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15 january 2014

Inspection Reform: What are we looking at?

Written by Graham Taylor

Inspection reform is not new to Ukraine. The period 2009-2011 saw a number of important legislative steps in this area. The results of this eagerness to improve the business environment of Ukraine seem to have been mixed, at best. The World Bank continues to rank Ukraine very low on their investment climate list. Not that the World Bank’s index is without critique, but it is indicative that Ukraine remains one of the least favorable countries for small/medium sized businesses. The question is can this be attributed in part to the failure of inspection reform? 

And failure seems to be the right term, at least if we are to believe the IFC. In a report from 2011, the authors, after surveys and consultations with businesses throughout Ukraine, found that very little had changed with regards to inspections. This was back in 2011, based on material taken from 2010. What has happened since then? It would be interesting to know. For one thing, more time has passed since reform was instigated. Inspectorates and other authorities have had more time to make adjustments. For another, we have a new government since 2010. What has been their take on this issue?

I would like to make some suggestions as to where one could look to see the current status of inspection reform in Ukraine. One might start by taking a look at a recent report from the OECD. The report’s author, Florentin Blanc, a respected researcher on inspection reform from the IFC, has in a final chapter provided some examples of international experience/good practice of inspection reform that Ukraine could compare with. Anyone interested in the business environment in Ukraine might want to read the entire report as it is reassuring to know that every country struggles with balancing the interests of business with the interests of the public.

The areas that Blanc raises that I would also like to point out include delegated inspection, institutional change, governance, risk-based targeting and compliance promotion. I chose to highlight just these aspects because I feel that they represent five areas in which if reform has been successful then it is in these areas it shows itself most clearly. These areas are inter-related to the extent that they have to do with the inspectorates themselves, rather than the regulations they might apply or the actual application of them, the inspections themselves. They focus on the inspectorates as institutions, which I feel the greatest need for reform lies.

The first area I would like to point out is the use of delegated inspection services. This could involve applying self-certification regulation, where businesses themselves guarantee that they are in compliance. It could also involve the use of the private sector, with companies acting as third-party certifiers/inspectors. The use of non-state actors within an inspection system can have a number of benefits: cost-savings for the state, it involves a shift in liability for compliance, increase competence of inspectors, etc.

An example of successful implementation of inspection outsourcing has been applied within the common market of the European Union on non-food stuffs. The use of self-or third party certification has lower costs both for business and for the states themselves. It is also a way of moving liability from the state to the producers and in the case of third party inspections, to those companies that provide certification. The problem that many of the EU member states have experienced has been related to follow-up. The use of delegated inspections does not meant that the state no longer has responsibility to insure that the regulations are being applied. The state must insure that the rules are being followed.

Perhaps the most famous of recent problems associated with delegated inspections occurred in France and involved the use of industrial silicone in breast implants. The implants were improperly produced, and often leaked the possible poisonous silicone into the body. Blanc interestingly points out that the media has focused mainly on the failure of the state to ensure the safety of products, but little has been said about the large German company responsible for inspecting the products.

The next area where inspection reform can be judged is the area of institutional restructuring. This is perhaps the broadest area of reform and one that almost every country in the world struggles with. One aspect is the need of consolidation. There are too many inspectorates, they tend to overlap one another and lack clear mandates for what is being inspected.

One country that has drastically attempted to resolve this issue is Bosnia-Herzegovina. In 2004 the government established a single state inspectorate to cover all non-fiscal inspections. A new Law on Inspections was written for each area and all inspectors were forced to re-apply to work at the new institution.

Another aspect of institutional reform that can be explored is that of the relationship between central and local authorities. Inspectorates, not the least in Ukraine, are highly centralized and bureaucratic, leaving little room for local realities. One country that is highlighted by Blanc that has worked hard at this relationship in the Netherlands. After a destructive fire on the edge of the Rotterdam that was largely attributed to the lack of competence at the local level, the government has spent money on creation pools of resources helping to develop the competences of even small municipalities. Money has been spent on developing better communication channels between central bodies and their local representatives so that inspections are of equal quality throughout the country irrespective the size of the municipality.

Yet another concern for reform is in the area of governance. Inspectorates are at the mercy of political will in every country throughout the world, both rich and poor. The real safety of citizens has the tendency to take a backseat to the most recent inspection related scandal. The independence of an inspectorate is often a good indicator of the ability of the inspectorate to do its job properly.

The Netherlands has also focused on limiting the power of the government to use inspectorates for political means. One way they have done this is to have the chief inspectors of each of the inspectorates report back not only to the Ministry but also to the parliament. The example that was mentioned earlier with regards to breast implants in France is another good example of where governance has not been working. Where obvious blame was put on the company providing unsafe products, the French government, as well as EU authorities, have failed to explore the failure of the German third part certifier who did not do its job properly.

One area that received particular attention in Ukraine during the reform period was risk-based targeting. Pressure was placed upon inspectorates to make use of inspections according to the risk that a given business might pose to public safety, rather than a general application of inspections on all businesses irrespective of the danger the business poses. This would lower the number of inspections while likely increasing actual safety. The problem, at least initially, was that inspectorates failed to apply their own risk-assessment findings.

Another problem was that the criteria establishing risk levels led to almost all businesses being placed into categories “medium” or “high”, justifying continued high inspection rates on all businesses. This might be a problem of improper criteria, but it might also be a reflection of widespread malfunctioning throughout industries.

The last area that I have chosen to highlight here is in fact the one that I feel is the most important: promoting compliance. While need for inspections is important, the results of those inspections need not always be negative. In a perfect world, businesses would comply in self-interest. And it is in the best interest of the state that businesses are given the tools to do this. States should be more inclined to apply the carrot instead of the stick.

One very good example of this is the use of instructional booklets for food service regulation in the United Kingdom. The clear guidance provided by these booklets has led to far greater compliance by businesses than before without major changes in regulation.

Transparency is also important in this regard. The use of inspection checklists, provided by the inspectorate and easily accessible by businesses, gives businesses a greater ability to prepare for inspections. Ukraine has an order concerning the use of checklists by inspectorates from 2010 from the State Committee on Regulatory Policy making the use of checklist mandatory, but what has been the result of this?

Checklists are not unproblematic. The use of checklists has been criticized in the UK and the Netherlands for being too formalistic and taking away from the professionalism of the inspectors. But the practice in Lithuania might better suit a Ukrainian context. After instituting a risk-based inspection scheme, Lithuanian inspectorates were able to eliminate half the number of inspections between 2011 and 2012. A survey of businesses quoted by Blanc suggests that the opinion is very positive towards this change, that the use of checklists, while not perfect, is better than the old system, where businesses never knew what was going to happen when an inspectorate showed up at their door.

So the question remains as to the state of inspection reform in Ukraine. We could learn a lot by looking at the state of delegated inspections, institutional reform, governance, risk-based targeting and compliance promotion.  As the IFC concluded in 2011, there exists a framework that mirrors international standards in Ukraine with regards to inspections. The problem then was institutional: the inspectorates dragged their feet in implementing and once reform was implemented it was ignored.

But more than two years have gone by since then. One wonders if the important institutional changes have been made. Institutional reform is difficult politically. And with elections next year, is there political will to make waves by taking away jobs, even if it is done for the good of the economy?