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Levies Guidelines and Principles
Introduction
The Government introduced 12 Levy Principles in January 1997. These Principles must be met when an industry or group of levy payers proposes a new, or a change to an existing Statutory Levy (Levy Principles provided in Attachment 1).
Since these principles were introduced some difficulties have arisen in their implementation, requiring the Government to delay the introduction of some levies until further industry consultation processes have been completed.
As a result, Levy Guidelines have been developed to complement the 12 Levy Principles and assist rural industries in the consultation processes that should be followed before the Government formally considers the levy proposal brought forward by an industry. After some 18 months, minor revisions and updating have been done to improve the operation of the Guidelines.
Guidelines
A) The initiator of a new levy must be able to demonstrate it has met the first 11 levy principles. The principal criteria to be satisfied are market failure, net industry benefit and that the application of the levy is practical. Market failure is avoided where only collective action by levy payers will ensure the desired outcome cost effectively. Net industry benefit establishes the case for industry benefits exceeding the costs of raising and funding the levy. The collection of the levy needs to be practical.
B) For a change to an existing levy that is of an administrative nature, designed to fine tune the rate of levy in circumstances of fluctuating production and prices, then Levy Principle 12 applies.
C) For a new levy, or a change to an existing levy that is not simply administrative, (ie will substantially change the level of the levy or direction of the activity that the levy funds), the initiator must take effective steps to inform all actual or potential levy payers of the levy proposal. The levy payers should be informed of its purpose and intended industry benefit by widely promoting the proposal in industry forums/meetings, newsletters and/or advertising in the rural press, in advance of a vote being taken at industry meetings or through a postal vote conducted by an industry. The objective is that all levy payers are aware of and have the opportunity to express a view on the proposal.
D) Due to the fact that industries have differing arrangements for voting at industry meetings, there will be some flexibility on how a vote of levy payers is taken to support or reject a new levy or a substantial change to a levy. For industries that have a statutory, corporate or industry organisational structure that prescribes the voting rules and processes in its supporting regulations or constitution, the Government will accept the voting rules prescribed in order for the industry to demonstrate majority support for the proposal, providing Guideline C has been met.
E) In circumstances where no such formalised voting industry arrangements exist under statutory, corporate or industry organisational arrangements, it is the Government's intention that the initiator should conduct a vote of actual or potential levy payers to demonstrate that a majority of levy payers in the industry support the proposal. The only exception to this would be if the proponents can demonstrate that voting in this way would be prohibitively expensive.
F) In circumstances where an initiator of a new or change to an existing levy has clearly been able to satisfy Guideline A, but has been unable to conduct a vote under Guideline E, because it has not been cost-effective to do so, then they will need to demonstrate majority support by providing evidence that a thorough industry-wide consultation processes has been followed and that industry is widely supportive of the proposal. From the date the levy proposal, including the supporting documents relating to the level of support, is formally lodged with the Minister or Parliamentary Secretary dissenters have three months in which to lodge a formal objection. Dissenters should include in their objection reasons why the levy is opposed, with analysis of the pro levy argument and clear evidence they can demonstrate support of at least 50% of the actual or potential levy payers to oppose the implementation of the levy. Objections considered irrelevant, frivolous or vexatious, or objections having little basis in fact will not be proceeded with.
G) Where evidence of the extent to which net industry benefit and market failure tests are met is not clear cut, the required level of support by industry for the proposal is 75%. Where the initiator has satisfied Guideline A and C but has been unable to conduct a vote under Guideline E, due to prohibitive cost, then they will need to demonstrate majority support by providing evidence that a thorough industry-wide consultation processes has been followed and that that industry is widely supportive of the proposal. From the date the levy proposal, including the supporting documents relating to the level of support, is formally lodged with the Minister or Parliamentary Secretary dissenters have three months in which to lodge a formal objection. Dissenters should include in their objection, reasons why the levy is opposed, with an analysis of the pro levy argument and clear evidence they can demonstrate support of at least 25% of actual or potential levy payers to oppose the implementation of the levy. Objections considered irrelevant, frivolous or vexatious, objections having little basis in fact, will not be proceeded with.
H) Decisions to instigate management of emergency animal and plant health issues, pest incursions and product safety, should on economic grounds be taken only if there is an expectation that the sum of the net industry benefit and the public benefit less the cost to industry and government is clearly positive. Where there are pre determined arrangements for responding to emergencies, and where there are pre-determined cost-sharing arrangements between governments and industry, these pre-determined arrangements will prevail.
