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1999 September Report of the Auditor General of Canada

Main Points

11.2 Our audit found that the organizations often view user fees primarily as a means of generating revenue, ignoring their potential to achieve other possible benefits. For example, the Canadian Food Inspection Agency often charges the same fee for inspections whether or not food inspectors have found deficiencies, even though an inspection that has found problems entails additional time. This provides no incentive for the industry to comply with regulations and thereby minimize the time government inspectors need to spend.

11.3 The organizations we audited need to make major improvements in the way they report to the public, the industry and Parliament on their plans for user charges and on the results. Despite the fact that this is a contentious issue that has sparked a great deal of interest from Parliament, the organizations in most cases have not publicly explained why specific user charges were needed and how they would be applied. Nor have their reports provided enough information to allow readers to judge whether user charges are managed properly.

11.4 The three organizations need to improve their management of user charges in a number of areas, including costing their services, assessing the impact of fees, establishing formal appeal processes and integrating user charges into their strategic planning.

Background and other observations

11.6 Organizations in the agriculture portfolio charge for many different services. For example, the Canadian Grain Commission charges the grain industry for weighing and inspecting grain destined for export. The Canadian Food Inspection Agency charges importers and exporters to inspect plants and plant products for pests or diseases. Agriculture and Agri-Food Canada charges owners of cattle that graze on community pastures for services it provides.

11.7 User charges have been a focal point of much concern in the agriculture sector. Over the past five years, revenues from user charges in certain areas have increased by as much as 300 percent. Producers and the industry have objected to the way the fees were introduced and to the cumulative impact they have had. Some have contended that the fees were simply a tax.

11.8 A moratorium on new fee increases was announced at the time the Canadian Food Inspection Agency was created, to be in effect until the year 2000. Officials of the three organizations have given many different interpretations of not only how long the moratorium will last but whether it applies to other organizations in the portfolio. We note that the organizations we audited believe they are constrained from correcting even known inconsistencies among fees and responding to changes in their business environment. In our view, the period of the moratorium offers them an opportunity to reassess their current position, develop guiding principles and plan improvements.

11.9 The organizations face specific challenges in that they recover fees from individuals they also regulate. It can be difficult to establish the amount that users of a service should be charged for the benefits they receive when the service also benefits the general public. There is a need for broader consultation, where possible, that takes into account the interests of both industry and the public. Those who pay fees want to influence how services are provided, and the organizations must ensure that the needs of all stakeholders are taken into account.

11.10 The three organizations need to make key decisions on user charges and take action to resolve the following situations:

• Recent changes in its operations and in the grain industry have made the existing fee structure of the Canadian Grain Commission no longer appropriate.
• The Canadian Food Inspection Agency initiated fee increases but has not completed its plan for user charges. Consequently, commodity groups are paying different proportions of the Agency's costs for similar service, which represents inconsistent treatment.
• Agriculture and Agri-Food Canada has not explained adequately when, how and why user charges are implemented for each of its programs. Consequently, the reasons why some programs have user charges and other, similar programs do not remain unclear.

Introduction

11.12 The major organizations in the agriculture portfolio who apply user charges are Agriculture and Agri-Food Canada (the Department), the Canadian Grain Commission and the Canadian Food Inspection Agency. User charges cover a wide range of services, from inspecting cattle slaughter operations to certifying product standards and quality, to administering loan guarantee registration. User charges for these organizations totalled $135.6 million in 1997-98, the seventh highest in the federal government, where the total was $3.937 billion.

11.13 The proportion of their expenditures that the organizations finance through user charges varies considerably. The Canadian Grain Commission recovers close to its full costs. The Prairie Farm Rehabilitation Administration (a branch of Agriculture and Agri-Food Canada) recovers almost all direct costs of providing pastures for grazing and breeding services for cattle. At the same time, there are minimal or no user charges for many programs in the Department's Market and Industry Services Branch and Research Branch.

11.14 The government defines external user charges as "all non-tax revenues related to the provision of goods, regulatory and non-regulatory services, or rights and privileges, from all sources, whether generated in Canada or abroad, from persons or organizations external to the federal government."

