Cost recovery

1.1 Cost recovery of Australian Government regulatory activities is defined as:

… the Australian Government charging the non-government sector some or all of the efficient costs of a specific government activity. That activity may include the provision of goods, services or regulation, or a combination of them.⁴

1.2 Cost recovery is one element of the Australian Government’s Charging Framework, implemented in July 2015, to apply across the general government sector, to improve consistency of charging activities and help determine when it is appropriate to charge for a government activity. The policy underpinning the Charging Framework notes that cost recovery can:

• promote equity, whereby the recipients of a government activity, rather than the general public, bear its costs;
• influence demand for government activities;
• improve the efficiency, productivity and responsiveness of government activities and accountability for those activities; and
• increase cost consciousness for all stakeholders by increasing awareness of how much a government activity costs.⁵

1.3 Charging decisions are made by the Australian Government. Based on the type of activity, policy outcomes sought and relevant public interest considerations, the government may decide to charge for an activity, taking into account the following Charging Policy Statement:

Where specific demand for a government activity is created by identifiable individuals or groups they should be charged for it unless the Government has decided to fund that activity. Where it is appropriate for the Australian Government to participate in an activity, it should fully utilise and maintain public resources, through appropriate charging. The application of charging should not, however, adversely impact disadvantaged Australians.⁶

1.4 There are two types of cost recovery charges:

• cost recovery fees — fees charged when a good, service or regulation is provided directly to a specific individual or organisation; and
• cost recovery levies — charges imposed when a good, service or regulation is provided to a group of individuals or organisations (for example, an industry sector) rather than to a specific individual or organisation.

1.5 Fees are charged for pre-market activities, such as the issue of licences, registrations, approvals and patents, while levies cover post-market activities, including monitoring and compliance, investigations and enforcement. Fees are to reflect the efficient unit cost of a specific good or service, while levies are to reflect the overall efficient costs of an activity.⁷ Generally, fee related activities are relatively easy to cost with a degree of precision, while levies are more difficult to estimate and are generally applied to an industry sector, and not to an individual.

1.6 Both fees and levies need statutory authority to charge (legislation), although levies also require a separate and specific taxation act. Cost recovery revenue from levies differs from general taxation as it funds activities provided to the group that pays the levy.

1.7 The Department of Finance has issued the Australian Government Cost Recovery Guidelines (Cost Recovery Guidelines) to support the implementation of the government’s Charging Framework. The Cost Recovery Guidelines are a sub-set of the Charging Framework and must be applied by all non-corporate Commonwealth entities, and by corporate Commonwealth entities where the Finance Minister has made a ‘government policy order’ that applies the Australian Government cost recovery policy to them.⁸

1.8 Four stages are identified in the Cost Recovery Guidelines:

• Stage 1: Australian Government policy approval to cost recover.
• Stage 2: Cost recovery model and Cost Recovery Implementation Statement (CRIS).
• Stage 3: Implementation.
• Stage 4: Portfolio charging review.

1.9 The Cost Recovery Guidelines (paragraph 15) state that the following three principles must be applied across all stages of the cost recovery process: transparency and accountability; effectiveness and efficiency; and stakeholder engagement.

1.10 In 2017–18 reported revenue from regulatory charging in entity financial statements totalled $2.0 billion against reported expenses of $2.2 billion.

Cost recovery by the audited entities

1.11 This audit considers the application of cost recovery principles in the:

• Australian Maritime Safety Authority (AMSA);
• Department of Agriculture and Water Resources (Agriculture); and
• Department of Health (Health) for the Therapeutic Goods Administration (TGA).⁹

1.12 In 2017–18, the revenue raised from the cost recovery activities covered in this audit for these three agencies was approximately $372 million — AMSA $128 million, Agriculture $91 million and Health $153 million.

Australian Maritime Safety Authority

1.13 AMSA was established under the Australian Maritime Safety Authority Act 1990 as the national regulatory authority to:

• promote maritime safety and protection of the marine environment;
• prevent and combat ship-sourced pollution in the marine environment;
• provide infrastructure to support safe navigation in Australian waters;
• provide a national search and rescue service to the maritime and aviation sectors; and
• provide, on request, services of a maritime nature on a commercial basis to the Commonwealth and/or states and territories.

1.14 AMSA has been recovering costs for ship and seafarer safety, environmental protection and navigation infrastructure since its inception in 1990. These costs are recovered through:

• the Marine Navigation (Regulatory Functions) Levy for the provision of maritime safety and regulatory activities on international and national commercial shipping operations;
• the Protection of the Sea Levy to prevent and combat ship-sourced pollution;
• the Marine Navigation Levy to develop and maintain aids to coastal navigation; and
• fees for marine services, including services to seafarers and coastal pilots, such as issuing seagoing qualifications, inspections and surveys and ship registrations.¹⁰

1.15 AMSA also now collects fees for service for marine surveyor accreditation, issuing exemptions and ‘equivalent means of compliance’¹¹ to the domestic commercial vessel fleet under the National System for Domestic Commercial Vessel Safety (National System).¹² This is outside the scope of this audit.

Department of Agriculture and Water Resources

1.16 The audit examined Agriculture’s food export certification activities, which occur across four cost recovery arrangements — meat exports, dairy exports, fish and egg exports and non-prescribed goods.¹³ The department commenced partial cost recovery of export certification activities in 1979 and implemented full cost recovery from 1 January 1991.¹⁴

1.17 To certify a product’s compliance with relevant Australian regulations and the importing country’s requirements, the department undertakes a range of activities that are cost recovered, including the:

• development, implementation and monitoring of operational policy and systems that support compliance with Australian export controls and any additional importing country requirements that maintain access to export markets for Australian agricultural food products;
• provision of inspection and auditing activities to ensure that the production, storage, handling and transportation of meat, dairy, fish and egg and non-prescribed goods intended for export comply with the conditions of the Australian export controls and any additional requirements imposed by an importing country;
• issue of permits, health certification and other documentation necessary to confirm compliance with Export Control Orders and any additional importing country requirements; and
• management of quota allocation and quota certification to enable exporters to access tariff rate concessions offered under trade agreements.

Department of Health (Therapeutic Goods Administration)

1.18 The TGA is Australia’s regulatory authority for therapeutic goods.¹⁵ Industry sectors to which cost recovery applies are: prescription medicines; over-the-counter medicines; complementary medicines; medical devices including in-vitro diagnostic devices; and blood, blood products and biologicals. Cost recovery activities include:

• pre-market assessment of medicines and devices for inclusion in the Australian Register of Therapeutic Goods;
• post-market monitoring and enforcement of standards; and
• licensing of Australian manufacturers and verifying overseas manufacturers’ compliance with Australian standards.¹⁶

1.19 The costs of regulatory activity within the scope of the Therapeutic Goods Act 1989 have been fully cost recovered since 1999. Most of Health’s funding for the TGA ($153.0 of $155.3 million for 2017–18)¹⁷ is from cost recovery. Legislative authority for TGA fees and charges is through the Therapeutic Goods (Charges) Act 1989.

Rationale for undertaking the audit

1.20 The government charges people and businesses to recover the costs of providing some services. In auditing cost recovery in the selected entities, the Australian National Audit Office (ANAO) examined whether the Cost Recovery Guidelines were applied effectively, so that charges were set to not over- or under-recover costs, and stakeholders were engaged in the processes for setting charges.

Audit approach

Audit objective, criteria and scope

1.21 The objective of the audit was to assess whether selected regulatory entities effectively apply the cost recovery principles of the Australian Government’s cost recovery framework.

