Hong Kong is celebrated as a fast and efficient place to do business. But our crown in this area may be slipping. Our members increasingly tell us that excess regulation and outmoded laws are restricting their ability to grow. 

At the Chamber, we believe that a robust assessment of new rules, and a regular review of current ones, would go a long way to solving this problem. In fact, Hong Kong is the only OECD member that does not have a Regulatory Impact Assessment (RIA) framework in place.

To learn more, the Chamber organized a two-day event, “Designing an Effective Regulatory Impact Assessment Framework For Hong Kong.” We were privileged to have a top-flight panel of speakers – two from Hong Kong and two from overseas – share their expertise at our seminar on 15 November. The following day, representatives from the United Kingdom’s Regulatory Policy Committee delivered a full-day workshop to really get into the detail of how a RIA system operates. Ahead of the event, The Bulletin spoke to these experts to hear their insights on creating better regulation.

Richard Wong, Chair of Economics at the University of Hong Kong, explained how the situation in Hong Kong has changed in recent years.

“Regulations have proliferated,” he said. “Some have severe impacts on economic and social outcomes. Some reduce economic efficiency. Some worsen inequality.”

In the case of housing and land, for example, he said that an explosion in regulations had slowed down development and increased costs.

Wong also gave the example of a change to the rules regarding access to public housing. Previously, a household with more than 50% of its members having seven years of residency was eligible to apply for public housing. This was changed to 50% – a small change on paper which had a huge impact.

“The result is that a two-person household with one seven-year resident can apply for public housing,” he explained. “This tilted the opportunity of getting a public housing unit in favour of new cross-border households, with huge political and social consequences.”

Nick Sallnow-Smith, Chairman of the Lion Rock Institute, has a fairly extreme opinion on legislation in general, questioning whether governments should play any role at all in the economy.

“My approach is based on my view that all government regulations tend to be negative for society,” he said. “They represent a use of coercion on free people to achieve an agenda decided on by the few. Of course, this is disguised as for the ‘public good.’ But that itself is defined by the government and is never demonstrated.”

Sallnow-Smith said that an RIA process could help businesses by reducing the number of regulations, but noted that there were also some pitfalls.

“The value of a RIA is as a hurdle that might restrain the Government from some egregiously expensive regulations, and could help focus debate on the lack of genuine justifications for interference in free market principles,” he said.

“The risk is that it might even encourage the Government to do more, not less, on the basis that once their proposal has ‘passed’ an RIA test, it must be good for the public.”

He also cautioned Hong Kong against using examples from overseas as “proof” that a policy is a good idea, giving minimum wage as an example: “There is a huge amount of research that shows the damage caused by minimum wage, especially to the poor and unskilled. But there is enough positive ‘research’ to allow cherry-picking to ‘support’ its instruction.”

The U.S. experience
This issue of cherry-picking was also noted by Ike Brannon, President of Capital Policy Analytics and Former Senior Fellow at the Cato Institute.

The United States has its own RIA system, although Brannon suggested that its many flaws mean it is not the best model for Hong Kong. But he acknowledged the benefits of a good RIA. 

“Constructing an RIA framework can, if done properly, serve as an effective check on the rule-making agenda of a government agency,” he said. 

In the U.S., when an agency proposes a major regulation it must construct its own cost-benefit analysis, which is then submitted to the Office of Management and Budget (OMB).  But there is no public publication that measures the cost savings, and interested parties can “torture the data” until they get the results they want. 

“The reality is that most proposed rules eventually do become actual laws,” Brannon said. “Those that were judged to not pass a cost-benefit analysis are usually tweaked in some way or – more often – the OMB objections to the cost-benefit analysis are set aside.”

Another issue is that the executive office of the president has the final say, and the acceptance of any RIA opinion “is largely dependent upon the enthusiasm of the White House.” 

When asked about examples of regulations being introduced without proper assessment, Brannon said: “It is unclear whether any of the new rules issued by the Trump administration that limit the ability of immigrants to enter the U.S. and either work or attend school can be judged to pass any cost-benefit analysis.”

U.K. model
In contrast, the U.K. has an independent body, the Regulatory Policy Committee (RPC), to review new rules. 

Speaking at the Chamber’s seminar, Anthony Browne, Chairman of the RPC, explained the need for assessment. Rules can become outdated, and governments are often not good at seeing the costs to business and the wider economy. There is also the fact that policymakers tend to be biased towards government intervention.

“If you’re a policymaker, the solution to everything is a policy,” he said. 

