Overview of costs and benefits associated with regulation in Scottish agriculture
Research providing an overview of the regulations in Scottish agriculture and exploring 12 case studies in further detail.
Executive Summary
Background
Farming is a diverse and complex industry associated with both positive and negative non-market effects, particularly on the environment and animal health and welfare. Market failures are common and can provide a rationale for policy intervention, where there are social benefits from doing so. Crudely, such intervention may take the form of information provision, incentive schemes or regulatory controls - although these options are not mutually exclusive and are often used in combination.
Whilst incentive schemes potentially offer some efficiency gains, regulatory controls are often used where environmental damage or animal disease exhibits threshold effects beyond which damage rapidly escalates and/or is difficult to reverse, and where incentive schemes have high transaction costs. In such cases, mandated performance standards or practices typically offer greater reassurances than reliance on the uptake of voluntary incentive schemes. Regulation is therefore recognised to bring about benefits. However, intervention via regulation can be controversial and unpopular with industry since it is perceived as imposing costs through enforced adjustments to inputs, processes or outputs, as well as administrative requirements. In some cases regulation can however lead to greater operational efficiency.
Governments are increasingly aware of the problems that poorly designed regulation can have and "Better Regulation" has become an important policy driver at both European and national level. The objectives of this report are:
- To describe the regulations associated with Scottish agriculture
- To provide an overview of the methodology for assessing costs and benefits of regulation in agriculture in Scotland, including a critique of the standard cost model
- To assess the costs and benefits associated with key regulations in Scottish agriculture and with specified environmental regulations
- To identify best practice in the implementation of regulations in agriculture in other countries
- To identify areas where there are opportunities to improve the effectiveness of regulation in Scottish agriculture.
Agriculture regulation in Scotland
During the initial review, 102 regulations were identified that relate to Scottish agriculture; however this is not an exhaustive list. Some of these regulations are also relevant to other industries, and the full set does not exclusively apply to the agriculture sector. The identified regulations fell into five categories:
- Agricultural support and rural development
- Pollution control, natural heritage and waste
- Animal health and welfare
- Employment legislation
- Other (notably land use planning and food safety)
Procedures for assessing the costs and benefits of regulation
In common with other policy areas, the assessment of the costs and benefits of agricultural regulation is an integrated part of the Regulatory Impact Assessment ( RIA) process in Scotland. Guidance on the UK Impact Assessment ( IA) process is offered by the UK Better Regulation Executive, but draws on other sources such as the Treasury Green Book. The RIA process in Scotland follows the Better Regulation Executive guidelines, with the Scottish Government Improving Regulation Unit ( IRU) overseeing the process, providing advice and auditing RIAs. Supplementary IRU guidance in Scotland covers the following points: Micro Business Test; Legal Aid Impact Test; "Test Run" of business forms; Ministerial sign-off; Review Regulatory Impact Assessments.
The cost of regulation is frequently considered to fall into two separate components: the policy cost and the administrative cost. The policy cost is defined as the cost of changing inputs, outputs or processes in order to comply with a regulation. The administrative cost is the cost of undertaking administrative tasks required to comply (e.g. familiarisation, recording and providing data, cooperating with inspections).
Measuring the cost of regulation can be hampered by a lack of representative data and difficulties in assessing dynamic competitiveness effects. Monetisation of the benefits of regulation, particularly where environmental goods are concerned, is particularly challenging.
The Standard Cost Model ( SCM)
The SCM is a methodology for measuring the administrative cost of regulation imposed on business by government and does not examine the policy cost. In essence, it is a consistent way of breaking down the administration required to comply with a regulation into a range of manageable, measurable components.
The SCM is not a way of measuring administrative costs more accurately; it is primarily a way of being able to repeat measurements and demonstrate change. It is therefore most effective when employed as an integrated part of an ongoing programme of admin cost reduction, rather than as a one-off assessment of costs. The following recommendations are made regarding the potential use of the SCM:
- It is unnecessary to fully replicate the ABME/ SCM exercise undertaken in UK central Government as many lessons have already been learned and do not to be re-learned.
