Productivity Commission asks: Is variation in council regulation good or bad? Does it impose costs on businesses? What should change?

By Alex Tarrant

How does variation in the ways local authorities enforce regulations like building codes impose costs on business? Do council powers need to be more centralised, or does allowing councils to operate as they see fit lead to innovative ways for them to mould regulations to suit their communities?

The Productivity Commission is calling for submissions on its investigation into local government regulatory functions and whether some or all of the regulatory powers granted to local and regional councils would be better administered by central government.

Likewise, when certain regulations were centrally controlled, would it be better to hand the reins over to the local authorities that knew about local preferences and issues?

The Commission today released a paper on its local government inquiry, setting out a number of questions on the issue which it invited submissions on from the public.

See: Govt announces local council reform package in bid to keep rates rises down and council debt under control; Also: Productivity Commission’s latest gig to look at local govt productivity, regulation, and what central govt could do; MULs in sights again.

Costs on business

Differences between councils in how they applied regulatory standards, or in how they enforced the same standards, could increase the costs faced by firms that operated across council boundaries and required compliance with different approaches to regulation, the Commission said in its issues paper.

"Firms will seek to pass these additional costs on to their customers or in some cases may decide not to operate in some local authority areas. Community wellbeing will be reduced if there are situations in which the benefits of tailoring regulation to meet local circumstances are exceeded by the additional regulatory costs this might entail," it said.

Variation: Good or bad? (or both?)

The Commission said a core question for the inquiry was whether variation in regulatory practice between councils mattered.

"One way in which it might matter is where businesses operate over more than one local authority area and incur costs through having to comply with different council requirements. The extent to which it does matter will be important for how regulations are made, administered and enforced," the Commission said.

Variation could be expected because of the diverse characteristics of local authorities in New Zealand, the different policy issues they faced, and the mechanisms they had for regulation

The Commission was interested in cases where variation in regulatory practice was a direct result of councils meeting local preferences.

"The issue has received attention in Australia with respect to its Building Code. In some states, local government could make bylaws that effectively varied or even added to requirements contained in the Building Code of Australia," the Commission said in the issues paper.

"The right to do so was vigorously defended by the Australian Local Government Association on the grounds that individual councils, being closest to the community, are best placed to balance local preferences and costs," the Commission said.

"The Australian Productivity Commission, in its final report on the Reform of Building Regulation (2004) recommended that the Australian Building Codes Board reduce the scope for what it considered to be the "inappropriate erosion" of national consistency by local government. This has been done through an Intergovernmental Agreement," it said.

See: Construction companies being forced to build identical houses differently to meet the divergent demands of different council inspectors and their councils.

One of the Commission's 65 questions in the issues paper asks (Question 8): "To what extent are local preferences a source of regulatory variation in New Zealand? How far should councils, when implementing a national standard, have discretion to reflect local preferences in their bylaws?"

Questions 14 and 15 then ask: "Can you provide examples of inconsistencies in the administration and enforcement of regulations between local authorities? And: "Do these inconsistencies impose extra costs on businesses? If so, are these extra costs significant?" 

However, the Commission also said diversity among local authorities could lead to the adoption of different and innovative regulatory practices.

"The Commission is interested in learning more about the process of regulatory innovation at the local government level - particularly the incentives on local authorities to seek out and adopt more efficient regulatory processes," it said in the paper.

Centralised economies of scale vs local knowledge

Because local governments were closer to local communities and businesses, they might have better information about their preferences and local conditions, and might be better able to design or implement regulations in a manner that reflected local needs and preferences, the Commission said.

"This in turn enables regulatory efforts to be better targeted - resulting in higher levels of compliance, lower implementation costs and less unnecessary regulation," it said.

"Moving the locus of decision-making authority down the hierarchy and closer to local sources of information can also allow regulators to respond more rapidly to certain types of change in the external environment, such as technological, environmental or social change. However widely dispersed information requires institutional mechanisms for aggregating, evaluating, codifying and diffusing knowledge."

Collecting and analysing complex objective information may involve economies of scale and specialist personnel, the Commission said.

"On these grounds, more centralised units of government may be better at collecting and analysing complex information than smaller, decentralised units (unless the latter can gain sufficient expertise through collaboration or outsourcing)," it said.

By adopting new ways of implementing regulations, local governments may be able to reduce their internal costs, reduce the regulatory burden on businesses or the wider community and generate better regulatory outcomes through more effective regulation, the Commission said.

"Flexibility in the manner in which regulatory objectives are achieved at the local level can encourage regulatory innovation. Local governments may be able to learn from each other's experienced and, through exchange of information, adopt best practice," it said.

In contrast, central agencies might find it more difficult to experiment with different policies for different regions as policy uniformity might be required for equity reasons.

"A centralised environment discourages process experimentation - a vital step in the process of innovation," the Commission said.

"Just as competition between businesses can lead to better and cheaper products and services, competition between regions can also lead to better regulation," it said.

Decentralisation allowed local and regional councils to differentiate themselves on the regulatory policies they implemented.

"If citizens and businesses can and do move to regions that best match their regulatory preferences, it may create incentives for councils to innovate and contain costs. This way, councils can attract more residents and businesses and encourage those they already have to remain," the Commission said.

"Mobility also allows residents and businesses with similar needs to group together in the same region. Competition and comparison with other local authorities also places political pressure on councillors to improve policy and regulatory performance," it said.

However, one criticism about regulatory competition between regions was it might create a 'race to the bottom.'

"For example, where governments compete with one another to attract business by having low environmental or safety standards," the Commission said.

"This argument is strongest where regulatory competition creates negative externalities for other jurisdictions so that the home jurisdiction does not bear all the costs of the lower standards," it said.

National reputation

There may also be reasons why national consistency was important and should outweigh local preferences.

"One example is setting and ensuring compliance with standards required to maintain a national reputation, or conform to international standards," the Commission said.

Local governments may also not have the capacity to implement a particular regulation sufficiently.

"For example, where specialised technical skills and expertise are required (or cannot be cost effectively sourced) at the local level. Central government may find it easier to recruit staff because it can pay higher wages, provide better access to support and training and promotion opportunities and is located in larger cities with more potential employees," the Commission said.

"On the other hand, local government may attract staff with specialist expertise because they are attracted to the amenities available in provincial areas," it said.

Submit

The Productivity Commission's issues paper on its investigation of Local Government Regulatory Performance is available on its website, www.productivity.govt.nz. It is calling for initial submissions by August 31, and will release a draft report on the investigation in December 2012. Submissions on the draft report will be due in February 2013, with the final report to government set to be on April 1, 2013.