The Cost of Regulation and the RMA

The Cost of Regulation and the RMA

Speech to the AGM of the Wellington Branch of the NZ Planning Institute

Simon Arnold, President, Wellington Regional Chamber of Commerce

The cost of regulation is an issue that business organisations often raise. Our concerns most often get expressed in terms of “the cost of compliance”, but in practice there are other less obvious but more significant problems with regulation – regulatory failure.

In crude terms regulatory failure occurs when a regulation fails to address the presenting problem, or creates more problems than it solves. Making regulations is a risky business for governments, there is very often a vocal constituency for intervention and a reasonably dispersed and therefore unfocused constituency opposed. What is more the costs imposed on individuals by regulation is hidden, unlike the alternative when direct government expenditure is used to address a problem.

The cynics among us often argue that this makes regulation more attractive than direct intervention – the costs are hidden.

With this introduction I am sure you can see where I’m going.

The Resource Management Act (RMA) sets out the process local authorities have to follow to promote the sustainable management of natural and physical resources. Among other things it allows for the regulation of resource management as an option, and perhaps not surprisingly in light of my early comments, this tends to be the main focus of local authority practice.

Now much has been written on both sides of the debate about the apparent failings of the Act and its administration. For the majority of New Zealanders who want to be better off, but also want to make sure that this is done in a sustainable way, there is a real frustration about the way the Act seems to cause unacceptable costs and delays.

However the Act, properly implemented, has the potential to help avoid poor regulatory behaviour by local authorities . The Act requires local authorities to systematically work through a process of:

Identifying what the local issues relating to sustainable resource management are;

Specifying the objectives that need to be achieved to deal with those issues;

Framing policies that will help achieve those objectives;

Deciding what methods are best used to give effect to the policies; and finally,

Specifying the anticipated environmental results.

This process is typical of the processes used to ensure good public policy.

However the devil is in the detail.

Getting the context right (i.e. identifying the issues) and choosing what (if anything) to do about it are essential if a local authority is to avoid poor regulations.

The first priority is to get the context right.

There is a widespread assumption that the Act is primarily about protecting natural and physical resources.

In fact it is about promoting (not ensuring) sustainable management of these resources.

Sustainable management involves achieving the joint objectives of meeting peoples’ needs while sustaining (not preserving) the capacity of natural and physical resources to meet future needs. For many resources sustaining their capacity is something that requires human intervention - nature won’t do it alone.

However in practice when local authorities come to identify sustainable management issues they focus on what needs be done to sustain natural and physical resources in isolation from meeting peoples’ needs. They lose the context of what their residents and ratepayers want to do with those resources . This focus also leads local authorities into the trap of thinking that they need to manage the use of these resources, rather than just the effects of their use, a point I will return to later.

It isn’t surprising that many resource management policies and plans end up over emphasising preservation and the status quo, and fail to recognise the need for innovation, dynamism and flexibility in resource use.

They take the easy route and limit the use of resources, rather than mitigate the effects of their use as intended by the RMA.

One of the big hidden risks with regulation is that while they might do a reasonable job of solving today’s problem, they fail to cope with the future. Fixing things for today is useful, but if it comes at the price of inhibiting innovation (“dynamic efficiency”) then the solution isn’t worth having.

To avoid this trap it is critical that local authorities make sure the context in which resource use is occurring is clearly incorporated as an integral part of any policies and plans.

This means insisting on the need for innovation in resource use, and the impact of change and growth all being explicitly incorporated into policies and plans prepared under the Act.

However, having the context clear is not enough.

Local authorities have to decide if they should regulate to promote sustainable resource management, or whether there are other more appropriate responses (including doing nothing).

As I have noted, there are a lot of pressures on local authorities to regulate. This pressure arises even when there are better alternative methods for achieving objectives, or when any intervention is likely to make matters worse off .

The RMA anticipated these problems and sets down steps local authorities must follow before introducing regulations. In essence they must:

address the extent to which regulation is needed at all, explore other possible means apart from regulation, and provide reasons for and against the proposed method and the principal alternative means;

evaluate the benefits and costs of the proposed option and of the principal alternative means; and

decide whether the proposed means is necessary to achieve the purpose of the RMA and is the most appropriate in terms of effectiveness and efficiency .

A Treasury Working Paper that reviewed decision making for sustainable development concluded: “In terms of sustainable development, regulation can be expected to result in excessive resource use in the present that might work to reduce the welfare of future generations. The weight of evidence shows [market based instruments] to score relatively highly in terms of sustainable development”.

The reason for this is that market based instruments have the advantage they can take account of the value placed on the resource use and be much more flexible in the face of change.

Let me give you an example of the kinds of problems that arise in planning under the RMA if the hard analysis isn’t done. Simply because we are meeting here in the Wellington Town Hall I had a look at Wellington City’s District Plan for inspiration.

