Part 2: Principles guiding the setting and administration of fees and levies

Setting and administering fees and levies for cost recovery: Good practice guide.

In this Part, we discuss:

  • the requirement for your public organisation to have legal authority to charge for the goods or services it is required to provide; and
  • our expectations for how you administer and manage fees and levies, based on four principles.

A public organisation must be sure that it has the appropriate legal authority before implementing and managing charges to recover costs.

Legislation authorising charging is often permissive, and it sometimes presents a range of options to consider. However, this is not always so. Therefore, your starting point always needs to be making sure that you have the appropriate legal authority to charge and administer fees or levies in the way you intend.

That legal authority will usually be in an Act of Parliament. The Act will usually include an “empowering provision” that authorises the setting of the amount of a fee or levy through regulations. It will not usually specify the amount to be charged.

The empowering provision may also specify other matters, such as:

  • the activities a public organisation is authorised to charge fees or levies for;
  • the recovery period;
  • how often it must review its fees and levies (for example, every five years); and
  • the circumstances in which it can waive or refund the fee or levy, or exempt someone from paying it.

It is important that you thoroughly check the provisions in the relevant Act and any related regulations.

Guiding principles

Once you have established the legal authority for charging fees or levies, four principles should guide how you administer them. They are:

  • equity;
  • efficiency;
  • justifiability; and
  • transparency.

Following these principles helps you to administer fees or levies appropriately. It also helps you to provide adequate transparency to enable fee and levy payers, Parliament, and the public to hold your public organisation to account.

There might be tension between the principles, and you will need to consider any trade-offs that you need to make when deciding how to administer charges.

First principle: Equity

Equity is about ensuring that you administer and manage fees and levies in a way that is administratively fair.

When implementing and reviewing fees or levies, it is important that you consider equity matters so that the recovery of costs from fee and levy payers is fair. This means that you do not seek to recover costs from one group that could benefit a previous or future group.

If you do not review your fees or levies regularly, equity issues between groups of fee payers could develop over time.

Equity might also be an important consideration when determining when and who to charge, but these are policy choices that are outside the scope of this guide. For more information on this, see the Treasury’s guidance.4

Second principle: Efficiency

Efficiency means that public organisations produce as many goods, or provide as many services, to the desired level of quality as possible from a given quantity of resources. This achieves value for money.

You need to structure fees and levies in a way that closely reflects the costs needed to produce the goods or provide the services to an individual or organisation. Setting or updating fees is an opportunity to review the costs of delivering goods and services.

This is an opportunity to check that your public organisation is delivering those goods and services as efficiently as possible and that it is not incurring any unnecessary costs that you then need to recover from fee or levy payers.

You also need to consider how much effort you will put into determining the costs of services. Sometimes, accurately costing individual consumption might take more effort and generate more costs than the cost of the goods and services that you will recover. You will need to decide which approach is most efficient.

There are also other considerations – for example, the incentives that particular cost structures create. For this, see the Treasury’s guidance.

Third principle: Justifiability

Justifiability means that the costs you recover through fees or levies reasonably relate to the goods or services you are charging the fees or levies for. Where possible, it means eliminating cross-subsidisation (see Part 3).

To justify fees or levies, you need to have an accurate understanding of both the direct5 and indirect costs6 of the goods or services. When charging for a service, you also need be clear about what the service is and the standard your public organisation delivers it to, so that the costs reflect the service quality the recipient requires.

Reliably establishing the costs of delivery is essential to managing costs and identifying potential inefficiencies. This is important regardless of how you recover the costs. It is important that you recover only those costs that can reasonably be attributed to producing the goods or providing the services that the charges apply to.

This includes a reasonable portion of costs that can be attributed to multiple services (for example, overhead costs). Services will draw on other indirect costs, such as an organisation’s management layer.

It is justifiable to recover a portion of the direct and indirect overheads associated with the goods or services through an overhead component in the charge.

Fourth principle: Transparency

A public organisation is accountable to Parliament and the public. To be accountable for your charging practices, you need transparent processes for setting and managing fees or levies.

Fee and levy payers need to have enough information to understand and assess whether the:

  • basis or method for setting the fee or levy is appropriate;
  • fees or levies are fairly costed; and
  • revenue generated is correctly accounted for and used appropriately.

Transparent fees, levies, and charging practices are the main way that public organisations are held to account for their charging decisions. Part 4 discusses the several ways that public organisations can achieve transparency and accountability. These include:

  • building relationships by engaging with fee and levy payers;
  • recording surpluses and deficits associated with the fees and levies; and
  • regularly reporting the status of memorandum accounts, changes in forecast revenues and costs, changes in service mix, performance, and cost allocations to fee and levy payers.

4: The Treasury (2017), Guidelines for setting charges in the public sector, paragraph 3.4.

5: These are costs that are directly determined by providing a unit of service, such as labour, materials, and motor vehicle mileage.

6: These are costs that are not directly determined from the consumption of a particular unit of service, such as information management, corporate services, management, and other overheads.