What are quality inspections?
- Defining “quality” for an inspection system is not easy, because an inspection system is only one piece of a larger and complex legal system.
- At bottom, inspections are meant to improve compliance with clear rules in order to achieve desired policy results.
- But compliance alone is not a sufficient standard of quality. This report proposes four quality criteria:
- maximizes compliance with clear government regulations;
- minimizes uncertainty for businesses;
- fights corruption;
- minimizes costs to businesses and optimizes costs to governments
Inspections: The Front Line of the Regulatory State
- Government inspectors are on the front line between the state and the market. They are the public face of the state for most businesses. Their performance has come under increasing scrutiny as the high costs of poor inspection practices for economic performance and the quality of governance have become clearer.
- This report examines key practices of effective inspections for the protection of human health and safety and the environment. In all countries, regulations and inspections to enforce them are part of the mix of policies intended to carry out these and many other public policies. Government effectiveness in protecting these vital public interests depends on the quality and skills of regulatory agencies in developing high- quality regulations and implementing them efficiently through inspections and other incentive mechanisms.
- Based on a review of good inspection practices and reforms, the four criteria proposed in this report for a good inspection system describe a system that:
- Maximizes compliance with clear and legitimate government regulations by detecting and deterring noncompliance consistently and fairly;
- Minimizes uncertainty and regulatory risks for businesses by operating transparently and under the rule of law;
- Fights corruption by reducing the opportunity for abuse of discretionary powers;
- Minimizes costs to businesses and optimizes cost to governments by using resources efficiently to target the highest risks.
4. These characteristics are not easy to achieve. In the difficult legal, institutional, and financial environments that are characteristic of transitional and developing countries, the inspection function is highly vulnerable to inefficiency, abuse, and under budgeting. Inspectorates often fall short because they:
- Leave too much discretion to inspectors to choose inspection targets, conduct inspections, and set penalties, increasing the risk of capriciousness, corruption and abuse.
- Are not transparent and consistent in the procedures through which they are conducted, and so obscure the legal rights of businesses.
- Have unclear limits and mandates, so that businesses do not know the scope of the inspection, while inspections from various agencies and authorities overlap and duplicate each other.
- Do not make the underlying regulations and interpretations clear well in advance so that businesses can understand their compliance obligations.
- Invest too little in training and pay inspectors too little, and therefore cannot keep trained professional staff.
- Are not constrained by effective oversight, checks, due process and appeals to prevent and correct violations of procedures and rights.
- Are unsupported by information systems that allow inspectors to target high-risk businesses, and therefore penalize the businesses who willingly comply.
- Focus on legalities, paperwork and formalities instead of results and regulatory objectives and helping businesses to comply better with the spirit of the law.
5. The challenge in addressing these kinds of problems is not only for the inspectorates themselves, because they cannot operate in isolation from the institutions of governance around them. Sustainable reform also requires the consolidation of the rule of law throughout national governing structures. “Rule of law” reforms should place a priority on creating a legal system and credible, effective institutions that protect market competition, respect property rights, and establish a level playing field for market entrants. The principles of such a legal regime are legality, neutrality, transparency, efficiency, and accountability. Inspectorates must play their role in achieving this goal, but they cannot do it alone.
6. For example, setting penalties is one of the crucial steps of the inspection. This review suggests that developing countries provide much more discretion to inspectors to set penalties than do industrialized countries. Shutting down a worksite is a common and alarming threat in many developing countries. Reducing inspector discretion in setting penalties by involving checks and balances might be a priority area for future reforms to improve inspection quality.
7. For that reason, inspection reform is usually part of a broader program of governance and regulatory reforms. Serbia launched its regulatory reform program in 2001 by reducing the number of inspections needed for businesses before they open their doors. This reform was aimed at quickly stimulating badly needed investment and start-ups, but was followed by wider reforms to address more difficult regulatory problems that businesses faced after starting up. Most developed and many developing countries have launched programs of regulatory reform to reduce the costs of regulation and improve regulatory effectiveness in carrying out public policies such as protecting health, safety, consumers, and the environment. These reforms focus on the quality of regulatory instruments and policies, and increasingly include the inspection function, one of the weakest components of regulatory policy.
8. Improving inspections must be seen as an element in building the public-private relationships needed for good market regulation. Many developing countries suffer from a culture of noncompliance due to a wide range of institutional failures in both public and private sectors, including the durability of large informal sectors. When Vietnam’s Ministry of Science, Technology and Environment arranged a large-scale environmental inspection of enterprises in 1997, it found for the first time, that out of 9,000 enterprises in high-risk activities, some 50% were in violation of the Law on Environmental Protection.
9. Compliance is particularly difficult in a period of economic transition, when regulations are changing quickly. Reformist governments have the difficult task of combining regulatory reforms, which often means profound changes as they deregulate and re regulate while establishing a stable rule of law and providing, as far as possible, a stable regulatory environment.
10. The style of enforcement is key to improving compliance. An effective inspectorate cannot function as a police force seeking criminals in the business community. No regulatory system can operate mainly through fear and coercion. Rather, the inspectorate must improve compliance by building cooperative relations with the business community built on transparency and communication, backed up as needed by coercive powers as one element of the relationship. Recognition is needed of the limited resources of businesses, particularly SMEs, in responding to the demands of inspectors. Inspectorates should be seen as providing compliance assistance services rather than as policing.