Cutting Red Tape as a Key Productivity Driver: KPMG/Wolters Kluwer Group of 100 Lunch

Good afternoon everyone. It’s great to be here at the KPMG/ Wolters Kluwer Group of 100 Lunch in Sydney today.

My background was as a Crown prosecutor and legal academic in criminal law – in some ways a good preparation for politics. So I am always assessing whether a proposition can be accepted beyond Reasonable Doubt.

Having been in charge of the Government’s red tape cutting agenda – there are a few important things I am now convinced of.

Australia now has its most precise, comprehensive and transparent programme to reverse the growing costs of red tape on the Australian economy.
• It is true beyond reasonable doubt – that in 2015 there will be less Federal regulation in the Australian economy than there was in 2014.  Restated – the stock of Federal regulation measured by its cost on the economy has decreased this year compared to last.

• It is highly likely – that this is the first time there has been a downturn in the amount and cost of Federal regulation in the economy in several decades, or perhaps ever.

The reason why it is hard to verify whether this is the first time there has been a downturn in the amount and cost of Federal regulation is the completely remarkable fact that until this government – Australia:

• had no accurate measure of the total cost of the total stock of Commonwealth regulation; and
• no consistent accurate measure of how much was being added to or subtracted from that total stock in any given year.
The Coalition Government committed to making decisions to reduce the regulatory stock by $1billion each year. The starting point for that process was to try and work out how much regulation existed at the Commonwealth level and what was the cost burden it imposed. It is somewhat astonishing that until this Government there was no proper measure of the cost of regulatory stock.

On another level the reason why the stocktake process has never happened before because there is so much Commonwealth regulation it is hard to identify it all let alone measure its effect. In fact there was so much Commonwealth regulation we could not undertake an estimate based on costing each piece of regulation individually so a taxonomical process was undertaken.

Regulation occurs in primary legislation and subordinate legislative instruments (regulations); and quasi regulations (administrative actions, rules forms requirements – developed by Departments).  Commonwealth Departments have gone through a process of cataloguing all regulation by grouping – like with like and then subgrouping.  This was done according to six criteria.

Then a process of stratified sampling was undertaken using random samples from each grouping and then devising averages and measuring the costs effects in terms of compliance costs / administration costs and delay costs. What we found was that there were:

{Slide: Total break down by Department in pie chart}

•              85,000 regulations that portfolios estimate they administer.
•              More than 70,000 of these regulations arise from powers delegated by the Parliament to agencies and regulators to achieve outcomes (quasi-regulations).
•              Two regulators alone – ATO and the Australian Prudential Regulation Authority (APRA) – are responsible for more than half of all of the Commonwealth’s quasi regulations.
•              The ATO is the largest Commonwealth regulator – estimated the annual burden it imposes costs entities and individuals $40 billion per annum.
•              Total costs of $65Bn per annum (or 4.2% of GDP).
In summarising what the Government is doing to bring down this huge cost of regulation – we deal with three issues.

•              First – Why is there a problem with the levels of regulation in Australia (Why put so much effort into reducing red tape)?

•              Second – How is the Coalition going about the task of reducing red tape (what is the process to bring about regulatory reduction)?

•              Third – what have we managed to achieve so far.
1.  WHY IS THERE A PROBLEM?

The first point to make on regulation in Australia is that there is a lot of it. This is, in turn because it appears to have grown unabated every year (although this is difficult to verify given the present government approach to stringency in measurement.

{Slide: Deloitte’s analysis of pages of new Federal Parliament legislation by decade}

Measuring regulation by volume of pages is simple but it is only partly and not perfectly instructive because of course volume by pages is not as important as how costly it is to comply with the volume of regulation that exists. Costs of even small legislative instruments can be very high and regulatory costs might occur by administrative decisions independent of statutory instruments.

{Slide: Deloitte’s rise of Australia’s compliance workforce}

Deliotte also estimated that middle managers are spending 8.9 hours a week on red tape compliance and that one in every 11 employed Australians now works in the compliance sector. As an example of how a small change can generate a large savings because of the volume of people effected:

• The Coalition achieved a $156 million compliance saving by fixing a form.  Simplified income tax return lodgements through myTax which allow automatic pre-populated income and other data already available to the ATO reducing the amount of information that individuals must separately enter into their tax return.

• Another example is ending the regulatory impediment on use of mobile devices at take off and landing that resulted in a $17.6m savings every year – because of the huge volume of people it effects 66 million each year.

Then some changes affect a small group of people or entities:

•              The Coalition Amended the Sea Installations Act 1987 and repealed the Sea Installations Levy Act 1987. Essentially roving redundant permit and levy process for sea installations such as pontoons and artificial islands (which were already covered by the EPBC Act and the Great Barrier Reef Marine Park Act 1975).  Ten operators each year will not be required to complete and file applications under a duplicative scheme.  The estimated annual savings is $5,633 in compliance costs.

