Annual Review 2000, Regulations 1999 and 2000

Appendix 7 – OECD Conference – Puebla Regulation Reform
24-26 September 2000

Subcommittee delegates travelled to Puebla with some other Australian delegates including – Mr Ross Campbell from the National Competition Council and Radmila Ristic from the Office of Regulation Review (ACT).

That evening we attended a reception for OECD delegates held at the Fiesta Americana, Puebla. The reception provided a good opportunity to meet delegates from overseas jurisdictions.

Registration was followed by a formal welcome by Melquides Morales Flores, Governor of the Mexican state of Puebla. The Conference was particularly significant as it was the first time an OECD conference of this type has been hosted by a state (ie Puebla), as opposed to a nation. Media attendance at the opening was significant.

Scott Jacobs was the first speaker at the conference. He heads the OECD’s Regulatory Reform Program. According to Jacobs, the conference provided an opportunity to measure Mexico and other member nation's progress in the field of regulatory reform since the OECD’s last major report. The driving rationale behind increased reform efforts is the continuing need to improve the management of natural and human resources. Global poverty and inequity stand to be reduced if these efficiencies can be achieved.

Jacobs indicated that the driving principle behind regulatory reform should be regulatory quality and not de-regulation. The problem with de-regulation is that the costs are high and the market benefits are low and this results in regulatory gaps. A more positive approach is for government to focus on quality, that is achieving high standards of health, safety and environment protection at lower economic costs.

Jacobs discussed the advantages of focussing on regulatory quality as the most significant means of regulatory reform –

• It boosts consumer confidence and leads to a decrease in prices for services and products, for example, electricity, transport, health etc.

• It decreases export costs and improves competition in regional and global markets. Through regulatory reforms Mexico has experienced a boost in its export sector.

• It addresses the lack of flexibility and innovation in supply and stimulates economic growth. Mexico is now increasingly open and flexible and is responding to outside changes much more quickly than previously.

• It helps to increase employment by creating new job opportunities.

• It maintains regulatory protection in areas where it is needed such as health, safety environment.

Over-regulation, in the opinion of Jacobs, arises out of a lack of trust. Yet the results of successful reform agendas can be demonstrated, and should act to build trust. For example, electricity industries around the world have been greatly reshaped over the past decade. Lower real prices have resulted and this is a consumer benefit in real terms.

Throughout the conference repeated references were made to global electricity markets as a leading example of the benefits of Government led regulatory reform programs.

The United States can trace its reforms back over 23 years. OECD measurements suggest an annual saving to consumers of US$42-US$54 billion as a direct consequence. Operating costs in a number of specific sectors have been reduced by up to 75%. In the US, two sectors have not yet fully embraced the regulatory liberation of those cited. These are the health and airlines sectors.

By world standards France and Japan are still heavily regulated economies.

Scott Jacobs believes Governments can take strength from the failure of dire safety warnings to be realised. Deregulation can be pursued with appropriate safety guarantees.

At a macro level national economies are stimulated by regulatory reform programs, due to the non-inflationary stimulus generated. It has been estimated that a comprehensive reform program would add 6% to French GDP with little if any risk of inflationary pressure.

The experience of Mexico in the aftermath of its severe 1995 recession may be instructive. It recovered far more quickly than anticipated, which could be due to the way its Government has pursued an ambitious regulatory reform program. Mexico now has higher living standards, increased structural stability, over 90% of its laws have been revised and it has become more competitive in international markets. Jacobs warned that Mexico must not be complacent – that there are many policy challenges and these must be actively pursued.

Scott Jacobs presented two 1998 OECD research graphs to delegates. The first listed product market regulation by nation. The UK ranked first, Australia fifth and Italy last. The second graph detailed barriers to trade and investment. Australia ranked best on this measure (i.e. least barriers) while the US came 13^th, and New Zealand 14^th

Monday’s second speaker was Fernando Salas Vargas, Mexican Commissioner for Regulatory Improvement, who provided an insider’s view of the challenges which micro-economic and regulatory reform brings in a federated nation such as Mexico. According to Vargas the objective of his agency’s activities is to create a protective framework in those fields being reformed – health, education and environment – where service costs were driven down through competition.

The work of the Commission has two parts – deregulation and new regulation. He referred to Impact Manifestations which we understand to be the Mexican equivalent of Victoria’s Regulatory Impact Statement (RIS).

Vargas discussed some of the difficulties facing Mexico and stopping it from moving forward. These included – lack of co-ordination between federal dependencies (which he noted is slowly disappearing); lack of transparency in the regulatory processes; lack of public participation and confusion arising from state laws where those state laws are not updated and made consistent with Federal laws.

