TUESDAY 10 DECEMBER 2002

__________

Members present:

Mr David Curry, in the Chair
Mr Michael Jack
Mr Austin Mitchell
Mr Bill Wiggin

__________

Memorandum submitted by Department for Environment, Food and Rural Affairs

Examination of Witnesses

LORD WHITTY, a Member of the House of Lords, Parliamentary Under-Secretary (Farming, Food and Sustainable Energy), MR TOM EDDY, Head of European Union, Agriculture Co-ordination Division, MR PETER MURIEL, Head of Agricultural Policy and Food Chain Economics Division, Department for Environment, Food and Rural Affairs, examined.

Chairman

185. Welcome to the Sub-Committee. Just for the record, Lord Whitty, you are Parliamentary Under-Secretary for things which seem to keep changing, but for the moment your guise is farming, food and sustainable energy, is it not?

(Lord Whitty) That will do, yes.

186. I see you as Minister for the food chain -

(Lord Whitty) You can call it the food chain, it is all the same stuff.

187. Tom Eddy, you are Head of European Union, Agriculture Co-ordination Division. It is Peter Muriel, is it?

(Mr Muriel) That is right.

188. What is your role?

(Mr Muriel) I am Head of Agricultural Policy and Food Chain Economics Division.

189. Lord Whitty, perhaps you can put us out of our misery on one small thing to begin with. We are all going into a debate on Thursday and everybody is being extraordinarily guarded about what the debate is about. I know these sort of things are State secrets. Could you raise your skirt a tiny bit on the ankles so that we might have a faint idea of what we might prepare? Is it in response to Curry?

(Lord Whitty) I am not entirely sure I should interfere in the affairs of the lower House, Chairman.

190. But at my invitation.

(Lord Whitty) It is a debate on Defra which will incorporate a statement we intend to make that day on the response to Curry. So it is not confined to the responses to Curry, it is wider than that, but that is the intent of the debate.

191. Now we think we have found the mystery money. That will be good enough. Secondly, do you actually attend the Council of Ministers?

(Lord Whitty) Not normally. On occasions I do attend the Council of Ministers with the Secretary of State and in place of the Secretary of State, although since they have merged the Fisheries and Agriculture Councils Eddie Moyse (?) is there more frequently than I am.

192. So when it comes to seeking information from you on the hoof, in the margins of the Council, which is often an important part of the Council, you are not dealing in that particular trade?

(Lord Whitty) Not normally, no. If I am there, I am involved in some of the works in the working margins, some of which the Secretary of State is involved in and some which he is not, but I have not been at the last two meetings of the Council.

193. At the end of the meeting I would be grateful if you could perhaps just spend five minutes on horticulture research internationally. Would you be agreeable to that?

(Lord Whitty) Sure.

194. I would like to get up-to-date on that. On CAP reform and the Mid-Term Review, which bits are alive and which bits are dead now?

(Lord Whitty) They are all alive. The agreement in Brussels and the consequences of that have obviously been taken into account by Commissioner Fischler. He has made clear that all his proposals are still alive. He is looking at them in the light of the implications of that post-2006 limitation and he will come forward with adjusted proposals and legislative proposals in January.

195. Do you think that any Government other than our own and Mr Fischler himself thinks it is all still alive?

(Lord Whitty) Yes, I think so, I think the German Government do. There were somewhat different interpretations from Berlin and Paris as to what the agreement in Brussels meant, but Chancellor Schröder was clearly committed to continuing the discussions on the Mid-Term Review. I think the Danes, the Swedes and the Dutch are of equal enthusiasm for at least the main parts of the package and the Italians support a very significant part of it. So I think it is alive. It is going to be a serious negotiation between those countries and those like the French and the Spanish and the Irish who are pretty dyed in the wool opponents of most of what Fischler is proposing.

196. Leaving aside the debate as to how alive Chancellor Schröder is and his government, when we were in Brussels Fischler's Cabinet were saying they thought dynamic modulation was pretty dead and we had the Irish Minister sitting where you are sitting last week and he has pronounced it to be dead and a lot of the vibes we picked up suggested that that was the bit of the package which seemed most likely to fall victim to the general mood of ministers. Rather than asking you to say which is alive and dead, would you grade the package in terms of pulse? Which bits has got its pulse beating hard and in which bits is the pulse a bit feeble?

(Lord Whitty) I will switch from the medical metaphor and say there is a stronger wind behind the decoupling elements of the package than there is behind dynamic modulation, but that does not mean that dynamic modulation is dead because clearly part of Commissioner Fischler's long-term strategy is to switch expenditure out of Pillar I into Pillar II. He chose modulation as the means for doing that and it is still his preferred means, but there are other ways. If we were starting from scratch and from a blank sheet of paper then there may be better ways of doing it from the point of view of the UK Government, but modulation is there. Decoupling has a much stronger wind behind it partly because of its own intrinsic merits and partly because of WTO pressures on the horizon.

197. There have been two criticisms of the Fischler package in terms of presentation. The first is that, in the sense that this was a Green Paper, it was very very sketchy indeed. We have had many people say we simply did not have enough bones to be able to form much of a judgment. So we are moving from a Green Paper which is very outline to actual legislative proposals which are very detailed and it would be much more helpful to have a rather more detailed outline so we could really get to grips with some of the nitty-gritty. The other criticism is that Fischler's presentation of this as being absolutely essential for the European Union to put itself in a good posture in relation to the WTO may have been true but that is not always the best argument to persuade ministers. Had he put it more in terms of the European Union's own needs and interests then it might have sold better in the marketplace. Do you subscribe to either of those thoughts, and do you have any criticisms about the way the package was brought forward and promoted?

(Lord Whitty) I would not put it as high as criticism. I think it is certainly true that on key features such as the decoupling proposals, insofar as there was detail it was mechanistic and slightly too complex and insofar as there was not detail, then quite a lot of how decoupling would be implemented and impact on the various countries' farming sectors was not and is not yet clear. It is slightly difficult to say that you could have an interim discussion of any great meaning apart from the discussions I have already had on the Council and elsewhere on the basis of the principle without actually having relatively firm proposals in front of you which you could modify and alter and negotiate about, but you would have to start from some specific proposals on decoupling. I think there it would be fair to say that the Commission's details when they first presented the principle was not as robust as one would have liked. I have lost the second part of the question. The second part was?

198. About presenting this as let us get there ahead of the US rather than the intrinsic needs of Europe. Was it diplomatically clumsy given the way farm ministers tend to think?

(Lord Whitty) It depends what audience we are talking about. As far as the EU and EU governments as a whole are concerned, the EU and all governments within the EU, including the French, are committed to success in the WTO process. There are large parts of the economy who will be dependent on a successful outcome of the Doha Round. Therefore, as audiences of the governments in general then I think the WTO is a very important card to play. I think it is also important that farm ministers, insofar as they operate in silos - sorry about the agricultural metaphor.

199. It is a metaphor which we ourselves have used.

(Lord Whitty) They need to be brought out of that. One of the problems is that we are moving to a world where agriculture is going to be treated more like other trading commodities, on a global basis and some of the treating agriculture as an entirely unique form of market needs to be changed. Insofar as farm ministers and farm communities at times are stuck in the uniqueness of agriculture, they need to be reminded of these wider issues. That may not be all that palatable, but it is part of the process and therefore I think Fischler was right to stress the WTO implications.

200. We are bringing out two schools of thought immediately. There is one group of countries which when we think of agriculture put in the forefront of their analysis economic criteria and there seems to be another group which basically are thinking in terms of social criteria. Would you accept that the UK tends to be in the forefront of the group which actually apply economic criteria to the way we think about agriculture and the French and the Irish would be in the group which tend to think in terms of social criteria?

