Do we need government sponsorship for healthy and safety?

There is a case for government-sponsored economic incentives to promote health and safety at the workplace.

Virtually all countries, including South Africa, have occupational health and safety legislation and workmen’s compensation systems. These laws (in addition to other objectives) seek to ensure that working environments are safe and do not expose employees to preventable risks.

There is broad consensus that this is a noble objective. After all working conditions influence the competitiveness of firms. Poor working conditions impose additional costs which increase the overall production costs of a firm. There is also the risk of damage to the reputation of the firm in the eyes of its stakeholders. For instance, poor working conditions negatively impact on the morale of employees which, in turn, affects productivity. Less occupational accidents and diseases increase productivity of workers, lower production costs and contribute to the stability of the country’s human capital.

An efficient and results-oriented system to protect occupational safety and health is, therefore, an absolute prerequisite for any industrial sector and forms a good basis for social and economic progress. So firms are naturally interested in ensuring that they operate under conditions which are free from occupational risks.

However, there is considerable debate on the question of how best to achieve the objective of accident prevention. In most cases governments try to facilitate occupational safety and health at workplaces through enforcement of regulations, which may vary widely in their design and objectives. Regulations may prescribe fines, penalties and other civil and criminal sanctions for firms that are found to be in violation.

Another instrument employed by governments is building some form of experience rating into workmen’s compensation premiums or assessments that are paid by employers.

Enforcement of regulations is generally the more dominant of these two approaches to preventing occupational accidents. Policymakers and lawmakers set compliance standards in occupational health and safety and are also involved in policing and sanctioning firms that fail to meet these standards. This in itself is not a bad idea. No one can seriously argue that firms in breach of occupational health and safety regulations should not be sanctioned. But policing and sanctioning should neither be an obsession nor the only approach.

Other methods of encouraging firms to be innovative and do more to promote occupational health and safety should be explored. Only through the adoption of multiple and complementary measures can occupational accidents be effectively managed and prevented.

One way governments could encourage firms to invest more in occupational health and safety is by offering employers economic incentives to be proactive and innovative in accident prevention. In this regard the European Agency for Safety and Health at Work defines economic incentives to mean processes that reward firms and organisations that develop and maintain safe and healthy working environments.

These incentives can be financial or non-financial. Financial incentives could be in the form of variable contributions to a workmen’s compensation fund that are transparent and properly benchmarked to results- or tax-based incentives. Non-financial incentives can be in the form of awards and qualifications to bid for future public contracts.

For instance, the right to bid for contracts awarded by the state and other public entities could be conditional upon bidding firms showing that their occupational health and safety score (based on a national index) is above a pre-set minimum threshold. Such incentives would encourage firms to be proactive by taking steps to promote occupational health and safety with minimum state intervention.

In 2010, the European Agency for Safety and Health at Work, based in Luxembourg, produced a report on economic incentives to improve occupational safety and health in Europe under the auspices of the European Union (EU) Commission.

The report makes interesting reading. It advocates for a shift from the old “command and control” approach by governments, towards a more proactive approach to accident prevention, that is based on providing incentives for firms to do more on their own to prevent accidents.

According to the report, offering economic incentives to firms has several advantages. First, it can stimulate continuous and progressive improvements in occupational safety and health. Most regulations specify minimum performance and compliance levels with no incentive to improve. Not surprisingly, firms do only what is necessary to meet the specified standards and nothing more – even if the capacity for further improvement exists. By offering economic incentives, the mindset of firms could be shifted from a compliance focus to an innovation focus in the area of accident prevention.

Second, occupational risks are constantly evolving, with new risks emerging. For example, new production methods and changes in technology that require new regulations to be promulgated to address them. In practice, however, policy-making and formulation of new regulations usually lag behind, causing a mismatch to develop between existing regulations on one hand and the risks they are intended to address on the other. Because they focus on the outcomes of risks rather than the processes by which risks are generated, economic incentives can play a decisive role in addressing both traditional and emerging risks.

Third, economic incentives are linked directly to business performance and their impact is instantly visible to managers. This is important in that accident prevention can be easily integrated with other measures on which managers’ performance may be evaluated.

Lastly, because they are based on outcomes rather than methods and processes, economic incentives have the added advantage of encouraging the development of innovative solutions to problems.

It can be argued that firms have a distinct advantage in appreciating and understanding the risks associated with their production methods and should, therefore, be encouraged to do more to manage those risks. Entirely compliance-based approaches to occupational safety and health miss out on this crucial opportunity because when regulators become obsessed with compliance, it should be no surprise if the regulated firms also become obsessed with compliance.

It is not suggested that existing occupational health and safety systems do not contain any economic incentives at all. On the contrary, most workmen’s compensation and occupational health and safety legislation includes some incentives to firms but these tend to be based on historical performance and are not intended to encourage initiative and innovation.

For instance, contributions by an employer to a workmen’s compensation fund usually get adjusted in accordance with the number of claims lodged by that employer over the recent past. This approach is usually more pronounced in private schemes where workmen’s compensation risks are insured with private insurance companies. In these private schemes, insurers reward firms with favourable accident records and penalise those with less than favourable records.

A key assumption in all this is that the cost or number of claims lodged is a reliable guide to the risk of injury or disease. In practice there are limitations to this assumption. There are cases where the design of the compensation system and other structural issues within that system may encourage over- or under-reporting of claims.

Additionally, there is usually no transparent and strong correlation between preventative measures taken by firms and financial benefits awarded by the insurer. In public workmen’s compensation schemes the adjustment of contributions to reflect claims reported often is even more arbitrary and less scientific. The provision of economic incentives could help overcome some of these concerns.

The EU report further notes that a study done in the United States focusing specifically on the construction industry found that the provision of economic incentives to firms generally had a positive impact on improving safety and health at workplaces. In Europe, some countries (notably Latvia, the Netherlands and Germany) have tax systems which are tailor-made to influence the behaviour of firms in the area of occupational health and safety.

However, given the nature of taxes, only firms that make a profit would benefit from a tax-based incentive. But even then, any attempt to employ multiple approaches to accident prevention ought to be welcomed. By cutting down the number of accidents, successful accident prevention interventions can help improve the benefits payable to the few unfortunate employees who get injured.

Virtually all social security systems aimed at compensating victims of accidents and diseases at the workplace claim to prioritise accident prevention. The South African system is no exception. But there are very few concrete mechanisms (beyond partial experience rating of contributions) built into these systems, including the South African workmen’s compensation system, to encourage firms to proactively do more on their own. Firms possess the knowledge and expertise to prevent accidents, but sometimes regulators tend to be too overbearing leaving firms with no option other than to focus on compliance alone.

Perhaps offering economic incentives can help unlock this potential and there are compelling reasons to support the proposition that they could help lower the cost of benefits under the South African system. Offering economic incentives can also widen the scope of cooperation between government and the private sector in accident prevention which can only be good for the economy.

Legally Speaking is a regular column by Albert Mushai and Hugh-David Hutcheson, both in the school of Economics and Business Sciences, University of the Witwatersrand. Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining Wits University as a lecturer in insurance. Hutcheson holds a PhD from Wits and is a lecturer in insurance.