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The national and international policy framework
2.1 Market failure and the need for regulation
2.2 Costs of regulation and the impact on competition
2.3 Impact of the Act and its administration on industry
2.4 The international policy environment
2.5 The national policy environment
In order to evaluate the operations of the Imported Food Control Act 1992 and administration under the Act, it is necessary to consider the impact of market forces as well as the national and international regulatory framework. Internationally, the World Trade Organization (WTO) Codex Alimentarius Commission (Codex) and special arrangements with New Zealand place limits on Australian regulations for imported food safety. The Review Committee analysed the operations of the Act and IFIP against not only this background but also the national food safety regulatory framework, in order to establish the nature and extent of necessary modifications.
Where competitive markets are working properly, they allocate the economys available resources to their most valued uses. Markets allocate resources to individuals according to the value they place on them. However, in some cases markets fail to produce economically efficient or socially desirable outcomes. In such situations a case may be made for government intervention. Regulatory intervention by government is often employed to:
- deal with market failure; and
- attain socially desirable outcomes such as worker safety, consumer protection and equity.
The governments actions in regulating the food sector for both domestic and imported foods reflect both principles mentioned above. The overriding concern that drives food regulation policy is the need to protect human health and safety by ensuring that food entering the marketing chain is safe and free from microbial, physical and chemical contamination. One way this can be achieved is by the government setting food standards designed to provide a minimum acceptable level of protection from unsafe foods. However, government regulation of the food industry goes beyond the setting of food standards to a more interventionist approach that aims to ensure that the standards are observed. This is because a number of factors pertinent to the food industry can lead to market failure and so impede the efficient operation of the market in delivering outcomes that are consistent with the desired standards.
Markets will not operate effectively unless consumers have sufficient information upon which to base decisions on what goods to buy and consume. Lack of adequate information can lead to market failure with consumers making decisions that may not be in their best interest. Consumers normally lack the resources to verify the standard or wholesomeness of a part of the food which they buy. With foods there are two concerns regarding the provision and availability of information to consumers:
- Some qualities of a food can only be determined after purchase and consumption, and even then it may be impossible to ascertain safety where there could be adverse long term effects. As well, because some companies might regard some information to be of limited relevance to consumers, food companies might not supply complete information to consumers.
- People with allergies or specific dietary requirements need to know the composition of foods that they consume.
Government regulation through the setting and enforcement of food standards provides confidence to consumers that commercially available foods are generally safe for human consumption and requires food manufacturers to identify (ie, label) the contents of their foods.
Another major source of market failure in the food sector is where the costs arising from the sale of contaminated food are not fully borne by the suppliers of those foods but spill over to the wider community. This is best evidenced where contaminated food has led to an outbreak of food-borne illness.
Businesses supplying contaminated food products are rarely forced to compensate consumers for the illness due to practical problems in independently verifying food quality, and linking the supplier to the consumer or the food to an illness, and arriving at a value for compensation (Food Act Review Working Group 1998).
In addition to problems with compensation, there are also the costs incurred by the public health agencies in trying to identify and contain the source of a food-borne disease outbreak.
Businesses supplying safe food can also be adversely affected by other businesses that supply contaminated or sub-standard food, often due to an inability or a reluctance by consumers to distinguish between similar generic products (Food Act Review Working Group 1998). A regulatory impact statement on the Tasmanian Food Bill 1996 prepared by the Tasmanian Department of Community Health and Services refers to two major recent outbreaks of food-borne illness, which occurred as a result of a significant breakdown in hygiene controls, either within the premises processing the food or in the premises supplying raw materials. In addition to the direct medical costs and productivity losses resulting from the illnesses, both outbreaks had disastrous consequences for the industries concerned, illustrating problems that food-based industries face when consumer confidence in the safety of their products is shattered. This is well illustrated by reference to the mushroom industry, highlighting the interdependence of the domestic and importing food industries:
The Australian mushroom industry is valued in excess of $0.25 billion annually. A major food scare, caused by contaminated imported product could have devastating consequences for the industry by eroding consumer confidence in the entire mushroom category (The Australian Mushroom Growers Association Submission 1998).
