Australian Government Cost Recovery Guidelines July 2005
FINANCIAL MANAGEMENT GUIDANCE NO.4
© Commonwealth of Australia 2005
ISBN 0-9757365-1-5 (print)ISBN 0-9757365-5-8 (on-line)
Department of Finance and AdministrationFinancial Management Group
Rewritten and updated July 2005 on an activity basis, rather than on an agency basis. This publication replaces the Commonwealth Cost Recovery Guidelines for Information and Regulatory Agencies, March 2003, ISBN 0-9580419-5-4.
Cover Photo: Parliament House Canberra, photographer Lincoln Fowler, courtesy of Tourism Australia
(FILE 100\100877).
This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600
or posted at
An appropriate citation for this document is: Commonwealth of Australia, Australian Government Cost Recovery Guidelines, Canberra, 2005.
The Financial Management Guidance series of publications
No. 1 Commonwealth Procurement Guidelines, January 2005.
No. 2 Guidelines for the Management of Foreign Exchange Risk, November 2002.
No. 3 Guidance on Confidentiality of Contractors’ Commercial Information, February 2003.
No. 4 Australian Government Cost Recovery Guidelines, July 2005.
No. 5 Guidelines for Implementation of Administrative Arrangements Orders and Other Machinery of Government Changes, September 2003.
No. 6 Guidelines for Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort, September 2003.
No. 7 Guidelines for the Management of Special Accounts, October 2003.
No. 8 Guidance on the Listing of Contract Details on the Internet (Meeting the Senate Order on Department and Agency Contracts), January 2004.
No. 9 Australian Government Competitive Neutrality Guidelines for Managers, February 2004.
No. 10 Guidance on Complying with Legislation and Government Policy in Procurement, January 2005.
No. 11 The Role of the CFO – Guidance for Commonwealth Agencies, April 2003.
No. 12 Guidance on Identifying Consultancies for Annual Reporting Purposes, July 2004.
No. 13 Guidance on the Mandatory Procurement Procedures, January 2005.
No. 14 Guidance on Ethics and Probity in Government Procurement, January 2005.
No. 15 Guidance on Procurement Publishing Obligations, January 2005.
No. 16 Public Private Partnerships Introductory Guide, May 2005.
No. 17 Public Private Partnerships Business Case Development, May 2005.
No. 18 Public Private Partnerships Risk Management, May 2005.
No. 19 Public Private Partnerships Contract Management, May 2005.
The Financial Management Reference series of publications
No. 1 List of Australian Government Bodies 2002-2003, June 2004.
No. 2 Introduction to Australian Government Financial Management
Contents
Introduction1
Glossary of Terms5
Overview9
What are these Guidelines?10
Who should use these Guidelines?10
What is cost recovery?10
Why have cost recovery?11
Designing cost recovery arrangements12
The cost recovery process13
Stage 1 Initial policy review14
Stage 2 Design and implementation14
Stage 3 Cost Recovery Impact Statement process14
Stage 4 Ongoing monitoring15
Stage 5 Periodic review15
STAGE 1 – Policy Review17
Which of the agency’s objectives are relevant to the activities
or products being considered for cost recovery?18
Should cost recovery be introduced?19
Regulatory activities19
A Registration and approvals20
B Issuing exclusive rights and privileges24
C Monitoring ongoing compliance with regulations25
D Investigation and enforcement28
Information activities29
Determining the basic product set29
Recovering the cost of additional information products35
What mechanisms, including consultation, should be used for
ongoing monitoring of the efficiency and effectiveness of cost
recovery arrangements?37
How long before the cost recovery arrangements should
be reviewed again?37
STAGE 2 – Design and Implementation 39
Partial cost recovery40
Who should pay cost recovery charges?40
Regulatory Activities40
Information Activities41
Should cost recovery charges be imposed using fees or levies?41
What are the legal requirements for the imposition of the charges?42
Which issues should any legislation address?42
Which costs should the charges include?42
Regulatory activities43
Information activities43
How should charges be structured?44
Regulatory Activities44
Information Activities45
How should costs be calculated and allocated?45
STAGE 3 – Cost Recovery Impact Statement
(CRIS) Process51
What is a significant cost recovery arrangement?52
Triggers for preparing a CRIS52
What should be included in a CRIS?54
Consultation54
What happens when the CRIS has been finalised by the agency?54
Summary CRISs55
Relationship between the CRIS and the Regulation Impact
Statement (for regulatory activities)55
STAGE 4 – Ongoing Monitoring57
STAGE 5 – Periodic Review59
Appendices61
Appendix A:Selected charging issues62
Regulatory activities62
Levy design 62
Start-up costs 62
New products 63
Information activities63
Charging for non-rival products63
Charging for products when future demand is unclear63
Charging for products with large fixed costs64
Charging for products and services between agencies65
Appendix B:Case study - Information on the Internet66
Usual case66
Special cases66
Introduction
In December 2002 the Australian Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of Commonwealth cost recovery arrangements and promote the efficient allocation of resources.
