Lessons from the British Columbia Model of Regulatory Reform

Good afternoon, Chairman Jordan, Chairman Palmer, and ranking members Raskin and Krishnamoorthi. I want to thank you for inviting me to testify. I bring warm wishes from north of the border.

By way of background, my interest in regulatory reform comes from my roots as an economic researcher and from my current job advocating for Canadian small business owners who, like their American counterparts, are deeply affected by regulation. Specifically, my research focuses on the importance of and the challenges associated with implementing successful reforms that make a positive difference to citizens. This, as we all appreciate, is not easy.

Governments of all stripes tend to agree that reducing red tape is a worthy objective but accomplishing this objective can prove elusive. The challenge modern governments in developed countries face is controlling the growth of red tape in the messy real world where measures are imperfect and the line between justified regulation and red tape can be difficult to establish.

• The stakes are high as excessive regulation leads to a host of bad consequences from reduced incomes to increased income inequality and poverty.
• An overarching and important lesson from the British Columbia (BC) model is that a substantial reduction in rules is possible without negatively affecting health, safety, and environmental outcomes.
• The BC model stands out in this regard not as a perfect model but as one that has moved the province forward using a simple approach that engages regulators themselves to be a substantial part of the solution.

THE BC MODEL IN BRIEF

Context

British Columbia is Canada’s westernmost province with a population of 4.6 million people (roughly the same population as Louisiana) and a GDP of approximately C$220 billion (approximately US$170 billion). Economic growth and employment in British Columbia lagged the rest of the country in the 1990s. At that time, excessive regulation and high taxes were widely cited as major concerns by those in the business community.

Examples of excessive regulating were not hard to find. Forest companies were told what size nails to use when building bridges over streams. Restaurants were told what size televisions they could have. Golf courses had to have a certain number of par-four holes, and the maximum patron capacity for ski hill lounges was based on the number of vertical feet it took to get to the top of the mountain.^[1]

In 2001, a new government was elected after campaigning on promises to improve the economy. One of these commitments was to reduce the regulatory burden by one-third in three years.

Implementing the Reforms and Measuring Progress

The new premier appointed a minister of deregulation whose only responsibility was regulatory reform. The minister’s first challenge was to develop a new regulatory policy and to figure out what measure the government would use to determine the success of its commitment to reduce the regulatory burden by one-third in three years.

The minister considered several options before deciding the province would create its own “regulatory requirement” measure. A “regulatory requirement” is defined in BC’s Regulatory Reform Policy as “an action or step that must be taken, or piece of information that must be provided in accordance with government legislation, regulation, policy or forms, in order to access services, carry out business or pursue legislated privileges.”^[2] For example, writing your name on a form or being required to have a safety committee meeting would each count as one regulatory requirement.^[3] Like all measures, the regulatory requirements measure has its limitations but it proved to be a good choice in that it was simple enough to apply broadly and capture requirements in regulations large and small.

To develop a baseline count of regulatory requirements against which to measure the one-third reduction, each ministry conducted its own count of all regulatory requirements contained in the statutes, regulations, policies, and forms that the ministry oversaw. This was done with the help of some interns in a matter of months. Today more modern approaches using text analysis to count regulatory restrictions could make this far easier.^[4]

The regulatory requirement measure, like all measures, has its benefits and flaws. Its main benefit is its simplicity, which means it can be broadly applied, easily understood, and replicated. The main flaw is that it is one step removed from what we really want to know about regulation, which is its effect on well-being and the quality of life of citizens.^[5]

The first government-wide count revealed 330,812 regulatory requirements.^[6]

Of course having a measure is not enough; it also must be monitored. In BC’s case, the measure was monitored closely. During the initial years of the reform, the BC government publicly issued quarterly reports showing how many regulatory requirements each ministry had reduced (see table 1 for an example). The reports were discussed regularly at cabinet meetings and created a strong culture of accountability across government. A regulatory checklist was also put in place.

TABLE 1. BRITISH COLUMBIA QUARTERLY PROGRESS REPORT, MAY 2004: REDUCTIONS BY MINISTRY AND MAJOR CROWNS/AGENCIES

Note: The count includes rules associated with tax administration.

Source: Government of British Columbia, Ministry of Small Business and Economic Development.

