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Cost Recovery Proposals under the Animal Products Act 1999

7 Stakeholder Contributions to NZFSA Costs

This section details the criteria used for determining the Crown and industry contributions to the costs of providing services. Based on these criteria, the relative Crown and industry contributions are proposed.

The Crown and industry as the major stakeholders will be contributing to the cost of services provided by the NZFSA. In determining the respective contributions of the Crown and industry, the Treasury document Guidelines for Setting Charges in the Public Sector and the Audit Office Guidelines Costing and Charging for Public Sector Goods and Services have been taken into account.

7.1 Framework for determining service type

In principle, the appropriate source of funding of an activity depends on the nature of the good or service. Economic theory distinguishes between three types of goods or service: public goods (or services), industry goods (or services) and private goods (or services). The key characteristics of these three categories and their appropriate sources of funding are considered below.

Public Goods

The classic definition of a public good or service is where consumption of the good or service is both:

non-rival: where consumption of the good or service by one party does not reduce the amount of the good or service available to other potential consumer. An example is radio broadcasting because one person listening to the channel doesn’t reduce the ability of others to tune in; and

non–excludable: where it is not possible (or too costly) to prevent a party from freely consuming the good or service. For example, in the case of public radio broadcasts, anyone with a suitable receiver can listen in.

Examples of pure public goods are rare. For example, some have argued that a lighthouse is a public good, as use by one ship of the light does not diminish the ability of another ship to use the light and it is generally difficult or impossible to prevent a ship from benefiting from the service. However, it has been noted that original lighthouse services were in fact provided by private operators who funded the activity by charges on ships entering the harbour. Similarly, in the case of radio broadcasting, while it may meet the criteria for a public good, there are ways other than general taxation of funding the activity (ie, advertising).

In practice, the distinction between a public good, industry good and private good is not black and white. The issue is more one of degree, with the practical question being how costly it is to charge (or exclude) a user of the publicly provided service.

Industry Goods

In the case of an industry (or club) good, use by one person does not detract from its use by another (ie, consumption is non-rival, like a public good), but people can be excluded from the benefits at low cost (unlike a public good).

Industry goods can, in principle be provided by member-owned ‘clubs’ (eg, an industry organisation), by a separate organisation or by the public sector.

There are typically advantages in an industry good being funded by the industry (rather than by the taxpayer). These advantages can include:

• more equitable outcomes, as those who impose the cost of supplying the good or service, or who benefit from it (rather than the general taxpayer) pay for the costs of supplying the good or service;

• better incentives for the industry to moderate its demand for the publicly-provided services and to minimise the activities that give rise to the cost or risk associated with the activity; and

• better incentives for efficiency in the provision of the good or service, as the industry is likely to have better ability and greater incentives than the general taxpayer to monitor the performance of the supplier.

Where a publicly provided activity is industry (or privately) funded, the charging mechanisms used should be consistent, transparent, and implementable and the charges set should not over-recover the cost of the service.

Private Goods

In the case of private goods, people can be excluded from its benefits at low cost and its use by one person conflicts with its use by another.

Private goods are by far the most common. There is a strong case for recovering the costs of a private good from those who benefit from it.

7.2 Application of the Principles to NZFSA’s Activities under the APA

This part of the section considers the extent to which each of the outputs provided by NZFSA under the APA are public, industry or private goods, as defined above. In assessing the nature of the goods or service, the following criteria are used:

• whether consumption of the service is non-rival;

• whether consumption of the service is non-excludable; and

• the costs of identifying and charging those person or persons that create or contribute to the costs or risks (the ‘exonerator’) or the user/beneficiary in the case of private goods.

Market Access

NZFSA’s output Market Access activities are activities undertaken to promote and deliver animal product exports worldwide and include bilateral/regional negotiations for obtaining and maintaining access.

Market Access is primarily an industry good as, while its use by one exporter does not detract from its use by another, it is largely an excludable activity because exporters require registration and frequently require official assurances, such as certification of an export consignment from the government. Where the government undertakes specific market access negotiations for specific products, the activity is also an Industry Good because the industry or sector benefiting can be easily identified. It is generally feasible to charge the exporter for the costs of market access as part of the official assurance process or by way of general export charges.

Particular issues can arise in the case of new species, sectors or products (as has arisen recently, for example, with ostriches and emus) where the first entrant or entrants to the industry have to bear the establishment costs of negotiating market access for the new product. It can be argued that those start-up costs only arise because the new entrant is seeking to export but it can also be argued that some costs should be recouped from other businesses entering later. In either case, if the taxpayer paid, the taxpayer would be subsidising the new industry and bearing the risk that the industry may fail. However, in some circumstances there is no ability, or it is difficult, to apply regulatory charges to recover start-up costs from persons prior to the activity commencing.

Some specific components of NZFSA’s Market Access activities have public goods characteristics. These components are:

• technical input to policy (see under separate heading below)

• multilateral standards activities (see under separate heading below)

• a case can also be made for Crown funding of the costs incurred by NZFSA in Free Trade Agreements (FTAs) negotiations, especially where the FTA is politically rather than trade driven or where the agreement is plurilateral (like the P4 agreement and the ASEAN agreement that is currently being developed).

