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Lanka Business Online, 21 April 2005

Local experts on policy and regulation are calling for a system to better understand effects of regulations before they are adopted.

"Sri Lanka needs to invest in Regulatory Impact Assessment – RIA - to minimise adverse impacts of unsuitable regulations," says Malathy Knight John, Head of Public Enterprise Reform, Competition and Regulatory Policy Research, Institute of Policy Studies (IPS).

Experiences with existing laws show that enforcing laws without understanding their impact, can do more damage than good.

An IPS report - Regulatory Impact Assessment - Regulatory Impact Assessment - A Tool for Better Regulatory Governance in Sri Lanka? – points to the Economic Service Charge (ESC) as one such example.

According to the law, persons and partnerships are liable to pay one percent ESC on "liable turnover."

The Finance Act defines ‘turnover’ as the "total amount receivable, whether received or not, from every transaction entered into in that year of assessment in the course of trade, business, profession or vocation, carried on by such person or partnership," subject to certain adjustments for VAT, sale proceeds of fixed assets and bad debts written off.

This definition of turnover had the traditional export sector, plantations and distributors protesting loudly, because their businesses have low profits despite very high turnovers.

Commission agents, whose revenue is based on margin, objected to ESC being calculated on gross turnover.

Leasing companies were also unhappy, as ESC computation does not distinguish receivables that include capital repayment, leading to a greater incidence of liability.

So now the ESC law is to be amended and businesses have to grin-and-bear-it until the changes to the law are implemented.

But if the trouble were taken to understand the ESC workings through a RIA process, it would have saved a lot of time and trouble for businesses as well as lawmakers.

The experience with the By-Pass Control Rules (International Traffic By-Pass Control Rules of 2003), in the local telecommunications sector, also show that the regulations couldn’t do what it was meant to do - stop illegal bypassing of international call traffic.

"While reliable figures are not available, it is estimated that despite the regulatory actions by the TRCSL (Telecommunication Regulatory Commission of Sri Lanka), the current ongoing by-passing of international traffic amounts to a significant percentage of the international traffic terminated in Sri Lanka," says the IPS report.

The repeal of the Monopolies, Mergers and Acquisition clause in Sri Lanka’s consumer protection law is another instance when RIA could have been extremely beneficial to the public.

"Presently, the “hole” in the current law regarding Monopolies and M&A may be utilized by firms to achieve dominant market positions, through either expansions or mergers," says the IPS report.

With no rules to regulate monopolies and mergers Sri Lanka’s consumer law can’t protect consumers from monopolistic behaviour by companies.

"The repeal of the Monopolies and M&A’s clause should have therefore been subject to an appropriate evaluation process before the current CAA Act was passed in parliament," points out the report.

Proper understanding of a regulation before it is enforced, on the other hand, can help the public as well as the regulator.

The telecom regulator’s decision to go for a public hearing on billing disputes for instance, produced regulations that left most people happy, for a change.

The public hearing resulted in a regulation, for all fixed access operators, to issue itemized billing information to customers – this sorted out many a customer complaint.

Learning from these experiences, the IPS suggests developing a RIA framework for Sri Lanka, to understand the impact of existing as well as proposed regulations and regulatory alternatives.

RIA is defined as "a systematic process for assessing the significant impacts (positive and negative) of a regulatory measure and of potential alternatives (including ‘don’t regulate’)."

"The assessment may relate to the likely impacts of a proposed regulation or the actual impacts of existing regulations."

An interim paper on RIA for Sri Lanka is now available for public comment at www.ips.lk/percr/news.html

The feedback will be used to finalise the paper into a Concept Paper for policymakers, which will be presented to the Government says the IPS.

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