•              Mining Tax – Fewer than 20 entities contributed to the meagre revenue raised by the mining tax; but over 125 other miners were complying with the mining tax legislation, (while not actually paying any tax). The compliance cost was $10.3million.

We also know it is not just a problem of Commonwealth regulation – there is also State and Territory and Local Government regulation.

And the private sector also imposes regulatory burden on itself. The fact that Australia has a lot of regulation is not in itself the answer to the question – why should there be an attempt to reduce regulation?

{Slide: Deloitte’s analysis of public sector vs private sector self-imposed regulations}

The answer is that: regulation is a problem that creates a problem.

And the problem it creates is productivity decline.

Productivity decline is not mono-causal.  Several factors cause productivity decline – productivity decline is the child of several parents.

{Slide: The World Economic Forum Global Competitiveness Ranking}

The Global Competitiveness Report 2012/13 – provided a comparative assessment of the competitiveness of 144 economies, overall and on a range of 12 individual criteria. It was interesting to look at the 11/12 to 12/13 period – Australia had the same position in 12/13 as 11/12 – but notably, over the last six years of the previous Labor Government, had been moving in the wrong direction.

There were 12 criteria:

•              on the burden of government regulation Australia slumped from 60th to 96th in one year.[1]

The Global Competitiveness Report – is a comprehensive assessment of national competitiveness worldwide (being based on perceptions of canvassed business it is illustrative but not perfect).
Productivity decline is very real. When we talk about productivity – there are generally two different measures:

{Slide: Productivity measures}

• Labour productivity – essentially the average output of labour – high labour productivity means a country uses high capital and high technology to produce more output per worker than other countries (China is less than 25% as productive as the USA but could become a bigger economy because it has four times the population).

• Multi-factor productivity – a more difficult concept.  In course summary, it just means how much more you can produce with a given set of inputs – no new capital no new labour.

Multi-factor productivity represents output growth not accounted for by the growth in inputs. It measures innovation – not just technical but organisational innovation / workplace innovation / regulatory innovation.  Multi-factor productivity is argued to be the most important driver of growth in modern economies – some economists say multi-fact productivity may account for up to 60% of growth within modern economies

{Slide: Multi-factor productivity growth in Australia}
{Slide: Multi-factor productivity growth by country}
The EIU ranked Australia second worst of 51 countries for Multi-factor productivity growth.
•              Australia 10.3 points out of 100
•              Behind Uganda
•              But just ahead of Botswana – last at 51 – with 0 points /100

The survey concluded that the poor ranking reflected what they called Australia’s “stuttering productivity performance” over the past decade. At the time the then Treasurer Wayne Swan brushed off the report by saying while productivity growth had been on the decline in Australia, the nation’s productivity was actually amongst the highest in the world.

“Our productivity levels in this country are very high on international standards, in the top dozen around the world,” Mr Swan said.

It is true that productivity has been fairly high and fairly consistent. But the reason decline in productivity growth is a real problem for modern economies is because having low productivity growth means you can fall down the rankings very, very quickly. You do not want to be like an AFL coach saying “I know we have lost the first 7 games of the season but don’t worry we were in the top 8 last year”.

The same survey placed Australia’s nation’s general economic performance behind 33 countries, including New Zealand and Colombia. We can all live with being behind Colombia, but losing to NZ in cricket and economic performance indicates it is definitely time for concerted action.
2. HOW IS THE REDUCTION IN RED TAPE BEING ACHIEVED?

The distinction between multi-factor productivity and labour productivity demonstrates a very important fact. Notably there are two broad ways to increase productivity. The first way is to Invest in infrastructure and new technology to raise labour productivity. This is critical and the Coalition government is completely committed to this undertaking.[2]
In fact it is worth noting here that one reason why it is important to return to surplus perhaps – a reason that is not sufficiently understood or spoken about is that the costs of ever increasing interest bills of debt generated by ongoing deficits. The cost of the interest payments is not just to be measured in of the amount of dead taxpayer’s money going overseas to pay the interest on our borrowing, but it is also to be measured in lost opportunities.[3]
Labor left a situation where Australia is now paying $1 billion a month to service the interest on our $191.5 billion worth of debt. If not brought under control this interest bill can further deplete productivity growth. It is dead money that could be spent on hospitals, schools, roads and on the infrastructure, education and technology that increases Labour productivity. If nothing was done the debt Labor left us with would have resulted in an interest bill of $27billion per year by 2023-24 that would seriously limit our ability to spend wisely to increase Labour productivity.
The second way to increase productivity is reform, designed to increase efficiency and increase multi-factor productivity growth.  What is notable from the Global Competitiveness Report, is that Australia under the previous government did very badly in a lot of areas directly associated with government – taxation and the quality and amount of government spending – and of course, regulation. In one sense, as distinct from spending on infrastructure, technology and education; removing regulation is a budget neutral way to increase productivity but it is still is not simple (indeed it takes intense effort).
So how do you go about making a big dent in the regulatory burden to increase productivity?
Essentially the answer is:
• Setting and sticking to removal targets – to get rid of costly old regulation.
• Instituting and sticking to proper processes – to slow the growth of new regulation.
Dealing first with ‘Instituting and sticking to proper processes’, the Coalition has set a target to remove $1 billion net in regulation each year. Obviously to meet that target we need to be accurately counting the costs – both the few additions, as well as the many reductions in the stock of regulation the Government has achieved.
{Slide: Summary of the new RIS process}

