PART I

OVERVIEW

The External Advisory Committee on Smart Regulation recommends major shifts in perspective and practice in this report. Canada has a sound regulatory foundation. But the Committee has found that the regulatory system is being challenged daily to be more effective, responsive, cost-efficient, transparent and accountable to Canadians.

The context in which the system operates has changed. Protecting citizens, consumers and the natural environment is a more demanding task in the 21st century. Businesses must perform more efficiently and be more innovative in a highly integrated international economy. Perhaps not surprisingly, the Committee heard from every major sector that the current regulatory system often acts as a constraint to innovation, competitiveness, investment and trade.

But Smart Regulation, as defined by the Committee, is not deregulation. Smart Regulation does not diminish protection, as some may fear. It strengthens the system of regulation so that Canadians can continue to enjoy a high quality of life in the 21st century. The Committee believes that regulation should support both social and economic achievement — providing citizens with the protection they need to feel safe, supporting the transition to sustainable development, encouraging a more dynamic economy and creating opportunities for Canadians and a model of regulatory excellence in the world.

The Committee's challenge was to identify how to improve the regulatory system in order to sustain Canada's well-being into the future. It has concluded that this objective cannot be realized without cooperation among governments, industry and citizens, which is why cooperation is at the heart of the Committee's proposed new regulatory strategy for Canada outlined in Part I of this report. Cooperation anchors its vision and principles statement and underlies many of its recommendations. The Committee believes strongly that a high-performing 21st century system requires better and closer relations between the partners in the system — governments, government departments, industry, citizens/consumers and other stakeholders — based on improving information, transparency and trust.

The Committee believes that the federal government must use regulation more strategically in the 21st century to advance Canadian interests and priorities. The way we regulate should be clearly seen to support national policies. As illustrated in Part II of the report, this means ensuring that our regulatory system supports the best health outcomes for Canadians, encourages innovation, sustainability and investment opportunities in Canada's manufacturing and natural resources sectors, enables First Nations economic development, and helps promote important new industries like biotechnology.

What Are the Consequences of Non-Action?

Regulation is a powerful instrument of government. However, the Committee has observed that it has not received the same attention as program spending and taxation. The Committee believes that Smart Regulation should become a major priority of the government, as the regulatory system is not sustainable at the level Canadians expect without fundamental and systemic changes.

If the system is not aligned with new developments and 21st century practices, it may put Canadians' safety at risk and affect citizens' trust in government. Without change, it will limit Canadians' access, for example, to new medications, cleaner fuels and better jobs. An outdated system is an impediment to innovation and a drag on the economy because it can inhibit competitiveness, productivity, investment and the growth of key sectors. Other countries are reforming their systems, and Canada cannot afford to be left behind.

What Is Driving the Need for Change?

The Committee concluded that certain 21st century realities make regulatory reform essential. It found that there is general agreement within the government that the system must be changed to take these realities into account. But this recognition has not yet been translated into daily practice.

• First, the speed of modern society has resulted in an explosion of new technologies, the rapid flow of commerce and instant access to information. Businesses are continually innovating to meet changing consumer needs, cut production costs and increase their market shares. In a knowledge-based economy, regulatory regimes have to adapt quickly to sustain effective protection and keep pace with innovation and entrepreneurship.
• Second, policy issues are increasingly complex. Boundaries between once distinct areas and disciplines have become blurred (e.g. bioproducts). In addition, major new policy directions have emerged, such as sustainable development, which will have profound implications for regulators. In this changing policy context, departments and governments must increasingly work together in defining regulatory strategies.
• Third, public expectations of government have risen, and at times they conflict, as citizens ask for more freedom of choice in some areas, increased regulation in others, and greater accountability and transparency.

What Needs to be Improved?

The Committee's analysis and recommendations for improvements are set out in detail in the chapters that follow. Several key messages emerged from its deliberations and its discussions with stakeholders and government officials:

• The importance of getting our national house in order. The harshest criticism of current regulatory practice is the lack of cooperation and coordination between federal government departments and among federal, provincial and territorial governments. From the average consumer to the largest multinational enterprise, the Committee heard that governments need to stop fighting over jurisdiction and find ways to work together on behalf of citizens and industry.
• The need for a more strategic international regulatory approach. International cooperation is increasingly necessary to provide high levels of consumer, social and environmental protection. It is no longer possible to protect Canadians' health and safety and provide access to innovative products — and do it all ourselves. From a business perspective, Canada must be more strategic in its regulatory relations with trading partners. A key irritant for industry is the proliferation of minor differences between Canadian and American regulations, given an increasingly integrated North American market. Minimizing these differences would remove wasteful duplication and reduce costs for consumers, industry and government.
• The value of other perspectives. The Committee's deliberations were enriched and informed by the involvement of consumer, industry, Aboriginal and environmental voices. While governments have a central responsibility to maintain the regulatory system, they need the input and insights of businesses, non-governmental organizations (NGOs) and other stakeholders to ensure that the system is relevant and effective.
• The necessity for more cost-effective, timely processes. The Committee heard repeatedly that the government takes too long to design regulations and complete approvals. Slowness is sometimes equated with higher protection. In a fast-paced environment, however, a sluggish process can have grave implications for human and animal health. It can be the determining factor in a small Canadian business remaining viable or international investment leaving Canada in favour of a more streamlined regulatory environment elsewhere.
• More focus on results. Increasingly, many regulatees have the knowledge and capacity to meet regulatory goals without the need for detailed prescriptions about how they should do it. With the right monitoring and assessment strategies in place, Canada can and should be more bold in its use of performance-based regulations and other alternative instruments.
• Better performance and accountability measurement. The government's stakeholders want much more emphasis placed on performance and accountability in the future. The Committee found that there is no systematic review of federal regulations to determine if they are still doing the job intended, including whether they are based on the latest scientific developments, as well as their effect on citizens and businesses. The regulatory process should encourage continuous improvement. Regulators must be clear and transparent with Canadians about the results they want to achieve and how they will measure them. There must also be recourse — an independent third party — for when normal processes fail.
• The need for cultural change. The recommendations in this report, and the expectations of stakeholders, cannot be addressed by tinkering with the process. A major change in approach is needed, supported by training for government regulators and the commitment and drive of senior bureaucrats and parliamentarians.

Regulating in the Public Interest

Broadly speaking, regulation is meant to serve the public interest. The Committee found that there is no shared definition of the public interest among government departments. Therefore, some of its work was dedicated to developing a better overall understanding of the Canadian public interest in the 21st century¹ as well as ways to assess the public interest in specific circumstances (see Annex II, A Public Interest Accountability Framework).

Recent studies have found that Canadians' views on regulatory reform have evolved considerably since the late 1980s. Canadians are more pragmatic than ideological. Citizens' demands for protection have increased over time, particularly with respect to health, safety and the environment; however, their views go well beyond the notion that more regulation is better.

Canadians now see social, environmental and economic goals as intertwined. They believe that there is an excessive compliance burden on business. They also accept that markets, trade and competition serve both public and private interests. This represents an important change. Canadians believe that the government is ultimately responsible for the health and safety of Canadians and protection of the environment, but they are prepared to be flexible in how these objectives are attained, as long as both industry and government are accountable and achieve results. Their trust in the system will depend on the quality of the process, which they expect to be fair, open, transparent and accountable.

Canadians have little tolerance for federal-provincial conflicts and they expect departments within the same government to coordinate their actions. From an international perspective, they are generally in favour of greater cooperation, in particular through multilateral international bodies, and they will also support bilateral cooperation, including Canada-U.S. regulatory cooperation, if it means strengthened regulatory standards or if it represents a more cost-efficient way to achieve the desired results.

What is Smart Regulation?

After considering current regulatory practice in Canada and other OECD countries, and the comments of stakeholders and other governments, the Committee has concluded that there are three key characteristics of Smart Regulation:

Smart Regulation is both protecting and enabling. It involves using the regulatory system to generate social and environmental benefits while enhancing the conditions for a competitive and innovative economy that will attract investment and skilled workers and sustain a high quality of life for Canadians. It is about making regulation as effective as possible — and making sure it is never more complicated or costly than it has to be.

Smart Regulation is more responsive regulation. An effective regulatory system must be self-renewing and keep up with developments in science, technology and global markets. Smart Regulation is acting quickly and deliberately to contain or prevent risks and enable innovation and opportunity so that Canadians receive the benefits of new knowledge. This also means giving regulatees more flexibility in terms of how results are achieved, as long as high standards are upheld and the appropriate accountability measures are in place.

Smart Regulation is governing cooperatively for the public interest. In a modern regulatory system, regulation is a shared responsibility in which governments, citizens and industry all have an active role to play in making the system more effective. Smart Regulation is taking into account the views of citizens and, at the same time, being attentive to, and balancing, the needs of firms and the challenges they face in an international economy. It is realizing that the regulatory system is part of a complex global system which requires governments and government departments and agencies to work better together towards common goals.

What Are the Benefits and Opportunities for Canada?

In summary, Smart Regulation offers Canada the opportunity to:

• support and enable Canadian social, environmental and economic priorities;
• achieve high standards of protection for citizens;
• support the transition to sustainable development;
• enhance business confidence and public trust in Canada's regulatory system;
• position Canada internationally as a place to do business;
• help Canadians take advantage of new knowledge; and
• make better use of government resources.

VISION AND PRINCIPLES

The Committee proposes the following vision and principles to guide a Smart Regulation strategy for Canada.

Vision

Governments, citizens and businesses will work together to build a national regulatory system that maximizes the benefits of regulation for all Canadians, enables them to take advantage of new knowledge and supports Canada's participation in an international economy. Within this vision are three components:

TRUST - The regulatory system must instil trust, confidence and credibility at home and abroad in Canadian products and services, markets and government institutions.

INNOVATION - The regulatory system must enhance market performance and support innovation, competitiveness, entrepreneurship and investment in the Canadian economy.

PROTECTION - The regulatory system must demonstrate to citizens that the public interest, which includes such issues as human health and safety and environmental protection, will be safeguarded within dynamic global markets.

Principles

This vision can be achieved by having our regulatory system, from the design stage to compliance and enforcement, adhere to the following principles:

1. EFFECTIVENESS - Regulation must achieve its intended policy objectives and must advance national priorities. It should be based primarily on standards and performance targets, rather than on how those targets are achieved, in order to provide flexibility while serving the public interest. Regulation should be supported by evidence and should reflect the latest knowledge. Regulatory measures must be regularly and systematically reviewed and, where necessary, eliminated or modified; and new measures must be created to take into account changing consumer preferences and expectations, scientific and technological advances and changing business environments.

2. COST-EFFICIENCY - Regulatory analytical requirements, measures and enforcement should be commensurate with the risks and problems involved. The appropriate instrument mix should be designed and implemented in the least costly manner possible to achieve the desired policy objectives. Single windows between departments and between jurisdictions should be offered. Regulators must understand the cumulative impact of regulation and seek to avoid overlap, duplication, inconsistency and unintended consequences.

3. TIMELINESS - Regulatory decisions and government services must be provided in a manner that reflects the pace at which new knowledge develops, consumer needs evolve and business now operates. Timeframes and standards for decision making should be developed and enforced.

4. TRANSPARENCY - The accessibility and transparency of the regulatory system must be maximized to promote learning and information sharing and to build public trust at home and abroad in the quality of Canadian regulation and the integrity of the process. Policy objectives should be clearly defined. Regulators must explain their priorities and decisions, show why and how these decisions are in the public interest, and be subject to public scrutiny. Information on regulatory programs and compliance requirements should be readily available in print and electronic formats. The regulatory system should be more predictable to provide certainty to those being regulated. Citizens and business should participate through active consultation and engagement.

5. ACCOUNTABILITY AND PERFORMANCE - Regulators must account for their performance. They need to announce their intended results and demonstrate their progress in achieving them. Performance should be monitored, measured and reported on publicly. Results should be used to modify regulatory programs and should be systematically reported to the public. also be established, well publicized, accessible, fair and effective.

A REGULATORY STRATEGY FOR THE 21ST CENTURY

Introduction

As the first part of its mandate, the Committee was asked to provide its advice on a new regulatory strategy for Canada. It was asked to consider how regulation can better contribute to the achievement of Canada's social, environmental and economic objectives in the context of the 21st century — the rapid increase in scientific and technological advancements, trans-boundary health and environmental risks, greater integration of markets and companies, and citizens' growing expectations of government. The Committee recognizes that this rapidly evolving policy environment challenges the regulatory system on every front and, at the same time, calls for higher and higher standards of performance.

The Committee's proposed strategy is based on the vision and principles of Smart Regulation set out in the previous chapter. The strategy describes, in effect, how to put the principles into practice and realize the vision of Smart Regulation for Canada over the next three to five years. It sets out proposed directions and recommendations regarding international regulatory cooperation, federal-provincial-territorial regulatory cooperation, federal coordination, risk management, instruments of government action, the regulatory process, and government capacity. The seven sections of the strategy address key questions about the practice of regulation in Canada in the 21st century:

• How should we interact with other countries?
• How do we get our "national house" in order?
• How can we achieve better coordination within the federal government?
• How do we manage risks or hazards?
• What are the most appropriate tools or instruments?
• What is the optimal process for designing and implementing regulations?
• How does the government equip itself to deliver Smart Regulation?

The Committee notes that the elements of the strategy are highly interdependent. For example, the strategy calls for a more strategic approach to international regulatory cooperation, which will require more coordination among federal departments, improved federal-provincial-territorial cooperation and more flexible use of instruments. Conversely, improved international cooperation should enrich domestic risk management practices and strengthen and speed up the regulatory process.

As the policy environment continues to evolve, the Committee believes it is essential that the regulatory system become self-renewing — that the system is adapted on a continuous basis, as a result of lessons learned and results achieved, and becomes more responsive to new developments in science, business and society.

3.1 International Regulatory Cooperation

International regulatory cooperation involves looking outside the domestic toolkit to meet national policy objectives. Cooperation is increasingly important to achieving the key Canadian goals of providing high levels of consumer, social and environmental protection and promoting innovation, trade and investment. Cooperation can leverage international resources to address important regulatory issues of local, national and international concern. No country today can regulate well without using regulatory expertise from outside its borders.

International cooperation can take many forms. It can be the informal networking of officials, involvement in a multilateral working group to deal with a particular issue, or participation in an international standard-setting organization.

Activities include sharing information, undertaking collaborative scientific work, forging common data collection and risk assessment methods, carrying out joint reviews, and developing common or international standards.

Canada today is enmeshed in a dense web of international relations that govern many aspects of our lives. International standards provide the guidelines and benchmarks from which much of Canadian regulation is derived. There are standards for food safety, plant and animal health, biodiversity, transportation, emissions control, pharmaceuticals and toxins management, and safety standards for electric, medical and electronic devices. As new products are developed and new risks emerge, more and more international institutions are being formed to manage and mitigate harm.

International cooperation is increasingly important for building a competitive economy. Inefficient regulation inhibits trade, deters investment and hampers innovation. Different regulatory requirements between Canada and the United States, for example, can add to a company's design, production and administrative costs. These differences can dissuade foreign-based companies from developing or investing in the Canadian market, choosing instead to focus on larger, more lucrative U.S., European or Asian markets.