1.22 Reflecting these principles, the audit criteria were:

• Are the entities’ cost recovery arrangements transparent and do they promote accountability?
• Are the entities’ cost recovery arrangements effective and efficient?
• Have the entities engaged stakeholders effectively in the design, planning and implementation of their cost recovery programs?

1.23 The scope of the audit was the application of the cost recovery principles for: AMSA’s four levies or fees outlined in paragraph 1.14 (domestic commercial vessel fleet activities are outside the scope of the audit); Agriculture’s food export certification activities; and Health’s cost recovery activities for the TGA. The Department of Finance was also included in the audit in light of its responsibilities for developing and promulgating the Australian Government’s Charging Framework, including the Cost Recovery Guidelines.

Audit methodology

1.24 The audit method comprised: document collection from each of the three audited entities; interviews with entity staff; interviews with staff of the Department of Finance; and analysis of the information collected during the audit.

1.25 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of approximately $560,000. The team members for this audit were John McWilliam, Renina Boyd, Nathan Callaway, Lachlan Fraser, Gabrielle Davy, Esther Barnes and Andrew Morris.

Have entities complied with key requirements of the Cost Recovery Guidelines?

2.1 Entities are required to comply with key requirements of the cost recovery framework and Cost Recovery Guidelines.¹⁸ These requirements include that:

• entities and responsible ministers must have policy approval from the Australian Government to cost recover (paragraph 33);
• there must be a statutory authority to charge (paragraph 34);
• entities must undertake a risk assessment and agree on a risk rating with the Department of Finance (paragraph 60); and
• entities must document each cost recovered regulatory activity in a Cost Recovery Implementation Statement (CRIS) before charging begins (paragraph 39).

Policy approval

2.2 Policy approval for the three entities’ charging policies and changes to them are summarised in their CRISs. As shown in Table 2.1, AMSA and Agriculture had policy approvals for the cost recovery activities examined. Health had the required policy approvals for Therapeutic Goods Administration (TGA) charges, except for fee-free services where there was ministerial approval rather than the required government approval.

Table 2.1: Policy approval of cost recovery in the three entities

Note 1: Although outside the scope of this audit, AMSA obtained policy approval for fees related to the new National System for Domestic Commercial Vessel Safety, for which it assumed full responsibility on 1 July 2018.

Source: Entity CRISs.

2.3 Paragraph 33 of the Cost Recovery Guidelines requires entities and responsible ministers to obtain government approval for a new cost recovery ‘model’ or significant changes to a cost recovery ‘model’.¹⁹ The Department of Finance (Finance) advised that the intention of this requirement is that entities and responsible ministers obtain government approval on how costs are to be recovered — through levies or fees — and the legislative authority to be provided, rather than on the details of the cost recovery model used to determine the appropriateness of amounts that are charged. Finance also advised that policy approval is only required where changes to charges are either material, sensitive or complex and that the responsible minister or accountable authority can approve changes of an operational nature. To avoid ambiguity, Finance should clarify the use of the term ‘model’ in this context in any future review and revision of the Cost Recovery Guidelines.

Statutory authority to charge

2.4 Each entity’s cost recovery charges (levies and fees described at paragraph 1.4) have a statutory basis and are underpinned by specific legislation or legislative instruments.

Risk assessments of cost recovery activities

2.5 Each entity completed Finance’s risk assessment template for charging for regulatory activities, and rated their cost recovery risks as ‘medium’. AMSA and Agriculture last updated their risk assessments in 2015. Health last updated the TGA’s risk assessment in 2016. As required, AMSA’s and Agriculture’s ratings were agreed with Finance. Health’s risk assessment for the TGA in 2016 was provided to Finance as part of the proposed Budget measures, although Health did not obtain Finance’s agreement to the rating.

2.6 There have been changes to the TGA’s charges since 2016 resulting from implementation of recommendations of the Medicines and Medical Devices Review, but Health has not completed a further risk assessment of the impact of these changes.²⁰ AMSA and Agriculture have not reviewed their risk ratings since charges were last changed in 2015. It is important that arrangements are in place to provide assurance that the risk assessment of charging arrangements remains appropriate, even where there are no changes to charges.

2.7 To provide the necessary assurance that the risk assessment of an entity’s charging arrangements remains appropriate, the Cost Recovery Guidelines could require entities to review the continuing suitability of the risk assessments of their cost recovery arrangements at set minimum periods or whenever significant changes are made to the cost recovery arrangements.

Cost Recovery Implementation Statements

2.8 The CRIS is the primary document for explaining an entity’s cost recovery charging policies and providing key information on the implementation and performance of cost recovery activities. The Cost Recovery Guidelines require that:

• each cost recovered regulatory activity, regardless of financial value, must be documented in a CRIS before charges commence (paragraph 39);
• the CRIS must be published on the entity’s website before charging begins (paragraph 40);
• the CRIS is updated, in consultation with stakeholders, at the commencement of each financial year and, as necessary, throughout the year to reflect any changes in the cost recovery model and updated financial and non-financial performance information (paragraphs 40, 124 and 125);
• the CRIS provides information on 11 separate criteria (paragraphs 41 and 104); and
• the CRIS is certified by the accountable authority of the entity; approved by the responsible Minister; and agreed for release by the Minister for Finance if the cost recovery risk rating is ‘high’ (paragraphs 42 and 105).

2.9 The Australian National Audit Office (ANAO) has assessed the CRISs of all three entities as not fully compliant with the Cost Recovery Guidelines (see Table 2.2).

Table 2.2: Assessment of entity Cost Recovery Implementation Statements against the Cost Recovery Guidelines

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO assessment of entity CRISs for activities within the scope of the audit against the mandatory criteria for CRISs in the Department of Finance’s Cost Recovery Guidelines (paragraphs 40, 41, 104, 105, 124 and 125). The assessment is based on relevant CRISs published since, but with particular focus on the most recently available CRIS for each entity.

2.10 The main areas of the CRISs’ non-compliance with the Cost Recovery Guidelines were:

• performance reporting: in part, because of a failure to update the CRIS at least annually to include reports on performance — see section starting at paragraph 2.18;
• updates to estimates and the underlying methodology used to determine these estimates — again partly due to a failure to update the CRIS at least annually; and
• key forward dates: the key forward dates envisaged in the Cost Recovery Guidelines are not always being shown in the CRIS.

2.11 AMSA and Agriculture have not always updated their CRISs at the start of each financial year for the budget year and forward estimates period (and as necessary throughout the budget year), as required by the Cost Recovery Guidelines (paragraphs 124 and 125). AMSA did not update its CRIS in 2017–18, while Agriculture last updated its CRIS in 2015–16. Health has updated its TGA-related CRIS regularly, but has not always provided estimates for the four forward years.

2.12 Both AMSA and Agriculture questioned the need to update their CRISs each year, as no changes in charges were proposed. Agriculture advised that it sets CRISs on a four-year cycle and there have been no changes to legislated prices over this period. Agriculture also noted that it had delayed updating its CRIS because of continuing work requested by its Minister on proposed changes to charges since 2015–16. For example, Agriculture proposed to its Minister that it would issue a CRIS as a basis for consulting with industry on revised charges in 2018–19, but the Minister for Agriculture instead deferred this to enable detailed consultation with industry and implementation of the changes in 2019–20. However, as explained at paragraphs 124 to 126 of the Cost Recovery Guidelines, updates to a CRIS are needed not just to explain changes in charges, but to provide performance information and updated estimates of revenues and expenses for each forward estimates period.