The food industry as a whole relies on consumer confidence in the supply of safe food to market its products (Food Regulation Review Committee 1998). To maintain consumer confidence governments must have systems in place that ensure the integrity of the food supply. The desire by consumers for a regulatory system that guarantees the safety of foods sold commercially, is demonstrated in consumer surveys where the majority of respondents support such regulation and, more importantly, exhibit a willingness to pay for the setting, maintenance and enforcement of adequate food standards (John Hawkless Consultants 1998).
A survey on food safety in Tasmania found that some 99 percent of those surveyed consider that regular inspections of food manufacturing and food selling premises are necessary. The survey also highlights the role that governments have in bestowing consumer confidence in the food industry: 86 percent of respondents indicated that adoption of government-approved safety plans by food sellers may result in increased patronage (ABS 1997).
Given the potential risks associated with eating contaminated or unsafe food, there is strong consumer demand for government-backed assurances regarding the safety of food that is commercially available in Australia, whether imported or produced domestically:
We certainly believe that there is a strong justification for having a program for inspecting and testing imported foods. We believe that the governments role in imported food inspection should be based on standards that are clearly defined and enforced by government personnel (Australian Consumers Association Submission 1998).
This concern with food safety and quality mirrors a reported rise in the incidence of food-borne illnesses in Australia and an increasing awareness of the costs of such illnesses to the community. Between 1991 and 1997, the number of reported cases of salmonellosis and campylobacteriosis increased by 25 percent and 29 percent, respectively. A report commissioned by ANZFA estimated the annual cost of acute food-borne illness in Australia to be around $2.1 billion (John Hawkless Consultants 1998). This represents the costs of medical treatment for patients and the opportunity cost of days missed from work. This estimate does not take into account long term or chronic complications associated with some of these illnesses, which are difficult to cost.
Food regulation is also aimed at protecting consumers from pesticides, contaminants and some other additives, where prolonged ingestion of food with high levels of such substances may result in harmful long term health effects. Because any adverse effects that these agents may have on individuals take a long time to develop, causality and cost attribution is very difficult to establish.
Whilst government regulation is often used to address a market failure and to deliver socially desirable outcomes that would otherwise not be delivered, it is not without costs to the community as it directly affects the environment in which business operates. The prescriptive nature of food legislation can have an adverse impact on competition through its effect on company costs. Such costs can act as a barrier to entry in the industry or may impede the operations of existing companies. In either case it is likely that, in a highly regulated environment which results in substantial compliance costs, the supply and choice of foods available to consumers will be restricted and prices will be higher.
Costs of regulation can be divided into direct and indirect costs.
- Direct costs are those costs that are borne directly by companies or the sectors that are subject to regulation. In the case of the IFIP, these costs are: fees for inspection and testing, administrative costs incurred to ensure compliance with the Act, and extra interest and stockholding costs due to delays caused by IFIP. These costs are dealt with in greater detail in Section 5.1.
- Indirect costs are more difficult to quantify and extend beyond individual companies. These costs mainly arise out of the impact of regulation on the allocation of resources across the economy. Costs due to misallocation of resources are nil or minimal where regulatory controls are targeted to directly address a market failure. However, costs become more pronounced where regulations are overly prescriptive or extend beyond the market failure they seek to correct.
Because Australia has no direct control over food production in overseas countries, it needs a system to ensure that imported foods meet Australian standards. Failure to do this could put Australian consumers at risk from contaminated or sub-standard food and place Australian food manufacturers, which must comply with Australian standards, at a competitive disadvantage. In this respect, the objective of the Act is to ensure the integrity of imported foods, whilst providing a level playing field between domestic and imported foods.
Resource misallocation could arise should IFIP embody an inspection and testing regime that was more onerous than required to ensure compliance with Australian standards. Efficiency may be impaired and resource misallocation would then result as more resources were drawn into the food manufacturing sector, at the expense of other sectors. Consumers would also be worse off because of higher prices and reduced choice.
