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Cost Recovery Policy and Framework

NZFSA Background Paper No 06/04

29 August 2006

ISSN 1171-8951

ISBN 0-478-29851-X

Important Disclaimer

Every effort has been made to ensure the information in this report is accurate.

NZFSA does not accept any responsibility or liability whatsoever for any error of fact, omission, interpretation or opinion that may be present, however it may have occurred.

Further copies

Requests for further copies should be directed to:
New Zealand Food Safety Authority
P O Box 2835
WELLINGTON
Telephone : (04) 463 2500
Fax : (04) 463 2566

Website
A copy of this document can be found at www.nzfsa.govt.nz

Table of Contents

1 Introduction 4

2 Determining the Source of Funding for NZFSA Activities 5

2.1 Government Guidelines 5

2.2 Cost Recovery Principles 6

2.3 Principles in Legislation 6

2.4 Implementation of Principles 7

2.4.1 Equity 7

2.4.2 Efficiency 7

2.4.3 Justifiability 8

2.4.4 Transparency 8

3 NZFSA Activities – Who Should Pay? 9

3.1 Who to charge (point at which charges are imposed) 9

3.2 Whether to charge 10

3.2.1 The impact on regulatory agencies 10

3.2.2 The effect on the regulated industry 10

3.2.3 The impact on consumers 11

4 What are the activities that need to be funded? 12

4.1 New Zealand standards, specifications and guidance 12

4.2 Export standards and market access 13

4.3 Approvals 13

4.4 Compliance 14

4.4.1 Monitoring and audit 14

4.5 Operational Response 14

4.5.1 Investigations 14

4.5.2 Enforcement 14

5 Classification of NZFSA Activities 16

5.1 Setting New Zealand standards 16

5.1.1 Generic standards 16

5.1.2 Industry/product based standards. 17

5.2 Policy Advice 17

5.3 Multilateral standard setting 17

5.4 Overseas market access 18

5.5 Official Assurances 18

5.6 Approval, accreditation and certification activities 18

5.7 Monitoring and Compliance 19

5.7.1 Monitoring 19

5.7.2 Systems Audits 19

5.7.3 Company/business Audits 20

5.8 Operational Response 20

5.8.1 Investigations 20

5.8.2 Sanctions and prosecutions 20

5.9 Services provided by third parties 21

6 Cost Recovery Policy 22

6.1 Process for Calculation of Charges 22

6.2 Total Costs to be Recovered 23

6.3 Charging Regime should not be Overly Complex 23

6.4 Risk-based fees may be appropriate 24

7 Cost Recovery Mechanisms 25

7.1 Fees 25

7.2 Levies 25

7.3 Other mechanisms 26

7.4 ‘Menu’ of Tools27 8B

8 Basis of Charging For NZFSA Services 28

8.1 Private Goods 28

8.2 Industry Goods 29

9 Glossary 30

1 Introduction

This paper sets out the New Zealand Food Safety Authority’s cost recovery policy and framework. It outlines the principles and methods that will be applied when recovery of the costs incurred by NZFSA in carrying out its statutory functions is required.

It does not deal with the level or amount of costs that are to be recovered ie, what the actual fees and charges will be. This will be the subject of separate discussion papers as appropriate.

The framework is based on Government guidelines and high level principles as set out in the Treasury-produced ‘Guidelines for Setting Charges in the Public Sector’ and the Audit Office’s ‘Guidelines on Costing and Charging for Public Sector Goods and Services’.

It also takes into account constitutional principles as set out in Parliament’s Standing Orders and guidance received from reports of the Regulations Review Committee.

2 Determining the Source of Funding for NZFSA Activities

Ultimately it is the Government that makes decisions about the provision and funding of government-provided functions, through the budget and its associated appropriations and purchase agreements.

However, the Government is guided by departmental advice on whether it should purchase regulatory functions, and on whether the government (taxpayer) or industry should fund those functions. There are a number of guidelines that assist in this process.

2.1 Government Guidelines

The Treasury document Guidelines for Setting Charges in the Public Sector identifies three types¹ of ‘goods’ that determine the appropriate source of funding:

Public Good: Excluding people from the benefits of a public good is either difficult or costly and its use by one person does not prevent its use by another person.

Public goods should be government (taxpayer) funded.

Private Good: People can be excluded from the benefits of a private good if they do not pay for it, and its use by one person conflicts with its use by another (so there is an additional cost incurred in providing the service to another person).

Private goods should be funded by the users or beneficiaries (or those whose actions create the risk if applicable).

