Part 2: Principles for setting fees

Charging fees for public sector goods and services.

2.1
In setting a fee for providing goods and services, we expect public entities to be guided by three principles:

  • authority;
  • efficiency; and
  • accountability.

2.2
In this Part, we describe the principles and how they should be applied.

Authority

2.3
A public entity must have legal authority to charge a fee for the goods or services that it is legally obliged to provide. A public entity will usually be funded for the costs of providing goods or services that it has an obligation to provide, and needs specific legal authority to act outside this.

2.4
That authority will be in an Act of Parliament. The authority may relate either directly or generally to the activity being carried out. The legislation will usually include an empowering provision that authorises the entity or the Governor- General to set the amount of a fee through regulation, rather than specify the amount in the primary legislation.

Scope of the empowering provision

2.5
The entity needs to clearly identify and understand the scope and any constraints or limitations of the empowering provision before taking any steps to decide how much to charge.

2.6
The scope can vary substantially, which will affect the nature and extent of costs that can be recovered, as well as the type of fees that can be charged. Some empowering provisions contain specific rules about how fees are to be set. Further, the legislation might require the entity to charge a fee, while other statutes might state that charging is discretionary.

Over-recovery of costs

2.7
In general, the statutory authority to charge a fee will not extend to allowing over-recovery. This can cause difficulties if a public entity is trying to recover a deficit from a previous period of under-recovery. The entity can manage these issues if there is enough scope in the statutory authority, and if it is clear that at an administrative level the surpluses and deficits are being managed within a reasonable budgeting framework for managing costs and setting fees over a period of time.

2.8
Memorandum accounts, for example, are a device for tracking surpluses and deficits against forecasts, with the aim of balancing revenue and expenditure over time. Beyond this general system, any attempt to fund a deficit through current fees need to be carefully considered. The attempt to do so might result in current consumers being charged more than the costs of providing the goods or services they receive, or in a lack of equity between current and future consumers – which could be outside the scope of the legal authority. The entity should get specific legal advice before setting fees to recover such costs.

2.9
Some statutes set out how any over-recovery is to be treated. It is always important to have regard to the legislative context in which the fees are to be set.

Cross-subsidisation

2.10
Cross-subsidisation occurs when the fees collected for providing one category of goods or services cover some of the costs of providing goods or services in another category. As a result, the costs of some goods or services are being over-recovered while others are under-recovered.

2.11
Whether cross-subsidisation is lawful and appropriate will depend on the particular legal authority under which the fees have been charged. A public entity could have the authority to set various fees for the different goods and services it provides, with this authority deriving from a number of empowering provisions in different statutes. The empowering provisions must be broad enough to permit the entity to lawfully cross-subsidise, especially when the entity is considering cross-subsidising between goods and services provided under different statutes.

2.12
For example, the Department of Internal Affairs charges for many of its activities, including passports and licences for gaming machines.1 A cross-subsidy could exist if the Department over-charged for passports and used that income to cover some of the costs of providing gaming machine licences. Alternatively, the Department could over-charge for an adult's passport, and use that income to cross-subsidise the cost of a child's passport.

2.13
The extent to which a cross-subsidy is lawful will always depend on the wording of the empowering provisions and the particular circumstances of the entity. An entity may need to obtain legal advice if it is unclear about the purpose and scope of its ability to charge fees, including any questions about cross-subsidies.

2.14
Any cross-subsidising must be clearly authorised and transparent, and the reasons for doing so clearly documented. External review organisations, such as the Regulations Review Committee, may consider the appropriateness of the entity's approach for charges set by regulation.

Policy and other considerations affecting the amount of the fee

2.15
The reason for setting fees at any particular level is often guided by policy considerations, and could be subject to various imperatives. While an entity might be able to recover its costs fully, it may choose not to. This is a policy decision for the entity. We expect any policy decisions about charging less than the fee needed to recover costs to be explicitly included in the methodology used to set the fees.

2.16
The capacity to charge less than full cost-recovery depends on the availability of some other source of funding, such as an appropriation or rates revenue, or on the ability of the entity to cross-subsidise. Not all entities will have this flexibility.