(Lord Whitty) I think there is a mixture in all of them. I think the UK certainly is more inclined to look at market orientated solutions, but of course we are also at the forefront of looking at the environmental and broader rural and countryside impact dimensions of it which are not in the narrow sense economic. When you look at how the Irish agriculture system operates, one would hardly say that they ignored the economic imperative. They have done rather well on gaining markets and operating agriculture which a few years ago may have been a social policy and is now a major economic area for the Republic. I think all countries have an economic dimension to it and even within the UK there are parts of farming where the social impact of changes in farming is obviously going to be more difficult than others and some of those are in England and some in Scotland or Ireland and Wales. We do have to take those social impacts into account.

Mr Jack

201. Minister, can I just follow up the Chairman's line of questioning about how alive this reform is. Let me just read to you one or two quotations from our partners in Europe. President Chirac said in a television interview on 14 July, "There is a much more serious reality hidden behind a certain number of arguments that have been developed as a facade, that is the determination of certain countries starting with our German, English and Dutch friends to reduce their financial contributions to Europe," and in this interview he expressed a determination not to allow any CAP reform until 2006. Renata Künast, who has a close alliance with your Secretary of State, while she welcomed the Commission's proposals, she warned that farmers in eastern Germany with huge collective farms could be disadvantaged and she said that that would be unacceptable. Mr Walsh, the Irish Agriculture Minister, said, "I am opposed to a fundamental reform of CAP on the basis that we are two years into Agenda 2000." The Spanish Minister of Agriculture is quoted as saying reform would be negative for Spain, and so on. It does not sound like a ringing endorsement for reform. Yet in spite of the fact that President Chirac and Herr Schröder got together to carve up a deal on a financial envelope, as far as they were concerned that seemed to be that, and you are telling us this thing is still alive?

(Lord Whitty) Absolutely. What the French President said on 14 July I think needs to be taken as sounding off a little. Clearly his interpretation of the deal was that he was attempting to stop reform as well as reaching an agreement with the Germans on the longer-term financial operation, that is the French position. What I am saying is that there is a significant number of states, including Germany, who do not take that interpretation and they are backing some reform in the Mid-Term Review and the principles of the Fischler approach. The comments of Künast you quoted were about one aspect of the package where we would share anxiety with her and that is the ceiling in respect of individual farms. That is one part of the package to which the UK Government as well as the German Government have taken exception.

202. Can you cite any quotation or give an example of a Member State who stood up following the Schröder-Chirac deal and said we think reform is still a good idea - apart from yourselves and your Secretary of State - and these are the things we are still backing? Who has given a warm ringing endorsement to this?

(Lord Whitty) I suspect if you read the rest of Minister Künast's speech she would have done. I cannot give you chapter and verse here and now. Chancellor Schröder's views were clear that this did not prevent reform and they were still seeking reform. I suspect if we looked carefully we could find the Dutch and Swedish Governments similarly making those statements.

203. Perhaps you could help us because it is important that we have a clear picture as to what is on the table and is still actually likely to get some kind of political backing. If you could find some I think we would find it very interesting to read about that because I am getting stuck to find supporters as far as this is concerned. Can I ask you if Defra has done any kind of economic modelling to work out the effects on UK agriculture of the original Fischler package of what was the Mid-Term Review?

(Lord Whitty) We have looked at the implications of the various parts of the package. One can make judgments about the commodity part of the package and about the effects of modulation, but one of the difficulties of doing the overall picture is that we do not know precisely how decoupling is going to operate and therefore that rather essential part of it we are not in a position to do effective economic modelling on.

(Mr Muriel) That is certainly correct. We have analysed the commodity side as it were and we have made the best estimates we can about the impact of modulation. On decoupling, changes of this sort have not taken place virtually anywhere in the world, including New Zealand which was a slightly different case. So we have commissioned some work which is nearing conclusion and that will be shared with stakeholders during the middle of January when the reports are available.

204. So putting it in crude political terms, by that time we should be able to say who are the winners and losers in terms of the proposals that you have been able to analyse?

(Mr Muriel) That is correct, although in terms of a clear snapshot view, decoupling is almost without exception likely to make all agricultural producers winners in that they receive the decoupled payment but they do not have to produce to receive that and therefore they should be at least as well off as they are now.

205. Do you think the fact that you say that all producers effectively in that context will be winners means the Mid-Term Review ought to have a lot more of a fan club than the quotes I read out earlier would suggest?

(Lord Whitty) Yes I do. I think a lot of other countries recognise that this is a way both of maintaining a degree of support for land management in rural areas whilst allowing farmers effectively to choose their level of production and their type of production which relates to the market and therefore being able to optimise their profitability. In any other sector that would be obvious. In agriculture it is not so obvious partly due to the slightly backward looking views of some farming communities and some agricultural ministers.

Mr Mitchell

206. You are whistling in the wind, are you not? You are trying to make the best of a bad job. We are stood on the field and entirely unexpectedly we have been kicked in the cods. The Germans have caved in to the French, as they always do and they are trying to issue a few placatory remarks such as it does not really stop reform, it might happen, or we might help you and you are standing there gasping, trying to recover and saying it is not very painful really, let us carry on as before. It just does not wash.

(Lord Whitty) I am not sure what you say has changed.

207. I am saying you are trying to make the best of a bad job and that is unrealistic.

(Lord Whitty) It was always going to be an uphill negotiation, the Mid-Term Review. Nobody has changed sides. We are still in a situation where Commissioner Fischler's proposal is on the table. Those negotiations have not yet started in reality. We are in no different a position in that sense than we were prior to Brussels. What happened in Brussels was that the Council accepted the Franco-German proposal as to what the total amount of Pillar I payments was going to be beyond 2006. Notionally, at least, the Mid-Term Review applies to the period before 2006. The situation after 2006 now has a ceiling on it as far as Pillar I is concerned and that is to be spread between 25 countries instead of 15. That of itself puts pressure on the present structure of the CAP quite apart from the WTO or any other pressures from us and other governments for change. If anything, the fact that we have now got a post-2006 ceiling makes the need for structural reform more substantial rather than less.

208. Did we expect the Franco-German proposal? Did it come out of the blue or was it anticipated?

(Lord Whitty) I think the way in which it came about was unexpected. The fact that the Council was going to have to discuss some form of total budget beyond 2006 was known. I think it would be fair to say that the importance of the Franco-German discussions at that point were not quite known and the fact that they reached a deal in quite such explicit terms was not known, but it was not beyond the realms of where we thought we would be at the end of the Brussels Council meeting. In process it might have been slightly surprising but in outcome it was not that surprising.

209. We thought the Mid-Term Review should go further and be more radical, did we not?

(Lord Whitty) Indeed.

210. The Secretary of State told us that it did not go far enough or fast enough. There is no hope of that now, is there?

(Lord Whitty) I think that is fair enough. The Commission were likely to propose to be at the radical end of proposals from day one. I do not think that has changed as a result of Brussels.

211. The Irish Minister for Agriculture told us that there will be little reform before 2006. Would you agree with that?

(Lord Whitty) He would, would he not? No, we do not agree with that. I think the Irish are clearly at the extreme end of attempting ---

212. They are in terms of farming, are they not?

(Lord Whitty) Yes, and they will negotiate hard like everybody else, but at the end of the day the goalposts will have moved. How far they will move depends on the balance of negotiations, the skill of the negotiators and the political will of the negotiators and also the degree to which we want to be up front in the WTO discussions and having made our commitments on WTO at an early stage in that process rather than being dragged kicking and screaming into it at a later stage in the WTO process.