3.1.1 Key Challenges

Canada has been a strong and influential voice in developing and promoting the use of international standards since the 1950s. Its international activity is increasing over time. The Committee has observed, however, that much of this activity is ad hoc and uncoordinated. The result is an everything-is-important approach. Compounding this problem is the government's inability to accurately assess whether its international initiatives have helped to meet Canadian policy objectives. The situation raises a question as to whether the government's international regulatory activity is well aligned with national priorities and whether resources are being put to the best use.

Another key challenge is that, despite Canada's effort to cooperate internationally, significant regulatory differences remain between Canada and its key trading partners, particularly the United States. The cross-border movement of goods is still subject to an array of different regulatory requirements.

Coordination is an issue not only across federal departments, but between federal, provincial and territorial governments as well. There are many international standards in areas that are the sole or shared responsibility of provincial and territorial governments. It is important for federal regulators to collaborate with their provincial and territorial colleagues to ensure that international obligations and requirements are being met (see Section 3.2 "Federal-Provincial-Territorial Regulatory Cooperation").

3.1.2 Creating a Strategic Policy Framework for International Regulatory Cooperation

The Committee believes that international regulatory cooperation should be a distinct component of Canadian foreign policy. In support of this move, the federal government should develop a strategic policy framework for international regulatory cooperation. The framework should provide direction to departments on what Canada wants to achieve through international cooperation and how it intends to achieve it. The goal is to achieve high levels of environmental, health and consumer protection and support a dynamic economy. The framework should also identify priorities and key partners for international engagement.

The Committee believes that the framework should focus in the short term on the United States and North America, but it should also address other bilateral and multilateral cooperative arrangements within North America and internationally, and establish parameters for Canadian leadership abroad. The framework should be guided by the following principles:

• pursuit of the Canadian public interest through international engagement;
• simultaneous promotion of high levels of protection and economic competitiveness;
• provincial/territorial involvement in issues in their areas of responsibility; and
• transparency, accountability and public involvement.

The Committee proposes the following priorities:

• improving the management of threats to human and animal health and the environment;
• removing small regulatory differences that represent barriers to international trade;
• supporting investment in Canada in the research and development of new products;
• advancing international regulatory speed, predictability and consistency through the promotion of international standards; and
• promoting one review or joint reviews of new products to enter markets in multiple jurisdictions.

As part of the development of this framework, the federal government must be able to assess which international regulatory activities have yielded good results and which have not. It needs to systematically review and evaluate its international regulatory activities so that it can learn from and improve upon its experiences. Evaluating Canada's international cooperative initiatives will help the government pursue its priorities in those areas that are the most appropriate, particularly with regard to its efforts to remove regulatory barriers and promote joint reviews.

Recommendation 1: The federal government should include international regulatory cooperation as a distinct part of Canadian foreign policy. To this end, it should develop a strategic policy framework for international regulatory cooperation that identifies priorities for coordinated federal and national action. The framework should provide guidance in the following areas:

• the design and implementation of regulation in Canada;
• an agenda for regulatory cooperation in North America; and
• Canada's key bilateral and multilateral relationships.

Designing Canadian Regulation

As it pursues a more robust international regulatory cooperation agenda, the Committee believes the government should also limit the number of specific Canadian regulatory requirements. This step would reduce the cumulative impact of unique regulatory requirements on international commerce. This does not mean compromising Canada's ability to meet its social and environmental objectives. International cooperation does not mean lower standards. Rather, the emergence of global markets and the need to cooperate in managing international problems means that country-specific solutions are increasingly less effective. They are becoming a smaller and smaller percentage of the stock of regulations.

Canada should develop its own regulatory requirements only when they are necessary in order to meet national goals or values. In many cases, international standards are sufficiently developed that Canada can achieve its policy goals without the addition of Canada-specific requirements. In the few cases where there is no international consensus on a standard, if the approach of key trading partners meets Canadian standards for protection, their approach should be adopted.

There are some factors unique to Canada, such as climate and geography, that may require adjustments to international standards or the approaches of its trading partners. In the automotive industry, for example, Canadian vehicle safety needs are determined in large part by local factors including northern weather conditions, the Canadian road system and seat belt use rates.

To ensure that specific Canadian regulatory requirements are limited, departments should clearly state how these requirements are in the Canadian public interest. They should explain the intended results of the regulation and why these results are best achieved through legislative instruments. They should also demonstrate that these results outweigh the impact of the regulation on Canadian competitiveness and provide significant net benefits.

Recommendation 2: When developing new regulatory frameworks, the federal government should review and adopt international approaches wherever possible. The federal government should limit the number of specific Canadian regulatory requirements.

Recommendation 3: Specific Canadian regulatory requirements may be appropriate when:

• there is no commonly agreed upon international or North American standard;
• important national priorities, unique Canadian circumstances or Constitutional values require different approaches; or 
• the government does not have sufficient confidence that the regulatory processes, practices, results and/or decisions of a trading partner will meet Canadian policy objectives.

Recommendation 4: Where specific Canadian regulatory requirements are adopted, the federal government should reduce or minimize the cumulative impact of regulatory differences on trade and investment by:

• assessing alternative instruments for meeting policy objectives (e.g. voluntary measures, information strategies);
• promoting the use of performance-based approaches where possible; and
• establishing the appropriate accountability structures to review requirements regularly to ensure that policy objectives are being met and eliminate those regulations that are no longer necessary.

Engaging Internationally

A) North American Cooperation

Free trade is a cornerstone of Canadian public policy. Since the signing of the Canada-U.S. Free Trade Agreement (FTA) in 1989, the two-way exchange of goods and services between Canada and the United States has more than doubled to $644.6 billion ($1.8 billion per day). Today, 79.7% of Canadian exports are destined for the United States.² Both the FTA and the North American Free Trade Agreement (NAFTA) focused on the movement of goods. More recently, there has been a shift towards services and technology, reflecting changes in the North American economies. NAFTA ushered in a new level of regulatory cooperation between Canada, the United States and Mexico. These three countries have set up several technical working groups to facilitate collaboration. But Canada still faces two significant challenges to improving regulatory performance and economic competitiveness.

First, Canada and the United States maintain parallel processes and structures across almost all areas of regulatory activity. Their two sets of processes reflect a convergence in policy objectives and regulatory procedures. However, much of this work is duplicative, particularly given the integrated North American market. The outcome can be poor regulatory and economic results and higher costs for governments, consumers and businesses, as illustrated in the sidebar on pesticides.

Second, the cross-border movement of goods and services is still subject to an array of different regulatory requirements, a challenge the Public Policy Forum has called "the tyranny of small differences." Examples can be found in Part II, Section 1.1 "Manufacturing and Product Approval." Some of these regulatory variations arise from differences in policy objectives. But many of them relate to product classification, procedural requirements and decision-making processes without relevance to substantive results. As these differences proliferate, the cumulative impacts can significantly affect a company's ability to do business and, thus, can impede trade and investment.

The Committee believes that Canada must take a more deliberate and strategic approach to regulatory cooperation with NAFTA partners. Otherwise, it may face social, environmental and economic performance well below its potential.

The short-term objective is to achieve compatible standards and regulation in areas that would make the Canadian economy more efficient and provide high levels of protection for human health and the environment. It requires the removal of regulatory impediments to an integrated North American market and the elimination of the tyranny of small differences. Over the longer term, Canada should work with its NAFTA partners, particularly the United States, to build greater mutual understanding and trust in each other's regulatory processes and decisions, and create common or joint regulatory institutions or processes in key sectors.

The vast array of regulations in North America suggests that regulatory cooperation is a task that is best broken down into issue-specific segments. Such an approach makes it easier to bring together key partners, including provincial and territorial governments, First Nations, citizens' groups and industry leaders.

Stakeholders and federal departments have noted that it may at times be difficult to engage the United States in cooperative regulatory initiatives. In cases where regulatory differences are insignificant or present low risk, it may be in the public interest for Canada to be pragmatic and simply align its approach with that of the United States. The Committee believes that the smart approach, in these cases, is to avoid unnecessary duplication and focus regulatory resources on situations that warrant a unique Canadian solution.

Alignment may not be possible in areas where Canada-U.S. interests diverge and where there are significant policy differences. In these cases, measures should be put in place to reduce the impact of regulatory differences. They could include arrangements to share information, implement common data collection, risk assessment and decision-making procedures, and conduct joint reviews. A good example is the Four Corners Agreement negotiated in 1996 between Environment Canada, Health Canada and the U.S. Environmental Protection Agency (EPA) (for more details, see the sidebar on the Agreement). Similar mechanisms are in place for the joint review of pesticides.

Information-sharing and decision-making measures should be designed to help countries build confidence and trust in each other's regulatory and decision-making processes. They should also help us recognize that each country's regulatory standards, processes and decisions produce similar results. This recognition could eventually lead to one review and approval for a product to enter all jurisdictions in North America. Pesticides, animal vaccines and pharmaceuticals may be appropriate candidates for implementing single reviews for the North American market. (See Part II, Section 1.1 "Manufacturing and Product Approval.")

The United States will likely be interested in cooperative initiatives with Canada to achieve American social, economic and environmental objectives. The Committee believes that Canada and the United States should go beyond aligned regulatory frameworks and identify where they could move toward integrated regulatory institutions and processes. For example, integration is particularly important in those areas where environmental, economic and health issues converge with clean air, animal health and food safety issues. Given the integrated nature of the North American agricultural and food processing industries, Canadians and Americans could gain from having common risk management approaches, joint inspection and monitoring systems and joint emergency responses. Recent experiences with bovine spongiform encephalopathy (BSE) in both countries underscore this point. Similarly, Canada and the United States could collaborate to secure all ports of entry into North America to prevent the spread of risks to human and animal health and the environment. The goal of Canada-U.S. regulatory cooperation in these instances should be effective regulatory regimes that provide high levels of environmental, health and consumer protection.

Recommendation 5: North America should be the primary and immediate focus of the federal government's international regulatory cooperation efforts. The federal government should work to:

• achieve compatible standards and regulation in areas that would enhance the efficiency of the Canadian economy and provide high levels of protection for human health and the environment;

• eliminate small regulatory differences and reduce regulatory impediments to an integrated North American market;

• move toward single review and approval of products and services for all jurisdictions in North America; and

• put in place integrated regulatory processes to support key integrated North American industries (e.g. energy, agriculture, food) and provide more effective responses to threats to human and animal health and the environment.

Recommendation 6: The federal government should work with its U.S. and, where appropriate, Mexican counterparts to build mutual trust and confidence in each other's regulatory processes and decisions through the increased use of independent peer reviews of these regulatory processes, information sharing, shared data collection and risk assessment methods, common decision-making procedures and joint reviews.

B) Key Bilateral and Multilateral Relationships

While regulatory cooperation with the United States is of prime importance, Canada should not diminish its long-standing commitment to working with international standard-setting bodies and other jurisdictions. Broad-based international cooperation is essential in managing many, if not most, environmental and health issues today. It is also important to improving access to markets worldwide for Canadian exported goods and services. Europe and emerging markets such as China, India and Brazil are important markets for Canada to target.

Canada must continue to pursue targeted opportunities to work bilaterally with the European Union. The EU is the world's largest single market, having surpassed the United States in population and exports and rivaling it in gross domestic product. Following expansion in May 2004, its population has grown from 377 million to 450 million. Europe is Canada's second largest trading partner, receiving $33.6 billion worth of exports representing approximately 3.5% of Canada's GDP.

Canada's relationship with the European Union is strategic for more than just commercial reasons. The European Union is becoming an increasingly important regulation setter internationally, and both the European Union and its member states have undertaken several regulatory innovations and renewal efforts in recent years (e.g. the Better Regulation Task Force in the United Kingdom). The European Union can be a key ally for Canada in working towards international standards. When the standard is in the Canadian public interest, Canada should work with its European counterparts at bridging North American-EU differences.

At the December 2002 Canada-EU Summit, Canada and the European Commission agreed to "design a new type of forward-looking, wide-ranging bilateral Trade and Investment Enhancement Agreement (TIEA)" and "to intensify our regulatory dialogue and work toward a new framework in this field." The framework on regulatory cooperation will form the basis for developing voluntary cooperation between EU and Canadian regulators. Both agreements should be completed.

Working within international organizations also achieves the important objectives of improving international regulatory consistency and predictability through the development of international standards and common decision-making procedures. Common standards and procedures also help to reduce trade barriers and encourage investment.

The Committee believes that the federal government needs to focus its international regulatory activities on issues that derive the greatest benefit for Canada. A key area for multilateral cooperation is the approval of new and innovative products and technologies (see Part II, Section 1.2 "Biotechnology/Life Sciences"). For medium-sized countries like Canada, the ability to developregulatory frameworks and evaluate every new product is a growing challenge. Canada should be a strong voice for the development of international standards for product safety and promote one review for products entering markets globally.

The single review of products requires high levels of trust in the decision-making procedures and processes of other jurisdictions. Trust is built through a process that involves exchanging information and collaborative scientific work, implementing common data collection and risk assessment methods, participating in joint reviews and monitoring performance through market audits, for example.

There may be cases where Canada should accept the decisions of regulators in other jurisdictions, particularly in the European Union and the United States, without undertaking a reciprocal confidence-building process and without compromising Canada's high standards for health, safety and the environment. The best candidates are products from areas where there are well-established, internationally recognized conformity assessment procedures already in place. In these cases, Canada should make arrangements with foreign regulators to review and monitor their decision-making procedures and regulatory performance.

Another key challenge for the federal government is to identify when Canada should be an instigator internationally. Canada may not derive any benefit from being the first country to establish a regulatory standard or framework in the absence of an international process or without the involvement of key partners. While exercising leadership is important, the government must be strategic and use resources for the maximum benefit of the Canadian public interest. Rather than being the first out of the gate with a regulatory framework, Canada should work bilaterally and multilaterally to reduce the differences that emerge across national regulatory systems in the absence of an international consensus. Enhancing international regulatory consistency and predictability can help reduce trade barriers and make Canada more attractive to investment in research and development. The government should focus on those areas where standards are necessary for the health and safety of Canadians, where Canada is a leading innovator and host to significant R&D investments, or where Canada has important national policy objectives to pursue.

The promotion of cultural diversity is an area where Canadian leadership has had a national and international impact. Following disputes with its trading partners, some of which it lost, Canada became a strong voice for clear ground rules to guide it and other countries in establishing regulatory frameworks to preserve and promote domestic cultures while respecting the rules of the international trading system. Canada's leadership in this area advanced the interests of federal and provincial governments and Canadian cultural groups. Canada's efforts were not intended to create unique regulatory requirements, but rather to promote international coherence and predictability. Canada should focus its future leadership efforts on areas identified as national priorities and as having significant innovation potential, such as biotechnology.

Recommendation 7: Canada should promote joint and single product reviews for multiple markets. Canada should also move toward accepting the approvals and reviews of products by its U.S. and EU trading partners in sectors where there are well-established, internationally recognized conformity assessment procedures already in place.

Recommendation 8: Canada should identify and target the areas where it wants to be an international leader, focusing on those areas that will produce maximum benefit for Canadian citizens and businesses, for example biotechnology, natural resource development and cultural diversity.

