| Step 4 Analyse the status quo and the options suggested by the shortlist of persons and groups who could be charged, developed under Step 3, against the objectives of cost recovery and other relevant considerations. |
Rationale
Cost recovery is not an end in itself. It is only of value if it compliments the outcomes the outputs contribute to, and advances the objectives of cost recovery. In respect of outcomes, if, for example, the government were to charge beneficiaries for its services at the border this would do little to alter the behaviour of passengers who risk introducing unwanted goods, substances, organisms and people. The objectives of cost recovery are established in the Treasury Guidelines and are repeated in Box 1 in our Overview section. They essentially amount to efficiency, equity/distributive and fiscal considerations.
Other considerations are also likely to have a bearing on the analysis. The purpose of Step 1 was to draw out what considerations in the present and emerging environment may be of relevance to the analysis here (and in respect of the upcoming analytical steps).
The options of who to charge developed under Step 3 should be evaluated and so too the status quo. There is little point in upsetting the status quo if the alternatives are not more effective in addressing the objectives and any other relevant considerations that have been identified.
It is important to note that the analysis may suggest charging more than one group as, for example, when more than one group benefits from a service provided. In these instances thought will need to be given to how best to share costs. Step 5 suggests a way forward.
Suggested approach
Table 5 (over) is a useful way for organising one's thinking about who to charge. Running down the left-hand-side are the options of who to charge, including the status quo. Across the top are the objectives of cost recovery and other relevant considerations against which these options should be assessed. If there are a number of other relevant considerations common to more than one option, then it may be an idea to split this column accordingly.
There are a number of ways in which the cells in Table 5 can be filled out, such as:
- using ticks when the option scores well against an objective and crosses when it does not:
- using happy (
), neutral (
) and sad faces (
) to visually illustrate how well or poorly options advance
objectives; - shading individual cells to indicate the degree to which the options advance the objectives (such as we have used in the matrix in Box 3);
- typed comments within each cell (such as we use in the example below). For instance, in the efficiency cell comments should address whether least cost production over the long run is encouraged, and whether the option being considered promotes or detracts from allocative efficiency; and
- a mixture of symbols (ticks, crosses or faces) and text (such as is used in Table 7 and Table 8 where an approach to step 6 is suggested and illustrated by way of an example).
Which method is best will depend on the complexity of the cost recovery issue being assessed, the number of options being weighed against each other, and the relative priority attached to each of the objectives of cost recovery.
Table 5: Analysis of who is it "best" to charge
| Objectives / Options | impact on .. | other relevant considerations | ||||
| outcomes | efficiency | equity /distributive | fiscal | transaction costs | ||
| status quo | ||||||
| direct users | ||||||
| beneficiaries | ||||||
| parties downstream of beneficiaries | ||||||
| parties upstream of beneficiaries | ||||||
| risk exacerbaters | ||||||
| downstream risk exacerbaters | ||||||
| upstream risk exacerbaters | ||||||
| taxpayers |
This is a working approach to the conceptual framework illustrated in Figure 2. As was emphasised there, this is an objective framework for subjective analysis. That is, assessing the relative merits of options will necessarily require analysts to exercise their judgement regarding:
- the relative importance of the objectives of cost recovery and other relevant considerations;
- the extent to which the various options advance or impede the objectives and other relevant considerations; and
- which option or options are best, in light of their assessed implications for the objectives and other relevant considerations.
Example: Registration of sawmills to mill indigenous timber
The purpose of Part IIIA of the Forests Act 1949 is to ensure the sustainable management of privately owned indigenous forests. One of the means to facilitating this end is the requirement that sawmillers wishing to mill indigenous timber register with MAF. A requirement of registration is that, apart from a few exceptions, mills only saw timber harvested under a sustainable management plan or permit that has been approved by the Chief Executive of MAF.
Presently the cost of registration is met by the sawmillers. Another option is that the costs be met by indigenous forest growers, as they are the initial source of risk that indigenous timber will be unsustainably managed. A third option is that taxpayers pay on behalf of those who gain comfort in being assured that indigenous forests are being sustainably managed. As the property rights of these beneficiaries are not well defined and as they are a disparate proportion of the population, under this option the costs falls on all taxpayers. Table 6 analyses these options against the objectives of cost recovery and other relevant considerations.
Table 6: Who "best" to charge for the registration of sawmills?
| Objectives / Options | impact on .. | other relevant considerations | ||||
| outcomes | efficiency | equity / distributive |
fiscal | transaction costs | ||
| status quo: sawmillers | encourages sawmillers to mill timber only from
sustainably managed forests shifts the risk of unsustainable forest management practices on to sawmillers costs can be passed on to indigenous forest growers, who are the original source of risk |
it may be regarded as "unfair" as sawmillers bear
the cost of risks posed by indigenous forest growers and of measures to address the
concerns of the environmentally conscious however, sawmillers are likely to pass costs on to forest owners |
minimises fiscal costs | minimises transaction costs | ||
| risk exacerbaters: indigenous forest growers | encourages the internalisation of the
externalities of milling indigenous forests but possibly overcompensates as there is not accurate correspondence between charges and the value of the negative externality |
it may be regarded as "unfair" for indigenous forest growers to pay for an element of a regime that may detrimentally effect their bottom lines | minimises fiscal costs | transaction costs will be higher than the status quo as there are numerous indigenous forest growers compared to the relatively fewer sawmillers of indigenous timber | it may be argued that the property rights of forest growers are "unfairly" eroded | |
| taxpayers on behalf of the environmentally concerned | as it is not just the environmentally concerned who pay taxes, there is a moral hazard that those so concerned will lobby for greater protections than is optimal | taxpayers may be paying for an ends they do not feel strongly about | adds to fiscal costs | this option is the most efficient from a transaction costs perspective, as it piggybacks on an existing mechanism - general taxation | ||
No single option scores well against all the objectives. Judgement needs to be exercised when assessing who of the options assessed it is "best" to charge. Arguably, the status quo is the "best" option as it:
- minimises fiscal costs;
- places a backwards pressure on indigenous forest growers to sustainably manage their forests; and
- is more efficient from a transaction costs perspective than charging indigenous forest growers directly.
However, the equity of charging sawmillers is debatable.
Contact for Enquiries
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