2.17
The fees set for civil court proceedings are an example of charging less than full cost-recovery because of policy considerations. These fees are not set to recover all of the relevant costs because to do so was considered likely to inappropriately limit access to justice. These fees were considered by the Regulations Review Committee, which concluded that some of the proposed increases to fees would create barriers to accessing the court system.2

2.18
Entities considering the appropriateness of charging fees at a particular level should refer to the Treasury Guidelines, which contain useful discussion on the objectives for charging fees and appropriate charging methodology.

Efficiency

2.19
Public entities have a responsibility to understand and monitor their costs in order to ensure that they are operating efficiently. By “efficient” we mean producing as many goods or services as possible to the desired level of quality from a given quantity of resources, and thereby achieving value for money.

2.20
A crucial factor in measuring efficiency is having an accurate understanding of the costs – both direct and indirect – of the goods or services being provided. Without knowing these costs the entity cannot assess whether it is obtaining value for money.

2.21
Accurately establishing the costs of producing something is a useful exercise in managing and controlling those costs and identifying inefficiencies, which in turn can lead to improved use of public resources. This is important regardless of whether the consumer meets the costs of providing the good or service.

2.22
The discipline of monitoring costs can also help to ensure that charges are being set lawfully and appropriately because it will identify any over-recovery of costs.

Regular reviews

2.23
Because costs are not static, it is important that fees are reviewed regularly to ensure that they remain appropriate and that the assumptions on which they are based (for example, volumes of demand or cost increases) remain valid and relevant.

2.24
The appropriate timing for the reviews will need to be determined by the public entity, considering the particular circumstances and changes in costs and demand. The entity should also take into account the costs involved in the review itself.

2.25
We suggest that a review takes place at least every three years.

2.26
One approach is to carry out a simple review each year and a more comprehensive review at longer intervals. The comprehensive review should include the method of allocating direct and indirect costs, estimating future costs, determining fee structures and levels, and considering whether assumptions remain valid. It might be enough for a simple review to look at just the costs for which there have been known, regular, or significant changes (for example, salary increases for the relevant staff).

2.27
Failing to review and adjust fees to reflect changing circumstances can lead to under- or over-recovery of costs. Frequent adjustments to the level of charges are not ideal, but adjustments should be made where a clear trend of under- or over-recovery emerges. Operating memorandum accounts (discussed in paragraphs 3.53-3.58) is one way of evaluating whether a review might be needed, and can also assist with avoiding overly frequent changes.

2.28
Management might sometimes be able to evaluate efficiency by benchmarking costs, or components of costs, with similar goods or services available in the market, such as administration or printing services.

Accountability

2.29
A public entity is accountable to Parliament and the public. To be accountable, entities need to ensure that their processes for identifying costs and setting fees are transparent.

2.30
Transparency and accountability are achieved in several ways:

  • through consulting the public about new fee regimes before they are introduced;
  • by recording the surpluses and deficits associated with the entity's fee regimes; and
  • through reviewing the use of the powers to set fees under regulation, by either:
    • the Regulations Review Committee, which considers on behalf of Parliament the scope of the empowering provisions and whether the regulation falls outside certain criteria; or
    • the courts, through judicial review proceedings.

2.31
The Auditor-General can also review the way in which entities set fees.

Consultation with the public

2.32
We would usually expect a public entity to disclose its costs and charging practices to give the public an opportunity to comment on and question them. This imposes a discipline on the entity not to pass on inefficient costs to consumers. It also helps the consumers to understand and accept the charging practices. The entity should consult in a way that is practical and appropriate to the nature and significance of the changes.

2.33
For the consultation to be effective, the public – with an emphasis on current or potential consumers – should be provided with enough information to understand the policies and the underlying cost data from which the fees have been determined. The consultation process should allow enough time to enable genuine and considered feedback, and be more than mere prior notification. The feedback obtained from the consultation should be considered by the public entity with an open mind before final decisions on charges are made. Case law outlining the elements of consultation exists, such as the Wellington International Airport case.3

2.34
Consultation with consumers can also provide the entity with information to help tailor what it produces in response to consumers' needs. It can also better inform investment decisions and other changes, and can sometimes prompt the entity to reconsider decisions that consumers did not support.

