FINA Committee Report
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User charges for government services are nothing new. In 1965-66, one measure of user charges found that they accounted for 1.6% of federal government revenue. Since then, the overall importance of user charges has risen somewhat: a wider definition of user charges places them at 2.4% of government revenue, albeit much larger revenue, in 1998-99.
Overall, user charges contribute very little to the federal budget. However, on a program-by-program basis, the institution of cost recovery has seen user charges increase dramatically. In 1998-99 there were 391 user-charge programs in 47 departments and agencies, bringing in $3.7 billion in fees. This was up slightly from $3.5 billion in 1994-95. These user charges cover everything from admission to federally run parks and rent for crown lands, to mandatory licensing fees and fees for passports.
While user charges are often seen, sometimes with good reason, as a tax by any other name, there exist several good reasons why user charges are potentially valuable tools for both the government departments providing the service and service users themselves. Professor Bird and University of Toronto Professor Thomas Tsiopoulos state that "whenever possible and desirable, public services should be charged for rather than given away."
As Professor Bird told the Committee: "(T)he appropriate starting point for any discussion of user charge policy in government has to be that any service provided by a public agency, (for) which there’s an easily identifiable, direct beneficiary — it could be a group rather than an individual — should be paid for by that beneficiary, unless and only unless sound and convincing arguments in favour of a particular degree of explicit public subsidy can be produced." According to Professor Bird, "the onus for proof of any other position should always be on those who support subsidization. Or to put it another way, the use of other people’s money to provide services from which they personally benefit."
Properly designed, user charges can serve as price signals that can contribute both to equity and efficiency. Efficient programs help assure that scarce resources are put to their best possible use. On the government side, attaching a price to a government-provided service allows officials to see how much of it is demanded by users. As the April 2000 Auditor General’s report remarks, "We found that where a service involves user fees or cost recovery (charging a user for the costs of using a service), better cost information is generally available." The report notes in even stronger terms, "We are concerned that without good cost information, service managers do not have the information they need to provide the highest quality of service at the lowest possible cost."
From the user side, when consumers are not charged for a government service, they will tend to use more of the service than is socially optimal. In reality, it costs something to produce a "free" service; these additional resources could have been used to provide something else of value: other services, debt or deficit reduction, lower taxes. This overconsumption can also act as a perverse signal for government to provide even more of an already overused service.
In theory, faced with an explicit price for a service, ideally equal to its marginal cost (the cost of providing an additional unit of the service) consumers will demand a socially optimal amount of that service. This signalling of the appropriate demand level encourages both the minimizing of costs and greater efficiency of delivery.
As Professor Bird remarked, "Revenue is not the point. The point is rather to make governments accountable for how they use resources by ensuring that direct users value what they get at least at the economic cost of producing it. So, users of government services in principle, should gain from well-designed charges in the sense that they get what they pay for and the nation in general should also gain by making better use of the resources that citizens have transferred to the government."
This will not happen, added Professor Bird, "unless the revenues from charges are formally linked through the budgetary process to the expenditures with respect to which charges are levied." There is more to it than that, however. Other revenues cannot be negatively linked to these user-charge revenues.
Regarding equity, when relatively more affluent Canadians use a service provided free by the government, society, including the less affluent, is subsidizing their activities. Charging for the use of such services (such as boat-docking fees) can in such cases be seen as a progressive move.
This question of public and private goods and services is central to the discussion of user charges. Simply put, "private" services should be subject to user charges, while "public" services should not. Further, most economists would argue that if a good or service can be priced like a good in the private market, then it should probably be delivered by the private sector.
In determining whether a good or service is a private or public good, economists look for a number of characteristics. If its consumption by an additional consumer does not affect its consumption by others (rivalness), then it is considered to be a public good or service. Similarly, if it is difficult to prevent non-payers from enjoying a service (excludability), then it is a public good or service. Otherwise, it is a private good.
The classic example of a public good in this sense is national defence. Even an individual who has managed to avoid paying taxes receives the benefits of this service. In contrast, the benefits from a private service like skydiving lessons accrue only to the individual taking the lessons.
The private sector is typically unable to provide efficiently goods and services where indirect positive or negative impacts occur (externalities), or where specific social or political objectives are sought. In these cases, government intervention is appropriate. Mr. Richard J. Neville (Deputy Comptroller General, Treasury Board Secretariat) told the Committee that: "There are several government programs that spend money to protect the public from risks associated with industrial activity. According to our cost-recovery policy, some part of the costs of these programs should be borne by the industry that originated these risks. Some of these costs belong, according to this argument, to the cost of production of that industry. They are industry costs, and should be internalized."
Using the tax/transfer system to take into account externalities has long been advocated by economists as a way of achieving economic efficiency. That in itself is quite different from cost recovery proper.
A basic criterion for a user charge is the ability to identify individuals’ consumption of a good or service: charging for a fishing licence is much easier than charging someone for their share of national defence. It makes sense to charge for a fishing permit: the holder of the permit is easily identifiable, receives a benefit not available to others (the fish he catches) from a public resource (the fishery).
However, simply being able to identify the direct recipient of a government service does not mean that a user charge should be levied. Instead, we must look at who benefits from the provision of the service. This is a task made more difficult by the fact that most government services on which we could place user charges are characterized by a mixture of private and public benefits. Testing of new drugs, for instance, clearly has a public component, in that it assures that no harmful drugs are sold in Canada, but it also provides a benefit to the drug company, in that it signals that their good is of a high quality. In such a case, it makes sense that the user pay for the benefit received, with the rest being covered from general revenues. The value of the private benefit produced by the government service is the benefit in excess of that which could be achieved through other means. For example, if a drug has been approved in the United States, England, Japan, etc., what is the incremental value, as a signal of quality, of the drug’s approval in Canada? On the other hand, if Canadian approval is early, the private benefit is large.
Even after a service has been placed along the public/private continuum, deciding what to charge is very difficult. Economic theory holds that the best policy is to charge a price equal to the marginal cost, as happens in a perfectly competitive market. However, marginal costs — the cost of producing an additional unit of a good or service — are difficult to calculate. Ideally, marginal costs include not only the direct financial cost of production, but also the opportunity cost of production. For instance, in considering what to charge for admission to a park, one must consider not only upkeep costs but also the potential revenues from all alternative uses of the land.