213. Just a question on the Mid-Term Review itself. We are usually criticised for not playing enough of a part in the formulation of policy in Europe, too little too late kind of stuff. Did Member States play any part in the formulation of the Mid-Term Review?

(Lord Whitty) Yes, indeed. The Commissioner went round to a number of bilateral meetings. The Secretary of State, myself and the Prime Minister all had discussions with him before he produced his package. I would say his package was closer to what we were urging on him than most other Member States were urging on him.

214. So you saw us as putting lead in his pencil even if that lead is now broken a bit?

(Lord Whitty) I would not entirely share that metaphor, but I think we had some significant influence on it. That is not to say we agreed with all of it or we thought it went far enough in a certain respect. I think we did have some significant influence, yes.

Chairman

215. The UK always - and this is governments of both parties - tends to oversell, do we not, the possibilities of radical change? We gave the impression that enlargements gave us a wonderful opportunity to force change, but it was never very plausible because we were in favour of enlargement so we would have been the last country to hold up enlargement in order to negotiate the reform. The CAP budget is going to accommodate enlargement without major difficulty and short of dramatic changes externally. Would it not be a sensible policy if the UK said to President Chirac that the UK really does not want to reform the CAP at all, we would quite like to go backwards? Would the French not then say, "My God, if they have decided they want to reform it there must be something to be said for reform after all" and put the boot on the other foot? We are aggressive promoters of reform but occasionally I get the impression we are actually counter-productive.

(Lord Whitty) If it were not for governments like the UK and, in this context, the Germans and the Swedes then the process for reform would hardly exist at all. A few years ago it was the UK only pressing for reform. Some governments have changed their position not unconnected with the fact that they have become net payers into the CAP, like the Netherlands and now Italy. Those who want reform are still growing and therefore the UK's responsibility to continue to urge reform is clear. I do not think a complete turn around in position will actually affect the French Government one way or another. They know what their position is. They also know that the rest of the economy and France needs, for example, a WTO deal and there will be some tensions within France in that regard.

Mr Jack

216. I want to explore for a moment the budgetary implications of the Mid-Term Review. In your evidence to the Committee in paragraph 43, commenting on the _200 million annual savings which the Commission set, you say, "However, even were such a saving to be realised, it is insufficient in the overall context of the CAP budget of over _40 billion, and an additional cost of _8-9 billion a year by 2014 if the Commission's proposals for rolling out the CAP to new Member States are implemented." So there is a suggestion there that these reforms do not deliver a financial package that can be afforded and yet the message that we got in earlier evidence was that enlargement and the existing CAP could well be accommodated within the revised financial perspective which is after 2006 or 2008, whichever date is the right one. Subsequently, the budget grows at one per cent per annum so that is a real terms cut I guess - unless inflation goes down to one per cent - at a time of considerable strain on the budget and in light of the enlargement. Could you just take us step by step through understanding whose numbers are right and what can be afforded within what has now been agreed as a result of the Chirac-Schröder deal?

(Lord Whitty) The comment in our evidence at that point relates to the fact that we would like to have seen and to see some degressivity in the total Pillar I budget. Degressivity gets used in different ways, but focussing on the Pillar I budget, there is extended degressivity, we have a one per cent rise per year, I think that 200 million relates to that.

(Mr Eddy) This is all pre the extension of the financial controls to the next perspective.

217. That is why I said to you can you just take me through it again for the benefit of simple politicians who do not have available some of the detail you have. That is why I asked the question what can actually be afforded in terms of what has been agreed?

(Lord Whitty) I think what Tom is saying is that that figure relates to the pre-Brussels position, is that right?

(Mr Eddy) Yes.

(Lord Whitty) It depends to some extent on the final terms of enlargement which we will not know until the end of the month, but assuming the enlargement package goes forward roughly on the basis that we are expecting then without reform I think the present structure of the CAP could survive not much more than a year. By 2008 the agreement on direct payments would put pressure on the ceiling if nothing else changed. If you are saying in 2007 they are only 25 per cent direct payments, in 2008 35 per cent ---

(Mr Muriel) In 2005 it is 25 and 30 and then 35.

218. Could you just go over those numbers again because I need to have a picture? Just take me slowly through it.

(Mr Muriel) The current proposal for the ten new Member States is that the direct payments will increase from 25 per cent of the EU level in 2004 which will be paid out of the 2005 budget, it will go up to 30 per cent in the following year, then 35 per cent, then 40 per cent and then in ten per cent points up to 2013 when they reach 100 per cent of what the EU level is. That is the original proposal. What the final agreement is remains to be seen.

219. But within the Chirac-Schröder numbers, if I can call it that, are you saying that that progression towards 2013 could not have been afforded?

(Mr Muriel) Yes. We estimate that that increase in direct payments will increase the budget by between _8 and _9 billion per year. It is very difficult to estimate what the overall budget will be in 2013. A lot of things can happen between now and then in the context of world commodity markets.

220. I can see how that ties together. I understand it now from what you are saying. What has got to be agreed to get it back into balance because the message we are getting is that those Chirac-Schröder numbers gave you an affordable package to deal with enlargement and sustenance of CAP as it is at the moment for existing Member States? Where is there a misfit?

(Lord Whitty) We would begin to hit the ceiling of that from 2008 onwards. Therefore, this is pressure on all the costs. The new financial perspective goes up to 2007. That reflects 2006 direct payments, as I understand it. So it is 2008 payments that become a problem in regard to the ceiling. From there on and therefore in anticipation of that we have to cut costs effectively.

221. So going back to the original reform of the CAP and not the Mid-Term Review, you could have had a "do nothing" situation until 2008 and then you would have to come back or work very quickly from 2008-2013?

(Lord Whitty) Yes, that is right, on present proposals. If anything, the final negotiations will be slightly more difficult because I am sure there will be one or two more concessions, but it will not make much difference to the final budget, it is of that order and therefore very early in the new financial perspective we will be up against ceiling pressures which will force you into some change in the structure of the CAP even if nothing else had been agreed.

222. So put simply, the paying for the existing Member States could really come in 2008 because the enlargement negotiations will lock into place this progressive increase in direct payments to the new members and so if you are going to stick within the envelope the only way that money could come is from the existing members, is that right?

(Lord Whitty) That is right. We are talking about Pillar I. The ceiling on Pillar II is not there, there is not one in the same sense and therefore it is in everybody's interest to see the money switched into Pillar II.

Chairman

223. Is that situation not likely to militate against reform of the dairy and the sugar regimes? Those reforms cost money and they have got to come out of the existing budgets. If, as you are saying, those budgets are probably much more tightly committed by the enlargement process than we might have imagined people will be saying we cannot afford these reforms -

(Lord Whitty) We cannot afford to go on in the present system. The costs of the regime as it is would add to the costs. The cost of moving away also is an additional cost. There is no no-cost way of moving on from the dairy regime whatever option you take because the WTO would impact on dairy in particular.

Mr Jack

224. The part that does not seem to be incorporated in the agreed envelope are rural development measures. Could you just help us to understand how open-ended the budgetary position is on rural development measures because, if I understood it correctly, in terms of the original package, one of the proposals for the modulated monies which appeared perhaps not to happen was that that money was going to go back to the Commission for subsequent re-distribution. In other words, you were top-slicing the main agriculture budget and then having it re-distributed, but were there proposals to add monies to that from within the Commission or does it still come from within the same zero sum game?

