Assessing, Selecting, and Implementing Instruments for Government Action

Introduction

A broad spectrum of instruments for government action exists for advancing public policy. These instruments range from laws to economic, public, and peer pressure. Choosing an instrument or, more importantly, the appropriate mix of instruments involves selecting the tools that are most likely to achieve the public policy objective pursued on a sustained basis and at an acceptable cost.

Several federal documents provide direction and guidance on selecting instruments. These include the Canadian Cost-Benefit Analysis Guide, the Cabinet Directive on Law-Making, the Guide to Making Federal Acts and Regulations, and the Cabinet Directive on Streamlining Regulation.

In September 2004, the External Advisory Committee on Smart Regulation (EACSR) tabled its report, which included a recommendation that a framework be designed for assessing and selecting instruments, including economic instruments, for government action. With the coming into force of the Cabinet Directive on Streamlining Regulation in April 2007, departments and agencies are now required to select an appropriate mix of government instruments.

This document consolidates the government's various guidelines and directives on instruments for government action and addresses the EACSR's recommendation by providing a decision-making framework for assessing, selecting, and implementing instruments.

Purpose

This document is intended to support the Cabinet Directive on Streamlining Regulation. It provides guidance to officers of the Treasury Board of Canada Secretariat who perform a challenge function regarding policy, legislative, and regulatory proposals involving issues of instrument choice and to officials in other government departments and their legal advisors whose work involves considering which instruments will best achieve policy objectives.

Document Organization

This document has two sections:

• Section 1 provides background and context for the question of instrument choice. It identifies an array of instruments and focusses on how instrument choice can lead to policy innovation.
• Section 2 presents an analytical framework to facilitate a disciplined approach to assessing, selecting, and implementing instruments. The framework sketches out a sequence of enquiry, suggests a methodological foundation, and provides guidance for each step in the instrument choice process. Departments and agencies are invited to use the framework as is or as a template for developing their own versions in their respective areas of responsibility.

Annex A provides an example of one department's instrument choice framework: Environment Canada's Qualitative Screening of Management Tools (QSMT). Eventually, this annex will be expanded to include a series of weblinks to departments' customized instrument choice frameworks. For the time being, Annex B presents detailed tables for Environment Canada's QSMT, for illustrative purposes.

Key Messages

• Instrument choice should be considered early in the policy development process.
• The government cannot deal with every situation. Its involvement must be assessed in light of its responsibilities, its resources, and the likely effectiveness of its involvement relative to that of a variety of actors such as other governments, the private sector, non-governmental organizations, and the voluntary sector.
• A broad range of instruments exists, allowing the government to choose the type and degree of intervention, if any.
• A mix of instruments has been found to be effective in achieving successful outcomes.
• The effectiveness of an instrument in promoting conforming behaviour needs to be considered early in the policy development process.
• A statute or regulation should be chosen only after the full range of possible instruments has been considered.

Section 1: Background and Context

What are instruments for government action?

Instruments for government action are the means a government has at its disposal to achieve public policy outcomes—to govern. While several definitions of "instruments for government action" exist, this document uses a broad interpretation, defining them as the "means by which policy objectives are pursued." Instruments for government action set up relationships between the state and its citizens. In some cases, such as criminal law, the relationship is of a coercive nature. In other cases, such as legal agreements, the relationship is reciprocal.

Some well-known instruments that can be used singly or in combination are:

• laws (statutes and regulations)
• economic instruments, including market-based instruments, taxes, fees, user charges, loans and loan guarantees, and public expenditure
• public ownership
• forms of self-regulation, including regimes operating within a framework of legislative authority
• standards and other forms of voluntary action
• performance-based regulation
• contracts
• information and education
• insurance schemes
• collaborative/consensual approaches, including formalized partnerships and less formalized networks

"Regulation refers to the diverse set of instruments by which governments set requirements on enterprises and citizens. Regulation includes laws, formal and informal order and subordinate rules issued by all levels of government, and rules issued by non-governmental bodies or self-regulatory bodies to whom governments have delegated regulatory powers."

-OECD report on Canada: Maintaining Leadership Through Innovation, 2002.

Regulation is one of the most important instruments used by governments. It may be defined as government intervention through a set of rules identifying permissible and impermissible activity on the part of individuals, firms, or government departments and agencies, along with accompanying sanctions and rewards. This definition, based on one from The Tools of Government Workbook 1, Social Regulation Workbook (in The Tools of Government Workbooks, ed. Lester M. Salamon, Oxford University Press (2002)), emphasizes the use of legal texts known as acts (primary legislation) and regulations (secondary legislation). However, too often government intervention is equated with legislation, which means that not enough consideration is given to other forms of government action. A broader definition of regulation is needed to understand the breadth and complexity of instruments required to make any regulatory regime function effectively.

