2. RIA system at Sunass
RIA must be understood as a comprehensive ex ante evaluation system of the regulation. This chapter contextualises the importance of the implementation of RIA at Sunass. This chapter also lists the key elements for implementing RIA as a system. This includes the assumptions for the preparation of a RIA, exceptions, technical guidelines, and thresholds for different types of RIA analysis. The chapter finishes by introducing the preparation and oversight as independent processes.
The regulation, inspection and supervision of the provision of the water sanitation services is part of the duties of the National Superintendence of Sanitation Services (Sunass, for its Spanish acronym). According to the Framework Law for Regulators on Private Investment for Public Services (LMOR), Sunass is a decentralised public organism affiliated to the Presidency of the Council of Ministers, with legal capacity and administrative, technical function, economic, and financial autonomy. According with the Sanitation Service Management and Delivery Framework Law, the function of Sunass is as follows:
The National Superintendence of Sanitation Services – Sunass, on its character of regulatory body, is responsible for ensuring users the delivery of sanitation services in the urban and rural setting, with quality, contributing to the population health and the environment preservation.
According to Sunass General Regulations (RGS), its main objectives include the following: (SUNASS, 2019[1]):
Encouraging, by means of tariffs, the achievement and maintenance of the economic-financial balance of Service Provider Companies (SPC), as well as their efficiency on the expansion and development of services.
Supervising and inspecting the compliance of the rules on sanitation service supply and of the goals of quality and coverage of such services.
Watching the comprehensive compliance of the contract concession of sanitation services.
The compliance of these goals requires designing and implementing high quality regulation1 (see Box 2.1). Sunass is uniquely positioned to control the quality of regulation. This is because it has a role throughout the regulatory governance cycle. Sunass has the power to issue regulations, to supervise them and to generate sanctions in case of non-compliance. It should also be noted that Sunass also implements and supervises regulations that central-government ministries of Peru issue.
Regulations are rules governing the daily life of companies and citizens. They are essential for economic growth, social well-being, and environmental protection. But they can also be costly in both economic and social terms. In this context, “regulatory quality” means to improve performance, profitability, and legal quality of regulatory and administrative formalities. The concept of regulatory quality covers the process, that is, the way in which regulations are developed and enforced, which must follow the key consultation principles such as, transparency, accountability, and empirical basis. Beyond the process, the concept of regulatory quality also covers the outcomes, that is, regulations which are effective for achieving objectives, efficient (not imposing unnecessary costs), consistent (when considered within the whole regulatory regimen), and simple (regulations themselves and those rules for their implementation are clear and easy to understand for users).
By constructing and extending the OECD Recommendation on Improving the Quality of Government Regulation (OECD, 1995[2]), it is possible to define regulatory quality through regulations that:
1. Serve public policy goals which are clearly defined and effective for achieving those goals;
5. Produce benefits that justify the costs, considering the distribution of the effects on society and taking into account the economic, environmental and social effects;
6. Are applied in a fair, transparent, and proportional manner;
8. Promote innovation through market incentives and objective-based focus; and
9. Are compatible, if possible, with principles of competence, commerce, and ease of investments, nationally and internationally.
Source: OECD (2015[3]), OECD Regulatory Policy Outlook 2015, OECD Publishing, Paris. https://doi.org/10.1787/9789264238770-en.
Frequently, regulators face situations where their goals compete among each other. For instance, Sunass must mediate the pressure to regulate water tariffs implemented by Service Provider Companies (SPC). On one hand, there is the objective of expanding and increasing the quality of the infrastructure in which SPC invest in. This necessarily requires an increase in the income available for SPC investment, thus obliging a tariff increase. However, an increase in tariffs also means a higher cost for users, which can lead to inability to pay or significant effects on the available income of the population in Peru. Sunass also has the objective of protecting the rights and interests of users. While this is the most classic example of the tensions faced by a regulator, the Sunass has a wide range of regulatory tools that it has to design and implement to ensure the functioning of sanitation services.