(Lord Whitty) The proposals on the modulation in the Mid-Term Review would be zero sum, it would be money taken out of Pillar I and put into Pillar II in the proposals for modulation. You could do it not through modulation, you could simply cut the Pillar I budget and increase the Pillar II budget, it would still be expenditure neutral.

225. But there is no other line somewhere, which I may well have missed, which also has rural development expenditure, another sum of money which is unrelated to the recycling of CAP monies?

(Lord Whitty) There is no actual ceiling at this point, but then there is not a ceiling on anything except Pillar I. The 2006/2007 perspective will have to put limits on all reforms of EU expenditure, structural funds and everything else.

226. I am seeking out the facts at the moment. You have got the big 40 billion, we are clear on that, but is there another line somewhere with another sum of money which can go to be spent on things like rural development exclusive of whether or not modulated payments are recycled? Is there a separate line for rural development?

(Lord Whitty) There is a separate rural development current figure. There is not the equivalent Brussels ceiling for rural development as there is for Pillar I.

227. What is the discussion within the debate on the reform package about how that money should be used because in terms of protecting and stimulating the rural economy as a way of cushioning, as we have discussed in the UK, some of the impact of change on agriculture could be quite a powerful tool? What are the Commission's proposals in the context of the Mid-Term Review about expenditure on rural development?

(Lord Whitty) In terms of the Mid-Term Review, the proposal is simply that you transfer via dynamic modulation into Pillar II. We would then await the views of the Commission as to whether we would change the terms on which Pillar II expenditure could be used. One of the problems from the UK point of view of the existing Pillar II is we have had a very low take up partly because of the requirement for match funding historically and partly because what you can spend it on is not particularly appropriate to the UK and is not flexible enough. We have argued and Commissioner Fischler in principle has broadly agreed that the long-term Pillar II structures have to be more flexible and have wider scope for rural development expenditure. There is not a proposition on the table to deliver that, but we would expect one in the terms of the legislative proposals in January and certainly in the course of the negotiations over the next six months.

228. Let us move on to sugar and the dairy regime. As the Chairman indicated, there does not appear to be much financial flexibility to fund any serious reform of either of those two. Again, if I have understood correctly the Mid-Term Review proposals, they do not as such, over and above everything but arms agreement, contain any specific proposals about the sugar regime. Is my understanding on that technical point correct?

(Lord Whitty) Sugar is not referred to in the Mid-Term Review because the sugar regime has a separate timetable which goes up to 2006. It is not the equivalent of the Agenda 2000 agreement, it is on a different timescale, but Commissioner Fischler has indicated that he is going to return to the sugar regime some time next year.

229. So what can British sugar farmers expect?

(Lord Whitty) I am not sure what the farmers can expect. We will have to see how far Commissioner Fischler is going to go, but clearly in many respects the sugar regime is the least liberalised of regimes, it is therefore likely to be under pressure from the WTO and Johannesburg process and the liberalisation or the reduction in support of sugar is likely to be part of Commissioner Fischler's proposals, but the detail of that is not yet with us.

230. You have only got two parameters in sugar, one of which is to produce less of it or that you amend the current artificial price structure so that returns to farmers are lower. What is the UK Government's stance on either of those two options in terms of the fact that there will be demands by sugar producers for some form of compensatory assistance? Do we have money in our budget for that or does the Commission have money for it because there does not seem to be any?

(Lord Whitty) When we come to it the Commission will make a proposition which may involve switching monies from price support into compensation. That may well be the proposition, but we are not in a position to say that at this point. There is no additional UK-based money and I do not think it would be open to us to apply any UK specific money even were we so inclined. It has been the UK's quite long-term view that the sugar regime does the liberalising and in the long run that must mean that the price comes down and I suspect that there will be huge pressure for the price to come down.

231. But it is only the processing aid which costs any money. The rest of it is an artificial construct in keeping an artificially high price, is it not? UK farmers do not have Commission cheques handed to them.

(Lord Whitty) No, but they get a price which they would not otherwise get.

232. It is a slightly artificial situation. What about the dairy regime reforms? We have got quotas until 2008. There are a number of proposals in the Mid-Term Review to change intervention prices, increase the price of cow premium. Is there money there to fund that?

(Lord Whitty) The present regime costs money. We would wish to see a decision to phase out or end the whole quota system. The support system and the export refunds will be under pressure in a WTO context, they will almost certainly go during that process, but in terms of the internal regime, I think the Commission will decide which of the options presented in the MTR proposals it wishes to run with and most largely at the moment it would appear to repeat the Agenda 2000 exercise rather than go for committing now to end quotas beyond 2008. However, in the process between now and 2008 there will be growing support for ending the quota system.

Mr Mitchell

233. The Department's evidence says that it will facilitate the Mid-Term Review of the process of WTO reform and it will transfer the majority of CAP support into the Green Box. Do you think our negotiating partners in the WTO are going to accept that because support has been shifted from the blue and amber boxes to the Green Box and the EU can continue to spend as much on agriculture as it did before? Is that going to be an acceptable position to negotiate from?

(Lord Whitty) The WTO recognises that non-trade distorted subsidies will continue to be allowable. There may be an argument about ---

234. --- scale.

(Lord Whitty) Maybe about scale but also about what is cosmetic and what is not as to our subsidies and the American subsidies. The process is clearly that the Green Box subsidies, which do not have an effect on productions, they do not support production prices or stimulate the production, will continue to be allowable. The Americans and ourselves will probably, therefore, be put in a position where if we want to liberalise trade in general then whatever support we give to rural areas must go through the Green Box and not through any production related amber or blue box. It is important to recognise that the kind of subsidies we are talking about coming through the rural development Pillar would not be related to agricultural production and would not be exclusive to farmers and therefore you will not get the same amount of euro money plus some matched funding from the national government going back into rural areas, a significant proportion of which in practice would go to the same farmers which were previously receiving subsidies. That is not the point of the subsidy. The point of the subsidy is to maintain the landscape, meet various environmental outputs, but you would not have x number of euros per sheep or hectare of grain.

235. You can say that Scouts honour, but it will still be a subsidy to farmers and that is going to be difficult to justify or to provide an intellectual basis for. The Department seems to be putting great hopes on decoupling as it is going to bring farmers closer to the market. How long can the single decoupled payment be justified intellectually? I just do not see how it is going to be possible to justify long term a single decoupled payment?

(Lord Whitty) How long term are we talking about? There are two different things, there is a decoupling payment and there is Pillar II payments. Pillar II payments are not related to the past patterns of subsidy whereas the decoupled payment clearly is and it would be politically difficult. However much intellectually you might want to start from a blank sheet of paper, it is not open to Commissioner Fischler to say that we pay a decoupled payment on anything but something related to historic receipts. There is a long-term difficulty in justifying that, but we are talking about quite a lengthy process here. We are talking about a change in the EU's internal processes which may take some time to reach full fruition and we are talking about a situation in the WTO where the commitments are themselves phased in and it would be phased in over a number of years and by the end of that period we may be in a slightly different situation. What is essential and what Fischler is underlining and stressing is important is that unless we do decouple then we have no commitment to the WTO process that will be recognised anywhere by our trading partners, so the sine qua non of going in positively to the WTO process is relatively early decoupling.

Chairman

236. Because of the boxes?

(Lord Whitty) Yes.

Mr Mitchell

237. There has to be a long-term basis for paying it and the farmer expects a cheque until he dies and then his successor would expect a cheque. The Commission suggests three approaches, that is area payments at farm, regional or national level. What is the Government's preferred approach to implementing this decoupled farm payment?

