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Mid-Point Levy Review: Submission

Wednesday, 23 December 2015

midpointfundingreview@maritimenz.govt.nz

Mid-Point Funding Review

Thank you for the opportunity to submit our views in respect of the mid-point review of the funding of Maritime New Zealand (MNZ). Thank you also for arranging briefings and consultation meetings on this issue.

Coastal shipping is a vital part of New Zealand’s transport infrastructure. It also plays a role in civil defence. It is important for New Zealand’s economic, environmental and social welfare that the coastal network operates efficiently and effectively. Central and local government decisions can optimise the way that the coastal network performs. These decisions can also drive unnecessary costs into shipping operations.

The Federation is committed to working with decision-makers to ensure that the best policy settings are in place for the benefit of all New Zealanders. We are happy to work proactively to bring sector knowledge to support the policy-making process.

The New Zealand Shipping Federation is the key representative body for New Zealand’s coastal shippers. Members of the Federation are:

Coastal Bulk Shipping www.coastalbulkshipping.co.nz

Golden Bay Cement www.goldenbay.co.nz

Holcim www.holcim.co.nz

Interislander www.interislander.co.nz

NIWA www.niwa.cri.nz

Pacifica Shipping www.pacship.co.nz

Silver Fern Shipping www.sfsl.co.nz

Strait Shipping www.strait.co.nz

We understand that MNZ believes that it needs additional funding of between $2.2m-4.3m over the next 3 years. We appreciate that this either comes from the government in recognition of the public benefit of a properly functioning regulator, or it comes from the maritime sector.

We appreciate that MNZ have made efficiency gains in recent times and that it will continue to look for better ways to achieve its goals of safer, cleaner, more secure waters around New Zealand. The Federation is conscious that MNZ used to work with a much smaller staff (e.g., 115 staff in 2004 vs 190 staff now) and appeared to achieve its goals within those resources.

Historical Context

The Federation is a forward-looking organisation but we believe that it is important to understand the historical context in which the current decisions are made.

2006

• At this time, the Levy formed the bulk of the funding for MNZ

• Government made the decision that the balance should shift to user-pays, i.e., more fees. Officials start to work on this.

• The problem with a fees model for this sector is seen by officials as one of scale, i.e., NZ needs to meet its international obligations but we have only a small maritime sector from which to recover the costs on a user pays basis or a levy basis.

• Greater fees can deter compliance and this is a double negative where compliance directly relates to safety, biosecurity, security and international reputation.

2008

• Officials developed a new model (i.e., the balance between fees and levy) but this did not incorporate any review of the level at which fees were set.

• The model incorporated assumptions about the proportion of the total levy that should be derived from each sub-sector within the Maritime sector.

2009

• The Cook Strait passenger ferries had an increase in their levy of over 340% and in excess of million per year. This was due to the change in levy basis from gross tonnage (GT) to passenger carrying capacity, which was stated as better reflecting the demands imposed on MNZ by passenger vessels. The consequence of harm through passenger vessel accidents was seen by officials as much more significant than for comparable accidents of other vessels such as fishing vessels. We wish to record the fact that passenger ferries have a strong history of assisting other vessels rather than needing assistance themselves but this has been ignored in the risk calculation.

• Cruise levies went up by 180% based on passenger carrying capacity and port visits. Note that ferries operating across Cook Strait do not have a port visit component to their levy as they pay directly for usage and access to the local ports under wharfage dues.

2010

• Officials began work on implementing the new model

2012

• New model implemented.

• Complaint made to Regulations Review Committee about the allocation methodology. The complaint was partially successful (levy methodology seen as arbitrary and not based on analysis) but government amends the Regulations to widen the levy-setting power.

2014

• MOSS and SeaCert commence. 83 new fee-able activities identified by MNZ, with MNZ seeing the activities/fees as supplanting services/charges previously paid to private sector and therefore not generating new or additional costs.

2015

The key purpose in recounting this history is to make it clear that the reductions in 2012 only happened after massive levy hikes in 2008. The Federation shares with the rest of the maritime sector a sense of frustration that the significant levy increases in 2008 appear to have been lost from the institutional memory of the government.

In addition, the Cook Strait ferry operators understood that the Report of the Regulations Review Committee on the Complaint regarding SR 2008/319 Marine Safety Charges Amendment Regulations 2008 (August 2009) would lead to a review of the appropriate basis for imposing the levy on passenger-carrying ferries. That report criticised MNZ for lacking

a robust system of information gathering and analysis” (page 13)

and said that they expected that in future

[MNZ] will follow and will be seen to be following a fair, reasonable, robust and coherent process. We do not consider that such a process has been followed in this case, particularly as regards the risk analysis that has been undertaken” (page 13).

Such a robust process would show that the risks are not best reflected by the potential maximum passenger numbers a ship can carry. Experience would suggest that risks might be better reflected by the type of operation, such as with fishing operations and recreational use.

