Competitiveness proofing is a reinforced analysis of the impact that new policy proposals will have on the competitiveness of enterprises. It is part of the European Commission's integrated impact assessment approach. It is a response to the need for better-targeted tools to boost productivity and growth in times of economic slowdown.
The guidance is a twelve-step tool addressing the impacts of a policy proposal on enterprise competitiveness through its effects on the cost of doing business; on the affected sectors' capacity to innovate; and on their international competitiveness. It provides a simple and effective tool to deliver more thorough analyses of the impact of proposals on competitiveness.
Competitiveness proofing operational guidance is used continuously during the preparation of Commission initiatives. The following impact assessments accompanying a Commission proposal include a section on competitiveness proofing:
Posting of workers (DG Employment, Social Affairs and Inclusion)
Impact Assessment on the Revision of the legislative framework concerning the posting of workers in the context of the provision of services, annex 11
Revision of the Data Protection Regulation (DG Justice)
Impact Assessment on the Regulation of the European Parliament and of the Council on the protection of individuals with regard to the processing of personal data and on the free movement of such data (General Data Protection Regulation), annex 10
CO2 emissions of cars and vans (DG Climate Action)
Impact assessment on the Regulation amending Regulation (EU) No 510/2011 to define the modalities for reaching the 2020 target to reduce CO2 emissions from new light commercial vehicles, annex 7.9
Roadmap towards a 2050 low-carbon economy (DG Climate Action)
Impact assessment on the Roadmap for moving to a competitive low carbon economy in 2050, Sections on sector specific impacts p.61-85
Action Plan for an innovative and competitive Security Industry (DG Enterprise and Industry)
Commission Staff Working Paper on the Action Plan for an innovative and competitive Security Industry, annex 7
Package Travel Directive (DG Justice)
Impact assessment on the Directive on package travel and assisted travel arrangements, amending Regulation (EC) No 2006/2004, Directive 2011/83/EU and repealing Council Directive 90/314/EEC, annex 7
Safety of nuclear installations (DG Energy)
Impact assessment on the Council Directive amending Directive 2009/71/EURATOM establishing a Community framework for the nuclear safety of nuclear installations, annex 6
Clean Air Programme for Europe (DG Environment)
Impact assessment on the:
- Communication, 'A Clean Air Programme for Europe';
- Proposal for a Directive on the limitation of emissions of certain pollutants into the air from medium combustion plants;
- Proposal for a Directive of the European Parliament and of the Council on the reduction of national emissions of certain atmospheric pollutants;
- Proposal for a Council Decision on the acceptance of the Amendment to the 1999 Protocol to the 1979 Convention on Long-Range Transboundary Air, annex 9.
Animal cloning (DG Health and Food Safety)
Impact assessment on the Directive of the European Parliament and of the Council on the cloning of animals of the bovine, porcine, ovine, caprine and equine species kept and reproduced for farming purposes, and Proposal for a Council Directive on the placing on the market of food from animal clones, annex 9
Greenhouse gas emissions allowances (DG Climate Action)
Impact assessment on the Commission Regulation (EU) No 176/2014 of 25 February 2014 amending Regulation (EU) No 1031/2010 in particular to determine the volumes of greenhouse gas emission allowances to be auctioned in 2013-2020, section 4.5
Collective action within the context of the freedom of establishment and the freedom to provide services (DG Employment, Social Affairs and Inclusion)
Impact assessment on the Regulation on the exercise of the right to take collective action within the context of the freedom of establishment and the freedom to provide services, annex 11
Free trade agreement between the EU and Japan (DG Trade)
Impact assessment on the Recommendation for a Council Decision authorising the opening of negotiations on a free trade agreement between the European Union and Japan, section 5.3
What determines competitiveness?
The core determinant of competitiveness at all levels (enterprise, industry, regional, country or EU) is productivity. Productivity growth is intimately related to the propensity to innovate. Since resources (capital and labour) are finite, the long-term growth of standards of living is determined by a nation's or firm's ability to produce output through a superior and innovative combination of existing resources. This is often identified with total factor productivity (the element unaccounted for by the contribution of factor inputs). Economic theory predicts that in successful enterprises, gains in market share, long-term profitability and rising real wages are unambiguously linked with vigorous productivity growth. And conventional indicators of competitiveness – unit labour costs or price and quality competitiveness – also reflect the underlying dynamics of productivity and innovation.
