8.2 Charging for the use of assets

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Charging for asset use brings a number of benefits:

• The level of pricing can be used to modify or suppress demand for the service that the asset supports, or for the asset itself. Realistic pricing can also encourage the search for more efficient solutions to the service requirement.

• Resources are allocated more effectively.

• Some or all of the costs of operating the asset can be recovered (depending on the pricing policy).

• More realistic costs are available, for comparison with other sources of the service.

• Benchmarking and comparisons with the private sector become possible.

The price set when an asset is to be used by another party should, in most instances, reflect at least the full cost of the asset (or the services it provides). This cost should reflect the capital charge attributable to the asset, the operating and maintenance expenditure, and depreciation.

Entities may hire or lease assets (or the services they provide) under a number of different circumstances. Assets may, for example, be provided for use to another party within the public sector or to a private sector party, as well as to users within the entity itself.

In allowing other parties to use assets for which it is responsible, the entity must develop suitable charging arrangements. Generally, all charges should be set to recover full costs, and the same charge should be applied for all users. An entity does, however, have a number of options for cost components when setting charges–these are described in ‘Pricing Models’ below.

In setting charges, the entity needs to understand the total cost structure of the asset and the service that it supports. Such information will clearly highlight issues such as cross-subsidisation in the provision of services. It will also help the entity to develop policies for use of the asset in different circumstances.

Pricing models
The pricing model selected by the entity should reflect the circumstances under which the asset is being made available. In setting the user charge, any of the pricing models described below may be applied, providing agreement with the relevant Minister is reached.

Entities responsible for the hire or lease of assets should consider the options, and record the reasons why the particular pricing arrangement was selected.

Market price
Assets charged in this way reflect the prevailing market price. Not all Government assets or services have a ready market price, so this method is of limited application.

Where conditions do allow the market price to be charged, the entity must ensure that it covers, as a minimum, the full costs of using the asset, including the capital charge. Any variation from this approach must have the agreement of the relevant Minister.

Full cost, plus a factor
There are two applications of this pricing model:

Cost plus: An amount is added to the full cost. This amount may be fixed (eg $x per unit) or variable (ie x% of the total cost).

Target profit: A target profit per unit is added to the full cost. This may be a fixed dollar amount or a variable figure, such as return on assets.

Actual full cost
This charge is based on the full cost of using the asset (see Section 8.1). It needs to be recognised, however, that this pricing model yields no profit.

Standard cost
This charge is based on the actual full cost, modified to eliminate overheads or costs that an alternative supplier would not incur. Benchmarks are first established, based on expected efficient performance. Costs are then adjusted against these. In effect, this pricing model prevents the cost of any overheads or penalties of the entity being passed on to the user. This option may be suitable as an intradepartmental charge, particularly where individual divisions or branches are required to use internal departmental services.

Marginal (partial) cost
This charge reflects only part of the total cost of providing the item (eg it could exclude all or part of the indirect costs). This type of pricing arrangement may be used to encourage the use of internal services; the disadvantage is that it can encourage over-consumption and increase unrecovered costs.

A discount given in a non-contestable market should be recorded in the entity's financial records as a community service obligation or as a subsidy payment made by the entity.

No cost
To fulfil agreed community service obligations, an entity may provide an asset for use free of charge.

Review of charging policies

The policies and practices followed by an entity in charging for the use of assets should be kept under close review so that they continue to reflect Government policy regarding full costing and commercial pricing. This is especially the case where assets are provided at minimal or no cost.

Department of Treasury and Finance, Accounting and Financial Reporting Division Telephone 61 3) 9651 2187

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