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Professional Engineers Registration SchemeCost recovery options, discussion paperThe Professional Engineers Registration Act 2019 (Act) was passed in the Victorian Parliament in August 2019. The Act introduces a co-regulatory scheme where individuals providing professional engineering services require registration, bringing professional engineers in line with other professional sectors in Victoria, such as lawyers, doctors and nurses. The scheme will reduce information asymmetry in the professional engineering services market and enable community, industry and the government to purchase professional engineering services with greater confidence.About this discussion paperThe purpose of this discussion paper is to provide a background on the Victorian Government’s cost recovery principles, which will guide the setting of the registration fees for the Professional Engineers Registration Scheme (scheme), and to outline several optional approaches to setting those fees for preliminary comment by the Reference Group and the Stakeholder Forum supporting the implementation of the Act.Feedback received in response to this discussion paper will inform the development of the final options that will be tested by an economic impact assessment in a Regulatory Impact Statement (RIS) to be released for public consultation before the end of this year.Regulatory Impact StatementBackgroundAs part of the implementation of the scheme, a suite of regulations is being developed which enable the operation of the Act. The regulations proposed for the scheme fees will set out the fees to be paid by professional engineers, for example, to apply for:registrationendorsement to work in the building industryrenewal of a registration or endorsement, andan official extract of information held in the register of professional engineers.The proposed fees regulations will require the preparation of a RIS because the economic impost of these regulations is expected to be greater than $2?million per year, which is the threshold for preparing a RIS.One of the key features of the RIS process is to test a range of options that deliver a desired policy outcome, using an economic impact assessment framework. The impact assessment uses an objective decision-making tool such as, cost-benefit analysis, or multi-criteria analysis, to identify a preferred regulatory option.Cost recoveryConsistent with the Victorian Guide to Regulation (Better Regulation Victoria, 2016) and the Cost Recovery Guidelines (Department of Treasury and Finance, 2013), regulations that set fees for government services and activities should achieve full cost recovery—unless there are compelling policy reasons not to do so. A departure from the full cost recovery may be justified where: merit goods are being provided or where activities generate benefits to unrelated third parties e.g. education and preventative healthcareobjectives of income redistribution or social insurance are important e.g. health, education, public transport and social housingconcessions are deemed appropriate e.g. for low income groupsfull cost recovery may undermine innovation and product development e.g. the full cost of getting approval to bring a new product into the marketthe government is providing goods and services on a commercial basis in competition with the private sector, and/orfull cost-recovery might adversely affect the achievement of other government policy objectives e.g. charging consumers to make a complaint or obtain advice from a regulator.For Professional Engineers Registration, total scheme costs include both the direct and indirect costs of ongoing operation. Direct costs include the additional labour impost incurred by the Building Licensing Authority (BLA) and the Victorian Building Authority (VBA) to process and decide registration, endorsement and renewal applications by professional engineers. Indirect costs include additional expenses incurred by Consumer Affairs Victoria (CAV) and the VBA that cannot be attributed to individual registrations or renewals, e.g. costs associated with general administration, compliance-monitoring, enforcement and ongoing policy development.OptionsThe options briefly outlined below represent early thinking on cost recovery approaches that would support the scheme moving forward. The options range from zero cost recovery to full cost recovery. Stakeholder input will be invaluable to develop and refine these preliminary options and will help determine which options will be tested, alongside the ‘base case’, in the economic impact assessment. At this stage, options have not undergone any evaluation against the assessment framework (see below), as this paper is intended to initiate a broad discussion on fee design options.Base case (zero cost recovery) – Professional Engineers Registration (Fees) Regulations 2021 are NOT made, therefore NO FEES are prescribedOperation of the scheme would be governed by principal legislation in relation to fees. In practice, no fees would be prescribed to cost recover the scheme.Scheme costs would require recovery by some other means, e.g. costs met by government. Where costs are not met by fees, the economic impost of the scheme would inevitably be transferred to Victorian taxpayers.Option 