3.2 Federal-Provincial-Territorial Regulatory Cooperation

Federal and provincial/territorial governments in Canada share regulatory responsibilities in many areas, including agriculture, environment, food safety, pharmaceuticals and transport.³ In the area of pharmaceuticals, for example, the federal government is responsible for approving drugs for market, and provincial governments regulate the selection of drugs used in each provincial medical system. Shared responsibility in a range of areas is enshrined in the Constitution. The problem is that the potential for duplication and inefficiency is high without careful coordination between the two orders of government.

Issues of overlapping jurisdiction and duplication have been raised in reviews of Canadian regulatory practice since at least the 1980s. The 1986 Guiding Principles of Regulation promised that the federal government would cooperate more with provinces to address "the overall regulatory burden" by eliminating "wasteful duplication." Following this review, provincial consultation was added as an element of the federal Regulatory Impact Assessment. In the 1990s, as part of further efforts to improve regulatory harmonization, federal and provincial/territorial governments signed the Agreement on Internal Trade and the Accord on Environmental Harmonization. During that decade, most provinces and territories also reformed their regulatory processes and eliminated thousands of outdated and unnecessary regulations.

Still, regulatory coordination between governments in Canada remains a serious problem. Stakeholders consulted for this report were unanimous in calling for major improvements in federal-provincial-territorial regulatory cooperation. Many noted that the absence of cooperation — both between federal and provincial/territorial governments and between provinces/territories — results in significant costs to the Canadian economy. The comment heard most often was that "Canada needs to get its national house in order" to create a stronger, more seamless national system and to improve international efforts.

3.2.1 Key Challenges

Lack of coordination between governments can seriously affect the efficiency and overall effectiveness of a regulatory system. The Committee's consultations and recent polling show that Canadians are increasingly frustrated and impatient with the lack of progress in this area. Non-cooperation increases costs and limits opportunities for both consumers and businesses. Industry representatives underscored that Canadian firms need a national regulatory system that is more predictable, timely and efficient if they are to succeed in a competitive international market. Firms are concerned about a persistent view abroad that Canada has an overly complex regulatory environment. This perception can be a deterrent to business development and investment in Canada.

Recent studies confirm these concerns and support the need for change. The 2002 review of regulatory reform in Canada by the Organisation for Economic Co-operation and Development (OECD), though complimentary overall, highlighted federal-provincial-territorial cooperation as a major priority for reform. The 2002 federal Innovation Strategy noted that different government regulatory regimes result in high compliance costs for business and constrain Canada's innovative potential. A report of key international corporate executives and foreign investors, prepared by Investment Partnerships Canada and released in 2003, identified coordination problems between orders of government in Canada as a key barrier to investment.

A significant challenge to addressing interjurisdictional coordination is the lack of a formal process and mechanism to promote cooperation. Federal-provincial-territorial ministerial councils have been established in most major policy areas (e.g. labour market, health, the environment and transport). But federal, provincial and territorial governments rarely meet to discuss regulatory policies. Government officials cautioned the Committee that simply creating another federal-provincial process is not the answer. They stressed that changing the status quo would require leadership at the highest levels and a clear mandate with priorities for reform.

Another challenge to federal-provincial-territorial cooperation, also identified in other parts of this report, is the lack of coordination between federal departments. This point was raised frequently in the Committee's discussions with provinces and territories. The Committee heard that cooperation with one federal department is often undermined by the actions of another.

Finally, the Committee notes that a common theme in discussions with stakeholders was the pressing need to accelerate implementation of the Agreement on Internal Trade. Provincial-territorial issues such as internal trade were outside the Committee's mandate. However, the Committee recognizes the significance of this issue for Canada and is encouraged to see internal trade on the agenda of the recently formed Council of the Federation.

3.2.2 Building Cooperation

The Committee believes strongly that a Smart Regulation regime will require governments to work together better. The Committee's vision and principles are not evident in the current arrangements between governments. As pointed out in the Committee's consultations, government stakeholders could help in the process to improve cooperation, as they have experience and insights into the barriers and areas of duplication that need to be addressed.

Further, the Committee believes that consistency within Canada is important to developing a more strategic international regulatory approach. As suggested in Section 3.1, provincial and territorial governments should be involved in developing new international approaches in areas that affect them. The current Action Research Roundtable on Canada-U.S. Relations, led by the Canada School of Public Service, shows that most provinces have developed close relations with individual American states in recent years across a range of areas.

The Committee supports the establishment of a more systematic approach to federal-provincial-territorial regulatory cooperation that also respects the distinct responsibilities of jurisdictions. That said, the status quo is not acceptable. The Committee agrees with those stakeholders who say that pragmatic, concrete solutions are needed that go beyond questions of jurisdiction. Indeed, some stakeholders suggested that serious consideration should be given to the substitution and delegation of regulatory responsibilities between governments and agencies. This idea may be worth exploring by federal and provincial/territorial governments.

The Committee believes there should be more information sharing between governments and learning from provincial/territorial regulatory innovation and best practices. To name just two examples that could hold important lessons for the federal government, the Government of British Columbia has implemented a Fast Track Approvals Process for projects (e.g. ski resort expansion) that aims to streamline regulatory processes, and the Government of Alberta is working cooperatively among departments to streamline and improve its energy, environmental and resource management regulatory regimes to efficiently protect environmental quality.

Promising Developments

The Committee notes some recent promising developments in regulatory cooperation. In March 2003, following the consultation report from the Innovation Strategy, federal-provincial-territorial deputy ministers responsible for innovation and trade established a working group on regulatory reform. Co-chaired by Industry Canada and the Province of British Columbia, the group identified best practices and guiding principles for reform and discussed possible priorities for future cooperation. It submitted its report to the Committee for consideration in January 2004.

The report recommended two priorities for better collaboration: environmental assessments and biotechnology/emerging technologies. While cooperation agreements on environmental assessments have been signed between the federal government and a number of provinces and territories, consultations with industry, provinces and territories, and other stakeholders suggest that significant challenges remain. One key issue, for example, is the increased involvement of Aboriginal communities in these processes. As the second priority, biotechnology is seen as an example of an emerging technology with far-reaching implications for provincial and territorial governments. Their early involvement could improve the quality of regulatory decisions and implementation. Both priority areas are discussed in more detail in Part II.

The working group also suggested that it might be useful to pursue joint work in regulatory governance. A strong point of regulatory reform in Canada is the emerging practice of regulatory quality management: the development of policies, tools and institutions aimed at continuously improving the quality of the regulatory environment. This trend is consistent with that of OECD and APEC member countries. The OECD's work in this area points to significant benefits, such as improved economic performance, more effective and efficient government, and enhanced democratic values, such as transparency, public participation and responsiveness.

Early in the Committee's mandate, the Chair wrote to the most senior official in each provincial and territorial government and met with their representatives. These discussions confirmed a high level of interest among provinces and territories in collaborating on common regulatory issues. From these consultations, as well as discussions with industry representatives, First Nations and other stakeholders, the Committee believes that the timing and conditions are right for a broader and more sustained agenda of regulatory cooperation in Canada.

Recommendation 9: The federal government should pay urgent attention to creating a more seamless regulatory environment in Canada. Federal-provincial-territorial cooperation should be formalized in a new joint arrangement between governments, to be initiated through a discussion involving First Ministers. The new process should focus on key priorities (e.g. environmental assessments), identify and address impediments to cooperation, develop a framework to guide regulation making and publish regularly on the state of regulation in Canada.

Recommendation 10: The federal government should ensure the early involvement of provincial and territorial governments in developing Canadian positions on international regulatory issues that have an impact on their jurisdiction, and the two orders of government should work together to ensure the effective implementation of these international obligations.

Recommendation 11: Building on the report of the Federal-Provincial-Territorial Working Group on Regulatory Reform, the federal government should work with provincial and territorial governments on two priorities:

• developing a common and consistent regulatory approach to environmental assessments. Given that environmental assessments often have an impact on Aboriginal communities,⁴ federal and provincial/territorial governments should also involve Aboriginal peoples, where they have key interests; and 
• exploring a cooperative approach to regulating in the area of biotechnology and emergent technologies.

3.3 Federal Regulatory Coordination

Very few regulatory issues fall under the exclusive mandate of a single federal department. In the food processing sector, for example, there can be as many as three different federal departments and agencies with regulatory responsibility in this area — Health Canada, Environment Canada and the Canadian Food Inspection Agency (CFIA). This is in addition to Agriculture and Agri-Food Canada, which holds the broader policy responsibility for this sector.

Regulatees and other interested parties have expressed repeated frustration at having to deal simultaneously with different federal regulators with sometimes competing regulatory demands. This lack of regulatory coordination has a real impact in terms of increased production costs for industry. In addition, it contributes to a perception of Canada and Canadian regulation as being overly complex, which acts as a disincentive to investment in Canada. This multiplicity of federal regulators also creates barriers to citizens' participation in the regulatory process.

Lack of coordination has been acknowledged as an issue by senior federal officials, not only with respect to regulation but other aspects of government operations as well. It is referred to as the challenge of "horizontal management" and has been the focus of significant discussion and study.⁵ Despite these efforts, however, not enough progress has been made and — to borrow the title of one of the studies on this topic — effective coordination among federal departments is still a "heroic act."

A constructive environment that supports increased regulatory coordination is essential to promoting economic growth and meeting regulatory objectives to protect health, safety and the environment and ensure a fair and efficient marketplace. The Committee believes that, if the federal government were better coordinated and spoke with one voice on regulatory issues, it would be in a stronger position to engage with international regulatory partners and work better with provincial and territorial governments and First Nations governments. Moreover, in showing its resolve to better coordinate its approach to regulation, the federal government would be more credible in promoting cooperation and the greater use of partnerships with industry and other stakeholders to advance public policy goals.

Fundamentally, the Committee advocates a cultural change within the federal public service, leading to a reformation by the government in how it develops, implements and enforces regulation. The Committee views the challenge of federal coordination as paramount to the Smart Regulation initiative and feels that, if progress can be made on this issue alone, it will greatly improve the regulatory landscape in Canada.

3.3.1 Key Challenges

One of the Committee's initial findings on this topic was that federal departments still work predominantly in "silos," meaning within the monopoly of their legal mandate and expertise. This approach results in regulation that is used to advance only a narrow departmental mandate, rather than government-wide social, environmental and economic priorities as well. The Committee believes that this is a key barrier to overcome. Regulatory officers should not feel that they are compromising the regulatory mandate of their department because they are also considering the achievement of broader national objectives.

A second major challenge to federal coordination lies within the government infrastructure itself. The Committee has noted a lack of mechanisms within the government to ensure that regulatory coordination among departments occurs and is made easier. There is no locus within the government to facilitate interdepartmental coordination on regulatory issues — particularly when various departments may hold conflicting views on the same issue — and to ensure that regulation is aligned to advance government priorities. As noted in a 2004 report by the Canada School for Public Service, there is a "failure to realize that departments had only a limited capacity to overcome interdepartmental differences" and that there might be a role for central agencies "with respect to initiating, sustaining, resourcing, coordinating, and monitoring horizontal initiatives."⁶

The third major observation made by the Committee is the absence of clear policy and strategic directions on many fronts. The Committee makes many recommendations in this regard throughout the report, particularly in Section 3.1 "International Regulatory Cooperation" and Part II, Section 1.5 "Oil and Gas Exploration and Development." Horizontal management has often been reduced to a process (i.e. the creation of an interdepartmental committee) rather than a means to achieve collective objectives. Without substantive direction, these processes generate considerable frustration for the participants and observers of the process, not to mention those whom it is supposed to serve.

3.3.2 Mechanisms for Coordination

Given the diverse nature of their respective mandates, federal departments sometimes have different or conflicting views on the same regulatory issue. The result is that the government does not speak with one voice on issues when dealing with industry or other interested parties. The Committee has witnessed this phenomenon first-hand, as various departments have presented conflicting views on specific regulatory issues to the Committee throughout the process of preparing this report.

While Memoranda to Cabinet require interdepartmental consultation in order to develop a consensus on a given policy issue, this coordination does not necessarily carry through to the development and implementation of regulations. As discussed earlier, "horizontal management" in the federal public service "is still at a pioneering stage . . . too frequently it seems managers must overcome obstacles that the 'system' could reduce or eliminate."⁷ As such, the Committee recognizes that departments need a place where they can discuss, debate and develop a joint position on a specific regulatory issue.

The Committee notes that the Government of Canada's Regulatory Process Management Standards require that the development of new regulations involve interdepartmental coordination to "determine what, if any, related regulatory requirements already exist." The standards also require that "new regulatory requirements must be coordinated with existing ones to avoid duplication and to take advantage of possible efficiencies."⁸ Despite these requirements, the Committee has heard that, in practice, the department that holds the regulatory authority has the discretion to consult with other departments on regulatory issues, rather than consultation occurring systematically.

The Committee feels that this approach is unsatisfactory and does not go far enough. Instead, the process or mechanism envisaged by the Committee would ensure that all departments that have an interest in a regulatory issue are involved, as appropriate, whether in policy development, the development of regulations and the administration of regulatory programs, or the enforcement and evaluation of these regulations. What is required is a process or mechanism for departments to come together to discuss and debate regulatory issues, including the impact or relevance of ongoing regulation and the creation of new regulations. It is the position of this Committee that this coordination function should be played by the Privy Council Office (PCO), as it is the central agency responsible for regulation.

Recommendation 12: The Privy Council Office should establish a mechanism to support interdepartmental discussion and foster the development of government-wide positions on regulatory issues and ensure that departments take appropriate action to align regulations with national priorities.

3.3.3 Policy Frameworks

Regulatory coordination would be greatly facilitated by the provision of clear, consistently applied policy directions to allow for coherent regulatory decisions across government. Policy frameworks would be used to coordinate regulation by several federal departments clustered around certain activities or sectors. This could involve a general regulatory area, such as departments' involvement in international regulatory cooperation, or a specific sector, such as regulatory activity in natural resource development in Canada's North. By articulating the government's broader policy goals, policy frameworks would be able to provide guidance to regulatory authorities — with concrete objectives and standards to gauge success — and would provide long-term coherence to governance in a given area.

Policy frameworks could also focus on accountability and the need for departments to follow through on implementation, including at the regional level. The Committee heard that policy frameworks would help to reduce the inconsistent enforcement of policy and regulation by federal regional offices across Canada (this achievement would be particularly helpful with respect to the environmental assessment process). In addition, the Committee feels that policy guidance at the regional level must be complemented by strong accountability in regions and leadership by headquarters.

Recommendation 13: Overarching regulatory policy frameworks should be developed that spell out the government's objectives in a sector or area of regulation. These frameworks would provide overall guidance to the various regulatory authorities and ensure that regulatory action is coherent and integrated. For example, policy frameworks should be established for sectors such as biotechnology and issues such as international regulatory cooperation.

3.3.4 Single Windows and Federal Coordinators

Industry and NGOs alike have cited the lack of single windows to engage with the federal government on the regulation of a given issue or sector. As demonstrated by the food processing sector, there could be myriad federal organizations — and even a number of contact points within each department — for stakeholders to deal with. This occurrence is particularly daunting for the individual citizen or small or medium-sized business that wishes to participate in the regulatory process but does not possess the legal or financial resources to navigate the system to ensure compliance with federal regulations.

