How to analyse the cost of regulation to industry

16th April 2019

As part of its Better Regulation Toolbox, the European Commission coined the term Cumulative Cost Assessment as a policy analysis instrument[1]. Its purpose is to analyse the cost imposed on a specific industrial sector by a set of regulations and to identify any adverse effects on industrial competitiveness. Its methodology is based on cost quantification, taken from a company’s primary data.

Technopolis Group has carried out four Cumulative Cost Assessments for the European Commission, and national governments, on forest-based industries, the chemical industry and a refinery. Each one had a different legislative scope: energy, environment, worker protection and technological risk[2][3][4][5].

We justify the use of a methodology that focuses on costs by citing Konstantin Pashev, the World Bank economist: “if the costs are too high, benefits might never realise”[6]. It is not often that a single piece of legislation creates a problem for industrial competitiveness. Rather, it is the cumulation of the regulatory costs and possible overlap between different pieces of legislation that require similar things in different ways.

The Cumulative Cost Assessment methodology also takes into account the benefits, and the “push”, that legislation can give industry to innovate — especially for mature industries such as the forest-based industries.

Cumulative Cost Assessments reveal the costs of legislation
The methodology can show policymakers which types of industrial regulation are expensive, and which type of costs — such as taxes, fees, capital investments, or operating costs — can be problematic.

The aim is to explore how different pieces of legislation work (or fail to work) together. Policymakers can then tackle any regulatory problems identified. The intention should not necessarily be to remove specific legislation, but rather to streamline it — to make it easier for industry to comply with it.

A sound analysis of the selected legislation, and its cost-requirements, is at the basis of any Cumulative Cost Assessment. One of the most important lessons learned from working on these assessments is that additional costs often appear, beyond those stipulated in the legislation. The human factor also needs to be taken into account when considering the interpretation of legislation, and how it is applied by a company. For example, legal experts in different companies will interpret and implement regulations differently.

Scenario: running a Cumulative Cost Assessment
Now, imagine you are running a Cumulative Cost Assessment and you meet a company representative. You have prepared a highly detailed questionnaire and you ask the first question: “Based on EU Directive 98/24/EC, how much have you spent on security equipment for your employees?”. You are ready to start writing down the answer, but the only thing the company representative says is, “I don’t know”.

Company accounts, and cost-collection structures, are not adapted to the needs of a regulatory cost assessment. The costs relating to specific legislation are rarely noted on company bills, or suppliers’ contracts, or any other relevant documents for that matter.
Even within corporate groups, there are considerable differences in how costs are reported, depending on the country and the internal practices. Some costs can be externalised (allocated to external administrative costs) or accounted for internally (internal administrative costs, or operational costs).

Cumulative Cost Assessments are both useful and difficult
Hence, industry experts are faced with a difficult reality: they do not know how much legislation costs. This is why Cumulative Cost Assessments are so useful; and why they are so difficult.

Now, imagine meeting three company representatives. Once more, you ask the question: “Based on EU Directive 98/24/CE, how much have you spent on security equipment for your employees?”. One of the company representatives says that such expenses are not relevant; that employee security costs do not fall under specific legislation. But he assures you that the safety of employees is crucial, legislation notwithstanding.

The second company representative makes some calculations and jots down a number. The third company rep disagrees, stating that costs should be added for cleaning workwear, as well as time for getting changed. The resulting cost estimate is almost doubled.

Can we conclude that the regulatory costs for the third company are the highest? Or that the company based in the third country is subject to a competitiveness disadvantage? Probably not.

The above examples suggest some useful lessons:

  • Running a Cumulative Cost Assessment requires a substantial understanding of the inner workings of companies
  • Flexibility is required to understand (sometimes contradictory) company data
  • The human factor in cost reporting is a fact of life. 

These lessons are useful in that they oblige us to question the way that we gather data with the Cumulative Cost Assessment methodology. In particular, experience shows that the process of collecting data from companies is challenging, and unpredictable, and these difficulties should be taken into account when planning such an assessment.

Challenging the use of statistics
Indeed, this would lead us to the observation that the whole range of statistics, used by policymakers and researchers around the globe, should be challenged. We can also observe, based on our experience with Cumulative Cost Assessments, that data cleaning, and data interpretation, play a much bigger role than expected. The lead researcher’s role is to understand and tackle these limitations — and also to be aware of the fact that a Cumulative Cost Assessment is not an “audit”.
Producing a simple graph, like the one shown below (taken from Technopolis Group’s 2016 Cumulative Cost Assessment on Forest-Based Industries), involves considerable interaction with companies, experts, industry and institutional representatives.

The graph shows costs linked to energy, environmental, employment and other legislation for the 28 EU Member States. The legislation considered is exclusively EU-level legislation.

Figure 1: Costs of various categories of regulation for the cardboard paper industries over the last ten years, expressed as a percentage of value added

Source: Technopolis, Cumulative Cost Assessment for the EU’s Forest-Based Industry

Behind these overall numbers conceal differences between the data from the different EU Member States, which are based on varying industrial practices, human interpretations and differing levels of regulation within the Member States.  In addition, a number of national, regional, and local-level regulations simply write EU regulations into national law. That can make it very tricky to distinguish the costs of national and EU regulations from each other.  

Avoiding the trap of comparing EU-legislation and national legislation
In a study that focuses on a vast regulatory area, our experience suggests that trying to analyse costs at the EU level, as well as at the national and local levels, can be complex. The complexity lies in the different ways EU regulations are transposed into Member State regulations and practices.

Our approach is to compare legislation at the same levels, while remaining aware of any additional costs that may emerge from national legislation. These additional costs are referred to as “gold plating”[7]and occur when lower level legislation goes beyond the requirements set out by EU directives.

Gold plating ultimately interferes with the policy goal of EU-level regulation, adversely affecting consumers and economic operators. Ensuring comparability between the various legislative levels means that the lead-researcher must constantly be on the lookout for these local differences.

Can this methodology help policymakers simplify legislation?
The Cumulative Cost Assessment seeks to bring an overview of the costs, as well as the not-so-obvious benefits, linked to regulation affecting a sector. Its main purpose is to help policymakers make informed decisions and to promote a thriving EU-wide industry without being detrimental to human and environmental health.

Cumulative Cost Assessments are useful to inform policymakers about the costs of regulation in a specific policy area and highlight dysfunctionality that can arise from the interactions of different regulations.

Based on quantitative insights, they create a qualitative understanding of regulation that enables performance improvement, by the regulators as well as the companies involved. This is the most valuable contribution that a policy study using the Cumulative Cost Assessment methodology can have.
 
Eleonora Zoboli, a specialist in industrial policies, economic analysis, and innovation, worked with Technopolis from 2015 to 2018.
 
Sebastian Otte is based in the Brussels office of Technopolis Group and specialises in the techniques of public policy evaluations.

[1]Better Regulations Guidelines, European Commission, 2017
[2]Cumulative cost assessment for the EU chemical industry, DG GROW Unit D2 ‘Chemicals’
[3]International cumulative cost assessment for the EU Chemical industry, DG GROW Unit D2 ‘Chemicals’
[4]Audit on industry regulations linked to environment, energy, health and safety (cumulative cost assessment) for the chemical, paper and oil industries
[5]An assessment of the cumulative cost impact of specified EU legislation and policies on the EU forest-based industries
[6]Ex-ante Assessment of Cumulative Costs by Konstantin Pashev, DG ENTR Unit A5 ‘Economic Analysis and Impact Assessment’, presentation to Directors and Experts of Better Regulation Meeting, Vilnius, June 2013
[7]Better Regulations Guidelines, European Commission, 2017