Where some of these foods are used as inputs in the production of other foods in Australia, there would be detrimental effects if the higher prices of these inputs were to raise the cost of production of these foods and hence lower their competitiveness in the domestic and export markets.
Perceptions by overseas countries that regulations are used to assist domestic industry by imposing non-tariff barriers to trade and thus making it more difficult and costly to import to Australia may lead to trade tensions and retaliatory action which could harm Australian exporters. In its submission the Australian Food Council states:
Australia has a trading surplus in food as commodities and finished consumer food products. It is critical that access to overseas markets is not jeopardised through barriers to trade inadvertently being created by food regulations based on faulty science or poorly established risks to public health.
One of the reasons for the introduction of IFIP was to address an apparent inconsistency in the treatment of imported food compared to domestically produced food. Before IFIP, imported food was generally subject to end-product testing at the retail level only in Australia. This compared to domestic food, which was subject to a maze of controls and regulations imposed by all spheres of government. According to the AQIS submission:
Before 1990 there was no comprehensive national inspection program for imported food and it was argued that domestic food producers were disadvantaged . . . There was no national control over imports, yet local producers had to comply with regulation covering all aspects of premise construction, hygienic practices, product labelling etc. As the jurisdiction of each State or Territory extends only to its borders, there was no national alert system or consistent control mechanisms when a problem was detected with imported foods.
As discussed in Section 2.2, the Imported Food Control Act has a direct impact on the cost of imported foods. The legislative provisions for the inspection and testing of food imports add to the costs of these goods and so affect their profitability and supply on the Australian market. Higher costs can also have an adverse effect on the level of competition in the food sector. Under the Act there are no requirements for the licensing of importers, so the impact of IFIP on competition is through its effects on company costs.
IFIP has a twofold impact on the Australian food industry in:
- the treatment of imported foods compared with domestically produced foods; and
- the possible differential treatment of food importers of different characteristics (eg, size, type of business).
For the former, industry costs will be higher and competition lower than warranted if the inspection requirements of IFIP are more stringent than is needed to ensure that imported foods meet Australian standards.
The impact of the Act and its administration on the level of competition among food importers will depend on the effect the program has on the cost structures of the various types of firms. Where costs are disproportionately large for small companies, IFIP will have an adverse impact on competition. Whilst larger companies may be better placed to absorb or pass on additional costs, the capacity to pass on costs also depends on the nature of the market for which the food is imported. Food imported as a brand name or for a niche market provides an importer with greater discretion over pricing.
The Review Committee sought, in its deliberations, to ascertain not only whether the current scheme delivers a net benefit to Australia by ensuring safe food from imported sources, but also whether it is efficient and effective in its operation and equitable in its delivery. Such issues as the frequency, relevance and selection of tests, the consistency of application of regulations, the role of quality assurance arrangements in the provision of safe food and the costs of the program are addressed in the report.
2.4.1 The WTO and SPS/TBT agreements
With the reform of agricultural protection which resulted from the Uruguay Round of Multilateral Trade Negotiations held under the auspices of the General Agreement on Tariffs and Trade (GATT), there was concern that countries might turn to food safety and quarantine restrictions as a means of protecting their agricultural industries. The 1994 WTO Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) and the 1994 WTO Agreement on Technical Barriers to Trade (TBT Agreement), which entered into force with the establishment of the World Trade Organization on 1 January 1995, were designed to prevent this from happening. The purpose of these two agreements is to prevent the proliferation of non-tariff barriers to trade by defining how technical barriers to trade may be used legitimately. The 1994 TBT Agreement replaced the earlier TBT Agreement (also known as the Standards Code) which was one of six codes signed at the end of the GATT Tokyo Round in 1979. The 1994 SPS Agreement was the first such code covering sanitary and phytosanitary matters and was designed to improve the conduct of trade.
