Workplace Policy
Pure Business Project
Project Overview - Understanding the Issues
Appendix 3 - Regulatory Debate
Policy background and Regulatory Debate
This section outlines the key features of the regulatory debate that has been occurring within New Zealand and other OECD over the last two decades and provides the rationale for the development of the current SME "Good Regulation" Project led by Department of Labour.
The New Zealand Regulatory Debate
Within New Zealand, the regulatory debate has predominantly centred on compliance costs borne by small and medium enterprises (SMEs) and the need to either reduce, or more rarely, increase regulatory measures to support business more effectively.
The debate as to whether regulation should be increased or decreased has been widely documented in the media, particularly in recent years. Much of the media representation has highlighted apparent contradictions between stated government support for business on the one hand, and the negative consequences of regulatory compliance on the other, resulting in an increasingly polarised debate between SMEs and Government that continues today.
For example Business Editor for the Weekend Herald, Jim Eagles, began a column on 10-11th January 2004 with[15]:
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..."
In quoting A Tale of Two Cities, Eagles conjured a picture of disparity between a booming economy and government assistance for business in the form of training and immigration policies, and business having to "...absorb an outpouring of new laws, tougher regulations, higher penalties, extra obligations, new charges, extra costs, fresh obligations and added paperwork." Eagles list of regulation included "...security charges for exporters, holiday pay, petrol tax", as well as the new employment relations law changes introduced to Parliament before Christmas.
While the Eagles article is a particularly recent example of the New Zealand regulatory debate, the debate itself is not new. Concerns about the impact of regulation have been loudly voiced by business commentators and owners from the1980s onwards, most notably the NZ Business Roundtable. Many business groups have argued that regulation, 'compliance costs' and intrusive government are an unwelcome feature of New Zealand's current economy. Unnecessary compliance costs were argued to be the result of complicated and unnecessary volumes of regulation, removing or reducing government regulatory requirements was argued to be necessary in order to stimulate a productive economy. Successive governments have, however, continued to modify or implement new regulatory measures on the grounds that these are necessary to constrain and reduce risks that may impact on economic growth in the long term[16].
The rising concern about whether regulation is unnecessary or wrong has paralleled the political and economic changes that occurred throughout the mid 1980s and through the 1990s, during which, successive governments sought to establish a more 'de-regulated' economy, introducing competitive markets and quasi-competitive social structures[17]. These changes were radical, given the preceding decades of close government control of the economy, (for example, wage and price controls, a regulated foreign exchange and high tariff barriers etc). However, de-regulation activities were also associated with attempts to improve regulation; for instance by pursuing performance based rules, negotiated compliance or standards, 'Plain English' drafting, requirements to produce compliance costs statements, and a host of other approaches. At the same time, the flow of regulation did not abate. Regulation was needed for managing the emergent markets, and new areas of law and regulatory practice were created. This occurred both in New Zealand and overseas, so much so that this period has since been characterised as one of "re-regulation" rather than just "deregulation"[18]. This period has also seen the rapid development of a body of literature arguing that society can be conceptualised as a "risk society", which has produced a "regulated state" to manage risk[19].
Some deregulation and re-regulation efforts have been successful, at least in part. For example, the cost and standards of services, such as in telecommunications and air travel in New Zealand, have improved for the consumer as a result of competitive deregulation. However, in other instances the removal of regulatory requirements has created considerable debate and criticism. The New Zealand power industry is a recent high profile example[20]. Other industries have been plagued by apparent regulatory failure, for example, the 'leaky building' construction boom of the 1990s[21], and have generated concern and demands for tighter regulation.
Although the regulatory debate has been occurring over the last two decade within New Zealand, it has remained largely one-dimensional, particularly within the media - with the issue defined as being about more or less regulation[22]. This has led to an increasingly entrenched struggle between those opposing regulatory measures and those arguing their merits, which is evident in recent press coverage, for example, Happy New Year! Let the battle begin[23], Employers set for stoush on job law reform[24], Minding our small business - rules and regulations threaten to cripple backbone of NZ Economy[25], Small business grows, despite the red tape[26].
Thinking about regulation as a process occurs sporadically in New Zealand regulatory agencies[27]. The academic discussion of how to develop and apply regulation in a way that takes full account of the social processes is largely occurring overseas. In practical terms these ideas have been slow to influence regulatory development and application within New Zealand, though they can be found taking root in some regulatory agencies. Overseas there are attempts to configure agencies and regulatory processes in a way that matches the needs of the regulated, for instance, the work of the Small Business Service in the UK, and in particular in this area the enforcement concordat[28].
