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Cost Recovery Proposals for Dairy under the Animal Products Act 1999

7 Stakeholder Contributions to NZFSA Costs

This section details the criteria 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 the services provided by 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.

7.1.1 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 consumers. 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 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 (eg,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.

7.1.2 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, be able to be implemented. The charges set should not over-recover the cost of the service.

7.1.3 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 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. With the exception of some New Zealand generic standard setting activities no changes are being proposed to the relative Crown/Industry contributions. 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.

7.2.1 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. Exporters of dairy products are the primary beneficiaries.

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. This is because exporters require registration and, in many cases 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 sector which benefits 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.

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

• Technical input to policy (see under heading below)

• Multilateral standards activities (see under separate heading)

• 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 theP4 agreement and the ASEAN agreement that is currently being developed).

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

7.2.2 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 residue monitoring programmes such as the dairy residue monitoring programmes. Exporters of dairy products are the primary beneficiaries.

Export Systems and Standards is primarily an industry good. The development of the service is generically 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 National Contaminant Monitoring Programme for the dairy industry are included in the Export Systems and Standards output. This is a significant cost item at $1,209,468. In the past a component of this charge was funded through the Dairy Exporter registration fee. The National Contaminants Monitoring Programme is 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.

7.2.3 New Zealand Systems and Standards

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. New Zealand Systems and standards 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, or in the case of the dairy industry – differential charges. Generally those standards are put in place for industries use and benefit.

Some tension has arisen in recent years between Government 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 Government services 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 Government guidelines and is likely to be a relatively blunt and inefficient form of assistance to the business sector.

7.2.4 Compliance

The area of compliance is an industry good. Compliance and monitoring activities involve monitoring and assessing recognised agencies and accredited persons (in conjunction with the accreditation body). Compliance activities also involve resolving regulatory compliance disputes and, imposing regulatory sanctions when non-compliance is not corrected.

Other compliance activities involve ensuring that international obligations to other Governments for the provision of official assurances are undertaken and that product certification meets international authority requirements.

Other industry benefits derived from the work of NZFSA’s Compliance, Audit, Investigation and Enforcement Team include the ability to respond proactively to threats which compromise food safety and to respond to signals and information that indicate potential problems.

7.2.5 Generic Standards

In the case of generic New Zealand food standards, it can be argued that all New Zealand consumers benefit and that therefore the taxpayer should pay. However, in designing a funding regime the prime focus 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 them 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 to monitor costs.

It should also be noted that the domestic 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.

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 advice, 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. The Government also makes a contribution to the operation of Food Standards Australia New Zealand (FSANZ).

The situation is different for generic standards set for export standards and systems. Here the primary beneficiaries are the exporters, because the setting of such standards result in exporters developing, or maintaining, the ability to trade internationally.

7.2.6 Approvals, Accreditations and Registrations

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

7.2.7 Official Assurances (Certification)

These are private goods and therefore costs are allocated at a rate that reflects the actual cost of providing the service.

An official assurance is a general statement to a foreign Government, or an agent of a foreign government, attesting that, as appropriate, certain conditions apply in respect of export material or product.

The term official assurance carries a broader definition than just export certification, as it can include other types of assurances such as MOUs (Memorandums of Understanding) and administration regimes, and can incorporate the wider systems, processes and procedures underpinning the issuing of any assurance made by one Government to another.

Although third parties can perform a verification role, only Government is accountable for, and in control of, issuing official assurances for use in importing countries. The integral role played by Government in issuing official assurances helps to promote confidence in, and to protect the credibility of, official assurances. The exclusive role of Government in issuing official assurances is defined in legislation. For example, Section 61 of the Animal Products Act specifies that it is the Director-General of MAF, or persons authorised by the Director-General, who may issue official assurances.

To be robust and credible, official assurances must be supported by underlying export systems, processes and procedures which are auditable and which demonstrate exporters are complying with all appropriate standards, guidelines and recommendations.

7.2.8 Multilateral Standard Setting

Multilateral standards activities cover a range of activities. NZFSA’s contributions to multilateral negotiations and international forums (eg, Codex, the OECD, APEC, Biosafety and WTO) cover a general range of agricultural and food industry interests which benefit the agricultural 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.

For the dairy industry the Crown will fund the chair and hosting of the Codex Committee for Milk and Milk Products. The Crown also contributes significantly to the International Dairy Federation.

It would 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.

7.2.9 Technical input to policy

Technical input to policy component activities should be regarded as a public good. Food safety 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 the policy advice activities) should be regarded as public goods and be taxpayer funded.

7.2.10 Trans-Tasman activities

A case can be made for Crown funding of the costs incurred by NZFSA for trans-Tasman activities which include the work NZFSA undertakes with FSANZ, CER and the Trans-Tasman Mutual Recognition Agreement (TTMRA).