Administration
The core administrative goal is to minimise transaction costs (namely, the costs of collection, compliance and enforcement) without generating excessive levels of evasion. At one extreme it may not be practicable to exclude users from benefiting from an activity. Conversely, the ability to exclude implies the feasibility of a charge.
Administrative design balances purity against practicality – what is worth doing and what is most important?
Other factors relevant to detailed charge design include allocative and administrative efficiency at a given time, dynamic efficiency over time, accountability and due process; equity, the robustness of the revenue base, local/central government responsibilities and the split between those who benefit from expenditure (beneficiaries) and those whose behaviour makes it necessary (exacerbators).
There can be a trade-off between monitoring and enforcement costs and the level of a charge. For example a low level charge may not cover the cost of the necessary monitoring and enforcement to ensure compliance. In such circumstances it may be better not to charge at all rather than introduce a regime that will be ineffective and potentially undermine public trust and compliance behaviour. In the example of irrigation, any change to policies must consider whether it will require greater measurement of water take and use, and the capital and operating costs of doing so. Conversely once a decision is made that requires such measurement, the range of available policy tools is wider because of the improved information and the low marginal cost of using it.
In competitive situations, it is generally desirable to avoid distorting behaviour. This could happen if charges for Crown managed resources were set below market rates in situations where private competition existed; e.g. for gravel extraction.
Flexibility is important in regime design as long as principles are not compromised.
Those affected by a regime will tend to seek certainty on their obligations but flexibility regarding their compliance. Certainty is important to support investment decisions. Flexibility in administration can be valuable but is not a goal in its own right. Ongoing negotiations or frequent changes, however, can increase uncertainty and transactions costs. Also more discretion means more scope for lobbying and corruption. The balance between certainty and flexibility should take into account how long the regime is likely to be in place and the period for investors to earn a return on associated investment.
Access to water is a classic example of the certainty/flexibility trade-off. It is a limited resource that can be applied to multiple beneficial uses. There are major long-lived investments required in taking and using it. The planning issues are complex, involving multiple potential uses, and there are long time horizons to determine impacts. The benefits of both flexibility and certainty are high for both regulators and users.
Building in assessment criteria from the beginning can avoid unnecessary difficulties later.
Success criteria should be set up front. Unclear objectives or failure to define what will represent success can undermine any regulatory regime before it begins and prevent subsequent effective evaluation. Adjusting incentives within an existing regime is typically harder than building in appropriate incentives as part of the initial regime design.
Transition
Transition arrangements are often significant. Introduction of a regime needs to take into account the extent of existing rights and therefore where and when a royalty can reasonably be imposed. There may be historical factors that argue against a royalty regime such as residual rights (mining privileges for water take in Otago), previous ownership interests in a resource, or offsetting arrangements about cost recovery or the terms of access (fishing quotas).
3. Any charging regime should aim to:
(a) minimise administration, compliance and transaction costs, including being as uniform as possible across locations, users and uses;
(b) provide certainty for investment and include fair transition provisions where relevant.
Also, regardless of the terms on which access was originally obtained, existing users may sometimes have since effectively paid the cost of accessing the resource as part of the market price for acquiring land or a business. For example, access rights from a house to the beach may have been acquired without charge, but any subsequent purchase of the house would have paid a price reflecting the existence of those rights.
Windfall gains and losses may not fall to current users, and need to be considered alongside ongoing incentives.
In such circumstances arguments about the social equity of ‘giving’ them “free” access are by no means straightforward. There are equity and efficiency considerations in imposing a royalty after the fact, including the risk of “stranding” investment in existing assets when alternative uses may require equivalent investment from scratch.
Overall, therefore, it is necessary to carefully consider how to treat “windfall” gains to existing rights holders (from resources becoming scarce and/or tradable), and consider that issue separately from the question of creating better incentives for future use.
