Department of Agriculture, Fisheries and ForestryAgvet Chemicals (Domestic & International Policy)Agricultural Productivity DivisionGPO Box 858CANBERRA ACT 2601

Email: FPCostReview@daff.gov.au

Dear Madam/Sir

Accord is pleased to provide the following submission on the Department of Agriculture, Fisheries and Forestry’s (DAFF) First-principles review of the APVMA’s cost recovery arrangements. Accord welcomes the review to comprehensively examine the APVMA’s cost recovery arrangements although we are concerned with the timing of this review given the Australian Government’s current consideration of the Cost Recovery Guidelines being undertaken by the Department of Finance and Deregulation.

Accord Australasia, represents the manufacturers and suppliers of formulated products, including: hygiene, cosmetics and specialty products, sunscreens, food contact sanitisers, household pesticides, disinfectants and specialty commercial products. These products help safeguard public health and enhance our quality of life.

The formulated hygiene, cosmetic and specialty products industry is a significant industry sector contributing to a prosperous Australian economy. Our industry’s products include household and commercial cleaning agents; disinfectants; make-up and beauty products; toiletries and personal care products; hair-care products; skincare products, including sunscreens; oral hygiene; fragrances and perfumes, feminine hygiene products; industrial and agricultural sanitisers; household pest control; and adhesives and sealants.

Sector products play a vital role in:• Safeguarding public health: Maintaining essential standards of hygiene and sanitation in

institutions, hospitality, manufacturing and agriculture.• Promoting personal well-being: Helping people keep clean, healthy and shielded from

harmful effects of the environment.• Maintaining comfortable homes: Enabling people to keep their everyday surroundings clean

and inviting.• Enhancing quality of life: Giving people greater personal freedom through time- and effort-

saving technologies.• Boosting confidence and emotional wellbeing: Providing opportunities for self-expression,

individuality and pampering.• Keeping the wheels of commerce and industry turning: Fulfilling specialised uses in industry,

institutions and agriculture.

Accord has around 94 member companies which range from smaller Australian-owned family businesses to the local operations of large consumer brand multinationals (a full membership list is provided at Attachment 1).

Accord Australasia Limited ACN 117 659 168 ABN 83 205 141 267Fusion Building, Level 4, Suite C4.02, 22 – 36 Mountain Street, Ultimo NSW 2007

PO Box 290 BROADWAY NSW 2007

Tel: 61 2 9281 2322 Fax: 61 2 9281 0366 Website: www.accord.asn.au

Products for healthy living and a quality lifestyle

Headline features and statistics for our industry’s economic footprint include:• Estimated annual retail-level sales of industry products nudging the $10 billion mark.• Accord member companies directly contribute more than 12,000 full-time equivalent jobs.• Nationally more than 180 offices and more than 66 manufacturing sites are operated by

Accord member companies.

Our sector is highly regulated with a recent internal Accord survey of members showing that:• 97 percent have dealings with the National Industrial Chemicals Notification & Assessment

Scheme (NICNAS)• 73 percent with the Therapeutic Goods Administration (TGA)• 51 percent with the Australian Quarantine Inspection Service (AQIS)• 27 percent with the APVMA; and• 29 percent with Food Safety Australia New Zealand (FSANZ).

Additionally, our member companies are regulated by the Australian Competition and Consumer Commission (ACCC) under the Australian Consumer Law as well as a range of state and territory health, OHS, environment and transport agencies.

In essence there are three distinct product segments for our industry, each with distinct supply chains through to the product end user:

• Industrial and Institutional products (e.g. commercial cleaning products, agricultural sanitisers) which are mainly sold on a business-to-business or business-to-government basis or through agricultural product resellers.

• Fast-moving consumer goods (e.g. household cleaners, laundry detergents, toothpaste, shampoo, soap) which are sold to consumers primarily via either: grocery retailers, pharmacies, mass-market retailers, direct selling and hardware chains.

• Cosmetic and beauty industry products (e.g. make-up, skincare, sunscreens, fragrances, hair dyes) which are sold to consumers primarily via either: department stores, specialty retailers, grocery retailers, pharmacies, mass-market retailers, direct selling, hair salons, beauty salons, spas and on-line.