2.13 The ANAO notes that, while paragraphs 124 and 125 of the Cost Recovery Guidelines clearly state the CRIS should be updated at the commencement of each budget year for the budget year and forward estimates period, paragraph 40 only states that an initially-approved CRIS ‘should be amended to reflect any changes to the cost recovery model and updated regularly with financial and non-financial performance information’. This difference in wording should be amended to avoid possible misunderstandings about the timing of updates to the CRIS.

2.14 Health questioned the need to obtain ministerial approval to updates of a CRIS where there has been no significant change to the entity’s cost recovery policy and the minister has separately approved any changes in charges.

Role of the Department of Finance

2.15 Finance advised the ANAO that it is aware that many entities do not update their CRISs, as required, although it does not systematically take this up with them. While it is the responsibility of entities to comply with the Guidelines, Finance has a role in promoting compliance with the Guidelines, given its policy responsibility. To help promote compliance with the Guidelines, Finance should advise entities at the start of each budget cycle (for example, in the annual Budget circular) of their responsibility to update their CRISs. In doing so, it could also remind entities of the level of information to include in the CRIS.

2.16 Finance should also update and refine the Cost Recovery Guidelines to remove ambiguities and help promote compliance with them, including through addressing issues raised in this report (see Appendix 2).

2.17 Finance conducts a biennial survey of charging by entities to provide data on trends and opportunities and reports to the government on key issues.²¹ This survey provides an opportunity for Finance to collect information on issues entities have in complying with the Cost Recovery Guidelines and identify where the Guidelines could be refined to enable greater compliance.

Have entities reported on performance on an ongoing basis?

2.18 A key part of achieving transparent cost recovery arrangements under the Cost Recovery Guidelines (paragraph 27) involves ongoing and timely performance (financial and non-financial) reporting. This includes (paragraph 123) that an entity must report on cost recovery:

• at an aggregate level in the entity’s annual financial statements, in accordance with the financial reporting rules; and
• at the cost-recovered activity level on the entity’s website as part of the CRIS.

2.19 As discussed in paragraph 2.12 of this report, paragraphs 124 and 125 of the Guidelines require entities to update the CRIS at the commencement of each budget year (and throughout the year as required), although paragraph 40 is not consistent with other paragraphs. The ANAO’s analysis is based on the guidance at paragraphs 124 and 125.

2.20 The ANAO’s assessment of the entities’ cost recovery performance reporting is presented in. The assessment indicates scope for improvement in the level of information on cost recovery performance included in CRISs and annual reports, including by:

• reporting on performance annually at the activity level;
• developing metrics for cost recovery financial performance — each of the three entities provided historical performance of their cost recovered activities, but did not have metrics on balancing revenue and expenses for their activities over nominated timeframes and managing reserves; and
• providing explanations of factors affecting performance, including changes in costing methodologies.

Table 2.3: Performance reporting on cost recovery activities, 2015–16 to 2018–19

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO analysis of entity cost recovery and performance reporting documentation.

Australian Maritime Safety Authority

2.21 AMSA’s CRISs from 2015–16 have included financial and non-financial performance information as required by the Cost Recovery Guidelines, and have been published on its website. The section on financial performance in AMSA’s most recent CRIS for 2018–19²² included information and reporting on expenses, revenue and the balance of these. Reporting was provided on actuals for five financial years ( to 2017–18) and estimates for two financial years ( and 2019–20). It did not include estimates for the four forward years because of uncertainty about the impact of the National System (see paragraph 1.15) after 2019–20. This section also explained how surpluses were used. However, AMSA’s:

• CRISs have not provided disaggregated historical financial performance information at the regulatory activity level (that is, by levy type and for fees-for-service — they have only provided consolidated financial information for all cost recovered activities) — so that it is not possible to see how well distinct charging activities have been performing; and
• failure to publish a CRIS in 2017–18 meant that there was a delay in the release of financial performance information for 2016–17.

2.22 AMSA’s CRISs have included non-financial performance measures with reports on performance against these measures provided in AMSA’s annual reports, not in the CRIS. In its 2017–18 annual report, AMSA reported that it fully met five of its performance targets and partially met the remaining three.

Department of Agriculture and Water Resources

2.23 Agriculture’s most recent CRIS (published in 2015–16) for the food export program is available on its website and includes performance information.²³ As required by the Cost Recovery Guidelines, the CRIS contains financial and non-financial performance information including:

• financial performance information and reporting on actual expenses, revenue and the balance of these for 2011–12 to 2014–15; and
• two non-financial performance measures against the four export types.²⁴

2.24 As noted at paragraph 2.12, over the past four financial years, Agriculture has not updated its CRIS annually, as required by the Cost Recovery Guidelines, despite the 2014–15 CRIS indicating that financial reporting for 2015–16, 2016–17 and 2017–18 would be updated in 2016, 2017 and 2018, respectively. While Agriculture has not updated its CRIS, it has regularly consulted industry on cost recovery issues through consultative committees (see Chapter 4).

2.25 Agriculture has reported against the two (non-financial) performance measures in its CRIS in its annual reports. In its 2017–18 annual report, Agriculture reported that it met both of its performance targets in 2017–18.

Therapeutic Goods Administration

2.26 Health makes the TGA’s CRIS publicly available on the TGA website and, since 2015–16, these have been updated at least annually, and sometimes more frequently. The most recent CRIS for the TGA (February 2019, covering 2018–19) includes financial and non-financial performance information for its regulatory activities.²⁵ However, this CRIS provided reports on actual revenue and expenses for only three years — 2015–16 to 2017–18 (Health has indicated that in future it will provide this information for five years) — and financial estimates were included for only two forward years and 2019–20 (unlike CRISs for earlier years, which included estimates for all forward years).

2.27 The section on non-financial performance in the TGA’s CRIS includes six performance indicators, which are the key performance indicators from the Australian Government’s Regulator Performance Framework. Health publicly reports against these six performance indicators in an annual self-assessment report against the Regulator Performance Framework. The most recent report was for 2017–18.²⁶ Health reported that it achieved (met or substantially met) all of its non-financial performance targets for the TGA in 2017–18.

2.28 The ANAO notes that the Regulator Performance Framework performance indicators focus on broad aspects and impacts of regulation (such as reducing regulatory burden, transparency and continuous improvement) but not on the performance of individual activities. The Cost Recovery Guidelines state that achieving transparency in cost recovery activities involves reporting performance at the regulatory activity level (paragraph 27). Accordingly, Health could provide specific non-financial performance indicators for the TGA’s cost recovery activities to supplement or replace the Regulator Performance Framework performance indicators. This view is consistent with that of a review that Health commissioned of the TGA’s cost recovery arrangements in November 2016, which recommended that the ‘TGA should provide additional information in its CRIS to document the performance of individual activities’.

Have entities implemented effective governance and accountability arrangements?

2.29 Under the Cost Recovery Guidelines, entities are expected to manage the implementation and operation of cost-recovered activities consistent with Australian Government policy approval, relevant legislation, the Cost Recovery Guidelines and the broader resource management framework (paragraph 108). This includes having arrangements in place to monitor and report on the production of the outputs of the regulatory activity against financial estimates and performance targets and identifying the need for, and timely implementation of, operational or policy changes.