In addition to ensure the technical quality of the regulation, Sunass must manage its relationships with the parties obliged to comply with the regulation or who will benefit from it. Precisely, these regulatory decisions create differential costs and benefits for the regulated parties, users, and the government itself. This can lead Sunass to make evidence-based decisions and to be transparent in the regulatory issuance and supervision processes. This is the motivation for Sunass to seek the implementation of better regulatory tools, which will allow it to make better public policy decisions. A Regulatory Impact Assessment (RIA) system helps to make decisions transparently, explore costs and benefits, and weigh alternatives which solve public policy problems.
In 2016, the OECD published a cross sectional study on regulatory policy in Peru. Among the problems analysed, the lack of a system of ex ante regulatory evaluation stands out. Although Peru has certain tools that improve regulatory quality, the report identified the need to implement a Regulatory Impact Assessment (RIA) system. As part of the assessment, the OECD highlighted the following:
Although Peru has some basic elements, it lacks an exhaustive system for ex ante assessment of draft bills and regulations subject to amendments, to evaluate if they yield a positive net benefit to society and if they are consistent with other government policies. (OCDE, 2016[4])
For central government, OECD recommended to implement a RIA system, which at the beginning was managed by the Ministry of Economy and Finance (MEF), the Presidency of the Council of Ministers (PCM), and the Ministry of Justice and Human Rights (MINJUS) (OCDE, 2016[4]). The central government of Peru is already working for implementing the RIA.2
The regulatory policy review (OCDE, 2016[4]) also covers the topic of governance of regulators, where Sunass is included. For Peru, the institutional design of regulatory bodies includes the presence of regulators that rule, oversee, and inspect private investment and public infrastructure. These regulators are empowered with technical, financial, and management autonomy. In this context, OECD considered necessary that such bodies implement their own RIA systems. This along with the goal of ensuring their technical independence. This motivated the OECD to produce the following recommendation, which directly concerns the Sunass:
To introduce an ex ante assessment system, that is, a Regulatory Impact Evaluation3 for draft bills and regulations subject to amendments, which must be independent to RIEs of the Peruvian central government (OCDE, 2016[4]).
Every regulator has started to implement its own version of RIA. Each one with its own operational processes and technical guidelines.4 Having its own RIA system will allow Sunass to ensure technical independence, and at the same time, to improve the quality of the regulations issued. However, implementing a self-surveillance system requires seals and credible practices by Sunass. Achieving this will allow Sunass to warrant the quality of RIA against the regulated parties, population, and central government. The rest of the chapter presents recommendations for designing the RIA system from the Sunass’ view of the regulatory framework.
By being the governing body of the oversight and regulation of sanitation services, Sunass has a fundamental role on tariffs regulation, quality, and conditions for access, as well as oversight and inspection. The following is a brief summary of the role of the Sunass in these three areas.
Tariffs regulation
One of the main activities of Sunass is to regulate tariffs5 set by SPC. The General Regulation of Tariffs (RGT, for its Spanish acronym) establishes the methodologies and procedures that govern the way these tariffs are calculated. The Optimized Master Plan (OMP) is the basis for preparing the tariffs estimation, and is also regulated by the RGT. Through these OMP, Sunass carries out the necessary analyses to define tariffs. The authorised tariffs have a 5-year life, after which, the study for the OMP is performed again specifically for each SPC. The RGT also defines the procedure for approving formulas and structures of tariffs, as well as the management goals. Some other elements defined by the RGT include prices of collateral services and the inflation adjustment obligation for sanitation service tariffs.