(Lord Whitty) The Commission at present are saying they would move on a farm level historic basis. Whether that would be in the long term is another matter. It would not be acceptable to move from the present subsidised sector into a decoupled payment unless you were taking some account of what the historic receipts for that farm were. The difference is that instead of getting a payment for every extra sheep you produced ---

238. You would get some anyway.

(Lord Whitty) But that means you would use the land to produce what the market wants not what the European Commission wants.

239. He wants a guarantee that that is going to go on. It is a subsidy to agriculture.

(Lord Whitty) It is a subsidy to the use of the land in an effective way, yes.

240. That farmer's costs on world markets are less because he is getting an annual payment.

(Lord Whitty) On an average basis but not on a marginal basis in the sense that at the moment you get so many euros per every extra sheep you produce and if you are competing with Australia and New Zealand then you have got that subsidy in the market. That will go.

Chairman

241. I am still not clear whether this payment is attached to the holding or to the farmer, you will know, but there is a significant percentage of dairy quota now held by people who do not farm, it sort of replaced Equitable Life as a sort of pension scheme. Is it intended that this payment which is not going to be degressive is going to be attached to the holding and could somebody then retire and keep the payment? Is it clear?

(Lord Whitty) This is one of the areas where clearly we need more detailed Commission proposals, but I think Commissioner Fischler has made it clear that it is attached to the land and not to an individual.

242. Do we know how long that payment would last? You set up a payment which is based on an historical pattern of production. How long does that payment continue based on an historical pattern of production? And once farmers have connected with the market and all that, does that payment continue as a bonus?

(Lord Whitty) I think you are asking me to look too far into the future, Chairman. Theoretically, at least, the whole of the system of subsidies could end at the end of this financial perspective, so nobody has total security, but I suspect that whatever is agreed on decoupling is likely to last for the next financial perspective or at least the changes in it will already be known, but beyond that I think we are in a different world.

Mr Mitchell

243. I bet Corus wishes it could get a deal like that to make government payments compulsory and set them in concrete for a couple of years. We are told Defra has done research into the implications of decoupling. What is that research addressing?

(Lord Whitty) It will have to be based, to reach its definitive stage, on what exactly the Commission is proposing. Peter, if you come just outline the general principles of it.

(Mr Muriel) At this stage we have commissioned research to look at the implications for farm businesses of decoupling payments to see what impact that would have on production levels and price levels and we have commissioned work on the cereal side and on the livestock side, that is the main area of the research underway.

244. So socially it is going to make the whole business of subsidies to farming more transparent. This is going to be happily viewed by the rest of the nation as Farmer Jones is getting so much per year for doing nothing, is it not?

(Lord Whitty) I think the rest of the population regard the whole of the subsidy on farming with some suspicion under its present arrangements and do not understand the way farmers are subsidised. I think in political terms and presentational terms it is easier to justify continued support for delivering environmental outcomes and countryside landscape ---

245. That is not what it is for, it is just setting payments in answer to that farmer.

(Lord Whitty) Provided he keeps the land in appropriate condition. It is not an open-ended cheque for land you can then concrete over and move out of farming or open country entirely. You have got to keep it in reasonable condition and with reasonable environmental outcomes in order to get the payments, so it is not as though it is for nothing.

Chairman

246. If you then went in for significant environmental enhancements so that a significant part of the land was taken out of productive potential and into some sort of environmental use a payment which was still based upon its production would persist for a period, would it not?

(Lord Whitty) Again, we would have to look at the details of the Commission's proposals, but for those sectors which previously received the payment then the answer to that is yes and they may be able to get some enhanced environmental scheme for the development of the environmental side as well.

247. If the payment attaches to the land, not the producer, and, as you say, you can only assure those payments over the period of a financial perspective, could you speculate as to what would happen to the market in agricultural land as we approached the end of that financial perspective and it became unclear as to whether or not that payment would persist?

(Lord Whitty) I think you have asked me to speculate a lot, Chairman.

247. It is a seriously important question. We want to see land change hands, we want a market in land, we want people coming in and doing new things to the land, but if there is a chunk of land and let us say for the sake of argument there is a £250,000 annual payment attached to that land and you do not know whether that is going to be there in two years' time, you are going to think hard about whether you will buy that land or not. It will have an impact on the market.

(Lord Whitty) If you are talking about two years' time, the expectation now is that there will continue to be a support system of the size that was agreed in Brussels and subject to all the changes which may or may not happen in the Mid-Term Review. The impact of the immediate changes on land prices is virtually nil. I expect the total amount of money going into land management is going to be of that order. What the situation will be in five years' time when we are approaching the end of the next financial perspective I do not know and I would not wish to speculate. It would depend then on whether there was an expectation that we were about to do a New Zealand type removal of all support systems or whether in some form or another there would continue to be some support for land management or farming. That is a bit too far off for me to speculate this morning.

248. I think we will leave the pigs flying scenario just for the time being. On modulation, we have had discussions as to what extent dynamic modulation is alive and kicking or not, but for the moment let us suppose it is. The British Government has said that it wants "annual, degressive cuts in direct payments, in line with the 'dynamic modulation' model, but with some, rather than all of the money saved being recycled into the second pillar". Can you carry on for the next two or three sentences of that, please? How much and which bits do you want to save? This is a contribution saving mechanism. Can you tell me what is the thought process behind that?

(Lord Whitty) The position behind that is that we originally ideally were looking for some degressivity in the total Pillar I payments. The Brussels agreement means that there is not a degressivity in the Pillar I payments. We hoped that degressivity was going to be achieved in two ways. One, by shifting money out of Pillar I into Pillar II through modulation and, two, by an actual cut. The actual cut, except in so far as one per cent is less than inflation, is not going to happen to the extent that we would wish it to happen if we stick with the Brussels' ceiling, so the degressivity would be achieved either by some new mechanism or by dynamic modulation or something like it.

Mr Jack

249. If dynamic modulation is dead in the water, which seems to be the consensus ----

(Lord Whitty) No, that is not the consensus.

Mr Jack: Let us put it this way, going back to what Mr Walsh told us last week ----

Chairman: It is like the Royal Navy's destroyer, it is on a sort of mother ship being brought home just at the moment.

Mr Jack

250. That is right. What is going to happen to the Curry Commission's proposals for modulation if the Commission's proposals do not happen?

(Lord Whitty) There is already a mechanism for modulation which the UK Government has taken up. The Curry Commission's proposals were made before Commissioner Fischler's proposition, which would be for compulsory modulation. Provided that the ways in which the modulated money could be spent were sufficiently flexible to meet UK requirements we would want unilaterally to go down the Curry proposition.

251. All the way to 20 per cent?

(Lord Whitty) The initial stage of that is one year behind what Curry originally proposed as a result of the spending round 2002, that we would start implementing in 2005/06 rather than the previous year and move on beyond that, which would have been roughly in parallel with what the Fischler proposals were suggesting on a compulsory basis. How far we would go, I think we would have to judge on how far the Pillar II technicalities met our objectives.

252. Can you just flesh that out a bit more so that I understand exactly?

(Lord Whitty) At the moment there are only a limited number of things that you can spend Pillar II money on. Some of them, like entry and exit schemes, are not appropriate for UK agriculture, whereas if we are trying to modernise and orientate towards the market and make it more environmentally sensitive there are schemes which would be appropriate to some sectors of British agriculture which at the moment are not allowable under Pillar II. We would want to see a greater degree of flexibility both on the scope and on the degree to which you could operate perhaps different schemes for different sectors in different parts of the country. Provided that happened then the Curry proposition seems to us still to be attractive to do on a unilateral basis. It would have been better if we were to do it on a compulsory basis or some mixture of compulsion and unilateral flexibility, and that may still be the case because, whatever the Irish may say, frankly the British and the Germans have rather more votes than the Irish. At the end of the day I do not believe dynamic modulation is dead, or some form of it is still revivable. If we did not get it at all then, yes, the answer is we would like to go down the Curry lines but only if we get some flexibility on spending.