Club Good or Industry Good: A club good has some characteristics of a public good, in that its use by one person does not detract from its use by another, but either people can be excluded from the benefits of the good at low cost, or the beneficiaries are a narrow identifiable group. For the purposes of this paper, it is proposed to refer to such goods as Industry or Club Goods.

Industry/Club goods should be funded by the identified groups of the users or beneficiaries (or risk makers).

2.2 Cost Recovery Principles

Once it has been determined that a function or activity is a private or industry good and the costs of its provision should therefore be recovered from the private sector, the Treasury-produced Guidelines set out key principles for that cost recovery. These principles include:

- charges should in general be set at the full cost of providing the service; that is, including all overheads

- charges should not be excessive in relation to the costs incurred

- charges can be set to vary by the location where the service is provided or by the time at which the service is provided, but account needs to be taken of the costs resulting from complex fee structures, compared with more simple ones

- the process for setting charges should be clear and appropriate

- transaction costs in setting and collecting the charges should be kept low

- appropriate consultation with those affected should be undertaken

- there should be a robust statutory basis for any charges

- there should be fair treatment for taxpayers, beneficiaries of the service and risk exacerbators.

2.3 Principles in Legislation

Government guidelines for setting charges in the public sector are reflected in several Acts administered by NZFSA – notably the Animal Products Act 1999 and Wine Act 2003, and are proposed to be incorporated into the Agricultural Compounds and Veterinary Medicines Act via a Bill currently awaiting introduction. It is also being proposed as part of the Domestic Food Review to amend cost recovery provisions in the Food Act 1981 to the same effect.

These Acts state and define the criteria that need to be considered when determining the most appropriate method of cost recovery:

Equity: Users or beneficiaries of a function, power or service will generally be required to fund the cost of providing the function, power or service at a level that reflects their use or benefit.

Efficiency: Costs should generally be allocated and recovered in a manner that ensures maximum benefits are delivered at minimum cost.

Justifiability: The costs (including the indirect costs) associated with providing a function, power or service should be reasonable and justifiable.

Transparency: The cost of providing a service, function or power should be identifiable and allocated in a transparent manner.

2.4 Implementation of Principles

2.4.1 Equity

Equity of cost recovery policy and process will be ensured by examining all activities subject to cost recovery on the same basis, and applying the same cost recovery principles to each sector.

Funding arrangements could be considered inequitable, if some groups pay for the services they use and benefit from, while others who use the same services do not pay.

Cost recovery assessment will therefore start from the premise that, ideally, if an activity is Crown funded for one industry, it should be Crown funded for all. And similarly if it is industry funded, all sectors should pay where that activity is carried out for their sector. However, in practice this may not be possible in all cases.

Also, charging rates for the same activity should be the same across all sectors; hourly rates should not differ between different sectors for the same activity.

Whatever regime is adopted, it should be consistent across all sectors. There should not be two (or more) different systems operating under the same Act. This is particularly important where producers are operating across more than one sector, for example fresh/canned/frozen food; meat/fish/plant products. With the implementation of the Domestic Food Review many operators will have greater choice over which Act they operate under. Charging regimes will need to be consistent across all NZFSA legislation so as not to unduly influence operators choice of regime.

2.4.2 Efficiency

An efficient cost recovery regime will be achieved by

• Targeting charges to those in the best position to monitor the costs, quality and quantity of the services, and to change their behaviour to influence the nature and level of the services, to help ensure delivery of maximum benefits at minimum cost.

• Selection of cost recovery mechanisms that minimise compliance and administration costs.

2.4.3 Justifiability

Charges will be based on the costs of providing the service and will be at a level that does not over-recover costs from any identified user or user-group.

2.4.4 Transparency

Costs will be identified and allocated as closely as possible to the specified service, in the period in which the service is provided.

NZFSA is not required to strictly apportion costs for a particular function, service or power based on usage. Fees or charges may be determined by averaging the costs or potential costs.

Fees or charges may also be set at a level which takes into account costs (e.g, generic services costs) that are not directly provided to the industry sector that pays the fees or charges but which are indirect arising from the delivery of a service to the affected industry sectors or arising from the delivery of services to all industries receiving NZFSA services such as generic New Zealand or generic export standards

2.4.4.1 Consultation

Open, regular, timely and honest consultation is essential throughout the entire process. All affected parties will be identified as far as is possible, and given sufficient time and information to make an informed contribution. When consulting with affected parties, parties will be provided with:

• a breakdown and description of the services to be provided including why they are needed

• the cost of providing those services

• an analysis based on government guidelines for determining whether the services are Public, Private or Industry goods and whether the Crown or industry should pay for them

• an analysis based on Audit Office guidelines of the possible charging mechanisms for developing an efficient charging regime; and

• a proposed cost recovery regime including timelines.