The majority of Accord members which deal with the APVMA are small to medium enterprises operating in low margin businesses that are susceptible to input cost-pressures. The majority of products are either fast moving low risk consumer goods or low risk, well characterised products which represent a low regulatory burden on the agvet sector and are not the core focus of the APVMA’s regulatory activities. Accord members thus have a specific and direct interest in the APVMA’s cost recovery processes and we welcome this review as the basis for ongoing analysis and dialogue on the APVMA’s cost recovery processes with a view to streamlining and minimising the cost burden on industry.

Ours is a heavily regulated industry, as recognised by the Productivity Commission (PC) in its 2008 report into chemicals and plastics regulation. Accord supports independent, science-based regulation where warranted for legitimate public health and environmental risks but, consistent with the PC report recommendations, believes Australia’s overly complex and fragmented regulatory system for chemicals management and the costs associated with this regulation needs urgent and significant overhauling.

Governments have recognised the complexity of the regulatory system and the chemicals and plastics sector has been the focus of reform efforts following the PC study. Unfortunately, this has resulted in little by way of real outcomes having been achieved for our sector, but has resulted in increased costs due to the nature of cost recovery and a general tendency towards more unique Australian requirements rather than a move towards harmonisation of regulatory practices with that of our major trading partners. We believe that cost recovered agencies are not subjected to the same level of scrutiny as budget funded entities despite the rhetoric around reform and a seamless national economy.

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At the Commonwealth level, Accord members are primarily regulated by three cost recovered agencies the Therapeutic Goods Administration (TGA), the Australian Pesticides and Veterinary Medicines Authority (APVMA) and the National Industrial Chemicals Notification and Assessment Scheme (NICNAS). In addition, member companies with consumer products are also regulated by the ACCC with particular regard to ingredient labelling, product safety, mandatory reporting and misleading and deceptive conduct. The ACCC is not cost recovered, yet is seen as a far more efficient and effective regulator than the TGA, APVMA or NICNAS.

Accord members have seen costs for services continually rising with a commensurate decrease in the quality and quantity of services provided. For Accord members, any proposed cost increases are not seen in isolation, but as an aggregate of the total cost of doing business in Australia which is much higher than elsewhere. This is not only through compliance with unique Australian requirements, but the additional costs imposed through cost recovered agencies and lost opportunity costs through an inefficient and complex regulatory regime. The growing impost on industry is not sustainable.

However we do recognise that the APVMA has made efforts to reduce the cost burden on industry by limiting certain cost increases such as by not applying a blanket CPI increase and/or additional costs to recover the costs of reform as has been done by other regulatory agencies with which we deal. The APVMA has been mindful of this and efforts have been made to reduce the impact on industry. This is appreciated by industry.

Australia is the only advanced economy which operates on a full cost recovery basis for industrial chemicals, therapeutic goods and agricultural and veterinary products. We believe that full cost recovery is a break on innovation, a barrier to trade and stifles competition. The introduction of cost recovery has not led to improved efficiency and effectiveness of the three major regulators with which Accord members deal; rather it has led to increased costs and reduced outcomes.

In a survey conducted in 2010, Accord asked whether Members believed they received “value for money” for services from the three regulatory agencies, NICNAS, TGA and APVMA. The results indicated a fairly low degree of satisfaction as shown below:

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The Australian Government formally adopted a cost recovery policy in December 2002. The Australian Government Cost Recovery Guidelines of July 2005 currently apply. Accord supports cost recovery on a user pays principle and where it delivers efficiencies to the regulated sector. We do not support the current approach adopted by Government in that industry must meet all the costs of a regulatory agency regardless of the beneficiary. Much of the work undertaken by a regulatory agency is in the public interest and as such should be paid for by the taxpayer.

While the APVMA sets charges to recover most of the costs of its services, the application of the APVMA’s mode of cost recovery does not comply with the Australian Government’s Cost Recovery Guidelines since a critical element of the Guidelines regarding activity based costing and charging the direct beneficiary where identified, does not apply to the APVMA’s cost recovery arrangements.

It has been made clear that the costing framework has been determined by the Signatories’ Working Group (SWG) and endorsed by the Primary Industries Standing Committee (PISC). There is a significant element of cross subsidisation of APVMA registration activities with that of funds received through the levy.

In the past, Accord has been highly critical of regulatory agencies undertaking cost recovery impact assessments. We therefore welcome DAFF taking a lead role in this review as there is considerable discussion of policy related matters which industry has previously raised with the APVMA during previous CRIS processes but which have not been addressed because the APVMA does not have a role in policy development.