Efficient prices must also account for existing complements of and substitutes for the service. Finally, if the costs of implementing the user charge are greater than its benefits, then no user charge should be implemented.
A good user charge should approximate the price that the service in question would attract in the private sector; this is, of course, not always possible. As well, for political and bureaucratic reasons, public-sector charges are very sticky; once a price is set, it is difficult to change. For this reason, and because there is no competitive pressure on many government user-charge programs, it is important that the process of setting charges be as open as possible. Allowing Canadians in general and interested parties in particular to participate in the process of setting fees helps assure that user charges are more than just revenue sources. Making the fee-setting process as transparent as possible also allows affected groups to see the benefits (e.g. efficient service delivery) of user charges.
Any monopoly, public or private, is likely to exploit its economic power to extract the maximum return from its unwilling clients if it can get away with it. So it becomes particularly important to ensure that the prices set are reasonable and particularly difficult in many instances to persuade those who must pay them that they are. (Professor Richard M. Bird)
It is essential to note that the efficiency case for user charges rests on the assumption that competition exists. Prices can only act as an efficiency signal if they cause the quantity demanded to change: a price increase should cause a drop in the quantity demanded of a service. However, many government services are mandatory, not voluntary. In the case of fees for drug approvals, a company can only decide not to have its drugs tested in Canada by refusing to offer those drugs in Canada. Government in these cases is a monopoly supplier.
Ideally, where consumption of government goods and services is voluntary, the government’s attempt to maximize returns by setting price equal to marginal cost will also maximize overall welfare because it will lead to an efficient use of resources. However, when it acts as a monopolist, maximizing its returns results in socially suboptimal prices. According to Professor Bird, "a lot of what government does, people don’t have the choice of taking the service or not: it’s a mandatory service. Moreover, in many cases it’s a mandatory service provided by a government monopoly, so it’s all too easy for user charges to become taxes."
This does not mean that user charges should never be implemented for mandatory activities. Again, where the user of a service obtains from that service a benefit not available to all other consumers, that user ideally should pay for the benefit received.
It is important to consider the question of who benefits from the service provided. Canadians benefit, for example, by keeping harmful products off the market. It is also possible that firms should pay a share for their own self-regulation. Mr. Dann Michols (Director General, Therapeutic Products Programme, Health Protection Branch, Health Canada) made the case that, "In our opinion, there is no philosophical contradiction presented by the fact that the industry making a profit from the sale of its products should pay for some of the costs of the apparatus that society has to put into place to ensure that these products are safe, effective, and of high quality."
Mr. Michols suggested that industry benefits from an efficient, highly qualified regulator, because it signals that their products are of a high quality. Again, the question of degree is a difficult one. Bird and Tsiopoulos provide the other point of view: "The clients for most regulatory services … can only by a considerable stretch of the imagination be considered to be direct beneficiaries of the services they consume, which are presumably designed to achieve some broader public purpose." In other words, the beneficiaries of the drug approval process are not drug companies but consumers of drugs.
Setting efficient mandatory user charges is made more difficult by the reality that there often exists no corresponding private-sector good to use as a basis for setting prices. Since consumption is unresponsive to changes in price, it is difficult to find an optimal competitive price. Ideally, the starting point for charging mandatory fees should be the cost of the service; in other words, cost recovery. (Again, determining the correct breakdown of public/private benefits is notoriously difficult.) This allows for prices to approximate what would be charged in a competitive market, minimizing the impact of service charges on the economy.
Great care must be taken in imposing user charges for mandatory activities because of this lack of price signals. Because regulated firms have to pay the charges to stay in business, it is vital that regulators be sensitive to the situation of the regulated group. What’s more, as Professor Bird told the Committee, the political acceptability of user charges "to a considerable extent probably depends upon the extent to which the prices charged actually go to finance the services for which they are charged."
As the Committee heard, the Cost Recovery Policy and its implementation "has major implications for the Canadian economy in terms of productivity, employment and access to innovation, access to products." (Mr. Jayson Myers, Senior Vice-President and Chief Economist, Alliance of Manufacturers & Exporters of Canada, Co-Chair, Business Coalition on Cost Recovery) Far from being simply "the cost of doing business," user charges, like taxes, impose potentially important transaction costs on economic activity. By increasing their costs, user charges affect firms’ profitability and their ability to compete.
Canada is a small market. As such, prohibitively large charges for the approval of new drugs or environmentally friendly pesticides, for instance, can reduce Canadians’ access to cutting-edge technology as foreign firms wishing to sell these technologies find that the high fees make it unprofitable for them to do so. Domestically, high charges can stifle firms’ incentives to innovate. This in turn reduces their ability to generate employment.
The effects of such charges are often disproportionately borne by small- and medium-sized enterprises (SMEs), the growth engines of the Canadian economy. A $100,000 licensing fee presents a much greater burden on an SME than it does for a large multinational, to say nothing of the paperwork required to obtain a licence. A good user charge should consider the size of a business affected by the charge.
The Business Coalition on Cost Recovery (BCCR) has conducted one of the few studies on the effects of user charges on the economy. Its rough results suggest that in 1996-97, the $1.67 billion in fees paid by business reduced economic output by $2.56 billion, GDP by $1.37 billion, and employment by almost 23,000 jobs. Lost taxes on this foregone economic activity and job creation (through "increased" EI premiums) means that the $1.67 billion received in fees netted only $270 million in additional funds.
That user charges, like taxes, distort economic activity is not an argument for their removal; an Infometrica study commissioned by Treasury Board found that taxes equivalent to the user charges currently in place have a similar effect on the economy. However, broad-based taxes are likely to have lower transaction, compliance and administrative costs than user charges.
In order to assess fully the effects of user charges, one has to look also at their benefits. A good user-charge program is one for which the transaction, compliance and administration costs are outweighed by its benefits. This is made explicit in the Cost Recovery and Charging Policy: "A cost-recovery regime is only appropriate where the benefits to the government outweigh the startup and ongoing costs of administering the charges."
Just as Canada could benefit from an improvement in our user-charge programs, we could benefit from a well-designed regulatory regime in general. As the Committee heard, "While the market size of other countries will forever overshadow that in Canada, the capacity to lead the world by providing fast and globally respected technology registrations could distinguish Canada as a global discovery centre. To do such could foster significant R&D investment while also providing Canadian growers with a competitive advantage of being the first to utilize state-of-the-art technologies." (Mr. Charles D. Milne, Vice-President, Government Affairs, Crop Protection Institute)
The Committee found it difficult to generate a complete picture of the government’s cost-recovery program. Information on the government’s 391 user-charge programs is spread out over 47 departments and agencies, and the comprehensive list kept by Treasury Board does not provide enough detail as to the nature of the charges, lumping together voluntary and mandatory, business and consumer charges. This information is vital to the success of any meaningful reform of Canada’s cost-recovery program.