The analogy between tools in a tool box and instruments in a government's policy tool kit demonstrates the point. If all you have is a hammer to work with, you will look for things to hammer and use the hammer for everything you find. If legislation is the only tool a government uses, it will deal with every public issue by passing yet another law.

Many governments are now considering instruments other than regulation to achieve public policy outcomes. Prompted by factors such as globalization, international competitiveness, increased emphasis on market solutions, and new philosophies of governance, they are seeking new or modified instruments that provide effective approaches to policy making. Some of the new policy instruments or new applications of policy instruments that government is now using and that are indicative of the government's recent emphasis on the search for new governing tools are:

• adjustment programs
• capacity building
• commercialization
• contracting out
• decentralization
• partnerships
• networks
• organizational structure

A focus on results

Government officials are encouraged to adopt a more comprehensive approach to developing proposals for attaining policy objectives. They should focus on achieving a desired outcome rather than assuming that a particular instrument, particularly an act or regulation, will be effective. The Cabinet Directive on Law-Making states that:

Law [statutes and regulations] should be used only when it is the most appropriate [instrument]. When a legislative proposal is made to the Cabinet, it is up to the sponsoring Minister to show that this principle has been met, and there are no other ways to achieve the policy objectives effectively.

If the decision is made to use a law, consideration should be given to how the law is designed. The law should be conceived in ways that allow for the use of a range of approaches and compliance measures. Research shows that using a mix of instruments often improves outcomes. A package of instruments can be used with significant success to improve citizen quality of life, national competitiveness, and environmental protection.

In the regulatory area, concerns about the negative effects of conventional laws on industry innovation and competitiveness have made governments look to other forms of laws, such as performance-based regulation (PBR). PBR sets the standard or objective to be met rather than prescribing the means for achieving it. It also harnesses the energy of external actors in finding solutions. In 1996, the Quebec government stated by decree that it would favour the use of regulation by objectives (also known as performance-based regulation), preferring regulations that focus on the results sought by the legislature or regulatory authority to a precise definition of the means for achieving those results.

The ways in which instruments interact should also be considered when assessing and selecting instruments. Officials should explore how different instruments can most effectively be used together to support each other's strengths and weaknesses and avoid conflicts. Some inherently complementary combinations include:

• information and all other instruments
• voluntarism and command-and-control regulation
• command-and-control regulation and supply-side incentives
• command-and-control regulation and broad-based economic incentives
• contracting out
• decentralization
• partnerships
• networks
• organizational structure

Limits of Law

The following examples illustrate that laws alone are not always the best option.

Laws have been in place since shortly after World War I to dissuade people from drinking and driving, but no significant drop in the incidence of impaired driving occurred until the 1980s. Since prohibitive legislation seems to have been ineffective, what happened in the 1980s to alter behaviour?

One answer could be that government began to look at the problem differently. Through public education campaigns, federal and provincial intervention, and community and non-governmental organization involvement, a change in awareness and behaviour began to occur, causing a major shift in societal norms and attitudes, to the point where it is now socially unacceptable to drive while impaired.

In this example, government use of laws to forbid a type of behaviour was less successful than using a range of instruments that encourage individuals to think about their behaviour and the risks to others and to themselves, and to make different choices. Similarly, a case study on reducing the use of tobacco supports the view that using a mix of instruments leads to more successful outcomes.

Another example involves efforts to prohibit the use of cell phones while driving. A study conducted by the United States Insurance Institute for Highway Safety found that, in the months following the coming into force of legislation in New York, the percentage of drivers using cell phones dropped from 2.3 to 1.1 per cent. However, within 15 months and despite enforcement efforts, cell phone use among drivers climbed back up to 2.1 per cent. The Canada Safety Council is of the view that a similar law in effect in Newfoundland is practically unenforceable without substantially increasing the number of police officers, which, in an era of limited resources, is difficult to do.

Stimulating innovation through policy instruments

Careful consideration and appropriate use of non-conventional policy instruments may lead to innovative ideas and means for government intervention. Innovation is a process whereby new and different approaches to government intervention are incorporated into the decision-making framework and where, in applying this framework, knowledge sharing about the viability of different instruments in various circumstances acts as a catalyst for change in government action. Below are some situations where a non-conventional approach may be appropriate, with examples of where such an approach has proven successful.

