Fees and Charges

1. This section gives guidance on charging for goods and services. It is aimed primarily at the constituent parts of the Scottish Administration (including the core Scottish Government and Executive Agencies). However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable, including bodies sponsored by the Scottish Government, should, as appropriate, follow procedures consistent with the guidance and ensure compliance with any relevant provisions

Key Points

2. The standard approach to setting charges for public services is full cost recovery. Charges for information are generally low or waived as a matter of policy.

3. Portfolio Finance Teams must be consulted in advance on the proposed provision and financial objectives of all services supplied by constituent parts of the Scottish Administration.

4. It is important to decide (and document) clearly the level of any deliberate public subsidy, why it has been granted and how long it should last.

5. It is important for public suppliers of commercial services to respect competition law.

6. The relevant Accountable Officer should be able to defend the provision of a commercial service as being an appropriate use of resources.

7. It is good practice to review the service routinely at least once a year, to check, and if appropriate revise, the charging level.

Background

8. Charging for services helps to avoid unnecessary public expenditure, eliminate hidden subsidies, and promote competition. Charging also provides an incentive to use goods and services economically, efficiently and effectively. A service in the context of this guidance refers to an output which includes both goods and services. The terms fee and charge are interchangeable. A fee is normally a charge made for a statutory service.

9. Services are either statutory or non-statutory. A statutory service is one set out in legislation and the legislation will normally specify whether or not a fee may be charged and, sometimes, how the charge should be calculated. A non-statutory service is a discretionary service that may or may not be provided in competition with the private sector.

10. Services between constituent parts of the Scottish Administration should not normally be subject to charging but charging may be appropriate where "customers" hold the necessary budgets and have freedom to choose different sources of supply. Guidance on charging with regard to shared services can be obtained from the Scottish Government's shared services team at sharedservices@scotland.gsi.gov.uk. (General guidance on shared services is set out in the Scottish Government's Shared Services Guidance Framework.)

11. The checklist at Annex 1 identifies the main issues that need to be considered when introducing a new or updated charging service.

Financial Objectives

12. The standard approach to setting charges for public services (including services supplied by one public sector organisation to another) is full cost recovery. It normally means recovering a 3.5% real charge for the cost of capital. Exceptions to this standard approach include:

Subsidised services: where ministers decide to spend public resources on lowering costs for some or all consumers of public services.
Information services: where charges are generally low or waived as a matter of policy.
Commercial services provided in competition with the private sector: where a commercial rate is normally charged.
Levies: licences to operate using public goods, often set to recover associated costs such as supervision by a regulator.

13. Commercial services provided in competition with the private sector should normally aim to recover full costs plus a real rate of return in line with the rates achieved by comparable businesses facing a similar level of risk. The normal range of rates is 5 -10% but rates as high as 15% may be appropriate for the very highest risk businesses.

14. Great care should be taken in pricing competitive services where public sector suppliers have a natural dominant position. The market prices of competitors will often be a good guide to the appropriate rate of return if there is genuine competition in the market. Where there are limited numbers of buyers and sellers in a market, it may be better to take other factors into account as well. These might include past performance, the degree of risk in the underlying activity and issues bearing on future performance.

15. Despite every effort to measure and forecast costs, surpluses and deficits are bound to arise from time to time. Causes may include variations in demand, in year cost changes, and so on. It is good practice to consider mid year adjustment to fee levels if this is feasible. It is also good practice to set fees to recover accumulated past deficits.

16. Portfolio Finance Teams must be consulted in advance on the proposed provision and financial objectives of all services supplied by constituent parts of the Scottish Administration. Any financial objectives of less than full cost recovery for statutory services and for commercial services provided in competition with the private sector must also be approved in advance by the responsible Cabinet Secretary / Minister and cleared by the Cabinet Secretary for Finance and Sustainable Growth.

17. If Ministers decide on a financial objective short of full cost recovery, there should be a plan to achieve full cost recovery within a reasonable period. If this is not intended, it is important to decide (and document) clearly the level of any deliberate public subsidy, why it has been granted and how long it should last.

Defining Services

18. When deciding the level of a charge, it is important to define the range(s) of services for which a charge is to be made; and how any different categories of service are to be differentiated, if at all, in setting charges. Normally the same charge should apply to all users of a defined category of service. The policy might be to charge at a uniform rate for all varieties of a service; or different fees may be set for objectively different categories of service costing different amounts to provide. Possible ways of setting charges for different categories of service include:

Supply differences, eg in person, through the post, over the telephone or using the internet.
Priority, eg where consumers pay more for a faster, more expensive, service.
Scale or value, eg where a premium service offers more facilities to the customer than others.
Structural, where it costs more to supply some consumers with a consistent service.

