Administrative Scale

1                This working paper describes the expense assessment for Administrative Scale and provides information on its impact on GST revenue distribution for the 2007 Update.  The development of the assessment method is discussed in Volume 7 of the 2004 Review Working Papers.

2                Administrative scale factors were assessed to recognise the per capita difference in the costs of operating the minimum administrative structures required to provide State services.  These minimum structures comprise the part of State head offices which provide corporate services, policy and planning functions and some whole of State services (such as those provided by Treasuries and museums).  The Commission decided the costs of operating minimum structures were the same for each State[1].  That is, an equal per State assessment (hereafter fixed costs). 

3                These fixed costs impose a greater per capita financial burden on the less populous States, so the assessment increased the GST revenue shares of the five less populous States and reduced the shares of New South Wales, Victoria and Queensland.

4                Estimates of the costs of operating minimum structures were made for each category.  The fixed costs component weights, which reflect the proportion of total category expenses accounted for by fixed costs, are based on those estimates.

Deriving the scale factor

5                Administrative scale factors are calculated by dividing a States' per capita fixed costs by the average per capita fixed costs.  The factor is calculated as:

Administrative Scale Factor  =    (1)

Where:            FC        = fixed costs amount
                        P          = population
                        i,s         signify individual States (i) or the States as a whole (s).

6                For most categories, the fixed cost expenses are the same for all States.  In this case, the calculation simplifies to:

Administrative Scale Factor  = 

7                Table 1 shows the 2005-06 administrative scale factor for these categories.

Table 1            General administrative scale factors, 2005-06

8                For some categories the fixed costs are not the same for all States.  This occurs because adjustments are made to the assessed fixed costs for the ACT and the Northern Territory, discussed below.  The administrative scale factor for these categories will be different from that shown in Table 1, the factor is calculated by dividing each State's per capita fixed costs by the average per capita fixed costs for all States.

9                The fixed cost amounts assessed for each category are updated annually for movements in price (measured using the consumer price index) and wage levels (measured using the public sector wage price index).  Updating for the movement in price and wage levels increases the level of fixed costs assessed for each year but it does not change States' shares of those costs.  Equation (1) shows that if States' shares of fixed costs do not change, the assessed factors do not change.  Administrative Scale factors are updated annually for changes in mean resident population.  Equation (1) shows that if States' population shares change, the assessed factors will change.

Calculating scale factors

10            Fixed costs are the minimum head office and whole of State expenses that each State needs to incur regardless of the size of its population.  They are not the total administrative or head office costs.  Administrative and head office costs in excess of the fixed costs amount are considered to be influenced by the size of the relevant service delivery task.  They are included in other components of categories where disability factors that reflect the relative size of the task (such as socio-demographic composition factors) are applied.

11            The Commission used information from many sources to estimate fixed costs.  It referred to annual reports, its own special data collections, the Productivity Commission, Australian Institute of Health and Welfare and Ministerial Council on Education, Employment, Training and Youth Affairs (MCEETYA)reports.  The purpose was to obtain information about the head office and whole of State services expenses in the smallest States to give an indication of the smallest amount of fixed costs incurred in providing the services.  Simulations were also undertaken of the cost of the minimum staffing numbers required to provide particular services.

12            The Commission undertook considerable work in the last two reviews to estimate fixed costs.  Data on fixed costs were available for most expense categories or groups of categories but comprehensive estimates were derived using judgment.  The Commission considered that the estimates it made were robust.  The general approach was largely supported by the States.  They were provided with an opportunity to comment on the proposed estimates of fixed costs.  They did not present evidence to cause the Commission to make major changes.

13            In the 2004 Review, the orders of magnitude of the fixed cost estimates used in the 1999 Review were largely confirmed.  They were revised for changes in wages and price levels between the reference years in the two reviews and to recognise new head office functions, such as increased regulation and accountability responsibilities.  In particular:

·                the fixed costs were calculated by adding to the 1999 Review estimates, 10 per cent of costs previously classified as scale‑affected variable costs and adjusting these amounts for changes in wage and price levels (between 1997‑98 and 2002‑03).  For subsequent years, the 2002‑03 fixed costs are updated for the annual movement in wage and price levels; and

·                adding $10 million to the new fixed costs for new head office functions for each year to 2002‑03.  The $10 million was spread across all categories according to the proportion to total fixed costs in each category.  For subsequent years, the amount is updated for the annual movement in wage and price levels.

14            For some categories, a higher amount of fixed costs was assessed for the Northern Territory or a lower amount for the ACT.  The Commission decided the very high proportion of Indigenous people in the Northern Territory necessitated dual planning and administrative structures for some functions.  Additional minimum fixed costs were assessed for the Northern Territory for head office Indigenous functions of $1.1 million each for the education, health, welfare (including Services to Indigenous Communities) and housing functions.  For years after 2002‑03, the amount is updated for the annual movement in wage and price levels.