- Any Scottish exercise should focus on key regulations and seek to complement, rather than replicate, the UK exercise. There is considerable scope for reducing the cost of an ABME/ SCM exercise through targeting and the use of existing data sources. Information and experience gained through Scotland's Environmental and Rural Services ( SEARS) will be highly relevant to such an exercise. Indeed, it may be that SEARS already offers more agriculturally relevant insights and remedies than a separate SCM exercise would, even though the latter does not provide a quantitative measurement of admin cost reduction.
- The UKABME/ SCM will be revised/repeated in 2010; this represents a window of opportunity for partnership.
- Achieving reductions in admin burden on their own are unlikely to improve industry confidence in regulation. Again, this is implicitly already a key component of SEARS and the degree of stakeholder engagement already achieved will contribute to industry confidence. Reductions need to be clearly demonstrated to the industry, not just achieved, and this may also require the close involvement of the industry if a measurement and re-measurement process is put in place.
Case studies
From the initial scoping of 102 regulations, twelve regulations were selected for analysis in case studies. Most of the selected regulations were either wholly or partly the result of EU obligations. The predominance of EU-derived regulations in the agriculture and environment policy areas can limit the scope for domestic initiatives to reduce regulatory policy costs, and administrative costs may then be a particular focus. An overview of the regulation costs and benefits are given below. In terms of the overall balance of costs and benefits of the regulations, some case study results were characterised by lack of detailed valuation, in part reflecting the difficulty of valuing costs and, in particular, benefits. In the case studies examined, the existence of social benefits is acknowledged even where full monetary valuation of these benefits is methodologically challenging. In some cases incremental costs are examined where RIA's examine the difference between options for implementing a policy against a do nothing or do minimum benchmark.
Table i. Summary of the case study results
Regulation |
EU or Domestic |
Comments on overall size and balance of costs and benefits |
Recommendations |
|---|---|---|---|
1. SSI 2004 No. 518 The Common Agricultural Policy Schemes (Cross-Compliance) (Scotland) Regulations 2004 |
EU |
Studies generally conclude that cross compliance has a very limited cost for farmers, associated with co-operating with inspections. Benefits include compliance with good farm practice (resulting in potentially lower costs and extra revenue) and potential improvement in public goods provided by agriculture over and above that provided by regulations that underlie cross-compliance. |
A study quantifying the present and future benefits could be undertaken, but with potential methodological challenges. |
2. SSI 2005 No. 225 The Land Management Contracts (Menu Scheme) (Scotland) Regulations 2005 |
Domestic legislation designed to meet EU obligations |
Subjective assessment indicates that overall costs and benefits are likely to be low. Admin costs are associated with: applying; record keeping and inspections; processing applications; compliance monitoring. The main policy costs arise from: income foregone/costs incurred and deadweight losses. Benefits include: access to modulated funds; on-farm improvements; improved farm/chain efficiency; environmental improvements |
Additionality of benefits (i.e. the benefits over and above those that would have been realised without the regulation) needs to be determined, although low share of Pillar II budget perhaps lowers the priority of assessing this. Possible need to improve targeting and uptake, although constraints on budget levels and payment calculations will hinder this. |
3. SSI 2005 No. 348 Water Environment (Controlled Activities) (Scotland) Regulations 2005 |
Domestic legislation designed to meet EU obligations |
Difficult to quantify benefits from avoided water pollution as the CARs will have significant (indirect) benefits in the medium-long term. |
Early evidence suggests that the regulations are performing well, however they should be kept under review to ensure that any lessons arising can be incorporated. |
4. SSI 2003 No. 51 The Action Programme for Nitrate Vulnerable Zones (Scotland) Regulations 2003 |
EU |
Low admin costs expected from completing manure management plans and co-operating with inspections. Main policy costs associated with upgrading storage. Benefits include reduced fertiliser purchases and the range of benefits arising from reduced pollution. Uncertain magnitude of benefits, due to debate surrounding the underpinning science and the economic benefits of cleaner water, makes overall balance of costs/benefits difficult to determine. |
More accurate figures on the economic costs and benefits of previous action are required and may be possible through development of the current monitoring system. Look at opportunities for persuading the EC to revisit the scientific basis of the Nitrates Directive, in line with recent UK House of Commons committee recommendation. Revisit the current approach used to change farmers' (mis)use of fertiliser and manures. |