3 NZFSA Activities – Who Should Pay?

The objective of food safety regulation is to ensure that consumers are protected (both domestically and internationally) from risks that may arise in connection with the consumption of food. NZFSA’s core business is about promoting and achieving food safety and food export market access. These core activities underpin the health of all New Zealanders and the nation’s economic well-being.

Regulation to achieve this aim affects various groups in society, including consumers of regulated products and regulated firms.

Arguably, consumers of food are the main beneficiaries of food safety regulation and should pay for most, if not all, of its provision. This arrangement would give better signals about the value that consumers place on food regulation. By making the beneficiaries pay a little more directly than they otherwise would, these measures may be preferable on economic efficiency and equity grounds to funding food safety regulation through general taxation revenue.

On other hand there is also an argument that risks to food safety and suitability arise in the food production chain, and it is food producers and other food sector operatives who create the need for government regulation. These parties should therefore pay for the costs of food safety regulation, as ‘exacerbators’.

An issue here is that while risks do arise in the food production and distribution chain, very few, if any, producers knowingly or deliberately produce unsafe food. It is arguable that their actions give rise to the need for Government intervention. Also industry has no control over the safety of food once it is in the hands of the final consumer, ie, the general public are also risk exacerbators.

3.1 Who to charge (point at which charges are imposed)

In practice it would be difficult to identify everyone who benefits from food safety regulation activities, and/or impractical to charge them for those benefits.

It is likely to be more efficient to charge producers because:

• beneficiaries are widespread, with consequent high costs of collection

• producers 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 food producers pass the cost of regulation onto final consumers, charging producers is also equitable, as beneficiaries are being charged.

3.2 Whether to charge

Government guidelines recognise that while, in principle, costs should be recovered from beneficiaries or those who create the risk, in practice implementing a cost recovery regime is not costless. If costs outweigh benefits, it may be more efficient for the government to pay.

Factors to take into account in assessing the efficiency of implementing cost recovery include the influence of cost recovery arrangements on:

• the behaviour and efficiency of regulatory agencies;

• behaviour, innovation and product development in the regulated industry; and

• consumer behaviour.

3.2.1 The impact on regulatory agencies

This may be

• positive, heightening the interest of firms or consumers in the efficiency of the regulator, or

• negative, creating incentives for

o ’regulatory creep’ - the tendency of a government agency to over-expand its operations because costs can be charged to a third party; and

o ’gold plating’ – having bigger/more expensive systems equipment etc, than is required to provide the service, so that costs are excessive for the level of service provided.

3.2.2 The effect on the regulated industry

• There may be potential for ‘free riding’ to inhibit innovation in the development and marketing of new foods, if property rights are weak. For example, in the absence of intellectual property rights, a variation in a standard initiated by one firm would be available to all firms in the industry. While the safety of all consumers of that product (produced by any firm and not just the output of the applicant) would be protected, all other producers of that food could ‘free ride’ on the application of the first firm. In this situation funding from general taxation revenue (or a levy-based arrangement that charged all producers) may be more appropriate.

• The effect on small businesses – all businesses may benefit from or contribute to need for a service, but a flat fee calculated by averaging across the number of businesses will impact disproportionately on small businesses, especially if there is a large fixed cost component. It may be more equitable to charge according to size eg, volume or value of turnover.

• Given that some firms and some products impose greater risks than others, and thus require more regulation, a flat charging structure would benefit some firms at the expense of others.

• Possible effects on competition, for example if imported food does not attract a charge, domestic producers may be disadvantaged.

• Charging ‘occasional’ and voluntary food producers, who operate within or according to established standards, but may not be efficient because of the size and nature of their operations.

3.2.3 The impact on consumers

Consumers will be affected by changes in prices of food:

• To the extent that costs of regulation are passed on, the price of food will be higher than otherwise. This may have a disproportionate effect on lower socio-economic groups.

• Behavioral change may be positive (in terms of achieving the desired outcome of lower incidences of foodborne illness) if high risk food is more highly priced, so less is consumed.

• But there is also potential for ‘perverse incentives’ if the costs of regulatory control (and therefore food products) are so high that the incentives are to circumvent controls, and drive people into areas where regulations are less easily monitored and enforced eg, buying off the ‘back of the truck’, gather own shellfish, home-kill, grow and/or trade own food.²

4 What are the activities that need to be funded?

In administering the Acts of Parliament that it is responsible for, NZFSA carries out activities in the following key areas:

1. Setting of New Zealand standards

2. Export (including official assurances)

3. Approvals and registrations

4. Event/Emergency Response

5. Compliance, covering:

- Monitoring and audit

- Investigations

- Enforcement.