Australian Maritime Safety Authority

2.30 AMSA commissioned a review of its cost recovery framework, which reported in 2018. This review found that AMSA lacked internal documentation that specifically outlines its cost recovery process and procedures and had incomplete documentation to support cost recovery decisions, stakeholder engagement and the cost recovery model, as required by the Cost Recovery Guidelines. The review also identified changes that were needed to AMSA’s cost model. Following this review, AMSA has redeveloped its cost recovery model and data collection arrangements to improve the allocation of costs to activities and outputs. It has also prepared a draft Cost Recovery Policy statement. AMSA has not yet documented its cost recovery systems and procedures, but advised the ANAO that, after further refinement of its cost recovery model and data collection arrangements, it plans to do so by 30 June 2019.

2.31 AMSA’s Finance and Business Services Directorate in the Corporate Services Division manages the authority’s cost recovery operations, in consultation with other divisions. In March 2018, to enable the views of divisions to be considered in the redevelopment and implementation of its costing approach, AMSA established an internal Cost Recovery Consultative Committee, which includes representatives from each division.

2.32 Internally, regular financial and non-financial performance reports are provided to the AMSA Executive and AMSA Board. Other than in relation to cost recovery for the National System, AMSA advised that the CRISs and the annual report are the only documentation provided to the Portfolio and Minister on cost recovery outcomes. While the implementation of the AMSA Cost Recovery Consultative Committee is a sound initiative, AMSA has not actively managed the alignment of expenses and revenues (see paragraphs 3.25 to 3.29).

2.33 To help ensure that charges are implemented efficiently, AMSA has been working with Marine Operations Division staff to increase their awareness and understanding of the cost recovery arrangements and provide accurate attribution of their time to levy-based and fee-based activities. It is also planning to provide feedback to operational staff on the results of cost recovered activities to promote more active involvement in the outcomes being achieved.

Department of Agriculture and Water Resources

2.34 Agriculture’s Industry Support Branch in the Finance and Business Support Division manages the department’s cost recovery activities. It is responsible for oversight of overall cost recovery performance and maintenance of Agriculture’s cost recovery model. The branch has a team of 11 staff dedicated to the management of cost recovery.

2.35 Agriculture established a Cost Recovery Board in 2016 to oversee its cost recovery activities. This Board includes representatives of relevant divisions and meets quarterly (initially it generally met monthly). At each meeting, it monitors cost recovery performance across the department. The Agriculture Executive Management Committee is also briefed on cost recovery policy issues, such as the findings and recommendations of a 2017 Cost Recovery Revenue Taskforce, and on cost recovery performance through monthly reports from the Chief Finance Officer.

2.36 In 2016, Agriculture prepared a cost recovery policy statement. In 2017, Agriculture prepared a high-level cost recovery allocation policy statement for staff, which provides policy guidance for cost allocation in the department to ensure efficient and effective business planning, control and accountability. Other guidance for staff is provided, for example, on use of the activity recognition tool.

2.37 Agriculture established a team in 2014 to review its cost recovery arrangements at the time and has adopted a similar approach to a current review of its cost recovery arrangements.

Therapeutic Goods Administration

2.38 In response to a recommendation of Health’s 2016–17 portfolio charging review, in May 2018 Health established a unit in its Financial Management Division to:

• be the policy owner of charging for the department;
• provide guidance and advice on charging to those areas of the department, such as the TGA, that cost recover some or all of the cost of their operations;
• maintain a central register of all charging activities across the portfolio;
• work across the portfolio to ensure CRISs are reviewed and updated annually and completed to a consistent standard; and
• ensure that, where possible, a consistent costing model is used for charging activities across the portfolio and that costing models for charging activities are robust enough to estimate both direct and indirect costs.

2.39 There is a small team in Health’s Regulatory Practice and Support Division that manages the TGA’s cost recovery activities, with the support of staff from the department’s Financial Management Division.

2.40 Oversight of the department’s cost recovery activities is provided by the Health Products Regulation Group Executive, to which reports are provided. Health also established an internal committee — the Expert Review Implementation Committee — to oversee the implementation of the government’s Medicines and Medical Devices Review reforms (referred to in Table 2.1). The Health Minister is briefed at least annually on the department’s cost recovery performance and on possible changes to its charging arrangements.

Recommendations

Do cost recovery charges recover the full costs, or agreed partial costs, of the regulatory activity?

Portfolio charging reviews

3.1 Under the Cost Recovery Guidelines, departments of state are required to review all charging activities within their portfolios at least every five years, in consultation with the portfolio entities and the Department of Finance (paragraphs 17 and 44). Review reports must be submitted to the responsible minister and copied to the Finance Minister (paragraph 47); they are not published. Any significant policy recommendations must be approved by the government and documented before changes to cost recovery arrangements are implemented.

3.2 Portfolio charging reviews were completed for the Department of Infrastructure, Regional Development and Cities (including AMSA) in 2015 and for the Department of Health (including the TGA) in 2017, and the outcomes of these reviews are shown in Table 3.1. A portfolio charging review is being undertaken for Agriculture and expected to be completed in 2019. The timing of this review is consistent with the schedule of portfolio charging reviews issued by the Department of Finance.

Table 3.1: Outcomes of portfolio charging reviews for the Australian Maritime Safety Authority and the Therapeutic Goods Administration

Source: Infrastructure and Regional Development, Portfolio Charging Review Report, June 2015 and Department of Health, 2016–17 Portfolio Charging Review Report.

Entity charges — use of levies and fees

3.3 The Cost Recovery Guidelines state (paragraph 4) that:

• cost recovery fees will be imposed when a good, service or regulation is provided directly to a specific individual or organisation; and
• cost recovery levies will be imposed when a good, service or regulation is provided to a group of individuals or organisations (e.g. an industry sector) rather than to a specific individual or organisation.

3.4 The Guidelines also state (paragraph 36) that cost recovery charges should be: clear and easy to understand; closely linked to the specific regulatory activity; set to recover the full efficient costs of the specific regulatory activity; efficient to determine, collect and enforce; and set to avoid volatility while still being flexible enough to allow for changes based on fluctuations in demand or costs.

Australian Maritime Safety Authority

3.5 The overall structure of AMSA’s charges (see paragraph 1.14) is consistent with the distinction in the Cost Recovery Guidelines relating to fees and levies. AMSA’s charges were last revised in 2015.

3.6 Paragraph 94 of the Cost Recovery Guidelines indicates that, when designing a levy, the cost driver should approximate the level of resources used to provide the activity and that differentiated levy rates could be used to more closely reflect resources used by different groups based on their risk, size or other criteria. The Marine Navigation Levy and the Marine Navigation (Regulatory Functions) Levy are based on a sliding scale on the net registered tonnage of ships, while the Protection of the Sea levy is based on a rate per ton of the tonnage of ships. Fees are either a specified amount or an hourly rate. AMSA argues that these tonnage-based levies are easy to administer and accepted by industry. However, as required by paragraph 94 of the Cost Recovery Guidelines, there is no clear relationship between AMSA’s costs for these activities (for example, navaid maintenance ($11.3 million in Protection of the Sea levy) and service contracts ($17 million in the Marine Navigation levy)) and the tonnage of ships, so resulting in likely cross-subsidisation of the owners of smaller vessels by the owners of larger vessels. An alternative approach to using tonnage as a cost driver for levies, which would better relate charges to efficient regulatory effort, would be to differentiate the charges based on risk analysis of different classes of regulated entities and the routes they take.²⁷ AMSA is intending to review its charging arrangements following the introduction of the National System and there would therefore be an opportunity to examine suitable proxies for levy-based charges in this context.