I) As a general rule, where funding for research and development provides net industry benefit and meets the criterion of market failure, industry needs only to satisfy Guidelines B to F to meet the Guidelines.
J) Where industry support is provided to Government efforts in trade access negotiations, market failure will be considered on a case by case basis. Where evidence regarding net industry benefit and market failure is limited, Guideline G applies.
K) These Guidelines do not apply to the National Residue Survey (NRS), except where participation in the NRS is at the voluntary instigation of the industry concerned, such as to meet quality assurance arrangements. Where participation is considered necessary by Government to meet certification requirements for domestic and/or international trade, or participation is in the national interest where there is a significant risk to public health or to trade, the Government may require an industry to participate in the NRS and may implement statutory arrangements to recover the cost of the survey from industry.
L) Where there is failure to demonstrate a net industry benefit and market failure, statutory levies not be supported.
M) Statutory levies are not to be used to fund agri-political activities.
Footnote : DAFF will provide advice to initiators of a new levy proposal or for a change to existing levy on appropriate industry consultation processes with respect to meeting these Guidelines. This includes the need to widely disseminate relevant levy information to levy payers and providing the opportunity for levy payers to express their views on the levy proposal, before bringing recommendations to Government. Processes followed should be documented. The Government may also decide on the need for an independent professional assessment before approving the levy.
A Summary Pro-forma (attached) has been prepared for use by Industry in preparing its submissions to Government.
DAFF Contact :
Levies Revenue Service
Freecall 1800 020 619
SUMMARY PRO-FORMA FOR THE DETERMINATION OF STATUTORY PRIMARY INDUSTRY LEVIES
(TO BE PREPARED BY INDUSTRY AND ASSESSED BY DAFF BEFORE SUBMISSION TO GOVERNMEMT FOR LEVY APPROVAL*)
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1. Purpose of compulsory levy (describe type of levy, the reason for levy and its proposed purpose. Define whether it is a new levy or a change to an existing levy) |
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2. Explanation of type of market failure that levy will overcome (an outline of the type of market failure that the proposed levy will overcome, including a description on how the benefits cannot be captured by individual firms acting alone, why collective action is the best solution) |
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3. Size of industry and/or public benefit (describe and quantify where possible the size of the industry benefit and/or public benefit that will flow from the proposed levy, together with the costs of imposing the proposed levy and thus present the case for an industry net benefit) |
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4. Relative efficiency criterion (outline why a compulsory levy is the most cost-effective way to collect the industry funds. Would a voluntary levy achieve the same result?) |
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5. Industry consultation process (is the 50% or 75% test of industry support the appropriate % given the type and extent of market failure and net industry benefit?) (outline how the 50% or 75% test has been satisfied, for example, has a vote been taken? If so, describe the voting process and the results. If not, describe how industry support has been ascertained to satisfy the 50% or 75% test including industry consultation processes for all levy payers) |
* Please list here the background source documents from which this Summary has been derived.
Attachment 1 :General Principles Applying to Proposals for New and Changed Primary Industry Levies
- The proposed levy must relate to a function for which there is a significant market failure.
- A request for a levy must be supported by industry bodies representing wherever possible, all levy payers, or by levy payers directly. Otherwise a levy may be initiated by the government in the public interest in consultation with the industries involved.
- The initiator of a levy proposal shall provide an assessment of the extent, the nature and source of any opposition to the levy, and shall provide an analysis of the opposing argument and reasons why the levy should be imposed despite the argument raised against the levy. The initiator shall also demonstrate that all reasonable attempts have been made to inform levy payers of the proposal and that they have had the opportunity to comment on the proposed levy.
- The initiator shall provide an estimate of the amount of levy to be raised to fulfil the function to be paid for by the levy, a clear plan of how the levy will be utilised, including an assessment of how the plan will benefit the levy payers in an equitable manner, and demonstrate acceptance of the plan by levy payers in a manner consistent with Principle 2.
- The initiator must be able to demonstrate that there is agreement by a significant majority on the levy imposition/collection mechanism, or that, despite objections, the proposed mechanism is equitable in the circumstance.
- The levy imposition must be equitable between levy payers.
- The imposition of the levy must be related to the inputs, outputs or units of value of production of the industry or some other equitable arrangements linked to the function causing the market failure.
- The levy collection system must be efficient and practical, and must impose the lowest possible "red tape" impact on business, subject to transparency and accountability requirements.
- Unless new structures are proposed, the organisation or organisations which will manage expenditure of levy monies must be consulted prior to introduction of the levy.
- The body managing expenditure of levy monies must be accountable to levy payers and to the Commonwealth.