In this I found Wellington City had identified a specific resource management issue in the need to manage urban development on the edge of the city . To quote: “The Plan therefore works toward general containment of city expansion and the intensification of development within the existing urban boundaries. This will encourage the better utilisation of existing infrastructure and transport systems and save energy. This is consistent with the requirement to promote the sustainable management of the City.”

The Plan in turn contains an objective “To promote the efficient use and development of natural and physical resources in the Rural Area” .

To achieve this objective, the Council had set a policy of: “Encouraging new urban development to locate within the established urban area”. The Plan then states an intention to set rules and use the management of infrastructure to achieve this objective.

The Council notes that it “generally intends to contain new development within the existing urban area, as it considers that continuously expanding the city's edge will not promote sustainable management. Expansion beyond the existing urban form will only be considered where it can be demonstrated that the adverse effects, including cumulative effects, of such expansion can be avoided, remedied or mitigated”.

“The environmental result will be that the city's development occurs in a manner which will reduce transport distances, make public transport systems more viable and make better use of existing infrastructure.”

This is all a bit curious.

First you will note that the Council has decided it needs to manage urban development on the edge of the City. We have a Council that has decided it needs to manage the urban land (and place limitations on its use) rather than mitigate the effects of its use.

What’s the mischief in this?

Well the purpose behind the Council wanting to manage this activity is to improve the use of infrastructure and the public transport system.

I can feel the warm glow across the room. Why shouldn’t the Council manage the urban land bank to make sure we all get good use out of our infrastructure and public transport (and by the way we’ll all use less energy).

Except I feel constrained to ask four related questions:

What about the efficient use of all the other resources that go into urban living, might they be possibly more important to factor in to ensure sustainable management, and mightn’t a preoccupation with one set of resources be suboptimal?

Why has the Council used its regulatory powers selectively to give its own interests paramount consideration? The Council has allowed its roles to get confused.

What is the real cause of any problems (perceived or real) that lead to infrastructure and public transport being inefficiently used, and why is this intervention the best solution?

And finally, whatever happened to the objective in the plan which you will recall was “to promote the efficient use and development of natural and physical resources in the Rural Area”?

I don’t think you need me to pick over these bones to show why this is an appalling example of public policy analysis. Just to note:

Any link between the objective, the rationale for action and the proposed action is non-existent, and

The context within which the Council is regulating is well and truly lost. If the real issue was the efficient use of infrastructure or public transport I’d say there are much better ways of addressing the issue than a rule in the Plan that inhibits expansion of urban areas into rural. In fairness the council does mention that one of its methods might be the management of infrastructure, but why then regulate?

This kind of result should not have happened had the Council followed the requirements set out under the RMA.

But wait, there is more.

What is the impact of this kind of regulation going to be, particularly in a dynamic sense?

First it is going to constrain the land bank available in Wellington for urban development. It will artificially push up the value of urban land – beyond what would be the value set by normal market mechanisms. It will equally suppress the value of the rural land on the margins of the City.

Now the justification for Wellington City regulating to achieve this would have to be that there are some costs of urban living across the city that are not reflected in the market price of urban land. Unless this is the case then pushing the price of urban land up would lead to inefficient resource use – something contrary to the City’s district plan.

The only guidance that the Plan gives is that urban expansion leads to problems with infrastructure – but as I have noted that is something that can be dealt with directly and doesn’t need the Council to distort the whole property market to achieve.

And what happens when Wellington wants to grow and increase its population? How well does this kind of intervention work in a dynamic environment? It leads to property inflation and discourages inward migration.

Much of the above analysis relies upon some understanding of economic principles and a general willingness to consider market interventions rather than just regulatory ones.

Why doesn’t this happen?

When reviewing why regulation was so popular, the Treasury Working Paper I mentioned earlier notes “either the application of [market based instruments] is infeasible in law, or in cases where it is feasible administrators are reluctant to implement [them]”.

As to why they might be reluctant the paper suggests: “First, interest groups might be able to exert influence on policy and mechanism design. Second, it might be argued that lower levels of government do not have the scientific knowledge necessary for using [market based instruments]. Third, lower levels of government may not have the expertise to analyse and propose operational alternatives to [command and control].”

In my view local authorities are over using regulation to promote sustainable resource management. This is having an adverse impact both on sustainability (because resource use is overly encouraged by regulation) and on growth (because of the inflexibility of regulation).

The planning fraternity can help over come this problem by insisting on rigorous analysis before accepting that regulation is the only option. If you lack the capability to do the required scientific and economic analysis then seek external advice (while developing your own capability).

Even if it transpires that the best solution is not legally feasible, pressure will mount on central government to speed up the introduction of better options.

You may feel this may be costly, but as the Treasury Working Paper notes: “Part of the reason why [command and control] endures may well be the fact that we simply don’t know how much [it] costs the economy.”

We should support local authorities that are willing to do the work and find out.

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