The key process is the Regulatory Impact Statement – (RIS) Process. Upon coming to Government the Coalition immediately strengthened the RIS process for measuring the costs and savings of additions and reductions in the stock of regulation.
• Everything that increases or decreases regulatory cost that goes to Cabinet must have a RIS.
• RIS process was strengthened to allow for greater consultation with the business and groups that might be affected by any change.
• Rules were developed that make it clear that non-regulatory options must always be considered for any issue and that the option with the highest net benefit is the one that should be pursued.
• Specific Deregulation Units tasked with cutting red tape were inserted into each portfolio department and the.
• Government has developed better and more precise methods of calculating the costs of regulation – for instance, for the first time, there is a thorough consistent measuring ofregulatory costs to individual Australians (in a very poor effort the former Labor government had no proper measure of the cost effect on individual Australians of regulation they put in place).
The Coalition did one other very important thing; it has actually observed the process in a substantive way.
{Slide: The Coalition Government’s compliance with the RIS process}
{Slide: The Prime Minister’s exemptions under the RIS process under the former Labor Government and under the Coalition Government}

A process designed to check the growth of regulation and incentivise the removal of unnecessary regulation is not much good if it is observed most substantially in the breach, as was the case under the previous government.
A key measure of whether the RIS system is being properly observed is how many Prime Ministerial exemptions to the process are granted. A recent Office of Best Practice Regulation Report notes that:
• In the Coalition’s first year of Government there was only one occasion where a regulatory scheme went to Cabinet and the Prime Minister exempted it from the RIS process (that was the Qantas Sale Amendment Bill).
• The Coalition was 100% compliant with the Australian Government RIS process in 2013/14, as the only non-compliance for the year was by the Labor Government.
• Under the former Labor Government there was a total 27 exemptions granted by the various Labor Prime Ministers over their last three years and a remarkable 14 exemptions granted in 2010-11 alone.  These included serious and likely high cost regulatory matters such as amendments to the Fair work Act 2009, changes to the 457 Visa system NBN implementation Plan.
So having slowed the growth of new regulation, we have got right into cutting the old regulation.

3. WHAT HAS BEEN ACHIEVED SO FAR?

Twice a year we have had repeal days that involve an Omnibus Repeal Day Bill and Amending Acts Repeal Bill and a Statute Law Repeal Bill and each repeal day there is a number of Stand-alone Bills that repeal regulatory provisions in or of specific Acts. This a cultural process that says if an Act, or part of an Act is not serving a useful purpose, whether there is a compliance cost associated with it or not,  just get rid of it.

To date these bills have repealed over 10,000 legislative instruments and over 2,700 Acts. This Includes 890 Acts and 160 legislative instruments repealed on Wednesday (18 March 2015).

The earliest Act repealed so far was the Defence Act 1904. It made amendments that were themselves amended and overtaken multiple times since 1904. This is recorded in the legislative amendment history of the current Defence Act 1903. Indeed, so historic is the Defence Act 1904 that it references a State Division of the Naval Forces and not the Royal Australian Navy, which was formed in 1911.

Repeal days critically serve as the time for accounting for and announcing the total cost reduction by all the administrative changes or legislative changes that have occurred since the last repeal day. The repeal day process provides a completely transparent way of accounting for the Government’s red tape reduction efforts than has never existed in the past. Critically the measurements of the cost of red tape that is being subtracted or added to the stock are very thorough.

{Slide: The generic regulatory costing process}

When we measure the cost of regulation we are measuring:

• Delay Costs
• Substantive Compliance Costs
• Administrative costs

{Slide: The regulatory costing process with the Safety, Rehabilitation and Compensation Act as an example}

Compliance costs are essentially a measure of the value of wasted time. Substantive compliance costs are activity based costing. An Act or regulation is considered for every single interaction point at which it requires some person to do something; then the nature and time of the task is considered as is the cost of the time required by a person to do the task and a compliance cost outcome is then calculated.