Service quality
Sunass has the task of ensuring that the quality of SPCs service is adhered to the established regulations. The Reglamento de Calidad de la Prestación de los Servicios de Saneamiento [regulation of quality of sanitation services] (RCPSS, for its Spanish acronym) defines the obligations that SPCs have regarding the access to the service, quality of supply, and other topics, including the closure of services and rules for properties with common use areas. Below, some key responsibilities of Sunass derived from the RCPSS are listed:
Definition of the service delivery contract, as well as the characteristics of the contract and relevant topics, including the amendment or termination.
Guidelines of general obligations for SPC and users, including the adequate and rational use of services, quality conditions, communication to users about obligations, equipment installation.
Drinking water quality control and issues including treatment, monitoring and analysis of control parameters, evaluation of treatment plants, disinfection process, and wastewater treatment.
Oversight and inspection
The Reglamento de Supervisión, Fiscalización y Sanción de las Empresas Prestadoras de Servicios de Saneamiento [regulations on supervision, oversight, and sanctions of sanitation service provider companies] frames the Sunass’ functions on such topics, divided in the following core topics:
Supervisory function: Onset of supervising actions from headquarters or at the field, conclusion of the supervision, supervising actions carried out by third parties, including the choice of supervisory bodies and their obligations and corrective measures.
Sanctioning function: sanctions regime, administrative responsibility of the managed parties, types of sanctions and fines, researching powers of Sunass, record of sanctions.
Recommendation 1: The obligation to carry out the RIA should be regulated under a Sunass regulation. The regulations should consider the assumptions that oblige to conduct the RIA, technical guidelines, exceptions and thresholds for different types of RIAs.
The first step to implement the RIA system is to think in the best possible terms to institutionalise its practice. This necessarily requires legal reform, so that Sunass has a legal obligation to carry out the RIA. As part of this demand, the controls that ensure the quality of the analysis must also be regulated. Sunass has to design the optimal regulatory framework to establish the obligation to conduct RIA for the issuance of new regulations, as well as the modification of existing regulations.
For such purpose, Sunass must weigh the possible options according to the legal technique. That is, comparing the alternatives, such as creating a regulation for RIAs, or outlining the obligations in different regulations, such as the Internal General Regulation. The most relevant fact of this decision is to consider if there is a significant difference between the likelihood of compliance versus the different design options of the legal framework (OECD, 2020[5]).
Recommendation 1.1. RIAs must be a requirement for all regulations involving costs.
It is essential to define clear and specific criteria that indicate the scenarios in which a regulatory process should be subject to the RIA. The most common practice is to impose an obligation to carry out the RIA when the issuance or modification of regulations involves costs. In this context, a comprehensive definition of costs as regulatory impacts should be considered (see Chapter 4). This implies extending the cost analysis to analyse how the different sectors involved are affected. In addition, the different categories of costs involved in a regulation must be considered. Figure 2.1 shows the taxonomy of the costs of regulatory compliance. Moreover, the following list includes common examples of cost categories:
These impacts affect differently the involved groups. It is therefore desirable that the impacts on each group should also be specifically analysed. It is unlikely that a regulation can frame all the regulatory costs. It is also undesirable to define cost limits since this would cause the omission of some. That is why Sunass must achieve sufficiently broad wording to ensure that the obligation to conduct the RIA is systematic.
Recommendation 1.2. Exceptions to conduct RIAs must be limited and clearly defined in the regulations.
There are regulations that have insignificant costs. Some examples are changes of domicile, legal name, or reform of internal regulations for hiring technological equipment or personnel. It is obvious that for these events, RIAs do not provide an added value. For this reason, RIA systems provide exceptions to certain regulations. Sunass has to clearly define when a regulation is exempted from the RIA for insignificant costs. The risk is that non-monetary costs, or externalities, such as those listed in Figure 2.1, will not be taken into account.
Even though regulations imply costs, it is common for regulatory systems to foresee exceptions from the obligation of carrying out RIAs. Some examples include emergency regulations requiring fast-track procedures, national security policies, and tax revenue or public debt policies. Defining which regulations qualify as exempt from RIA is a challenge, particularly for central government systems where regulations for different industries are administered. Within the OECD countries, seven countries consider exceptions for regulations constituting part of an international trade, thirteen countries when a regulation has insignificant impacts, and thirteen when an emergency regulation is involved (OECD, 2018[7]).