1. To supplement conventional regulatory approaches, thus reducing the need for regulatory enforcement action through the courts

Example: The Competition Bureau, working with the Retail Council of Canada and three other major retail associations, developed a code pertaining to the accuracy of price scanners in supermarkets. Under the Scanner Price Accuracy Voluntary Code, if a customer finds a discrepancy between the price advertised and that charged at the counter, the customer is entitled to get the product for free if it is less than $10, or for $10 off if it is more than $10. This creates an incentive for both consumers and retailers to be vigilant about pricing. The code is an adjunct to regulatory approaches, as there are laws at both the federal and provincial levels prohibiting misleading or deceptive advertising. The code prompts retailers to comply with these laws and in effect mobilizes consumers to act as informal "inspectors" in regard to the practices of retailers. Evidence suggests that complaints about retailers to the Competition Bureau concerning inaccurate pricing have decreased since the introduction of the code.

2. To address problematic activity more quickly than through conventional approaches

Example: The Accelerated Reduction/Elimination of Toxics (ARET) program was introduced in 1994 as a challenge to industry to voluntarily reduce or eliminate the release of 117 identified toxic substances by the year 2000. For its time, ARET was an innovative approach, as the concept of voluntary measures was still uncharted territory in Canada. A primary objective was to stimulate early action on toxic substances without a full-blown risk assessment under the Canadian Environmental Protection Act. Eight major industry sectors, 171 companies and government organizations, and 318 facilities took the challenge. Collectively, they reduced the release of almost 28,000 tonnes of toxic substances, as measured by comparing releases in the last year of the program with the base-year levels of those releases. Over the entire course of the program, more than 70,000 tonnes of substances targeted by ARET were prevented from release. The use of an expanded tool box and non-conventional approaches means government can address problematic issues more quickly than through conventional regulations, which can be slow and costly to develop. Environment Canada and Health Canada are now in the process of reviewing hundreds of chemicals with a view to managing risk using a range of instrument options referred to in the Canadian Environmental Protection Act (see sidebar). Other substances that are not toxic but of concern are managed throughout their life cycle by means of a variety of non-regulatory instruments. Environment Canada now has a minister-endorsed policy for minimum criteria applied to all voluntary initiatives, to ensure that clear targets are achieved in an accountable way through verifiable agreements. These voluntary agreements will replace the ARET program.

Instruments Allowed Under the Canadian Environmental Protection Act

In addition to establishing regulation-making powers, the Canadian Environmental Protection Act provides authority for the use of economic instruments, environmental quality objectives, guidelines and codes of practice, administrative and equivalency agreements, pollution prevention plans, environmental emergency plans, information-gathering notices, national pollutant release inventory, alternative compliance measures known as environmental protection alternative measures, and environmental protection compliance orders.

3. To overcome or avoid federal-provincial jurisdiction issues

Example: In many policy contexts, both the federal and provincial governments have some degree of constitutional authority to develop legislation. This can lead to "paralysis," where neither level of government acts for fear of challenges that its legislation exceeds its jurisdictional competencies. Voluntary market-driven approaches are not so constrained. For example, an "ombudsnetwork" has been put in place by private-sector financial institutions to provide consumers of Canadian financial services with a complaint resolution service. Because the participating institutions may be federally or provincially regulated and because participation in the network is voluntary, the ombudsnetwork avoids any possible constitutional challenges. Federal and provincial regulators may still impose a regulatory approach at any time but, in the meantime, the private-sector approach serves the purpose.

4. To address fast-moving technologies or issues

Example: E-commerce is an area where technology is moving very quickly—perhaps too quickly for regulators to stay current through conventional regulatory approaches. To fill the gap, the private sector and consumer organizations have established voluntary market-driven schemes for merchant reliability, privacy, and redress. Under such schemes, a third party such as the Better Business Bureau or a trusted consumer organization allows businesses to use a "seal" or logo on their websites that tells consumers that the business has been checked for reliability and that, if something goes wrong with the purchase, they have a source of redress other than the legal system. This is particularly helpful in cases where a transaction crosses jurisdictions. Perhaps, at some point, an effective and cohesive inter-jurisdictional legal approach will be adopted but, in the meantime, voluntary approaches offer some assistance for consumers wishing to engage in cross-border e-transactions and for firms wishing to offer services across borders. In Canada, the Office of Consumer Affairs of Industry Canada is in the process of developing a voluntary code for consumer protection in e-commerce that could be used as the basis for seal programs.

5. To address issues that fall outside the legislative scope of government

Example: The Federal Contractors Program uses the government's procurement power to address employment equity in the workforce. As a condition for bidding on large federal contracts, contractors are required to certify in writing their commitment to employment equity. Entities that do not want to do business with the federal government are not required to comply with the program. As entering into business with the federal government is voluntary, this is an example of the government using its procurement power to further its policy aims and to stimulate changes in behaviour beyond its legislative competencies.

6. To allow governments to encourage activities that they wish to promote but not require

Example: The federal government's EcoLogo program and some aspects of its energy efficiency programs provide signals to consumers who wish to be more environmentally responsible, but do not impose legislative requirements on industry. Various cultural industry programs that provide financial incentives (including those for the film, magazine, book, and music industries) operate in this manner.

