Cost Recovery Impact Statement - Horse Imports Program Fees

November 2009

Animal Division
Animal Quarantine and Export Operations Branch
Horse Imports Program Fees

Table of Contents

1. Overview
1.1 Purpose
1.2 Background
1.3 Australian Government cost recovery policy
2. Policy review – Analysis of Activities
3. Design and implementation
3.1 Basis of charging – fee or levy
3.2 Legal requirements for the imposition of charges
3.3 Costs to be included in charges
3.4 Outline of charging structure
3.5 Summary of charging arrangements
4. Ongoing monitoring
4.1 Monitoring mechanisms
4.2 Stakeholder consultation
4.3 Periodic review
5. Certification
6. Cost recovery links

1. Overview

1.1 Purpose

This Cost Recovery Impact Statement (CRIS) outlines the rationale for proposed amendments to the Australian Quarantine and Inspection Service (AQIS) – Horse Imports Program (HIP) fee schedule following a comprehensive review of cost recovery arrangements for horse imports. The review of AQIS fees for horse imports gives effect to the Australian Government’s response to recommendation 37 of the Report of the Equine Influenza Inquiry released in June 2008.

It is anticipated that the new fees will be introduced in November 2009 and be in place for the remainder of the 2009/10 financial year and throughout the 2010/11 financial year.

1.2 Background

Departmental Overview

The Australian Government Department of Agriculture, Fisheries and Forestry objective in 2009–10 and beyond is to implement the government’s policies to ensure Australia’s agriculture, fishing, forestry and food-related industries better respond to their threats and opportunities. The Department’s two outcomes are:

1. more sustainable, productive, internationally competitive and profitable Australian agricultural, food and fibre industries through policies and initiatives that promote better resource management practices, innovation, self-reliance and improved access to international markets.
2. safeguard Australia’s animal and plant health status to maintain overseas markets and protect the economy and environment from the impact of exotic pests and diseases, through risk assessment, inspection and certification, and the implementation of emergency response arrangements for Australian agricultural, food and fibre industries.

The Department’s strategy for achieving the outcome relating to the safeguarding of Australia’s animal and plant health status and maintenance of overseas markets includes:

• delivering a continuum of service across pre-border, border and post-border operations which will allow an integrated focus on the safe movement of animals, plants, people and cargo to and from Australia, and support an effective response to any pest and disease incursions.
• managing risk through the application of scientifically based measures, a focus of resources in the greatest areas of risk, increased use of prevention and preparedness measures, and partnerships with clients, industry sectors and state/territory biosecurity agencies.

AQIS plays a key role in contributing to the achievement of the Department’s outcomes and implementing the Department’s strategy. AQIS’ objective (Program 2.1 Quarantine and Export Services – 2009/10 Portfolio Budget Statement) is to maintain overseas markets and protect the economy and environment from the impact of exotic pests and diseases through:

• delivering a continuum of biosecurity services across pre-border, border and post-border operations.
• developing effective biosecurity service arrangements in partnership with clients, government and industry partners.
• maximising the use of science-based risk assessment and risk-based measures across the biosecurity continuum for import and export operations.
• a collective focus operating through a service mechanism. The program undertakes advising/informing, educating and regulating activities through direct service delivery

The key performance indicators for the Department’s Quarantine and Export Services Program are:

• the Quarantine and Exports Program works towards maintaining overseas markets and protecting the economy and environment from the impact of exotic pests and diseases.
• the Quarantine and Biosecurity Review recommended moving away from the mandated intervention targets set in previous quarantine policy, and instead adopting a risk-return approach that targets quarantine intervention at the highest biosecurity risks. As the new approach develops, performance will be assessed and reported based on monitoring of the effectiveness of the overall biosecurity system.

Horse Imports

Prior to the outbreak of equine influenza in August 2007, horse imports formed part of the AQIS Post Entry Animal Quarantine Program (PEAQ). Following the release of the Report of the Equine Influenza Inquiry in June 2008 the Department restructured animal and plant quarantine operations resulting in the establishment of two separate Branches, the Animal Quarantine Branch and Plant Quarantine Branch.