Given that Australia exports more than four times as much food as it imports, it is clearly in Australia's interests to ensure that food safety policies and procedures are not used as a device to protect industries from import competition. The SPS Agreement covers such matters as the application of food safety and animal and plant health regulations for animals, plants and food-related products moving in international trade. The Agreement also serves to maintain the sovereign right of any government to provide the level of health protection deemed appropriate, as long as these measures are based on a scientific risk assessment process. It requires that sanitary and phytosanitary measures be applied only to ensure food safety and animal and plant health. The Agreement clarifies factors that should be considered in assessing the risks and requires that measures to ensure food safety and to protect the health of animals and plants should be based (as far as possible) on the analysis and assessment of objective and accurate scientific data.
For food, the SPS Agreement provides a special status to standards, guidelines and recommendations established by the Codex Alimentarius Commission (discussed in Section 2.4.2). Sanitary measures which conform with the Codex position are deemed to be necessary to protect human health and presumed to be consistent with the SPS Agreement. Hence no additional scientific justification for such measures is required. However, if the national requirement results in a higher level of sanitary protection than would be achieved by an international standard (such as, Codex), then a country could be asked to provide scientific justification, in order to demonstrate that the measure was based on a consistent application of scientific risk assessment principles.
The TBT Agreement provides protection from the application of arbitrary and discriminatory measures to imported foods, covering issues such as labelling, which lie outside of the scope of the SPS Agreement. Both the SPS and TBT Agreements recognise the principle of equivalence, thereby allowing exporting countries to apply measures, which, while differing from the detail of the importing country requirement, provide the same outcome.
The Codex Alimentarius Commission is an international inter-governmental body that develops food safety and commodity standards to facilitate trade and promote consumer safety. The Commission was established in 1962 by the Food and Agriculture Organization (FAO) and the World Health Organization (WHO) of the United Nations. The Commission, comprising representatives of each of its 154 member countries, establishes policy and work priorities and adopts standards based on the recommendations of the Commissions 28 subsidiary bodies. To date, the Commission has adopted over 230 food standards, 3500 maximum residue limits for agricultural and veterinary chemicals and over 40 hygiene and technological codes of practice. These are published in the 14 volumes of the Codex Alimentarius.
Australia has always been an active participant in the Codex program for two prime reasons. First, the utility of Codex standards and codes provide a means of protection of consumer health and safety. Of equal importance to Australia, Codex standards provide the basis for harmonisation of requirements for foods moving in international trade. Whilst Codex member countries have been committed to the principles of the Codex Alimentarius Commission since its establishment, use of Codex standards was rather arbitrary until the conclusion of the GATT Uruguay Round and the adoption of the SPS Agreement.
Codex standards also provide a bridge between the facilitation of trade and domestic standards for local consumers. Governments frequently adopt Codex norms directly into national regulations, as is the case with many of the developing countries where resources and expertise for food standard setting are limited. On the other hand, governments may use Codex standards as the basis for developing domestic standards. In Australia, ANZFA has a statutory obligation to take into account international standards when developing measures for inclusion in the Food Standards Code.
There are two main linkages between Codex and the Imported Food Control Act. First, the Food Standards Code is the applicable standard under the Imported Food Control Act. Second, and of particular relevance, Codex has established a committee to develop guidelines for import and export certification systems. Inspection procedures utilised by Australia will need to conform with Codex standards, when these are finalised.
At its February 1998 meeting, the Codex Committee on Food Import and Export Inspection and Certification Systems, chaired by Australia, progressed further development of proposed Guidelines for Food Import Control Systems. The first of the seven principles in the draft Guidelines states:
Imported food standards and application of those standards cannot be more rigorous than domestic controls, while acknowledging that domestic production allows some scope for "in process" control.
The full set of proposed principles in the draft Guidelines is shown at Appendix E.
2.4.3 Special arrangements with New Zealand
The Review noted that Australia has particular obligations under agreements made with New Zealand. In 1997 Australia and New Zealand agreed to relax border controls for food traded across the Tasman. This was a flow-on from the creation of ANZFA and the agreement to harmonise food standards. The only New Zealand food products now subject to testing upon entry to Australia are those on the jointly agreed list of foods that are considered to have the potential to pose a risk to public health.