The use of single windows on specific regulatory issues (e.g. environmental assessments) or at the industry sector level (e.g. the automotive industry) would be a significant and necessary step to improve coordination. By "single window," the Committee refers to a single point of contact for the entire federal government to liaise with a specific industry sector. This approach should be complemented by the use of e-government in order to ensure all of the necessary regulatory documentation is available online and is easy to use.

Moreover, the Committee feels that the use of single windows at the federal level could eventually lead to a leadership role for the federal government in working with other orders of government to create single window service on specific issues for all of Canada, as appropriate.

Single windows should be complemented by the appointment of federal coordinators for specific large-scale investment projects, such as the Mackenzie Gas Pipeline (MGP) project. A federal coordinator would be given clear decision-making authority and accountability with respect to the relevant federal departments in order to establish an efficient and transparent regulatory decision-making process for each respective project. This federal coordinator would also ensure that the federal government speaks with one voice when engaging with other jurisdictions, stakeholders and interveners on the project. Both the single window and federal coordinator approaches would significantly reduce transaction costs for stakeholders and governments. Some of these issues are discussed at greater length in Part II.

Recommendation 14: The federal government should provide stakeholders and the public with single window access. It should also take a leadership role in working with other orders of government to create single window service.

Recommendation 15: In the case of significant investment projects, the federal authority to oversee the regulatory involvement of various federal departments.

3.4 Risk Management

Regulators need to act on problems or risks even in the face of uncertainty and imperfect information. Because their resources are limited and the number of issues they could address is almost infinite, they need to make hard choices about priorities, types of intervention and the commitment of resources. At the same time, citizens are demanding ever-greater levels of protection against an expanding range of potential hazards, and industry is asking for a predictable business environment. Regulators therefore need a process for solving problems and making decisions in a principled, consistent and transparent manner.

At the centre of risk management is the idea that a rational, deliberative and evidence-based approach to decision making will deliver better results over time. It recognizes that risk cannot be eliminated totally, but it can be managed in such a way as to mitigate or reduce harm to the greatest extent possible and practical.

Expanding knowledge and technical competence, combined with rapidly and widely disseminated information about real and perceived risks, means that the function of risk management has become more important for regulators, particularly those working in science-based regulatory regimes. The Committee believes that taking a risk management approach in the design of regulations and the administration and enforcement of regulatory programs must be an essential component of a Smart Regulation strategy.

The examples used in this section relate essentially to science-based regulation (e.g. health and safety and the environment). Risk management is relevant for all regulatory programs; thus the proposed approach could be applied to other fields.

3.4.1 Key Challenges

Regulators must make decisions in an environment characterized by complexity, uncertainty and imperfect information (see Table 3.1). The issues they address are increasingly interrelated and international in nature. For example, ensuring the safety of the North American food supply requires consideration of several factors, including the effects of chemicals and biotechnology on human health and the environment, international trade flows, and manufacturing and labeling practices. This challenge is compounded by the fact that risks can often have both beneficial and harmful consequences. Take, for instance, the development of a new therapeutic product. The availability of this product can lead to important improvements in the health and quality of life of many individuals. However, the manufacture and disposal of the product may have harmful effects on the environment that need to be managed and regulated.

Another challenge for regulators is that risk does not respect departmental boundaries. An integrated approach to risk management is therefore required to protect the public interest. Coordination is critical when the policy and regulatory responsibilities for an area such as agriculture and food issues are shared among multiple departments (e.g. Agriculture and Agri-Food Canada, the Canadian Food Inspection Agency, Health Canada and Environment Canada). In such instances, the government should have in place coordinated approaches to scanning, assessing and comparing risks as well as implementing and evaluating policy and related regulatory programs.

Table 3.1 Risk-related issues and the regulatory environment

Some issues may also require the involvement of provincial and territorial governments. Improving water quality and safety in Canada, for example, requires the coordinated efforts of at least five federal departments and the provincial and territorial governments.

Another challenge concerns the transparency of decision making and public perceptions of risk. Individuals have a different relationship to risk than governments. They tend to focus on more personal factors, such as the potential consequences of harm or injury to themselves, family members and friends. Citizens also want to make their own decisions about many risks, such as transport and food choices, and regulators must make sure that people have access to information on the inherent risks of various decisions. Regulators cannot simply decide behind closed doors what is in the best interest of citizens. They should be transparent in their decision making and involve citizens in a meaningful way. The regulator's ability to communicate with and engage citizens and other parties is a critical success factor in sustaining trust in the regulatory system.

3.4.2 Risk Management Framework for Regulation

The Committee believes that the federal government should develop a risk management framework for regulation that would serve as a guide for departments when they prepare specific risk management approaches. It would provide guidance to regulatory officers so that their decisions are made within a transparent framework and are not subject to their personal evaluation of risk. A framework helps regulators conduct rigorous analysis, exercise sound judgment and, ultimately, make decisions in the face of uncertain hazards.

The Committee believes that departments should be more consistent in their approach to risk management, recognizing that different risks will require different management strategies. For each regulatory program, for example, risk should be classified in terms of severity and anticipated response (e.g. the use of different instruments), including thresholds of risk below which government will notintervene through regulation. Proportionately greater attention and resources should be devoted to risks identified as high departmental or governmental priorities. Lower-level risks should be approached through less resource-intensive compliance mechanisms (e.g. information programs). This classification should be reviewed systematically to take into account new science, changing behaviors and results achieved through the programs.

Departments could take a consistent approach to risk by developing and adopting a risk management standard such as the Canadian Standards Association's Q-850 (see sidebar). A good model is the risk priority matrix developed by Fisheries and Oceans Canada that determines thresholds for various types of regulatory action. Such a framework is broadly applicable to a range of regulatory issues (see Part II, Section 1.4 "The Environmental Assessment Process").

The risk management framework for regulation should include three core elements: risk prioritization, risk assessment, and risk communication and consultations.

Key objectives of this framework are to:

• reduce the risk of harm through effective and responsive regulation;
• allocate and prioritize departmental resources to provide the greatest benefits at the lowest cost;
• ensure that the risk management process becomes more transparent, consistent across departments and predictable;
• improve expectations, mutual understanding and trust among industry, government and citizens;
• ensure that risk assessments are evidence based;
• achieve government-wide shared practices for risk management that emphasize strategic risk prioritization and forecasting, ensure that regulatory measures are commensurate with the risk involved, and make use of a mix of instruments (for enforcement and compliance strategies as well);
• develop innovative opportunities for public participation in determining risk priorities and levels of protection; and
• respond better to risk management problems that involve more than one department.

Recommendation 16: The federal government should develop a risk management framework for regulation that would include the three following core elements: risk prioritization, risk assessment, and risk communication and consultation.

Risk Prioritization

Canada has limited resources to achieve a growing range of public policy objectives; at the same time, the regulatory environment is driven by greater public demand for accountability and fiscal responsibility. It is therefore critical for government to apply risk management when deciding how to allocate regulatory resources. Resources should be allocated to achieve the greatest social and environmental benefits in the most cost-effective way.

Some departments have begun to develop risk profiles — taking into account a range of political, social, legal and financial factors — related to the effective use of resources to manage risk.

Risk identification and the evaluation of priorities should be done consistently — from both a departmental and a whole-of-government perspective. Risks often need to be managed by more than one department, and risk reduction activities in one area increasingly have the potential to increase risks in another.

Risk scanning should be performed on an interdisciplinary basis in order to leverage and pool knowledge and regulatory capacity. In addition to all relevant government officials, the activities could involve Canadian and international scientists from research institutions and academia, provincial and territorial governments, regulatory officers from other countries, industry representatives, non-governmental organizations, citizens' groups and think-tanks.

Regulators should establish their risk priorities, which should be made public, as well as their rationale for choosing these priorities. Departments' annual reports on plans and priorities should present the corresponding resource allocation, and departmental performance reports could highlight the progress made towards reducing these risk priorities.

Recommendation 17: The federal government should undertake periodic risk scanning exercises and ensure that regulatory programs and resources are allocated to address Canada's risk priorities.

Risk Assessment

Regulators must develop a deep understanding of the nature of the problem or hazard they need to address. This means undertaking the necessary research and analytical work and measuring and quantifying the risk at stake. Science is critical to informing the development of regulatory options and decisions, from policy to enforcement and should be conducted in an independent manner and peer reviewed when necessary. This is a key step in the risk management process that provides a strong evidence-based foundation for risk assessment.

In science-based regulation, it is essential that risk assessors have access to the best and latest science to make sure that the regulation reflects leading-edge knowledge. At a time when knowledge is evolving very quickly, this is no easy task. Further, maintaining sufficient in-house scientific capacity and other professional expertise to ensure that risk assessments are based on adequate data and independent research is crucial for government. There should be regular monitoring of government scientific capacity to ensure that the science base is adequate. Periodically, an independent scientific institution could be asked to undertake such a review. Attracting and retaining respected scientists in government will represent an ongoing challenge, given the competition for scientific talent that exists among potential employers.

As argued in the section on international regulatory cooperation, regulators must also maintain relationships and share information with their colleagues in other countries and access international scientific networks. Increased collaboration should be established with the Canadian scientific community (e.g. the National Research Council of Canada, the Canadian Institute for Health Research and universities) on regulation in general and risk assessment in particular.

In addition to scientific information, regulators must also understand the public environment. In developing a regulatory response, they must take into account issues such as values, public tolerance to risk, policy priorities and the evolving social, cultural, political and financial environment.

There are currently no federal risk assessment standards or guidelines. As a result, government as a whole is inconsistent in performing risk assessments that explicitly and transparently describe how empirical evidence and the public environment inform and influence regulatory decisions and serve the public interest. This difficulty is compounded by the fact that, as indicated earlier, risk increasingly needs to be assessed from an interdepartmental perspective. Departments have not yet adopted a coordinated strategy for risk assessments that would allow them to better address new sources of risk to health, safety and the environment and set priorities, particularly when the risk cuts across many departments. Measures to improve consistency and coordination among departments would be desirable.

Precaution

It is important to ground regulatory decisions in science. However, when regulators cannot count on full scientific certainty and they need to make a decision because there is a risk of serious or irreversible harm, they will apply "precaution." The use of precaution is prescribed in several key pieces of Canadian legislation, including the Canadian Environmental Protection Act, 1999 (also known as CEPA 1999), the Species at Risk Act and the Oceans Act.

On a day-to-day basis, regulatory officers or inspectors use precautionary considerations in making decisions. It is part of the regulators' responsibility to anticipate problems and prevent them from occurring. Applying the principle of precaution can be in the public interest and consistent with a Smart Regulation approach. At the same time, the manner in which precaution is integrated in risk decision making is important. If the application of precaution is abused, it can increase risks and impose unnecessary costs on all those involved in the regulatory system, including governments. The Framework for the Application of Precaution in Science-based Decision Making about Risk, recently developed under the leadership of the Privy Council Office, represents a solid foundation to frame the government's use of precaution. It will be important for departments to explain how they will implement this new policy.

The Committee sees no need to formalize precaution in the vast majority of day-to-day circumstances where there is little scientific uncertainty. However, there are situations (see the sidebar on the New Directions Group) that warrant the framing and establishment of specific processes for the application of precaution.

Addressing these special situations will often call for increased engagement from interested parties, including industry and non-governmental organizations. Some feel that such a process delays decision making. The Committee believes that, when based on cooperation and a commitment to finding solutions, the involvement of many parties can improve the timeliness of decisions, contribute to maintaining trust in the regulatory system, and ensure that protection objectives are met and that innovation is not stifled. Transparency and accountability should guide these processes.

Precaution decisions should be grounded in the best available science. Addressing these situations will often necessitate increased information and additional reviews. Other countries often rely on a national science academy to provide scientific advice to the government in these circumstances. In the absence of such an institution in Canada, it would be desirable to involve peer reviews, both with Canadian and international experts, when the precautionary principle is used to justify a significant regulatory action.

Decisions resulting from these processes should be periodically reviewed as science evolves, new knowledge is generated and the public environment changes.

Recommendation 18: The federal government should develop a federal risk assessment standard or guidelines for regulation that would include:

• a federal strategy to systematically and strategically access the best scientific information and knowledge to support regulatory decisions;
• the coordination of risk assessments across departments;
• the classification and prioritization of risks, including the identification and publication of the risk priorities of each regulatory department;
• regular scanning of the public policy environment;
• systematic re-evaluation of these risk priorities in order to account for advances in information and science, results accomplished by the regulatory programs and changes in the public environment, and to respond to new sources of risk; and
• a regular review of the government's scientific capacity. 

Recommendation 19: Federal departments should frame and establish processes for the application of precaution in specific situations, such as when the potential risks or benefits to society are a high priority; when the level of scientific uncertainty is high; when there is a significant lack of societal consensus due to a fundamental clash of values; or when the regulatory framework is unclear or inadequate for addressing new emerging risks. For these situations, they should:

• develop protocols and processes for decision making and how they plan to use precaution in decision making;
• explain the rationale for the use of the precautionary principle to the public;
• consider independent peer reviews to assess the rationale for acting rather than waiting for more evidence; and
• commit to the regular review of significant decisions based on the precautionary principle to determine if information has become available that is relevant to the decision.

Risk Communication and Consultation

It is not possible for government to protect the public from all forms of harm. For example, pesticides make fruits and vegetables more affordable and accessible, and these foods in turn lower many health risks, such as certain types of cancer. However, pesticides may increase other cancer risks. One challenge that regulators face in implementing risk management regimes is the difficulty that citizens and parliamentarians have in understanding certain risk trade-offs. This is particularly true when a situation is perceived to be a regulatory failure (e.g. the withdrawal of a drug from the market). Such outcomes often lead to increased — and not always rational — calls for regulatory intervention.

The Committee believes that risk management must be recognized as a task in which government, industry and citizens play complementary roles to bring risks to acceptable, manageable levels. A critical success factor of a Smart Regulation strategy is government's ability to communicate effectively about risk and to engage citizens, media and parliamentarians in how to manage it. Risk communication plays a key role in establishing trust in Canadian markets and institutions. It is worth noting that a proactive and cooperative communication strategy regarding the BSE incident in the summer of 2003 contributed to maintaining the trust of Canadian citizens, who increased their beef consumption.

Uncertainty concerning sources of harm can be addressed through good professional judgment and action on the part of regulators. At the same time, public trust can be maintained and enhanced by rendering uncertainties transparent. A transparent regulatory system also contributes to increasing the predictability of the business environment, which is something industry values highly. It is therefore important for regulators to clearly explain their decisions, including the factors they analyzed and the options they considered.

Public consultations are critical because risk management is more effective when government works with citizens and industry. Government cannot manage risk alone. Public engagement complements peer-reviewed scientific, economic and social analyses. Citizens and industry have important roles to play in identifying and evaluating priorities, risk tolerance levels and appropriate government and industry responses. Regulators need to find new and innovative ways to engage citizens in order to better understand their risk tolerance, and to obtain their input on risk priorities, risk management options and the corresponding allocation of regulatory resources.