19. Differentiation by different kinds of customer, eg less for personal consumers and more for corporate bodies, is not permissible unless allowed for or required by primary legislation.

Calculating Costs

20. Once defined, the full cost of each category of service should be measured realistically and objectively: see Annex 2. The cost should be estimated, extrapolating past trends and forecasting future consumption patterns. The calculation should take full account of non-cash items eg depreciation, the cost of capital and the notional cost of insurance where applicable. There is some limited flexibility about the charge in any single year, since demand cannot be forecast precisely and it may make practical sense to round charges. But neither factor can justify planning to recover less or more than 100% of costs. Special rules apply to charges for information services: see Annex 3.

Levies

21. Compulsory levies, eg licences to operate charged by statutory regulators are justified in the wider public interest and not to provide a beneficial service to those who pay them. As with other fees and charges, levies of this kind should be designed to recover the full costs of the service provided. If the legislation permits, these costs can include the costs of the statutory body, eg a regulator could be empowered to recover the cost of supervision as well as registration to provide a licence. It may be appropriate to charge different levies to different kinds of licensees, depending on the cost of providing the licence.

Commercial Services

22. Charges for discretionary services should be set at a commercial rate, including delivering a proper return on the use of resources acquired with public funds. So the financial target should be in line with market prices, using an appropriate risk weighted rate of return on capital. The rate of return used in pricing calculations should be:

for sales into commercial markets - in line with competitors' assessment of their business risk, rising to higher rates for more risky activities; or
where a public sector body supplies another, or operates in a market without competitors - the standard rate for the cost of capital.

23. If, during the year, a deficit on a commercial service is forecast charges should be adjusted or costs cut or both in order to recover the deficit within the year. Failing that, the deficit should be recovered in a future year.

24. It is important for public suppliers of commercial services to respect competition law. Otherwise public services using resources acquired with public funds might disturb or distort the fair operation of the market, especially where the public sector provider might be in a dominant position: see Annex 4.

25. The relevant Accountable Officer should be able to defend the provision of a commercial service as being an appropriate use of resources. Account should be taken of parliamentary and public expectations about the type of activity in which public sector bodies should properly engage. The core functions of some Executive Agencies and sponsored bodies may involve the provision of commercial services. In addition the most efficient use of a public sector asset - whether fixed or non-fixed - may involve exploiting its commercial potential in order to generate additional resources in support of core functions. As a general rule however assets should be disposed of if they are not required in order to undertake core functions.

Sponsored Bodies

26. Bodies sponsored by the Scottish Government are required, as appropriate, to follow procedures consistent with this section of the SPFM. In addition any proposals by sponsored bodies to recover less than the full cost of providing a statutory service or a commercial service provided in competition with the private sector must be submitted to the sponsoring unit within the Scottish Government for approval. The sponsoring unit must consult its Portfolio Finance Team and submit the proposal to the relevant Cabinet Secretary / Minister (and the Cabinet Secretary for Finance and Sustainable Growth) for decision.

Monitoring and Review

27. As with any other use of public resources, it is important to monitor performance so that the undertaking can be adjusted as necessary to stay on track. It is good practice to review the service routinely at least once a year, to check, and if appropriate revise, the charging level. At intervals, a more fundamental review is usually appropriate, eg on a timetable compatible with the dynamics of the service. Issues to examine include:

Is it still right for a public sector organisation to use public resources to supply the service?
Does the business structure still make sense? Are the assets used for the service adequate?
Would another business model (eg licensing, contracting out, privatising) be more satisfactory?
For services supplied within the public sector, is there scope to supply others to take advantage of economies of scale?
Is the financial objective right?
- for a statutory service (or one supplied to another public organisation) if full costs are not recovered, why not?
- for a commercial service, does the target rate of return still reflect market rates?

Can efficiency and effectiveness be improved?
Looking ahead, what developments might change the business climate?
Do any discretionary services remain a good fit for the business model and wider objectives?
Should any underused assets be redeployed, used for wider markets activity, or sold?

Records and Accounts

28. As with public expenditure, the resources used in supplying public services and the proceeds of charges should be properly recorded and accounted for. Each service should keep records of its costs and the associated receipts. Under the terms of the Financial Reporting Manual (FReM) relevant annual accounts should include an analysis of the services for which a fee is charged. For each service where the full annual cost is £1 million or more, or (if lower) where the amount of the income and full cost of the service are material to the financial statements, the following information should be provided:

the financial objective;
full cost;
income;
surplus or deficit; and
performance against the financial objective.

29. For each service where the full annual cost is £1 million or more business areas within the constituent parts of the Scottish Administration should copy such analyses to the relevant Portfolio Finance Team to enable it to monitor performance in relation to significant services.

Page Published/ Updated: January 2008

The Scottish Government

Public Sector

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Fees and Charges