Increasingly within New Zealand government is seeking to achieve effective regulatory change. Regulatory compliance costs have been recognised as a legitimate issue[29] for business, and this has been reflected in a number of government initiatives, for example, the requirement to prepare Business Compliance Cost Statements and Regulatory Impact Statements for new regulation[30]. Two recent examples where enterprise has been involved in extensive consultation are the establishment of a Business Compliance Cost Panel to determine where compliance burdens are greatest and develop solutions[31], and more recently, the establishment of a Small Business Advisory Group, that has been tasked with representing business operators and giving SMEs a "policy voice"[32]. Previous administrations were also active in seeking reform of regulation that would make it more effective. Institutional arrangements for good regulation practices are also being assembled in different parts of government[33]. In particular, there are pushes for more "whole of government" or "joined up government" approaches - from stakeholders, Ministers and government agencies themselves[34].
These government initiatives suggest that there are opportunities to begin generating an activity-based understanding and practice of regulation within the New Zealand. Engendering and supporting this regulatory 'tack' is an important goal of the SME "Good Regulation" Project.
The International Regulatory Debate
A similar regulatory debate has been occurring internationally, and been driven by broadly similar economic and political changes. As in New Zealand, the 1980s-1990s were a period of very active regulatory reform within the OECD[35]. An increasing demand for deregulation led to the privatisation of government assets and the development of markets where there had previously been monopoly state institutions. This was particularly so in the area of utilities - railways, postal services, power, water and air transport services, roading, telecommunications, health and even welfare and penal institutions. These reforms altered the regulatory landscape, and produced as much new and re-regulation as deregulation[36]. While approaches to regulatory reform have been broadly similar across the OECD, there has been a great deal of variety in the timing and intensity with which the changes were implemented. The debate on the consequences and outcomes of the reforms has diverged even more wildly.
The debate has, however, progressed; thinking about regulatory issues internationally has become increasingly characterised by four main features that are particularly relevant for the SME "Good Regulation" Project.
Firstly, understanding how to achieve the goals of regulation is still developing. Although theoretical work with particular resonance for NZ is occurring in the UK, USA and Australia[37] there is no agreement, either internationally or in NZ, over whether there is a 'best' means of managing 'regulation'[38].
Secondly, despite differing interpretations of regulation and of SMEs, OECD countries have generally adopted some similar philosophical approaches to the development and application of regulations. An international trend in regulation since 1980 has been to move from specific requirements towards general standards, even 'aspirational' standards, to allow enterprises to adapt compliance procedures to meet their unique and often changing circumstances.
Thirdly, the notion of the regulated 'customer' has become increasingly popular. In the 1990s the US Clinton administration pursued an agenda of 'reinventing government', to get the public service to view their task as assisting the regulated, rather than being engaged simply in enforcement activity[39]. These ideas were also pursued in NZ, with privatisation of public assets one of the means of introducing increased customer focus, but also more expectation of 'service' being built into core public service operations. While this idea of customer focus is not without its drawbacks (prisoners may not realistically be thought of as 'customers') the idea has been a powerful shaper of public services.
Fourthly, the regulatory debate has moved from being a two dimensional argument about the need for more or less regulation - to a more nuanced approach, recognising that fewer rules alone are not the answer to many regulation problems[40]. This shift is particularly important as it highlights that previous conceptualisations (and thus solutions) to regulatory issues have struggled to account for the fact that many regulatory problems stem from the application of rules, in particular the degree of discretionary decision-making that inherently occurs in the application of regulation, rather than from the existence of regulation itself. Discretion is exercised by SME owners and operators as well as regulators, as individuals and by the enterprise as a whole, either explicitly or covertly, for instance: "Shall I run this orange light because I am late?".
This shifting conception has developed in conjunction with work focused on achieving 'regulatory goals'. As a result, 'regulations' as rules become to be seen as less important than actual social interactions, namely, the practice and activities of regulators and the regulated.
Conceptualising Regulation as Social Activity
The resultant shift is an emerging understanding of regulation as a social activity; it is "as much a process as an event"[41], and one that occurs through on-going interaction between the various players in a regulatory system. Social norms dictate that individuals almost never explicitly follow "the rules" but instead incorporate their perceptions of the rules into their existing behaviours[42]. In some instances this may mean individuals - either unintentionally, or deliberately - avoid rules altogether. As a result, regulators are required to exercise discretion on a daily basis. This discretion includes interpreting what the rules mean in practice, who will be subject to certain interpretations, when they will be subject, and, ultimately, what consequences will result. Discretion is exercised both by individuals in an organisation and by the organisation as a whole, either explicitly or covertly, a mundane example would be: "shall I run this orange light because I am late?". As a result, "the rules" are less important on a daily basis than the actual social interactions, namely, the practice and activities of regulators and the regulated.