15            For some categories, a lower amount of fixed costs was assessed for the ACT.  The Commission decided the ACT did not need to provide some services, such as Services to Indigenous Communities, or it had a reduced need, such as in Primary Industry and Mining, Fuel and Energy.  The following adjustments were made for the ACT:

·                no minimum head office expenses for the Indigenous Community Services category;

·                total minimum fixed costs of one third of other States for the Primary Industry and Mining, Fuel and Energy categories; and

·                a fixed cost of $0.1 million for Non-Urban Transport because of the ACT's co-ordination responsibilities for the sub‑region.  For years after 2002‑03, the amount is updated for the annual movement in wage and price levels.

16            For each relevant category, component weights were determined by dividing total minimum fixed cost expense by total category expenses.

Deriving assessed scale expenses per capita

17            Table 2 sets out the minimum fixed cost expenses assessed for each category for each year of the 2007 Update.

18            Table 3 sets out, for 2005-06, the adjustments for the ACT and the Northern Territory and their minimum fixed cost expenses after these adjustments have been made.

Table 2            Minimum fixed cost expenses by category, 2007 Update

(a)        Minimum fixed costs apply for all States, with adjustments for the ACT and the Northern Territory. 

Table 3            Minimum fixed cost expenses, the ACT and the Northern Territory, 2005-06

(a)        Minimum fixed costs apply for all States, with adjustments for the ACT and the Northern Territory. 

19            Table 4 shows the administrative scale factors for those categories where the minimum fixed cost expenses were the same for each State.  These factors applied to all categories except those where an adjustment was made for the ACT or the Northern Territory.

20             

Table 4            Administrative Scale factors, 2007 Update

21            Table 5 shows the factors for categories where minimum fixed cost expenses were not identical across States because of adjustments to the ACT or the Northern Territory.  The education, health, welfare and housing categories had adjustments for the Northern Territory, while Non-urban Transport, Primary Industry and Mining, Fuel and Energy categories had adjustments for the ACT.  The Services to Indigenous Communities category had adjustments for both the ACT and the Northern Territory.

Table 5            Administrative Scale factors, 2007 Update

Table 5            Administrative Scale factors, 2007 Update (cont.)

GST revenue distribution for the 2007 Update

22            Table 6 shows the factor's contribution to the distribution of GST revenue and Health Care Grants (hereafter described as GST revenue) for the 2007 Update.

Table 6            Administrative Scale, contribution to GST revenue distribution, 2007 Update

23            The Commission estimates that the five States with above average assessed expenses per capita — Western Australia, South Australia, Tasmania, the ACT and the Northern Territory — require additional assistance totalling $648.4 million if they are to have the capacity to provide the average level of minimum administrative structures.  The States with below average assessed expenses per person — New South Wales, Victoria and Queensland — are assessed to require $648.4 million less in assistance.

Differences from an equal per capita assessment

24            The administrative scale assessment is based on an assumption that (aside from the adjustments made for the ACT and the Northern Territory) every State incurs the same minimum fixed cost expenses to provide the necessary administrative structures for service provision, regardless of population size.  This assessment imposes a greater per capita financial burden on the less populous States, so the assessment increases their GST revenue share and reduces the share of the more populous States.

25            The Northern Territory was assessed to have additional assessed differences because it was compelled to operate two different service delivery models in providing education, health, welfare (including Services to Indigenous Communities) and housing for its Indigenous and non‑Indigenous population.

26            The ACT was assessed to have reduced assessed differences because the Commission decided it did not need to provide some services at all (Services to Indigenous Communities) or it could provide services in a different way (Non-urban Transport, Services to Industry).

Changes in the GST revenue distribution:  2007 Update compared to 2006 Update

27            Compared with an equal per capita assessment, the 2007 Update redistributed $648.4 million from New South Wales, Victoria, Queensland to the other States, $28.8 million less than in the 2006 Update.  The reduced redistribution arises because the Commission increases scale expenses by the annual movement in price and wage levels.  This increase is less than the growth of GST revenues, so the proportion of expenses to which scale disabilities apply is declining as is the factor's impact on relativities.

28            Table 7 compares the contribution of administrative scale factors to the 2006 Update and the 2007 Update.

Table 7            Administrative Scale, contribution to GST revenue distribution, 2007 Update

(a)        Assessed using the same pool and populations that were used to calculate the 2007 Update distribution.

(b)        This figure shows the change in the amount redistributed among the States between the 2006 Update and the 2007 Update.  It does not necessarily equal the difference in the total redistribution from EPC between the two inquiries.

This chapter was prepared by the Expense — Education section of the Commonwealth Grants Commission.  If you have any questions about its content please contact Dermot Doherty on (02) 6229 8869 or dermot.doherty@cgc.gov.au.

   Date: 23/2/07