11.15 In April 1997, the government revised its 1989 cost recovery charging policy to take a less prescriptive approach. The policy outlines several broad principles that departments and agencies must apply to user charges. First, they should charge for "services that provide identifiable recipients with direct benefits beyond those enjoyed by the general public." This is designed to ensure that the general taxpayer does not pay the full cost of services that provide direct benefits to specific individuals or organizations.

11.16 The policy's second principle emphasizes that the benefits of user charges can go beyond revenue generation to better and more client-oriented services. The policy also advances the notion that user charges can serve as a market test of demand for services and can help reduce excess demand for "free" services.

11.17 Government-wide initiatives have had an impact on user charges in the agriculture portfolio. The Program Review exercise of 1994-95 required departments and agencies to review each of their programs, with the aim of eliminating programs that were not really needed, improving service to clients and re-engineering programs to reduce overall spending. The government suggested that expenditure reductions could be accomplished through program cuts or by finding other sources of revenue. Each of the three organizations we audited has made significant expenditure reductions since Program Review, in some areas by as much as 20 percent.

11.18 Revenues from user charges have increased substantially for the Canadian Food Inspection Agency since 1994-95, while changing less significantly for the other two organizations in our audit (see Exhibit 11.1). These increases, as well as fee increases from other departments and levels of government, have been met with strong opposition from producers and industry.

11.19 The key concerns of stakeholders are the way the fees were introduced and the cumulative impact of the fees. Many contend that user fees are simply another form of taxation. A few have said that user charges may distort the impartiality of regulatory activities: regulators may redesign programs to suit industry's wishes because industry is paying the fee.

11.20 Parliamentarians have expressed similar concerns. User charges have been discussed in several hearings and reports by the agriculture committees of both the House of Commons and the Senate. Concerns about the impact of user charges have intensified with the severe pressures on incomes in the sector as a result of low commodity prices.

Focus of the audit

11.22 In Agriculture and Agri-Food Canada, most issues pertaining to user charges for intellectual property in the Research Branch were distinct from issues facing the Department's other branches and the two other organizations. The results of our work on the Research Branch are reported in Chapter 12 of this Report.

11.23 The Canadian Food Inspection Agency began operations in April 1997, combining the inspection activities previously carried out by three organizations - Agriculture and Agri-Food Canada, Health Canada and the Department of Fisheries and Oceans. Our audit examined programs with user charges, where relevant, both before and after the Agency's creation.

11.24 In essence, our audit asked the question, "How well are the organizations in the agriculture portfolio managing their external user charges?" The specific objectives of the audit were to determine whether the three organizations we audited:

• have properly designed and managed user charges so as to achieve the government's objectives for user charges;
• are learning from experience through the regular review of information and experience gained in applying user charges; and
• monitor and report performance in a way that is clear and meaningful and allows Parliament to judge how well user charges have been implemented and managed.

11.26 Details of our audit objectives, scope and criteria are at the end of the chapter in About the Audit. Recommendations for corrective action by the three organizations are presented at the end of this chapter. Insert 2 summarizes our findings on some key elements of managing user charges, and notes some good practices that might be useful to other organizations in the portfolio or elsewhere in government.

Observations

Implementation of Government Policy Is Incomplete

11.28 We recognize that the organizations we audited are very different from one another in the type of services they provide and the progress they have made in implementing the government's policy on user charges. While implementing user charges is an ongoing task, each organization is at a point where it needs to make key decisions on user charges. The current status and the decisions facing each organization are summarized in Insert 1.

Improvements needed in program costing

11.30 Over the last five years, the three organizations we audited have shown little improvement in the way they obtain and use cost information. They can roughly estimate the direct and overhead costs of delivering their programs, but have not calculated the full costs of the various services in each program. We found a reasonable costing system in only one program - the administration of Agriculture and Agri-Food Canada's Net Income Stabilization Account.

Service standards are not widely used

11.32 Clients want to know the level of service they will receive for the fees they pay, and they want to know that they will receive full value for their money. In a competitive market, the customer can choose the supplier who offers the best price, quality and service. In a regulated environment, where there may be only one supplier, the customer has no such choice. In those cases, communicating service standards and reporting performance against them serve as a form of accountability to the public and users of the service that helps to compensate for the lack of choice of suppliers.

Are the impacts of user charges well understood?

11.34 In accordance with the government's policy, we expected that the designers of user charges would use the information gained from impact assessments, including the potential impact on competitiveness. The federal government's Business Impact Test is a tool that can assist in these assessments. We found that the organizations in our audit do not use such tools on a regular basis.