At the department level, the Policy requires that programs submit user charges to business impact analyses: fees that impose too great a cost on business are either to be revised or eliminated. Despite this requirement, no comprehensive analysis of the total, cumulative effect of all user charges has ever been undertaken. This makes it difficult, if not impossible, to evaluate whether or not the benefits of the User Charge Policy (most studies that have been conducted centre only on the costs of regulation) outweigh its costs. Regarding the measurement of benefits, the Consumers’ Association of Canada emphasized the need for a study of the benefits of cost recovery and regulation: "Because government regulation is there to protect health and environment you’ve got to look at the delivery side as well, you know, you don’t just compare the costs, you’ve got to look at the results." (Ms. Jennifer Hillard, Vice-President, Issues and Policy, Consumers’ Association of Canada)
The analyses that have been done are not encouraging. According to the 1997 survey article by Messrs. Bird and Tsiopoulos, all studies on user charges at all levels of government have "reached the same conclusion: what is now being done in the way of charging for public services is for the most part done badly." The general consensus among analysts is that "most existing user charges have more to do with the search for revenue than with any economic principle."
Treasury Board officials have indicated that a mandated review of the Cost Recovery Policy is about to get underway, and should be completed by next winter. According to Treasury Board officials, the review will involve consultations with government, industry and other interested groups. However, this review must do more than simply examine the Policy’s nuts and bolts.
Recommendation 1:
The Committee is concerned that the upcoming Treasury Board review of cost recovery, while dealing with important questions of implementation, will not be sufficiently broad in scope. Therefore, the Committee recommends that a Committee of Parliament conduct a government-wide study of the Cost Recovery and User Charge Policy to evaluate both its benefits and costs. This should serve as the basis of any policy reform.
One of the difficulties in conducting such a study, and with cost-benefit analysis in general, is measuring qualitative effects. However, any attempt at such a measure is surely preferable to the current situation, in which no information exists on benefits.
The transparency of information on user charges is a related matter. While Treasury Board collects information on user charges, it is not easily accessible to the public, either by department or by program.
At present, obtaining complete information on user charges — their size, structure, etc. — requires contacting 47 separate departments and agencies. This does not make sense, especially as a central agency, Treasury Board, is charged with monitoring the Policy. Further, like taxes, it makes sense that user charges be reported separately.
Recommendation 2:
That information on user charges be made easily available to all interested parties. It should include the formula used to determine the user charge, an indication as to whether it is a mandatory charge, whether it is a business charge, the amount of revenue it generates, and the performance promised by each user-charge program. The estimated public/private benefit split should be included, as well as its justification.
Recommendation 3:
Fee revenues should be published annually, with the publication of the budget.
Beyond the economics of a good user charge, a sound cost-recovery policy requires effective oversight, funding and dispute resolution. On these issues, this Committee found a great deal of harmony among witnesses — from industry, government agencies, the Office of the Auditor General and academia. The Committee found these ideas useful in evaluating the current policy.
The Office of the Auditor General summarized these issues in its December 1997 report: "Have departments minimized their costs before asking users to pay? Have the financial, competitive and socio-economic impacts of user charges, in both the short and long terms, been considered? Are there proper redress mechanisms for stakeholders? And perhaps most important for parliamentarians: does Parliament have the information it needs to keep an eye on this issue?"
Consistency, accountability and transparency. As with taxes, individuals and firms facing user charges should be able to expect a degree of consistency in user-charge quality from department to department. Because they are linked to a service, user charges should also be linked clearly to the cost of the service provided. Clear dispute-resolution mechanisms are required, as is a strong central overseer with the powers to enforce consistency among departments.
Revenue should be a secondary target. As more than one witness observed, user charges have been seen by departments as revenue generators making up for budget cutbacks. "Too often the introduction of cost recovery is accompanied by a reduction in government funding." (Ms. Jean Szkotnicki, President, Canadian Animal Health Institute) As a result, departments ignore the efficiency gains available from the use of user charges. Tellingly, according to Ms. Szkotnicki, "in the U.S. the Prescription Drug User Fee Act specifically states that appropriations to the FDA cannot be cut in those areas where user fees are administered. In other words, user-fee revenue is specifically meant to complement, not replace, government appropriations."
Consultation and Impact Assessments: Government departments should consult with those who will be paying their user fees, and conduct impact assessments, in order to assure that the benefits of user charges are not outweighed by their costs. Special attention should be given to the plight of small businesses, for which user charges and regulatory requirements often present a disproportional burden.
THE COST-RECOVERY POLICY: ISSUES AND CONCERNS
There’s a disconnect between the theory and what’s actually being implemented. (Ms. Szkotnicki)
The present Cost Recovery and Charging Policy was adopted in April 1997. It makes explicit the need for cooperation and "meaningful and effective consultations" among departments and agencies and their "clients," as well as "other affected parties to ensure that competing policy objectives are not compromised." Treasury Board is the keeper of the Policy, and is charged with monitoring adherence to the Policy, "through client feedback, internal and external audits, program evaluations, special studies, and the review of annual Departmental Business Plans."
However, it has been left to the departments and agencies to devise and implement compliant cost-recovery programs, and set up an appeal process.
Specifically, "departments must conduct periodic reviews to ensure user-charge policy requirements are being met. Such reviews should also address whether fees should be increased or decreased where cost structures have changed, where the mix of public and private benefits has changed, or where service levels have been altered." The Policy also stipulates that "(d)epartments and agencies should be open to client requests for reviews of any unforeseen impacts which emerge." (Cost Recovery and Charging Policy)
The President of the Treasury Board "will serve as a point of contact for clients who feel departments or agencies have not given them a fair hearing in the fee-setting process." (Cost Recovery and Charging Policy)
This decentralized approach to user charges presents several problems. First, under this policy, and confirmed by testimony, departments have the main responsibility for assuring that user-charge programs are being implemented fairly, consistent with Treasury Board rules. Treasury Board seems to be taking a passive role as to the workings of the Policy. For instance, it is taken on faith that user charges across the government do not account for more than 100% of the cost of their programs. Mr. Neville told the Committee that this belief rests on the fact that "that’s one of the principles. … We haven’t had any indications at this point that there is no inordinate imbalance between the two."
