a) Describe the objectives of charging for services by Public Service Organisations and

discuss the desirable characteristics of such charges and factors that should be taken
into account when setting fees and charges.
Objectives of charging for services by Public Service Organisations

Certain public goods and services are financed by charges rather than from general taxation.
This can be a rational way to allocate resources because it signals to consumers that public
services have real economic costs. Charging can thus help prevent waste through badly
targeted consumption. It can also make comparisons with private sector services easier,
promote competition, develop markets and generally promote financially sound behaviour in
the public sector.

The government provides a variety of services to the public in pursuit of its policy objectives.
There is a range of possible funding sources for these government activities, including cost
recovery, general taxation, revenue from government investments, and revenue received
through commercial charges which are usually based on market rates.

Users and the public should be assured that government agencies are managing their costs
efficiently and effectively, and taking appropriate consideration of principles such as transparency
and accountability.

Desirable characteristics of such charges

In some cases, legislation allows the cost of these services to be recovered from users. The
types of activities that are cost-recovered are decided on a case by case basis depending on
the nature of the activity, the intended policy outcomes, which can or should be charged, and
the effectiveness and efficiency of cost recovery.

Each cost recovery regime should be based on sound analysis, underpinned by transparent
information and a good understanding of the impact of the cost recovery regime. In summary,
a public entity that generates revenue via cost recovery should be able to demonstrate: a
documented approach to its charging system that makes clear the legal authority for charging,
the scope of and rationale for charges, and any other sources of revenue, a clear
understanding of the objectives sought and the trade-offs that have been made a sound cost
allocation process, with clear assumptions for each charge-setting process, a clear audit trail
showing the assessment of costs incurred (where applicable), expected to be incurred and
forecast demand, and the way in which the charges have been determined that the entity has a
performance framework against which their cost recovery activities are measured lines of
accountability for the activity being cost recovered and the related charges, and a plan for
implementation, monitoring and review.

Setting user charges and fees can be difficult. Items to consider when developing
charges and fees should include:

1. Consider applicable laws and statutes before the implementation of specific fees and
charges.

When a charge for a public service is to be made, it is normally necessary to rely on powers
in primary legislation. The legislation should be designed so that ministers decide, or have
significant influence over, both the structure of the charge and its level. It is common to
frame primary legislation in general terms, using secondary legislation to settle detail
Treasury consent is required for all proposals to extend or vary charging schemes. This holds
even if the primary legislation does not call for it, or the delegated authorities within whom
the organisation operates would otherwise allow it.

2. Adopt formal policies regarding charges and fees. The policy should:

Identify the factors (affordability, pricing history, inflation, service delivery alternatives, and
available efficiencies) to be taken into account when pricing goods and services.

State whether the jurisdiction intends to recover the full cost of providing goods and services.
Set forth under what circumstances the jurisdiction might set a charge or fee at more or less
than 100 percent of full cost. If the full cost of a good or service is not recovered, then an
explanation of the government's rationale for this deviation should be provided.

Outline the considerations that might influence governmental pricing decisions. Such policy
concerns might include the need to regulate demand, the desire to subsidize a certain product,
competition with private businesses, economic development, elasticity of demand for the
particular service, and visibility of the service to the community.

The specifics of how the fees and charges will be levied and collected should be a
consideration when developing policy.

3. Calculate the full cost of providing a service in order to provide a basis for setting the
charge or fee.
Full cost incorporates direct and indirect costs (including operations and maintenance),
overhead, and charges for the use of capital facilities. Examples of overhead costs include:
payroll processing, accounting services, computer usage, and other central administrative
services. One useful tool for calculating service costs is Activity Based Costing (ABC). ABC
assigns costs to the activities required to deliver a service and can be more accurate than
traditional costing methods. The associated costs of collection need to be addressed.

4. Review and update charges and fees periodically based on factors such as the impact of
inflation, other cost increases, adequacy of cost recovery, use of services, and the
competitiveness of current rates. By updating fees on a periodic basis, this may help smooth
charges and fees over several years rather than having uneven impacts. Periodic review of the
service demand and competition is also recommended to ensure that the appropriate quality
and price point of the service continues to meet actual demand. The review should be
performed in conjunction with a look at alternatives for cost reduction.

Benchmarking individual fees and charges with those charged by comparable or

neighbouring jurisdictions can guide a governing body when setting rates; it can also
differentiate service levels to reveal service or pricing options.

5. Utilize long-term forecasting in ensuring that charges and fees anticipate future costs in
providing the service. If the charges will recover costs associated with other long-term plans,
such as a multi-year capital plan, a longer-term service fee plan should be consistent,
recognizing the plan may be amended to reflect changing conditions in the future.

6. Provide information on charges and fees to the public. There should be opportunities for
citizen feedback, particularly when new rates are introduced or when existing rates are
changed. This includes the government's policy regarding full cost recovery, subsidies, and
information about the amounts of charges and fees (current and proposed), both before and
after adoption, and the anticipated impact of the new fee on providing the service in future
years.