Department of Agriculture and Water Resources

3.7 The application of Agriculture’s fees for its biosecurity, live animal export, plant export and food export programs is detailed in the department’s 2017 Charging Guidelines, which are available on the department’s website.²⁸

3.8 Agriculture reviewed its charging arrangements in 2014–15, and legislation to support the revised charges came into effect on 1 December 2015. Since then, no new charges relating to food exports have been introduced and there have been no price increases. However, Agriculture has provided remissions where it has assessed that charges have exceeded costs.

3.9 Agriculture has a range of fees and levies, which are used to recover the cost of six fee-for-service functions and 11 levy functions (grouped into Program Management and Administration, Assurance and Incident Management). Fee bearing activities may include assessments of applications for export documents and issuing approvals/certification, inspections and audits of products for exports and other services. Levies include charges for registered establishments, slaughtering or dressing of animals, applications, livestock and meat export licences and export documents.

3.10 The explanatory memoranda for the legislation supporting the revised charges in 2015 stated that the reforms sought to align Australia’s export certification system with an efficient and effective cost recovery model, consistent with the Australian Government Cost Recovery Guidelines. However, while Agriculture has a legislative basis for its levies, the Cost Recovery Guidelines indicate that some levy-based costs would more appropriately be recovered through fees.

3.11 Levy Program Management and Administration activities include workforce and business management, business system administration, stakeholder engagement, policy and instructional material, business improvement and other activities, such as organising initial appointments, staff training, assessment or mentoring and attending general phone and email enquiries. In its Charging Guidelines, Agriculture justifies recovery of these charges through levies on the basis that they have broad benefits, and do not benefit individual clients. However, this is not always the case. Further, many of the costs recovered through levies are enabling or indirect costs, and the Cost Recovery Guidelines indicate (at paragraphs 84 to 87 and Figure 3) that fees should include both direct costs and an appropriate share of indirect costs.

3.12 By way of example, the cost of assessment and approval/certification issuing functions are recovered through three fees — electronic and manual document fees and replacement document fee. There is also a levy — the electronic document levy that is used to recover levy function costs. When an exporter applies for an electronic export permit, the invoice will have two amounts payable — the electronic document fee and the electronic document levy. Agriculture also has a levy for recovering the costs of a registration application, with no associated fee. The cost base for this charge is five per cent of the levy functions of a team in the Exports Division, which is responsible for: registering export establishments; developing export certification to meet new and changing importing country requirements; amending export requests for permit to export in response to changes required by exporters; and facilitating detained consignments.

3.13 The use of a levy as a charging mechanism for the recovery of expenses from an individual making an application is inconsistent with the Cost Recovery Guidelines principles (paragraph 54) that a cost recovery fee should be used when ‘the activity and its costs can be linked to a specific individual or organisation’ and ‘a cost recovery levy should only recover the costs of the activity provided to a group of individuals or organisations that pay the cost recovery levy’ (that is, the cost of activities such as policy development and development and promulgation of standards, but not overheads, such as property, IT and technical support costs (see paragraph 84 and Figure 2 of the Cost Recovery Guidelines). Agriculture’s approach was criticised in reviews commissioned by the department of several of its cost recovery arrangements and some industry groups did not support the approach.²⁹

3.14 Agriculture has advised industry in the context of a review of its charging arrangements that it proposes to recommend to government that some, but not all, of the indirect costs of outputs in future be recovered through fees. However, it would be consistent with the Cost Recovery Guidelines for an appropriate share of all indirect costs of an enabling nature to be recovered though fees.

3.15 Agriculture is also considering whether fees for replacement export certificates would more appropriately become levies. The rationale for this proposed change is that some drivers of these services may be outside the control of an exporter (for example, because of a change by the importing country). However, such a change would be inconsistent with the principle in the Cost Recovery Guidelines that fees be charged when a good, service or regulation is provided directly to a specific individual or organisation.

3.16 Agriculture should use its current review of its charging arrangements to align the structure of its fees and levies with the requirements of the Cost Recovery Guidelines. It could also review fees that have not changed for around a decade. For example, the current fee of $500 for replacement certificates was set in 2009, although the cost of these charges should have fallen in 2015 because of Agriculture’s decision at that time to recover indirect costs of fees through levies. Examination of Agriculture’s 2015 cost model indicates that the $500 fee for replacement certificates over-recovers the cost of these services by around $200.

3.17 Fees are based on quarter-hourly rates, rather than a standard price for each service. This approach provides flexibility in charging where the length of time required is not known in advance. As Agriculture is currently reviewing charges, it may also be timely to consider alternative charging approaches that would provide greater certainty of the cost to industry.

Therapeutic Goods Administration

3.18 Fees are imposed for TGA pre-market services, such as the assessment of applications and evaluation of products, and levies are imposed for post-market processes, comprising compliance, enforcement and good manufacturing practice. Health’s cost allocation methodology for the TGA calculates fees to be applied for specific services, while the levies are assessed by industry sector and apportioned across a class of stakeholders.³⁰

3.19 Fees are payable for the registration, listing or inclusion of a product on the Australian Register of Therapeutic Goods. Almost any product for which therapeutic claims are made is required to be entered into the Register. Fees vary according to the types of products under each category of registration, listing and inclusion on the Australian Register of Therapeutic Goods and are paid by the sponsors of a product. Fees are also charged for the assessment of the application for registration. These fees vary according to the risk level of the product.

3.20 The costs of post-market processes are more difficult to assign to individual companies and therefore are imposed through levies, apportioned to all sponsors of products registered, listed or included on the Australian Register of Therapeutic Goods and imposed as an annual charge.

3.21 This overall structure is consistent with the distinction in the Cost Recovery Guidelines between fees and levies, and changes to fees and charges are approved by the Minister for Health.

Alignment between expenses and revenue

3.22 The Cost Recovery Guidelines (paragraph 37) require entities to develop mechanisms to manage any under- or over-recovery of costs and prevent any systematic over- or under-recovery. The Guidelines also indicate that ideally expenses and revenue should be aligned on a yearly basis, but recognise that there can be justification for alignment over a longer period (for example, the business cycle of the activity). Requiring the alignment of expenses and revenue to be assessed as part of the annual Budget process would help to prevent any systematic over- or under-recovery of costs, particularly at the program or sector level. In this regard, it is important that entities clearly specify the period of time over which expenses and revenue are aligned.

3.23 A key issue in considering the alignment of expenses and revenue is the level in the output structure against which cost recovery should be measured — individual fee for service or fee category (see paragraph 1.4). Higher-level measurement of the alignment of expenses and revenue provides an entity with flexibility, but obscures under- and over-recovery results within the total result. Variances at the output level and an explanation for these variances should therefore also be provided.

3.24 Regulatory agencies should actively manage under- and over-recovery results and maintain an agreed level of equity reserve (for example, three months working capital). Over-recovery results should be returned to industry (desirably the same client group) through reduced prices in the future or rebates to those who paid fees. Investment in the regulator’s capability funded by equity reserves should be agreed with industry (evidenced by decision in industry consultative committee minutes). Under-recovery means that industry is being subsidised and there is the potential for higher charges in the future to recover the shortfall, with consequential market distortions.

Australian Maritime Safety Authority

3.25 AMSA’s cost recovery financial performance over the five years from 2013–14 to is summarised in Table 3.2.³¹ This indicates that over this period AMSA:

• over-recovered costs across all of its regulatory activities by $28 million;
• over-recovered costs in each year for activities covered by the Regulatory Function Levy and had an accumulated surplus for the period of $40 million;
• over-recovered costs for four of the five years on activities covered by the Protection of the Sea Levy and had an accumulated surplus for the period of $17 million;
• under-recovered costs for four of the five years on activities covered by the Marine Navigation Levy and had an accumulated deficit for the period of $14 million; and
• under-recovered the cost of fee-for-service activities in each year and had an accumulated deficit of $15 million.

