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Dairy Industry (Fees) Regulations 2000 Amendment

Regulatory Impact Statement

Nature and magnitude of the problem and the need for government action

Cabinet has agreed that the dairy industry be regulated under the Animal Products Act 1999 (Animal Products Act). The Animal Products (Inclusion of Dairy Products) Amendment Bill (APA Dairy Bill) is expected to be passed by the end of 2003. As part of the enactment new fees regulations for the dairy industry that are consistent with the Animal Products Act need to be developed. This will necessitate a change in the way some costs are currently recovered.

The current New Zealand Food Safety Authority (NZFSA) fees and charges for regulatory activities for the dairy industry are collected under the Dairy Industry Act 1952 (Dairy Industry Act). The Dairy Industry Act will be repealed and its associated fee regulations revoked when the APA Dairy Bill is passed and comes into force. Under the Animal Products Act dairy premises will no longer be registered. Currently an annual charge on each registered premise ($1095 pre premise and $630,800 in total) is one of the principle means of cost recovery for industry good services (product management, standards, guideline development and setting, performance management programme, 5 % of the residue monitoring programme). It is expected that the APA Dairy Bill will come into force halfway through the financial year but it is not desirable to change the cost regime in the middle of a financial year as this could lead to confusion, add compliance costs and has the potential to over or under recover costs.

The existing regime provides for a flat fee to be paid by each premise registered regardless of its size. Operators of small businesses have been concerned that this system is unfair in that it is not in line with the level of benefits received. Currently small business pay 41 percent of the cost of industry good services but account for less than one percent of the raw milk received from farmer suppliers.

Statement of the public policy objective(s)

To establish a cost recovery system for dairy industry good activities provided by the New Zealand Food Safety Authority (NZFSA) that complies with the principles for cost recovery established under the Animal Products Act and the Guidelines for Setting Charges in the Public Sector (i.e. to recover the full cost from all industry users and beneficiaries of the programme equitably, efficiently, justifiably and transparently) and apply that system under the Dairy Industry Act until the APA Dairy Bill commences.

Feasible options (regulatory and/or non-regulatory) that may constitute viable means for achieving the desired objective(s)

Status quo

Currently, there is an annual charge on premises to recover the costs of industry good services supplied by the NZFSA.

The status quo involves dividing the total cost of industry good type services by the estimated number of registered premises and charging the registrant the amount derived as an annual fee. The cost per premises is:

Development and maintenance of standards $ 812.25

Dairy residue monitoring programme $ 101.25

Performance monitoring $ 181.13

TOTAL per premises per annum $1094.63

Industry good services are supplied at the same level and are equally applicable to large and small dairy premises. The service must be supplied at the same level regardless of the number or size of premises in the industry. This method therefore recovers the cost of those services at the same rate per premises, although it is arguable whether stores and laboratories use the services at the same level as manufacturers.

This method of cost recovery is efficient as the NZFSA easily calculates the cost for each registered premise on an annual basis. Each registrant is charged the same regardless of their size or use of services supplied. The cost of recovering such a fee is low under the Dairy Industry Act but would be higher under the Animal Products Act as a premises registration (listing) system would need to be set up expressly for the purpose of cost recovery.

The selection of registered premises as the basis for setting fixed charges is driven only by the fact that the Dairy Industry Act historically requires all premises to be registered. Arguments could equally be made for other drivers to be used to set a fixed charge against, for example, on a per company basis, or on a per product type manufactured, stored or tested basis, or on a Product Safety Programme basis (see below). Each option would satisfy the criteria that industry participants pay an equal share of the cost but each option would deliver a quite different and arbitrary distribution of costs to industry participants.

This method of cost recovery may not be equitable. If it is assumed that dairy processors who produce or handle the highest volume of product benefit the most from regulation, standard and guidance development, then they should pay the greatest proportion of the cost of providing these services.

Non-regulatory options

There are no feasible non-regulatory options that would constitute a viable means of achieving the desired objective. The NZFSA is unable to charge fees for the provision of regulatory services under the Dairy Industry Act other than those prescribed by regulation.

Regulatory options

Fixed charge per risk product safety (risk management) programme

This option provides for the total cost of the industry good type services to be divided by the number of product safety programmes (PSP). A PSP is a programme of conditions, processes, procedures, measures, and standards to be complied with relating to the production, manufacture, storage, or transport of dairy produce. It is estimated that the fee per PSP would be $3334 per annum.