Giving due recognition to the practice and activity of regulation is particularly relevant in cases where the rules are expressed as "performance based" requirements, as is becoming increasingly common. The area of Health and Safety regulation is one example where regulation centres around generic principles - such as "taking all practicable steps" to avoid harm to people[43]. Making sense of such a requirement means that employers, employees and contractors need to be alive to the dynamics of a workplace, assessing and responding to changes that might create a hazard on a regular basis[44]. Regulators must also be alert to these dynamics; including how they have influenced the past and present compliance activities. As no two individuals are likely to fully agree about all elements of a workplace health and safety situation, both the regulator and regulated will explicitly and implicitly negotiate an agreed way of interpreting the situation to determine if "all practical steps" have been taken to their satisfaction. Research into the regulation of paper manufacturing plants in the US, Canada, Australia and New Zealand described the task of a regulator as being like a "cowpoke", making sure that the "herd" of regulated stayed together and generally moved in the right direction, while keeping the hindmost moving. This research also indicated that even when regulations were tightly prescribed with significant consequences, regulators still exercised significant discretion[45].
Conceptualising regulation as an activity that occurs within a broader context of organisational and social behaviours, and values, recognises that the problems associated with the application of regulation (whose which trouble 'the regulated') is a complex and entwined process that is linked to both regulatory development and the process of application. There are often several regulatory processes applying at once seeking to cover the same activity, with differing requirements. For instance, within New Zealand, both the Accident Compensation Corporation (ACC) and Occupational Safety and Health (OSH) arm of Department of Labour have developed health and safety regulation[46]. These types of issues are ones that are unlikely to be resolved by simply reducing or increasing the amount of health and safety regulation.
The role of government in generating and enforcing rules is of central concern to a democracy. The power that resides in a state is both awesome and necessary in a democracy, but at the same time dependent on the agreement of citizens to be governed. Devising the best means to ensure both appropriate regulation making and enforcement, and community willingness and acceptance of those processes, is vital to the life and health of a functioning democracy. The SME "Good Regulation" project is designed to explore how at the level of the enterprises regulation can best be developed and applied.
Summary
The conceptual shift toward thinking about regulation as an activity is occurring sporadically, and remains generally isolated to the international academic arena. In practical terms this conceptual shift is slow to be applied to regulatory development and application within in New Zealand, in part because of the entrenched and rather two-dimensional nature of the debate on regulation. However, in recent years, governments have placed increased emphasis on the need to focus on achieving regulatory "outcomes", not just outputs, and to seeking "whole-of-government" or "joined-up-government" responses to regulatory problems.
Increasingly NZ is seeking to tap in to these principles; the Ministry for Economic Development has a policy section in the Regulatory and Competition Branch with a work programme aimed at improving the quality of regulation[47]. The principles of good regulatory design, including the institutional arrangements for good regulation, are being assembled in different parts of government[48]. In particular, there are pushes for more working together by agencies - "whole of government" or "joined up government" approaches - from stakeholders, Ministers and government agencies themselves.
Generating an activity based understanding and practice of regulation within the NZ context as it applies to SMEs is an important goal of the SME "Good regulation" Project. The project utilises activity-based research processes that will deliberately promote learning, exploration and change within and alongside the existing systems and networks of Government agencies and SMEs, as opposed to devising changes in isolation from the practical activities of these groups. For more detail about activity theory and associated research practices, refer to the Project's research plan (Appendix One).
Footnotes
[16] The regime introduced to manage subcontractor payments in the building industry is a recent example: Construction Contracts Act 2002, for explanatory material.[17] See, for instance: Boston J et al. (eds). Redesigning the Welfare State in New Zealand (Auckland, Oxford University Press,1999), 356 pp, and Boston J et al., Public Management: The New Zealand Model (Auckland, Oxford University Press, 1996), 412pp.
[18] See, for instance: Ayres and Braithwaite Responsive Regulation – Transcending the Deregulation Debate, 1992, Oxford University Press, pp7-18; M Sparrow The Regulatory Craft – Controlling Risks, Solving Problems, and Managing Compliance, Brookings Institute, 2000, pp 1-77; The New Politics of Risk Regulation in Europe, Critical Reflections on Regulation, and Is Regulation Right? - LSE CARR. Also see discussion of society and the state as being a ‘risk society’ and a ‘regulated state’: Hood et al, The Government of Risk Risk – Understanding Risk Regulation Regimes, Oxford University Press, 2001 and Demos The Long Game – How regulators and companies can both win where Demos argue that the regulation should be conceived of as a complex adaptive system.
[19] See, for example: Hood et al, The Government of Risk – Understanding Risk Regulation Regimes pp 3-19, Jaeger et al, Risk, Uncertainty, and Rational Action pp 7-19.
[20] See: MED site
[21] See: the Building Bill 2003, and see - Demos in particular (note 10 above) argue that problems like the one in NZ of ‘leaky buildings’ could be seen as a “regulatory mess”, where system dynamics were unappreciated because of the application of an over-simplified market model.