The main activities in these areas are:

4.1 New Zealand standards, specifications and guidance

• provision of technical policy advice to Government policy makers

• setting New Zealand safety and suitability standards

• setting MRLs (not a product safety standard)

• developing and implementing operational standards and guidance for industry

• clarifying and interpreting standards or specifications

• setting verification requirements

• overall review of standards’ effectiveness

• managing incidents and responding to events

• contributing to the development of international standards

• establishing import requirements.

4.2 Export standards and market access

• provision of technical policy advice to Government policy makers

• contributing to the development of international standards

• negotiating technical market access conditions and specifications

• providing certification and other assurance activities to meet international authority requirements

• setting verification requirements for industry

• provision of verification services (where these are required to be performed by Government employees)

• administering the export eligibility system (E-cert)

• overall review of industry export programmes

4.3 Approvals

• approval of:

- risk management programmes (production systems and processes)

- agencies and persons, including third party verifiers (Warrants for NZFSA, MAF, QS, VA, PHU staff etc)

- exporters

- products and/or substances

- facilities, equipment, premises

• providing the administrative systems and processes for approvals including evaluation and review

• assessment or evaluation of applications, systems or processes

• maintenance of associated public registers

• suspension and removal of approvals.

4.4 Compliance

4.4.1 Monitoring and audit

• regularly collecting and assessing information to check compliance with regulatory requirements:

- general (national) monitoring programmes eg, shellfish monitoring commercial harvest

- random sampling and testing of products across the spectrum

- imported food monitoring programme

- industry level monitoring programmes eg, National Chemical Contaminants Programme (dairy), poultry residue monitoring

- monitoring and assessing recognised agencies and persons

- scheduled auditing of industry or business systems and processes

- intervening when non-compliance is detected

- dealing with inquiries and providing information to industry on compliance

- trends analysis for compliance/non-compliance.

4.5 Operational Response

4.5.1 Investigations

• responding to and investigating consumer complaints and reports of non-compliance.

• investigation of signals and information that indicate potential problems.

4.5.2 Enforcement

• applying corrective actions in cases of non-compliance by containment or prevention of recurrence.

• imposing regulatory sanctions.

• initiating and/or managing product recalls and emergency responses:

- implementing standards relating to responses for the range of events that arise

- providing systems and processes for emergency response

- co-ordinating recalls of food (domestic and international) and other relevant product from the New Zealand market.

• preparing and taking prosecutions

• ensuring a nationally consistent response.

5 Classification of NZFSA Activities

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.

5.1 Setting New Zealand standards

The principal area where the distinction between public and industry goods, and thus the appropriate source of funding, is particularly not clear-cut is New Zealand standard setting. For this activity, there is a case for Crown funding, but also a case for industry funding. Both have been found to be valid in current NZFSA charging regimes.

5.1.1 Generic standards

These are non-rival, in that once standards are set, their use by one person or group does not impose a loss of benefit on others or restrict others’ use. They are also non-excludable - they are publicly available so it is difficult and/or costly to exclude people from using them, however where legislation exists users of generic standards can, in general, be excluded from receiving the benefits of the standards (by virtue of the registration process). In these circumstances they are industry goods in nature, but in other circumstances they have public good characteristics.

If a uniform charge were to be imposed across all industry for setting generic New Zealand standards, this may be passed on and consumers will pay.

The question is whether this is efficient – if it requires setting up and administering a new charging system, it may be more efficient for taxpayer to pay through the existing taxation system. Other relevant factors include whether food consumers and taxpayers are different groups of people, or largely the same group; and the cost of differentiating between standards for different foods, and charging depending on how widespread or not consumption is.

There is also an equity issue, in that costs could be recovered from some sectors because of the legislation they operate under, and the fact that there are existing mechanisms for cost recovery in place. Whereas other industries operate under a different legal framework, and cannot be charged, but cannot be excluded from using the established standards. At present there are no mechanisms available for charging all parts of the domestic sector for generic standards.

Exporters also benefit from the establishment of New Zealand standards as they allow them to export (the standards provide the basis for trade). It could thus be argued that they should contribute to the development of those standards. To the extent that exporters require clearance to export, they are excludable. However, not all exporters require such clearance, so there is no mechanism for charging the whole export sector for generic standards.

5.1.2 Industry/product based standards.

If standards apply to specific industries or sectors, the users can be defined as either the whole industry or certain groups within the industry. Such standards are thus more in the nature of a club good as their use by one enterprise does not detract from their use by another, but it is possible to exclude parties at low cost. They therefore should be privately funded, by industry as a group.