The Cook Strait ferry operators feel betrayed and fobbed off because their reasonable expectations of a review of the passenger capacity basis of levy setting have not been met by this mid-point review. The subsequent changes to the levy-setting power did not address this need for a better process.

Allocation of levy across the Maritime Sector

Buried in the model are a series of assumptions about the risks within the sub-sectors of maritime, and therefore the need for MNZ to both regulate and support that sector. In 2008, the burden of the costs of Maritime New Zealand were not allocated across the various users of the maritime sector on the basis of the costs those users actually imposed on the system, nor were they based on an accurate assessment of the risks of each sector.

In the papers provided by MNZ, sub-sectors were described as

Sub sector                                            % of levy as at 2014/15        % of levy as proposed

Foreign non-passenger                                 73.8%                                          63.3%

Foreign passenger                                        17.7%                                          19.6%

NZ SOLAS passenger                                   3.9%                                             4.1%

NZ Fishing                                                      1.2%                                               2.4%

NZ Domestic Passenger                                0.9%                                                1.4%

Other Commercial                                           1.1%                                                1.5%

Recreational maritime users not subject to Maritime Levy

These allocations are made by government decision and have never been justified, even in spite of the comments made by the Regulations Review Committee in 2009. We would welcome an explanation based on relative risk and compliance burden, as to how these allocations were determined and justified.

The proportion of the levy allocated to fishing and NZ Domestic Passenger does not reflect their widely understood risk or their compliance burden. The fishing sector would appear to be under-levied based on either criteria. An example best explains the benefits to the domestic passenger sector: one domestic ferry operator has 16 vessels and moves 4.5 million passengers per year, but apparently are seen as very low risk judging by the levy that they are paying, notwithstanding well documented and publicised safety and risk issues during the year

Affordability as a criteria

In the absence of the credible allocation model requested by the Regulations Review Committee, a proxy for ability to pay was developed; which does not meet the test of a consistent, analytical robust process. A further problem with the ability to pay concept was that its implementation was based on guesswork.

We have a further concern that using the perceived ability to pay as a criteria is promoting inefficiency within the New Zealand maritime sector. Fishing appears to be a sector that is under-levied based on its safety record, and where the sector itself believes that it is over-capitalised and under-developed. See for example “Calls for greater fishing industry collaboration to boost profitability” National Business Review 17 December 2015. It would be better to set levies that recognise the actual risk level in the fishing sector even where this drives consolidation within the sector.

The shift from GT to passenger capacity as a determinant of fees remains a concern to the sector. There seems to be an underlying assumption that the cost of the levy can just be added to the ticket price without any effect on the travelling public. In effect the passenger capacity calculation punishes passenger ferries for the seasonality of usage.

By way of example, midwinter overnight trips may have minimal passenger numbers (20-30 persons) but the SOLAS passenger ships are paying a levy based on the ship having full passenger loading on every trip. This appears to us to be conceptually wrong, especially when risk is supposed to be a component of the levy-setting process.

Taxation

It is pointed out in the consultation paper that in many jurisdictions there is a correlation between the extent to which a maritime sector pays tax and the extent to which their government supports that sector’s compliance costs.

The United Kingdom and Singapore are at opposite ends of the spectrum. In the United Kingdom there is a substantial domestic maritime sector, paying taxes in the United Kingdom and, accordingly, the proportion of government funding for the operation of maritime officialdom is high. In Singapore, the maritime sector is substantially not paying taxes in Singapore and the cost of running the compliance system is largely coming from levies on the participants. New Zealand sits somewhere in the middle.

Based on overseas practice, we believe there is a sound argument for the parts of the New Zealand maritime sector that are domiciled here for tax purposes to receive a higher proportion of government funding for the operations of MNZ in respect of that sector. The coastal shipping sector fits this description. Accordingly, we assert that coastal shipping should be subject to lower levies with the shortfall being met by an increased government contribution. This is not a donation; rather it is a recognition of the benefit to this country of having locally domiciled ship operators.

In conclusion, we are concerned that:

• Government is not meeting its share of the burden of ensuring New Zealand seas are safe, clean and secure.

• Robust data as to levels of risk and compliance burden have not been used, with the effect that the levies do not proportionally align with the differing demands placed on MNZ by the different parts of the maritime sector.

• The use of passenger numbers is an inappropriate measure to use when setting levies. It leads to over-levying passenger carrying ships. This measure appears to have been selectively used to the detriment of SOLAS passenger ships but ignored in respect of non-SOLAS passenger vessels.

• Assumed ability to pay is an inappropriate measure when setting levies. As currently run, the levy structure appears to be designed to subsidise the fishing sector, non-SOLAS passenger vessels and recreational use.

• The significance of only some parts of the sector being New Zealand taxpayers is not adequately recognised.

Again, thank you for the opportunity to provide comments.

Yours sincerely

Annabel Young

Executive Director