- Levies must be reviewed against these principles following a specified period and in a manner determined by the Government in consultation with industry at the time of the imposition of the levy.
Changes to Existing Levies. - The proposed change must be supported by industry bodies or by levy payers, or by the Government in the public interest. The initiator of the change must establish the case for change and, where an increase is involved, estimate the additional amount which would be raised, indicate how the increase would be spent and to demonstrate how this expenditure would benefit levy players.
Attachment 2
BACKGROUND PAPER
MARKET FAILURE AND NET INDUSTRY BENEFIT
The economic rationale for governments to facilitate industry wide levy funding of research, promotion and other industry programs rests in part on two propositions. First, the nature and dispersal of program benefits are such that a private investor would not profit from supplying them. For example, the results of some research are widely applicable within the industry, but the benefits are not always appropriable by private investors. Second, levies represent a source of funds with low enforcement and collection costs, largely because industry participants recognise the benefits of cooperative behaviour.
Assessment of a particular levy proposal can be approached by seeking answers to the series of questions outlined below.
The relevant questions are:
- whether the industry benefits are likely to exceed the levy costs - including collection and other administrative costs;
- whether there is market failure, and
- whether the levy approach will facilitate operation of the program and provide the lowest cost means of finance in the particular case.
INDUSTRY BENEFITS
In the circumstances in which levies are likely to be considered, program benefits will generally accrue as a result of group actions. Nevertheless, industry benefits from the program will simply be the sum of benefits to all individuals in the industry. If it is apparent that an individual or a group of individuals could profitably organise and finance the program, there is no case for government provision of levy funding. In other cases there may be an issue of appropriate definition of the industry or of distribution of industry benefits. The discussion below of 'public benefits' concerns cases where there are significant benefits to individuals who are excluded from any practical definition of the industry for levy purposes.
MARKET FAILURE
A primary role for government is the setting and enforcement of property rights and related institutions that will facilitate the efficient operation of commodity and resource markets. Where markets fail to provide socially desirable levels of a good, or do so but not cost effectively, there may be a case for other forms of government action.
The rationale frequently used to justify government intervention in industry research is that the results of some research are a 'public good'. Such goods have two key characteristics. First, the use of public good by one person generally does not alter the ability of others to use it. This is described as being nonrival. In essence, nonrivalry encourages 'free riding' by individuals who realise that they can benefit from production of the good as long as somebody pays. Second, it is not possible to prevent others from using it. This is described as a lack of appropriability. Lack of appropriability discourages individuals from producing a good, no matter how much others value it.
In the case of research, if it were simply that research results were not appropriable, a policy solution of providing or strengthening property rights where possible generally would be appropriate. Such a policy would enable private researchers to restrict the use of the research results and recoup the cost of their research in the same way they would recoup the costs of any other investment. However, with research results being nonrival, social benefits from the research would be higher if research results were made available to all at the cost of dissemination of the results. Dissemination costs would usually be small relative to the cost of the research and researchers would be unable to capture sufficient benefits to recoup the costs of the research.
Lack of appropriability of the benefits of individual efforts may also characterise aspects of weed or pest control. One farmer's pest and weed control will benefit neighbouring farmers. But in a free market, those neighbours will pay nothing for the benefit. Conversely, any farmer maintaining a poor standard of weed and pest control will increase the cost of control to neighbouring farmers. Some aspects of weed and pest control may have added problems of nonrivalry. Consider a farmer who uses a pest control regime designed to minimise pesticide resistance in insects. Any resulting lowering of the probability of resistance will be available to all farmers.
Individual incentives to be involved in generic food safety and product promotion campaigns are also likely to be limited by lack of appropriability and nonrivalry of benefits. To the extent that changes in consumer perceptions from such campaigns benefit one producer, they are likely to benefit all. And an individual promoter of a generic product will be able to retrieve part only of the benefits of those efforts.
Not all research results or benefits from promotion are public goods. For example, private investors in research can appropriate some of the benefits by means such as keeping the results secret or, as incumbent firms, taking advantage of their research in the short term. Promotion of product brands allows a producer to appropriate much of the benefit of product design, quality control and advertising. An important test of the proposition that an industry funded effort is worthwhile is that public goods characteristics dominate for the case at hand.
PUBLIC BENEFIT
The government role discussed above is to ensure that industry policy or research of potential benefit to rural industries as a whole is undertaken. In some cases there may be substantial benefits to others outside the industry. The two most obvious cases of benefits external to the industry concern research or policies that benefit domestic consumers of farm products and those that improve environmental amenities that are valued by individuals not associated with the industry.