5.2 Policy Advice

Technical food policy advice, like other policy advice, should take a national rather than a sectoral, interest perspective and consider often-competing claims. To maintain the independence of the advice these activities should be regarded as a public good and funded by the taxpayer.

5.3 Multilateral standard setting

NZFSA’s contributions to multilateral standards negotiations or international fora (such as Codex, the OECD, APEC, WTO) cover a general range of agricultural and food industry interests which benefit these sectors. They could therefore be considered industry goods. However, it would be difficult, and costly, to apportion the costs of such activities to individual industries or sector groups. The activities 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 trade arena and could therefore be regarded as public goods. While costs of multilateral standard-setting activities that relate to a specific product (such as commodity-specific Codex committees) could be apportioned and charged to that industry or sector group, the costs of doing so mean that it is probably most efficient for these activities to also be funded by the Crown.

5.4 Overseas market access

The setting of specifications or standards for access to overseas markets for particular products or product groups benefits the relevant group of exporters directly. Such standards are not set to protect New Zealand consumers, and there is no case for government intervention in absence of producers’ desire to export. Market access is primarily an industry good as its use by one exporter does not detract from its use by another, but for the most part its use is excludable at low cost. There is therefore a strong case for spreading the costs of providing such services amongst the beneficiaries of them ie, industry funding.

The most appropriate mechanism for doing this may differ between industries/groups (eg, levy on volume or value of turnover or exports, annual charge on RMP or premises) and will be negotiated between NZFSA and industry representatives.

There will be a need to look at mechanisms for charging exporters only, not those who produce only for the domestic market.

5.5 Official Assurances

These are private goods, being both excludable and rival. The issuing of official assurances for particular consignments should be funded by the individual firms or persons concerned.

5.6 Approval, accreditation and certification activities

The provision of approval, accreditation and certification services is generally a private good. Use of the services is excludable and rival, and benefits can be directly attributed to those persons requiring a particular approval.

However, there is a problem for pre-market approvals (before the product is offered for sale) when the regulator requires the first new example of a product to go through a more onerous and costly process than that for subsequent examples.

Cost recovery could be appropriate if the firm can obtain an exclusive commercial benefit (through patents, for instance), but otherwise charging for the assessment of new products can encourage firms to avoid the costs of approvals by waiting for others to seek approval first (thus ‘free riding’ on the approval of others). This would penalise the first firm that introduces a new product to the market, and impair innovation and product development.

Examples of this type of regulation include the approval of a new food standard, and the approval of a new GRAS (generally recognised as safe) substance, where any firm can use the new approved substance in their products.

Given these ‘free rider’ problems, and the fact that the capacity to provide this service has to be in place regardless of the number of approvals given, there may be case for a two-part fee, consisting of a standard fee charged to industry (using for example a levy or a charge per risk management programme); plus a time based charge to the applicant for specific approvals.

5.7 Monitoring and Compliance

5.7.1 Monitoring

General monitoring of performance measures and measures of status (eg, Total Diet Survey)

These activities have public good characteristics, being non-rival and non-excludable (results are publicly available; use of information by one person does not affect use by others, and there is no extra cost involved in providing information to additional users). However, their classification may depend on the reason for the programmes - are they gathering information for compliance purposes or for standard setting, checking effectiveness of standards?

Sector-based residue monitoring programmes and industry-specific compliance monitoring programmes best fit the definition of an industry good. They are non-rival (use by one industry participant does not impose a loss of benefit on others or restrict others’ use) and the users are a defined group. It is thus generally quite feasible to identify the costs incurred by the different sectors and charge the sectors accordingly. There are also efficiency considerations, in that charging may provide incentives for industry to monitor regulator’s cost and level of service.

5.7.2 Systems Audits

Audit programmes examining aspects of industry systems audit programmes have some public good elements in that they are non-excludable (operators in the industry cannot be excluded from the outcome of the audit), and non-rival (use by one operator does not conflict with use by another).

However, the users/beneficiaries are an identifiable group, with industry audited according to industry-specific standards. Audits therefore best fit the definition of industry goods. There are also efficiency considerations, in that charging will provide incentives for industry to monitor the regulator’s cost and level of service. These types of audits are part of NZFSA’s monitoring programme to help confirm that standards are appropriate.

Riskier products will have a greater level of auditing activity; firms/importers providing such products are in the best position to monitor the quality and quantity of the services, to change their behaviour (risk management systems and processes) to influence the nature and level of the services, and potentially to pass some of the costs onto the main beneficiaries of these services - consumers.