253. If the Commission's proposals on modulation remain in place, what would happen to the existing programmes under the English Rural Development Plan which have been started and drew down their funding from the modulation to which we have just alluded? How would you keep them going if, in fact, modulation from the Commission came in?

(Lord Whitty) Do you mean the existing schemes?

254. Yes.

(Lord Whitty) Most of the existing schemes are for a number of years and, therefore, any commitment under that would continue. There would have to be some transitional arrangements to a new scheme. If you are involved in a seven year scheme, that seven year scheme will be honoured and there may indeed be some premium environmental scheme which will continue and replace that. In Curry terms there would be what he called a broad and shallow scheme, what we are now trying to call an entry level environmental scheme, to which most decent farmers could get access, but over and above that there will continue to be higher premium schemes under Pillar II money.

Chairman

255. Just picking up on dynamic modulation, at the moment under our present schemes, which as you say are done under the European programme where we are now the only people doing it because the French have stopped it, the Scots of course do their own thing, do they not?

(Lord Whitty) Yes.

256. The rates are UK-wide?

(Lord Whitty) The rates are UK-wide, yes.

257. But the purposes of the money can be decided nationally within the UK.

(Lord Whitty) Within the EU rules they can be, but that is part of the problem. We would like more flexible EU rules which would allow greater flexibility to England and to the devolved administrations.

258. The reason I ask the question is that representing a northern constituency we are seeing increasingly situations where farmers on different sides of the hill are subject to different regimes because some are in Scotland, some are in England, and the level playing field issue does emerge within the United Kingdom. The national envelope in the sheepmeat regime, for example, is being applied differently on the two sides of the border. My question is are you concerned that there should be some sort of framework beyond which one does not go so there is not too much of a dislocation in policies on the two sides of the border? It is about an entente cordiale with the Scots.

(Lord Whitty) Without going so far as an entente cordiale, or the cordiale bit anyway, the relationship with the devolved administrations obviously needs to be kept very close. We do not want to do things which undercut each other or undermine each other. One of the consequences of devolution, and indeed the different structures of agriculture in the four countries, is that there will be slightly different decisions taken provided that is allowable under EU rules, that is the nature of devolution.

Mr Jack

259. One of the things that intrigues me in listening to this discussion is this question of cross-compliance. In your evidence in paragraph 33 you said to the Committee "...the cross-compliance rules as encouraging compliance with EU statutory requirements, plus an obligation similar to that in the current EU small farmer scheme to keep land in good agricultural condition." I suppose the basic question is who is going to be responsible for defining the standards which represent cross-compliance? How will that be done?

(Lord Whitty) The straight answer is I do not know yet until we are clear what the Commission's proposals under decoupling and cross-compliance are likely to be. There is a precedent for some of that being defined by national codes of practice as distinct from EU statutory requirements.

260. So you could have variations on a theme?

(Lord Whitty) Yes, to a limited degree.

261. I can see that opening up a very fearsome debate amongst our farmers because we would obviously, I am sure, want to have a very good standard, whatever that standard would be. You mentioned earlier in your comments about the broad and shallow scheme it is quite difficult to find out where you are going to set the base line. In other words, what is the base line for good farm practice, what is the base line and an acceptable way of looking after that bit of the countryside for which you as a farmer have responsibility? Clearly where you set it depends whether you have to spend more or less money than the farmers are spending at the moment on their environmental responsibilities. It is a bit of an open-ended arrangement, is it not?

(Lord Whitty) We are engaged in a process of defining what we mean in that context for the entry scheme level, as we are now calling it. We have announced the pilots will run for two years before we finally define it. The intention is that farmers who have methods which meet what are generally regarded currently as good agricultural practice would be able to meet the requirements of the, old speak, broad and shallow scheme.

262. Is there a piece of paper that I can go to and pick it up and it says "DEFRA good agricultural practice" and find a definition of what you think it is at the moment?

(Lord Whitty) There always used to be. There is not a single piece of paper but in relation

to ----

263. I am prepared to accept more than one.

(Lord Whitty) In relation to livestock farming, arable farming and environmental standards there are various bits of paper. That is what the process of setting up these pilots is intended to do so that we can see for different types of farming what the standards would be and how they could be effectively applied. The intention is to get something like what you are describing.

264. What kind of audit arrangement do you think there would be to make certain that people comply in a uniform way across the Community because I can really see British farmers being very worried that our Government in a desire to be seen to be the best when it came to environmental practice would set standards which could be measurably above those that would be adhered to in other Member States? For example, on a small farm stuck somewhere in the Greek outback I would imagine that the adherence to environmental standards of whatever level might be more difficult to achieve than in the rural acres of the lusher parts of England simply because of the differences in the farming regimes. How are you going to ensure equivalence across the Community?

(Lord Whitty) It does not quite work like that. We are the only people at present who are proposing the broad and shallow arrangements. We need the European Commission's agreement that that meets the criteria for Pillar II payments. Likewise, the Greeks would require the Commission's agreement. This would be subject both to national inspection and to EU spot-checks, the same as any payments of subsidy are now. Yes, there would be different regimes operating but they would not all be a requirement to meet the minimum land management and environmental standards.

265. Why can you not just have some basic rules of compliance and if people do not adhere to them then they do not get their money? Why do we have to go into defining an even more complex scheme? Why can we not just have a system that says if you are not a good farmer by these rules you do not get any cash, end of story?

(Lord Whitty) That is effectively what we are working to.

266. You are talking about the broad and shallow but you had better make some definitions. Is it going to be the ultimate lowest common denominator?

(Lord Whitty) No, it will not be the lowest common denominator because those that would fail under the present quality control would not meet the standards, but in general those who farm the land with effective, good land management practice, meet all the environmental standards, would have access without additional expenditure to the broad and shallow scheme.

267. These cover more than land management, they cover food safety, environmental protection, animal health and welfare, occupational safety as well. It is a pretty comprehensive package.

(Lord Whitty) Under all of which there are statutory requirements.

268. There are indeed. Are you saying then that what we have already got in terms of what farmers have to do now, it is your hope that as long as people comply with those rules that will be the gateway to them receiving their money?

(Lord Whitty) That would be part of the package to receiving the money, yes. This also fits in with the overall Curry proposition of a whole farm approach, that you would regulate on the basis of the totality of management of a farm. Within that you would have to meet the various currently multiple regulators' requirements but you would be judged on the totality of how you manage the farm. If you like, you would have an inspection that you met those standards and were therefore entitled to the payment on the one hand, and on the other hand it would confirm that you had met the statutory obligations in so doing. The Curry vision would add to that and it could also in a commercial context mean that you would have a basic assurance scheme as well, so it would have a market benefit to meet those standards as well as a subsidy and a management benefit.

269. And no attempt to encourage, if you like, higher than minimum standards?

(Lord Whitty) As I said earlier there would continue to be a higher premium environmental schemes under Pillar II in the way that ----

270. What about animal welfare?

(Lord Whitty) There may be a higher standard of animal welfare schemes as well. At present there are not Pillar II schemes but there could be, for example, on organic production or free range schemes or whatever. Certainly there will be the equivalent of the current environmental schemes in terms of woodland and enhancing the environmental condition of the land more generally. There will continue to be some premium schemes but only a minority of farmers will go for those premium schemes. What the broad and shallow, entry level scheme, would provide would be for the generality of farmers to meet a different standard in, ideally, a one-off basis of regulation.