The strategy adopted to overcome some of these problems include –

• Eliminate all the processes and procedures which companies must comply with.

• Simplify regulatory procedures generally.

• A requirement that all new rules go through a cost-benefit analysis.

• Reform all legal procedures for making new rules – ensuring that there is transparency in this process and that costs are low.

• Improve co-ordination and communication between the different levels of Government.

An ongoing challenge to the Commission is the lack of harmony between the federal and state governments. Mexico has 32 states, and there is at times fierce competition for investment, which leads to some federal funds being diverted by states for short-term gain. The need to ensure cohesion between federal and state regulations in areas such as environmental codes is paramount.

At subsequent stages of the conference it was apparent that the relationship between the federal and state governments over regulation reform is at times tense. On more than one occasion a state based delegate observed that there was inadequate dialogue with the federal government and this made the task of selling the virtues of reform agendas very difficult at state level.

Vargas indicated that the way ahead included –

• The development of a new culture amongst those working in Government.

• The establishment of a good legal framework for making new rules.

• Balance the interests of the public and private sector. Vargas noted that this is a very difficult challenge for the government because some businesses don’t want to be involved at all and other businesses seek to obtain an unfair competitive advantage.

• Improved co-ordination between the different levels of Government – Federal – States and Municipal.

Monday’s third speaker was Carlo Malinconico, Chief of the Italian Department of Judicial Affairs. His presentation detailed the broad front at which Italian reform programs are moving. Italy’s reputation is as an over-regulated nation, and serious efforts have been undertaken to address this. These include –

• Appropriate devolution of authority to make regulations to the local level. In order to ensure this delivers improved regulatory quality, administrative efficiency has been tied directly to financial fidelity.

• The regulatory process is guided by ‘frameloads’ which are intended to avoid constitutional challenges and to maintain high standards of quality. The responsibility for laying down frameloads rests with the federal government.

• The establishment of dedicated authorities such as the Data Protection Authority and the Competition Policy Unit to ensure citizen privacy is maintained through a period of rapid change.

• Mandated revision of objectives. All rules must have clear aims and in this way these aims can be enforced.

• Regular formatted dialogue between different levels of Government. All levels of Government – provinces and municipalities must comply with the principles which will achieve improved regulatory quality.

Two special conferences have been established –

• Conference of State and Regional Governments – which meets regularly to discuss and exchange ideas on laws.

• Conference of Authorities – which meets to formulate proposals for new laws and make decisions.

The Italian Government takes pride in the benefits of its regulatory reform program over the past six years and points to a massive drop in the national debt as a percentage of GDP as evidence of this achievement.

Salvador Madero Escudero, the Deregulation Unit Manager in the Mexican State of Nuevo Leon, spoke of the entrenched corruption and tendency to corruption which arose under the former Mexican administration systems. A hallmark of this former model was the direct control of the national trading environment by the Executive. A highly protected trading regime also gave rise to a large bureaucracy.

In contrast, Mexico has now signed 27 separate bi-lateral and multi-lateral trade agreements over the past 6 years which has truly liberalised its trading regime. While the benefits of this new environment are becoming apparent, he is concerned that at the State level in Mexico there are tendencies to re-invent federal regulation. A recent innovation of the unit has been to eliminate duplication of paperwork across Government departments. He believes public servants who fail to deliver this objective should be punished, which seems a rather severe view to take. This view is probably based on a higher incidence of corrupt public service practices than what we would be familiar with in Victoria.

Antonio Garcia who is the Secretary of Development in Puebla, provided the conference with a general overview of the State’s modernisation program. He noted that Puebla has a great deal of wealth. The objective of the new regulatory framework is to increase investment and make Puebla more competitive.

One of the challenges is for the Federal Regulation Reform Program to promote local reform. Puebla is looking for backing and participation from the private sector. Participation is currently poor and the Government of Puebla would like to see increased participation from business. Currently the Government of Puebla is working on new laws concerning water.

Rick Rammeloo heads the Commission of Administrative Simplification in Belgium. His was a fascinating presentation due to the complex administrative arrangements which govern this European nation of only 10 million people. The nation features three recognised languages – Dutch in the north (covering Brussels and Antwerp), French in the south, and German in the remaining sector. The regional divisions in language can be traced back to the years of the Holy Roman Empire around 700AD!

The country features six separate Parliaments and Governments. The basic unit of administrative organisation is the commune of which there are 589. These are organised into 10 provinces although none covers Brussels which appears to stand alone as a city. One of the problems is that the system of Government in Brussels is so complex that it is often unclear who has responsibility for dealing with various matters.