The fast pace of scientific development and the trend towards increased access to information can lead to a more confused citizenry. For example, for years physicians told their patients that cholesterol was bad and that they should avoid it in their diet. Now scientists tell us that there is "good" cholesterol as well, which makes food choices more complicated. Citizens do not always know whom to believe and where to find accurate and independent information. One of the roles of government as a risk manager is to ensure that citizens have access to relevant information to help them make choices.

Recommendation 20: The federal government should develop and publish federal guidelines for risk communication that provide:

• a clear and transparent explanation of the rationale for decisions and how they were made, including the relative weight assigned to the various factors used in decision making; and
• a strengthened role for the federal government as a reliable provider of scientific and other relevant information to consumers, parliamentarians and the media.

Recommendation 21: The federal government should develop guidelines on how public engagement could be used to gain a better understanding of public risk tolerance and to obtain input into key risk management issues and options.

3.5 Instruments for Government Action

Governments have a broad range of instruments or tools to help them achieve their policy objectives. In addition to the more conventional legislative instruments are performance-based regulations, economic instruments, information and education programs, voluntary initiatives and standards, to name just a few. Each instrument involves stakeholder cooperation to varying degrees, such as industry in the case of voluntary codes, and each has its own merits and limitations.

The Committee recognizes the benefits of using a mix of instruments. This approach allows the regulator to adapt its intervention to the circumstances at hand and to draw on the strengths of the most appropriate tools. In some cases, well-designed conventional regulatory approaches may be the most efficient and effective, especially when accompanied by compliance, promotion and other supportive programs. In other cases, there may be advantages to using alternative instruments, sometimes as stand-alone initiatives and in other situations as supplements to conventional approaches. For example, a study conducted by the Department of Justice on its impaired driving initiative indicated that, while legislation was necessary, changing people's attitudes through outreach and education (as in the case of Mothers Against Drunk Driving) was also essential to reducing the incidence of drinking and driving.

3.5.1 Key Challenges

For most of the last century, regulatory practice has relied heavily on a command-and-control model, which focuses on rules to determine behaviour in the hope of producing desired outcomes. Despite the federal government's efforts to encourage departments to consider and use a broader variety of alternative instruments, by training federal officials for example, progress in this area has been slow. Departments still rely too heavily on laws as their tools of choice, without giving due consideration to other options. This is particularly true for economic instruments, which are addressed at the end of this section. The Committee would also like to see greater use of performance-based regulation.

At this time, lack of awareness and experience remain barriers to the increased consideration and use of a broader variety of alternative instruments. Another challenge stems from the fact that the federal government has not yet framed the use of instruments to assist regulators, especially those who design and implement enforcement and compliance strategies. There is no framework to serve as a road map and there is little debate on, or ongoing challenge of, instrument decisions, including whether or not to regulate in the first place. Without clear government guidance, officials involved in regulation (e.g. lawyers, policy analysts, regulatory officers) must rely on their experience and expertise to make instrument decisions and they have little incentive to innovate. Further, legislative constraints on creating and implementing mixes of instruments were raised as a key challenge to the greater use of alternative instruments.

Moreover, in some cases, non-existent or unclear policy direction and objectives also create a barrier to the proper consideration and use of alternative instruments. The Committee recognizes that without clear goals, the effective consideration and assessment of potential instruments and the design of optimal instrument mixes become significantly more difficult. This objective is further hindered by the potential for instrument discussions to turn into policy discussions.

The Committee also observed that concerns over effectiveness posed another challenge to designing and implementing a variety of innovative alternative instruments. During its consultations, it noted that NGOs and citizens still perceive and trust the government to be the "guardian" that protects their health and safety as well as the environment. A number of them, along with some government officials, consider that traditional prescriptive command-and-control regulatory measures are the most effective and reliable means to achieve these objectives, despite agrowing body of evidence that other forms of regulation can, if well designed, produce better results. Some parliamentarians also share this view at times. During the consultations, the NGOs repeatedly expressed a lack of faith in the ability of industry voluntary codes alone to deliver consumer protection or safety objectives, for instance. The Committee recognizes that, as is the case for all measures, there are limitations to alternative instruments, including voluntary codes. This, however, should not preclude their careful consideration and appropriate use.

The Committee believes that strengthened accountability measures are essential to fostering increased public trust. As discussed in Section 3.6.3 "New Approaches to Regulatory Action," the government should explain how the proposed instruments will help achieve the desired results. It should evaluate regulatory strategies on an ongoing basis, report on performance to the public, learn from the results and modify its approaches as needed.

3.5.2 Framing Instrument Decisions

Currently, no framework is available to assist decision makers in their policy analysis and their consideration of various instruments. The Committee recognizes that there is no one single method for creating the optimal mix of instruments. The selection of policy instruments is not a task that can be performed using a "one size fits all" tool. Each situation must be evaluated on the basis of the specific risks involved, the relevant legal framework and the needs, obligations, roles and responsibilities of all players. Yet, the Committee believes that an analytical framework could help decision makers in considering a wide variety of instruments and in finding the right match between the goals pursued and the instruments, from the initial decision to regulate or not, through to the consideration of various compliance and enforcement strategies.

Such a framework could include information on the attributes of each instrument and describe the interrelationships between them. It could also provide criteria and a series of methodological considerations to serve as a road map for decision makers in evaluating the appropriateness of instruments and their compatibility with the objectives being pursued. For instance, officials could be required to consider such matters as the level of risk to society, the industry's structure, its homogeneity or diversity, its history of conformity, the stakeholder or public pressure to resolve the issue, the government's administrative capacity, etc.

The Committee also believes that the choice of instruments should be more thoroughly debated at the outset of the policy design process. The government should cooperate with industry and citizens and build trust in the design of regulatory programs and the choice of instruments from the beginning of the policy development process. Also, to prevent decisions on instruments from being made in isolation, the government should put in place mechanisms to ensure that all relevant members of the federal regulatory community, including lawyers from departmental legal services, are involved in the design of regulatory strategies.

Finally, the Committee is of the view that departments would use a greater range of tools if the choice of instruments were more strongly challenged throughout the policy development cycle. The Committee finds that, once a decision is made to use the force of law to resolve a public policy issue, the existing mechanisms to question that decision and suggest changes should be strengthened.

This could be achieved by reinforcing the role of analysis and the challenge function of the Privy Council Office, notably by requiring that these functions be exercised earlier in the process. The new template for Memoranda to Cabinet suggests discussing "instruments available to achieve policy objectives." This is a step in the right direction in recognizing the importance of instrument consideration in policy development and implementation. Also, when it introduces a bill in Parliament, the government should provide a description of the key policy instruments to be used and a narrative of the proposed substantive regulations planned for the year following adoption of the law, as well as their intended results. These details would better inform Parliament of the full importance of the proposed legislation.

Recommendation 22: The government should develop a framework for the design and use of a mix of instruments, including compliance and enforcement strategies. It should also establish mechanisms to ensure that instrument decisions are more strongly debated throughout the policy development cycle, notably by requiring that the Privy Council Office's challenge function be exercised earlier in the process.

3.5.3 Increasing Awareness

In recent years, the federal government has provided some training and information on instrument choice to encourage officials (e.g. lawyers, policy analysts, regulatory officers) to use a wider range of instruments. Some departments have become quite successful at creating innovative mixes of instruments and working cooperatively with industry and citizens. For instance, Environment Canada's approach to pollution prevention and the protection of the environment and human health includes not only the Canadian Environmental Protection Act, 1999, and its regulations, but a variety of other non-legislative tools such as environmental quality guidelines, codes of practice and pollution prevention plans developed by industry.

However, the Committee notes that, despite these efforts, progress on the use of alternative instruments has been slow. This seems to be attributable to entrenched habits in the regulatory community and the result of a "vicious circle," where Canada's lack of practical experience and awareness feeds an ongoing reluctance to depart from more traditional regulatory approaches.

The federal government should pursue its efforts to help officials involved in designing, implementing and enforcing regulation to become more aware of the potential uses of alternative instruments. In the Committee's view, this should involve continued efforts to provide them with practical and focused training and information. Integrating regulatory innovation into the performance assessment of civil servants could also encourage regulators to consider innovative instruments or mixes of instruments.

Further, increasing awareness of the various instruments will require that best practices in instrument choice be given more profile and that they be shared across departments. These best practices could be supplemented by conducting a number of case studies of various alternative instruments. The results could be benchmarked against those of other countries.

Recommendation 23: The federal government should accelerate efforts to make the regulatory community aware of the various instruments available and the benefits of using a combination of tools to solve policy issues.

3.5.4 Removing Legislative Constraints

Instruments are often selected on the basis of availability. Traditional views of government and regulatory action have favoured the use of statutes and regulations as the main policy tools. Therefore, federal statutes often focus on using conventional regulations to implement the legislative schemes rather than other tools that would better serve policy objectives. This is particularly the case for older statutes, where the details of the legislative schemes are often required to be prescribed by regulations.

The problem is that when a statute requires the Governor in Council to make regulations respecting specific matters or activities, these matters or activities cannot be regulated otherwise, such as through voluntary codes or other instruments. An illustration of this principle is found in the case Aucoin v. Canada (Minister of Fisheries and Oceans),⁹ in which the Federal Court of Appeal declared illegal a partnering agreement with snow crab fishers because it was not authorized by the Fisheries Act. By entering into this agreement, the Minister of Fisheries and Oceans had acted beyond his legal authority.

The same problem exists with respect to performance-based regulation, a type of regulation highly favoured by larger firms — and one for which smaller firms require guidance — which sets a desired performance standard and lets the regulated community decide how best to achieve it. For instance, an environmental regulation may state the maximum level for effluent discharge, but each firm can choose the best method for restricting its discharges to meet the prescribed limit. When a statute requires the Governor in Council to prescribe the method or means for regulated parties to use in order to achieve certain results, the regulations must indicate which method is to be used. Regulatory authorities are therefore prevented from using performance-based regulations.

The Committee believes that if federal officials had more flexibility in designing regulatory strategies and if existing legislation did not limit in their options, they would consider and use alternative instruments more often.

Therefore, regulatory authorities should be asked to identify the legislative constraints they face when considering alternative instruments or performance-based regulations. These constraints should be removed through stand-alone or omnibus bills at the earliest opportunity.

At the same time, departments that wish to bring forward new statutes should be required to create their mix of instruments early enough in the process (e.g. prior to the drafting of the Memorandum to Cabinet) to ensure that the appropriate authorities are built into the statute and that they have the necessary tools available to them for future use.

Recommendation 24: Legislative constraints on creating mixes of policy instruments and using performance-based regulations should be eliminated.

3.5.5 Increasing the Profile and Use of Economic Instruments

In addition to its broader consideration of instruments, the Committee examined the use of economic instruments to meet environmental objectives. It did so in view of Canada's ambitious environmental objectives and because Canada's experience with economic instruments is limited and lags behind that of most OECD countries, which have much greater use of such instruments to achieve environmental goals. The OECD's Economic Survey of Canada, 2000 concluded that there was a need to increase the use of economic instruments to reinforce the polluter-pays principle.

The Committee is of the view that the Government of Canada should take a more innovative approach to regulatory governance in this area, which would involve a government-wide approach to policy development and implementation.

Economic instruments complement but do not substitute for legislative instruments. They use market-based signals to motivate desired types of decision making. They either reward desirable behaviour or penalize undesirable behaviour. They encourage the development of full cost accounting, which includes all the costs of a project (e.g. polluter-pays principle). These instruments include the allocation of property rights, fee-based measures, liability and assurance regimes and tradable permits. Applications that the government may wish to consider include a deposit-refund or rebate scheme that would encourage life cycle management of consumer recyclables, a pollution tax that penalizes those who create and emit pollutants, a restructuring of fuel excise taxes (i.e. expansion beyond transportation fuels into coal and other on- and off-road fuels), infrastructure program spending, and conditionality and tax credits as well as subsidies for renewable energy sources and technologies.

Economic instruments are a key part of the broader concept of Ecological Fiscal Reform (EFR), which involves redirecting taxation and expenditure programs to create an integrated set of incentives to achieve environmental objectives. While a number of European countries have successfully implemented various aspects of EFR over the last decade, Canada has very limited experience with it.

Economic instruments can have important advantages over other tools. Studies¹⁰ indicate that their compliance costs can be significantly lower. Economic instruments can also reward continuous improvement and stimulate environmental and technological innovation.

International successes with economic instruments clearly demonstrate these advantages. For instance, the U.S. implemented a successful emissions trading program targeting sulphur dioxide emissions from electric utilities. Under this regime, the cap on annual emissions of sulphur dioxide acts as a performance standard, while the tradability of emissions allowances lets firms decide how they want to comply. During the first phase of the program — which took place between 1995 and 1999 — the cost to participants of reducing emissions to the target level was between 1/7 to 1/3 of the cost originally anticipated by the U.S. Environmental Protection Agency and others.

Several studies have estimated the annual Phase 1 cost to participants at approximately $1.2 billion, which is much lower than the original estimate of $5 billion.¹¹ Emissions were reduced by four million tonnes annually over this period. That number is expected to double during the second phase, which started in 2000.

Similar to other alternative instruments, the main barriers to using economic instruments in Canada appear to stem from two sources: the regulatory community's lack of awareness and experience, and, in the case of charges or taxes, resistance to what the public perceives as additional fiscal measures.

The Committee's observation is that the limited use of economic instruments and EFR means that Canada may be incurring higher costs than necessary in addressing environmental policy issues. It is the Committee's view that Canada should seriously consider economic instruments, in combination with other tools, as a means of attaining its environmental objectives. A key step could be to thoroughly examine both EFR and economic instruments. Their successful use in Canada will require collaboration across all federal departments, including Environment Canada, Natural Resources Canada and Finance Canada.

The Committee recognizes that some concerns regarding the use of economic instruments and EFR are legitimate. It is possible, for instance, that Canada's regionally diverse ecosystems, policy contexts or fiscal philosophies may make it difficult to design a "one size fits all" approach. There also appears to be a lack of detailed knowledge among decision makers, stakeholders and the public about the range of EFR and economic instruments and their operation. These factors should not preclude the examination of these instruments on a case-by-case basis.

Recommendation 25: The government should examine expanding the appropriate use of economic instruments in Canada. Efforts could include the following:

• examining the opportunities and challenges associated with EFR in Canada and addressing whether and, if so, how EFR could be implemented to support environmental policy goals; 
• identifying several economic instruments which could be used to attain environmental policy goals and assessing their effectiveness, either individually or as part of an instrument mix; 
• identifying areas where fiscal measures act as disincentives to achieving environmental policy objectives and finding ways to redress the situation; and
• launching pilot initiatives to examine the effectiveness of economic instruments in achieving policy objectives. For example, the government could design and implement one or more pollutant charges or taxes as well as incentives to accelerate the adoption of innovative environmental technologies.

3.6 The Regulatory Process

This section focuses on how regulation, in its broadest sense, is developed, implemented and evaluated. The Committee believes that the federal government needs to improve the process for making rules that affect Canadians' lives and interests. Reforming the process in accordance with the values and principles of Smart Regulation would strengthen the public trust in Canada's regulatory environment and make it an asset for citizens and business.