11.35 Most fees are established and enforced through regulations. In accordance with the government's regulatory policy, we expected that the intended benefits of new fees or fee changes would be compared with the expected cost of implementing them. However, the assessments did not routinely identify or include benefits, especially indirect or societal benefits. Where such non-monetary benefits have been anticipated, they have not been well documented or communicated to stakeholders or parliamentarians. These benefits and costs - including the costs of implementing and administering the fees - need to be assessed.

11.36 The impact assessments of proposed regulatory amendments that we reviewed were imprecise and lacked quantification. Further, we had difficulty finding evidence in the assessments to support their frequent contention that the fees would have little or no effect on competitiveness because they were such a small percentage of the costs of the products inspected. The impact assessments contained little information that would help the reader understand the fees' expected impacts.

11.37 While individually each fee may seem insignificant, in total they can amount to a significant portion of net income in some industry sectors. The revised government policy states that departments and agencies must "work with clients to assess the cumulative impact of multiple fees from all federal sources, and assess proposed fees in that context." Agriculture and Agri-Food Canada has analyzed the cumulative impact of the user charges in its portfolio (see Exhibit 11.3).

Exploring alternatives before establishing user charges

11.39 Assessing alternatives includes determining which alternative best meets the objectives of the organization, the program and the needs of all stakeholders. Good costing systems are needed to assess alternatives properly.

11.40 We found that the organizations in our audit have in place or are considering a number of new and creative ways to deliver mandatory services. On a larger scale, the Canadian Food Inspection Agency's creation was itself a major cost reduction initiative, designed to reduce government spending by $44 million without increasing user charge revenues. However, we found little evidence to suggest that the organizations analyze options such as cost avoidance in sufficient depth before user charges are applied.

Consultation process has improved

11.42 In the absence of appropriate consultation, there is a risk that opposition to a proposed fee could derail a user charge initiative and result in lost revenue to the Crown. The organization also risks charging an inappropriate amount or charging the wrong party. A further risk is that the organization will miss valuable advice from clients on how it can improve the service.

11.43 Clients often mount strong opposition if they believe fees are being imposed unilaterally. They are more accepting when the fees provide an agreed-upon level of service that clients identify as a private benefit to them.

11.44 We found that the framework for consultations has improved over the past five years. Agriculture and Agri-Food Canada and the other organizations have made an effort to ensure that consultations are properly structured. Large and small producers and industries are better represented in recent years, although smaller producers find it costly to take time away from their business for consultations.

11.45 Clients who pay the fees - the private beneficiaries of the service - have been represented in consultations by their national associations. However, apart from government officials protecting the interests of the public, there has been little representation of the beneficiaries who do not pay fees. In the consultations held during its recent review, the Canadian Grain Commission was successful in engaging some of the broader beneficiaries (producers) beyond those who pay the fees (grain handling companies). The Canadian Food Inspection Agency has attempted to engage consumer groups in consultations on food issues, but with limited success. When representation of the public good is relatively low, the results of consultations may be perceived to favour industry.

11.46 Nevertheless, we found that consultations were generally open and that feedback was provided to the consultation groups on a timely basis. The government organizations involved have changed fee structures or amended fees in response to stakeholder concerns, as well as altering the way they deliver services.

11.47 At the same time, however, a number of stakeholders who participated in consultations with the Canadian Food Inspection Agency told us that in their view, the Agency had used the meetings not so much to consult as to announce its planned fee increases.

11.48 While their consultation processes have improved, the three organizations could make them more effective by using them as a regular, ongoing means of sharing information about program performance and future objectives. Client satisfaction can be improved with proper consultation and reporting of results against service standards.

Developing alternative fee structures

11.50 The organizations in our audit did attempt, usually during the consultation process, to ensure that their fees were structured to meet users' needs. Examples from the Canadian Food Inspection Agency include lowering fees for smaller enterprises and basing charges on the length of time it takes to deliver the service.

11.51 While the organizations have responded to their clients' needs, they have not adequately considered the costs of doing so. The Canadian Food Inspection Agency now charges more than 1,600 fees. Besides the cost of delivering the services, there are additional costs to maintain regulations and administer invoices and fee collection, as well as the hidden costs to both staff and the clients of the Agency in keeping track of the fees and filling out the proper forms. The Agency has not estimated these costs, but it needs to consider them in choosing one fee structure over another.