It would be appropriate for most of these three components of the costs of ‘Market Access’ to be publicly funded.

Export Systems and Standards

Export Systems and Standards relate to the development, maintenance, evaluation and review of export food and food-related product standards; the development and implementation of systems and processes for export food and food-related regulatory programmes; and the development and implementation of standards and implementation tools for verification of export requirements. This output includes the residue monitoring programmes such as the dairy, meat and poultry residue monitoring programs.

Export Systems and Standards is primarily an industry good. The development of the service is generally provided and the costs can be attributed, on an industry-by-industry basis. It is also quite practical to charge on an individual industry basis.

The full costs associated with the different residue testing programs (eg, meat, dairy) are included in the Export Systems and Standards output. These are significant cost items ($1m plus in the case of meat). Residue monitoring activities are an industry good. It is generally quite feasible to identify the costs incurred by the different industries/sectors and to charge the industry/sector accordingly.

New Zealand Systems and Standards

New Zealand Systems and Standards are also primarily industry goods. In the case of the development and setting of operational standards and product and operational safety guidelines for a specific industry, use by one enterprise does not detract from its use by another but it is possible to exclude parties at a low cost. These activities are therefore industry goods. It is quite feasible to charge the industry for such activities. Enterprises need to register their risk management programmes to supply products and the cost of developing and maintaining safety standards could legitimately be included as part of the costs of the registration, or through levies.

In the case of generic food standards, it can be argued that all New Zealand consumers benefit and that therefore the taxpayer should pay. However, the prime focus in designing a funding regime should be on who imposes or creates the costs, rather than on who benefits. Charging those who impose the costs can have the advantage of encouraging those who impose the cost to moderate their behaviour and to monitor the costs incurred in supplying the activity. On the other hand there are arguments that generic standards are so general in nature and the beneficiaries are so widespread that they will have little ability to influence their supply or monitor costs.

It should also be noted that the consumers of a particular food or beverage are not the same as taxpayers. Different sectors have different standards with differing costs for designing, implementing and monitoring them. Further, consumers’ patterns of expenditure on the different products differ widely so it is not clear that having the taxpayer pay is efficient or equitable.

Some tension has arisen in recent years between the government’s guidelines for setting user-charges in the public sector and calls to assist and provide protection for small and medium size entities from the full cost of supplying the government service to those enterprises. As a result, either larger business or the general taxpayer has had to cross-subsidise smaller businesses. Such subsidisation is inconsistent with the government’s guidelines and is likely to be a relatively blunt and inefficient form of assistance to the business sector.

As with Market Access, there are some components of the costs incurred in New Zealand Systems and Standards that are more properly regarded as public goods. These components are technical input to policy, multilateral standards activities, including trans Tasman activities. It would be appropriate for most of these two components of the costs of ’New Zealand Systems and Standards‘ to be publicly funded.

Approval, Accreditation and Registrations

Approval, Accreditation and Registrations is a private good as the service is generally provided and the costs can be attributed, on an enterprise-by-enterprise basis. That is, consumption is ‘rival’ because extra costs are involved in supplying the service to each enterprise. It is also quite practical to charge for Approval, Accreditation and Registrations services on an individual enterprise basis.

Technical input to policy

Technical input to policy component activities should be regarded as a public good. food safety policy advice, like other public policy advice, should take a national (rather than a sectoral) interest perspective and consider often competing claims. To maintain independence of advice, NZFSA’s policy advice activities (like other policy advice activities) should be regarded as public goods and be taxpayer funded.

Multilateral standards

Multilateral standards activities cover a range of activities. NZFSA’s contributions to multilateral negotiations and international fora (eg, Codex, the OECD, APEC, Biosafety and WTO) cover a general range of agricultural and food industry interests which benefit the agriculture and food sectors and could therefore be regarded as industry goods. However, they also contribute to meeting New Zealand’s national interest obligations as a signatory to underlying treaties and agreements and to New Zealand’s standing in the international arena and could therefore be regarded as public goods. It would also be difficult to apportion the costs of such activities to an individual enterprise or sector group unless the activity was very focussed and tightly constrained to a particular sector. On the other hand, the costs of multilateral standards activities that relate to specific agricultural/food products could be apportioned to the specific product and could (and should perhaps) be funded by that industry or sectoral group. For example, contributions to commodity specific Codex Committees could be expected to fall within this category. Overall, it is probably efficient for most of these activities to be Crown-funded.

Summary of Assessment Proposed Crown/Industry Contributions

Service Area	Crown	Industry
Market Access		ü
Export Systems and Standards		ü
New Zealand Systems and Standards		ü
Approvals, Accreditations and Registrations	ü
Technical Input to Policy	ü
Multilateral Standards	ü
Input into Trade Agreement	ü
Implementation	ü	ü