The regulatory process sets the basis for much of the business of modern government. Developing regulatory policy, implementing regulatory legislation, achieving public compliance with laws and assessing the effectiveness of regulatory intervention are all among the primary roles of government as it seeks to protect the public interest.

The Committee has developed recommendations that it believes reflect the interrelated nature of the regulatory system. Process improvements that focus only on part of a larger system run the risk of degrading, not enhancing, overall system performance. As in all systems, a key issue in improving the regulatory system will be balance. It is inevitable that the design and execution of the regulatory process will reflect competing objectives and interests. Timely decisions and an affordable process are valued, but so is consultation and improved analysis. More public and parliamentary involvement is desirable, but the process should avoid gridlock and delays in dealing with important public policy issues. Flexibility is another desirable attribute, but so is predictability and equitable treatment. The Committee suggests mechanisms that allow for the weighing of competing objectives to achieve a Smart Regulation process.

3.6.1 Key Challenges

The Committee heard the following key concerns related to the regulatory process:

• The coverage of the current policy is too limited: the federal Regulatory Policy is aimed only at the development and approval of regulations; a separate process exists for the development and approval of draft statutes; and quasi-legislative rules are not subject to any consistent or formal process of analysis or approval.
• In many instances, existing statutes present impediments to the application of Smart Regulation principles. One obvious example is the confusion about the application of the term "regulation" in the Statutory Instruments Act.
• The quality of information and analysis available to decision makers and stakeholders is variable. The current system does not provide the discipline needed to clearly express regulatory objectives and anticipated outcomes that can be measured and evaluated.
• Insufficient attention is paid to compliance and enforcement issues at the design stage of regulatory strategies. Departments are limited in their options when designing compliance strategies.
• The system is not clear or transparent for many players, who often do not understand why and how regulation is developed, when and how they may participate or obtain recourse, and how to find information about proposed or existing regulation.
• There is considerable frustration with the slowness of the regulatory process. In particular, delays in processing some regulations with minimal impact are unacceptable. There is also widespread dissatisfaction with the delays involved in processing applications for approvals, licences or other types of governmental services and with the transparency and predictability surrounding these processes.
• There is a large stock of existing regulation that is not evaluated regularly to determine if it supports the objectives of Smart Regulation. In addition, there is no evaluation of whether the regulatory process itself promotes Smart Regulation.

3.6.2 Policy and Legal Frameworks for Regulatory Action

Smart Regulatory Policy

The central government policy for regulatory intervention is the federal Regulatory Policy, the first version of which was designed in 1986 when regulation was growing at all levels. The current Regulatory Policy focuses on the development and approval of regulations (subordinate legislation). It does not apply to the development of statutes (which is governed by the Cabinet Directive on Law-making) and other phases of the life cycle of regulatory intervention such as the evaluation and removal of regulatory programs. Moreover, in the federal regulatory management system, officials who develop and assess policy options for ministerial consideration receive fragmented guidance, as guidelines are found in a variety of policy statements.

The Committee believes that a Smart Regulation approach to the regulatory management system would connect and integrate the system by bringing it under one broad policy on government use of regulatory intervention. In addition, an updated and responsive Regulatory Policy would clearly signal the political priority being placed on Smart Regulation principles and infuse the regulatory management system with new energy and direction.

The government should develop a new federal Regulatory Policy which would generally apply to all legislation, both statutes and regulations (see Annex III for a draft Government of Canada Smart Regulation Policy). Controls should be improved over specified quasi-legislation that has significant impacts on regulated parties. Furthermore, negotiating positions for treaties, conventions, international agreements and international standards that will oblige Canada to take regulatory action should be assessed in terms of Smart Regulation objectives. The Committee is aware that this would impose new requirements on the modeling of negotiating positions, but the role of international agreements in driving the form and content of regulations means that more attention must be paid to the potential consequences and impacts of negotiation stances.

Another component of the updated policy should be a new requirement to provide an explicit "public interest" rationale for a regulatory intervention. Smart Regulation's ultimate goal is to serve the Canadian public interest, and so a public interest rationale should be a key component of every major regulatory decision. A common framework that would encourage regulators to articulate the public interest considerations underpinning a decision would help in building better public comprehension of and trust in regulatory activities. A proposed model is contained in Annex II of the report.

The Committee also believes that proportionality in procedural requirements is a key element in the success of a new policy framework. Currently, the Regulatory Policy and the process requirements that flow from it apply broadly to all types of regulations (see the last page of this section for a diagram illustrating the current regulatory process). The policy and requirements do not take into account the levels of risk being addressed, the economic or social impacts of the proposals, the extent of consultation needed or the degree of controversy surrounding the proposals. In the current system, resources are not being used as "smartly" as they could. As a result, insignificant or low-impact proposals are subject to overly complex process requirements, while more significant proposals receive insufficient analysis.

A Smart Regulation approach would mean that the process requirements would be proportional to the impact of the regulation and would enable both government and stakeholders who wish to participate in regulatory decision making to focus their resources accordingly. The issue is finding the appropriate balance between the risks that regulation deals with or the impacts of regulation, and the time and resources that both government and stakeholders devote to the regulatory process. The application of the requirements under the federal Regulatory Policy should be targeted by adjusting or "tiering" requirements for analysis, consultation or pre-publication of regulatory proposals to accommodate impacts, levels of risk, degree of controversy and stakeholder need for information.

The Committee is aware that the Privy Council Office and departments already work together to ensure that the level of effort and analysis required for regulatory proposals is commensurate with their scope and impact. For instance, the Benefit-Cost Analysis Guide for Regulatory Programs classifies regulatory proposals according to their cost and the degree of public acceptance. Similarly, a Business Impact Test is required for "major" regulatory proposals. However, the Committee believes that tiering should apply to more procedural requirements. Further, it believes that more clearly defined "tiers" and better criteria for classification would improve the system.

It will be particularly important to streamline the process for regulations that have minimal impacts or that deal with areas of minimal risk. However, the streamlined process must remain transparent and accountable. At the same time, "significant" and "very significant" regulations must be identified and dealt with appropriately in terms of process and policy development.

Guidelines to define "less significant," "significant" and "very significant" will have to be developed, using such criteria as level of risk, projected costs for business, impact on citizens, effects on the economy, competitiveness, trade, investment, innovation, employment or sustainability, level of controversy, and degree of uncertainty about risk or risk reduction approaches. Other countries, like the United States and Korea, already use criteria such as the effects of the proposals on competition, employment, investment, productivity and innovation.

The Committee also believes that the policy importance of "very significant" regulations should be recognized and that the regulatory process for these regulations should more closely mirror that employed for statutory development. In this instance, the appropriate Cabinet policy committee approves legislative policy and drafting instructions. "Very significant" regulations are not frequent, but the Committee believes that full political involvement is appropriate for regulations that in another era may have been treated as statutes.

Recommendation 26: The Government of Canada should give priority to developing a new federal Regulatory Policy that would:

• reflect the Committee's vision, principles and proposed regulatory strategy as outlined in this report;
• apply to broader aspects of regulatory intervention, including statutes, regulations, specified quasi-legislation and the negotiation of international positions; and
• target or "tier" the procedural requirements to accommodate such matters as level of risk and impacts.

Smart Legislation

Legislation lies at the base of all regulatory action, but legislation itself can present impediments to the application of Smart Regulation principles. The government should identify these impediments and explore techniques to remove them to ensure that Canadian legislation is modern, flexible and effective in achieving Smart Regulation objectives.

Some of the impediments to Smart Regulation arise from difficulties in determining the scope of the Statutory Instruments Act. The government should introduce legislation to clarify the scope of the Act to reduce confusion and the time spent determining its ambit.

As explained in section 3.5, other existing impediments to Smart Regulation relate to the limits that departments and agencies face when they consider using alternative policy instruments or performance-based regulations. The Committee already suggested in that section that these constraints be removed through legislative amendments.

Statutes and regulations should be clearly drafted and accessible. To this end, the government should ensure that all officials involved in the preparation of legislative texts, including instructing officers, receive proper training in designing and drafting clear legislative texts and supporting documents. Improving the readability of legislation would enhance transparency, increase compliance and save time and money for those being regulated and the government.

The drafting of statutes and regulations should allow for modern regulatory techniques, such as the incorporation into regulations of standards developed by non-governmental bodies, international organizations or other governments, as amended by them from time to time. This technique keeps regulations up-to-date, particularly in changing areas of technical standards, and promotes interjurisdictional harmonization of regulatory standards. The government should establish a uniform policy on, and seek clear legislative authority for, incorporation by reference in regulations of standards and codes, as they are amended from time to time by external organizations or other jurisdictions.

Recommendation 27: Existing statutes should be reviewed to identify and remove impediments to Smart Regulation. Statutes and regulations should be clearly drafted and allow for the use of modern regulatory techniques.

3.6.3 New Approaches to Regulatory Action

The Committee believes that the initial framework for developing regulation should be improved and that certain considerations should be injected into the early analytical and planning process. As explained below, risk-based policy analyses, performance measurement plans and compliance plans are tools to improve thinking about regulation. In this sense, they can all be seen as improving the discipline of rule making.

Risk-Based Regulation

The Committee is suggesting a significant adjustment to the analytical and briefing requirements for proposed regulatory intervention, applicable both to bills and to "significant" and "very significant" regulations, by recommending that the concept of risk management be at the basis of all proposals. Risk-based thinking would expand and complement existing analytical requirements (which are primarily based on the economic analysis of costs and benefits) to provide information that the Committee believes decision makers need. The recommended risk-based policy analysis should provide explicit and preferably quantifiable projections (with clear disclosure regarding the degree of uncertainty) of risk reduction benefits and economic consequences from proposed regulatory action, including:

• how and why risks are expected to evolve in the future (the baseline problem);
• how various instruments could be used to change the evolution of risks (instrument choice);
• how the risks would change over time as regulation is implemented (performance expectations);
• how economic impacts (especially on productivity and innovation) are likely to evolve in response to government intervention; and
• how compliance is expected to evolve as the regulatory requirements are implemented under proposed compliance strategies.

Preliminary risk-based analyses and analyses of other impacts, including compliance costs, anticipated impacts on competition dynamics, ability to invest in innovation and other dynamic effects, will form a useful basis for consultation. Second-stage analysis can be developed as more is learned through the consultation process.

The Committee recognizes that risk analysis involves judgment, not just calculation. It is also well aware that a broadly applied risk-based approach to regulatory policy development implies greater clarity and transparency about assumptions, the limits of what we understand, the uncertainty that is implicit in public policy development, and the constraints on our ability to shape the future. However, the Committee believes that providing better information on how and why risks evolve and how government action can shape the evolution of risk will not only improve transparency, communication and accountability in the management of the regulatory process. The Committee believes that it will also give decision makers the kind of information they need to make wise decisions in the public interest, decisions that will ultimately generate better regulatory outcomes and better economic performance — the hallmarks of "Smart Regulation."

Recommendation 28: The government should implement a risk-based approach to regulatory action to improve analysis and decision making by requiring that all proposals for regulatory statutes and "significant" or "very significant" regulations be accompanied by an appropriately tiered risk-based policy analysis. The risk-based policy analysis should be open for public comment and reviewed by experts in the relevant discipline.

Better Planning of Performance Measurement

Performance measurement of regulatory action is key to implementing a Smart Regulation strategy. When taking regulatory action, regulators should announce the results they wish to attain, the manner in which they intend to measure them as well as when and at what frequency they will report on them. They must demonstrate their progress in achieving these results and be prepared to modify their approach if necessary. Evidence of performance is essential to sustain public trust.

This recommendation on performance measurement is aimed at improving the initial framework for assessing regulatory performance so that the government and stakeholders will be better informed of the objectives of regulation. It is also aimed at ensuring that these objectives are measured more accurately and, equally important, that adjustments are made to legislation and regulatory programs to ensure continuous improvement. This performance measurement recommendation is closely linked to recommendation 28 concerning risk-based policy analysis and recommendation 36 dealing with the evaluation of the existing stock of regulations.

The Committee recommends that regulatory bills and "significant" and "very significant" regulations be accompanied by a public performance measurement plan that includes projected risk reduction in measurable terms, performance measures, data collection requirements, a strategy for ongoing performance monitoring and a proposed schedule for evaluation. These plans would support subsequent legislative reviews and evaluations of regulatory programs.

Recommendation 29: The government should strengthen the performance measurement of regulation by requiring that all proposals for regulatory bills and "significant" and "very significant" regulations be accompanied by a public performance measurement plan.

More Attention to Compliance and Enforcement

The credibility of the law and the trust of citizens are diminished when legislation is passed that cannot be enforced. Realistic assessments must be made of the enforcement potential of new legislation and the enforcement effects on existing laws, given available resources. The current federal Regulatory Policy already requires that regulatory authorities articulate their compliance and enforcement policies when they develop regulatory proposals. However, the regulatory impact analysis statements prepared by departments with respect to regulatory proposals often lack details about compliance and enforcement strategies, and primarily the resources that will be dedicated to the program.

Implementation, compliance and enforcement need to be better considered at the outset of the policy design process to produce Smart Regulation. To this end, the Committee recommends that every proposal for "significant" and "very significant" regulations be accompanied by a compliance plan outlining the range of compliance and enforcement mechanisms, including innovative sanctions, to be used. The compliance plan should outline the resource requirements of the new regulatory program and the impact of those requirements on existing programs.

Compliance should be based on a risk management approach. Because government does not have the resources to inspect or enforce all regulations, a relationship of trust should be built whereby government compliance strategies could include incentives for businesses and citizens to voluntarily demonstrate compliance. Sanctions should also be sufficient to deter non-compliance by removing the ability to make a profit from non-compliance, for example.

Further, the Committee believes that compliance would be improved if officials had a broader range of possible responses to non-compliance that they could use to develop an "enforcement pyramid," moving up to more stringent responses as non-compliance becomes more severe. More legislation should include remedial sanctions, such as the alternative measures found in the Canadian Environmental Protection Act, 1999, or the Species at Risk Act.

An option would be to introduce legislation to give all departments more flexibility in creating compliance strategies and to authorize additional compliance and enforcement tools, including alternatives to regulatory prosecution, for use by all departments. Such a statute would permit all departments to take advantage of administrative innovations, enforcement alternatives and additional or alternative penalties (administrative monetary penalties, voluntary or mandatory corrective actions, suspension or revocation of licences, dispute resolution, etc.) as they evolve, whether or not these tools are expressly provided for in the statutes they administer.

Compliance and enforcement issues warrant more attention than was possible for the Committee to devote given the scope of its mandate. This is an area where the Committee suggests that the government might want to undertake more work and deeper analysis of the issues and potential areas of improvement.

Recommendation 30: The government should ensure that attention is paid to regulatory program implementation and compliance early in the policy development process by requiring that "significant" and "very significant" regulations be accompanied by a compliance plan.

Recommendation 31: The Department of Justice, the Privy Council Office and federal departments should work in collaboration to introduce legislation that would make a range of compliance measures available to all departments.

3.6.4 Transparency and Consultation

The Committee believes that transparency is a crucial element of a smart regulatory environment. Transparency must be maximized in government, as well as in industry, in order to promote learning and information sharing and to build public trust in the system's integrity. The following recommendations complement those made elsewhere in this report to increase the levels of transparency in the regulatory system.

