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Alternative suggestions for removing unfairness in FSANZ fee system

Date Published
 09 October 2009
 Joe Lederman

By Joe Lederman
FoodLegal Lawyers and Consultants
© Lawmedia Pty Ltd, October 2009

On 23 September 2009, Food Standards Australia New Zealand (FSANZ) released a Consultation Paper in relation to a review being conducted into its Cost Recovery Arrangements. This review is considering the hourly rate charged by FSANZ, the time in which FSANZ assesses applications, new administrative costs and its refund policy, among other issues. FSANZ is calling for submissions in relation to this Consultation Paper.

In this article, FoodLegal examines the effects of FSANZ’s cost recovery arrangements on Australia’s food industry and makes a number of suggestions for improving our food standards system.

This article discusses the current cost recovery structure and the Consultation Paper on FSANZ’s Cost Recovery Arrangements (Consultation Paper). It then goes on to consider how the exclusivity provisions in the Australia New Zealand Food Standards Code (Food Standards Code) could be expanded to counter-act the potentially innovation-stifling aspects of the current cost recovery scheme by which, in certain circumstances, FSANZ can recoup its costs from food companies applying to amend the Food Standards Code.

Submissions on the Consultation Paper can be made until 4 November 2009.

FSANZ’s cost recovery structure

FSANZ is responsible for developing the food composition, labelling, safety and primary production standards that form part of the Food Standards Code. Amendments to the Food Standards Code occur through one of two processes: a FSANZ (or government) initiated Proposal or a private Application.

Examples of recent Applications to amend the Food Standards Code include a number of applications for permissions to use new strains of genetically-modified substances in the production of food, permissions for new processing aids, extensions of permissions of use for food additives, etc. It is easy to see how the express requirements set out in the Food Standards Code require constant amendment in order for the Code to stay abreast of technological developments in the manufacture and marketing of food.

There are two situations where FSANZ currently charges fees for the processing of Applications:

- Where an applicant has an exclusive, capturable, commercial benefit in the outcome of the changes to the regulation (for example, where the applicant is the owner of a patent in relation to a new processing aid or novel food); and

- Where an applicant desires to have the Application expedited.

Our article “Changing Australia’s Food Standards: It’s Pay to Play!” in the May 2009 issue of FoodLegal Bulletin explored the FSANZ timeframes in relation to unpaid/un-expedited Applications. Needless to say, the timeframes for unpaid Applications can be quite substantial (some applications took 12 months for FSANZ to commence their full assessment process, never mind completing their assessment).

The Review into FSANZ’s cost recovery scheme

The Consultation Paper issued by FSANZ on 23 September 2009 primarily explored reasons and justifications for increasing the cost per hour used to calculate the fees charged by FSANZ in the Application process.

FSANZ states its fees are set to increase by 7%, partially due to the fact that they have not been reviewed in 7 years. This is despite the Commonwealth Government’s 2005 Cost Recovery Guidelines requiring agencies to review cost recovery arrangements “no less frequently than every five years”.

It must be noted at this point that the fees in expediting an Application are quite significant, (up to AUD$112,350 and due to increase should FSANZ’s recommendations in the Consultation Paper be proceeded with) and must be paid upfront by the applicant.

A significant amendment to the cost recovery process is that FSANZ intends to introduce more categories of Applications. This is mainly due to applicants paying large upfront fees and then becoming entitled to a fee refund later due to the Application not taking the time budgeted for. Provision of extra categories may provide more flexibility in calculation of upfront fees.

However, it is important to note that this FSANZ Consultation Paper does not even consider the basis for recovering costs. Or put another way, the Consultation Paper does not ever question whether it is appropriate for FSANZ to charge applicants for its public services.

Is it appropriate to recover costs simply to expedite an Application?

There is clear justification for FSANZ to have a cost recovery system in place in relation to where an applicant is going to acquire an exclusive, commercial, capturable benefit. This justification is that it is inappropriate to allocate significant public funds to a process that will convey an industry advantage to just one entity.

However, is it equitable or appropriate for a government entity to charge a private citizen a fee simply to process an application in a more timely fashion? Further consideration must be given to when the amendment being applied for could benefit the entire food industry. Why should one industry member shoulder a financial burden for the benefit of the entire industry?

This very issue was considered by the Productivity Commission when, in 2002, it published the report of its Inquiry into Cost Recovery by Government Agencies. The Australian Food and Grocery Council, in its submission to the Productivity Commission, made its position very clear that:

[T]he user-pays concept should be imposed only where there is an exclusive, capturable, commercial benefit to the beneficiary of the regulatory function or government service, if there are not to be externality effects creating a disincentive to business and a distortion to resource allocation…

And that:

[T]here is no justification for imposition of levies, fees or charges for ANZFA [predecessor to FSANZ] activities that provide for the public goof through the development of Standards that apply across the whole, or broad sectors, of the food industry.