The RIA regulation, or, if applicable, the legal obligation, must be clear regarding the assumptions for exceptions, and the policy for their approval. OECD emphasises that exceptions must be limited (OECD, 2020[5]). The advantage from having its own RIA system is that Sunass can define exceptions in a more specific manner. In the study case of Australia on Chapter 5, the rejection for exceptions for almost all regulations and those with the explicit permit of the Prime Minister office is emphasised.
Recommendation 1.3 Sunass must publish as part of a regulation the technical guidelines applicable for preparing the RIA.
The Sunass must have technical guidelines that ensure a standardisation in the RIA process. This includes the elaboration process and the responsibilities of the different directorates,6 as well as the RIA elements.7 These guidelines must be approved as part of a Sunass regulation in order to generate a legal obligation. The guidelines have to reflect the reality of Sunnas, including the responsibilities and internal powers. In addition, they must be kept up to date with possible changes in the ROF in terms of organisational structure (see Chapter 4).
Recommendation 1.4 Sunass must perform a RIA proportional to the regulatory impact of legislative projects.
The regulation should be evaluated differently depending on the degree of impact involved (OECD, 2020[5]). Therefore, regulatory systems design different types of RIAs with different requirements. The National Commission for Better Regulation of Mexico (CONAMER), expects RIAs of high-impact, moderate-impact, periodic updating, and emergency (see case study of Mexico). Defining several types of RIAs will help Sunass to be more efficient with the resources dedicated for the preparation and supervision of RIAs. Sunass must have at least definitions for low-impact and high-impact RIAs. Naturally, the requirement variates on the complexity of the cost-benefit analysis and the obligation to weigh different regulatory alternatives.
There are different methods to decide which type of RIA must undertake each legislative project. Commonly, there are cost thresholds, where passing a certain regulatory cost impact requires the more sophisticated RIA. Also, there are methodologies where a threshold is specified according to the type of legislative project. When defining thresholds to decide the type of RIA, the Sunass must avoid two common mistakes. The first one is to require that most of legislative projects fall within the high-impact RIAs, even when they not necessarily imply high costs. This would dilute the sense of importance for those regulations that truly have high costs. On the other side, Sunass must not allow so much flexibility so all regulations can be considered low-impact regulations.
The key difference in the RIA types relies in the difference of time and resources dedicated to their preparation. Also, the engagement of stakeholders can variate, as well as the strictness of the cost-benefit analysis. The Table 2.2 proposes the difference between the scope of key elements according to the type of RIA.
Example: potential high-impact regulatory amendment
In the event that there is no methodology to categorise the impacts of the regulation, it is recommended to include a justification of the proportionality of the RIA. Although this form may be less precise, it is a valid approach. The first step is dictated by the purpose of the regulatory project. That is, if the proposed regulation seeks to modify one of the main Sunass regulations, described above, there is a greater probability of having high impacts. Then, it is recommended to identify in a general way the different ways in which all the groups involved can be affected. If multiple groups are affected in different and relevant ways, a more complete cost-benefit analysis is recommended.
As an example, the Reglamento de Calidad de la Prestación de los Servicios de Saneamiento [regulations on the quality of sanitation services provision] defines the conditions under which SPC should provide home access services in Peru.
Article 6 – Mandatory character for providing access to services
6.2. The service provider company can deny the access if the Applicant, to the date of the submission of the Request of Access to Sanitation Services, has an enforceable debt with the service provider company for the services of sanitation, collateral services, or debt derived from an illegal connection. This provision is also applied if the property already has a household connection, with pending debts, and which requests an additional connection.