5. SSI 2000 No. 323 The Pollution Prevention and Control (Scotland) Regulations 2000 |
EU |
Main costs arise from applying for permits, record keeping and upgrading facilities. Magnitude of costs uncertain but with recognised environmental and societal benefits, such as reduced pollution incidents and NH3 emissions. |
The PPC case study examined the potential for adapting existing SCM data to estimate admin costs in Scotland. It found that existing standard costs would need to be adapted with caution if applied in Scotland. |
6. The Control of Pollution (Silage, Slurry & Agricultural Fuel Oil) (Scotland) Regulations 2001, 2003 |
Domestic |
Costs associated with improving storage facilities. Benefits have been improved working conditions and significantly reduced pollution incidents due to structural failures. Balance of costs/benefits difficult to assess, due to the lack of relevant data on the values of costs and benefits. |
Effort should be made ex ante to put in place provisions to assess the regulations effectiveness ex post, so that post-implementation reviews can be undertaken. Quantification of costs and benefits could be developed further. |
7. SI 1989 No. 1263 The Sludge (Use in Agriculture) Regulations 1989 |
EU |
Costs (of record keeping and treatment) likely to be outweighed by the benefits (provision of low cost alternative nutrient source; avoidance of disposal costs and associated environmental impact). |
There are no urgent problems to be remedied and planned amendments are to be made according to the legislative timetable. |
8. Disposal of fallen livestock under The Animal By-Products (Scotland) Regulations 2003 ( SSI 2003/411) |
EU |
Costs (compensation payments, and waste treatment and disposal) likely to be outweighed by the benefits (avoiding and preventing highly costly animal disease outbreaks; reducing TSE spreading risk; improving public health with respect to incidence of human vCJD cases). |
Any possible change of the Regulations should be carefully investigated and communicated with the stakeholders in advance. A review of the parent EU Regulation,1774/2002 is now under way, with the intention of securing a more risk based approach. |
9. SSI 2007 No. 559 The Sheep and Goats (Identification and Traceability) (Scotland) Amendment Regulations 2007 |
EU |
The change in tagging and record keeping requirements led to cost savings. However the full benefits of the scheme in terms of traceability will not be realised until linked to a (potentially expensive) system for monitoring movements. Potential costs associated with a lack of traceability in the meantime (e.g. a disease outbreak) are difficult to quantify. |
Need to focus on ensuring that the regulations are implemented effectively, and that future regulations are balanced with ongoing industry concerns about cost, proportionality and practicality. This will be particularly important if the EC continues on the path towards introducing EID in 2010. As with the current Regulation, it is imperative that the Scottish industry is able to cope with the physical and financial implications in order to comply. |
10. SSI 2005 No. 434 The Tuberculosis (Scotland) Order 2005 |
EU and domestic legislation |
Costs arise from testing /inspection and movement restrictions, while the benefits accrue from the avoided costs of greater incidence of b TB. The overall benefits of the 2005 Order in Scotland have not been quantified in a monetary sense and it is therefore not possible to compare this directly to the monetary costs. Benefits are expressed therefore in terms of expected false negative tests. Based on industry comment, the level of cost to benefit is generally seen as favourable since the Order has helped prevent the spread of TB in Scotland. |
Industry views on post movement testing have been positive as it is considered essential to protect the health status of Scotland and stakeholder support is strongly in favour. In view of the continued escalation of TB in England and Wales, the Scottish Government needs to keep the legislation under review to ensure that it continues to provide effective safeguards. |
11. SSI 2002 No. 255 The TSE (Scotland) Regulations 2002 Now replaced by 2006 SSI |
EU |
The main costs are record keeping, over thirty months cattle scheme, laboratory approval, meat hygiene inspection, over 24 month fallen stock, national Scrapie plan and rams genotype scheme. The benefits to industry from disease control include avoided production and market losses, improved food safety and associated improvements in public health and confidence. Keeping the prevalence level at its minimum level in Scotland entails a high cost. The total benefit of the regulations needs to be quantified |
A detailed cost-effectiveness analysis of the TSE regulations could be undertaken, which takes into account wider impacts, including the benefits to the industry, such as eradication of TSEs in farmed livestock. |
12. SSI 2006 No. 606 The Welfare of Animals (Transport) (Scotland) Regulations 2006 |