5.7.3 Company/business Audits

Audits of individual operator systems and processes are in the nature of private goods. In these cases, the amount of activity is directly related to the degree of risk posed, and firms should pay accordingly. This will place an additional economic incentive on them to ensure compliance activity, and costs are minimised.

5.8 Operational Response

5.8.1 Investigations

Investigations are to find out what went wrong and why. The investigation itself is not a sanction or a deterrent. It is inappropriate to make the subject of the investigation pay for the actual investigation.

Therefore where investigations of specific non-compliance are attributable to the actions of an individual, cost recovery could deter the reporting of non-compliance, so costs should not be met by the individual. Where the findings of an investigation may indicate fault, the resulting sanctions may include causing a cost to industry.

5.8.2 Sanctions and prosecutions

In many cases involving enforcement charging fees would be counterproductive. There is a general incentive issue; whether a party will incur costs if they report non-compliance. For example, charging individual companies for product recalls may discourage them from notifying the regulator about faulty or dangerous products.

In some cases, charging could also undermine policy objectives. For example, in legal proceedings, the court normally awards costs after considering the circumstances of the case. If an agency can automatically recover its legal costs from industry the discipline of potentially having costs awarded against it is reduced.

Considerations of natural justice also suggest that the regulator needs to be entirely independent in conducting enforcement and prosecutions activities. Charging would compromise the independence and integrity of regulator.

Conclusion: these services should be Crown funded.

5.9 Services provided by third parties

These services (such as sampling and testing, or verification of RMPs), are private goods provided in a market situation and will be paid for by the person requesting the services with the price determined by negotiation between the parties.

6 Cost Recovery Policy

Once it has been decided that it is both appropriate and efficient to fund particular activities privately rather than publicly, the most efficient way of recovering the costs of those activities needs to be determined.

This section outlines the policy for determining the basis for charging where costs are to be recovered from the private sector (industry groups, firms or individuals), including mechanisms and methods for calculating fees and charges.

6.1 Process for Calculation of Charges

The Audit Office has set out guidelines for determining the basis for charging. They involve the following steps:

(a) Identification of outputs and their associated costs;

(b) Forecasting of the volume of these outputs to be produced during a period;

(c) Determination of the costs and resources required to produce these outputs;

(d) Calculation of cost for each unit of output.

The guidelines state that:

• Functions and services should be categorised into areas of output;

• The actual cost of performing these functions and services should be identified;

• Fees should be set at a level for adequate recovery of costs;

• There must be no cross-subsidisation between output areas;

• The cost for each function or service must be allocated to those who benefit from the provision of the output, according to the benefit received. For example, time-based charges should be used for any activity that is deemed to have a variation in the time taken to conduct that activity.

6.2 Total Costs to be Recovered

As a general principle the price of each regulated activity should incorporate the total cost of regulation subject to the caveats of efficiency, cost effectiveness and consistency with policy objectives. This improves economic efficiency by ensuring that both users and suppliers of regulated services recognise the administrative costs involved in regulation.

Direct and indirect costs are incurred in carrying out regulatory activities:

• Direct costs can be attributed directly and unequivocally to an activity and include personnel and operating costs.

• Indirect costs are not directly attributable to an activity and are often referred to as overheads. They include:

- corporate services costs such as the costs of the Chief Executive Officer’s salary, financial services, human resources, records management and information technology

- accommodation costs (rent, heat, power)

- user cost of capital and depreciation (as defined by Treasury).

6.3 Charging Regime should not be Overly Complex

Providing a cost recovery system where small units of service are individually calculated for each client would be costly to set up and administer in comparison with the estimated costs to be recovered. In some cases the costs of obtaining the necessary information and keeping track of various components may outweigh the direct cost of providing the service.

6.4 Risk-based fees may be appropriate

The use of fixed fees may give rise to equity issues. If some firms and/or products impose greater risks than others and thus require more regulation, a flat charging structure would benefit some firms at the expense of others. In such cases a risk-based fees structure may be a more equitable basis for charging, although account must be taken of the increased complexity and administration involved. Areas of NZFSA activities where charging on the basis of risk may be appropriate include:

• compliance monitoring (where higher risk involves greater or more frequent monitoring)

• operational standard setting

• import standard setting (high risk products).

7 Cost Recovery Mechanisms

As well as providing a guide as to whether activities should be publicly or privately funded, the Treasury-produced Guidelines also describe the features of appropriate charging mechanisms. Where a publicly provided activity is privately funded (whether as a private good, or an industry good) the charging mechanisms used should be

• consistent

• transparent

• practicable, and

• the charges set should not over-recover the cost of the service.

Costs can be recovered using:

• a fee that charges individuals or firms directly for the costs of providing the activity; or

• a levy on a group of individuals or firms (legally a form of taxation).