In the U.K., assessments are done by government departments, and then the results are assessed by the RPC’s team of economists and analysts. The independence of the RPC is crucial, Browne said.
“If this were not the case, the danger is that officials would be ‘marking their own homework’ and would seek to find evidence that backs up their policies.”

Targets are in place to reduce costs for businesses. The “one in, two out” rule means that for every pound a new regulation costs business, savings of 2 pounds must also be found. The U.K. also has a target of reducing costs to business over a five-year period by 9 billion pounds (HK$90.2 billion).

“Business groups really appreciate that there is someone on their side, that can properly look at the impact of regulation, scrutinize it and challenge it,” Browne said.

The RPC also assesses its own impact. Since its inception in 2009, the proportion of red-rated assessments – that is, not fit for purpose – has dropped from 34% to about 18%.

“The quality of assessment has really gone up, and that is down to the culture change of proper scrutiny and proper analysis,” Browne said.

RIA for Hong Kong
Chamber CEO Shirley Yuen noted that the Hong Kong Government already carries out impact assessments, particularly for key and complex pieces of legislation.

“But these assessments are not necessarily done in the same thorough, mandatory, step-by-step manner as in the United Kingdom, for example,” she said.

Yuen also highlighted the importance of the scrutiny process being independent: “This increases accountability, increases the objectivity of such cost-benefit analysis, and quantifies the costs to business.”

Hong Kong should also take a more holistic view. For example, Yuen noted, in recent years we have seen the introduction of minimum wage, increases in paternity and maternity leave, and the proposal to end the MPF offsetting scheme. 

“If each of these regulations had been subject to a vigorous, cost-benefit analysis by independent experts, then perhaps the results would have been different,” she said. “We should look at the aggregate impact on businesses of all of our labour laws together.”

Hong Kong is known as one of the freest economies in the world, and thrives on being competitive, the ease of doing business and the rule of law. 

“To remain competitive we need to ensure all of our laws are fit for purpose. Doing regulatory assessments transparently and thoroughly is a key way to ensure this is the case,” Yuen concluded. 

Putting Knowledge Into Practice 

U.K. experts deliver workshop on how the British RIA system operates

Learning from best practice in other jurisdictions can help Hong Kong to design its own Regulatory Impact Assessment (RIA) framework. In a full-day workshop, Philipp Aepler and Rose Geeson from the U.K.’s Regulatory Policy Committee (RPC) introduced the British system and explained how it works in practice.

Aepler introduced the fundamentals of better regulation, starting with why impact assessment is so important. Besides saving costs and avoiding unnecessary laws, he explained that policymakers often have a bias towards regulation and are optimistic in estimating its impact.

“While governments usually have a clear picture of the costs for enforcement, they usually lack an understanding of the administrative burden and compliance costs imposed on business,” he said. 

Designing a better process means that regulation is more effective, better targeted and less costly to business. It keeps the amount of regulation under control, and ensures that when regulations are introduced, that they are based on strong evidence and analysis. It is also an ongoing process. In the U.K., regulations are reviewed at five-yearly intervals. 

Aepler gave some insights into how the U.K. system operates. For example, after the RPC’s assessment is complete, a simple colour-coded system is used. Green means “fit for purpose” with no major concerns, whereas “red signifies that there are major concerns over the quality of the analysis and evidence used that must be addressed.”

The RPC has estimated that scrutiny of measures in the 2010-2015 Parliament term had led to savings to business of 600 million pounds (HK$6 billion) per year, Aepler said.

After the lunch break, Geeson discussed some of the benefits to governments of carrying out impact assessments. RIA ensures that that policy decisions are being made on the basis of robust evidence and appropriate analysis.

“It is a systematic way of supporting decision making, and a strong and defensible narrative for your decisions,” she said.

She also discussed the challenges in assessing the financial impact of regulation. Some impacts – such as the cost to business of new equipment – are easy to monetize. Others, like a healthier population or more social cohesion, are harder to account for in money terms.

Geeson concluded with her top tips for regulators, starting with: “Don’t presume regulation is the answer.” She also highlighted the importance of ensuring there is substantive evidence to back up proposed legislation, and that estimates of costs and benefits are reliable.

Her final tip: “Understand the real cost to business of regulation.”

The workshop was attended by government officials and representatives from the Chamber’s member companies. Attendees said that they had learned a great deal from this practical and in-depth workshop, and that the knowledge acquired would lay the foundation for a better understanding of good regulatory practices going forward.