As productivity (defined as the value added per unit of input) is the core of assessing the competitive gains and losses caused by a policy, an analysis of competitiveness needs to look at cost and non-cost determinants of competitiveness. Competitiveness proofing takes into account the likely impact of a policy proposal on the cost of doing business. This includes the direct cost of compliance with new regulations; but also indirect changes in the prices of inputs, such as energy, and factors of production that are caused by the new policy. However, costs do not account for all competitive gains or losses. Products may become more attractive for consumers and gain market share due to better quality, design (including eco-design), technical specifications and functions. Technology development and innovation are of primary importance to the cost and quality competitiveness of products. Thus policy-triggered productivity gains and losses can be identified through impacts on business costs (cost competitiveness) and on the business capacity to innovate (innovative competitiveness).
What is competitiveness?
Competitiveness is a multilevel concept. Atthe level of the economy, competitiveness refers to the capacity of a nation or region to provide its citizens with a sustained increase in living standards with jobs available for those willing to work*.
Competitiveness of enterprises is a narrower, but closely related concept referring to the ability of firms to sustain and gain in market share through their cost and pricing policy, innovative use of production factors, and updates to product characteristics. It is often measured by the share of the products of one manufacturer in value terms in domestic and international market for those products. Accordingly, at sectorial level, EU industry’s competitiveness refers to sales performance (market share and comparative advantage) of this industry in EU and world markets.
* SEC(2009) 1657 'Commission staff document: European Competitiveness Report 2009'
How to measure competitiveness?
The analysis of impacts on cost and capacity to innovate, however, is mainly about the drivers of competitiveness. Even though they should be of direct concern for policy makers, the picture would not be complete if we did not assess them in an international comparative perspective, so that the likely impact of the proposal on European industries' market shares and comparative advantages are taken into account.
What is the objective of competitiveness proofing?
The objective of competitiveness proofing is to identify and quantify the likely impacts of a new proposal in three areas of competitiveness:
Cost competitiveness: the cost of doing business, which includes cost of intermediate consumption and factors of production (labour and capital);
Capacity to innovate: the capacity of the business to produce more and/or higher quality products and services that better meet customers' preferences;
International competitiveness or the likely impact of the policy proposal on European industries sales performance (market shares) and comparative advantages.
How can policy intervention affect business competitiveness?
An EU policy proposal is designed to address a problem, which cannot be fixed by policy intervention at national level alone. The Commission's Impact Assessment Guidelines (2009) include detailed and well-illustrated guidance on how to define the problem that needs solution, the related objectives of the intervention, and the regulatory and non-regulatory instruments at hand. In general, public policy seeks either to address market or regulatory failures*, to improve allocation of resources; or to improve social inclusion and safety by the redistribution of income. These policy instruments determine the framework conditions in which enterprises operate and compete. They can imply additional costs to business operations, or affect enterprises' capacity to innovate, which – if competitors are not subject to the same conditions – may lead to losses in market share.
* See Impact Assessment Guidelines Part III Annexes pp 19-23 for a detailed overview of market and regulatory failures
If impacts on competitiveness are included in the Commission’s Impact Assessment Guidelines, why do we need competitiveness proofing?
The economic impacts section of the Impact Assessment Guidelines lists a number of questions with direct relevance to enterprises' price and cost competitiveness, their capacity to innovate and their external competitive positions*. Apart from these questions, the Guidelines contain in their annexes detailed guidance on identifying and measuring the impact of a policy proposal on SMEs (the SME test)**, as well as impacts on technological development and innovation***. Further to these two, there is also Guidance on assessing the impacts on competition****.
Even though the necessary elements for a comprehensive assessment of impacts on competitiveness are in place in the current Guidelines, their application is not streamlined in the practice of impact assessment. One of the possible explanations is that Commission services were asked to assess these impacts, but were not told how to do so. The competitiveness proofing guidance offers a comprehensive methodology and lists data sources that can be used when assessing impacts on competitiveness within the integrated impact assessment process.
* Impact Assessment Guidelines, pp. 33-34
** Annexes to Impact Assessment Guidelines pp.32-34 Section 8.4
*** Annexes of the Impact Assessment Guidelines, pp. 34-38 Section 8.5
**** Impact Assessment Guidelines, p. 40
If the purpose of Impact Assessment is to assess the overall impact of a policy proposal, why do enterprises or sectors need a separate assessment?