DAFF has sought specific comments on the following four points:

1. The beneficiaries of the activities and services provided by the APVMA (with a view to informing where cost recovery should be best applied along the supply chain and how much each should contribute).

The principle behind the introduction of cost recovery is that the beneficiary pays. Cost recovery was meant to focus the regulatory agency on the cost of regulation by doing away with unnecessary costs and to introduce regulatory efficiency through the pricing structure. This has not worked because it is simply assumed that the regulated sector must pay either on a fee for service basis, a levy or both regardless as to whether the regulated sector or the broader community is the beneficiary.

We believe that there are considerable elements of public good in the work of the APVMA and this should be funded by the Australian taxpayer and not industry. For example the APVMA cites the introduction of new activities without dedicated funding such as responding to enhanced Freedom of Information legislation and implementing the Information Publication Scheme. Accord would categorise these activities as meeting community service obligations and as such should be Budget funded.

Similarly where a policy decision has been made to provide industry assistance, this should not be funded through cross subsidisation, but should be funded through industry assistance programmes designed specifically for this purpose either through DAFF or the Department of Industry, Innovation, Science, Research and Tertiary Education (DIISRTE).

The introduction of the re-registration programme which was a pre-election commitment is in the public interest. The aim of the re-registration scheme as stated in the Explanatory Guide to the Exposure Draft to the Draft Agricultural and Veterinary Chemicals Legislative Amendment Bill 2011 “…would promote public confidence in agvet chemicals while minimising impacts on industry.” The current system for the regulation of agvet chemicals in Australia is based on risk assessment. It is not necessary to introduce a complex and costly re-registration scheme funded by industry, rather it is more important to ensure that the existing system of chemical reviews works appropriately and that there is predictability and certainty in the overall regulatory framework.

2. How the use of fees or levies can support the efficient consumption of the activities and services provided by the APVMA, including views on the best mix of those mechanisms.

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Fees should be charged on a user pays basis and all fees should be established through utilising an activity based costing model. In Accord’s experience there is little evidence to support the idea that the use of levies results in an efficient system. There is little incentive for the regulatory agency to reduce costs through a levy system. This is simply another form of business tax.

The concern in the Government Cost Recovery Guidelines that a levy does not produce efficiencies to the same extent as activity based costs is certainly borne out by industry’s experience with NICNAS. When NICNAS extended the scope of its registration scheme to include all introducers its income was significantly increased and continues to increase on an annual basis, but its output in relation to activities directly related to what the regulated sector expects of a regulator has decreased. The scope of NICNAS activities has increased beyond that of notification and assessment and administration of the Act to also include policy work, international travel and undertaking activities which are more appropriate for the policy body of the Department than a regulatory agency. With the introduction of the increased registration fees, NICNAS’ budget almost double over a four year period as did its staffing levels. However, from an industry perspective, its work output in relation to its core activities did not improve.

In general Accord members supply into the marketplace low risk, well characterised agvet and domestic products. As such, they require a lower level of regulatory intervention, which should be reflected in the cost recovery arrangements applied by regulatory agencies. In particular there should be a reconsideration of the application of the levy on the turnover of goods sold. In general, many of these low risk products are high volume consumer goods requiring little interaction with the regulator, but nevertheless are levied on each and every sale. The application of a flat levy on the sale of goods amounts to cross subsidisation of low risk products to high risk products and is inconsistent with Government’s cost recovery policy.

3. How to avoid or mitigate exposure due to external factors such as weather.

The practice adopted to date has been the use of reserves to mitigate for external factors. Accord has noticed an inconsistent treatment of reserves by the three regulatory agencies with which our members have dealings. We first raised this as an issue in 2005 with the responsible Minister at the time and sought further guidance in the Cost Recovery Guidelines.

The running down of reserves has resulted in significant increases in fees, charges and levies which Accord members have been subjected to at various times. In a submission made to the APVMA on cost recovery in 2008 (Attachment 2) we cited the example of the APVMA’s use of reserves and over recovery to compensate for the decline in revenue which resulted largely from the drought and the reduction in the levy rate in 2000. However, the key impact of the drought on the APVMA’s revenue was in 2003-04 and 2004-05, not in 2000. Further, the APVMA had accumulated reserves of approximately $9m in 2000-01. During 2000-01 the APVMA began an expanded program of activities, taking on more staff. Expenses for the period from 1989-99 to 2003-04 had risen by 48% with staff increases of 20% and large increases in non-discretionary expenditure items such as insurance and superannuation. The APVMA over this period was not matching its level of services with revenue, which is the basis of an effective cost recovery scheme using an activity based costing model.