3.26 As at 30 June 2018, AMSA had retained earnings of $65 million.³² This includes reserves to meet the cost of environmental disasters (this capability is also met through a separate Pollution Response Reserve of $50 million that was approved by the AMSA Board). The purpose of the reserve is to support AMSA’s rapid response to major pollution incidents and to meet the costs of such incidents that are not recoverable from the ship owner or insurers.

Table 3.2: Australian Maritime Safety Authority — Cost recovery financial performance 2013–14 to 2017–18 ($’000)

Note a: Reliable data are not available for the 2011–12 and 2012–13 financial years. There are also differences in the figures published in CRISs because of the differing treatment of insurance recoveries and incorrect inclusion of non-regulatory revenue.

Note b: The figures for 2015–16 and 2017–18 include insurance recoveries not received when the financial statements were completed.

Source: AMSA.

3.27 AMSA’s financial performance indicates that there is a need for AMSA to restructure its charges for the Regulatory Function Levy and the Marine Navigation Levy so that revenues (and the resultant required charges) are aligned with AMSA’s costs for those activities. The charging opportunities identified in the Portfolio Charging Review (see Table 3.1) could also be examined in this context.

3.28 As shown in Table 3.2, AMSA does not currently recover the full cost of its fee-based services. AMSA advised that the costs of many of these fee-based services are influenced by the requirements of international agreements or other countries. If, after further investigation, AMSA considers that it cannot fully recover the cost of its fee-based services, the appropriate action would be to ask government to approve the amounts to be recovered from industry and the arrangements for meeting the shortfall in costs.

3.29 AMSA’s fees determination for regulatory activities covered in this audit was last revised in 2015.³³ There is a need for AMSA to update its fees determination more regularly to help address the under-recovery of costs relating to its fee-based services.

Department of Agriculture and Water Resources

3.30 Agriculture’s cost recovery financial performance from 2011–12 to 2017–18 is summarised in Table 3.3. This indicates an under-recovery of $3.3 million over the seven-year period and an under-recovery of $13.3 million since 2015–16 when Agriculture last revised its cost recovery arrangements (compared to a planned under-recovery of $5.2 million in the 2015–16 CRIS).

3.31 To address the continuing accumulation of cost recovery reserves, the 2015–16 CRIS provided for temporary remissions (discounts) to be provided to exporters. As at 30 June 2018 Agriculture’s cost recovery reserves for food exports was around $5 million, compared to around $6 million at 30 June 2017. Agriculture seeks to retain reserve balances of between zero and five per cent of annual program expenditure (that is, up to around $4 million).

3.32 Agriculture commissioned a review of cost recovery arrangements related to meat exports in 2017. This review:

• identified an imbalance between revenue and expense for some activities that will potentially provide less equity for industry participants; and
• found that Agriculture should revise the way in which it distributes the expense base associated with the Program Management and Administration cost pool to accurately determine the levels of any over-recoveries.

3.33 Some changes to Agriculture’s charges were announced in the 2018–19 Budget to address structural under-recoveries in some programs. The 2018–19 Budget measure included recovery of the costs of some export certification charges that are currently not cost recovered. Agriculture is currently reviewing and consulting with industry on its charges, with the aim of introducing revised charges from 1 July 2019.

Therapeutic Goods Administration

3.34 Health’s cost recovery financial performance for the TGA over the seven years from to is summarised in Table 3.4.

3.35 Table 3.4 indicates that, over the period for the TGA, Health:

• over-recovered across all industry sectors by $28.8 million, with most of the over-recovery occurring in two sectors — prescription medicines and medical devices;
• consistently under-recovered costs on its ‘Good manufacturing practice’ and ‘Blood, blood components and biologicals’ industry sectors in all or most years and, in recent years, also ‘Other activities’, with under-recovery in recent years also being related to the implementation of the recommendations of the Expert Panel Review of Medicines and Medical Devices Regulation (see Table 3.1); and
• under-recovered the cost of complementary medicines across the period, but with over-recovery since 2015–16.

3.36 Health revised the TGA’s charges in 2017–18 and 2018–19, some of which arose from the changed regulatory arrangements resulting from the 2014–15 Medicines and Medical Devices Review, to which the government responded in 2016. Despite under-recovery related to ‘good manufacturing practice’ since 2013–14, levies related to the manufacturing of medicines were reduced on 1 July 2018 (with an overall reduction for most medical devices of 4.96 per cent).

3.37 In the February 2019 version of the TGA’s 2018–19 CRIS, Health stated that it aims to maintain accumulated reserves (which are in a special account and require government or ministerial approval to access) at around 25 per cent of operating expenses. As at 30 June 2018, TGA accumulated reserves totalled $50.6 million or 33 per cent of annual revenue.

3.38 Health’s 2016 portfolio charging review noted that, while it fully recovered the cost of the TGA’s regulatory activities (apart from the small number of regulatory activities which were Budget-funded) between 2012–13 and 2016–17, the effectiveness of the TGA’s costing model could be improved by reducing the level of cross-subsidisation that has occurred across industry sectors.

3.39 The portfolio charging review also found (see Table 3.1) cross-subsidisation of fee-free services. While the review recommended that this cross-subsidisation should continue, but with disclosure in the TGA’s CRIS, this is non-compliant with the Cost Recovery Guidelines, which provide (Figure 12, page 38) that, where costs cannot be reasonably attributed to an individual or organisation, they should not be cost recovered. This suggests it would be more appropriate for these costs to be met from the Budget, in the same way that Health is funded for the TGA’s scheduling and some other services from the Budget. Health did not obtain legal advice on the matter. While noting that the Minister for Health approved the continued cross-subsidisation of these costs, paragraph 33 of the Cost Recovery Guidelines requires that entities and responsible ministers must have policy approval from the Australian Government to cost recover. The ANAO considers that the continued practice of cross-subsidising fee-free services should be further reviewed and that Health submits a proposal to seek a government decision on the funding of the cost of these services.

Do the entities’ cost recovery methodologies align costs and charges and promote the recovery of the efficient costs of the regulatory activity?

Cost recovery methodologies

3.40 The cost recovery methodology underpinning the development of individual charges is critical to the implementation of the policy and its legitimacy. In particular, entities need to be able to demonstrate how charges have been calculated and the appropriateness of the amounts charged (paragraph 74 of the Cost Recovery Guidelines). To do this, entities need robust cost recovery tools or ‘models’, such as activity-based cost models.

3.41 The Cost Recovery Guidelines (paragraphs 73) state that the cost recovery model should:

• identify outputs and business processes of the regulatory activity;
• accurately measure and assign costs to outputs and business processes;
• use relevant proxies for the allocation of indirect costs;
• track the degree of alignment between expenses and revenue; and
• produce relevant and timely reports for the regulatory activity.

3.42 The primary purpose of a cost recovery model is to determine the cost of all the outputs an agency provides to regulate an industry. The cost of the output is recovered through a cost recovery charge (fee or levy) based on an assessment of the nexus of the output and an individual participant in the industry, as well as consideration to the fairness of the costing (for example, rural providers would pay more for travel than metropolitan providers). The cost of the output is the basis for the charge.

3.43 The Guidelines provide the example of regulatory activity outputs or services and business processes shown in Figure 3.1. The Charging Framework states (Figure 1, page 6) that charges must reflect the efficient unit cost of a specific good or service, where revenue and expenses are closely aligned. In the Cost Recovery Guidelines’ model, an example of an output, for which a price would be set, would be issuing a certificate and the regulatory activity would be the regulation of aspects of an industry, such as medical devices. In a typical activity-based costing model, ‘activities’ are what the Cost Recovery Guidelines term ‘processes’.