1 (full cost recovery) – Fees reflect activity-based costs (direct) and an even distribution of other costs (indirect)Scheme operations would be entirely self-funded once fully implemented.Fees for registration and renewal would accurately reflect the respective labour effort of each activity.Each registered engineer would carry an equal share of indirect costs.Fees would undergo evaluation every 10 years and be amended (if necessary) to account for an under/over collection of revenue resulting from unanticipated levels of registration.Option 2 (partial cost recovery) – Fees reflect activity-based costs (direct) only. Indirect costs are borne by the government, i.e. indirect costs are not cost recoveredFees for registration and renewal would accurate reflect the respective direct labour effort of each activity.Indirect costs would be recovered through government funding or by some other means, e.g. taxpayer subsidy.Option 3 (hybrid: short-term partial cost recovery, medium/long-term full cost recovery) – Same as Option 1 except fees are reduced for the first five years of the scheme as a transitional measure and increased in the second five years to cover the initial shortfallScheme would be entirely self-funded in the medium to long-term, i.e. after five years.Fees would be reduced by some fixed percentage for the first five years as a transitional measure to assist industry with the new regulatory regime. However, as registration is a mandatory requirement with significant penalties for non-compliance the fees would be increased in the second-five years by a fixed percentage sufficient to recoup the first five-year shortfall.Option 4 (full cost recovery) – Total scheme costs (direct and indirect) are evenly distributed across each registrationA single fixed fee would be charged for new registrations and renewals.Simple scheme to administer and comply with.In the case where new registrations require more labour effort than renewals, cross subsidisation would occur from the renewal cohort to the new registration cohort.Option 5 (full cost recovery) – Fees are determined by risk-based approach (direct) and an even distribution of other costs (indirect)Certain engineering disciplines provide advice on matters that pose higher risk to the community than others. A risk-based approach would see registration fees for high risk engineering disciplines set higher than lower risk disciplines. For example, high risk disciplines may require increased compliance-monitoring by CAV and the VBA, which would be reflected in the fees for those disciplines.Risk-based fee setting would likely be more challenging to administer and regulate.Impact assessment frameworkSeveral agreed options, alongside the base case, will be tested by an economic impact assessment to determine a preferred cost recovery and fee design approach for the scheme. The impact assessment process will consider the base case and each option with respect to a range of decision criteria and compare across options. This assessment approach will highlight the qualitative impacts of each option and highlight the option with the greatest potential net benefit, i.e. preferred option.The economic impact assessment for the proposed fees regulations will use decision criteria founded on economic principles of efficiency, effectiveness and equity. At this stage, each principle is considered equally important. Accordingly, weighting of the decision criteria has been distributed evenly, i.e. scores will not require adjustment for relative weights.Each decision criterion is defined as:CriterionDefinitionEfficiencyWeighting: 13Efficiency refers to the extent to which scheme fees reflect the underlying costs of the registration/renewal activities being undertaken, and whether these price signals send accurate information to the professional engineering services market about the value of those activities.In the general case, fees set below the efficient level would result in greater demand for registrations and increase the administrative costs associated with maintaining the scheme. Conversely, fees set above the efficient level would result in lower demand for registrations and may impact the ongoing financial viability of the scheme if fixed costs are not recovered.EffectivenessWeighting: 13Effectiveness refers to the extent to which scheme fees create perverse incentives to elicit noncompliance or results in other unintended consequences.For example, fees set above an effective level may deter new engineers from entering the market as students substitute study preferences for professions that have lower registration fees. The reduced supply of new engineers would likely have a negative impact of the competitiveness of the Victorian professional engineering market.EquityWeighting: 13Equity refers to the extent to which those that that benefit from the scheme are accountable for the associated costs of administering the scheme. In this context, the equity criterion directly aligns with the user pays principle.Therefore, funding the scheme on an ongoing basis via appropriations from the Consolidated Fund would be inequitable, unless the benefits of the scheme could be expected to accrue to all Victorian taxpayers. ................
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