11.52 One area where the organizations have been able to keep costs low is the collection of fees. Some programs have been designed to accomplish this, while others have improved their collection processes.

Changing fees is a lengthy process

11.54 Fees are normally established following the regulatory process, which includes publication in the Canada Gazette. The statutory framework governing user fees includes the Constitution Act, which provides that legislation for any tax or charge must originate in the House of Commons, various other Acts that confer authority to establish and amend fees in relation to specific activity, and section 19 of the Financial Administration Act , which permits the Governor in Council to set fees or to authorize ministers to set fees by order. This regulatory process involves various steps that, while protecting the public from the indiscriminate and arbitrary application of fees, can often be lengthy and burdensome.

11.55 Streamlining is possible but would require better disclosure. Some streamlining is possible - the Canadian Food Inspection Agency Act allows the Minister of Agriculture and Agri-Food to set fees after consultation and publication of the proposed fee in the Canada Gazette. The Agency has used this provision to a limited extent for technical changes but has not yet used it to change fees, as most are related to other legislation. The Agency expects that recently tabled amendments to the Acts it administers will resolve this.

11.56 Any streamlining would need to be balanced, so that parliamentarians and external stakeholders would have sufficient opportunity - through impact analysis and better reporting - to scrutinize user fees adequately.

11.57 Delays in implementing fee changes can have a significant financial impact on the organization as well as its clients, in the form of possible underpayment or overpayment of fees in the meantime (depending on whether the changes proposed were to raise or lower the fee).

11.58 Delays can actually work against the interests of users who pay fees. For example, in 1997 the Canadian Grain Commission initiated a reduction of the grain receival service fee. From design to implementation, the change took 14 months - 4 months longer than the Commission had anticipated. When fees are being reduced with the agreement of all stakeholders, a more streamlined process would benefit everyone.

11.59 Fee structures inhibit responsiveness. As a delay in a fee change becomes extended, there is a risk that revenues will no longer offset expenses as intended, thereby increasing financial risk to the organization. This risk is more significant for the Canadian Grain Commission than many government entities that charge user fees, as it relies almost entirely on fees for its funding. In addition, the Commission has little control over the time it takes to change fees; this is dictated by the regulatory process. A streamlined regulatory process is needed, or else a more dynamic way of adjusting fees in response to changes in costs.

User charges are not well integrated into strategic planning

11.61 A user charge strategy is intended to identify activities where the organization could introduce user charges, and areas where overriding policy objectives would take precedence.

11.62 Of the organizations we examined, only the Canadian Grain Commission has communicated a user charge strategy to parliamentarians and stakeholders as part of its 1998-99 review of programs (see Case Study 2, Integrating User Charges Into an Organization's Strategic Planning).

11.63 Beyond having a user charge strategy, an organization needs to integrate user charges into its key decisions at the program and organizational levels and make it part of its management culture. User charges are a management tool - one of many used to achieve an organization's objectives. Our examination found that the organizations present little information on user charges in their business plans, beyond amounts shown as forecast revenue.

Planning of user charges could be improved at the program level

11.65 Organizations have included user charges in their planning in response to particular circumstances, but they need to do it on a regular, ongoing basis. For example, the Canadian Food Inspection Agency has not updated its user charge plan regularly, although a comprehensive plan was used when the cost recovery initiative was introduced in 1994.

11.66 Horizontal issues such as user charges need to be addressed in a similar way throughout the organization. We noted that, in the past two years, Agriculture and Agri-Food Canada has done a lot of work to establish a Performance Framework that sets out how the Department plans to meet its objectives. The Framework addresses several cross-cutting issues, such as integrating environmental considerations into decision making, but does not mention user charges and the efficient delivery of programs. The Framework or some other vehicle could be used to ensure that the Department's objectives for user charges are achieved consistently.

11.67 Planning for user charges at the program level usually concentrates on specific fee initiatives. Not considering user fees in annual planning at the program level means that opportunities can be missed to implement new fees or reduce existing fees.