At least two important groups involved in the article, users and SPC, can be preliminarily identified. More importantly, any change in the obligation to provide access to sanitation services implies profound impacts for these groups. For example, reducing the assumptions in which SPC can deny users access means a reduction in barriers for household users. This in turn means all sorts of direct and indirect benefits for household users in the form of health and income, among others. However, this can create problems for SPC and the industry in general. In some cases, not having the right assumptions to deny access can lead to perverse incentives and high financial costs. For this reason, a proper balance must be reached through a cost-benefit analysis.
Recommendation 2: RIAs must be designed by considering two independent processes: preparation and oversight.
Recommendation 2.1: The preparation process of RIAs must be a collaboration among the technical directorates and the DPN.
Currently, Sunass has a legislative preparation process certified by ISO (SUNASS, 2017[8]). DPN has an essential role in this process. In practice, it is in charge of preparing the projects so that they can later be filtered by the General Management and the Board of Directors. During the process, the DPN usually consults the technical directorates of Sunass to provide technical inputs to the normative project. Since the RIA is a tool that must fundamentally change the normative emission process, naturally there must be changes in the participation of the different Sunass offices.
Even if DPN can lead the preparation process of RIAs, the technical directorates must have an active role in the process. In chapter 2, there will be a detailed discussion of a specific proposal mapping the preparation process of RIAs and the cooperation required by the process within Sunass.
Recommendation 2.2 Sunass should form a review committee, with independent members from the development process.
The RIA process within Sunass must have a supervision stage. The purpose of this stage is to assess the RIA quality, as well as the reliability of its outcomes and evidence. Generally, regulatory systems at the international level have an agency or office that is independent of the ministries that develop the RIA. These offices receive RIAs and assess, publish, and manage the outcomes. As part of their powers, they review RIAs to dictate their approval. However, the independent governance of Sunass demands the self-supervision of RIAs. Both, the preparation, and supervision must be performed by Sunass. To achieve the certainty of having an adequate supervision, self-supervision must have two principles: independence on the legislative preparation process and enough power to reject a RIA. Hence, OECD recommends the creation of a Supervisory Committee of RIAs (CSA, for its Spanish acronym). The constitution of the committee must be by different directorates. This will enrich the analysis for having different points of view and specialties.
Approve/reject RIAs: In a more general way, the CSA must have the authority to approve a RIA in order for the regulatory project to be published. Similarly, the CSA must also have the authority to reject a RIA when it deems it necessary. This may include situations where the overall costs of a regulation are prohibitive, when the RIA reveals that the project is too complicated to be implemented or monitored.
Request reviews: If the CSA has noncompliance due to deficiencies in the analysis or the submission of the RIA information, it should have the authority to request a review from the bodies involved in the preparation.
Decide on exceptions: All legislative projects the directorates consider necessary to conduct a RIA must be notified to CSA. CSA must provide its approval.
Approve high-/low-impact RIAs: CSA must say if the RIA applicable to the legislative project must have a more detailed and specific analysis. This always has to be accompanied with the logic of proportionality.
Recommendation 3: Tariff studies must be integrated in a differentiated manner in the RIA process.
Tariff regulation is perhaps the regulatory instrument with the greatest impact administered by Sunass. By authorising tariffs, Sunass indirectly regulates the consumption behavior of the population, but also the business models and the financial viability of Service Provider Companies (SPC). The General Rules of Tariffs Regulation (RGRT) of Sunass frames the process and requirements for the studies that are part of the tariff definition, and the Optimized Master Plans (OMP). The regulation increases certainty and serves as a standardisation mechanism for tariff studies.