The new Animal Quarantine Branch comprised of the existing PEAQ Program, Live Animal Imports Program and a new program for horse imports. The Horse Imports Program (HIP) was established in July 2008 with its own budget and included all horse imports related revenue and expenditure that was previously included in the PEAQ Program. The formation of HIP, with its separate budget, was necessary to implement the government’s response to Recommendation 37 of the Report of the Equine Influenza Inquiry which required that the fees and charges associated with horse import and quarantine be isolated, reviewed and set so that they cover the full cost of the required level of service for horse imports.

The primary function of the Horse Imports Program (HIP) is to manage potential biosecurity risks associated with the importation of live equines prior to their release into the domestic population and to manage implementation of the government’s response to the Report of the Equine Influenza Inquiry. To manage biosecurity risks AQIS provides and maintains secure housing for imported equines requiring post arrival quarantine.

There are two AQIS operated animal quarantine stations within Australia that house equines:

• Eastern Creek Animal Quarantine Station, New South Wales
• Spotswood Animal Quarantine Station, Victoria
  

AQIS, through the HIP, charges daily fees that are consistent with the charging parameters outlined in Part 3 of the Quarantine Service Fees Determinations 2005. These fees recover the AQIS costs of providing services for the housing of equines undertaking post-arrival quarantine. The current fees of $165 a day for thoroughbred stallions and $65 a day for all other horses was introduced in October 2008 to give effect to Recommendation 38 of the Report of the Equine Influenza Inquiry, which stated that such fees should be introduced until such time that the fees charged in relation to the importation and quarantining of horses be reviewed (Recommendation 37).

During the development of the 2008/09 budgets for PEAQ and HIP, analysis of expenses and revenue relating to the importation of horses including property, full time equivalent employees (FTE) and field expenses was completed. This process determined that $0.703m of the $0.840m PEAQ accumulated deficit (as at 30 June 2008) was related to horse import activity and therefore attributed to the HIP.

The 2008/09 result for HIP was a deficit of $1.8m in addition to the accumulated deficit of $0.703m transferred from the PEAQ Program. This has resulted in a total accumulated deficit for the HIP of $2.5m. Analysis of the accumulated deficit determined that approximately $1.5m was attributable to the government’s response to the 2007 outbreak of equine influenza, that included measures implemented immediately following the outbreak and kept in place until the completion of reviews by the Expert Group on Horse Importation, Biosecurity Australia and the Interim Inspector General of Horse Importation in March and April 2009. These reports recommended that a number of the import measures could be reduced without compromising the management of biosecurity risks.

The Hon. Tony Burke MP, Minister for Agriculture, Fisheries and Forestry has agreed that $1.5m of the accumulated deficit attributable to HIP to be absorbed by the Department of Agriculture, Fisheries and Forestry leaving an accumulated deficit of $1.0m to be recovered from industry as well as the ongoing operational costs of the HIP. The $1.0m accumulated deficit to be recovered from industry is directly attributable to the provision of quarantine services since the inception of the Horse Imports Program on 1 July 2008 – including staff expenditure and property costs at the quarantine stations.

An industry consultative forum, the Horse Industry Consultative Committee (HICC), was established in late 2008 to provide a forum for consultation with industry. This included the implementation of the government’s response to the Report of the Equine Influenza Inquiry. Also, a Finance Sub-committee was established consisting of the three horse importers, International Racehorse Transport, New Zealand Bloodstock and Crispin Bennet International Horse Transport. The HIP has provided several cost modelling scenarios to the HICC Finance Sub-committee that consider both ceasing and continuing horse imports into the Spotswood Quarantine Station. This follows a suggestion by importers that the cessation of horses being quarantined at Spotswood Quarantine Station may be an option to reduce HIP expenditure and therefore keep quarantine fees as low as possible. At a meeting of the HICC Finance Sub-committee in August 2009, horse importers opted to cease the use of Spotswood Quarantine Station for horse imports in November 2009 to reduce HIP expenditure and therefore minimise the potential impact of horse quarantine fees.

1.3 Australian Government Cost Recovery Policy

In December 2002, the Australian Government adopted a formal cost recovery policy to improve the consistency, transparency and accountability of its cost recovery arrangements and promote the efficient allocation of resources. The underlying principle of the policy is that entities should set charges to recover all the costs of products or services where it is efficient and effective to do so, where the beneficiaries are a narrow and identifiable group and where charging is consistent with Australian Government policy objectives. Cost recovery policy is administered by the Department of Finance and Deregulation and outlined in the Australian Government Cost Recovery Guidelines (Cost Recovery Guidelines).