Belgium has for the past 30 years maintained a unique data collection system based on birth records. Currently a major re-engineering effort is underway to deliver greater efficiencies in the way personal data is maintained by Government agencies. One of the big problems in Belgium is that people often have to provide the same information to all the different levels of Government. This needs to be simplified. We understood from Rick’s address that an ‘Authentic Data Base Model’ is being developed which will essentially centralise the data collection efforts of different agencies but create at the same time a strict access regime. The system will develop a common means of identification – each person will be registered in a computer with a unique number.

The Belgium experience with personal data is also interesting from the point of view of dealing with different IT systems across Government. Harmonisation of the Government’s social security data systems has been underway over the past six years, and a new system should be established by 2002. Thirteen separate data systems are being reduced to one, and it is believed this will realise a massive saving of time and effort by Government agencies.

The example provided by Rick is very instructive for the Victorian Committee as it relates to the emerging forms of data collection and maintenance, and deals with core issues of privacy which is now to be included as a standing reference for the Committee’s work.

Roger Wilkins Director General of the Intergovernment and Regulation Reform Branch of the NSW Cabinet Office was one of only two speakers from the southern hemisphere. Roger characterised the current push for regulatory reform as part of the evolution of nation states which first emerged in the 16^th and 17^th centuries. Equally Roger argues that Australia’s federal system is symptomatic of the emergence of newer forms of administration which seek to balance competing systems of authority. To this extent he believes Australia’s governments have been extremely successful in reaching agreement on forums such as COAG (1990) and National Competition Principles (1994).

Roger noted that Federalism is not a guarantee of regulatory reform but rather this depends on the political and social factors which are at work. Federal systems are better placed than unitary systems to achieve regulation reform. This is because –

• Federal systems create conditions for competition and regulation reform. For example Australia applies the principle of mutual recognition which allows goods in one state to be sold in any other state and allows professionals to move between states. This has been done by the States referring powers to the Federal Government.

• There is greater accountability at all levels. For example the National Competition and Consumer Commission relies on State and Federal laws for its powers.

• Federal systems promote political consensus and therefore greater certainty.

Roger fielded a number of questions about Australia’s competition reform process. Competition policy reforms in Australia appear to be well ahead of most of the countries represented at the conference.

Hector Navarro is the head of the Deregulation Unit in the Mexican State of Aguascalientes. According to Hector the Mexican states have made great progress over recent years in reforming their inefficient regulatory environments. The mechanism by which formal reviews are applied is known as the ‘Theory of Restrictions’ and is designed to remove obsolete regulations. This applies to all state ordinances, although Hector indicated that one of the 32 states had not signed up to the reform agenda with the federal government. In 23 of the 31 which have signed, municipalities have been brought on-board to review their regulations as well.

Hector also referred to the utility of this program as an anti-corruption policy.

Dr Enrique Espinoza is a private consultant who also spoke of the need to eliminate corruption within government. He is particularly involved in redundant regulations, and cited the example of an ancient Mexican ordinance that banned the serving of wine to a man alone as opposed to the legal serving when in the company of his wife. Espinoza also discussed the goals of regulation reform and these included –

• Attracting investment in an environment which is nationally and internationally competitive.

• Establishment of a system of regulation auditing. This involves checking all the issues which affect business and the community and then making comparisons at the Federal and International level. For this to be carried out effectively an inter-disciplinary team is needed.

• Removal of obsolete regulations.

Dr Peter Szegvari, a Hungarian academic, spoke of the particular difficulties experienced by transition countries such as Hungary and Spain. These countries can be characterised as unitary systems which overlay several autonomous regions. Important issues facing Hungary include –

• De-regulation.

• Improving the quality of the public service.

• Improving transparency in the regulation-making process.

• Achieving consistency amongst regulations.

Day 1 of the conference concluded with a cultural evening in Puebla where delegates were treated to a display of colourful Mexican dancing in a spectacularly renovated church courtyard.

Professor Joanna Shelton is a former OECD office holder and now works at the University of Montana’a Mansfield Centre. She spoke of the need to continually address the inherent tensions between different levels of government and government agencies. As an example she said the Multilateral Agreement on Investment (MAI) had failed in large part due to the fears expressed in numerous jurisdictions about the ability of governments to effectively legislate in environmental matters. She believed these fears were overstated.

There are also tensions between Federal and State Governments concerning international trade – the interests of the different levels of Government do not always coincide. It is therefore necessary to have a political structure at the State/Federal levels which has strength – this improves public participation and accountability. But it can also have a chilling effect. Without State support the US cannot enter into international agreements.

The principles of regulation reform which need to be achieved include –

• Transparency.