This method of cost recovery would be efficient as the NZFSA could easily calculate the cost that needs to be attached to each registered PSP on an annual basis. Each PSP registrant would be charged the same regardless of volume of production or amount of product moved or stored. The cost of recovering such a fee would be low.

Like the current regime (see status quo above) the selection of the PSP as the basis for charging is arbitrary. It would also be possible for large companies to arrange their business to minimise the number of PSPs, for example, Fonterra may be able to develop a single PSP to cover its 14,000 suppliers and pay $3334 while a single supplier outside of Fonterra would have to pay the same amount under this option. If the number of PSPs reduces, the cost per PSP will increase. This would not provide for a fair or equitable cost recovery regime and would disadvantage small businesses.

This method of cost recovery may not be equitable. If it is assumed that dairy processors who produce or handle the highest volume of product benefit the most from the services then they should pay the greatest proportion of the cost of providing these services.

Differential fixed annual charge on raw milk received (preferred option)

The option involves applying a differential fixed charge based on raw milk received (to be determined on the basis of milk solids received).

Small operators (14 in total) would be charged an annual fee of $212. The effect of the proposal is to charge for industry good type services in line with size/throughput of the manufacturer as indicated in the following tables:

Redistribution of costs

Current registered premises

	Fonterra	Tatua	Westland	Others
Manufactures	94	6	2	75
Stores	147	2	3	164
Laboratories	27	1	1	21
TOTAL	302	9	6	226

Current and proposed fees for industry good type services

	Fonterra	Tatua	Westland	Others
Current Fees	$293,361	$9,852	$5,568	$284,604
Proposed Fees	$606,540	$5,187	$16,107	$2,968
Difference	+$313,180	-$4,665	+$9,539	-$281,636

Percentage of fee payments (Based on industry size - milk solids received from farm suppliers)

	Fonterra	Tatua	Westland	Others
Percent of industry (milk solids received)	96.5%	.8%	2.6%	.1%
Current percentage of fees paid	49.4%	1.7%	1.1%	47.9%
Proposed percentage of fees paid	96.2%	.8%	2.6%	.4%

This option is preferred as it most effectively addresses the public policy objective.

The net benefit of the proposal, including the total regulatory costs (administrative, compliance, and economic costs) and benefits (including non-quantifiable benefits) of the proposal, and other feasible options.

Government

• The NZFSA would be able to recover the full cost of services provided under the Dairy Industry Act at a level commensurate with the level and type of service being performed.
• The proposals would better comply with the principles for cost recovery established under the Animal Products Act and the Guidelines for Setting Charges in the Public Sector (i.e. to recover the full cost from all industry users and beneficiaries equitably, efficiently, justifiably and transparently).
• As the industry good services provided to the industry by the NZFSA will be the same under both the Dairy Industry Act and the Animal Products Act it is proposed that the same fees be charged under each Act. The most effective way to achieve this is to develop a cost recovery regime under the Animal Products Act and apply that regime as an interim measure under the Dairy Industry Act until the APA Dairy Bill commences.
• The proposal would allow for a seamless transition into the Animal Products regime.

Industry

• The policy will provide for a more equitable distribution of industry good (club good costs) in line with the benefits received by the users of the services. This would lower the cost of regulation (in government charges) for small dairy processors.
• The NZFSA would be able to recover the full cost of services provided under the Dairy Industry Act at a level commensurate with the level and type of service being performed.
• By placing the fee on raw milk received, the factory/ manufacturing plant has the opportunity of either passing the costs back to the producer or forward to their customers. Unless there is agreement between the parties, it may not be possible for Fonterra to pass on such costs due to restrictions in the Dairy Industry (Raw Milk) Regulations 2001. If this eventuates an amendment to the Dairy Industry (Raw Milk) Regulations 2001 will be proposed.