The policy applies to all Financial Management and Accountability Act 1997 (FMA Act) agencies and to relevant Commonwealth Authorities and Companies Act 1997 (CAC Act) bodies that have been notified. In line with the policy, individual portfolio ministers are ultimately responsible for ensuring entities’ implementation and compliance with the Cost Recovery Guidelines.

2. Policy Review – Analysis of Activties

Description of Activity

The HIP cost model was developed to assess the cost quarantine arrangements for horse imports and determine an appropriate fee structure for the HIP.

As mentioned previously there are currently two Government operated facilities where imported horses may undertake quarantine, the Spotswood Quarantine Station in Melbourne and Eastern Creek Quarantine Station in Sydney.

Imported horses (other than those from New Zealand) must undertake between 14 and 21 days of post-arrival quarantine, depending on the import conditions under which they arrive. Based on the average number of horses imported in the three years preceding the outbreak of equine influenza and period afterwards, the HIP anticipates that approximately 600 imported horses will undertake quarantine in a government operated facility each year.

While importers are responsible for the care and maintenance of the horses whilst in quarantine, AQIS is responsible for providing safe and secure housing for both equines and grooms accompanying the animals and adequate staffing to undertake the required biosecurity monitoring procedures and policy development. These include:

Regional Operations

• supervising the unloading of horses arriving at the quarantine station
• inducting, granting access and supervising non-AQIS personnel accompanying horses (grooms, farriers, vets, transport drivers) into the quarantine station
• assessment/audit of accompanying permits, health certification and laboratory paperwork
• inspection, decontamination and clearance of vehicles and belongings that have been in contact with imported equines
• twice daily monitoring of temperatures of quarantined equines
• daily reporting to central office
• liaising with clients and release of equines from the quarantine station.

Central Office Operations

• overseeing pre-export quarantine process and evaluate facilities for approval
• liaising with stakeholders and overseas authorities regarding import conditions
• developing work instructions, operational policy and training material
• undertaking verification audits of quarantine procedures and private quarantine facilities
• implementing the government’s response to the Equine Influenza Inquiry recommendations.
  

Findings and Recommendations - The Report of the Equine Influenza Inquiry and the Quarantine and Biosecurity Review

The Report of the Equine Influenza Inquiry noted that in relation to horse importation there was evidence of budget constraints and short-staffing. Commissioner Callinan also observed that central office costs and the full capital costs not being calculated, and that another fee review was overdue. Commissioner Callinan recommended (recommendation 38) that fees charged in relation to the importation and quarantining of horses be reviewed and fixed without delay having regard to a range of factors including the full cost of all administration, the cost of employing all people, all property costs, the costs of developing, auditing and reviewing work instructions. In preparing this fee review the program took into account Commissioner Callinans’ recommendation regarding expenses to be included when determining fees for horse importation.

The Quarantine and Biosecurity Review conducted by Mr Roger Beale AO identified that Australia’s biosecurity agencies were significantly under resourced. The review process articulated that the organisation had an obligation to provide effective and efficient regulatory functions through adequate investment in infrastructure, appropriate funding for staff and training, information technology and auditing of border biosecurity certification. Mr Beale also noted that over time fees in general had become more complex and narrow leading to a significant administrative burden in managing cost recovery. The findings of the Beale Review has informed the development of the fee structure for the Horse Imports Program.

Stakeholders

The HICC and its Finance Sub-committee have been consulted regarding the proposed fee increases since March 2009. Members of these groups include the three horse import agents (New Zealand Bloodstock, Crispin Bennett International Horse Transport and International Racehorse Transport), the Thoroughbred Breeders Australia (TBA), Australian Horse Industry Council, Australian Racing Board, Equestrian Australia, Australian Harness Racing, Australian Veterinary Association, Racing Victoria Limited and representative of Sydney Airport Corporation Limited and Melbourne International Airport.

