Risk based approaches to regulation

1
Risk based approaches to regulation

• Rex Deighton-Smith
• Director
• Jaguar Consulting Pty Ltd
• Challenges in Cutting Red Tape
• Rotterdam, 1 March 2007

2
Risk based approaches to regulation
3
The OECD Recommendation

• Including risk analysis in this process of
  adjusting the responsibilities and roles of the
  public and private sectors as may follow from a
  change in the content of regulations.
• Development of a risk based approach will be
  essential as part of any redistribution of
  responsibilities between the state, the private
  sector and civil society in an overall effort to
  produce effective responsible regulation.

4
Practice in OECD Countries

• Risk assessment formally required to be used in
  RIA in most OECD countries
• But widely varying amounts/types of guidance on
  performing risk assessments
• A lack of clear decision-rules or guidelines

5
Threshold test

• Most RIA guidelines require this step
• It is a longstanding (1995) OECD best practice
• Its use recognises the limits to govt action
• But how is it to be conducted in practice? What
  rules to apply?
• This is a risk based test but,
• Quantitative acceptable risk thresholds are
  almost unknown to govt policy

6
An exception the UK

• Fatality risks of 1 in 1 million years broadly
  acceptable.
• Fatality risks of 1 in 10 000 years at the
  boundary between tolerable and unacceptable risks
  for members of the public who have a risk imposed
  upon them in the broader interests of society.
• Fatality risks of one in 1 000 years the
  boundary between tolerable and unacceptable risks
  for workers who voluntarily assume a risk.
• Source HSE (2001), pp 44-5.

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Value of a statistical life (VSL)

• A fundamental element of benefit/cost analysis
  for health/safety based regulation
• Can be seen as implicitly setting an acceptable
  risk threshold
• Setting a given VSL limits the ability to pursue
  small risk reductions because BCA outcomes will
  usually be negative
• But relatively few countries provide explicit
  guidance on VSL

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VSL - examples

• EC Base case 1 million, sensitivity testing at
  2.5m and 0.65m
• US Most values are in the range 1 million to
  10 million
• Canada ditto
• UK BCA guide cites Dept. of Transport figure of
  1.145 million

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Results of the lack of detailed risk assessment
rules

• Hahn, Viscusi, etc point out losses of regulatory
  effectiveness
• Widely varying cost per life saved (-8bn to
  36bn!)
• Scope to both improve regulatory effectiveness
  and reduce costs by better targeting regulatory
  activity
• Will also improve regulatory credibility

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Some conclusions

• Hahn concludes the VSL figure used has little
  influence on proportion of regulations passing a
  BCA
• Similarly, the discount rate chosen has limited
  impact
• Rather, the key is ensuring that some figure is
  adopted and quantification occurs

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Conclusions

• Neither formal requirements for risk analysis nor
  RIA have substantially moved practice toward
  consistent, rational approaches to risk
• Partly due to continued lack of quantification in
  RIA
• But Hahn shows that inconsistency is rife even in
  US, where more quantification occurs

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Explaining the lack of progress

• Government is essentially responsive to
  subjective risk perceptions
• But subjective and objective risk can differ
• Voluntary assumption
• individual control
• outrage (risk less acceptable if associated
  with negligent behaviour)
• Understanding of risk
• Social amplification
• Risk perceptions (reality vs perception)
• Differences in risk acceptance (voluntary
  assumption of risk vs policy rules) (workers vs
  bikers?? 11000 risk)

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Explaining the lack of progress (2)

• Political imperatives
• (organised lobbying, narrow perspectives)
• Views on the reach of government
• (How much can govt do? Is it desirable?)
• Uncertainty
• (What is the real size/nature of the risk? How
  to respond to lack of knowledge?)

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Implementing the OECD recommendation

• Better implementing risk perspectives in
  regulatory design, implementation enforcement,
  by
• Establishing a detailed risk policy
• Includes setting VSL, acceptable risk threshold
  discount rate figures that are broadly acceptable
• Seeking broad support for it
• Active dialogue on risk regulation to establish
  legitimacy (e.g. Better Regulation Commission
  Whose Risk is it Anyway)

15
Implementing the OECD recommendation

• Addressing risk perceptions
• (Aligning subjective objective risk)
• Policies on dealing with uncertainty
• - How much conservative bias/safety margin?
• Integrating risk assessment with RIA
• Requires improved RIA guidance/quality control
• Addressing risk issues in compliance/enforcement
  policies
• Esp. targeted inspections, resourcing in line
  with risk levels (see Hampton).

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Conclusions

• The role of risk assessment is widely recognised
• But comprehensive policies to ensure
  implementation are largely absent
• Both political and technical impediments exist
• But co-ordinated action to address these offers
  the possibility of major improvements
• Gains in greater regulatory effectiveness,
  reduced cost, enhanced legitimacy are potentially
  massive.