House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Customs, Community Safety and Multicultural Affairs, the Honourable Jason Wood MP)

ATTACHMENT 2: REGULATORY BURDEN AND COST OFFSET ESTIMATE

1. The entry into force of an IA-CEPA is expected to result in a small reduction in ongoing business compliance costs for Australian exporters to Indonesia.

2. The reduction arises from:

a.

The possibility that some businesses that previously sought and obtained both preferential and non-preferential certificates of origin (COOs) may now be able to self-certify the origin of their goods for exports to Indonesia.

3. There is a level of uncertainty regarding the number and composition of COOs issued in respect of Australian exports into Indonesia. Accordingly, the estimates of the compliance costs under the status quo - as well as the likely incremental changes - are largely assumption driven and should be interpreted as such. However, based on the available data, it is possible to gain an appreciation of the order of magnitude of these changes.

Certificates of Origin

4. Industry groups such as the Australian Chamber of Commerce and Industry and the Australian Industry Group issue COOs, both for non-preferential purposes, as well as under the AANZFTA for preferential purposes.

5. Preferential certificates are generally issued in respect of countries with whom Australia has a free trade agreement, but which do not allow for self-declaration.

6. Non-preferential certificates are generally issued to meet specific requirements such as letters of credit or, in the case of antidumping concerns, to confirm origin.

Direct Costs

7. Where businesses seek third-party certification from industry groups, the cost of each certificate varies from between $20-70 at an average of $33. The cost of a certificate depends on a range of factors, such as whether an applicant is a member of the issuing body and the level of complexity.

Administrative costs

8. While new businesses may expend considerable time applying for certification for their initial consignment, as a matter of practice this information is re-submitted for subsequent certifications.

9. In addition, much of the information required would be collected for other purposes. Once the origin of the product has been determined, businesses only need to undertake this process again if their production process or the inputs/input prices change. This one-off administrative cost is likely to be moderate and take approximately two hours per business. This estimate is based on two factors:

a.

Some businesses may already be exporting under AANZFTA and will not require much additional information to make use of IA-CEPA.

b.

For businesses that are new to exporting under an FTA, it may take longer to learn about how to make use of IA-CEPA.

10. The ongoing administrative costs incurred by a business in preparing each subsequent COO are likely to be relatively low.

11. As IA-CEPA allows for self declarations of Origin on the invoice, businesses that are able to make use to the alternatives provide under IA-CEPA, and given most information will be known, would take on average less than 20 minutes.

12. Similarly, the records related to a COO are required to be kept for five years by most foreign customs agencies. However, businesses are required under Australian Taxation Law to retain these records for seven years. The incremental compliance burden associated with record keeping for COOs is therefore assessed as nil.

Incremental reduction in number of certificates under the IA-CEPA

13. COOs are required for Australian exports to Indonesia for a range of purposes in addition to tariff compliance. For example, overseas customs agencies may require COOs for the purpose of calculating import quotas and applying antidumping and countervailing duties. Alternatively, foreign banks may require COOs in order to provide letters of credit.

14. Therefore, it is possible that of the total number of Australian COOs currently issued in respect of Indonesia, some of these will no longer be required due to IA-CEPA. However, each business will have to consider for themselves, as a commercial decision, whether the benefits of obtaining a COO outweigh by the costs (administrative or otherwise).

15. It is therefore assumed that there will be a modest reduction in the number of third-party issued preferential and non-preferential COOs in respect of Australian exports to Indonesia as a result of the IA-CEPA. To the extent that this reduction occurs, those businesses will save the direct costs of certification by an industry body; offset by minor adjustment costs as a result of the additional work to understand and make use of the FTA.

Effect of Other Free Trade Agreements on reduction of certificates under IA-CEPA

16. By the time IA-CEPA enters into force, Australian businesses will have already been trading with Indonesia under AANZFTA since 2012.

17. Given this, it is expected learning times to make use of IA-CEPA would be significantly shorter, on average.

Estimate of Regulatory Burden and Costs Offsets

18. The average number of exporters to Indonesia over the three year period from 2014-15 through 2016-17 was 2,428. Each year, Australian exporters to Indonesia undertook some 72,480 transactions, worth on average A$73,887 per shipment. ^[11]

19. Given the average cost of a certificate in paragraph 7, the direct costs saved would, at most, be:

20. 72,480 transactions x $33 per certificate = A$2,391,840

21. With 2,428 business required to learn the rules of a new Agreement, a conservative estimate of two hours per business has been used based on the information in paragraphs 9a, 9b and 17. At a scaled up labour cost of $68.79 per hour, this works out as

22. 2,428 businesses x 2 hours x $68.79 per hour = A$334,044.24

23. Based on an estimate of completing the self-declaration taking up to 20 minutes, a total cost per year for completion of the certificates of origin is:

24. 72,480 transactions x 1/3 hours x 68.79 per hour = A$1,661,966.40

25. Over a ten-year period, businesses would be expected to save A$2,391,840 per year, or A$23,918,400 in total, and to spend A$334,044.24 in year one learning about the FTA, and A$1,661,966.40 per annum, or A$16,619,664 over ten years, completing Certificates of Origin.

26. Total cost over 10 years= 334,044.24 + 16,619,664 - 23,918,400 = -$6,964,691.76

27. Total regulatory saving per annum $694,469.18

28. Given the assumptions, the estimate is likely to have a low reliability; however, the magnitude of the savings is indicative of the overall minor positive effect.

29. The greatest risk to the estimate is that the time taken to complete a COO is not twenty minutes ^[12] .

30. It would be expected that given the repetitive nature of the process, any change in time taken to complete a COO is likely to decrease from twenty minutes, i.e result in a larger decrease in regulatory burden faced by Australian businesses.

Regulatory Burden (RBE) Estimate Table