Numerous fee modelling options have been provided to stakeholders for consultation and advice. On 21 August 2009, the three horse import agents supported the cessation of horse imports into Spotswood Quarantine Station after the October 2009 intake, in order to minimise the potential impact of any increase in horse quarantine fees (the cessation of horse quarantine at the Spotswood Quarantine Station will the save the HIP approximately $0.600m a year). The TBA also supported the cessation of horse imports into Spotswood Quarantine Station at this time. Although importers agreed that industry could not financially support the operation of two quarantine stations at the current time they did note that cessation of horse quarantine at Spotswood Quarantine Station would reduce flexibility and may increase the risk of a disease outbreak impacting on the ability to import horses. However, the reality is that a disease outbreak at one station would impact on the operation of the other quarantine stations accepting horses and horse imports into Australia in general. This was the experience with the equine influenza outbreak.

Conclusion

The Report of the Equine Influenza Inquiry and the subsequent review of Quarantine and Biosecurity conducted by Roger Beale AO, identified critical under-resourcing issues within the quarantine operations. In line with the recommendations of the Report of Equine Influenza Inquiry and Quarantine and Biosecurity Review, the HIP fee review, budget development and cost modelling process has determined expenditure levels that are necessary to ensure adequate resources are allocated to perform the required biosecurity functions and minimise the risks of further outbreaks of exotic diseases associated with the importation of equine.

3. Design and Implementation

3.1 Basis of Charging – Fee or Levy

In accordance with the user group pays principle applicable to cost recovery arrangements and in line with recommendations from the Quarantine and Biosecurity Review, which have been accepted by the Australian Government, clients who receive HIP equine quarantine services are required to pay associated fees.

The cost recovery arrangements for the provision of program services include the detention, maintenance and movement of animals housed at an AQIS operated quarantine station.

This proposal is an adjustment to fees that are already imposed under the ‘user group pays’ principle. In this way, the industry that is the recipient of the benefit of the service provided by the program directly pays for the service rather than the Australian population paying through increased taxes.

3.2 Legal Requirements for the Imposition of Charges

Section 86E of the Quarantine Act 1908 (the Act) provides that the Minister may determine fees in respect of specified services provided under the Act. The current fees are set out in the Quarantine Service Fees Determinations 2005 under the Quarantine Act 1908. Drafting of the legislative amendment is to be finalised and submitted to the Minister for approval in November 2009. The new fees will take effect once they have been registered which occurs within days of the Minister signing the determination. Delays in implementation of the fees could see the program lose approximately $0.200m per month.

The legislation will be amended to:

• continue to underpin current and proposed program business practices
  
• further clarify under what circumstances program services will be cost recovered
  
• accommodate the proposed fee structure so that the program will be able to recover its costs.

3.3 Costs to be Included in Charges

AQIS seeks to meet the commitment to recover the Program’s direct and indirect costs associated with managing the quarantine risks in relation to the importation of equines from approved countries in a manner that is fair and equitable to all importers.

There are three main expenses for the program: staffing, property and accommodation and corporate overhead expenses. Staffing costs comprise approximately 51% of the program expenditure budget with property and accommodation comprising 28%, overheads and costs associated with management programs comprising 6%. The remaining 15% includes expenses such as technical and field expenses for example disinfectants, safety equipment and disposable overalls.

Staffing

Staffing costs are associated with the level of quarantine activity expected in each year. Currently there is one manager for each quarantine station (two in total). The station manager will allocate FTEs, sufficient to deliver the service required and takes into consideration factors such as the DAFF certified agreement and occupational health and safety concerns. Besides regional staffing, FTEs are allocated in the central office to deliver import permit application assessment and approval, technical expertise and advice, policy development, liaison with stakeholders and overseas authorities, and overall program management.

Following the cessation of horse imports into Spotswood Quarantine Station (SQS) the HIP expenditure will be reduced since there will be one station manager and supporting staff at the Eastern Creek Quarantine Station for equine quarantine.

Average FTEs remain the same between 2010-2011 to 2011-2012, the employee expenses actually decrease. This is due to the expectation that senior staffing levels within the program will be reduced following the full implementation of the Governments response to the EI Inquiry. However, it is expected that lower level staff will be required to maintain program operations. As a result HIP FTEs will remain the same; however, overall employee expenses will decrease due to lower salaries and on-costs.

Property and Accommodation

Property Maintenance

HIP is obliged to maintain the horse facilities to a standard as specified in the lease. Financial resources are therefore required to meet the obligations contained within these agreements. Despite preventative maintenance programs, property maintenance costs have increased due to a combination of the age of the facility and their regular use.