2.35
In some instances it could be difficult for an entity to consult on proposed changes to fees before they are implemented. For example, the entity might expect that highlighting proposed fee changes would lead to a significant surge in demand for the goods or services before the changes are implemented, with associated cost and resource issues. This would not occur with all types of fees (for example, consulting on fee changes for an annual practising certificate that members of a profession are required to hold is unlikely to materially change the level or pattern of demand).

2.36
An entity needs to have good reasons if it decides not to consult the public on its fees. The entity should consider the transparency and benefits that can be gained from consultation on the one hand, with the increased costs and resources needed to meet the increased demand, or other perceived negative consequences, on the other. It might also be possible to tailor the consultation to minimise the risks, for example by consulting only a stakeholder group.

Recording the revenue from fees

2.37
To be accountable, an entity needs to know how much revenue is being generated from its fees relative to its costs. Memorandum accounts are one method of gathering this information.

2.38
A memorandum account is a notional account that records the accumulated balances of surpluses and deficits incurred in providing goods and services. The account will provide support for the entity's practices for charging fees, and can show when fees might need to be reviewed.

2.39
Although fees should be set to recover costs in the short term, in most instances there will be some variation between the costs incurred and revenue received, and what was forecast for the period. It is difficult, if not impossible, for forecasts to be completely accurate. Even with the best of intentions, an entity might under- or over-charge for a period. Memorandum accounts can provide a mechanism for tracking and smoothing the recovery of costs over time, and acknowledge that some smoothing between periods will be needed.

2.40
Under the Treasury Instructions 2007, except where the entity has prior approval from the Treasury, government departments must use memorandum accounts to record the accumulated balance of surpluses and deficits incurred in providing fully cost-recovered goods and services.4

2.41
Our expectations for memorandum accounts are set out in paragraphs 3.53-3.58. Memorandum accounts are also discussed in the Treasury Guidelines.

Regulations Review Committee's grounds of review

2.42
As well as the terms of its legal authority to charge a fee, a public entity should also consider good practice and the Standing Order grounds that the Committee considers when it reviews regulations.

2.43
The Committee will consider whether a regulation setting a fee ought to be drawn to the attention of Parliament on one or more of the grounds set out in Standing Order 315(2). The grounds most likely to be relevant to fees are discussed in broad terms below. More detail can be found in the Regulations Review Committee Digest.5

Not in accordance with the general objects and intentions of the statute

2.44
The first ground is that the regulation is not in keeping with the general objects and intentions of the statute under which it is made (Standing Order 315(2)(a)). The Committee considers whether the regulation is consistent with the intentions of the Act as a whole, and whether the authority in the Act authorises the making of such a regulation.

2.45
Fees must be imposed under clear statutory authority. A fee imposed by regulation could be objectionable if it is so high that it defeats the purpose of the enabling statute. A fee that is not based on costs and would result in over-recovery would also not be in keeping with the enabling statute.

2.46
For example, in 1998 the Committee considered a regulation prescribing a migrant settlement services fee that applicants for residence visas or permits had to pay.6 About half of the fee was to be used for providing English language tuition for speakers of other languages. All applicants had to pay the fee, regardless of whether they needed English language tuition. The Committee recommended that the regulation be revoked because it could be viewed as a tax. Therefore, it was not in keeping with the general objects and intentions of the enabling statute.

Trespasses unduly on personal rights and liberties

2.47
Standing Order 315(2)(b) refers to a regulation that trespasses unduly on personal rights and liberties. The Committee considers whether there is a trespass on a right or liberty and, if so, whether it is undue or reasonable. In the context of fees, the Committee considers whether the fees:

  • are unjustified in the circumstances;
  • clearly reflect unacceptably inefficient operation by the relevant entity;
  • include a component irrelevant to the person paying, unless there is enough justification for doing so; or
  • are set at a level that will defeat the purposes of the legislation.