The Trans-Tasman Mutual Recognition Arrangement (TTMRA) was signed by Australia and New Zealand in July 1996, and came into force in May 1998. Building on the principles of the Closer Economic Relations (CER) Treaty between the two countries, the objective of the arrangement is to remove regulatory barriers to the movement of goods and service providers between Australia and New Zealand. The TTMRA and its supporting legislation declares that goods, which comply with applicable standards and hence are legally available in Australia, are eligible for sale in New Zealand and vice versa. Quarantine requirements are outside the scope of this agreement and continue to apply.
With the relaxation of barrier inspection of food traded across the Tasman, the control of food from third countries was recognised as an important issue. Australia (AQIS) and New Zealand (Ministry of Health) have agreed to jointly assess proposed certification arrangements with third countries. Further, the certification arrangements that now exist with foreign countries are subject to review. This is an opportunity for expansion of certification coverage to encompass both Australia and New Zealand and to assess the efficacy of existing arrangements.
2.5.1 The national food regulatory process
Under the Constitution, the States and Territories are responsible for food matters. Historically this has meant that food legislation was developed differently in each jurisdiction and resulted in inconsistent approaches, with the potential to impact adversely on food traded between the various States, as well as food traded between Australia and other countries.
The States and Territories have been working with the Commonwealth Government since the 1970s to bring about nationally consistent food legislation. The primary legislation in each State and Territory is a Food or Health Act that is basedon the ModelFood Act adoptedin 1980. The statelegislationsupports two sets of regulations the food standards regulations (mainly end-product requirements) and the food hygiene regulations (mainly process requirements).
Uniformity has been achieved for the food standards regulations through an agreement between the States and Territories and the Commonwealth that established a Ministerial Council consisting of all Health Ministers chaired by the Commonwealth. In essence, the agreement provides that food standards, endorsed by a majority of members on the Council, are adopted by reference and without amendment into the food regulations in each jurisdiction. These standards are known collectively as the Food Standards Code and are developed by the Australia New Zealand Food Authority (ANZFA). The Agreement was extended to include New Zealand in 1996.
Whilst the state legislation does not directly impact on the operations of IFIP, the Food Standards Code is of particular relevance as the Imported Food Control Act defines the "applicable standard" to which imports must comply as "the national standard in force in relation to that food or matter at that time"; in other words, the Food Standards Code. As a result, all food products traded on the Australian domestic market, whether produced domestically or imported, must conform to the same standards. This ensures that the WTO requirement of "consistent treatment" is met.
2.5.2 Reviews of national food regulation
The legislative framework and content of food regulation in Australia are currently undergoing major reviews. In the case of the State Food Acts, whilst they are based on the Model Food Act, uniformity has not been fully achieved and there are significant differences between jurisdictions. Accordingly, ANZFA with the States and Territories is reviewing the Model Food Act and State Food Acts to increase uniformity and to enable the implementation of important food reforms such as the hygiene regulations and a national surveillance and compliance system. This review has been extended to include a review of relevant provisions of the New Zealand Food Act in an attempt to achieve uniformity of important provisions of Australian and New Zealand Food Acts.
The Review Committee noted that the development of nationally uniform Food Acts would result in consistent definitions across all jurisdictions for the first time. It would be desirable to align the definitions in the Imported Food Control Act 1992 with the Food Acts.
ANZFA is also reviewing the various food standards which make up the Food Standards Code. The specific objectives of the review include to:
- reduce the level of prescriptiveness of food standards;
- develop standards that are easier to understand and easier to amend; and
- replace standards which regulate individual foods with standards that apply to all foods or to a range of foods.
This review, which is the Authority's highest priority project, is expected to be completed by the end of 1999. It is also being conducted against the National Competition Policy principles.
The review of food standards is of particular significance to the operations of IFIP. During the course of consultations, it became clear that in some cases importers' concerns with IFIP were in fact related to particular aspects of the food standards that were claimed to be unduly restrictive or out of line with international practice for example, the Australian prohibition on the addition of preservatives to sauces. In this context, ANZFA commented that "[s]ince the revision of the Food Standards Code is being done taking into account the competition policy principles, our WTO obligations and Codex standards, it will address the major areas of complaint about IFIP put forward by importers" (ANZFA Submission 1998).