According to Mr. Milne, in a statement echoed by other witnesses, cost-recovery guidelines are being interpreted and enforced inconsistently. "Departments and agencies were left to make their own interpretations of how cost recovery would be implemented, resulting in a variety of differing operating styles in cost-recovery programs across government."
While decentralization allows departments to tailor cost-recovery programs to suit their specific needs, it also means that departments could be implementing the Policy inconsistently. Indeed, the Committee heard testimony from business groups that the treatment and analysis of business impact studies, even the existence of appeals processes varies from program to program.
What is required, as Mr. Neil Maxwell (Principal, Audit Operations, Office of the Auditor General of Canada) told the Committee, is "less of a piecemeal approach to implementing user-fees program by program and more something driven by an overall departmental strategy." It is the Committee’s contention that a well-thought-out cost-recovery policy would go a long way to addressing these concerns.
The Cost Recovery and Charging Policy is mostly silent on the issue of determining public and private benefits. Mr. Michols told the Committee that in the Health Protection Branch a lack of guidance from Treasury Board regarding the calculation of public/private benefits meant that his department had to "develop our own theory to a large extent."
Mr. Milne also remarked on the confusion over what is a public or private benefit under the Policy, raising the ever-present question of whether private industry should even be paying for mandatory services. "(I)f people are paying for participation on a trade mission or for a passport, that’s a discretionary decision, and a private benefit accrues to those who pay. The objective review of a drug or a pesticide assures and protects society, regardless of whether or not the applicant receives the registration. There appears to be a lack of clarity about whether the client is the payer or society." This is precisely the point made by Professor Bird.
The Auditor General also pressed the government on this issue. "On that particular issue of what is a public versus private good, there’s a need for a certain amount of clarification of that. Direction from Members of Parliament would be very helpful."
Recommendation 4:
More central guidance is needed in the implementation of the Cost Recovery and Charging Policy. Specifically, stricter guidelines for determining public/private benefits should be put in place. This will help assure that programs with user charges are not starved of general tax revenues, which represent the public investment in this activity.
Recommendation 5:
Uniform standards should be established by Treasury Board to be applied by all departments and agencies. Deviations from those standards must be justified by the departments and agencies.
The President of the Treasury Board is the final stage in the appeal process. However, the responsibility for the appeal process is left largely to the departments. This places the minister and the department in a conflict of interest: the department is in effect being asked to rule on something that could affect the amount of revenue received by the ministry. Further, as Mr. Garth Whyte (Senior Vice-President, National Affairs, Canadian Federation of Independent Business) remarked to the Committee: "In every other area where there is dispute resolution — NAFTA, internal trade barriers, whatever — you need another sort of neutral body. Where does that business owner go if they have a problem? If we have a coalition of 20 different business associations saying they have a problem, and we’re going to Treasury Board saying, ‘Here are some things we’d like to talk about,’ what does it take to deal with it?"
In the absence of central leadership, many disparate mechanisms have sprung up. Ms. Szkotnicki, as Co-Chair of the BCCR, related to the Committee some inconsistencies with the appeal process. "In working with the Canadian Food Inspection Agency relative to the approval program for veterinary biologics, we have found that by taking it up the ladder to senior bureaucrats and to Minister Vanclief, that indeed there is concern and they’re going to look at developing measures to bring us back to performance standards."
"But we followed the same route on the veterinary drug program and frankly, it’s like the black hole. We keep going back. There’s no sign of any relief relative to the veterinary drug program. There’s no game plan of how to improve the situation in that agency — and it is an agency with great problems."
The quality of the various appeal processes is unclear. Mr. Neville told the Committee: "There are in excess of 400 programs that are on cost recovery or components thereof. Therefore, we don’t monitor each and every one to see if there is a dispute resolution process. We hear from time to time that there isn’t and that’s because of the fall-back mechanism of having the President of the Treasury Board intercede where there is an impasse."
The problem was summarized by Mr. Myers, who remarked that, "The need to take it up the ladder indicates to me that there is no dispute-settlement process in programs and that should be there right from the very beginning."
"Secondly, I think in the discussions today I see some of the difficulties that are coming out here when you say to go to the departments. What we found is that the implementation of these programs is very much at the discretion of certain departments. Some agencies and departments consult well, they’ve implemented these things well. Others do not. And that’s part of the problem here. There’s no overall oversight monitoring or overall requirement of performance, and there’s no one to enforce that."
It is essential that user charges be seen as fair to those paying them, especially in the case of mandatory user charges, where users have no choice but to pay. Again, we return to problems with the Cost Recovery Policy. While the Auditor General found that Canadian Food Inspection Agency (CFIA) did not possess a formal dispute-resolution process, CFIA Vice-President, Policy and Regulatory Affairs, Mr. Jean Chartier, stated that his agency genuinely believed they in fact did have one in place. As he told the Committee, "I would point out to you that the policy of 1997 in no way defines what a dispute mechanism is. As such, it is very much in the eye of the beholder." It is the Committee’s belief that this should change.
Recommendation 6:
An open, clear and independent appeal process for those affected by user charges is essential to the well-functioning of any cost-recovery policy. Thus, the Committee calls on the government to create an explicit appeal process and to set up a third-party Ombudsman to deal with user-charge complaints.
One of the consequences of the lack of oversight of the Cost Recovery Policy is the lack of effective accountability. This can be seen through the descriptions of inconsistent appeal processes. It also serves to highlight departments’ lack of Parliamentary accountability in setting and collecting user charges, which annually amount to several billion dollars. Since, like taxes, user charges can have a substantial effect on productivity, prosperity and innovation, it is important that Parliament have an effective way of monitoring the introduction of new charges and increases in rates of existing charges. Parliament should also monitor the effects of existing charges. This would also help involve Canadians not directly affected by user charges but who, as Canadians, have an interest in these programs.
Recommendation 7:
Since user charges are similar to taxes, greater scrutiny is required. This cannot be left to individual government agencies. All new user charges, and changes to user charges, should therefore be subject to scrutiny by a parliamentary committee and adopted only if approved by the committee. This would aid accountability and assure that only appropriate fees are implemented. Parliament should also re-examine existing charges to ensure that they are well designed and well implemented.
