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Cost Recovery Proposals under the Animal Products Act 1999

8 Who in industry is it best to charge?

Having determined that industry should pay for certain services this section examines whom in industry it is best to charge for services provided. For economic efficiency reasons guidelines suggest charges should be imposed as close as possible to those persons who have the ability to moderate their behaviour and influence their demand for services, ie, those who use the services. However, for practical reasons and for charging efficiency, placing charges at different points of the supply chain may be a feasible option.

8.1 Who should pay?

New Zealand standards

Although the final beneficiaries of providing food standards are consumers, in practice it would be difficult to identify everyone who benefits from food regulation activities, and/or impractical to charge them for those benefits, particularly overseas consumers, unless the New Zealand taxpayer funds on behalf of all consumers.

It is likely to be more efficient to charge processors and other operators because

• consumer beneficiaries are widespread, with consequent high costs of collection;

• processors (and other operators) are likely to be in a better position to monitor the costs and activities of the service providers than consumers in general; and

• there may be better incentives for 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 (provided that the costs imposed reflect, and vary with, the degree of risk).

To the extent that animal product processors pass the cost of regulation onto final New Zealand consumers, charging producers is also equitable, as, the final beneficiaries are being charged.

It is proposed that the cost of New Zealand standard setting be recovered from processors (domestic and export¹) of animal products.

Market Access and Export Standards and Systems

Exporters of animal products gain benefits from market access and official assurance activities undertaken by NZFSA. However, most of the standards set and therefore assurances given are more applicable to the processors of export product.

It is proposed that the majority of market access and export standards and systems costs be recovered from processors of export product.

It is acknowledged that export processors have limited or no opportunity to pass on the cost of regulation to export customers.

8.2 Alternative options to recover costs from secondary processors (including stores, processing of by-products, rendering, animal feeds, dual operator butchers and hides and skins)

Option one

In terms of economic efficiency, charges should rest with each of the sectors listed and be recovered from these sectors accordingly. Secondary processors are likely to be in a better position to monitor the costs and activities of the service providers than consumers in general. There may also be better incentives for 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.

Costs would be recovered in the same fashion as above, ie, across all processors for New Zealand standards, and export processors for export standards and market access.

Option two

An alternative option is to recover the costs allocated to secondary processors from primary processors. The advantages of this option are:

• there is difficulty in identifying the amount of programme effort attributable to secondary processors on an ongoing basis - highly variable programme

• the scope and scale of secondary processors makes it difficult to identify a fair and equitable basis for charges - product values vary enormously

• difficulty in identifying sustainable mechanisms to base charging for secondary sectors on (currently a uniform fixed annual charge is the most feasible)

• an ability of some secondary processors to avoid costs by moving to other legislation ie, charges will influence behaviour and may include avoidance of regulation

• almost all primary processors are also secondary processors.

Secondary processing costs that could be recovered from primary processors could include animal feed, hides and skins, rendering and secondary processing of by-products.

Currently, except for standalone stores, rendering, secondary processors, and pet food processors (who pay fixed annual charges); the costs of secondary processing are paid by levy and annual levy revenue received from primary processors.

It is acknowledged that all secondary processors (except rendering) source animal products from primary processors, but not all primary processors send product on to secondary processing. Therefore bundling costs represents a degree of cross-subsidisation from primary processors to secondary processors. There may also be equity considerations when determining the amount of cost to be allocated to each primary processing sector.

¹ To the extent that the New Zealand Standards form the basis for all exported products, the cost of setting those standards are equally recoverable from export processors.