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Cost Recovery Proposals under the Animal Products Act 1999

6 Cost of providing services

This section details the costs of services NZFSA provides to its major stakeholders (Industry and Government). Budget information is provided on the proposed allocation of direct and indirect costs to each area of service.

6.1 Allocation of costs to services

NZFSA will incur direct and indirect, as well as fixed and variable costs, in delivering services to stakeholders.

Direct costs include personnel and operating costs (including fixed and variable costs).

Specific Costs are a form of direct cost that can be directly apportioned to particular sector or service areas, eg, residue monitoring programmes.

Indirect costs include management, a share of NZFSA management and support services and NZFSA/ MAF corporate overhead costs which include accommodation, equipment and communications. MAF Corporate costs and NZFSA fixed costs are apportioned to NZFSA outputs each year and form part of the cost of producing these outputs. ‘Drivers’ for allocating the MAF costs across five MAF businesses are determined by the MAF Planning and Budgeting Committee which includes representation from NZFSA. Drivers are selected to best represent a fair usage of the particular service. For example information management costs are spread on the basis of number of PCs and laptops used by the business and legal services on the basis of hourly usage.

Generic Standards are an output that is made up of direct and indirect costs. They have equal applicability across all food sectors. The key difference between generic standards and non-generic standards from an economic pricing perspective is the breadth of the industry to which the standards apply. In the case of industry-specific standards, the standards apply to a specific industry or sub-sector (eg, meat, game, poultry etc). In the case of generic standards, the relevant ‘industry’ for cost-recovery purposes is the group of sectors or sub-sectors to which the standards apply.

6.2 Basis of the Costs Estimates

The steps undertaken by NZFSA in calculating the costs of the services NZFSA provides to each sector under the APA are as follows:

1. New Zealand Standards, Export Standards and Market Access outputs (including overheads)

• estimates of time spent by each staff member on a full-time equivalent-basis (FTE) on NZFSA’s different outputs for each sector covered under the APA in 2005/06 have been made by NZFSA’s Directors;

• these estimates of the FTE time spent by staff for each sector have then been pro-rated against the total level of personnel costs expected to be incurred for each output in 2007/08 to obtain an expected level of personnel cost per output per sector for 2007/08;

• the estimates of the FTE time spent for each sector have also been pro-rated against the total level of operating and indirect costs expected to be incurred for each output in 2007/08 to obtain an expected level of operating and indirect cost per output per sector for 2007/08;

• the cost of specific programmes are allocated directly to the sectors or service they apply to, eg, the costs of the poultry residue monitoring programme will be a specific cost to the poultry sector etc.

Generic Standard Setting

Given that generic standards have equal applicability across all food sectors, the difficult question is how the costs should be allocated across the different sectors to which the generic standards apply. The costs incurred in developing generic standards are in the nature of a joint cost, with the costs being common across the different sectors to which the generic standards apply.

Options for allocating the costs of generic standards are: to pro-rata the costs across the sectors (eg, using FTE as a driver); to allocate the costs on the basis of a flat rate (uniform charge) for each sector, or to allocate costs in proportion to the sector size.

A flat rate charge could seem inequitable as it could mean smaller sectors which imposed relatively low costs on NZFSA may have to bear the same charge for developing generic standards as the much larger sectors. A pro-rata allocation of the costs of generic standards across the different sectors on the basis of FTEs would be compatible with the approach taken for allocating other joint costs, ie, overheads.

Wider considerations need to be taken into account when looking at allocating the cost of generic standard setting across all sectors covered by NZFSA. This includes the delivery of benefits to all persons producing or selling food whether they are a part of the Animal Products regulatory system or not. Allocation of generic costs on FTEs may not reflect an equitable distribution across all sectors.

NZFSA proposes that an equitable driver is to allocate New Zealand generic standard costs to sectors in proportion to the benefits received or allocate those costs on the use made of the standards as measured by the size of each sector (measured in value of total output, eg, both domestic and export).

Approvals, Accreditations, Registrations

Those costs have not been apportioned on a sector basis. The total direct and indirect costs of the services has been built into an hourly rate which has then been apportioned to particular functions based on estimated time taken.

6.3 Limitations of the costing methodology

It is important to remember that NZFSA is delivering a programme of work, some of which can be attributed to specific sectors, but a great deal of this work is generic in nature which benefits all food sectors. There are also necessarily wide variances from year to year in the focus for specific sectors, with some sectors requiring concerted attention for a period, but then needing little specific input for many years.

NZFSA must also be able to respond rapidly to areas where emerging issues are identified or attention must be given to unplanned activities to address problems arising.

While time recording provides historic information on the time that has been spent on specific sectors in the past, it cannot provide predictive information for the effort required in the future years to which charges will be applied. Due to the wide variances in focus that may be required from year to year, historic time recording information is of limited use in allocating costs for future periods.

NZFSA must determine its charges for this programme for a whole industry made up of many sectors, not to individuals or companies (as a lawyer or a consultant would do) and must determine these some 12 – 18 months prior to the relevant charging year. Charges can therefore only ever be based on the best information available at the time tempered with considerable managerial judgement.

This managerial judgement is based on:

• experience of the sectors over time,

• knowledge of likely areas of focus for the forthcoming period and

• sound strategic planning.

It must be applied to assessments of future time allocation along with the principles of equity, efficiency, justifiability and transparency.

Unpredictable and extreme swings in the allocation of costs is difficult for both NZFSA and the industry to manage and a degree of ‘smoothing’ must be factored in over a five year period to ensure that charging rates are not based on a period that is in fact not representative of the total effort required.

Given the above, the charging regime applied is the best available but will be adapted and modified over time. In the meantime the Animal Products Act provides for the operation on memorandum accounting which allows for under or over recovery of costs to be kept aligned with a particular function or to the sector so in future years the over or under recovery can be recovered or refunded accordingly.

6.4 Current Operating Budget

The fees, charges and levies set under the Animal Products (Fees, Charges and Levies) Regulations 2002 were set to recover the industry’s proportion of the total $14.090 million budgeted for those services. It is difficult to compile a direct comparison between this and the proposal because the basis for cost allocation has been changed from a sector base to a functional base. However, since the last fee review cost increases have occurred in

• Corporate overhead, including MAF Overheads

• Personnel costs

6.5 Annual Operating Budget

The annual operating budget for industry type goods can be found in Appendix 2 and is based on the allocation described in section 6.2 . This is projected to comprise:

• $960,000 for delivering market access

• $2,980,895 for delivering export standards and systems

• $2,839,000 for delivering New Zealand standards activities

Costs of goods with public good components (and therefore paid by the Crown) are estimated to be :

• $596,077 for delivering multilateral standards

• $854,800 for delivering technical input into policy advice

• emergency response outputs and contributions to trans Tasman activities which relates to animal product industries are also considered public goods

Cost for delivering approvals, accreditations, registrations, listings:

• $857,388