There are two issues inherent in FSANZ’s policy of charging for expediting Applications. The first is the clear issue of unfairness of one party shouldering the financial burden of a regulatory amendment that could benefit the entire industry. While it could be argued that an industry member in such a position does not need to pay to have the Application expedited, the fact remains that the entire industry benefits from the Application being paid (in that everyone can take advantage of the amendment sooner than if no fee were paid) and the entire industry suffers should an applicant decide not to pay and thereby leave the Application in the hands of FSANZ (which can lead to delays of several years) because the applicant decides not to pay for any expedited processing.

The second issue is one that was considered by the Productivity Commission in its 2002 Inquiry Report, which is that inherent in any cost recovery arrangement is the possibility that the arrangement stifle innovation. To quote the Report:

The Productivity Commission also found that:

1. cost recovery can impede innovation,

2. can have a disproportionate effect on small business, and

3. act as a barrier to competition.

Does the FSANZ process stifle innovation or adversely affect small business?

It must be acknowledged at this point that the majority of amendments to the Food Standards Code are typically initiated and sought by large companies, capable of developing and bringing to market substances such as new processing aids or new genetically-modified substances. However, the following examples illustrate the potential discouragement of small businesses and how the FSANZ Application process could stifle innovation in the food industry:

- Example 1 - Adding Stevia to a new food: The new natural sweetener, stevia, is being added to all sorts of food products around the world. However, the initial Application to permit the addition of steviol glycosides to foods in Australia only succeeded in obtaining permission to add stevia to a very select range of foods. If a smaller company were to develop a new food product in Australia that uses stevia as an ingredient, it could be required to apply to FSANZ in order to get permission to sell the product. By the time the Application is completed, the whole food industry of Australia would be ready to launch competing products on the market, regardless of whether the Application was expedited or not, thus removing the advantage of being first in the market space for the innovative small company that is willing to take the initiative of seeking the amendment to the Food Standards Code.

- Example 2 – Using a permitted substance for a non-permitted function: This is a more complicated situation. Where a manufacturer develops a novel way of using an existing ingredient, it typically would be legally obligated to apply to FSANZ to amend the Code to use that substance in the new fashion. This would immediately tip off the whole food industry as to the new process. It could be that other intellectual property protection avenues such as patents are not available for eligibility reasons. In this instance, a company that has developed this process would have to apply to FSANZ to amend the Code and yet, once it has been amended, the company would have to tolerate its rivals in the industry having access to a technology which that company has invested in developing. This issue is explored in more depth in our article “Protecting Proprietary Information from Prying Eyes in FSANZ Applications” in the September 2009 issue of FoodLegal Bulletin.

- Example 3 – Importing a possible “Novel Food”: A business might wish to bring in a new food into Australia that is consumed elsewhere (a rare fruit for example) but which could be considered a “Novel Food” in Australia. It the product were held to be a “Novel Food”, the applicant would have to apply to amend the Food Standards Code in order to sell the product. In this instance, the applicant could be eligible for an exclusivity period in which only the applicant is allowed to sell the product; however, this could also be deemed an exclusive, capturable, commercial benefit which means the applicant would be forced to pay the upfront fees for the FSANZ Application.

- Example 4 – Health Claims: The latest draft of the proposed Health Claims Standard (Standard 1.2.7), if approved, requires that all general level health claims be pre-approved by FSANZ. So if a company discovers or invests in medical research that proves a link between a food or food component and a health effect, they must apply to FSANZ to get it approved. Once approved, everyone in the industry will have been both alerted to it and ready to roll out competitive marketing campaigns and products, thus removing the advantage of being first in the market despite creating the basis for the health claim through the research and the FSANZ Application.

Possible options for consideration

First of all, it is accepted that removing the cost recovery arrangements for expedited Applications is unlikely to negatively affect very many small businesses or stifle innovation since expedited process will also permit other businesses to take advantage of the regulatory change sooner.

However, as illustrated above, the aspect of the FSANZ Application process which could appear to stifle innovation is the limited scope of exclusivity or market protection provided by FSANZ. As discussed in our abovementioned article “Protecting Proprietary Information from Prying Eyes in FSANZ Applications”, the only amendments to the Food Standards Code that provide exclusivity rights are applications to amend the Novel Foods Standard (Standard 1.5.1).

Yet there are strong arguments (especially to prevent smaller companies suffering unfairly) for there to be similar exclusivity provisions for any application, subject to the application meeting an established set of criteria. Analogies could be drawn from the international patenting system whereby intellectual property protection is only provided to processes that can be described novel and involve an “inventive step” under Section 18 of the Patents Act 1990 (Cth). Alternatively or further, exclusivity could be granted in varying degrees depending on set criteria (for example, the period could range from 3 months to the existing 15 months for novel foods depending on the exact type of Application).

Removing the expedited Application system would mean that all Applications would be dealt with equally. Providing exclusivity could, instead of stifling, actively encourage innovation in the way that a patent system does. It would also provide an incentive and an advantage to applicants who have developed novel substances, methods or research in food. Furthermore, if applicants so desire, they could waive the exclusivity period if they were happy to allow the whole country or a whole industry immediately to take advantage of the technology. In such an instance, as there would be no exclusive, capturable, commercial benefit, no upfront fees ought to be paid. In the writer’s view, the system needs to be reviewed by the legislators or policy-makers as well as by FSANZ itself.