Guiding principles for user charges can help

11.69 User groups also benefit from guiding principles, which can serve as "rules of the game". They provide important information to stakeholders, giving them a framework to judge whether existing or proposed user charges are fair and appropriate. Clearly articulated and publicly disclosed principles can encourage the acceptance of user charges among user groups and deflect attempts by certain user groups to avoid them.

11.70 The Canadian Food Inspection Agency's "General Principles for Cost Sharing" were established in February 1994, while the inspection services were still part of the Food Production and Inspection Branch of Agriculture and Agri-Food Canada. Some of the broad principles, similar to the more recent government policy on user charges, stipulated that:

• the private individual or enterprise who used a service or received an identifiable economic benefit from the Branch was expected to pay the government's costs of providing that service;
• fees should not be viewed as a source of general government revenue;
• consistency across commodities, programs and functions should be an objective;
• fees charged should not exceed the cost of providing the service;
• the development and implementation of fees should be a transparent and open process; and
• fees should not affect the quality, safety or reliability of agri-food products, and should not interfere with international trading requirements.

11.72 Together, these principles and targets represented a positive step and helped gain faster acceptance of new fees and fee increases from 1994 to 1998. However, the principles have not been updated since the creation of the Canadian Food Inspection Agency. Groups from each of the three originating departments brought their own practices and experience to the Agency; it is important that the Agency adopt the best of these in managing its user charges and services.

11.73 We found that Agriculture and Agri-Food Canada lacks guiding principles (see Case Study 3, Similar Programs - Dissimilar User Charges). The Canadian Grain Commission has had guiding principles for its user charges since 1994.

Determining private benefit and public good can be difficult

11.75 We expected that each of the organizations we audited would have established criteria on which to base the allocation of private benefit and would have clearly communicated those criteria to stakeholders. Determining the relative proportion of public good to private benefit is a highly judgmental process, and it is important that the people who pay the fees understand and accept the way the charges are formulated.

11.76 As we have noted, the Canadian Food Inspection Agency used a "rule of thumb" to determine the amount of private benefit in the services it provides. With few exceptions, it set cost recovery targets ranging from a low of 10 percent for some activities to almost full cost recovery for services it judged to provide an entirely private benefit.

11.77 As noted in our 1996 Report Chapter 9, Animal and Plant Health: Inspection and Regulations, the Department (and later the Agency) was committed to developing criteria for use in estimating the private benefit associated with each functional area of service; the Agency has not yet done this. Likewise, Agriculture and Agri-Food Canada and the Canadian Grain Commission have not developed or explained how they identify and value the public and private benefits of a service.

User charges can provide more than just revenue

11.79 We found evidence that the design of some user charges has worked against the desired behaviour. For example, fish processors require an export certificate in order to export their product. If there is a problem with the product, its packaging or labelling, and no export certificate is issued, a fee is not charged. In order to receive the certificate, the processor must correct the problem and request another inspection. It is possible that inspectors could inspect the same product three or more times but charge a fee only when they issue the certificate. If the product continues to fail the inspection and no certificate is issued, the processor is not charged for any of the inspections.

11.80 In summary, the Canadian Food Inspection Agency has considerable opportunity for using its fees to help achieve its program objective of fostering industry compliance and, at the same time, to better reflect the costs of providing the service.

Little review of performance

11.82 Possible measures of efficiency could include:

• benchmarking against comparable organizations;
• comparison with similar activities within the organization;
• comparison with past performance; and
• in-depth reviews of specific programs.

11.84 Agriculture and Agri-Food Canada, through its Review Branch, has the capacity to conduct this kind of review, but it has not used this capacity to review the performance of its user fees. The Canadian Food Inspection Agency recently formed an audit and review directorate and will have the capacity to perform such reviews in future years.

11.85 Have benefits been achieved? Review of programs with fees is also needed to determine whether charging users has achieved the intended benefits. Communicating that information to stakeholders and parliamentarians, especially where non-monetary benefits can be identified, can provide some assurance that the fees are more than just a revenue source.

Dispute resolution processes are not well known

11.87 The Canadian Food Inspection Agency has established a process for appeals and has published the process. However, most of the Agency's clients we interviewed said they did not know that an appeal process existed.