According to the Policy, departments and agencies are also required to:
Conduct impact assessments to identify all significant effects, positive and negative, and factor those results into sound fee-setting decisions;
Work with clients to assess the cumulative impact of multiple fees from all federal sources, and assess proposed fees in that context;
Identify and explain clearly to clients why services are being delivered in the manner they are, how charges are determined, and how costs are being controlled;
Provide feedback to clients on concerns expressed and suggestions made, in a timeframe that is relevant to the process; and
Establish a dispute resolution process to address client complaints which reach an impasse stage (e.g. an advisory panel to the Minister).
It is unclear how well departments have lived up to the promise to consult with businesses about user charges. Regarding business-impact analyses, the Committee heard that they are not treated seriously by departments. According to Ms. Szkotnicki:
Frequently … the impact of cost-recovery fees on the economy and industry are not addressed, or are simply ignored. Too often the focus of the fee-charging agency is on the need to generate revenues, rather than the need to provide value. Industry Canada, for example, compiles a comprehensive inventory of Canadian bankruptcy data. Industry Canada now charges about $250,000 per year for this data. In one affected market, a single small Canadian company competes for business with three U.S. multinationals. The need to pay this fee places the Canadian economy at a serious competitive disadvantage with its customers.
"The Canadian Federation of Independent Business (CFIB) pointed out to the Committee that one of the elements to be considered in determining the impact of cost recovery is the issue of productivity. In fact, cost recovery is perceived as a major impediment to improving small business productivity. More than one out of four CFIB members identified this issue as a priority to improve their firm's productivity."
In the Therapeutic Products Programme (TPP) of Health Canada, the BCCR report claimed that the TPP had largely failed to act on both industry reports and a third-party report by Price Waterhouse, and that a joint business-government committee has proved to be "a useful forum for discussion," but nothing more.
Regarding the Canadian Coast Guard’s Marine Service Fees, two disputed studies have already been conducted. A third study by Treasury Board was announced in mid-1998. According to Mr. Wayne Smith (Vice-President/General Manager, Seaway Marine Transport, Canadian Shipowners Association), "It’s been over a year and a half. It’s still trying to get off the ground and is progressing very slowly."
It is difficult to know whether these anecdotal stories add up to a systemic government problem because of the high degree of decentralization of responsibility for the Cost Recovery Policy. As Mr. Neville remarked, impact assessments are the responsibility of individual departments. That this part of the Policy is being conducted well seems to be taken on faith: "We’re not required to look at those (economic impact) assessments. We take it that the department concerned is carrying it out in a viable manner and sharing that information with the parties concerned."
Treasury Board, said Mr. Neville, has "discussions with departments on an ongoing basis. We have feedback from departments and from a number of users. I would say that we’re aware of a good majority of what’s being done but we can’t be aware of what’s being done in 103 departments and agencies all the time."
Recommendation 8:
The Committee recommends that Treasury Board state explicitly what is required in business impact assessments and verify that they are being conducted by the departments. Wherever possible, international comparisons should be made.
This recommendation goes to the heart of the problems with the Cost Recovery and Charging Policy: it is not being implemented consistently.
The Policy notes that "charging … cannot be used simply as a means of generating revenue to meet the funding requirements of a department or agency. There must be a relationship between the fee charged and the cost of the good or service, or the value of the privilege provided to clients."
Also in keeping with economic theory, the Policy’s stated goals are:
To promote the efficient allocation of resources;
To promote an equitable approach to financing government programs, mandatory or otherwise, by fairly charging clients or those who receive a benefit from services beyond that enjoyed by the general public; and
To earn a fair return for the Canadian public for access to, or exploitation of, publicly owned or controlled resources.
Consequently, it calls on departments to use prices based on market values where possible. Prices are also supposed to take into account policy considerations, such as externalities, and public/private benefits. In the case of regulatory services, prices should be cost-based; the Policy notes that, "Even in situations where services are mandatory, there may be scope for tailoring the service to better suit the operations of the clients it serves." Further down, it states: "Fees should be set on the basis of clear, and preferably agreed upon, service standards and performance measures unless it can be demonstrated that it is not practical or reasonable."
The Policy generally conforms to good economic practice: charges are supposed to be related to cost and to approximate marginal-cost pricing where possible, and the economic impact of the charges are supposed to be taken into account. User charges are supposed to be used not as revenue generators, but as a means to encourage efficiencies and to "get government right." At the policy level, there is a clear intent that user charges not be taxes of another kind. Whether the Policy is working properly in practice is another question. Regarding mandatory fees, the BCCR report states: "If this policy was being followed by those departments who require mandatory fees for regulatory services, over half the battle would be won. But it is not being followed, and has not been enforced by the Treasury Board."
The situation does not seem promising. As Bird and Tsiopoulos remark, "much of what is currently going on across Canada under the banner of ‘user charges’ makes little sense. Some activities that are being priced probably should not be. Many of the charges imposed may not provide the right economic incentives. Some of the public criticisms of ‘revenue grabs’ may be justified. Finally, nowhere, it seems, is government doing a very good job of explaining either to citizens in general or to the users (and managers) of particular services why charges, and why these particular charges, should be imposed."
And again: "As a rule, what is currently priced by government, and how it is priced, reflects historic accident and administrative convenience as much as — or more than — it reflects rational policy." This is true of all levels of government, not just the federal government.
The policy as it is written neglects to treat in a substantive manner the important differences, already discussed, between voluntary and mandatory user charges. Mandatory charges usually apply to services like licensing and inspections. In these areas, though a direct user can be easily identified, it is unclear what private benefit that direct user is paying for. It is valid to ask whether they should even be charged for the service, which has a very large public benefit component (e.g. food inspections to assure quality).
Industry groups have sometimes made the serious allegation that user charges for mandatory services are little more than taxes by another name. The Supreme Court seems to have commented on this in ruling in October 1998 that mandatory user fees that bear no relation to the costs involved in providing a service are a de facto tax. Since taxes cannot be set by regulation, only by legislatures, the charge in question (probate fees for wills in Ontario) was ruled illegal.
