Regulatory Impact Assessment and its benefits for the economy
BAKU, Azerbaijan, Jan. 23
What is Regulatory Impact Assessment?
As the name suggests, Regulatory Impact Assessment (RIA) assesses the impact of the States regulatory activity i.e. laws, administrative decisions, regulations, standards, etc., on the stakeholders of the said activity such as social, economic, environmental, and in some cases more specifically on regional development, SMEs etc.
According to the OECD webpage, “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.” From the World Bank’s perspective, RIA is a “tool that helps policymakers ask systematic questions about the different policy options and consequences of government interventions” (World Bank 2010b). The output of that process is an assessment report that provides high-quality evidence for comparing different policy options (World Bank 2010a). (GIRG,
Worldwide practices of Regulatory Impact Assessment)
RIA is included in the regulatory frameworks of 32 out of 35 OECD countries and 46 out of 58 high-income economies. Many
developing countries from all the regions of the world such as Vietnam, Morocco, Kazakhstan, Romania, have also developed good RIA practices in recent years.
The benefits of implementing RIA are manifold, including economic such as eliminating the unnecessary regulatory burden, which can cause public or private spending, sometimes estimated in millions of dollars. In a well-known example, the first proposal of the regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) from the European Commission could have imposed a 10 billion euro cost on the European chemicals industry. However, after conducting a thorough RIA and holding a public debate discussing various regulatory alternatives, the regulation was revised to make it more cost-effective and less burdensome for the private sector, while preserving the major benefits of the proposal. The final cost to the industry was reduced to two billion euros. The entire RIA was estimated to cost one million euros making a return on investment of 10,000 to one (World Bank 2010b).
General Principles of RIA
\RIA enshrines the following principles of regulatory best practice:
- Proportionality – regulators should only intervene when necessary. Remedies should be appropriate to the risk posed, and costs identified and minimized.
- Accountability – regulators must be able to justify decisions and those decisions shall be subject to prior consultation with stakeholders such as businesses, community, Non-profits (for example, specialized in environmental impact assessment, protection of vulnerable categories of society, etc.).
- Consistency – governmental rules and standards must be coherent and implemented fairly.
- Transparency – regulators, should be open and keep regulations simple and user-friendly.
- Targeting – regulation should be focused on the problem and minimize side-effects.
- International best practices of RIA
In many countries, RIAs focus on the economic impacts of a proposed or existing regulation, particularly on SMEs. Others, such as Estonia, which is a high-income developed country and has, recently, also been acknowledged among the fastest growing economies in the EU has more comprehensive impact assessments. (GIRG, Worldwide practices of Regulatory Impact Assessment)
According to Estonia’s guidelines, explanatory memorandum of the RIA shall contain the following presumable impacts: 1) social, including demographic impact; 2) impact on national security and international relations; 3) impact on the economy; 4) impact on the living environment and natural environment; 5) impact on regional development; 6) impact on the organization of state agencies and local government agencies; and 7) any other direct or indirect impact.
Other sophisticated examples of RIA would be Canada’s “RIA writers Guide”, British “Regulatory Impact Assessment Governmental Handbook” etc.
Many best practices also suggest implementing both ex-ante, the traditional form of RIA described so far, and ex-post assessment of regulations, i.e., evaluation of the impact by already enacted regulations. According to OECD, this allows holding the policy-makers involved in the regulatory process accountable for the economic resources and political capital invested in developed regulations. The ex-post evaluation also allows collecting evidence and data for further review of the effectiveness of policy tools used in practice, for a review of their performance and for improving the design and implementation of the policy. OECD 2003
Azerbaijan’s RIA Framework and its shortcomings
Elements of RIA exist in the Azerbaijani legal framework as well. According to Article 59 II of the Constitution of the Republic of Azerbaijan, “The State implements the regulation of entrepreneurship only to protect state interests, human life, and safety.” According to the Constitutional Law on Normative Legal Acts, regulatory activity in Azerbaijan shall be based on proportionality and accountability [to citizens], democracy and transparency, coherence of legal acts, protection of human rights, freedoms and legitimate interests and social justice, systematisms and unity of legal regulation of public relations. (Article 8. Principles of regulatory activity) The Law on Licenses and Permits dated 15 March 2016, stipulates that regulatory impact analysis is one of the principles of state regulation in the field of licenses and permits. (Article 10. Principles of state regulation of license and permit system)
Further, Article 16 of the Law is specifically devoted to regulatory impact assessment. According to that article, RIA shall incorporate the following:
Assessment of the impact on entrepreneurship of proposed legal acts on the establishment of activities requiring license and permit; Assessment of the impact on entrepreneurship of existing legal acts on the establishment of activities requiring license and permit. (The Law on Licenses and Permits, Article 16.1)
Regulatory impact assessment is implemented by the relevant authority and the authority issuing the license and permit (The Law on Licenses and Permits, Article 16.2).