7. To provide Canadians with faster, more convenient, less intimidating redress options than going to court, thereby reducing the burden on courts

Example: The Canadian Motor Vehicle Arbitration Program (CAMVAP) is an industry-funded arbitration program for consumers who have problems with their cars. In the United States, "lemon laws" provide the same relief, but require the use of courts. In Canada, consumers may opt to use CAMVAP or the courts.

Section 2: Analytical Framework for Selecting Instruments

The analytical process for selecting instruments is defined by a number of steps all of which are supported by consultation. The first step in the process is the identification and definition of the problem. This is followed by the setting of objectives and then the identification of potential intervention points. Next, actors and institutions having an effect on risks and objectives are identified and instruments are selected and considered. Finally, performance indicators are set and then the instruments are implemented.

This section presents an analytical framework to facilitate a disciplined approach to assessing, selecting, and implementing instruments. Departments and agencies may use the framework as is or as a template for developing their own framework for their respective areas of responsibility.

The framework sketches out a sequence of enquiry, specifies a methodological foundation, and provides guidance for each step in the instrument choice process.

Benefits of using an analytical framework

Several benefits flow from the use of an analytical framework for selecting instruments:

• greater transparency in decision making by providing an explicit rationale for instrument choices
• greater cohesion in decision making by providing a disciplined approach for assessing and selecting instruments
• overcoming of risk aversion by using a risk-based analysis that will assist in understanding the challenges and the most appropriate means of addressing risks
• better outcomes by selecting an appropriate mix of instruments

Overarching rationales for the framework

The following framework is based on two overarching rationales:

• The process of analyzing a situation or problem and considering means by which the government could take appropriate action is iterative.
• The contribution of consultation throughout this iterative process is crucial. It enhances government transparency, promotes knowledge sharing, and supports the integrity of government action.

The framework is not intended to be a sequential roadmap of where and how officials should assess instruments to achieve public policy objectives. The process is inherently iterative in that the accumulation of information and knowledge concerning a problem or situation and the objectives that the government is aiming to achieve will require officials to repeatedly revisit each of the steps in the framework.

Given the complexity of policy making, ongoing consultation with actors and institutions that can have an effect on the risks and objectives being addressed is a crucial component of this iterative process. Consultation not only improves the government's instrument selection capacity, but also increases Canadians' trust in government and encourages knowledge sharing among government, industry, and non-governmental organizations.

Seeking an Optimal Policy Mix

The Conference Board of Canada considers stakeholder participation crucial to identifying issues and risks (problem identification), assessing and selecting instruments, and evaluating impacts. The Board proposes the following approach for environmental policy making:

• Develop objective: Consider the needs and objectives of all stakeholders [...]. Stakeholders include those contributing to the problem, those affected by the problem, and those with the potential to help address the problem.
• Select instruments: Consider all stakeholders, particularly in terms of their rights, roles, and responsibilities.
• Evaluate impacts: Consider all stakeholders who may be positively or negatively affected.

-Conference Board of Canada, The Optimal Policy Mix: Matching Ends and Means in Environmental Policy Making, 2000.

Step 1: Identify and define the problem: issues, risks, causal factors

The first step in any policy analysis is to identify and define the key features and sources of the problem. The knowledge generated at this stage is crucial to making good decisions concerning policy priorities, instrument choice, performance expectations, and (if "rules" are part of the instrument mix) strategies to achieve conforming behaviour.

Increasingly, the problems that governments are asked to deal with are characterized in terms of "risk." Governments have to make decisions about whether and how to intervene in situations involving a high degree of uncertainty regarding what is going on now and what may happen in the future. Risk, which can have both positive and negative connotations, is a concept that can help decision makers cope with the uncertainty inherent in governance activities, discipline public policy analysis, and foster more rational approaches to instrument choice.

Government intervention in response to a problem cannot change the past or even the present; it can only change the future. Moreover, government's ability to manage risks in the near term is often quite limited in that the die is already cast and a government's ability to devise and activate an appropriate mix of instruments is subject to significant time delays. The further a government's action extends into the future, the greater is the government's ability to influence the level of risk, but also the greater is the uncertainty about how the underlying systems that determine the risk will evolve.

To appropriately address a public policy issue, government needs a sense of where the problem is headed, how far and how fast–the dynamics of risk. Basing decisions on "snapshot" assessments of past or current risk makes sense if the risk is static and likely to remain that way throughout the time horizon relevant for public policy choices and program implementation. However, the risks that government must address are usually the result of complex interactions of social, economic, and environmental systems. These systems themselves are in a constant state of flux, which means that the risk could change over time and perhaps in ways that are not intuitively obvious.