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Cost Recovery Proposals for Dairy under the Animal Products Act 1999

6 Cost of providing services

This section details the current and future costs for NZFSA to provide services to the dairy industry. Budget information is provided on the proposed allocation of direct and indirect costs to each area of service, along with the staffing requirements.

6.1 Current situation

The current fees and charges are based on services provided by the former Dairy and Plants Group. Since those fees and charges were set in 2004, NZFSA has restructured away from sector-based delivery of services to a structure based on functionality, i.e., services to the dairy industry are now provided through the:

• New Zealand Standards

• Export Standards and Systems including Market Access and certification

• Approvals; and

• Compliance and Investigation Groups.

Alignment by function provides for greater efficiency and will assist with the harmonisation across the food sector of food standards on operation systems.

The move away from sector-based delivery has necessitated a different approach to how services to the dairy industry sector are costed.

In 2005/06 NZFSA’s budgeted expenditure for New Zealand export standing setting, market access, and compliance was $2,659,586 (excluding Approvals, Accreditations, Registrations and Official Assurance services) for the services NZFSA provided to the dairy industry. The expected cost of providing these same services to the dairy industry for 2007/08 is $3,581,111, an increase of $912,525.

Changes to NZFSA’s cost recovery policy which reflect Government guidelines have resulted in Generic Standards activities being considered as an industry good and therefore funded by industry. Previously, these activities were considered to be partly a public good and therefore had a Crown funded contribution.

The services provided by NZFSA’s New Zealand Standards and Export Standards Groups provide some public good components. The Crown funds these public good components generically across these activities.

Costs of goods for all NZFSA services with public good components supplied to all industry sectors (and therefore paid by the Crown) are estimated (for 2007/08) to be:

• $774,515 for delivering multilateral standards

• $1,240,627 for delivering technical input into policy advice

• $854,179 for emergency response outputs and contributions to trans-Tasman activities which relate to animal product industries are also considered public goods.

6.2 Allocation of costs to services

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

This methodology is used to allocate costs for both the Crown and industry funded services. Discussion on who should fund these services is continued in Section 7.

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

Indirect costs include management, a share of NZFSA management and support services and NZFSA/ Ministry of Agriculture and Forestry (MAF) corporate overhead costs, such as accommodation, equipment and communications. MAF Corporate costs and NZFSA fixed costs are allocated to NZFSA outputs to each year and form part of the cost of producing these outputs. ‘Drivers’ for allocating the MAF costs across five MAF businesses 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 of NZFSA on the basis of hourly usage.

Generic Standards 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, dairy, 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.

6.3 Basis of the costs estimates

6.3.1 Process for calculating the costs

The steps undertaken by NZFSA in calculating the costs of the services NZFSA provides (New Zealand Standards, Export Standards and Market Access outputs (including overheads)) to each sector under the Animal Products Act 1999 are as follows:

• 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 Animal Products Act 1999 in 2005/06 have been made by NZFSA 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 costs of specific programmes are allocated directly to the sectors or service to which they apply, eg, the cost of the National Chemical Contaminants Programme will be a specific cost to the dairy sector.

6.3.2 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 these different sectors. 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 to the different industry sectors (including the dairy sector) are:

• To pro-rata the costs across the sectors (eg, using FTEs as a driver)

• To allocate the costs on the basis of a flat rate (uniform charge) for each sector

• To allocate costs in proportion to the sector size.

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

A flat rate charge could seem inequitable as it could mean smaller sectors which impose relatively low costs on NZFSA may have to bear the same charge for developing generic standards as the much larger sectors.

NZFSA proposes that an equitable driver is to allocate New Zealand generic standard costs to all food sectors in proportion to the benefits received or allocate these 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).

6.3.3 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 and 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 judgment.

This managerial judgment 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 of 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 2006/07

The current 2006/07 budget reflects the changes laid down in the Animal Products (Dairy Fees and Charges) Regulations 2005, carried forward from the Dairy Industry Act. They were last reviewed in 2004 for the 2004/05 financial year. No increase in charges have been made in the last three years and the regulatory programme costs have been applied as estimated resource allocations in the 2005/06 and 2006/07 financial years.

Better time tracking of activity/function against the industry sectors to which NZFSA provides services has enabled a level of confidence in the application of FTE units allocated to New Zealand Standards Activities, Export Standards and Systems and Market Access activity for the dairy sector.

6.5 Estimated annual operating budget for 2007/08

The estimated annual operating budget for 2007/08 is attached as Appendix 2.