The RGRT makes explicit the principles governing the tariff regulations of Sunass: economic efficiency, financial feasibility, social equality, simplicity, transparency, and no discrimination. As mentioned above, some of these principles compete naturally. The prioritisation of criteria is also not uniform in all regions of Peru. Since the needs and demands of the population vary depending on the particular context. RIA is a tool that can precisely help solve this problem of optimising priorities. Currently, the regulation foresees the elements of the tariff estimation study. In an accurate manner, Sunass presents an analysis of the supply and demand, financial, operational, and capital situation of SPC. Tariff estimation studies also include a section on the impact of tariffs. The tariff estimation study of Emapa Huaral in November 2019 shows the tariff increase depending on the sector: social, commercial, industrial, and state. The domestic sector is divided by low-medium low and medium-high consumption. An analysis relating impact as percentage of income and expenditure segmented by socio-economic decile of the population is included (SUNASS, 2019[9]). In the corresponding RIA, Sunass may assess these estimations.
The rationale of including the tariff estimation study as part of the RIA is to strengthen the impact assessment of tariff proposals. This leads to weighing different options of tariffs, performing a sensitivity analysis, analysing indirect impacts, and expanding the impact assessment to different stakeholders. This recommendation does not imply changing the process or requirements of the tariff estimation studies. DRT must continue with its defined process, which includes public audiences. It is also not recommended that the whole tariff estimation study is subject to RIA. In addition to the long content, there is information that would not necessarily benefit from going through the regulatory impact assessment. However, the tariff estimation study can include a broader section of impacts, which independently follows the RIA system process.
References
[4] OCDE (2016), Política Regulatoria en el Perú: Uniendo el Marco para la Calidad Regulatoria, Éditions OCDE, https://doi.org/10.1787/9789264279001-es (accessed on 13 May 2020).
[5] OECD (2020), OECD Best Practice Principles for Regulatory Policy: Regulatory Impact Assessment.
[7] OECD (2018), OECD Regulatory Policy Outlook 2018, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264303072-en.
[3] OECD (2015), OECD Regulatory Policy Outlook 2015, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264238770-en.
[6] OECD (2014), OECD Regulatory Compliance Cost Assessment Guidance, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264209657-en.
[2] OECD (1995), OECD Recommendation on Improving the Quality of Government Regulation, OECD, http://acts.oecd.org/Instruments/ShowInstrumentView.aspx?InstrumentID=128&InstrumentPID=124&Lang=en&Book=False.
[9] SUNASS (2019), Estudio Tarifario: Empresa Municipal de Agua Potable y Alcantarillado de Huaral Sociedad Anónima Emapa Huaral S.A., https://www.sunass.gob.pe/websunass/index.php/eps/estudios-tarifarios/cat_view/419-regulacion-tarifaria/28-estudios-tarifarios/301-finales/455-lima-sedapal-s-a-emapa-huaral-emapa-canete-s-a-eps-aguas-de-lima-norte-s-a-antes-emapa-huacho-s-a-y-semapa-barra.
[1] SUNASS (2019), Reglamento General de la SUNASS.
[8] SUNASS (2017), Elaboración de Proyectos Normativos, https://www.sunass.gob.pe/websunass/index.php/sunass/quienes-somos/politica-de-la-calidad.
Notes
← 1. For purposes of this report, the terms regulation, legislative project, regulatory instrument, rule, etc. are used indistinctly. Overall, all these terms refer to the judicial instrument issued by Sunass creating liabilities for any party. This may change from use of equipment, technical requirements, delivery of information, etc.
← 2. By the time of the preparation of the report herein, the PCM is performing an intergovernmental consultation of the regulation to implement RIA.
← 3. The terms of Regulatory Impact Evaluation and Regulatory Impact Assessment are considered interchangeable. Throughout the report the term Regulatory Impact Assessment is used for ensuring the consistency with the international use.
← 4. Chapter 5 analyses the practices and lessons obtained from Peruvian regulators by the implementation of RIAs.
← 5. Resolution of the Board of Directors No. 009-2007-SUNASS-CD.
← 6. Chapter 2 presents a proposal for the preparation process.
← 7. Chapter 3 presents a proposal for the technical guidelines for the RIA’s elements.