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5.4  Charging based on flat or variable charges

Flat fee

Flat fees are fixed charges for a particular good or service. The benefits of this approach to charging are that it is simple and provides certainty for charging entities and stakeholders. Consumers tend to dislike unstable prices as they might make it hard to plan. However, flat fees can have a disproportionate impact on occasional users, so might discourage continued involvement in an activity.

Variable charges

For some cost recovered activities the costs of producing an output could vary considerably depending on individual circumstances. For example the cost of approving an application for a permit could vary significantly depending on the specific application. In these circumstances an input-based fee may be most appropriate (eg, the number of hours it takes to approve an application). This also creates an incentive for stakeholders to be efficient in their consumption of services, for example by ensuring that their applications are completed in full so as to minimise the amount of time required to process them.

Input based charges (eg, charges based on a particular number of hours to process an application) also have the disadvantage of providing less certainty to fee payers and create a risk that charging entities will not operate as efficiently as they could. Variable fee structures such as these are more complex than flat fee structures. This complexity will increase transaction costs. A balancing exercise is needed to weigh the cost of a more complex fee structure against simplicity.

Charging entities should actively ensure they are operationally and financially efficient. For example, by requiring justification for charging over a certain level (known in some jurisdictions as 'speed humps'), or publishing information about past/average charges, in line with the requirement in section 4.2 to publish information about their performance. Another approach is to use a two tier charging structure, such as a combination of a flat fee with additional input based charges for complex or time consuming cases.

Example: Variable charges for financial market service licences

The Financial Markets Authority (FMA) charges application fees for licences to provide financial market services. The fees vary according to the type of licence and are based upon a set number of hours to process the application (eg, derivatives issuer licence is estimated to take 70 hours to process, whereas the estimate for a crowd funding service licence is 40 hours). Additional fees, based on an hourly rate, may be charged where the application process exceeds the stated number of hours.

In some circumstances there may also be a case for using a variable levy structure, such as complex activities where there are multiple cost drivers.

When deciding to use variable charges, it is imperative that agencies set up structures to actively demonstrate that they are operating efficiently. Variable fee structures need to have in place safeguards to ensure that the eventual charges are reasonable, and that there are constraints to help prevent overcharging. This could take the form of benchmarking, having a high level internal sign-off for charges beyond a certain value, and having a process of review or appeal of charges. Consultation with stakeholders is particularly important in the case of variable charges, to ensure that the output is fit for purpose.

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