The policy applies to all Financial Management and Accountability Act 1997 (FMA Act) agencies and to relevant Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies that have been notified, under sections 28 or 43 of the CAC Act, to apply the cost recovery policy. These entities are collectively referred to as ‘agencies’ for the purposes of these guidelines. The policy applied immediately in respect of new or significantly amended cost recovery arrangements and will be phased in for all existing arrangements over a period not exceeding five years (to 2007-08).
For the purposes of this policy, ‘cost recovery’ broadly encompasses fees and charges related to the provision of government goods and services (including regulation) to the private and other non-government sectors of the economy.
The Australian Government’s policy adopts the following key principles:
1. Agencies should set charges to recover all the costs of products or services where it is efficient to do so, with partial cost recovery to apply only where new arrangements are phased in, where there are government endorsed community service obligations, or for explicit government policy purposes.
2. Cost recovery should not be applied where it is not cost effective, where it is inconsistent with government policy objectives or where it would unduly stifle competition or industry innovation.
3. Any charges should reflect the costs of providing the product or service and should generally be imposed on a fee-for-service basis or, where efficient, as a levy.
4. Agencies should ensure that all cost recovery arrangements have clear legal authority for the imposition of charges.
5. Costs that are not directly related or integral to the provision of products or services (e.g. some policy and parliamentary servicing functions) should not be recovered. Agencies that undertake regulatory activities should generally include administration costs when determining appropriate charges.
6. Where possible, cost recovery should be undertaken on an activity (or activity group) basis rather than across the agency as a whole. Cost recovery targets on an agency-wide basis are to be discontinued.
7. Products and services funded through the budget process form an agency’s ‘basic information product set’ and should not be cost recovered. Commercial, additional and incremental products and services that are not funded through the budget process fall outside of an agency’s ‘basic product set’ and may be appropriate to cost recover.
8. Portfolio Ministers should determine the most appropriate consultative mechanisms for their agencies’ cost recovery arrangements, where relevant.
9. Cost recovery arrangements will be considered significant (‘significant cost recovery arrangements’) depending on both the amount of revenue and the impact on stakeholders. A ‘significant cost recovery arrangement’ is one where:
a. an agency’s total cost recovery receipts equal $5 million or more per annum - in this case every cost recovery arrangement within the agency is considered, prima facie, to be significant, regardless of individual activity totals; or
b. an agency’s cost recovery receipts are below $5 million per annum, but stakeholders are likely to be materially affected by the cost recovery initiative; or
c. Ministers have determined the activity to be significant on a case-by-case basis.
10. Agencies with significant cost recovery arrangements should ensure that they undertake appropriate stakeholder consultation, including with relevant departments.
11. All agencies with significant cost recovery arrangements will need to prepare Cost Recovery Impact Statements (CRIS). A CRIS will not be required where a Regulation Impact Statement (RIS) that also addresses cost recovery arrangements against these guidelines has been prepared.
a. The chief executive, secretary or board must certify that the CRIS complies with the policy and provide a copy to the Department of Finance and Administration.
b. Agencies must include a summary of the CRIS in their portfolio budget submissions and statements.
12. Agencies are to review all significant cost recovery arrangements periodically, but no less frequently than every five years.
13. Agencies will need to separately identify all cost recovery revenues in notes to financial statements – to be published in portfolio budget statements and annual reports consistent with the Finance Minister’s Orders.
14. Portfolio Ministers are responsible for ensuring that the cost recovery arrangements of agencies within their portfolios comply with the policy and will report on implementation and compliance in portfolio budget submissions.
Glossary of Terms
Agency – FMA Act agencies and relevant CAC Act bodies that have been notified, under sections 28 or 43 of the CAC Act, to apply the policy are collectively referred to as ‘agencies’ throughout these guidelines.
Basic product set – products and services that the Government agrees should be taxpayer funded.
CAC Act bodies – entities that are subject to the Commonwealth Authorities and Companies Act 1997. These are:
• Commonwealth authorities - a statutory authority (i.e. a body created by legislation) that is a separate legal entity from the Commonwealth and which has the power to hold money on its own account
• Commonwealth companies - companies under the Corporations Act 2001 in which the Commonwealth has a controlling interest.
Cost Recovery charge – modes by which agencies recover costs for some of the products and services they provide. Australian Government cost recovery charges fall into two broad categories:
• fees for goods and services; and
• ‘cost recovery’ taxes (primarily levies, but also some excises and customs duties).
Cost Recovery Impact Statement (CRIS) – a statement documenting compliance with the cost recovery policy. Only agencies with significant cost recovery arrangements must prepare a CRIS.
FMA Act agencies – agencies that are financially part of the legal entity of the Commonwealth and are subject to the Financial Management and Accountability Act 1997. FMA Act agencies include:
• Departments of State;
• Departments of the Parliament; and
• Agencies prescribed by the FMA Regulations.
Information activities – activities involved in collecting, compiling and disseminating information or any other activity of a non-regulatory nature. (See regulatory activities)
May – options in these guidelines that are denoted by the use of the term ‘may’ are to be considered by agencies and followed when deemed relevant.
