Assessing the impacts of primary and secondary legislation – a Real Options approach to rules for making rules

Abstract

Impact assessments (IAs) of government regulatory policy proposals set out their expected costs, benefits and risks and who is likely to face those impacts. In the UK, primary legislation can confer powers on Government ministers and other bodies to enact Statutory Instruments (SIs) and other secondary legislation. Because SIs have the same effect as Acts of Parliament, but face significantly less scrutiny, there has been a trend to increase the use of this mechanism for areas of policy or principle, rather than purely administrative procedures. This trend has implications for democratic accountability and the different timing and treatment of primary and secondary legislation also has important implications for the way impact assessment is carried out. This paper outlines the rationale for a compound (primary and secondary) approach to introducing legislation, identifies different types of subordination and considers the implications for estimating their expected impacts in an IA - particularly when the assessment of the secondary measure happens after some of the uncertainty related to the possible outcomes of the primary measure has been resolved and this can be taken into account in the secondary decision(s). It points out the limitations of the conventional NPV-based approach to assessing the impacts of compound measures and proposes the use of a real options approach to IAs to address this concern. In particular it suggests that the real options approach should be used in cases where there are: uncertain outcomes, different possible timings, irreversible policy decisions and distortions due to the use of standard discount rates. Primary legislation creates the opportunity but not the obligation to pursue secondary measures and should be assessed taking these future options into account.