When the BC government first introduced the Reform Policy in 2001, two regulatory requirements had to be eliminated for every one introduced. At one point regulators were going beyond this requirement and identifying five requirements to be cut for every new one introduced. Today the policy requires one-for-one.^[7] Requiring regulators to complete the checklist and eliminate two regulatory requirements for every new one introduced represented a dramatic change in thinking about regulation in BC: it put the onus on the government to make the case that additional regulation was necessary, to ensure adequate consultation, to keep compliance flexible, and to reduce the total amount of regulation. It essentially changed the role of the regulator from that of regulation “maker” to that of regulation “manager.” And it did this right across government.^[8]

By 2004 the three-year reduction target had been slightly exceeded with requirements being 37 percent lower than in 2001. Once the target was met, a new one-for-one policy replaced the two-for-one policy. Interestingly, the number of regulatory requirements did not stabilize at the 37 percent reduction but continued to move downwards, and as noted above currently stands at 49 percent below 2001 levels. This suggests a fairly deep culture change in government as regulators continued to identify requirements to cut faster than they were adding them, although they no longer had to do this. This is at odds with the trend that many jurisdictions face where despite efforts to put in controls, restrictions continue to proliferate.^[9]

REFORM OUTCOMES

As noted above the reforms have led to a close to 50 percent reduction in regulatory requirements. Importantly, at the same time the province has maintained high levels of environmental quality and safety.^[10]

The impact of the reforms on the economy cannot be precisely quantified and it is important to note BC’s regulatory reforms happened at the same time that there was an across-the-board personal income tax rate cut of 25 percent. We do know that before the reforms, business owners big and small were frequently pointing to excessive government regulation as a deterrent to growth and innovation in the province. We also know the province lagged the rest of the country on important indicators such as economic growth, per capita disposable income, and business creation, with the 1990s often referred to as the “dismal decade.” The province went from being one of the worst-performing economies in the country pre-reform to one of the best post-reform.^[11]

Economic growth in BC was 1.9 percentage points below the Canadian average between 1994 and 2001 but 1.1 percentage points above the Canadian average between 2002 and 2006.^[12] BC’s real GDP growth was lower than Canada’s as a whole in six of the nine years between 1992 and 2000, but grew faster than Canada’s every year between 2002 and 2008.^[13] While there were other factors at play in BC’s economic turnaround, red tape reduction played a critical role in this positive outcome.

Another indicator of success, albeit and indirect one, is the number of jurisdictions who have looked to incorporate elements of the BC model in their own reforms. Canada recently became the first country in the world to make a version of one-for-one the law when its federal government promulgated the Red Tape Reduction Act.^[14] However, it is worth noting that Canada’s federal government uses a cost measure that is applied much more narrowly than British Columbia’s. Other examples of jurisdictions inspired by British Columbia include Manitoba and Kentucky. Executive Order 13771 is another example of two-for-one. It too uses a complex measure that has narrowed its scope to a relatively small number of economically significant rules, which constitute about 8 percent or fewer of all federal regulations.^[15]

LESSONS FROM BRITISH COLUMBIA

The British Columbia model, while not perfect, has some important lessons in it.

Lesson #1: Political Leadership Matters

Successful reform needs political champions. In the BC context this came in the form of a premier who made reform a priority across government and a minister responsible who made sure that the reforms were well executed. In other political models, such as the United States, this would look somewhat different, but reforms need strong champions and those who can “quarterback” the reforms across government.

Lesson #2: Simplicity Matters (Particularly with Respect to Measurement)

One thing that distinguishes BC’s regulation reforms is the reliance on a clear, simple metric that could be applied broadly and communicated easily. There are certainly alternative approaches to the regulatory requirement metric used in BC that would be just as good, if not better. However, too often, regulatory measures become so complex that they are too expensive for governments to use broadly or communicate simply. More complex measures such as benefit-cost analysis have an important place in regulatory development and evaluation, particularly for the largest rules. But a broad measure also has an important place as it helps capture the blizzard of small things that can add up to a large regulatory burden from the point of view of those tasked with compliance. In the US context, creating an inventory with a simpler, broader measure may be a good complement to the existing two-for-one policy.

BC’s simple measure allowed for simple reporting. It was clear to other ministers as well as to the general public where regulatory requirements had been cut or added and by how much. This created very powerful incentives not to add rules unnecessarily and to reduce where possible. This seems replicable in the United States.

Lesson #3: Regulators Are an Important Part of the Solution

In BC regulation makers became regulation managers. This was accomplished in a number of ways including the two-for-one constraint and the one-third reduction target. The biggest indication of a culture change happened after the one-third target was met and regulators continued to identify more regulatory requirements to reduce than add, although they were no longer required to do this under the new one-for-one policy.

CONCLUSION

British Columbia’s model of regulatory reform stands out for its longevity, effectiveness, and simplicity. In the 17 years that it has been in place, the province has cut its regulatory requirements virtually in half (a 49 percent reduction since 2001). This is a remarkable achievement in two dimensions. First, cutting the number of government rules in half while maintaining good health, safety, and environmental outcomes is impressive. Second, the reforms represent an important step forward in regulatory accountability. Most jurisdictions in North America have no aggregate regulatory measure that is regularly tracked, although this is beginning to change.^[16]

The initial reduction target of one-third in three years was selected on the basis of a political “gut feeling” rather than research. Interestingly, more than that was possible. It also lines up with the “gut feeling” of small business owners in both the United States and Canada who, when surveyed on the subject, say they believe about one-third of government rules can be eliminated without negatively affecting the reasons for having the rules in the first place.^[17]