3.44 The cost recovery models of the three entities were assessed using the framework shown in Appendix 3. The ANAO’s assessment (summarised at Table 3.5) indicates scope for improvement in the methodologies used by all entities, although the cost model used by Health for the TGA is generally sound and reflects a genuine activity-based costing approach.

3.45 There is currently little discussion in the Cost Recovery Guidelines on ways of assuring the integrity of entity cost recovery tools/models. While Finance advised that the three entities had each consulted it on their cost recovery models, in reviewing the Cost Recovery Guidelines as proposed earlier (Recommendation No.2), it would be opportune for Finance to examine the best way of providing independent oversight of the integrity of entity cost recovery models. Finance could also examine the suitability of the models, commensurate with the materiality, complexity and sensitivity of the regulatory charging activity.

Table 3.5: The ANAO’s assessment of entity cost models

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO analysis.

Australian Maritime Safety Authority’s cost recovery model

3.46 Excluding cost recovery related to the National System, which is outside the scope of this audit, AMSA’s cost recovery operations are based around four regulatory activities:

• Navigation infrastructure — development of safety and environmental protection standards to promote the responsible operation of vessels and safety of seafarers in Australian waters, and monitor and enforce compliance with these standards (with costs recovered through the Marine Navigation Levy);
• Environmental marine protection — preventing and combating ship-sourced pollution in the maritime environment (with costs recovered through the Protection of the Sea Levy);
• Seafarer and ship safety — providing systems that aid safe marine navigation (with costs recovered through the Regulatory Function Levy); and
• Marine services and ship registration — promoting seafarers’ wellbeing, safety, competency and capability as an integral part of vessel safety (with costs recovered though fees for service).

3.47 AMSA does not recover the cost of its search and rescue operations, which are funded by the government as part of AMSA’s community service obligations.

3.48 In April 2018, AMSA received a report it had commissioned on its cost recovery framework. The report identified a number of deficiencies in AMSA’s cost recovery policies and practices, including:

• an inability to review the calculations and assumptions within the cost recovery model as AMSA’s previous cost recovery system (TM1) was no longer supported and historical costing information was not available for the previous three financial years;
• a lack of internal documentation that outlines AMSA’s cost recovery process and procedures and incomplete documentation to fully support the cost recovery decisions, stakeholder engagement and the cost recovery model;
• inconsistencies between the published 2016–17 CRIS for budgeted expenses and supporting documentation and work papers;
• a lack of evidence supporting the calculation of fee-for-service rates; and
• the need for AMSA to develop and regularly update a consolidated policy document outlining its methodologies for allocating costs, attributing revenue and calculating levies and charges, including standard operating procedures to ensure corporate knowledge is maintained with staff movements.

3.49 Since April 2018, AMSA has developed a revised cost recovery model (or suite of spreadsheet-based workbooks), which it has used to determine costs and revenue for 2017–18 and estimate costs and revenue for 2018–19 and the forward years. The model includes all AMSA regulatory activities, including the National System and search and rescue operations that are not cost-recovered.

3.50 AMSA has also provided increased support for operational staff to enable more accurate allocations of staff time and costs to be derived. AMSA advised the ANAO that it will continue to refine this revised cost model and develop supporting procedures over the next year.

3.51 The ANAO’s assessment of AMSA’s new cost recovery model (Table 3.6) indicates that it is not a fully functioning activity-based cost model and requires further work to enable it to: calculate costs at charge points; allocate corporate function costs accurately across all regulatory activities; and include accurate drivers of central costs and depreciation. It is not possible to determine from the model if the cost is the full or efficient cost of the output or service. However, the model has a clear overall structure; the data used in the model are apparent and calculations performed are transparent; and consideration has been given to the cost drivers used.

Table 3.6: The ANAO’s assessment of AMSA’s cost model

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO analysis of current CRIS model, used in the preparation of the 2018–19 CRIS for the National System and the draft 2018–19 CRIS for ship and seafarer safety, navigation infrastructure and environmental protection.

Department of Agriculture and Water Resources’ cost recovery model

3.52 In 2014, Agriculture used spreadsheet-based models to determine if its cost recovery arrangements would be over- or under-recovered. This model was used as the basis for Agriculture’s last CRIS in 2015. Agriculture implemented a new activity-based cost (ABC) system in December 2016 to replace its old system (TM1), and a new time recording system (TimeTiger) to replace a manual/spreadsheet process (running in parallel). Agriculture has been conducting a review of its charges and cost recovery arrangements in 2018–19, with a view to recommending changes to government for implementation in 2019–20. While Agriculture has a dedicated ABC system, it is continuing to use spreadsheet-based cost models to support this review. Agriculture advised that the ABC system will be used to calculate the final costs of the preferred options to be presented to the government.

3.53 The ANAO’s assessment of Agriculture’s cost model (Table 3.7)³⁴ found that Agriculture’s 2014 model did not calculate costs for individual outputs/services and comparisons of the charges for individual outputs/services with their cost were therefore not possible. While Agriculture’s current model does calculate costs for individual outputs/services, it is not possible to determine from the model if this is the full or efficient cost of the output or service.

Table 3.7: ANAO assessment of Agriculture’s cost model

Note 1: PwC, Department of Agriculture and Water Resources — Plant cost recovery arrangements independent review — final report, 24 June 2016, p. 6.

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO.

Therapeutic Goods Administration’s cost recovery model

3.54 Health uses an activity-based cost model for the TGA that was developed in 2013–14. Wherever possible, the processes behind each output in a regulatory activity were mapped and built from the ‘bottom up’ and the results were incorporated into a comprehensive spreadsheet-based model. In 2015–16 Health purchased proprietary activity based costing software (‘CostPerform’) and moved the spreadsheet model into that platform, which it still uses. The TGA cost recovery model identifies each regulatory activity and the outputs contributing to each regulatory activity undertaken within the regulatory areas.

3.55 The ANAO’s assessment of the TGA model (Table 3.8) indicates that the model is well-structured, calculates prices for regulatory activities based on expected volumes and the cost of outputs that contribute to those regulatory activities, and enables reporting of costs and revenues. However, the allocation of staff effort is based on annual surveys of line areas, which are not performed consistently across the entity and have a measure of subjectivity. Health advised the ANAO that it will endeavour to improve the quality of staff effort data for cost allocations.

Table 3.8: ANAO assessment of the TGA cost model

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: ANAO.

Measuring the efficient costs of regulatory activities

3.56 Cost recovery involves the Australian Government charging the non-government sector some or all of the efficient costs of a specific regulatory activity (paragraph 2 of the Cost Recovery Guidelines). Financial estimates should therefore be based on ‘efficient costs’, which the Cost Recovery Guidelines (paragraph 83) define as ‘the minimum costs necessary to provide the regulatory activity while achieving the policy outcomes and legislative functions of the Australian Government’.

3.57 To help ensure that efficient costs are recovered, the Cost Recovery Guidelines state (paragraph 53) that entity staff should, among other things, remove incentives for ‘cost padding’, inefficiency and the expansion of the activity beyond the original policy intent and, where possible, benchmark the regulatory activity and its business processes.

3.58 Agriculture and AMSA have not changed their charges since 2015. Health’s charges for the TGA have included increases for indexation, including increases in salary costs (although Health has absorbed some of these increased salary costs).