While Accord supports the operation of a reserve as prudent financial management, it notes that the APVMA’s reserve had been allowed to erode by more than $6M over a very short period. To compensate for the poor judgement in allowing the reserves to fall over a number of years, the APVMA adjusted the levy rate by 33% in 2005-06 to balance its budget and re-establish the APVMA’s financial reserves. This was against industry’s advice which argued that the increase was too much and would lead to over-recovery. In the subsequent year, the APVMA had to reduce the levy rate because as industry had advised, it had over-recovered and restored its reserves position. This is addressed more fully in Attachment 2.

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4. How fees or levies could be applied to ensure that they do not result in a disincentive in bringing new products to market

Currently there is no transparency in how fees are set and what represents value for money. As there is no open contestability in the provision of services or benchmarking of costs with the private sector or comparable academic institutions, how can industry be assured that the fees charged and time taken for registration represents best practice? Industry has however the example of a comparable regulatory scheme in New Zealand for which getting products into the market is much quicker and less costly. Questions therefore need to be asked as to the efficiency and effectiveness of the current system. Accord believes that full cost recovery mitigates against a more efficient and cost effective regulatory system.

Accord supports exploring options for a fee rebate, subject to its implementation being an efficient and effective mechanism to produce administrative improvements in the APVMA’s assessment processes. Such improvements would impose discipline on the assessors to complete the work on time through a more efficient application of risk assessment and risk resource allocation. It would focus the agency more clearly on its service delivery component rather than its own internal priorities and processes.

Fees could be significantly reduced by changing the culture of the regulatory agency and its acceptance of data and assessments from comparable overseas regulatory authorities. While regulatory culture is outside the scope of this Review it has a significant effect on the overall cost of the regulatory scheme. Compare Australia’s regulatory system with that of New Zealand’s to understand how the establishment of a proper risk management framework and regulatory culture can work to result in lower costs to industry without compromising New Zealand’s exports, environment and public health and safety.

Other issues

Consistent with previous positions put to the Government on agency responsibility for undertaking cost recovery impact statements (CRIS), we have always argued that a CRIS and similarly a regulation impact statement (RIS) involves policy considerations and should be undertaken by the policy department and not the regulatory body. We believe that it is the role of the DAFF to undertake all these consultations and not that of the APVMA.

Accord has had a long standing interest in cost recovery and how the current arrangements can be improved. We first wrote to Senator Nick Minchin in 2005 and then again to Minister Tanner about our concerns. We believe that the concerns first raised in 2005 are still relevant today and as such have been forwarded as part of Accord’s submission to the review into the Australian Government’s Cost Recovery Guidelines. Particular issues of concern included:

• Treatment of interest• Treatment of reserves• Funding of appeals• Funding of services performed by Government• Activity based costing• Using levies as a sales tax on goods for cost recovery purposes; and• Performance measures to demonstrate efficiency and effectiveness.

Some of which are addressed more fully in Attachment 2.

In addition to the concerns first cited in 2005, a further and more worrying issue has become apparent regarding the lack of accountability and lack of fiscal disciple and restraint in spending when compared to Budget funded government agencies and departments. The only growth in public sector employment seems to be within cost recovered regulatory agencies, budgets increase on an annual basis, as do staffing levels. Cost shifting of policy work from departments to regulatory agencies is also evident. Recommendation which were put to the Department of Finance’s Cost Recovery Review and are of relevance to DAFF’s First-Principle Review include:

• The application of an efficiency dividend to cost recovered agencies• Improved scrutiny and accountability of cost recovered agencies

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• Increased transparency in the adoption of and utilisation of activity based costing models• The introduction of contestability for certain assessment functions currently the monopoly of

regulatory agencies and/or government departments• Where regulatory changes accompany a CRIS that a full regulatory impact analysis is required and

that a CRIS no longer substitutes for a regulatory impact assessment impact; and• That greater clarity is provided to regulatory agencies and policy departments on the provision of

services to Government which are not to be cost recovered.

Should you have any questions in relation to Accord’s submission please do not hesitate to contact me on 02 9282 2322, 0422569222 or by email at dsabic@accord.asn.au.

Yours sincerely

Authorised for electonic submission

Dusanka SabicDirector, Regulatory Reform

25 September 2012

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