• Non discrimination.

• Avoidance of restrictions on trade.

• International harmonisation measures.

• Recognition of the equivalence of the regulatory measures of other countries.

• Competition principles.

It is important that the broader public interest is not sacrificed for outmoded industries.

The North American Free Trade Agreement (NAFTA) impacts on more than 100 agencies that have some responsibility for regulating individual and market behaviour. It is important that the agencies act in unison. The example of Massachusetts was given – this involved the state passing a law banning state contracts with Burma for human rights violations. But the law was inconsistent with federal US laws and found to be unconstitutional. The confusion dented investor confidence.

A steps taken by the US Federal Government to reduce the tension is the establishment of a contact system between the State Department and the Governor’s office in each state.

Salvador Morales Riubi is the Director General of Administration in Tijuana State. This state lies alongside the US border just south of San Diego. He provided a brief characterisation of Mexican municipal government and said its essential quality was ‘paternal’ in nature. The reform program in Tijuana includes –

• Selection of critical areas of local government.

• Each project must specify the time it will last so that everybody knows what will be done.

• Analysis of costs imposed on the three levels of Government.

The Economic Development Unit has been created with responsibility for determining training needs, improving quality of services, improving efficiency and diagnosing public needs.

Public participation is a cornerstone of this program. Citizens are given the opportunity to interact with Government and evaluate Government performance. A 24 hour telephone service has been established to provide assistance and support to the public. This enables members of the public to make complaints and contribute to the improvement of regulatory quality.

The Internet is also being used to improve regulatory quality. 40 regulations can now be accessed over the internet.

Peter Balaster is the head of Swiss State Secretariat for Economic Affairs. He raised the issue of mutual recognition and the principles which underpin it. Switzerland is currently not a member of the EU. The country, nevertheless, maintains a number of agreements between its member cantons. These agreements or ‘concordes’ are created through an elaborate process of consultation.

Jorge Witker Velazquez noted that Mexico has made an extraordinary effort to improve the quality of regulations. The principles which need to be followed include –

• Elimination of the regulatory burden with which companies have to comply.

• Removal of legal barriers which impede progress.

• Increase efficiency and competitiveness.

Fernando Sanchez Ugarte. In 1993 Mexico articulated a policy of competitiveness and liberalisation of its markets and entered into a number of commercial treaties. Privatisation is another aspect of economic reform. Mexico has not been as successful in this area. Banks have been closed to competition. However recently Banks have been opened up to unlimited participation by foreign investors. Mexico has followed an ambitious program of regulatory reform. Two continuing problems –

• It has been focussing on de-regulation rather than creating regulations and yet there is a need for new regulations in some sectors.

• Regulation reform has not reached all levels of Government.

There have also been considerable improvements in the co-ordination between various levels of Government. A process of economic reform must be clearly structured. If reform is carried out in an inappropriate way – it loses its balance.

Rex Deighton Smith has worked as an Administrator with the Public Management Service, OECD and as a Director of the Office of Regulation Reform (Victoria) and now works as a consultant. Deighton-Smith discussed national competition policy.

All State and Federal Governments are parties to national competition policy. A national competition policy has taken 6 years to implement. The National Competition Council ensures compliance. Each state has its own competition unit and each unit liaises with the National Competition Council. There has been significant but uneven progress and there is a strong presumption in favour of competition.

Between 1996-2000, 1,700 pieces of legislation were reviewed. For example, legislation applying to professionals, communications and water.

Regulation reform needs strategic policies in place and these should provide a bench mark so that the reform program remains focussed on the objectives. Reform has been compromised in some areas. State based reform is more subject to partisan politics. The option of national reviews of state based legislation is rarely used. Some states fear that national reviews would lead to restricted reforms because of the power wielded by the conservative states.

Each state produces annual reports and this keeps them accountable. National competition policy is highly transparent – decisions are open to scrutiny. There is no obligation to publish legislative reviews. However all legislative reviews are available. Consumer support is also important.

Harry First is the Chief of the AntiTrust Bureau in New York. There are 52 competitive authorities in the United States. The necessary elements of de-regulation include –

• Strong commitment to open and free markets (which is at times difficult).

• Strong commitment to the rule of law which ensures that markets work.

• Strong anti-trust enforcement and advocacy of competition policy by anti-trust agencies. (Anti-trust = price fixing and cartels).

The characteristics of the US regulatory system include –

• Breadth of economic regulation – transportation, power, communications, finance, health and so on.

• Independent Commission – provides guidance, regulates entry and pricing.

• Pricing must be just and reasonable.

• Anti-Trust Regulations – mandates market based economic decisions.