11.88 The Canadian Grain Commission and Agriculture and Agri-Food Canada have not established formal processes to handle complaints about user charges. However, the Canadian Grain Commission does have a toll-free complaints line and an appeal process for disputes over grading. Both the Commission and the Prairie Farm Rehabilitation Administration use informal contact and regular meetings with stakeholders to address their concerns.

11.89 A properly designed and established appeal and dispute resolution process will demonstrate to clients that user charges are applied fairly. If clients feel that departments or agencies have not given them a fair hearing in the fee-setting process, the government's policy explicitly identifies the President of the Treasury Board as a "point of contact".

What opportunities are there to learn from experience?

11.91 Along with reviewing performance, another means of learning from experience is talking with stakeholders. Consultation on specific user charges needs to be a regular, ongoing aspect of sharing information about program performance and future objectives. The Food Production and Inspection Branch and then the Canadian Food Inspection Agency held annual meetings (until this year) with stakeholders to discuss fee and program changes. While these meetings were a step in the right direction, we believe they could have been used to better advantage. Such meetings are a forum where stakeholders can suggest ways to improve the programs. They also give the organization an opportunity to show stakeholders the value they have received for their money and to discuss the organization's future goals - and, more particularly, user fees.

Reports on plans and on performance fail to inform adequately

11.93 The Treasury Board Secretariat requests departments and agencies to submit an annual summary of planned and actual receipts from external user charges as well as a listing of their user charge initiatives. We looked at the Treasury Board Secretariat's Web site to see what information it provides on user charges in the organizations we audited. We found the information presented to be confusing and not very informative (see Exhibit 11.4).

11.94 The report of the Independent Review Panel on the Modernization of Comptrollership, published by the Treasury Board Secretariat in 1997, highlighted the need to bring together financial and non-financial information (both historical and prospective) and to establish the links between them as a key to fostering a better understanding of past performance - and, more important, to support planning for the future.

11.95 We expected that the organizations would provide Parliament and stakeholders with a regular report on the financial results and performance of user charges in relation to their stated objectives. As requested by the Treasury Board Secretariat, the organizations did provide some financial information and a list of their user charges. In addition, the Canadian Grain Commission and the Canadian Food Inspection Agency provided summary financial information in their annual reports. However, none of the organizations supplied enough information for parliamentarians and stakeholders to judge whether user charges had been managed properly and the services delivered efficiently.

11.96 Organizations need to report against the goals established in the previous year and provide information that will answer the following questions:

• How do revenues collected from user charges compare with forecast revenues?
• Have the services related to user charges been delivered efficiently?
• To what extent have user charges helped the organization meet its objectives?
• Have user charges achieved non-monetary benefits?
• Can readers locate detailed information on how specific fees and charges were established (costs, unit pricing, consultations, legal authorities, etc.)?

Moratorium on New Fees

11.98 Since the announcement of this fee moratorium, there have been calls to increase its scope and duration. Incomes in the agriculture sector have been under severe pressure in the form of low commodity prices, and the federal and provincial governments have developed income disaster assistance programs. There have also been calls for a moratorium on user charges across the government.

11.99 During the course of our examination, officials from the organizations expressed different views about what organizations the moratorium applied to and how long it would last.

Impacts of the moratorium

11.101 Since Program Review in 1995, Agriculture and Agri-Food Canada and the Canadian Food Inspection Agency have gained experience with user fees and increased their knowledge. They have made an investment in developing better consultations and communicating with clients. There is a risk that this capability will be set back as the moratorium continues.

11.102 In the meantime, programs continue to be adjusted to meet the changing needs of their users. Examples can be seen on a major scale in the program redesign at the Canadian Grain Commission and the continued introduction of the Food Safety Enhancement Program (which applies Hazard Analysis and Critical Control Point principles) in the meat hygiene program of the Canadian Food Inspection Agency.

11.103 During the moratorium, however, fees cannot reflect these program changes. This creates the possibility that some clients may pay more than their fair share. The divergence of program costs from fee revenues can also increase financial risk to the organizations, and the risk is especially high for those that rely heavily on fee revenues.

11.104 The moratorium has also raised uncertainty among clients and stakeholders about the status of previously announced plans. There were no clear public statements to dispel the uncertainty and allow stakeholders to plan accordingly. One stakeholder told us, "Nobody knows what the future holds for user fees - the industry needs time to plan."

What action is possible?