An overall positive impact of a policy measure or regulation may mask large differences at the sectorial level that may be relevant when assessing economic and social costs. Firstly, the burden of the measure or regulation may not be large at the aggregate level but may fall on just a few sectors. An example is the implementation of the Emissions Trading Scheme. While the impact at an overall level could appear mild, energy-intensive sectors like the cement industry may be disproportionately affected. Secondly, when one or a few sectors bear most of the costs of a measure or regulation, if these sectors are geographically concentrated in a few regions, the social costs can be considerably amplified. For instance, if the sector needs to cut production and employment, and is concentrated in a single region, a relatively large workforce with similar qualifications will be looking for jobs at the same time in the same area.
However, taking the industry perspectives better into account should not come at the expense of the overall welfare approach of the Impact Assessment. In line with the Impact Assessment rationale, competitiveness proofing is designed to help better identify winners and losers and the cost borne by respective sectors; and accordingly to devise mitigating measures without compromising the long-term societal objective of the policy intervention. For instance, it was the examination of the impact of the Emission Trading Scheme in energy-intensive sectors that led to the allocation of free emission allowances to sectors exposed to the risk of carbon leakage.
When should we apply competitiveness proofing?
Not all Impact Assessments need competitiveness proofing. In its Industrial Policy Flagship Communication the Commission committed to '... ensure that all policy proposals with a significant effect on industry undergo a thorough analysis for their impacts on competitiveness. Examples of such measures are new internal market legislation, major financial market regulations, that might affect access to finance, and new climate change or environmental legislation*.' The Guidance (see p. 9) provides a simple check-list to help authors of an Impact Assessment decide whether the expected impacts on businesses are likely to be significant.
* COM(2010) 614 "An Integrated Industrial Policy for the Globalization Era: Putting Competitiveness and Sustainability at Centre Stage (145 kB)", p. 5
Does competitiveness proofing replace Impact Assessment for initiatives with significant impact on the business?
No, it neither replaces Impact Assessment, nor is it a stand-alone test separate or parallel to Impact Assessment. The Commission’s Impact Assessment system is based on an integrated approach, which analyses both benefits and costs, and addresses all significant economic, social and environmental impacts of possible new initiatives. This is an instrument to provide policymakers with additional information on impacts on competitiveness, which are vital for smart regulation. This complementary analysis should be proportionate to the quantitative, qualitative and political significance of the impacts on competitiveness. It is not an instrument to overemphasise specific impacts and stakeholders' expectations at the expense of others and thus compromise the overall core objective of the policy proposal.
Does competitiveness proofing impose additional efforts?
Yes. It is important, however to ascertain that these extra efforts are in line with the principle of proportionate analysis and are more than offset by benefits in terms of better, evidence-based law-making. The Commission's approach to competitiveness proofing seeks to optimise costs by using:
a simple check-list to help us judge if the policy proposal is likely to have substantial impact on enterprise competitiveness, i.e. if the Impact Assessment needs to contain a competitiveness proofing part;
a flexible modular approach, which allows the Impact Assessment team to decide on the scope and depth of the analysis in line with the principle of proportionate analysis, and to apply only those steps in the process that are relevant for their specific task without compromising the consistency of assessment.
The application of the principle of proportionate analysis implies the right choice for instance between the following options:
whether to apply mainly qualitative analysis using the available sector studies and statistics (i.e. interpret the existing data), or to go to fully-fledged quantification of expected impacts, through more sophisticated modelling or econometric exercise (i.e. producing new data/evidence from the available data);
whether to look at the directly affected sectors only or to also look at the indirectly affected sectors;
whether to look at direct costs of compliance with the proposed regulation, or to also assess the economic costs (e.g. changes of prices of inputs and factors of production, entailed by the policy intervention but not necessarily related to compliance).
What happens if the policy proposal does not pass the competitiveness test?
Competitiveness proofing is not a 'make or break' test of new policy proposals. Its purpose is not to block an initiative, but to bring to the attention of decision makers evidence of impacts on enterprises that might require mitigating measures in order to minimise negative consequences for society with regard to growth and employment.
What is the result of competitiveness proofing? How does it change the Impact Assessment?
Competitiveness proofing is not a 'make or break' test of new initiatives. It could ensure that the lightest option for EU industry is taken, as long as it allows for EU objectives to be reached. Therefore the additional analysis may affect the ranking of policy options, or could lead to the introduction of measures to make the preferred option less damaging for affected enterprises.