefits) and negative impacts (costs) are shown separately and net benefits calculated Present separately any significant distributional impact

Example: Smoking in public places in UK Annual Benefits £m Averted Deaths Option 1 Voluntary Action Option 2 Full Ban Option 3 Local Powers Option 4 Bans with food/non- food exception Non- smokers Employees Customers Smokers stopping Employees Customers Other…………

Example: Smoking in public places in UK Annual Costs £m Option 1 Voluntary Action Option 2 Full Ban Option 3 Local Powers Option 4 Bans with food/non- food exception Implementa tion -(minimal)unknown(minimal) Enforceme nt Other…………

Example: Smoking in public places in UK Option 1 Voluntary Action Option 2 Full Ban Option 3 Local Powers Option 4 Bans with food/non- food exception Net benefit