Proposed Fees and Charges

Service Area	Type of Fee/Charge	Existing Fee/Charge (excl. GST)	Proposed Fee/Charge (excl. GST)
Standard Setting:
Operational standards	Annual charge	$722 per annum for each registered premise, laboratory and store	$371,033.92 per annum for Fonterra $9,853 per annum for Westland $3,173 per annum for Tatua $501 per annum for Dairy Goat Co-op For manufacturers receiving less than 316,000 kg of raw milk solid $212 per annum for each other manufacturer
Monitoring and Review
National Residue Contaminants Programme Domestic (5% of total)	Annual charge	$90 per annum for each registered premise	$41,102.56 per annum for Fonterra $1,091.50 per annum for Westland $ 351.50 per annum for Tatua $ 55.50 per annum for Dairy Goat Co-op For manufacturers receiving less than 316,000 kg of raw milk solid this charge is included within the $212 per annum charge noted under operational standards
		$150 per annum for each registered exporter $736,036 per annum for Fonterra	$155 per annum for each registered exporter $735,538 per annum for Fonterra
Industry Performance (Including System Audits)	Annual Charge	$161 per annum for each registered premises, laboratory and store)	$194,404 per annum for Fonterra $5162.50 per annum for Westland $1662.50 per annum for Tatua $ 262.50 per annum for Dairy Goat Co-op For manufacturers receiving less than 316,000 kg of raw milk solid this charge is included within the $212 per annum charge noted under operational standards
Approvals:
Codes of Practice and Product Safety Programmes Premises, Laboratories and Stores, Quota Compliance Plans	Approval fee-	$117 per approval plus $117 per hour in excess of one hour plus disbursements	$106 per approval plus $106 per hour in excess of one hour plus disbursements
Hourly rate		$117 per hour	$106 per hour
Official Assurances
IMA Certification (currently in the Dairy Industry (IMA) Regulations 2000)	Annual Charge	$311,664 per annum paid quarterly by Fonterra plus disbursements	$312,000 per annum paid quarterly by Fonterra plus disbursements

Consultative programme undertaken

In February 2003, the NZFSA released a discussion paper to all affected parties and posted it on the NZFSA Web site. The proposals were discussed at the NZFSA run dairy seminars in February (which were held in Auckland, New Plymouth and Christchurch).

Five submissions were received including one from Fonterra. Three submitters supported the use of a levy on raw milk received. Two of these submitters, however, thought that the flat fee should apply to those manufacturers receiving 6000 kg of milk solids or less and that all other manufacturers should pay the levy. Two submitters, one of which was Fonterra, wanted the status quo to remain in place, that is, a charge on each registered premise. As noted above, premises are not registered under the Animal Products Act as they are under the Dairy Industry Act and this method of cost recovery could only remain in place as an interim measure (until 1 July 2004).

Officials met with Fonterra staff to discuss the proposals. Fonterra reiterated their initial position that the current cost recovery regime continue through the next financial year. Fonterra is strongly of the view that any cost recovery proposal based upon applying a differential fixed charge based on the volume of milk solids received does not meet the criteria as outlined in the initial discussion paper of equity, efficiency and justifiability. All costs for NZFSA services can only be recovered equitably if the recovery mechanism collects such costs from all entities that operate and benefit from this regulatory regime. This includes such entities as farm dairies, manufacturers, laboratories, stores, transporters and marketers. The proposed milk solids mechanism is not equitable as it loads all costs onto one sector of the industry and therefore leaves a significant group, who while benefiting from the regulatory regime, bear none of the associated costs.

The Ministry of Economic Development, and the Treasury were consulted during the development of this paper and no concerns were raised.

Business compliance cost statement

Sources of compliance costs

Compliance costs arise from regulated parties becoming familiar with the new fees and charges. Other sources of the compliance costs relate to the payment of the fees and charges.

Parties likely to be affected

Dairy producers, processors, laboratories, stores and exporters.

Estimated compliance costs of the proposal

The proposed fees and charges associated with the proposal are set out in tables included in the Regulatory Options section of the RIS. There will be a redistribution of costs. Around four hundred registered premises will not be subject to annual fees ($1095 each). Two of the three larger processors of raw milk will be subjected to increased charges. Fourteen smaller processors (those processing less than 316,400 kilograms of milk solids) will pay $212 each per annum.

Longer term implications of the compliance costs

Recurring compliance costs are not expected to change in the long-term.

Level of confidence of compliance cost estimates

The NZFSA has a reasonable level of confidence in the quantitative estimates of the compliance costs of the proposal because of its experience with the current regime and the relatively narrow scope of compliance costs associated with the proposal.

Key compliance cost issues identified in consultation

The only compliance cost issue raised during consultation was that related to the fees and charges detailed in the consultation section of the regulatory impact statement.

Overlapping compliance requirements

No overlapping compliance requirements have been identified.

Steps taken to minimise compliance costs

The policy to apply one set of fees and charges for coverage under both the Dairy Industry Act and Animal Products Act regime will minimise compliance costs and will provide for a seamless transition between two regimes. Affected parties will be notified of the new fees in writing or by E-Mail.