Regulation and innovation: beyond ‘top down’ solutions

Why didn’t Australia make the world’s first keyless car?

In the 1970s NRMA mounted a public campaign against the ludicrous ease with which our car thieves could ply their trade - just insert coat hanger and drive away!

Our car industry raced to the forefront of car security technology - a none too daunting target back then. The Australian subsidiary of the German firm Bosch became a world leader with Australian car security technology - like engine immobilisers and keypads - supplying Falcons in the local market and then exporting them to Europe.

So when Australians bought luxury European imports from Fiat, Volvo, Porsche and Ferrari they came duly fitted with Australian engine immobilisers.

By then, car keys were pretty much dispensable. Why didn’t we go the next step?

Perhaps no one thought of it.

But it sure didn’t help that selling a keyless car would have been illegal!

Australian Design Rule 25 (ADR 25) required mechanical door, ignition and steering locks. It even mandated the number of tumblers in the locks!

With the new car security measures having rendered ADR 25 redundant by the mid 1990s the Productivity Commission duly recommended ADR 25’s repeal.

The result? No action was taken. Indeed, six years later ADR 25 was expanded to require engine immobilisers as well.

Amid so many success stories in economic reform, this sorry saga is a case study in our failure to make regulation responsive to new developments and new possibilities.

The limitations of regulation are the limitations of “top down” management or central planning. Even when well intentioned, those at the top don’t have the information to make good decisions.

Large firms, like governments also face diminishing marginal returns to central planning or “top down” management. The good ones decentralise decision making.

At a time when Anglo-American managers were putting more and more effort into minutely specifying what they required from their employees on the line, their suppliers, including Japanese firms like Toyota, realised massive productivity gains by engaging their customers, employees and suppliers in an endless circle of responsiveness and continuous improvement.

Employees’ enthusiasm for improving they way they worked was assiduously cultivated even to the point of giving them real power - for instance to stop production to fix a problem.

With regulation, our response to the diminishing returns to “top down” management has not been to try to energise and empower those at the “coal face” to continually improve their own performance: it’s been more “top down” management.

All Australian governments have introduced “regulation review” regimes that require any new regulation to run the gauntlet of a “regulatory impact statement” (RIS).

The idea, laudable enough, is to impose a rigorous cost-benefit quality hurdle on all regulation. The practice has invariably fallen short - often scandalously so. The ALP government introduced the policy in 1986. Ten years later formal compliance was derisory. Three out of every four RISs required by the policy were completely ignored, and only one in ten were fully compliant with the policy.

Another decade on, formal compliance is much better, but RISs are regarded cynically - as boxes to be ticked.

While a major inquiry was being held into the problem, WorkChoices passed through Parliament with an RIS that read more like a corporate brochure than an economic analysis.

But even when it’s not traduced in this way, regulating the regulators with RISs seems to have done little if anything to stem the tide of red tape. You’ve heard of Moore’s Law in computing - effectively that computer power doubles each 18 months. Well here’s the “Law of More” in regulation - the number of pages of legislation doubles every decade - and so far this decade we’re a little ahead of schedule!

Where it cannot be swept away with the stroke of a pen - à la tariffs, and shopping hours, and airlines - regulating well is no easy problem.

Regulatory systems will always be commands from the “top down”. But regulation should take a leaf out of businesses’ book. In addition to the thankless and so far largely unsuccessful task of confining new regulation to cost-efficiency, we should pay much more attention to the responsiveness of existing regulation.

We need to give those who are regulated powers to challenge regulation and to propose better ways of achieving regulatory objectives, just like we give workers the ability - by giving them the power - to improve workflow on the line.

Our report to the Victorian Government, released yesterday, provides examples of opportunities lost because of the time, effort and uncertainty for businesses trying to get regulation changed to enable them to do new things, or to do old things better.

And it shows how we could benefit from becoming a regulatory pacesetter.

For instance in greenhouse gas abatement we could pioneering new ways of measuring, verifying and auditing carbon emissions - for instance agricultural methane emissions from livestock. In addition to placing ourselves in the box seat to influence the evolution of the global trading system, we’d place Australian companies in the box seat to develop new technologies to export to the world when it caught up.

The report also argues that firms with a proven commitment to excellence should be subject to fewer impositions from regulation.

Right now regulating the regulators, like a lot of regulation, isn’t really delivering the goods. I recall in 1994 conducting an inquiry for the Productivity Commission asking the Federal Office of Road Safety why they wouldn't change ADR 61 to allow vehicle manufacturers to reduce cost and improve security by replacing aluminium compliance plates with self-voiding plastic stickers.

The response?

“It’s not that easy. We would have to do a regulatory impact analysis and that takes time and resources we don’t have.”

Perhaps it’s time for some fresh ideas.