7.1 Fees

Government guidelines indicate that when cost recovery is appropriate, charges where possible should be based on fees, as long as they are efficient, cost effective and consistent with the policy objectives of the agency.

7.2 Levies

Levies do not have the efficiency advantages of fees because they are not so closely linked to the costs of individual activities. They may also place less direct pressure on the regulatory agency to improve efficiency. Also levies are not an efficient cost recovery option where there is a relatively low level of costs to be recovered, as the cost of setting up and administering a levy would outweigh the revenue to be recovered.

To design an efficient levy, the regulatory agency needs to be able to accurately identify a base for imposing the levy which reflects the cost of regulation and targets the firms creating the need for the regulatory activity. For example, it may be inappropriate to levy the whole industry if only a small group of firms creates the need for the regulation and this group cannot be individually charged. In this event a levy would have few advantages over general taxation.

Where levies are used, they should be closely linked to costs and focused on recovering costs from only those groups of firms or individuals who benefit from, or create the need for, regulation. If this is not possible the efficiency advantages of a levy over general taxation are less clear.

7.3 Other mechanisms

There are also mechanisms that can used to address perceived equity concerns, distribute the burden of cost recovery arrangements between users, or encourage access by particular user groups. For example:

• Minimum levy payment thresholds. Only those producing or selling above a set $ level or quantity of output have to pay a levy;

• Levy caps. eg, setting a maximum levy amount payable in any one year;

• Minimisation of upfront payments. To avoid disadvantaging smaller companies, or mitigating against local research and development efforts;

• Differential pricing policies. eg, agencies that charge fees for access to services may distinguish between users and charge prices according to characteristics such as age (child or pensioner discounts), income (discounts for low income earners) and employment status (student or unemployed discounts);

• Sliding scales for the calculation of fees. eg, according to usage where a flat charge may be seen as inequitable.

7.4 ‘Menu’ of Tools

Cost recovery operates generally on a case by case basis, so once it has been decided that cost recovery is appropriate and efficient, a variety of tools should be available to ensure maximum flexibility to match an appropriate cost recovery regime to the situation. Thus in recent legislation a ‘menu’ of tools (cost recovery mechanisms) is provided, based on government guidelines:

• fixed fees or charges

• fees or charges based on a scale or formula or at a rate determined on an hourly or unit basis

• fees or charges of actual and reasonable costs expended in or associated with the performance of a service or function

• estimated fees or charges, or fees or charges based on estimated costs paid before the provision of the service or function followed by reconciliation and an appropriate further payment or refund after the provision of the service or function

• refundable or non-refundable deposits paid before provision of the service or performance of the function

• fees or charges imposed on users of services or third parties

• levies

• any combination of the above.

8 Basis of Charging For NZFSA Services

8.1 Private Goods

Following the above policies and guidelines, the basis for charging for NZFSA activities in respect of private goods will be:

a. Direct and indirect costs will be calculated and recovered for each of:

• the management costs of each of the service groups directly involved with industry under the relevant Act eg, the Export Standards Group;

• NZFSA management and support services costs; and

• NZFSA/MAF corporate overhead costs which include accommodation, equipment and communications.

b. Direct costs will be fully charged to the services to which they relate. Indirect costs will be apportioned across all activities to which the core functions of the relevant NZFSA Group contribute, on the basis of personnel (numbers), IT costs (eg, numbers of work stations), or other cost drivers as appropriate.

c. Functions and services that can be divided into homogeneous units and where there is little variation in the cost of providing the unit of service will be charged at an average cost (direct and indirect) per unit of output.

• Fixed fees and annual charges will be used, to assist in minimising transaction costs and providing certainty over fees and charges.

d. Where there is a large variation in the cost of individual outputs (eg, in the time taken to perform the service) hourly rates will be used.

• Where hourly rates are used, disbursements covering items such as (but not exclusively) travel, accommodation, and communication will be charged at cost.

e. NZFSA will:

• attach fees and charges to specific units of service provided

• use mainly fixed fees and annual charges, as these are simpler to apply and therefore have a lower administrative cost

• set fixed fees and charges based on the average full and reasonable costs of providing the services

• set annual charges on the basis of the costs of performing these functions allocated amongst the persons that will be paying the charge

• set time-based charges on the basis of fixed and variable costs (eg, salaries and operating costs), and

• set other charges (disbursements) on the basis of actual and reasonable costs incurred in providing the service.

8.2 Industry Goods

Given that the nature of industry goods is such that it is difficult or costly to identify the individual people or firms who use or benefit from them, the basis of charging for industry goods is more likely to be a levy.