3.59 Action that entities have taken to help assure that efficient costs are used are summarised in Table 3.9.

Table 3.9: How entities seek to ensure that efficient costs are used

Note a: PwC, Department of Agriculture and Water Resources — Meat Export Programme cost recovery arrangements independent review — final report, February 2017, pp. 6 and 11.

Source: ANAO analysis.

3.60 This analysis indicated that AMSA and Health have undertaken little or no benchmarking of the cost of their regulatory services. However, there is scope for this to occur for these two entities and for Agriculture to increase its benchmarking comparisons and to use its cost model to help determine efficient costs. For example:

• as noted, AMSA plans to compare budgets and forecasts to a domestic and an international regulatory body that provide similar charging activities, such as the Civil Aviation Safety Authority and Maritime NZ on the basis that they provide similar services to those of AMSA;
• the 2015 benchmarking study commissioned by Agriculture noted that, through its consultations, several departments were interested in resource optimisation and it recommended that Agriculture leverage this interest by creating working groups and continually benchmarking progress against like agencies; and
• many of the services provided by the three entities, such as inspections, although related to different regulatory activities, are similar and therefore could be benchmarked across entities. For example, there is the opportunity to benchmark the full daily and hourly costs by APS classification (for example, APS 1 to 6 and EL 1 to 2) across all entities and efficiency rates (how long it takes to complete tasks) across entities with similar tasks. This suggests an opportunity for collaboration between entities in benchmarking some costs of their regulatory activities and reviewing why some activities take longer than others. It is suggested that the Department of Finance examine opportunities explore how benchmarking of regulatory activities can be further encouraged and facilitated.

Recommendations

Have entities developed and implemented ongoing cost recovery engagement strategies?

Developing and implementing stakeholder engagement strategies

4.1 Effective stakeholder³⁵ engagement is one of the three cost recovery principles outlined in the Cost Recovery Guidelines. The Guidelines state (paragraph 30) that:

Stakeholder involvement will generally result in better design, planning and implementation of government activities. Successful stakeholder engagement is most likely to occur when it is well planned and when government entities enter into meaningful dialogue with stakeholders, consider their views and, where appropriate, take action.

4.2 The Cost Recovery Guidelines require an entity to include an engagement strategy on cost recovery in its Cost Recovery Implementation Statement (CRIS), but they do not specify what to include in the strategy. Table 4.1 presents the ANAO’s high-level assessment for each entity against the key elements of the Cost Recovery Guidelines that an entity ‘must’ (mandatory) undertake and ‘should’ (best practice) consider in developing an approach to stakeholder engagement.³⁶

Table 4.1: ANAO high-level assessment of entity stakeholder engagement strategies

Legend: ◆ = fully met; ▲ = partially met (including where there was no explicit strategy, but elements of a strategy or equivalent arrangements were in place); and ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of entity arrangements and documentation.

Australian Maritime Safety Authority

4.3 The ANAO’s assessment of AMSA’s ongoing stakeholder engagement strategy (Table 4.2) is that AMSA does not have an ongoing stakeholder engagement strategy on cost recovery. AMSA should develop a stakeholder strategy, as required by the Cost Recovery Guidelines, and report on the strategy in annual updated CRISs.

Table 4.2: Ongoing cost recovery stakeholder engagement strategy — AMSA

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of AMSA documentation.

Department of Agriculture and Water Resources

4.4 The ANAO’s assessment of Agriculture’s ongoing stakeholder engagement strategy (Table 4.3) is that, while Agriculture has not had a comprehensive ongoing stakeholder engagement strategy on cost recovery in place for each year since 2015–16, it has engaged with industry on cost recovery through its industry consultative committees. It also commissioned reviews of several of its cost recovery arrangements, including a review of meat exports within the food exports program. It has also developed an engagement strategy for changes to its cost recovery arrangements that it plans to implement from 2019–20.

Table 4.3: Ongoing cost recovery stakeholder engagement strategy — Agriculture

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of Agriculture documentation.

Therapeutic Goods Administration

4.5 The ANAO’s assessment of Health’s ongoing stakeholder engagement strategy for the TGA and how this is reflected in its CRIS is shown at Table 4.4. While the TGA does not have a specific documented engagement strategy on cost recovery, it applies the department’s broader stakeholder engagement framework and has adjusted its consultative arrangements in response to stakeholder feedback.

Table 4.4: Ongoing cost recovery stakeholder engagement strategy — TGA

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of TGA documentation.

Have entities actively engaged with stakeholders at each stage of the cost recovery framework and considered their views in developing and reviewing cost recovery stakeholder engagement arrangements?

Engagement at each stage of the cost recovery framework

4.6 As a cost recovery principle, the Cost Recovery Guidelines state (paragraph 31) that stakeholder engagement should be applied ‘throughout all stages of the cost recovery process, from policy development through to implementation and review’. Table 4.5 presents the key elements from the Cost Recovery Guidelines that an entity ‘must’ (mandatory) undertake and ‘should’ (best practice) consider to achieve successful ongoing stakeholder engagement, and the ANAO’s high-level assessment of each entity.

Table 4.5: Stakeholder engagement at each stage of the cost recovery framework

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of entity documentation.

Australian Maritime Safety Authority

4.7 The ANAO’s assessment of the effectiveness of AMSA’s stakeholder engagement (Table 4.6) is that AMSA has not actively engaged with stakeholders on existing cost recovery activities since 2015–16, but has consulted extensively on cost recovery for the new National System. There is scope for AMSA to develop performance measures on stakeholder engagement on cost recovery, to be more responsive to stakeholder requests for information on cost recovery models and provide greater input to cost recovery processes, including through its CRIS.

Table 4.6: Stakeholder engagement at each stage of the cost recovery framework — AMSA

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of AMSA documentation.

Department of Agriculture and Water Resources

4.8 The ANAO’s assessment of the effectiveness of Agriculture’s stakeholder engagement shows that Agriculture has consulted extensively with industry through consultative committees and other arrangements, including on cost recovery issues, in developing its CRIS on food exports certification in 2015–16 CRIS and in progressing possible changes to its cost recovery arrangements, including those announced in the Budget. However, the department has not actively engaged with industry at each stage of the cost recovery framework since 2015.

Table 4.7: Stakeholder engagement at each stage of the cost recovery framework —Agriculture and Water Resources

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Source: Cost Recovery Guidelines and ANAO analysis of Agriculture documentation.

Therapeutic Goods Administration

4.9 The ANAO’s assessment of the effectiveness of Health’s stakeholder engagement for the TGA (Table 4.8) shows that Health regularly consults industry about changes to the TGA’s cost recovery arrangements and prices and makes changes to planned arrangements in response to industry feedback. It also regularly updates the TGA’s CRIS, which facilitates consultation with industry on cost recovery. The development of performance measures related to the effectiveness of stakeholder consultations on the TGA’s cost recovery arrangements would help to ensure ongoing assessment of the effectiveness of this stakeholder engagement.

Table 4.8: Stakeholder engagement at each stage of the cost recovery framework —TGA

Legend: ◆ = fully met; ▲ = partially met; ■ = not met.

Note a: TGA submission to the Executive of the Health Products Regulation Group in the Department of Health, 9 July 2018, p. 2.

Source: Cost Recovery Guidelines and ANAO analysis of TGA documentation.

Recommendations

Appendix 1 Entity responses

 

 

 

 

 

 

 

 

 

 

Appendix 2 Issues to be examined in a future review of the Cost Recovery Guidelines

Appendix 3 Cost model evaluation framework

Source: ANAO.