According to Ms. Szkotnicki, "fees have become taxes. Unfortunately there are far too many examples of fees being charged for services that are not being provided. Perhaps the best example of this comes from the drug and medical devices manufacturing industry. Health Canada requires drug and medical device manufacturers to pay an annual establishment licence fee. For medical device manufacturers, no service is being provided, no inspectors inspect the facility and there are no identifiable service standards that must be met to obtain the establishment licence. The only transaction that takes place is that a fee is paid and a certificate is issued saying that the applicant can run a manufacturing facility. This is a tax, not a fee. There is no service being provided in this case."
As this is clearly not the intent of the Policy, the fault lies with its implementation and not its design.
The government’s 1994 Program Review occurred at a time of acute government cutbacks; user charges, in many corners, were seen by departments as a way of maintaining cut budgets. In some cases cost-recovery programs have been structured to bring in a targeted amount of money. Between 1994-95, when Program Review was implemented, and 1996-97, user charges rose 17% (from $3.5 billion to $4.1 billion), as program spending fell 7%. Mandatory regulatory fees paid by Canadian businesses rose by 47% between 1994 and 1996.
This Committee heard that government restructuring in the wake of Program Review of 1994 made the implementation of sound cost-recovery programs more challenging. In the Agriculture and Agri-Food Department, Mr. Chartier told the Committee:
Certainly, program reviews in themselves created also a lot of challenges for the different departments to adjust to the new reality of globalization and of the new economy. On top of that, if I can speak for the Canadian Food Inspection Agency, its sheer creation back in 1997 — created, again, from four different departments — created some other challenges on top of that. If we add the notion that we had to come to grips with the moratorium that was set in place (fees are frozen until 2002), all of those different events have together made it a little bit more complicated to fully implement the intent and the thrust of the policy that was revised back in 1997.
Though the raison d’être of user charges is supposed to be improved efficiency of government-provided services, and not revenue generation, the Committee heard evidence that revenue generation was a major factor in the design of these fees. As the TPP’s Mr. Michols described it, resources that were available were a factor in setting fees.
Discussing the Canadian Food Inspection Agency (CFIA), the Auditor General said, "(T)he emphasis was put on fee collection initially, and I think that the departments had to do as good a job as they could to eventually implement the rest of the Policy. But it wasn’t put to them in the terms of starting to collect fees only when they had all of the elements in place. I think the revenue was assumed very quickly through the budget procedure."
This introduces a distortion into the fee-setting process. In the case of voluntary services, such an approach moves fee setting that much farther away from the admittedly difficult marginal-cost ideal. With mandatory services, setting a revenue target loosens the link between user charges and the cost of the service provided. Setting a revenue target and then dividing it into unit costs (to get an average cost — the preferred way of pricing services in government) discourages the development of efficient pricing and contributes to the view that cost recovery is being implemented to generate fees — not to support the efficient use of government resources.
What can result is a situation in which the general public, through general tax revenues and appropriations, is paying too little for a cost-recovery service, and the user of the service paying too much. As the Policy implies, cost recovery should not be used as an excuse to cut revenues.
Mr. Michols told the Committee: "Cost recovery, in our opinion, is a useful government policy, but programs must be given the resources and the infrastructure they require to ensure the benefits are fully available to Canadians and to clients."
Recommendation 9:
The Committee recommends that the government-wide review of user charges examine (1) how well user charges approximate efficient pricing; and (2) whether cost recovery has resulted in underfunding (from general revenues) of cost-recovery sections and overfunding of others. It should address such issues as mandatory user charges, performance standards and the treatment of public/private benefits with the goal of making the Policy more explicit in its requirements. More specific and enforceable guidelines should be developed to aid in the determination of pricing for voluntary and mandatory services.
Some groups are concerned about the potential for agency capture offered by the increasing reliance on cost recovery by some government departments. According to Mr. Michols, "Other stakeholders may express concern about the integrity of the services delivered, that concern being that if drug evaluation and services are potentially influenced on the basis of, ‘He who pays the piper calls the tune.’ That is a very real concern within the regulatory regime." According to Health Canada, total cost-recovery revenue for its Therapeutic Products Programme (formed in January 1998 from its Drugs Directorate and the Medical Devices Bureau of the Environmental Health Directorate) amounted to $39.9 million, approximately two-thirds of the Programme’s total funding.
This is a difficult area, as Mr. Neville told the Committee: "Government program managers must achieve a balance that is responsible to client needs, but does not allow this to undermine the policy basis of their programs. This can never be simple. However, industry representatives have every right to express frustration when agreed upon service levels have not been achieved. This is an area that needs a good deal of attention and will certainly form a key element of our policy review."
Members of the Consumers’ Association of Canada remarked to the Committee that, "Civil society, while generally supporting the concept that business and industry should pay a fee for the privilege of operating in Canada, distrusts information paid for by industry and have concerns that paying the government allows them to influence the regulators." (Ms. Hillard)
Talking about the TPP, Ms. Jean Jones (Chair, National Health Council, Consumers’ Association of Canada) said, "In many fora over the past two years consumers have expressed their serious concerns that the heavy dependence on cost recovery for funding of the drug-review process — they believe that this dependence is impacting the primary objective of the drug review process, which is to protect the health of the public, by focusing on service to the client. Senior bureaucrats now refer to industry as their clients, reinforcing the impression that they are focusing more on serving industry than protecting consumers."
Professor Bird also saw this as a problem. Taking a non-federal example, he said, "If I’m regulating the taxi industry, my clients are not the taxi drivers or the taxi owners. They’re the customers. The analogy is perfect: the clients are not the people you’re dealing with directly in most cases. They are in fact the Canadian people and that’s why it’s critical … that those groups be always heard."
Ms. Hillard added: "CAC believes that the transparency and accountability of any cost-recovery system is critical to its acceptability to all stakeholders. Business must recognize that the costs they pay are only a portion of the real costs, the rest is still borne by taxpayers. This must be clearly communicated to ensure that regulators are not pressured by those being regulated. It must be clear that they are not just service providers for the regulated."
The Cost Recovery Policy discusses briefly this concern. A question and answer section appended to the Policy states:
Those expected to pay have a clear right to be consulted on the costs and efficiency of programs instituted on their behalf, as well as on the quality standards achieved by such programs. However, there may be practical limits to this when there are competing policy objectives. Departments and agencies should work as closely and cooperatively as possible with their clients to deliver services efficiently without losing sight of fundamental policy objectives.
The Committee notes that Treasury Board has indicated that it will be listening to all stakeholders in its upcoming cost-recovery review. We also remark that enforcement of the Policy would address the concern over user pay, user say.