EU |
Costs arise due to transporter authorisation, and vehicle specifications and inspection. The overall balance of costs/benefits is uncertain, due to the difficulties associated with monetary valuation of improved animal welfare. |
Key focus areas are: rest times, journey length and space allowances. Close consultation with industry and research partners could help to draw out any differences between perceived and actual animal welfare benefits. |
Agricultural regulation in New Zealand and Denmark
A brief case study of agricultural regulation and the regulatory review process in New Zealand was undertaken, in order to identify examples of alternative approaches and best practice that might be applicable in Scotland. New Zealand has carried out a number of reviews of the regulatory environment recently, highlighting the Government's commitment to ensuring an open and fair commercial environment. The outcomes of the reviews are generally global in their applicability and provide useful guidance on priority areas for further investigation. Tools used for assessing regulations are also being developed and could provide examples for similar work in Scotland. Three areas were examined in more detail: TB, water pollution and animal transport. These case studies help to illustrate the outcomes based, light regulatory touch generally associated with New Zealand regulations, and highlights current developments in the environmental area in particular.
Denmark and Scotland share many similarities (e.g. in terms of population, area, location, climate and the role of agriculture in the economy). However, they also differ in important respects; for example Scotland's landscape is dominated by upland areas that limit agriculture to mainly pasture based systems. In contrast, Denmark is a low lying country where production is dominated by the pig and dairy sectors and the water pollution associated with these is one of the challenges facing their regulator. In terms of the overall performance of their regulatory landscape, Denmark sits in fifth place in the 2008 Doing Business rankings, just one above the UK. It shares the same target for reducing admin burden as the UK (25% by 2010), and was an early adopter of the SCM as a means of measuring admin costs. In terms of SCM usage and admin reduction targets, it differs from Scotland, which is adopting a mainstreaming approach to improving regulation.
Other routes to better regulation
Undertaking a SCM based ABME is only one of a range of initiatives that could be undertaken to improve regulation. Identifying the best course of action requires a clearly defined vision of how and why one wants to improve regulation, and this may involve expending greater effort on gathering information and securing stakeholder involvement. For example the table below shows four different goals that could all fall within the scope of improving regulation.
Policy goal |
Strategy |
|---|---|
Lower admin burden |
Admin burdens reduction involving an SCM-based measurement exercise and simplification programme. Expensive, but benefits likely to outweigh costs. Benefits to regulator indirect. |
Greater industry confidence in regulation |
Improved valuation of costs and benefits. Admin burdens reduction (see above) but with significant industry buy-in through stakeholder engagement. |
Better quality regulation |
Benchmarking could be undertaken using a metric such as the Environmental Regulatory Regime Index, however this requires good quality data. |
Economic efficiency |
Improved valuation of costs and benefits - this should improve the design of regulation where there is discretion; where there is no discretion, this should (a) help make the case for derogations (where C>B, and the regulations provide flexibility) or (b) improve confidence in the regulation (where B>C). |
Finally, the regulatory regime in Scotland and the UK as a whole needs to be viewed in context of the public benefits it provides. While the regulatory regime in the UK imposes costs on business, these need to be viewed in light of the significant benefits it provides to business by, for example: protecting the natural resource base; strengthening the competition regime; protecting consumers; encouraging people to take paid employment; and reducing the costs of accidents and ill health. By some measures the UK has a relatively benign business environment, which may be at odds with some industry perceptions. Furthermore, commitment to improving regulation has been demonstrated through recent UK and Scottish initiatives, and the ongoing efforts of the Scottish Government and its agencies to involve stakeholders in the development of regulation. At the UK level, a dedicated unit (the Better Regulation Executive) has been set up to drive forward the better regulation agenda through initiatives such as the Administrative Burdens Measurement Exercise and associated Simplification Programme. In the Scottish agriculture sector, the SEARS partnership has been welcomed as a way of reducing the administrative costs of regulation by identifying and reducing burdens.
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