Rent

The commercialisation of rents for the stations by the Department of Finance occurred in 1999/00, increasing the costs to the program. A rental subsidy was provided which gradually decreased from $301,000 in 99/00, to zero in the 2003/04 financial year. Program funding has been required to pay the full lease costs since that time.

While the Spotswood Quarantine Station (SQS) will remain open for the quarantine of dogs and cats, the cessation of horse quarantine at SQS will mean a reduction in all associated expenditure at that facility for the Horse Imports Program.

Following is a detailed breakdown of expenditure by revenue source, along with full time equivalent (FTE) numbers and assumptions for each financial year.

	2009/10	2010/11	2011/12
Average FTEs	12	11	11
Employee Expenses	1,178,774	1,092,056	996,246
Employee Remuneration	901,336	803,243	695,592
Leave Entitlements	102,330	106,525	110,893
Other Employee On Costs	19,839	20,652	21,499
Staff Training & Development	3,200	3,331	3,467
Superannuation	152,068	158,303	164,793
Supplier Expenses	879,752	900,473	922,984
Temporary & Contract Staff	12,000	12,300	12,607
Travel and vehicles	29,800	30,545	31,308
IT Comms & Office Equip	47,158	48,337	49,545
Property & Accommodation	582,997	596,299	611,207
Technical & Field	70,907	72,680	74,497
Other administrative	136,888	140,310	143,819
AQIS Overheads	113,146	115,975	118,874
Legal	8,147	8,351	8,560
General Office Supplies	3,531	3,620	3,710
Other	106,564	132,135	158,345
Corporate Expenses	83,016	85,091	87,219
Depreciation	21,606	45,053	69,086
Total Expenses	2,165,091	2,124,665	2,077,576
Revenue	2,428,617	2,469,600	2,469,600
Surplus/deficit	263,526	344,934	392,023

Assumptions:

Expenses have been allocated based on the 2009/10 budget taking into account areas of anticipated increases and decreases in expenditure for future years.

• Future staffing costs have been indexed at 4.1% to take account of expected increases under the new Collective Agreement, however overall staff expenses have decreased due to the completion of post Callinan Inquiry project implementation;
• Future supplier expenses have been changed to take account of changes in usage. The rates for supplier expenses have been increased by 2.5%, being the average expected increase in costs.

3.4 Outline of Charging Structure

The proposed amendments to the HIP fee structure allow for the simplification of charges providing ease of understanding for clients and staff alike. Currently the program has six separate charge codes for quarantine station activities; this has now been consolidated to one that will recover the operational costs of the program.

As outlined in section 2 above, the current fee structure has an associated administrative burden. The simplified fees ensure that staff are able to streamline the process of generating invoices. Greater clarity about the fee structure for clients will result in time savings for both Canberra office and regional staff resulting in less queries and complaints. The simplified fees will also provide greater certainty for clients of the final quarantine costs.

3.5 Summary of Charging Arrangements

SCHEDULE OF FEES AND CHARGES

Activity	Method of Recovery	Volume of Activity (Note 1)	Current Price	Cost Recovery Price	Total Cost Recovered for Activity	Total Cost of Activity
2009-10
Daily Accommodation	Fee Per Day	9,870 (Accom Nights)	$165 (Thorougbred Stallions) $65 (all other equines)	$196 (All Equines)	$1,934,520
					$494,097 (Note 2)
					$2,428,617	$2,165,091
2010-11
Daily Accommodation – All Equines	Fee Per Day	12,600 (Accom Nights)	$165 (Thorougbred Stallions) $65 (all other equines)	$196 (All Equines)	$2,469,600
					$2,469,600	$2,124,665
2011-12
Daily Accommodation – All Equines	Fee Per Day	12,600 (Accom Nights)	$165 (Thorougbred Stallions) $65 (all other equines)	$196 (All Equines)	$2,469,600
					$2,469,600	$2,077,576
Note 1 – Imported horses (other than those from New Zealand) must undertake between 14 and 21 days of post-arrival quarantine, depending on the import conditions under which they arrive. With the suspension of horse imports into Spotswood Quarantine Station, the cost model assumed that all equines would undergo 21 days quarantine as required by the import conditions for horses arriving from multiple pre-export quarantine facilities. Further, based on imports over previous years, the cost model has assumed that 600 horses will be imported per year over the next three years. The number of horses per year and the number of days of quarantine is the basis for setting the volume of activity (i.e. 600 horse x 21 days = 12,600). For the 2009/10 financial year this figure is reduced as the proposed fees will only apply for part of the financial year (November 2009 – July 2010). Until the new fees are in place horse import will continue to be charged under the current fee structure. The fee is charged on a per horse, per day basis depending on the amount of quarantine actually performed. The occurrence of a horse requiring a longer quarantine period due to illness or risk of illness is very rare. In the unlikely event that quarantine was extended the daily accommodation fee would continue to be applied. Note 2 - This figure represents anticipated revenue from the existing fees between July and October 2009.					Total revenue	$7,367,817
					Total Expenditure	$6,367,332
					Surplus	$1,000,485
					Less Total Accumulated (Deficit)	($1,000,000)
					Final Result (IEA Balance)	$485