Consultation as a Learning Dialogue

The OECD and other commentators have recognized Canada's strong performance in consulting on regulatory matters. Consultation has become part of the Canadian regulatory culture and has significantly changed the way government has done business in the last 25 years. Nonetheless, the Committee often heard cases of dissatisfaction with consultation. There was concern, for example, that consultation occurred too late in the policy development process, that government consultation efforts were not coordinated or that certain stakeholders were at a disadvantage in dealing with the demands of consultation. Another issue is that stakeholders sometimes take an adversarial approach to consultations, which is not conducive to problem solving. The government must improve its capacity to approach consultation as a dialogue, facilitating collective learning about risks, options for instruments, effective compliance strategies and the potential impacts of regulatory action.

The government should clearly frame the boundaries for consultation initiatives. This framework should include the consultation objectives, the type of comments the government wishes to receive and the timeframes and means for providing input. Such a document should provide clear rules of engagement for interested parties and help them decide whether and, if so, how to participate.

In order to facilitate citizen involvement, the Committee believes that the public should have all the information it needs during the consultation process, including the supporting rationales, the technical or scientific information, the analyses performed, the costs and benefits, the trade-offs considered, the risk assessment, the potential impacts and consequences, and the alternatives considered. The public needs to know which problems the government is paying attention to and what drives the government in solving those problems.

Yet, this information is often not shared with the public or other interested parties because it is said to be protected under Cabinet confidentiality. The Committee recognizes that Cabinet confidentiality is an essential component of Canada's system of responsible government. However, the zone of secrecy afforded to Cabinet confidences is limited to the information that forms part of the advice to a minister or the documents listed in section 69 of the Access to Information Act. The government should develop rigorous guiding principles on what can be disclosed in the context of consultation and what should be protected as Cabinet confidence.

One objective of public consultations on regulatory issues is to ensure that regulatory authorities are aware of a broad spectrum of perspectives and ideas. In this regard, consumer organizations are under-represented in consultative processes and do not have the resources to undertake the research and develop the expertise required to contribute to consultations on regulatory issues. Their capacity for constructive dialogue should be fostered by selective funding, for example. To ensure that the provision of participant funding does not distort the level of interest in a proposal by creating a financial incentive for intervention, the allocation of funding should be conditional on the provision of good quality research and analysis. The criteria for eligibility and the maximum funding available should be clearly communicated. A short-term solution could involve increasing the funds allocated to the Industry Canada Contribution Program for Consumer and Voluntary Organizations, which totalled only $1.69 million in 2003-2004. Additional funding allocated to this program could be directed to projects involving regulatory issues with significant impacts on consumers.

An interesting model of participant funding is provided by the Canadian Radio-television and Telecommunications Commission (CRTC), where the Commission has the authority to reimburse some or all expenses incurred by an intervener in a telecommunications proceeding. At its discretion, the CRTC may award such costs when it deems that they were incurred by an intervener who represents a group of consumers that has an interest in the outcome of the proceeding, has participated in a responsible way and has contributed to a better understanding of the issues. There is no fund established for this purpose. Rather, the telecommunications firms involved in the proceeding reimburse the interveners. The CRTC determines the extent of costs that are to be awarded, the telecommunications firms which will be required to pay and the amount (or the percentage) which they will each be required to contribute.

As citizens' expectations to be heard and take part in the policy process continue, the government will need to explore new consultation techniques and find creative ways to provide for increased and more meaningful citizen involvement. The Committee recognizes that this is a difficult and challenging task, one with which all governments of pluralistic societies struggle. It is a key issue of modern policy development that the government will have to address. This is an area where it will be necessary to experiment and learn. It would be useful to monitor experiences in other organizations (e.g. Canadian Policy Research Networks), other jurisdictions (e.g. the Government of Ontario) and other countries.

Recommendation 32: The government should improve its capacity to approach consultation as a dialogue that promotes collective learning about risks, options for instruments, effective compliance strategies and the potential impacts of regulatory action. It can do this by improving coordination, increasing financial support to consumer groups, exploring new consultation techniques or mechanisms, and developing and disseminating guiding principles to more clearly frame consultation exercises.

Harnessing the Potential of E-Government

The Committee believes that e-government would provide a powerful Smart Regulation tool for citizen engagement by offering opportunities for communication, consultation and collaboration as well as single window access to government regulatory programs. Such an approach could eventually go beyond the federal government and include provincial and territorial governments. The Committee recommends that the government establish a Smart Regulation Internet gateway that would allow the public to more easily and reliably access information about regulation by sector, subject matter or department. The gateway should provide information on current consultations and links to relevant departmental Web sites. It could be used as a tool to foster coordinated consultations by different departments on various regulatory proposals affecting specific sectors or groups.

Departmental Web sites should provide information about regulatory programs, compliance policies, impact analyses and background documents to analyses. In addition, each department and agency should publish on its Web site an annual virtual regulatory agenda that would provide information on such matters as advance notice of intention to develop regulatory proposals, consultation processes and schedules, legislative reviews, evaluation plans and performance measurement plans. The agenda should also include project plans and timetables for both legislative development and the development of "very significant" and "significant" regulations.

Recommendation 33: The government should capitalize on the potential of e-government as a tool for citizen engagement and as a vehicle for single window access to government regulatory programs; in particular, a Smart Regulation gateway and departmental virtual regulatory agenda should be established and maintained.

3.6.5 Timeliness and Efficiency

Timeliness and efficiency are key principles of Smart Regulation. Regulators must strive to ensure that both the development of regulations, as well as the delivery of regulatory programs better reflect the pace at which business operates and new knowledge develops.

Throughout its mandate, the Committee heard many complaints concerning unreasonable and unexplained delays in decision making by regulators. The Committee fully recognizes that, in the current fast-paced environment, the regulator is faced with making difficult decisions with imperfect, sometimes conflicting information. In these circumstances, it is in the public interest to take the time to conduct a more thorough analysis.

In order to maintain credibility and trust in the regulatory system, regulators must be transparent. The reasons for the delay should be explained to make it clear as to why a decision calls for more time. This would help ensure that the lack of timeliness is not linked to poor program management or lack of service standards, but rather to a legitimate complexity that regulators must manage in order to make the best decision.

Timelier Development of Regulations

There is widespread agreement that the regulatory process is in need of streamlining. Streamlining is closely tied with recommendation 26 dealing with targeting or "tiering" the requirements of the federal Regulatory Policy.

As explained earlier, one way to streamline the process is to decrease the procedural requirements for "less significant" regulations. Another method is to transfer the authority to make administrative and selected "less significant" regulations from the Governor in Council to the responsible Minister. Transferring such authorities would give departments and ministers more flexibility in carrying out their activities and would relieve the regulatory process from dealing with matters that should be dealt with administratively. However, transparency and accountability must be maintained in accordance with the principles of Smart Regulation.

To further streamline the regulatory development process, the government should explore broader exemptions from pre-publication in the Canada Gazette, Part I, notably when established standards for consultation are met. These standards will have to be developed, but may relate to such matters as the ability to identify and involve stakeholders, ongoing stakeholder participation in regulation through advisory groups and established consultation mechanisms, and the adequacy and accessibility of information. However, where there are legal requirements for pre-publication in domestic legislation or in international agreements, regulations made under these statutes or agreements should continue to be pre-published.

Government may also wish to explore streamlining the pre-publication process by providing for ministerial authorization of pre-publication in the Canada Gazette, Part I, and eliminating the need for Cabinet authorization for pre-publication at this stage.

Project planning and project management discipline should be applied routinely for "significant" and "very significant" regulatory initiatives. The Committee believes that identifying targets, setting schedules for action and developing performance standards for selected parts of the regulatory management process, such as intradepartmental approvals, would improve the timeliness of regulatory development, enhance service to the public, increase the transparency of governance functions, and foster a constructive approach to accountability for regulatory performance.

Recommendation 34: The government should develop new approaches to allow for more timely development and approval of regulations, including exploring broader exemptions from pre-publication requirements, improving project planning discipline and developing performance standards for appropriate stages of the regulatory process.

Timelier and More Efficient Delivery of Regulatory Programs

The Committee believes that when designing and implementing regulations and regulatory programs, serious attention should be paid to the concerns of regulated parties about efficient, timely and predictable service.

The Committee heard of cases where firms seeking governmental approval for a product were dissatisfied with the delays involved in the processing of their application and the lack of transparency and predictability around the approval process. One such example involved a small company that waited for more than a year for a federal department to process an application for approval for a new product that had been approved in the United States in only three months. Some of the reasons given for the delay were workload and other priorities, but the only recourse for the company was to write to the Minister and to ask for the assistance of the Member of Parliament. The Committee is concerned that such delays in the provision of government services can prevent consumers from having access to innovative products and cause significant economic losses to businesses, possibly jeopardizing their position in the marketplace in certain cases.

One response to cases like this would be to ask departments and approval agencies to develop service standards for regulatory programs, particularly when they involve approvals, licensing, permits or other types of regulatory responses.

By passing An Act Respecting User Fees (C-212), Parliament recently recognized the importance of establishing service standards in maintaining good services, particularly in the context where user fees are being charged for those services. This bill puts in place legal requirements that regulatory authorities must follow when setting or amending user fees for services. One of these requirements is that regulatory authorities establish standards for the services for which fees are being charged "which must be comparable to those established by Canada's major trading partners and against which the performance of the regulatory authorities can be measured."

The Committee supports the idea of establishing service standards and believes that they should be broadly applied. This principle is strongly supported by many industry stakeholders for whom a key concern is that, too frequently, either there are no clear deadlines under regulatory assessment processes, or they are not consistently respected by all parties. Among other issues, the Committee heard that deadlines were not always respected by all parties involved in environmental assessment processes under the Canadian Environmental Assessment Act.

The government could also explore other techniques to ensure that the regulated party receives timely service. For example, reversing the onus so that an application is deemed approved and the product may be marketed unless the government responds within a certain time, or requiring reasoned explanations if statutory service targets are not met, would ensure that timely service remains at the forefront of government considerations. As an example, this is essentially the way the new substance notification process works under the Canadian Environmental Protection Act, 1999.

As suggested earlier in recommendation 33, the government should use e-government to offer single window access to the various regulatory programs. This would help improve and coordinate the delivery of government services.

Recommendation 35: The government should improve efficiency, timeliness and predictability, and enhance transparency in the provision of government services. This should include the development of service standards and the use of e-government as a vehicle for single window access to government regulatory programs.

3.6.6 Accountability, Performance and Oversight

Accountability and evidence of performance are essential to sustain public trust. The Committee already suggested in recommendation 29 that the government strengthen the performance measurement of regulation by ensuring that "significant" and "very significant" regulations and regulatory bills are accompanied by a public performance measurement plan. That recommendation would apply only to new regulatory proposals. The recommendations below deal with the performance review of existing regulation, the performance monitoring of the regulatory process, and the monitoring of the implementation of the Smart Regulation strategy.

Review of Existing Regulation

The Committee believes that the government must give higher priority to updating and modernizing existing regulation. More attention must be paid to ensuring that the large stock of regulation does not impede Canada's ability to be an innovative and competitive country with modern regulation that is protective, up-to-date, flexible and responsive. A smart regulatory system should be self-renewing, continuously improving and include a built-in learning approach.

For example, each department or agency could prepare and publish an annual regulatory evaluation plan that would set out the evaluations to be completed in the coming years. Each plan would need to link to any available performance measurement plans for the program or legislation being evaluated. Priority for evaluation should be given to areas of higher risk, areas of rapidly changing science or technology, or areas where substantial degrees of uncertainty existed at the time the program or legislation was developed, for example where the precautionary principle was relied upon. The public could also be asked to suggest areas of regulation for priority review.

Another option would be to create multistakeholder "swat teams" around an industry sector or an area of regulation. These swat teams could include representatives from industry, provincial and territorial governments, Aboriginal organizations, non-governmental organizations and others. They would be asked, within a set timeframe, to identify the regulatory issues to be addressed and to propose means to resolve them.

Recommendation 36: The government should establish an ongoing program of evaluation and modernization of existing regulation, based on the priorities set out above, to ensure that regulation evolves with social needs and scientific advances. A mechanism by which the public can suggest areas of regulation for priority review should be established.

Monitoring Performance of the Regulatory Process

Finally, the Committee believes that continuous attention to the performance of the regulatory process will be an essential element in ensuring success for the Smart Regulation strategy.

The government needs to evaluate how well its regulatory management system is operating so that it can determine whether the quality is improving over time and whether mid-course corrections are needed. The government should establish performance criteria and indicators in order to monitor, evaluate, report on and adjust the process to ensure that it is effective at fostering the principles and objectives of Smart Regulation.

Recommendation 37: The government should establish performance criteria and measures for the regulatory process to ensure the principles and objectives of Smart Regulation are being fostered.

A) PCO Challenge Function

During the consultations, both external stakeholders and government departments emphasized the need for more thorough and consistent enforcement of the Regulatory Policy and more leadership from central agencies on regulatory matters. The Committee believes that the Privy Council Office must strengthen its challenge function. This will be particularly important if a new Regulatory Policy is adopted by the government. PCO's leadership will be critical in advancing Smart Regulation throughout government.

It is PCO's role to ensure that departments comply with the Regulatory Policy. The main point at which it exercises its challenge function is at the end of the policy development process when a new regulation is developed. It is important for PCO and other central agencies such as the Treasury Board to exercise the challenge function and management oversight throughout the policy cycle, from development to implementation and enforcement.

As guardian of the policy, it is also PCO's responsibility to monitor its relevance and ensure continuous reform. It should therefore play a lead role in the development and implementation of policy research and policy development agendas (see Section 3.7 "Government Capacity"). Recently, work has been done in the areas of consultation and performance measurement. Other areas could include the tiering of the submission process, risk-based policy analysis and compliance plans.

Finally, PCO should become a centre of expertise on regulation and provide advice and support to departments with respect to the implementation of smart regulatory practices. PCO should work with regulatory authorities to develop a government-wide regulatory agenda and advance it in support of government priorities. The implementation of these proposals would require the allocation of further resources to PCO.

B) Departmental Recourse Mechanisms

One way to increase transparency and trust in the regulatory system is to enhance stakeholders' access to government and provide mechanisms to permit them to challenge departmental decisions.

Currently, very few programs enable stakeholders or citizens to challenge a department's decision or offer a process for resolving disputes. For example, when a company disagrees with a department's position, when a complaint remains unanswered or when there is a delay in the development of a new regulation, the regulatory department is the only point of access for stakeholders. Stakeholders' main course of action is to bring the issue to the attention of senior governmental officials, in the hope that they will be more responsive, or to ask for help from their Member of Parliament. This situation raises issues of lack of transparency, which can result in a lack of trust in the regulatory system.

Most of the time, the only recourse is the court system, which is appropriate for legal issues but is a long and costly process when the use of a mediator could sometimes suffice in resolving an issue. The courts are not necessarily the most appropriate or efficient means to resolve policy issues, lack of service standards or deficient management practices.