Specific examples of RIA exist in other legal acts of Azerbaijan. For example, the Law on Protection of Environment stipulates that the state has to implement legal and economic regulations enabling the protection of the environment.
On 2 November 2017, the Cabinet of Ministers has enacted the “Rules of regulatory impact assessment” (hereafter, the “Rules”) in accordance with the Law on Licenses and Permits, which identifies the Ministry of Economy as the authority implementing RIA.
However, the Rules have certain shortcomings. First, as they are prepared in the context of the Law on Licenses and Permits, the Rules focus on state regulation of licenses and permits (but see, Article 2.2 of the Rules stipulating that “the Regulatory Impact Assessment of draft laws are done in each case”). However, the State’s regulatory impact on economy and society is not limited to issuing licenses and permits only. For instance, the State through amending individual legal acts such as the Tax Code, or the Criteria for defining entity size (see the “Cabinet of Ministers Decision on confirmation of criteria for micro, small, medium and big entities”) can cause huge impact on the economy. Second, the Rules limit RIA to draft laws and thus skip hundreds of other legal acts such as Presidential decrees and edicts, the Decisions of the Cabinet of Ministers, the rules and regulations of other authorities such as the Central Bank that has no lesser impact. And third, but not least the Rules fail to provide clear methodology for implementing RIA.
The “Impact Assessment” section of the Global Indicators of Regulatory Governance (GIRG) Project by the World Bank’s Global Indicators Group specify other shortcomings of Azerbaijani RIA frameworks such as the lack of specialized government body tasked with reviewing and monitoring regulatory impact assessment conducted by other individual agencies or government bodies. See Figure 2 (extracted from the page of the Project).
Source: GIRD database, https://rulemaking.worldbank.org/en/data/explorecountries/azerbaijan#
Implementing Regulatory Impact Assessment can be very beneficial for the development of the economy and the welfare of people living in Azerbaijan. The existing national RIA framework of Azerbaijan already allows implementing a certain level of RIA which is testified by recent legal and economic reforms by the Government of Azerbaijan. However, the existing national framework can be improved for the benefit of the country. For example, the Rules on Regulatory Impact Assessment could be amended in accordance to international best practice to cover all regulatory activities of the State, a specialized government body could be established to review and monitor RIAs implemented by all state bodies, and continuing cooperation with jurisdictions with successful RIA models could build.
Global Indicators of Regulatory Governance: Worldwide practices of Regulatory Impact Assessment, http://documents.worldbank.org/curated/en/905611520284525814/Global-Indicators-of-Regulatory-Governance-Worldwide-Practices-of-Regulatory-Impact-Assessments.pdf OECD 2003, Proceedings from the OECD Expert Meeting on Regulatory Performance: Ex Post Evaluation of Regulatory Policies, OECD Publishing, Paris, https://www.oecd.org/regreform/regulatory-policy/30401951.pdf Government of Canada, Treasury Board Secretariat, “RIA writers Guide”, https://www.tbs-sct.gc.ca/rtrap-parfa/riaswg-grrier/riaswg-grrier-eng.pdf British “Regulatory Impact Assessment, Governmental Handbook”, http://regulatoryreform.com/wp-content/uploads/2015/06/Israel-Regulatory-Impact-Assessment-Government-Handbook-2013.pdf
The Constitution of the Republic of Azerbaijan, http://e-qanun.az/framework/897 The Constitutional Law on Normative Legal Acts, http://e-qanun.az/framework/21300 The Law on Licenses and Permits, http://e-qanun.az/framework/32626 The Rules on Regulatory Impact Assessment, http://e-qanun.az/framework/34013 The Law on Protection of Environment, http://e-qanun.az/framework/3852
EKVITA is a full-service legal, tax and management consulting company with circa 40 full time professionals. Its active clients include several Fortune 500 companies operating globally. The company have also been engaged in government projects as well as worked for international donor organizations such as World Bank.
EKVITA company delivers integrated professional services combining general business advisory support with very strong legal, finance and tax practice.
The leading position of EKVITA in the market has been recognized by international ranking institutions and other relevant international standards.