4. Ongoing Monitoring

4.1 Monitoring Mechanisms

To ensure accountability in the financial status of HIP, cost recovery information provided to the program on a monthly basis from DAFF Corporate Finance through financial reports that track actual revenue and expenditure against budgeted figures and outlining variances. The program then reports to the General Manager, Animal Quarantine and Export Operations Branch. Corporate Finance also provides all of the Biosecurity Services Group (BSG) resource reports to the DAFF Executive Management Team and BSG Executive.

The impact of the fee increase will be closely monitored on an ongoing basis and reported internally as well as to Industry through the HICC.

4.2 Stakeholder Consultation

Following the outbreak of Equine Influenza in August 2007, the Horse Imports Consultative Committee (HICC) was established with the first meeting being held on 30 July 2008. HICC was established to provide an effective means of consulting with stakeholders about aspects of the Governments response to the EI Inquiry and other issues relevant to the Australian horse industry.

It has representatives from all major horse industry bodies, all the horse import agents, and other organisations relevant to the importation of horses such as the international airports in Melbourne & Sydney and Racing Victoria Limited. Where relevant, HICC representatives consult directly with their constituents.

The HIP has consulted with the HICC since March 2009 regarding the proposed fee increase. As outlined in section 2, while issues have been raised with the cessation of horse imports into the Spotswood Quarantine Station, HICC support the proposed fees. The program, inconsultation with HICC will conduct a review six months after implementation of the fees to assess the impact on the budget.

HIP will continue to engage both the HICC and the HICC Finance Sub-Committee in matters that impact the industry through formal face to face and teleconference meetings.

4.3 Periodic Review

Fees and charges are reviewed on a regular basis as part of routine governance arrangements for internal budgeting within BSG. The HIP cost model was initially developed based on the assumption that fees would be reviewed in January 2012 with either an increase or decrease required by July 2012. However, along with the review mentioned in section 4.2 above, the Government is also considering its involvement and other future arrangements for post arrival quarantine of imported live animals. As a result of this review or other potential factors such as disease outbreak, it may become necessary to formally review the fee structure earlier. When cost recovery arrangements require review, the relevant industry bodies will be consulted.

5. Certification

I certify that this cost recovery impact statement complies with the Australian Government Cost Recovery Guidelines.

[signed]
Conall O’Connell
Secretary
Department of Agriculture, Fisheries and Forestry

Date: 10/ 01/ 2010

6. Cost Recovery Links

• The Australian Government Cost Recovery Guidelines and the accompanying Finance Circular can be found at:

http://www.finance.gov.au/financial-framework/financial-management-policy-guidance/cost-recovery.html

• For proposals that involve regulation or amendment to regulation that affects business, a Regulation Impact Statement is required. Contact the Office of Best Practice Regulation for further information:

http://www.finance.gov.au/obpr/index.html

As at 1 July 2009 the Department restructured its biosecurity operations. The former Divisions of AQIS and Product Integrity and Animal and Plant Health (PIAPH) along with the prescribed agency Biosecurity Australia (BA) have merged and are now known internally within the Department as the Biosecurity Services Group (BSG). This restructure is in line with the Recommendations of the Quarantine and Biosecurity Review conducted by Roger Beale AO, and accepted in-principle by the Government. For external clients and stakeholders, AQIS and BA will retain their separate corporate identities until the formation of the new National Biosecurity Authority, some time in the future.