The Committee is of the view that contestability within the regulatory system needs to be increased and that appropriate recourse mechanisms should be put in place. This point was expressed frequently by a wide range of stakeholders during the Committee's consultations. Better mechanisms for recourse are also recommended in a recent report by the George Morris Centre entitled The Competitiveness Impacts of Canada's Agricultural Products Approval Regulations.

The following are different options for increasing contestability within the regulatory system and access to government for stakeholders and citizens. They can be established as stand-alone initiatives or used in combination, and their use can vary over the life cycle of regulatory reform.

An independent third party in the form of an expert panel could provide a review mechanism when the contentious issues are technical, scientific or economic in nature. This panel could receive submissions from the regulator and the stakeholder. This approach is generally voluntary and the recommendations of such a panel are not necessarily binding, depending on the nature of the issues. An example of such a mechanism can be found in the Act Respecting User Fees (C-212), recently approved by Parliament. The Act requires each regulating authority that sets user fees to establish an independent advisory panel to address client complaints about the user fees. The implementation of this measure should be monitored in order to draw relevant lessons, which could be applied to other regulatory issues.

Another option could be the appointment of a regulatory ombudsman — either within individual departments or for the government as a whole. Ombudsmen usually have investigative and recommendation-making power.

During the consultations, many stakeholders suggested that the recourse function be held by PCO. The Committee recognizes that this would be a new role for a central agency which could be at odds with its traditional challenge function.

The Committee believes that different models should be assessed. This may be an area where the government would want to test an approach for one year before institutionalizing such a function. The authority given to such a mechanism could include mediation, investigation, information collection, and the ability to convene public hearings and make recommendations. Transparency and fair access should guide its operation.

Recommendation 38: The federal government should establish a recourse mechanism independent of the regulatory program to provide an opportunity to stakeholders and citizens to challenge regulatory performance and decisions.

C) External Oversight Mechanisms

Some stakeholders have suggested the establishment of a permanent external advisory committee such as the United Kingdom's Better Regulation Taskforce. In the Committee's view, the creation of multistakeholder "swat teams" — a collaborative approach involving diverse stakeholders with experience and knowledge in a given economic sector — would be more effective in the short term to maintain the momentum on Smart Regulation (see Part III, "Making it Happen"). It believes that it may be more effective to convene another external advisory committee in two years to assess the progress made by government towards Smart Regulation.

The Committee notes that parliamentary committees are currently involved in the review of legislation, primarily statutes and some subordinate legislation. In recent years, they have expressed increased interest in regulation. Many stakeholders have suggested that parliamentary committees could assist and be involved in reviews of specific regulatory programs. The government may want to give consideration to this idea.

The Committee also notes that the Canadian Food Inspection Agency Act requires the appointment of an independent advisory board to advise the Minister of Agriculture and Agri-Food, which represents a form of oversight of the Agency. A board was appointed for a three-year term in 1998 but has been neither renewed nor replaced since its dissolution.

Recommendation 39: Another external advisory committee should be convened in the medium term (e.g. two years) to assess the government's progress in transforming the regulatory system.

3.6.7 Implementation of a Smart Regulatory System

Some of the recommendations in this section can be implemented relatively quickly and without significant diversion of resources. Other recommendations, however, represent a profound change in how government develops, decides on and implements regulation, and how it evaluates and modernizes existing regulation. For example, a risk-based approach to regulatory action will shift the emphasis of the analysis of the regulation's potential effects. Similarly, effective tiering will require officials to determine the appropriate tier and the consequent process for proposed regulations. Additional work will be required to develop the policies, guidelines, performance standards and implementation guides necessary to put many recommendations into place. The first step in making Smart Regulation a reality will be to develop a strategy and implementation plan, with its own milestones, for reforming the regulatory process. The Committee urges the government to be both realistic and transparent in its approach to implementing process reforms for the Smart Regulation initiative.

The Committee knows that officials and stakeholders do not have unlimited capacity to respond to increased demands. This fact needs to be recognized and ways found to make smarter use of existing capacity. In addition, it is important that new requirements, such as the analysis of more significant regulatory action, be balanced with streamlining and reducing the internal burden in other areas. Just as regulation itself is often a balancing of competing interests, so too must the design of the regulatory process reflect competing objectives and interests, such as timeliness versus improved collaboration, information and analysis. The Committee knows that finding this balance is not always easy, but believes that it will be vital to creating a process that produces the Smart Regulation that Canada needs.

CURRENT REGULATORY PROCESS

3.7 Government Capacity

The changes recommended by the Committee represent a call for a cultural change within government in general and within regulatory departments in particular. Public service officials often expressed the need to provide increased support to the regulatory community. This message was heard just as frequently from industry and non-governmental representatives who are in regular contact with regulatory officers and have a good appreciation of their reality. The Committee realizes that building departmental capacity is one of the keys to improving regulatory performance.

Regulatory officials face tougher and more complex problems than ever before. In biotechnology, for example, which combines issues in the fields of ethics, economic restructuring and science, regulatory officers must grapple with difficult intellectual issues and with the philosophical foundations of regulatory decision making in a pluralistic democracy. They are required to have both a specialized understanding of the sector (from the science behind it to the issues in the boardroom) and the broader socio-economic perspectives required for good public decision making.

The Committee is proposing extensive changes to the regulatory system. Priorities will have to be adjusted, resources assigned to different tasks, new skills developed, existing competencies enhanced, best practices and expertise shared, and new systems developed. These changes will probably take many years to achieve. Transforming how government regulates will also take commitment, leadership, resources, time and support, and an underlying recognition of the importance of regulation to Canadian society. This subject is addressed in more detail in Part III, "Making It Happen."

This section focuses on government capacity. However, the Committee recognizes that a Smart Regulation system will also involve building capacity in the private sector and among NGOs and Aboriginal communities.

3.7.1 Developing a Leading-Edge Regulatory Community and Supporting Learning

As in any knowledge enterprise, human resources are the most important asset. The regulatory system is no different. Stakeholders, particularly industry representatives, often told the Committee how important the quality and competency of the regulatory staff is to the effectiveness of the regulatory system.

Several human resource issues were raised with the Committee. There is a decline in the public service's knowledge and understanding of industry sectors (structure, consumer trends, criteria for investment decisions and technological developments). It is difficult to attract and retain expertise, particularly in the fields of science and technology. The Committee was often told, again by external stakeholders, that regulatory jobs in the public service warrant more prestige and that there should be more learning opportunities offered to the regulatory community. Lastly, regulatory officers who have consumer protection or health and safety mandates feel a value conflict if they are asked to work more closely with the regulated parties or to be sensitive to economic growth.

The Committee recognizes that public servants working in regulatory programs have an important responsibility. Their decisions can have a direct impact on the health and safety of people and the environment, and on the competitiveness of an industry sector or the viability of a firm. They have to deal with increasingly complex issues and high expectations. Departments used to be able to rely mainly on the expertise of specialist groups to regulate particular activities (e.g. veterinarians making animal health decisions, and engineers setting automobile safety standards). Now these people must not only be at the leading edge of their own increasingly specialized domains and participate in and have access to international expert networks, but they must also have significant skills in fields beyond their traditional areas of expertise. Officials are now required to understand the rules of international trade and operationalize concepts like sustainable development. They must also manage consultations and negotiations with much broader, more sophisticated stakeholder communities.

The Committee's proposed vision and recommendations call for new roles for regulators in the 21st century. The regulatory community will need to develop new competencies in response. The Committee believes that learning is a powerful tool for change and must be an integral part of a Smart Regulation strategy. It supports the objective of the Policy for Continuous Learning in the Public Service of Canada, which states that the public service must become a learning organization "to fulfill its mission as a national institution in the knowledge age, [and] to maintain the trust of those it serves." The Committee is of the view that the federal government should apply this approach to regulators and promote the development of a government-wide learning community.

Efforts to this effect have already started. Over the last two years, the Privy Council Office has organized learning events that were very well attended, demonstrating that regulatory officers have a need and an appetite for learning. The Department of Justice has also launched learning initiatives on instruments. The Committee applauds these initiatives and believes that strengthening them will support the implementation of Smart Regulation throughout government.

The Privy Council Office has started to identify the key elements of a strategy to support the development of a leading-edge professional regulatory community across government and to foster a culture of continuous learning. The government must pursue this work and develop a learning strategy. This strategy could include the sharing of best practices, mobility across departments, orientation courses and a system to disseminate knowledge across regulatory departments and agencies. Provincial and territorial governments should also be considered in capacity-building initiatives as well as Aboriginal communities and stakeholders, as appropriate. Many provinces and territories have expressed an interest in working with the federal government to identify and address training needs and help maximize the use of scarce resources.

At the same time, the federal government needs access to the latest and best scientific research to guide its regulatory decision making. However, given the rapid pace of scientific discovery and the increasing specialization of certain research fields, it will become increasingly difficult to maintain a critical mass of scientific capacity within the federal government. The Committee has noted that Canada has made significant investments in support of research networks across the country (e.g. the Networks of Centres of Excellence program) and feels that the government should take advantage of these national networks in regulatory programs — in addition to existing international networks — to supplement their in-house scientific knowledge. By tapping into these existing resources, Canada will be in a better position to inform its regulatory decision making with cutting-edge science and conduct scientific peer reviews when needed.

3.7.2 Developing Policy Capacity

Throughout this document, the Committee has stressed the cross-governmental nature of many regulatory issues and the need for greater and more effective coordination. While regulation is an important tool for government action, the federal government has no policy research and development agendas in this area. The Committee believes that to support continuous improvement in the regulatory system, which is at the heart of Smart Regulation, ongoing policy research and development agendas are needed. These agendas would stimulate new thinking and innovation in the regulatory domain.

The Regulatory Affairs Division in the Privy Council Office, which is the guardian of the regulatory policy, could take the lead. It could work with federal departments and strike the appropriate partnerships with organizations and individuals from outside the public service to build a national regulatory capacity.

On the policy research side, the lack of research on governance in general is already recognized, as indicated in the Preliminary Governance Research Plan produced by the former Canadian Centre for Management Development (CCMD) in March 2003. In addition, there is a relative paucity of academic work on what Malcolm Sparrow calls the "regulatory craft." The Institute for Public Administration in Canada has already expressed interest in being further involved in research into regulation. Other partners could include the research group at the Canada School for Public Service, the Policy Research Initiative and academics. In addition to developing a policy research program, research chairs in regulatory areas could be funded through the Social Science and Humanities Research Council. Partnerships between government and universities could benefit both sides, with graduate students participating in government regulatory programs and regulatory practitioners serving as adjunct professors.

Risk management and international regulatory cooperation would be two priority areas of a policy development plan, as suggested earlier in this document. The plan could also include the development of common methodologies and tools for regulators. It would be worthwhile to seek input from the provincial and territorial governments, the private sector and non-governmental organizations and to establish links with international organizations such as the OECD on such a plan.

Partnering with these institutions would help to develop a regulatory community of practice, create synergies and support the implementation of a national vision for regulation.

3.7.3 Providing High-Level Leadership

This section contains a number of recommendations, but the Committee believes that political commitment is a precondition to successfully creating and managing an effective Smart Regulation system. Political decision makers must send out a consistent message that they value a Smart Regulation process, and government and parliamentarians must encourage a Smart Regulation ethic and culture.

Change will require sustained leadership and commitment at the senior levels of the public service. Senior officials in the Privy Council Office will have to drive this agenda in order to support change at a general level and encourage innovators and change agents in the system to come forward with new ideas and concepts.

Deputy ministers will also have an important role to play in setting the direction, providing guidance and ensuring the progress of the smart regulatory agenda. Through a committee such as the Deputy Minister Group on Smart Regulation, they could coordinate and advance regulatory initiatives and maintain the momentum for change and continuous improvement. They could also champion initiatives such as developing and raising the profile of the regulatory community.

3.7.4 Enhancing Information Gathering and Analysis

It is recognized that the public service needs better systems to generate the information that supports decision making. This is also true in the regulatory area. The Committee sees the need to improve systems that support regulatory decision making. There was little data readily available on regulatory programs when the Committee was in the research phase of its work. For example, the Committee has not been able to establish how much the federal government spends on regulatory programs or how many persons work in this area. There is also very little data on how regulatory programs help the government achieve its policy objectives. Internationally, there is no inventory of cooperation initiatives or systematic monitoring and compilation of regulatory developments in key countries. The Committee is not recommending launching a costly and bureaucratic exercise. But it feels that government needs to improve its ability to collect and disseminate regulatory data and to analyze and use this kind of information. That is how it will continuously learn and improve its practices.

For more discussion on performance measurement, see Section 3.6 "The Regulatory Process."

3.7.5 Resourcing

Many officials have stressed the need for additional financial resources, particularly to implement the Committee's recommendations. Others have said that the lack of new funding should not be an excuse for failing to work within existing budgets, including reallocating resources.

While the Committee has not quantified the cost impact of its proposals, it has tried to be sensitive to these costs. However, while some initiatives may be accomplished by reallocating resources, the Committee thinks that the transition to a new way of conducting regulation in the 21st century could benefit from, and be accelerated by, some additional resources.

Recommendation 40: The government must develop and implement a comprehensive learning strategy for the regulatory community.

Recommendation 41: The government should develop and implement regulatory partners from outside the public service.

¹ Assessing the Public Interest in the 21st Century: A Framework,by Leslie A. Pal and Judith Maxwell, and A Public Opinion Perspective on Regulation,by Matthew Mendelsohn.

² Department of Foreign Affairs and International Trade, Fifth Annual Report on Canada’s State of Trade,March 2004. See http://www.dfait-maeci.gc.ca/eet/trade/state-of-trade-en.asp.

³ Municipal governments and some First Nations governments and institutions also have regulatory responsibilities; however, the Committee did not look into regulatory cooperation with municipalities. Regulatory issues with respect to First Nations are discussed at more length in Part II.

⁴ “Aboriginal” is used here to refer to people who self-identify as North American Indian, Inuit or Métis.

⁵ For example, a number of studies on this topic have been commissioned in recent years. Please see: Herman Bakvis and Luc Juillet, The Horizontality Challenge: Line Departments, Central Agencies and Leadership.Canada School of Public Service, 2004; Jacques Bourgault and René Lapierre, Horizontality and Public Management.Canadian Centre for Management Development (CCMD), 2000; Mark Hopkins, Chantal Couture and Elizabeth Moore, Moving from the Heroic to the Everyday: Lessons Learned from Guiding Horizontal Projects.CCMD Roundtable on the Management of Horizontal Initiatives, James Lahey (Chair), 2001.

⁶ Herman Bakvis and Luc Juillet, The Horizontal Challenge: Line Departments, Central Agencies and Leadership,pp. 2-3.

⁷ Mark Hopkins, Chantal Couture and Elizabeth Moore, Moving from the Heroic to the Everyday: Lessons Learned from Guiding Horizontal Projects,p.v.

⁸ Privy Council Office, Government of Canada Regulatory Policy, November 1999, p. 11.

⁹ 2001 F.C. (Trial Division) 800.

¹⁰ Economic Instruments for Environmental Protection and Conservation: Lessons for Canada, Stratos, December 2003.

¹¹ Chapter 6, The U.S. Experience with Economic Incentives for Protecting the Environment,U.S.Environmental Protection Agency, 2001.