Chairman

271. We are building a sort of architecture of agricultural policy, are we not, which is differing more and more from that in the United States? If we are going to get animal welfare and the green programmes, and no doubt we will have labour market conditions, Uncle Tom Cobbley and all before very long, demanding that all of these have account taken of them in the WTO it is going to make it harder and harder. Do you not occasionally say "hang on, this is going to be difficult enough to pull off the WTO round to take account of the needs of the developing countries, which are more insistent demands than perhaps in previous rounds, without having to go grinding on about animal welfare and all sorts of other things as well"?

(Lord Whitty) You are now talking about the trading conditions as distinct from the subsidy conditions?

272. I am saying if we are building this support system which increasingly comes to depend on non-production elements and we have then got to balance those off and seek account of those in the WTO we are just making the negotiations more and more complex, are we not?

(Lord Whitty) This goes back to the question of whether the kind of support system that Fischler is describing and I am describing will be regarded by our trading partners as green box areas. My belief is that it will, although there will be some scepticism undoubtedly by some of our trading partners, particularly the Cairns Group. That is something that we will have to be seriously negotiating for, no doubt.

273. There is going to be a lot of blue box left around as well, is there not?

(Lord Whitty) The blue box will be phased out during the course of the next round. That is effectively the Doha commitment. The Americans will have to shift whatever farm subsidies they continue to have and they will have to pay that on a basis which is unrelated to production. Indeed, they have tried to dress up some of their present Farm Bills as if it is already in the green box. The Americans are already switched on to this need. It is not that the Europeans are getting ahead of the game but if we are not careful the Americans will be further ahead of the game and regarded more benignly by developing countries and the liberal countries than we are, or the EU is, by the time we get to Cancun in September.

274. Let me move on to floors and ceilings because they are very much in vogue at the moment. There are three proposals in the modulation which I think I would like you to comment on. The first is the money collected goes into the central coffer, it does not remain with the national government and, therefore, there will be calculations made about whether you are in the red or in the black as far as the payments are concerned. Secondly there is the _5,000 floor and, thirdly, there is what I might call the Walston matter, which is the _300,000 ceiling. What is our reaction to each of those three?

(Lord Whitty) We are in principle in favour of the money collected going back into Pillar II money available for Pillar II purposes provided those Pillar II purposes are sufficient not only to meet our needs but also to end up with a rather higher proportion of Pillar II expenditure coming to the UK than does under the old Pillar II.

275. Just to paraphrase that: you are happy for that to go into the central coffer as long as more comes back than goes in?

(Lord Whitty) I think that is a better way of expressing it, yes, Chairman. Not necessarily more comes back than goes in but that we have a higher proportion than we have got now.

276. As long as we do not lose by that process, let us put it more modestly?

(Lord Whitty) Yes.

277. The agreement would incorporate some figures, would it, for what Member States would expect to get out of this?

(Lord Whitty) Not necessarily figures. There are not figures on the current proposals but the current proposals are limited by historic patterns and we would expect that to be lifted.

278. How would the agreement then give you the assurance you have just sought?

(Lord Whitty) It would depend on what the schemes were, whether the UK was best placed to capitalise on this.

279. So you would expect we would have schemes up and running which because of their eligibility would have the necessary consequences?

(Lord Whitty) They would certainly raise our share of total expenditure above the three and a half per cent which it is now and closer to what ----

280. What about the _5,000 floor, are we happy with that notion? Do we think there is a legitimate idea of de minimis?

(Lord Whitty) There is a euro-wide social aspect to this. With some reluctance we would be prepared to accept that there has to be some exclusion on behalf of very small farms. We think the way that Fischler has proposed it, attached to it employment criteria and other huge complications which means a rather large proportion of Mediterranean countries' agricultural land would be excluded, is not the appropriate way in which to favour small farms and is certainly over-complicated. In principle we are not against having some recognition that the very small farms should be excluded from this process. On the ceiling, we are totally against the ceiling on the ground partly that it hits the UK disproportionately hard. The quote from Renata Künast that Mr Jack read out earlier indicates that the Germans have similar concerns, indeed rather larger concerns, in terms of the proportion of their total acreage. Certainly the British and the Germans will strongly oppose that. There are other countries who will have some farms hit by it who may also oppose it.

281. Have you worked out in financial terms what the difference to the UK between having a ceiling and not having a ceiling would be? It is really only a handful of farms. Even in the UK it is a relatively small number of farms.

(Lord Whitty) As far as the UK is concerned the money saved comes back to the UK. If I were being totally partisan for the Government, it would come back to the Government to spend on agricultural purposes or land management purposes. It is not a question of how much the UK gets, it is how much would be effectively guaranteed by and large to large arable farms in Britain. We do have a figure for that somewhere. The farmers would lose _20 million but it would come back to the UK Government for expenditure on CAP.

282. _20 million?

(Mr Muriel) Shall I just explain?

283. Please.

(Mr Muriel) These are estimates, they are not precise figures so one has to bear that in mind. We estimate that when modulation is fully implemented, and it will build up over a period of years until it is 20 per cent, at that level then the exclusion above the ceiling in the UK would be worth _20 million. That is those payments will fall above the 300,000.

284. Without the limit there would be 20 million more coming in?

(Mr Muriel) Yes. It would be slightly more in earlier years because of the way that modulation works. That is when it is fully implemented.

285. You expect that you will find some allies in Germany for the reasons you have explained.

(Lord Whitty) The way German farmers would miss out on that would be 115 million, so the Germans obviously have a big interest.

Mr Wiggin

286. Do you agree that, as the Countryside Agency pointed out, the UK only gets three per cent of the EU Rural Development Regulation budget whereas it accounts for about 12 per cent of the agricultural area?

(Lord Whitty) Yes, that is what I have just been talking about. Three and a half per cent is our calculation. That is largely based on historic patterns. That three and a half per cent as a result of this change would need to be raised significantly for us to be fully in favour of the changes.

287. What do you think the prospect is of taking it forward?

(Lord Whitty) I think they are quite good provided we can persuade in the negotiations for greater flexibility on what you can spend the money on under Pillar II.

288. What are the implications for the Rural Development Programmes in the United Kingdom of the proposed increased rate of European Commission co-financing?

(Lord Whitty) The European Commission's proposals are slightly different from the proposals in Curry. If I can give you the Curry report proposals, which is the one year where we have calculated it, the first year of the extra modulation, the matched funding in that respect would require over 75 million. Obviously that would go up if we escalate it along the lines that Fischler or Curry are proposing. For the first year it would require matched funding of 75 million. Of course, one of the flexibilities that might be looked for in Pillar II is a reduction in the degree to which one has to co-fund it. Most of Pillar II requires 100 per cent co-financing at the moment but that need not be the case necessarily in the reformed regime.

289. How will you ensure that existing Rural Development Programme schemes are unaffected by the introduction of new compulsory programmes into the Rural Development Regulation? As I understand it, the European Commission is proposing to expand the Rural Development Regulation to include new chapters on food quality and meeting standards.

(Lord Whitty) Those programmes on which a commitment has been made, which quite often go up to seven years, would stand. There would have to be some transitional arrangements moving over from one system to the other, and the Commission referred to that in the document. There would still be some premium schemes along the lines of the current agri-environment schemes and other schemes under Pillar II.

