The Coming Digitization of the Regulatory Environment

On Point8 minutes readFeb 7th, 2019

There is no question that digitization is impacting both the global economy and government. On October 31st, 2018, the World Bank released the “Doing Business 2019” report, noting that the average time required to start a new business had decreased globally by more than half, from 47 to 20 days.1 The report documented a record number of 314 regulatory reforms over the past year, and highlighted that success requires initiatives that both improve efficiency and safeguards.

The report stated: “To realize economic gains, reduce corruption and encourage SMEs [small and medium enterprises] to flourish, unnecessary red tape should be eliminated. However, specific safeguards must be put in place to ensure high-quality business regulatory processes; efficiency alone is not enough for regulation to function well.”2 Two of the largest economies, China and India, are among the top 10 reformers, and not surprisingly they use digital techniques to streamline and enhance regulatory processes, especially for customs and trade processes.3

Government CIOs around the world should take note of these trends, as new regulatory regimes that spur competitiveness are emerging in ways that today’s digital government strategies rarely incorporate. The issue at hand is how to balance a country’s ability to create jobs with its ability to control company behavior with regards to workers’ rights, environment, public safety and other activities. In the digital economy, technology has created new regulatory approaches that governments must consider to keep up with China, India and others who learn from the World Bank research.

Historically, individual regulations have been created in response to a horror story or crisis, such as cancer caused by companies improperly disposing of toxic waste in order to save money. But, over time, many governments have amassed a Rubik’s cube of overlapping and often confusing regulations. Research from James Broughel at the Mercatus Center at George Mason University highlights the problem that many countries now face: “First, it means that the complexity of the code is rising over time. Complexity makes compliance more difficult and discourages entrepreneurial activity. Second, as the code grows, this increases the likelihood of rules interacting with one another in unexpected ways.”4

Regulatory reform has long been at the heart of governments’ approach to encouraging growth in the great jobs engine of SMEs. Much of the focus has been on getting rid of regulatory burdens with initiatives such as the U.S. government’s Paperwork Reduction Acts and amendments over the past 35 years, and reversing regulations with more recent initiatives such as the Congressional Review Act ant the Comprehensive Regulatory Review Act. But these are industrial era approaches to two principles that are generally agreed on in most countries: societies need commercial firms to generate economic growth and a legal framework to define rights and acceptable behavior by those firms.

What the “Doing Business” report highlights is how governments are starting to take advantage of digitization to regulate companies and create more economic growth than possible through traditional regulatory reforms. That’s in contrast to each regulation being implemented with its own form being filled out by hand by one or more people in each affected company, usually using data printed out from a computer. Since it was hard to regulate just the bad actors in the Industrial era, all companies in an industry had the same reporting burdens. Traditional reforms had limited impact on economic growth, because horror stories continued and the response was new regulations with more reporting (e.g. Sarbannes-Oxley in the U.S.). Many of the reforms highlighted in the report use digital approaches to target risky behavior, while reducing burden and streamlining regulatory compliance. They go far beyond using on-line forms, without eliminating the legal framework needed for economic and social growth. This is a disruptive approach to regulatory reform, as governments are starting to use data analytics tools coupled with machine-to-machine data exchange to streamline reporting and focus regulatory enforcement on risks, rather than using blanket approaches that generate excessive costs for both government and business. With India and China applying such a digital approach to modernize customs and trade regulations, we can expect that this will rapidly spread. Companies doing trade with China and India will likely ask their governments to make it as easy to comply with their home country regulations or threaten to leave.

Digitization of government is going to rapidly move beyond digital government services concepts of improved website design or e-forms. Recently, there have been dozens of successful experimental projects applying other digital tools to improve regulatory effectiveness and simplify reporting. The UK Cabinet Office recently released its report on what it calls “Experimental Government,” which citied how some of the digital government projects “reduced fraud and environmental harm by tackling the illegal disposal, misclassification and export of waste.”

“The Environment Agency’s impact evaluation showed that enforcement activity has a net positive effect on the environment, legitimate businesses, and tax revenues,” the report said.5 Other countries recognize the bold economic disruption implicit in the “Doing Business” report. The Philippines government recently enacted R. A. 11032 the Ease of Doing Business (EODB) and Efficient Government Service Delivery Act. This law defines a clear measure of success (substantial improvement in the global “Ease of Doing Business” rating), and is comprehensive, requiring both digital re-engineering of existing regulatory approaches and assessments of proposed regulations.

So what actions should state or national government executives take? First, a comprehensive digitization of your regulatory approach is required. This is not a technology user design exercise. It requires understanding of regulatory and related objectives and how those objectives are being operationalized in today’s interactions with a typical company: what regulations are applicable to that company, what data is required to be collected and maintained for assuring achievement of policy objectives for that industry segment, and how to best consolidate data collection and re-engineer processes to make sure regulatory decisions can be made appropriately, timely and in the least burdensome manner. Based on our experience targeting border threats, decision analytics and multi-faceted data can be used to streamline economic activity while improving risk management.

A second key to success is teamwork, comprising cooperation and collaboration among multiple regulatory and tax agencies. This requires senior leadership to identify and drive focus on at least one specific sector whereby business growth will substantially help the quality of life in the state or country. A simple approach for success requires an interagency team for each industry segment, a governance process with a clear charter for the interagency teams, a high-level leadership champion, and a governance model for decision-making on initiatives that can balance streamlining tradeoffs that might conflict with regulatory impacts. Each team should identify a critical path roadmap of changes, and then use a business case, including any required regulatory changes, to develop political sponsorship for its vision and roadmap. In turn, the political sponsorship must provide funding and bureaucratic cover for agencies implementing the roadmap, especially when it diminishes the funding and activities of an agency.

The third key is using technology to simplify and reduce filing burdens, while fostering regulatory compliance. Merely moving from paper forms to online forms does not substantially reduce paperwork burden; history has shown that approach does not change a company’s time spent locating data, creating new administrative reports from multiple corporate systems, obtaining online credentials from the government, and then hiring administrative staff to fill in e-forms. Instead, teams should look first at internal reforms that streamline internal processes, reuse data, and deploy collaborative workflows where overlapping regulatory requirements exist, such as financial data and environmental records. Teams also need to leverage industry-specific electronic data standards, consolidating security and privacy controls around a single electronic identity of a business, creating trust relationships using collaborative workflow tools, leveraging trusted IoT sensors and third-party data sources, and use of machine learning to continually improve analytics algorithms and remove bias in decision-making.

Government continues to be the single largest spender on IT outside of individual consumers. Those governments that aggressively apply technology to transform their operations will foster a more transparent, responsive, and economically successful environment than those that remain in the silos of the paperwork era.

1 DOING BUSINESS 2019, ©International Bank for Reconstruction and Development / The World Bank, 2019, p. iv
2 Ibid, p.1.
3 Ibid, p.12
4 James Broughel, Mercatus Center at George Mason University,
5 Cross-Government Trial Advice Panel, THE RISE OF EXPERIMENTAL GOVERNMENT, November 2018, p.5.

Tags-   Digital Government digital government transformation regulatory environment