The costs that arise might be the cost of compliance of filling out a form for instance. For example, customers are now able to use their Centrelink online account to update their income and/or assets (savings, shares and other assets). A portion of these updates will auto complete and not require any further information or contact with the Department of Human Services. This will result in a cost savings of $7.4million.

Administrative costs might take different forms, including capital costs. For example, the Australian Securities and Investments Commission provided conditional and time limited relief in relation to a derivative transaction reporting requirements. This applied to the five entities that are Reporting Entities under Phase 1 of the derivative transaction rules and had estimated annual saving of $2.5 million in compliance costs (essentially this was the cost of capital I/T that was avoided by those five entities).

Delay costs are reflected in changes to the net present value of a project.

{Slide: The one-stop-shop environmental approvals delay costs}

As yet we are not measuring:

• Broader economic impacts. For example the FTAs had a $0.4m decrease in compliance costs but a much larger productivity costs.
• Financial costs payable to Government such as the Mining Tax.
As of Wednesday (18 March 2015), the Coalition took decisions that will have the effect of decreasing the cost of federal regulation in Australia by $2.45 billion.

{Slide: Pie graph showing the regulatory and deregulatory decisions by value/number}
{Slide: Bar graph showing the two year cumulative effect}

Some examples of key features in the Autumn 2015 Repeal Day include:

{Slide: Summary of the Autumn 2015 Repeal Day highlights}
• The ATO has improved client experience by changing the structure and design of its website so that individuals and businesses can find relevant information more quickly.

• The amendments to the Health and Other Services (Compensation) Act 1995 will remove the requirement for compensation recipients to separately submit a statutory declaration when submitting a claim for benefits provided under Commonwealth programmes for Medicare, nursing home, residential care and home care services. Basically in these cases, it is already an offence to provide false or misleading information to the Commonwealth, so having separate statutory declarations is unnecessary. This amendment will reduce the regulatory burden on both compensation payers and around 50,000 claimants per year and allow automation of certain compensation recovery procedures for the Government.

• The Assistant Minister for Immigration and Border Protection has announced reforms to the 457 visa programme, which will benefit both businesses and applicants through streamlined application processes and, reform sponsorship requirements, reducing time and cost to businesses.

• The Government has expanded use of personal electronic devices in all phases of flight, provided the operator can ensure the aircraft is operated safely. This will now allow passengers to use electronic devices for the full duration of flights.

• We are also removing the requirement for heavy vehicle operators of B-double truck combinations registered under the Federal Interstate Registration Scheme to fit additional spray suppression devices. These devices were shown to increase costs but provide no additional safety benefits.

• After extensive consultation on reporting requirements under the Workplace Gender Equality Act 2012, this Repeal Day, the Government is streamlining the requirements to provide a sensible balance between the need for meaningful data and the burden on employers to report. The Government will retain several elements of gender equality reporting that will preserve valuable data on gender equality in the workplace. These reforms mean that employers will no longer be required to provide data that is considered to be onerous and less reliable. This includes information on the remuneration of CEOs or equivalent, or managers employed on a casual basis.

• In conjunction with past Repeal Days, the Government has introduced a range of administrative reforms to Commonwealth grant and procurement processes. For example, electronic tendering by defence materiel organisation, standard contract terms for procurements under $200,000, and standard agreement template for low-risk grants.

Examples of other significant measures taken by the Government since September 2013:

{Slide: Highlighting some of the Government’s red tape reduction achievements to date}
{Slide: Further examples of deregulation reforms that benefit business}
• The Government’s one-stop shop environmental approvals reform, separate Commonwealth assessment and approval under the EPBC Act will no longer be required where an accredited state approval process is in place. This will deliver simplicity in process with a one-stop shop for environmental approvals which will cover both State and Federal obligations.

• The Government has exempted highly skilled occupations from labour market testing requirements.

• In 2014, changes to the Building and Construction Occupational Health and Safety Scheme include removing the costly and time consuming requirement for builders to be certified to Australian Standard AS4801 (or equivalent) prior to applying for Scheme accreditation.
CONCLUSION

There will always be regulation – just like there will always be tax.

There is probably also good reason to believe that it is expected and natural that there would be more regulation in 2015 than in 1915. But equally, in the context of past trends in the number of new Commonwealth regulations, and declines in Australia’s multi-factor productivity growth, there is good reason to believe that there is likely far too much regulation.

And, equally good reason to believe that this happened because each time a new policy challenge arrived in a changing Australia, regulation without measuring its cost was the default position and the cumulative effect has had a profoundly negative effect on productivity. And I hope that you are now convinced, as I am, that the Coalition is making real and effective progress to decrease the burden of Commonwealth regulation for businesses, community organisations, families and individuals.