Unusual or unexpected use of powers

2.48
A further ground is that the regulation appears to make some unusual or unexpected use of the powers conferred by the statute under which it is made (Standing Order 315(2)(c)). Essentially, this ground involves considering similar issues about whether the regulation is in keeping with the general objects and intentions of the statute. If the consumers are paying for something that they do not receive, then the regulation setting the charges could constitute an unusual or unexpected use of the power. This is how the Committee considers the need for equity between current and future consumers.

2.49
An example is the Committee's report into licence fees that flight crews and aircraft maintenance engineers have to pay.7 The fees included a portion towards the cost of research into training methods for pilots. The Committee concluded that it was an unreasonable and unexpected use of the regulation-setting authority because current pilots would not receive any benefit from the research and therefore should not be required to contribute to the costs of the research. An individual should not be required to pay if they are not going to get the benefit of the resource being paid for.

2.50
A further example illustrating this is the Committee's report into licensing fees for gaming machines.8 The charges, based on full cost-recovery, substantially increased the previous fees that licence holders had to pay. The Committee thought that requiring all licence holders, regardless of their size, to pay the same level of charge was an unusual or unexpected use of the authority, even though the statute covering gaming machines did not permit differentiated fees.

More appropriate for parliamentary enactment

2.51
The final ground discussed here is that the regulation contains matter more appropriate for an Act of Parliament (Standing Order 315(2)(f)). This is based on the principle that statutes should set out the policy and substance of the law, and regulations should be limited to detail and implementing the policy.

2.52
This ground could be breached if increases to charges are so significant that they represent a substantive shift in policy that the Committee believes should be debated by Parliament. It would also be breached if the charges recovered more than the costs (because the presumption is that Parliament could not have intended a charge that amounts to a tax to be levied through regulations). For the same reason, a charge imposing a penalty (such as a late payment penalty) would need specific authority.

2.53
An example of this ground is the Committee's consideration of regulations from 1990 that significantly increased civil aviation fees.9 One of the fees was an international operator's fee charged to the aviation industry, which in part covered the cost of New Zealand's membership of an international governmental organisation. The Committee concluded that the cost of this membership should be paid for out of general taxation because the benefits flow to the wider community. It was not a service provided only to the aviation industry.

Judicial review

2.54
A public entity should also be aware of the grounds on which a regulation could be challenged in the courts through judicial review proceedings. The High Court can review the decision-making process and invalidate a fee set by regulation if it is unfair, unreasonable, or unlawful.

Review by the Auditor-General

2.55
The Auditor-General can examine the process used by a public entity in setting fees. This is part of the Auditor-General's role in providing assurance to Parliament that public entities are operating in a manner consistent with Parliament's intentions. The examination of the entity's process might be done to provide advice to the Regulations Review Committee on whether fees being set by regulations have been determined in keeping with the relevant guidelines. The process might also be looked at as part of the annual audit or through one of the Auditor-General's other roles, such as carrying out an inquiry.


1: Fees are set under the Passports Act 1992 and Gambling Act 2003 respectively.

2: Report of the Regulations Review Committee Investigation and Complaints Relating to Civil Court Fees Regulations 2004 [2005] AJHR I16H.

3: Wellington International Airport Limited v Air New Zealand [1993] 1 NZLR 671.

4: Treasury (2007) Treasury Instructions 2007, section 6.3.6.

5: The Regulations Review Committee Digest details all the matters considered by the Committee under Standing Order 315(2): http://www.victoria.ac.nz/NZCPL/Regs_Review/Index.aspx.

6: Report of the Regulations Review Committee Complaint Relating to the Immigration Regulations 1991, Regulation 32B, 23 February 1998, AJHR I16F.

7: Report of the Regulations Review Committee Inquiry into the Civil Aviation Regulations 1953, Amendment No. 30 [1989] AJHR I16.

8: Report on the Investigation into the Gaming and Lotteries (Licence Fees) Regulations 1997, 29 June 1998, AJHR I16H.

9: Report on the Inquiry into the Civil Aviation Charges Regulations 1990, 4 September 1990, AJHR I16B.

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