The fact that this is a concern indicates that the benefits of theses services are primarily public not private. If they were primarily private, user involvement in the design and implementation of mandatory services would not be a serious public policy issue and would pose no conflict of interest.
This was another area in which the Auditor General urged further discussion. "(T)here’s also the need for some direction on how to avoid the potential for conflict of interest. I think that as there is a greater dependency on fee recovery, a client-provider relationship could be established, and in some areas that may not be entirely healthy. So I think there’s a need to worry about that aspect as well."
There seems to be a Treasury Board problem: there was the introduction of these fees seemingly without a firm commitment to meet the performance levels that were implied. (Mr. Jim Keon, President, Canadian Drug Manufacturers Association)
When these fees were implemented, the government committed to making them fair, accountable and transparent. Our experience with cost recovery has not reflected these basic commitments. (Mr. Myers)
According to the Policy, providing better service more efficiently is one of the main objectives of user charges. It is clear from the testimony heard by the Committee that in many cases these improvements have not been made. In fact, in some areas, service delivery has actually worsened. In the TPP, drug approvals routinely take almost 600 days, nearly twice the promised 355 days.
Again, the lack of coherent information from Treasury Board makes it difficult to estimate the pervasiveness of service shortfalls. However, based on the testimony heard by the Committee, these shortfalls are important enough to warrant examination and action. Indeed, as Mr. Neville remarked, "Discussions about service standards must occur. They are central to our policy, but they are never going to be simple. There will always be an inherent different concept of acceptable risk between government and the affected industry."
Department officials pointed to a number of reasons for the delays, including a lack of resources linked to cuts to their appropriations and the need to consult and study the impacts of fee changes.
Two points should be considered. First, where an individual or firm must pay for a service, they have the right to know what they are paying for. This includes knowing how long it will take to complete the process. If the service is not delivered as "agreed" to, there should be penalties. Thus:
Recommendation 10:
Where possible, fees should be reduced if service commitments are not met.
Second, if departments or agencies are finding it difficult to fulfil their duties, alternatives should be examined where practical. As put by Mr. Michols, "As industry globalizes, it makes no sense at all that regulators don’t globalize at the same time." Though this can present its own problems (what standards should be used, etc.), it is worth exploring.
Recommendation 11:
Other enforcement mechanisms should also be considered such as alternative service providers and the use of international standards. Governments have reformed their approach to regulation by replacing some command and control regulations with market-based regulations.
Another area that ties into this issue quite closely is regulation red tape and paper burden. (Mr. Rob Meijer, Agri-business Policy Analyst, Canadian Federation of Independent Business)
Cost recovery is not the only government policy that affects the economy. Any attempt to address competitiveness or overall policy effectiveness must consider more than one area of government policy. Though this Report centres on user charges, much of this analysis can be expanded to include regulatory policy in general. Well-designed and appropriate regulations can have positive effects on the Canadian economy and Canadians’ standard of living, but they also impose a cost on businesses and, by extension, Canadians and the economy in general. As an OECD report on regulation notes, "Inappropriate regulations can potentially result in substantial costs or inefficiencies being imposed upon both the sector and the economy as a whole." In this sense, regulations are similar both to taxes and user charges. At the same time, regulations should only be undertaken to correct for market failure, generally following the "publicness" guidelines mentioned earlier.
It makes sense, therefore, that any reform in user-charge policy be accompanied by an examination of Canada’s regulatory regime.
Canada, like most OECD countries, has undertaken extensive reviews of its regulatory systems. In the United States, the National Partnership for Reinventing Government, began by Vice President Al Gore in 1993, tackled regulatory review, among other issues, with an aim to simplifying government. By 1995, it had produced recommendations with estimated savings of nearly $70 billion over a five-year period.
However, despite these reviews, the number of regulations in almost all countries continues to increase. There are many reasons for this, including the desire for greater environmental protection. However, more important than the quantity of regulations, though, is the quality of these regulations.
A Regulatory Impact Analysis (RIA) is designed to take into account the cumulative effect of regulations, weighing their pros and cons. A well-designed RIA program helps avoid implementing regulations that are more expensive and less effective than need be.
RIAs face the same problems as user charges: they are very difficult to quantify. Merging qualitative and quantitative analyses can be challenging. As well, the experience in OECD countries has been less than favourable. A survey of U.S. regulations found that half the regulations adopted could not pass a benefit-cost test, even after 15 years of investment in a benefit-cost program. In other countries, the OECD reports that regulations continue to be made without even rudimentary cost analysis.
It is also important that alternatives to regulation be considered. In certain situations, these can prove more effective at a lower cost than regulation. Some alternatives include: information disclosure, economic incentives, tradable property rights, voluntary agreements, self-regulation, risk-based liability, persuasion, performance-based approaches, and economic instruments such as taxes, and tradable permits. The goal is always to achieve a certain objective in the most efficient way possible.
Measuring the impact of regulation is difficult; most studies of regulatory impact seem to be content with noting the cost of regulation, and not its benefits, which are comparatively harder to quantify. Still, the OECD remarks that the quality of regulation in member countries seems to have gone up: "A key contributor to higher regulatory quality has been a shift away from older forms of economic regulation, which rarely result in net social benefits, toward social regulation in the health, safety and environmental areas, which address genuine market failures and have the potential to provide significant net benefits."
The OECD remarks that reviews, impact analyses, and greater consultation with involved parties have increased the quality of regulations, "so that, although there are many new regulations in the 1990s, they are on average better regulations than their 1970s counterparts. That is, regulations delivered better policy results at lower cost."
In 1992-93, federal departments and agencies, through internal processes, public consultations and support from the Treasury Board, undertook a regulatory review. As a result of the review, some 835 regulations were revised or eliminated between 1993 and 1998.
Despite the regulatory review, the number of regulations continues to rise. However, while the absolute number of regulations continues to increase, the rate of increase has fallen steadily from its high of 1,392 in 1985 to 676 in 1998. This experience — an overall increase in the number of regulations, but at a lower rate — is in line with the experience of the vast majority of OECD countries.
In January 1993, the Finance Committee released Regulations and Competitiveness, which examined the regulatory process, from the delegation of rule-making powers by Parliament to the monitoring and evaluation of existing regulations. Many of the Committee’s recommendations are reflected, to some extent, in the current Regulatory Policy. One interesting recommendation that is not calls for the President of the Treasury Board to release an annual accounting of the "Estimated Costs and Benefits of Federal Regulation." As with user charges, the interaction of the costs and benefits of regulations has not been well examined; an annual report such as that called for by this recommendation would go a long way toward giving policy-makers and Canadians a clear view of the debate.