11.106 Program managers could also collect information on the performance of user charges and the impacts of the moratorium; and officials could develop options for future policy on user charges. If the government does not intend to continue its implementation of new fees or to increase existing fees, one option is to permit fee adjustments in order to eliminate inconsistencies and allow fees to reflect changes in services.

Conclusion and Recommendations

11.108 Each of the three organizations has made progress in designing and managing user fees to achieve the government's objectives for user charges. The structure used for consultations has improved significantly over the past five years, and in some areas good practices have been developed. But there are still opportunities to improve their management of user charges in a number of areas, including costing of services, assessing the impact of fees, establishing formal appeal processes and integrating user charges into strategic planning.

11.109 An opportunity exists to strengthen the accountability relationship between those who provide the service and those who use and pay for the service. The organizations can improve services and adjust fees based on what they learn in applying user charges. This can be accomplished by linking better costing practices, efficiency of program delivery, and improved reporting to users on results. The three organizations have not monitored and reported their user fees in a clear and meaningful manner.

11.110 Although in recent years they have made progress, they are losing momentum and user charges are not being updated as programs change. This could result in some user groups paying either more or less than their fair share. There is also a risk that the capability to manage user fees that has been developed over the past few years will be set back.

11.111 Many officials see the moratorium as a sign of a broader government reluctance to continue with the implementation of user charges. As a temporary measure, the moratorium can give the three organizations time to reassess their current position, develop guiding principles, and plan improvements for the future of user charges in their organizations.

A Applies

A/L Applies to a lesser degree (some action already taken, or applies only to certain areas/programs)

N/A Not applicable

Agriculture and Agri-Food Canada's response: The Department appreciates the Auditor General's recognition of its notable successes and innovations over the years in administering what is a complex and often sensitive file. We are always interested in making improvements and appreciate the valuable contribution of the Auditor General towards this goal.

Agriculture and Agri-Food Canada is developing a management framework compatible with portfolio requirements that will enable it to better articulate the first principles that will guide the future application of user fees when the current moratorium is lifted. These first principles will respect the spirit of the Treasury Board policy and the needs of our clients. The Department recognizes the value of improving costing mechanisms, assessing the impact of individual fees and establishing appeal processes in the management of user charges. We seek ways to improve performance in these areas when undertaking reviews of programs and changes to fees. At the same time, the Department is looking for ways to improve the requirements and management of the regulatory process and will seek guidance from the Treasury Board Secretariat in this area.

Balancing good management theory and client acceptance of user fees has always been a challenge. We are proud of our efforts to strike that delicate balance in close co-operation with and constant feedback from our clients, and in the context of other factors which impact our working environment. Foremost among these other factors are instructions from Parliament and the need to balance impacts on the sector.

Canadian Grain Commission's response: The Canadian Grain Commission (CGC) appreciates the recognition of its successes by the Office of the Auditor General. We find that the chapter provides useful suggestions for improvement, and we intend to act on them. This notwithstanding, the following should be noted:

• The CGC conducts an annual review of all user fees. In recent years, the CGC has performed a comprehensive review of the costs associated with each service.
• The CGC has recently reviewed its current position on user fees, restated its guiding principles and proposed improvements that are in keeping with the 1997 Cost Recovery and Charging Policy of the federal government.
• Since 1991, the CGC has taken vigorous action, including streamlining, reorganizing and downsizing, to reduce costs and minimize the impacts of fees on the users of its services.

Within the parameters established by Parliament, the Commission is committed to working with its grain producer and industry clients to implement the government's cost recovery policy and to provide excellent service for the fees it collects.

Canadian Food Inspection Agency's response: The Canadian Food Inspection Agency (CFIA) has long contributed to the development and implementation of the government's cost-recovery policies and practices. Experience has shown that user charges have many benefits beyond that of revenue generation. The CFIA agrees with the observations and recommendations contained in the audit by the Office of the Auditor General. These will assist the CFIA to continue to maintain a fair and equitable system of user charges for those inspection services that provide an important economic benefit to the Canadian agri-food and fish industries.

The CFIA is exploring options for cost-recovery practices in the year 2000. Should the present cost-recovery moratorium be lifted, the CFIA will follow the Auditor General's recommendations to address the gaps in the current cost-recovery policy. Increased revenue generation may well be secondary to more important objectives such as the equitable and uniform application of service fees across all commodity programs. Should the moratorium continue, the CFIA will focus its activities on possibly simplifying fees, reporting on performance, and making minor fee modifications to address changes to CFIA cost structures, such as those resulting from restored collective bargaining.

