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Practice Advice on Public Financial Management

User Fees (OECD)

Summary Advice (OECD - User Charging for Government Services): The OECD reccomends that full costs must be determined and should reflect costs faced by the private sector; revealing full costs will also make transparent the degree of subsidy involved in providing a service. The guidelines specifically condemn cross-subsidisation practices between paid commercial and non-commercial government services especially under monopoly service provision. The guidelines further emphasise that costs calculations should factor in joint/shared costs (such as cost of capital).

Summary Advice (OECD - Fiscal Consolidation): Introducing or raising tuition fees to the average spending in countries that use tuition fees could yield additional revenues of around 0.4% of GDP.

Main Points (OECD - User Charging for Government Services):

Clear Legal Authority

  • It is important that the legal authority for an organisation to charge for its services be clearly defined.
  • This authority should be a general framework for the application of user charges and should not set the precise amount of the charges to be applied. This allows the charges to be adjusted without further legislative authorisation.

Consultation with Users

  • Consideration should be given to holding consultations with users when a charge is being introduced or significantly altered. This serves to communicate to the users the rationale for the charges and avoid misunderstandings. Furthermore, the views of the users can be useful in designing and implementing an effective and efficient charging system.
  • It needs to be made clear to users that these consultations are a forum for discussing the best manner of implementing user charges rather than whether user charges should be implemented. The consultations should proceed rapidly with a date for their conclusion set in advance.
  • Questions concerning the implementation of user charging systems will most frequently be directed to front-line staff. The rationale for user charging and the operation of the system should therefore be clear to front-line staff.

Determine Full Costs

  • The full cost of providing each service that is subject to a charge should be determined. This costing should be carried out regardless of whether the intention is to recover fully or only partially the cost of providing the service. If the intention is not to fully recover costs, this information will make transparent the degree of subsidy involved in providing the service.
  • Full costs include not only the direct costs of the service, but also costs shared with other activities (joint costs) and such non-cash costs as depreciation and cost of capital.
  • Determining full costs can be complex, especially when joint costs must be allocated. The effort made in costing should be commensurate with the scale of the service being charged for. In the case of small scale services, it may be appropriate to use reasonable estimates for allocating joint costs rather than elaborate cost accounting systems.
  • This costing should be reviewed periodically to ensure its accuracy.

Effective and Efficient Collection System

  • An effective and efficient system for collecting user charges is critical for the credibility of any user charging regime. Responsibility for collection should rest with the organisation levying the charge. This does not preclude an organisation from contracting with a third party for collection services.
  • In cases where payment cannot be demanded in advance of, or simultaneously with, the delivery of service, invoices should be sent out in a timely manner with clear deadlines for payment. Invoices should be clear and simple, providing sufficient but not overdetailed information.
  • Efforts should be made to minimise collection costs and any inconveniences associated with the collection process.
  • Non-payment of user charges should be followed up immediately. Appropriate enforcement mechanisms should be in place prior to the charge coming into effect. Recourse to these mechanisms needs to be clearly defined and transparent. The level of non-payment of user charges should be transparent. If a user charge is so small that it will not justify collection action, then the form of the charge should be considered for change.

Improve and Monitor Organisational Performance

  • Charging users directly for the services they receive can be a powerful management tool for improving organisational efficiency and service quality. Leadership by top management is required to fully reap these benefits.
  • Setting specific financial, service quality and other performance targets for organisations, in conjunction with user charging systems, is important. The performance of organisations should be monitored on a regular basis to ensure appropriate levels of efficiency and service quality.
  • Organisations should regularly and systematically solicit the views of service users in order to better understand their service requirements.
  • It should be recognised that user charging may require a new set of skills for many government organisations. This should be recognised and properly planned for. This is especially relevant in the fields of human resource management and information technology systems. Sufficient time and resources need to be devoted to developing and maintaining these skills.

Treatment of Receipts

  • Consideration should be given to the respective organisation retaining the proceeds of any user charges it collects. Such revenue should be classified as offsetting receipts (negative expenditures), as appropriate. This serves to reinforce the notion that users are paying a charge in return for a specific service and that responsibility for revenue management rests with the organisation itself.
  • Consideration should be given to adopting flexible budgetary arrangements for organisations financed by user charges which would allow them to respond to increased service volume by permitting commensurate increases in expenditure and user charging receipts.

Appropriate Pricing Strategies

  • Wherever relevant, pricing should be based on competitive market prices.
  • In other cases, pricing should be based on the principle of full cost recovery for each service unless there is a clear rationale for less than full cost recovery. This serves to enhance an efficient allocation of resources in the economy.
  • Simplicity in the fee structure is important. If substantially the same service is provided to a group of users, it can be appropriate to charge a uniform fee not withstanding some variability in the cost of servicing individual users.
  • If certain services are attributable to a class of users rather than individual users, it may be appropriate to charge each user within that class a fee to recover the costs of those services. It should, however, be recognised that this may involve the loss of some of the benefits of user charging as the link between the charge and the service provision is less direct.
  • Consideration should be given to differentiated prices for peak and off-peak periods in order to spread demand for services. Similarly, consideration should be given to offering priority service for a premium price.
  • Introducing user charging for one service can have a significant impact on the demand for substitute services if they are not subject to a similar charge. Consideration therefore needs to be given to also charging for such substitute services.

Ensure Competitive Neutrality

  • If an organisation is supplying a commercial service in competition with the private sector while retaining a monopoly provision of another service, care needs to be taken to ensure that the monopoly service is not subsidising the commercial service.
  • When pricing such services, care needs to be taken to ensure that their costing is accurate and that they incorporate all items of cost faced by private sector entities. For example, government organisations may be exempt from various taxes and enjoy free provision of certain support services provided by central agencies.

Recognise Equity Considerations

  • Consideration should be given to reduced charges for users where full cost recovery would represent an excessive financial burden on individual users. This may be especially relevant to lower-income individuals, smaller entities, users located in remote areas, and heavy volume users of services. The criteria for applying reduced charges should be clear and explicit.
  • When a user charge does not represent full cost recovery, the degree of subsidy should be transparent to those providing and monitoring the service.
  • It should be recognised that measures through the tax and benefit system may be a more efficient means of ensuring equity than reduced charges.

Main Points (OECD - Fiscal Consolidation):

Close to a quarter of public spending on education is to support tertiary education, including in countries, especially in continental Europe, where no tuition fees are levied. As a large share of returns to publicly-funded tertiary education accrue to individuals rather than to society (Blöndal et al., 2002), continued generous public support for higher education can be questioned, although some of the private returns are reduced by progressive taxes. This is more so given the greater prevalence of tertiary education among middle and upper income households. The introduction or increase of tuition fees may also improve educational outcomes, by making universities more responsive to market demands, with long-term gains to human capital, the quality of labour supply, the economy’s rate of potential growth, and overall fairness. Concerns that such reforms would reduce enrolment by students from poor backgrounds could to a large extent be addressed by loan programmes with repayment conditional on the subsequent income level, which would correspondingly reduce the budgetary gains.

Source: OECD (1998). Public Management Service, “Best Practice Guidelines for User Charging for Government Services” PUMA Policy Brief No. 3 at www.oecd.org/gov/budgeting/1901769.pdf (accessed 1 February 2013) and  OECD, "Fiscal Consolidation: How Much, How Fast and by What Means?" OECD Economic Policy Papers No. 01, at http://www.oecd-ilibrary.org/economics/fiscal-consolidation_5k9bj10bz60t-en (accessed 28 April 2014).

Page Created By: Matthew Seddon on 28 April 2014. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.


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School of Public Policy and Governance