In November 1999 Canada adopted a new Regulatory Policy, replacing the 1995 version of that policy. It transfers responsibility for the Regulatory Policy from the Treasury Board (which remains involved in the regulatory process) to the Privy Council Office; the PCO’s Regulatory Affairs Division is responsible for the Policy. Appendix II of this Policy, among other things, mandates:
Consultations with Canadians;
That regulations’ impacts on the economy be analyzed;
That regulations only be adopted if their benefits outweigh their costs, and if they are the best alternative;
That systems be in place to manage regulatory resources effectively; and
That international and intergovernmental processes be respected.
This Committee found substantial inconsistencies with the implementation of Treasury Board’s user-charge policy. We therefore suggest that a logical next step would be an examination of regulatory policy.
B. National Partnership for Reinventing Government: An American Example
In the United States, the ongoing National Partnership for Reinventing Government (NPR) provides a possible model for a Canadian re-examination of Canada’s regulatory framework. This reform, designed to, "In time for the 21st century, reinvent government to work better, cost less, and get results Americans care about," was centred around, "Providing the best customer service; increasing electronic access to government, or E-Gov; achieving outcomes no one agency can achieve alone; and embedding reinvention in government’s culture."
In regulatory reform, it aims to "target our reinvention efforts at those folks who are responsible and want to comply." Specifically, it is designed to accomplish four goals, enunciated in 1995:
Cutting obsolete regulations;
Rewarding results, not red tape;
Creating grass roots partnerships; and
Negotiating, not dictating.
Later that year, President Clinton called on departmental agencies to allow firms that have been fined to apply these fines to fixing their problems; and to reduce reporting burdens by doubling the time required between reports; i.e. annual reports could be given biennially.
This American effort involves a wide range of activities:
Sharing best practices across agencies;
Breaking down barriers between agencies;
Pushing plain language and compliance assistance tools;
Building partnerships with the private sector and communities;
Putting information technology to work; and
Changing the way progress is measured.
The U.S. claims to have had some success from this initiative. According to the NPR, government agencies are:
moving away from "command-and-control" methods of encouraging compliance;
measuring customer satisfaction and incorporating service and results measures into performance plans;
focusing on helping firms and industries comply with regulations; and
encouraging private sector to get involved in the rule-making process earlier rather than later.
For instance, voluntary partnerships instituted by the Environmental Protection Agency, which encourage and recognize environmentally friendly actions, resulted, in 1998, in savings of $US 3.3 billion; the elimination of 7.8 million tonnes of solid waste, prevented the release of 80 million metric tonnes of carbon dioxide, and saved nearly 1.8 billion gallons of clean water. The Consumer Product Safety Commission has developed a Fast Track Product Recall program that provides companies with a streamlined product recall process when firms recall their products voluntarily. It estimates that the percentage of products returned under this program is nearly 60%, against about 30% under a traditional recall program.
Finally, the Food Safety and Inspection Service has instituted a science-based, preventative program for ensuring that meat and poultry are safe. By putting "the responsibility for food safety into the hands of food producers, rather than into the hands of government inspectors," salmonella has been reduced in 300 large plants by nearly 50% in chicken products, 30% in ground beef and 25% in pork products in January 1998.
As this Committee has already noted, this kind of openness, clarity and responsiveness is what it has found to be lacking in the implementation of user charges in Canada. Further, in keeping with this Report’s recommendations, the government should consider implementing a "regulatory budget," which would detail estimates of the total cost of regulation, including enforcement and compliance costs, and a risk-benefit analysis. As was suggested by the Finance Committee in 1993, an examination of Canada’s regulatory structure would help determine whether Canada’s previous attempts at implementing sound regulatory policy have been successful.
Recommendation 12:
That the government set up a red-tape commission in order to evaluate and streamline regulations. It would conduct an examination of existing regulations to determine if they are still appropriate. Those that are not would be re-written, or deleted entirely. Further, the commission would establish guidelines for the implementation of future regulations. It would be guided by the goal of reducing the regulatory burden on the Canadian economy.
Traditionally, user charges have played a minor role in the financing of government programs. As a result, the link between individual programs and their performance, efficient construction and those served by the programs has been weak. As Professor Bird and others told the Committee, user charges have helped make people aware of the cost of "free" government services. On the other side, as the Auditor General has noted, cost recovery has forced departments and agencies to think in terms of controlling expenditures to deliver the best, most efficient service possible.
Most importantly, the implementation of user charges has opened up a dialogue among government, individuals and businesses who are the direct beneficiaries of these cost-recovery programs, and the Canadians served by licensing and regulatory regimes.
This Committee views our report as a contribution to this dialogue. Our examination of the content and implementation of the current Cost Recovery and Charging Policy has found many ways in which it could be improved. This is not surprising, since designing sound user charges is difficult enough in theory. Implementing them in the midst of complex real-world happenings is even more so.
Collecting and making available to Canadians timely and detailed information on cost-recovery programs will help in the evaluation of the Cost Recovery and Charging Policy generally and individual programs specifically. Given the current decentralization of the program, this is very difficult to do. The required increased central coordination, combined with better parliamentary oversight and an independent dispute-resolution mechanism, will provide Canadians with the accountability they deserve.
The Policy itself is generally sound. In keeping with the need for greater accountability and consistency, most of the Committee’s recommendations are centred on making the Policy more explicit and enforceable. Tackling the issue of how to define public and private benefits, for instance, will be a difficult but necessary step toward achieving a consistent, clear policy. And it is preferable to the present situation, in which 47 departments and agencies each have their own definition of public/private benefits, to say nothing of 47 different dispute-resolution processes, or 47 different definitions of business impacts.
This Committee believes its recommendations will help strengthen the Cost Recovery and Charging Policy.
The federal government is responsible for creating an environment in which individuals and firms can flourish. To this end, a solid user-charge policy is only one part of a positive economic climate. Like user charges, a badly implemented regulatory regime can have a negative effect on individuals and business. It is this Committee’s hope that this Report will both continue the dialogue on user charges and begin one on regulatory reform, all with an eye to making government more responsive to Canadians.