Where levies are used, NZFSA will ensure that to the extent possible costs are recovered in proportion to benefits received, by using mechanisms such as those described in Section 7.3 above. For example larger firms with higher outputs will pay proportionately more than smaller firms.

9 Glossary

Approval: confirmation by the Regulator that the (item) in question satisfactorily meets the legal requirements. ‘Approve’ incorporates ‘recognise’, ‘accredit’, ‘list’, ‘register’ and ‘license’. It does not cover requirements for export approvals (these are ‘official assurances’) or any matters associated with government staff, such as appointments, statutory powers or delegations.

Audit: checking of systems and programmes against agreed standards and outcomes.

Code of Practice: a document reflecting acceptable, industry-agreed operating practice for the activity in question and providing information on ways of meeting regulatory requirements.

Certification: procedure by which official written or equivalent assurance is given that foods or food control systems conform to requirements.

Compliance: meeting the legal requirements in respect of all aspects of product, facilities, people, programmes, and systems.

Cost: the full cost of producing outputs, including all overhead and non-cash costs (such the capital charge). It is measured in accrual accounting terms.

Direct Cost: the portion of cost that is directly expended in producing a product or service for sale, eg, most labour, materials and inventory. The cost can be traced to a given output in an economically feasible manner. Similar to what economists define as Variable Costs or short run Marginal Costs.

Evaluation: an assessment of a RMP to determine compliance with regulatory requirements and appropriateness for the operation to which the plan is to apply.

Exacerbators: those whose actions give rise to the cost or need for a good or service.

Food: Covers human food and animal feed (including pet food); related products, eg, animal by-products, raw materials, food packaging and containers; agricultural compounds and veterinary medicines where appropriate.

Fee: a charge to an individual firm or consumer for particular activities or services

Indirect Cost: the portion of cost that is indirectly expended in providing a product or service for sale, eg, rent, utilities, equipment maintenance, etc. Such costs cannot be traced to a given output in an economically feasible manner. These costs do not vary with the level of output in the short term. Also, referred to as Overheads. Is similar to what economists define as Fixed Costs.

Levy: total charge for an activity or service spread across a group of firms or users; equivalent to a tax.

MRL Standards: means New Zealand Maximum Residues Limits of Agricultural Compounds Standards. The MRL Standards set out specific statutory requirements prior to the Minister authorising the amendments. The Minister signs the Standards once satisfied these requirements have been met.

Monitoring: regular gathering and assessment of information to check the effectiveness of regulatory programmes and the on-going adequacy and appropriateness of standards.

Non-rival: where one person’s consumption of a good or service does not reduce the amount of the good or service available for others. For example, a generic food standard is a non-rival good because the use of the standard by one person does not detract from the availability of the standard for others. In contrast most goods are rival – if, for example, a cup of coffee is consumed by one person, that cup of coffee is not available for any one else.

Non-excludable: where it is not possible to charge for the consumption of a good or service. For example, free to air television service is non-excludable because anyone with a television receiver can tune in to the programme.

Recognition: approval by the Regulator, against specified standards, for agencies and individuals to undertake a particular function or functions.

Register: a centrally-held list, for example of products, persons, or facilities; usually associated with regulatory approvals.

Regulatory requirements: any standards and requirements set by the Regulator for the management of food safety that are required to be met by law.

Risk-based management plan (RMP): a plan detailing how food safety risks will be managed in a specified environment. Covers food safety plans under the Food Act, risk management programmes under the Animal Products Act and wine safety management plans under the Wine Act.

Specification: means a requirement specified by notice under section 167 (1) of the Animal Products Act (1999).

Standard: regulatory requirements. A standard is either legislated or enabled by legislation or at the tertiary level where standards are generally technical requirements.

Surveillance: the systematic ongoing collection, collation and analysis of data and the timely dissemination of information to those who need to know so that action can be taken.

Verification: the application of methods, procedures, tests and other checks by recognised persons to confirm:

(a) compliance of an operation with regulatory requirements, and

- compliance of the operation to the relevant documented RMP, and

- the applicability of the RMP to the operation; or

(b) that products for whose export an official assurance is required have been produced or processed in a way that meets the requirements for the official assurance.

¹ There is in fact a fourth category – merit goods. For merit goods, the community as a whole desires a higher use of the output than would be likely if it were charged for at full cost. Merit goods combine elements of public and private goods. The loss in public benefits from charging at full cost has to be significant. No merit goods were identified and they are not relevant to this paper.

² In respect of the last issue, NZFSA notes that the retail value of total food sales in New Zealand is approximately $20 billion a year, compared to total cost of setting domestic food standards in the order of $4-5 million (0.025%).