Must – obligations in these guidelines that are denoted by the use of the term ‘must’ are to be complied with in all circumstances.
Regulation Impact Statement (RIS) – the RIS is a document prepared by the department, agency, statutory authority or board responsible for a regulatory proposal following consultation with affected parties, formalising and evidencing some of the steps that must be taken in good policy formulation. Contact the Office of Regulation Review for further information regarding RISs.
Regulatory activities – activities involved in administering regulations. (See information activities)
Should – obligations in these guidelines that are denoted by the use of the term ‘should’ are to be complied with as a matter of sound practice.
Significant cost recovery arrangement - a ‘significant cost recovery arrangement’ is one where:
• an agency’s total cost recovery receipts equal $5 million or more per annum - in this case every cost recovery arrangement within the agency is considered, prima facie, to be significant, regardless of individual activity totals; or
• an agency’s cost recovery receipts are below $5 million per annum, but stakeholders are likely to be materially affected by the cost recovery initiative; or
• Ministers have determined the activity to be significant on a case-by-case basis.
Overview
What are these Guidelines?
These guidelines provide a framework to assist agencies to design and implement cost recovery arrangements that comply with the cost recovery policy.
Who should use these Guidelines?
These guidelines apply to all Financial Management and Accountability Act 1997 (FMA Act) agencies and those Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies (collectively referred to as ‘agencies’ for the purposes of these guidelines) that have been notified of the cost recovery policy under sections 28 or 43 of the CAC Act.
Agencies should use these guidelines when:
• proposing a new cost recovery arrangement; or
• amending existing cost recovery arrangements; or
• reviewing cost recovery arrangements in line with the Australian Government’s scheduled reviews (to 2007-08) or an agency initiated periodic review.
What is cost recovery?
Cost recovery is the recovery of some or all of the costs of a particular activity. Australian Government cost recovery charges fall into two broad categories:
• fees for goods and services; and
• ‘cost recovery’ taxes (primarily levies, but also some excises and customs duties).
Cost recovery is different from general taxation. Some levies or taxes are used to raise cost recovery revenues, but the direct link — or ‘earmarking’ — between the revenue and the funding of a specific activity distinguishes such cost recovery taxes from general taxation. General taxation, on the other hand, is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and which is not a payment for services rendered.
Many arrangements are not cost recovery for the purposes of the policy. Exclusions include:
• any form of intra-agency or inter/intra-governmental charging;
• charges by government business enterprises. These businesses operate in competitive or potentially competitive markets and are subject to competitive neutrality principles;
• other commercial charging arrangements in competitive or potentially competitive markets that comply with competitive neutrality principles (eg. commercial research);
• general taxation;
• repayments of loans to the Australian Government;
• receipts from asset sales, rental of property, royalties, including the sale of rights to access resources;
• fines and pecuniary penalties;
• payments by customers to non-Australian Government organisations and firms where Commonwealth policies may affect prices;
• receipts from one-off specific policy measures that have explicitly been recognised by the Government as not being subject to the cost recovery policy – for example where the Australian Government introduces a levy to fund an exceptional policy measure. Ministers must obtain the Finance Minister’s agreement where it is proposed to exempt a significant cost recovery arrangement that is new, materially amended or which has been reviewed (as part of the Government’s review schedule) on the grounds that it is a ‘one-off specific policy measure’;
• charges relating to industry-government partnerships;
• statutory marketing levies; and
• fees charged by courts and tribunals.
Where Australian Government agencies have service level agreements or other cost recovery arrangements with State/Territory Governments or with other Australian Government agencies, these guidelines should be complied with to the greatest possible extent, depending on other government requirements.
If agencies are unsure about whether the charges they impose amount to cost recovery, then they should consult with the Department of Finance and Administration.
Why have cost recovery?
Used appropriately, cost recovery can provide an important means of improving the efficiency with which Australian Government products and services are produced and consumed. Charges for goods and services can give an important message to users or their customers about the cost of resources involved. It may also improve equity by ensuring that those who use Australian Government products and services or who create the need for regulation bear the costs.
However, cost recovery may not be warranted where:
• it is not cost effective; or
• it would be inconsistent with government policy objectives; or
• it would unduly stifle competition and industry innovation (for example through
‘free rider’ effects).
Designing cost recovery arrangements
The cost recovery policy and these guidelines should be applied to all cost recovery arrangements. However, only ‘significant’ cost recovery arrangements are required to document compliance with the policy in a Cost Recovery Impact Statement (CRIS).
The cost recovery process
These guidelines adopt a five-stage process for determining the appropriate approach to cost recovery for activities and products (Figure 1).
Figure 1 Process for assessing cost recovery
Stage 1: Initial policy review
The Stage 1 policy review considers the following questions:
• which of the agency’s objectives are relevant to the activities or products being considered for cost recovery?
• should cost recovery be introduced?
• what mechanisms, including consultation, should be used for ongoing monitoring of the efficiency and effectiveness of cost recovery arrangements?