[22] There are some rare exceptions in the general media, see, for example: Solving our biggest problem Rod Oram, Sunday-Star Times, Aug 10 2003, D2 and Helping business do the right thing Rod Oram, Sunday-Star Times, Nov 23 2003, D2.
[23] Lesley Springall, Sunday-Star Times, Jan 18 2004, D1.
[24] NZ Herald, Jan 12 2004, C4.
[25] Sunday-Star Times, Aug 10 2003, D3.
[26] James Weir and AAP, Dominion Post, Oct 4, C3.
[27] That this is the case has already become clear through the preliminary work on this project.
[28] See: SBS UK and Cabinet Office UK for the concordat.
[29] Surveys such as National Bank Small Business Monitor, Business NZ/KPMG BNZ-KPMG Compliance Cost Survey and one by the Ministry of Economic Development (MED) have identified compliance costs as a significant burden for SMEs (as characterised by staff numbers). In-depth qualitative research on compliance costs, partially focusing on SME concerns was conducted by MED and the Department of Labour into the Health and Safety in Employment Act 1992.
[30] See Ministry of Economic Development (MED)
[31] See MED
[32] See MED
[33] Some recent examples: LTSA recently created a post for National Adviser on operational compliance strategy; Department of Internal Affairs has established a similar role; the Department of Labour is working towards greater integration of regulatory activities within the Department to achieve ‘high quality working lives’, concentrating on the workplace; IRD has applied a compliance strategy based on the writing and ideas of Braithwaite (see FN 9 above); the NZ Injury Prevention Strategy was developed to manage the multiple agency responsibility for injuries in NZ.
[34] One example is the development of a New Zealand Injury Prevention Strategy:
[35] OECD Publication
[36] Ayres and Braithwaite Responsive Regulation – Transcending the Deregulation Debate.
[37] The Centre for Analysis of Risk and Regulation, London School of Economics; the Kennedy School of Government, Program of Regulatory Policy, Harvard University; “Regnet”, Australian National University.
[38] And there is much debate over how to usefully define what constitutes a SME. For instance, in the US and UK, Medium enterprises are defined as a being those with FTEs of 250 or less; in NZ the working definitions most often used are: Micro (FTE 1-5), Small (FTE 6-20) and Medium ( FTE 21-50). FTE numbers are used along with financial turnover statistics internationally and within the New Zealand public service as descriptors, but have not proved useful in identifying likely policy issues that may affect SMEs.
[39] Malcolm Sparrow in Imposing Duties – Government’s Changing Approach to Compliance Greenwood Press, 1994 and The Regulatory Craft – Controlling Risks, Solving Problems, and Managing Compliance Brookings Institution Press, 2000 gives many examples of the way in which US government agencies tried to respond to the administration’s demands. The frequent unintended consequences of this approach are beautifully described in “the Babylonian Test” pp 11-14 of The Regulatory Craft. The IRS in the US and the Australian Tax Office went through a similar process of transformation that the IRD in NZ has entered before the IRD - going from “widget” producer (audits, inspections, tax forms processed) to a broader mission of increasing compliance and thereby increasing the tax take. This has been taken even further by the Canadian Revenue Service has identified its task as being about income redistribution as well as revenue collection (see Imposing Duties). The NZ tax commissioner, it is no coincidence, is an Australian.
[40] This report discusses attempts to reduce SME compliance problems in particular, and see also the discussions in Ayres and Braithwaite, Sparrow and the LSE, footnote 9 above.
[41] Hutter, B Compliance: Regulation and the Environment, Clarendon Press, Oxford, 1997 p 13.
[42] See case studies into Winemaking, Accommodation and Brewing industries. There is a rich literature on social norms and their role in determining behaviour developing in legal scholarship and law and economics, reviewing articles at the SSRN website amply demonstrates this.
[43] Sections 2 and 6 of the Health and Safety in Employment Act 1992 define and set out the general duties of employers.
[44] Demos in The Long Game argue that increasing complexity in the world is impelling the adoption of more self-regulation and co-operative action between government and enterprise.
[45] See: Gray and Shadbegian Environmental Regulation, Investment Timing, and Technology Choice, NBER Working Paper W6036, May 1997 (this is not a free download unless you are an NBER subscriber).[46] An issue specifically noted in the Compliance Cost Panel’s report
[47] See: MED
[48] Some recent examples: LTSA recently created a post for National Adviser on operational compliance strategy; Department of Internal Affairs has established a similar role; the Department of Labour is working towards greater integration of regulatory activities within the Department to achieve ‘high quality working lives’, concentrating on the workplace; IRD has applied a compliance strategy based on the writing and ideas of Braithwaite (see FN 9 above); the NZ Injury Prevention Strategy was developed to manage the multiple agency responsibility for injuries in NZ.