The Review Committee noted progress in the current revision of the Australian Food Standards Code and expects the proposed reduction in prescriptiveness and simplification of the food standards will facilitate compliance by imported food with Australian requirements.
The review of the food standards has another implication for the Act and its administration. The simplification of food standards is likely to lead to the removal of many of the specific and prescriptive labelling requirements, as well as of compositional and quality requirements. Instead, much greater reliance will be placed on the Food Acts under which it is an offence for food to be labeled in a manner which is false, misleading or deceptive. The Code will, however, continue to contain labelling requirements relating to health and food safety issues.
The Committee noted that at present the Imported Food Control Act does not contain a prohibition on false and misleading claims similar to that found in the State Food Acts and considered whether such a prohibition should be included in the Act. The Committee decided that, on balance, such a step was unnecessary. The following factors were relevant to the Committee's decision:
- at its inception, IFIP was clearly linked to the enforcement of the Food Standards Code and to depart from that position would necessitate a clear change in government policy;
- the Code would continue to contain labelling requirements relating to health and food safety issues and these would continue to be enforced under the Act;
- deciding whether a claim is misleading is generally a complex process that depends on evaluation of a wide range of factors; such decisions are ultimately made by courts, not by administrators;
- the States and Territories will still retain powers over false and misleading claims for imported foods; and
- IFIP does not have to duplicate government controls over all aspects of the domestic food safety and standards system.
The Committee recognised that the regulation of claims by reliance on general prohibition on misleading practices rather than by specific controls was a major development in food administration and enforcement policy. As this development was evaluated, the Committee considered it would be appropriate to further consider the implications for the imported food program.
The Review Committee noted that, with the removal of many of the specific and prescriptive labelling requirements of the Food Standards Code, the Act's powers over labelling will, in the main, relate only to health and food safety issues. The implications of this may need to be further considered by Government to determine whether any expansion of powers is required.
The Food Regulation Review (the Blair Review) reported during the course of the Imported Food Control Act Review. The Blair Review was a wide-ranging exercise, encompassing the whole of the food sector. It had the tasks (among others) of:
- proposing broad purposes for food regulation;
- identifying the nature and magnitude of the problems with existing food regulation;
- developing options (with costs and benefits);
- recommending changes; and
- reviewing the Australia New Zealand Food Authority Act 1991 against National Competition Policy principles.
The Draft Report was released for comment in May 1998 and the Final Report was released to the public in August 1998 (Food Regulation Review Committee 1998).
2.5.3 Development of the Food Hygiene Standards
In June 1995 and again in July 1996, State and Territory Health Ministers, in their capacity as the Australia New Zealand Food Standards Council, affirmed their support for a major reform of food hygiene regulation in Australia. They resolved that this could be achieved within the terms of the State, Territory and Commonwealth Agreement in relation to the adoption of uniform food standards of 1991. Food Hygiene Standards are outside the scope of the 1996 Agreement establishing a system for the development of joint food standards between Australia and New Zealand and therefore these proposed hygiene standards will only apply in Australia.
The purpose of the new hygiene standards is to enable Australia to have in place nationally uniform, efficient and cost-effective regulatory arrangements, governing the safe and hygienic production, storage, transportation, retailing and handling of food.
The Australian food hygiene reforms seek to:
- reduce the incidence of food-borne illness in Australia;
- reduce the incidence of food-borne pathogens reaching the marketplace, rather than detecting them after they have entered the marketplace;
- encourage a business environment that can respond quickly to emerging food-borne pathogens;
- encourage a business environment in which business can take full responsibility for the safety of the foods produced; and
- support export initiatives to enable Australia to compete more effectively on world food markets.
The Review Committee recognises that the development of the Food Hygiene Standards will require food importers to adopt food safety plans. This will require businesses to:
- adopt food safety programs;
- provide for food recalls;
- notify themselves to a relevant authority;
- ensure that their staff and supervisors have skills and knowledge in food hygiene commensurate with their work activities; and
- abide by standards which set out good hygiene practices for food handling and storage and standards for premises and appliances.
29 Nov 2007