Client consultations will continue to be one of the CFIA's most important cost-recovery activities, as they provide insight into the economic climate and reinforce the need to balance policy objectives with broader government-wide objectives. An effective, well-designed cost-recovery program is one that generates revenues in support of program objectives, thereby contributing to the overall well-being of the Canadian agri-food and fish industries.

About the Audit

Objectives

• have properly designed and managed user charges so as to achieve the government's objectives for user charges;
• are learning from experience through the regular review of information and experience gained from applying user charges; and
• monitor and report performance in a way that is clear and meaningful and allows Parliament to judge how well user charges have been implemented and managed.

Scope and Approach

The Office of the Auditor General has examined user charges as part of past audits in the agriculture portfolio. In Chapter 9 of our 1996 Report, Animal and Plant Health, we noted that amounts being recovered were significantly less than the full costs of delivering the service. There was also a lack of criteria for determining private versus public benefit. In Chapter 13 of our 1994 Report, Federal Management of the Food Safety System, we noted that costs of food inspection were not being recovered in accordance with the government's policy that was then in place, and that there were inconsistencies in cost recovery practices among and within departments involved.

Using the government's policy, the Organization for Economic Co-operation and Development and other sources of information as a guide, the audit examined how well the various organizations have implemented and managed user charges.

In addition to interviews with staff of the three organizations, we examined and analyzed organizational files, data and documentation. We conducted interviews with a number of industry groups as well as individual producers who are affected by user charges. We also observed services for which fees are charged by inspection staff at various locations, including meat slaughter and processing plants, import and export certification, and grain elevators in Vancouver and Thunder Bay.

The quantitative information in this chapter that was drawn from government and non-government sources or departmental databases has been checked for reasonableness but has not been audited.

Criteria

• the three organizations would have a comprehensive user charge strategy with clear objectives, and that this would be applied consistently in all areas where user charges may apply across the portfolio;
• appropriate consideration would be given to options for reducing and/or avoiding costs, and that the organizations would be able to demonstrate that activities are delivered efficiently;*
• user charges would be implemented in a timely manner, following due process, in accordance with all relevant legislative authorities;
• user charges would be implemented "for services that provide identifiable recipients with direct benefits unless overriding policy objectives would be compromised";*
• a reasonable analysis of cost drivers and the full cost of providing the service would be performed;*
• the level of the fee would be established taking into account not only the full cost of providing the service but also other factors, such as optimal pricing from an economic standpoint, the proportion of private benefit received by the user and the achievement of program objectives;
• clear and preferably agreed-upon service standards would be established where user charges are applied;*
• meaningful and effective consultations would be held with stakeholders when fees were established or revised;*
• the formulation of user charges would include information gained from impact assessments that have taken into account the cumulative impact of user charges and the impact of fees on competitiveness;
• the formulation of user charges would include an assessment of the merits of alternative fee structures (for example, flat fees versus fees based on the extent of use); and
• fees would be collected in a timely and diligent manner and that records pertaining to outstanding amounts would be properly maintained.

• a process would be in place for the periodic review of user charges, determining whether fees need to be adjusted where cost structures have changed, where the mix of public and private benefits have changed, or where service levels have been modified. This would include an analysis of results achieved against expectations;
• the information gained from the periodic review and from consultations would be considered for potential changes to the services provided, and would be incorporated in the strategy and objectives of the three organizations; and
• program changes would be made in response to the exhibited need for services and feedback from users, so that only those services that are needed are provided, and are provided in a manner that best meets the needs of the users.

For our third audit objective, we expected that there would be:

• a long-term plan for user charges clearly communicating to Parliament and other stakeholders the future direction of user charges and how these link with achieving the objectives of the three organizations; and
• fair and reliable reporting of financial and performance results achieved by user charges relative to their stated objectives provided to Parliament and stakeholders on a regular basis.*

Audit Team

Linda Anglin
Robert Anderson
Tina Guthrie
Martha Lywak
David Maxwell
Eimer Quinn
John Rossetti
Christian Weber

For information, please contact Neil Maxwell.