Mr Jack

290. Could I ask one technical question which I still have not got my mind wrapped around. In terms of the co-funding under the current Rural Development Plan, what is the reason or the requirement for the United Kingdom Government to match what we spend in that area from UK funds? Why do we have to match the funding? What is the thinking behind that?

(Lord Whitty) The thinking I assume - and this applies in all sorts of other areas of EU expenditure, as you are aware - was that we could not just switch funds into Rural Development Schemes for which there was no national commitment. In other words, it was not simply a drawing down of EU money, it would have to be matched by public or private local commitment. In most of the Pillar II schemes that is 100 per cent local commitment, which is not the case in all the Structural Funds and other areas of matched funding. That may become more flexible. I do not think we would move away from the notion that there has to be some local commitment.

291. Forgive me if I have not understood it properly but am I not right that under the proposals in the Mid-Term Review for the recycling of modulated monies, there is not a requirement for co-financing, is there?

(Lord Whitty) There will be if the rules are changed, yes.

292. If they are changed, but the original proposal was not?

(Mr Eddy) It is changing the rates, it is not changing the requirement for matched funding.

(Lord Whitty) That changed from 100 per cent to 50 per cent, for example.

Mr Wiggin

293. I am somewhat confused as well. My understanding is that if these extra chapters are included on food quality and animal welfare then the amount of matched funding will have to go up correspondingly. English Nature estimate that their own interests would cost somewhere in the region of £1 billion. Does that mean that the Government is going to have to find money to match more. Have I got it right?

(Lord Whitty) All these schemes are optional. If the UK Government goes to draw down that money then there will be requirements for some matched funding, maybe not 100 per cent but some matched funding for those schemes, yes.

294. Eighty per cent or 85 per cent in Objective 1.

(Lord Whitty) Yes.

Chairman

295. We have had the enlargement discussions which are now almost home and dry, we hope, with one or two little loose ends, although loose ends are notorious at tripping people up and let us hope that does not happen. We have got the Doha rendezvous in March but people are increasingly talking about Cancun as the relevant rendezvous and it is quite clear that the European Union will not be in a position to put forward an offer in March because really it is bound by the terms of the Agenda 2000. The Mid-Term Review, in whatever form it emerges, is a prerequisite for the Community being able to put an offer on the table for September. How confident are you that these timetables are going to permit the European Union to put a substantive offer on the table in time for Cancun? We are not even going to get proposals on the Mid-Term Review now until the end of January. Negotiations are going to be pretty difficult. I am becoming a little concerned as to whether or not even that September rendezvous might look to be very ambitious and difficult.

(Lord Whitty) I think it is ambitious in one sense in that, as you say, these are going to be pretty difficult negotiations. Fischler himself is pretty confident that he can reach some conclusion by the end of the Greek Presidency, which is early June, which is certainly all our targets. It is pretty clear, I think, that the timetable for the EU to produce its own mandate by March is not going to be met. The problem is the later it goes beyond March and the closer it gets to Cancun the agenda will be set by the WTO negotiators themselves who are writing papers already. The Americans have made an offer already, which I do not wish to be cynical about, and if we are not careful by the time we get to Cancun then the other trading partners will have made all the running and the EU will be in the dock. That is what is in the interests of the EU as a whole, leaving aside the agricultural interests, not to be in that situation by the time we reach Cancun.

296. Lord Whitty, thank you very much for that. You did say that you would be happy to answer a couple of questions on HRI. The reason I ask is that I attended the launch of their annual report last week and a number of questions emerged from that. As you know stage one of the quinquennial review has now been completed and the original timetable, I think, was looking to an announcement to Parliament of a stage one outcome by the end of July this year and then stage two to follow August to November. The position we are now in is that we are awaiting the Government's response to stage one. Meanwhile, as you know, given the recommendations in that review there will be customers of HRI who want to know where it is going, the staff themselves, Warwick University, who are talking about the possibility of a relationship with the new shape of HRI, they cannot hang on indefinitely, and obviously the East Malling Trust needs a decision on that site. Can you give us any indication of when you hope to make that announcement and how substantive it will be? I think there is some hope you might manage it before Christmas.

(Lord Whitty) I could not make a commitment to doing it before Christmas. Certainly we are concerned about the urgency of making decisions on all of these fronts. As you will appreciate, I and my officials are in discussion with HRI, with Warwick University, with the East Malling Trust and with other industry interests to reach a conclusion as soon as possible. Of course, we have only just ended the consultation on the stage one proposals. I met the chair of the quinquennial review last week and there will be some minor modification of those proposals in the light of that consultation. I would hope to make an announcement certainly within weeks, even if I do not quite manage it before Christmas.

297. You would accept there is an urgency now?

(Lord Whitty) Indeed, yes. There is an urgency in the sense that if there is any continuing uncertainty then East Malling will begin to lose both customers and staff. Probably that is true of Wellesbourne as well. I am well appraised of the need to take the decision as soon as possible.

298. I know ministers hate to be pressed on this sort of thing. We have a half-term holiday starting on St Valentine's Day, I think, if I remember rightly.

(Lord Whitty) You have the advantage over me there, we do not have half-term holidays in the House of Lords.

299. February 14 is the Friday of the half-term holiday, which is entirely appropriate, of course, to Horticulture Research International.

(Lord Whitty) It is certainly my intention to make a decision before then.

300. Hopefully quite a way before then, if possible.

(Lord Whitty) Yes.

Mr Jack

301. Minister, before I ask you a question I would like to record for the record that the company of which I am Chairman, the Hartington Group, was invited some time ago to participate in bidding on matters referring to the redevelopment of the East Malling site, it was not successful and no longer has any relationship with that. I thought you ought to be aware of that before I asked my question. This Committee has produced two reports into HRI and having now read the quinquennial review, which I thought was an excellent document, it did occur to me why only now are DEFRA willing to make decisions about the future of HRI when it was blindingly obvious from the evidence that we received on two occasions and published that there was then an urgency about sorting out matters which the quinquennial review has brought into very sharp and clear focus? Can I seek your assurance that when you do respond to it that all of those outstanding issues in terms of the size, scope, scale, terms of employment of people who work for HRI, will once and for all be sorted out to take away much of the uncertainty that has clouded this troubled organisation for a long time.

(Lord Whitty) I think it is true that some of the problems were evident at earlier stages, as your Committee and others have identified. We did try and run with a structure and a funding management system which in the end did not prove to be robust enough. We are now in a position where we do have to take some fundamental decisions and we have to take them pretty fast, as I have said. Not all of the issues on which you have touched will be entirely resolved by my announcement but the future structure and status of the various parts of HRI will be clear at that point. Obviously some will require further negotiations, particularly staff terms and conditions and so on, as will discussions with Warwick University and others.

302. Given that your department has now got its own three year financial settlement in place, will one of those key issues that you will be able to address be a clear statement on what DEFRA's funding for its research purchases, if you like, from HRI is going to be over the next three years to give them certainty at least in one source of their income stream?

(Lord Whitty) We will go as far as we can in that direction. Although we have a three year allocation we do not have the finalised next year's budgets yet. We are required by the Treasury to----

Chairman

303. I have indeed tabled a question asking for the budget in relation to the PSA objectives.

(Lord Whitty) I think I am aware of that question. In so far as we can answer it, that will relate to the current year and the first years of the new budget because we are required by the Treasury, as a result of the settlement, to engage in what they call a base line review in the course of the next few months which may alter the balance of expenditure. As far as horticultural research is concerned, or horticulture research earmarked for HRI, we will go as far as we can in making the commitment which the quinquennial review requests of us.

Mr Jack

304. Do you tacitly accept in the statement that you have made that that degree of financial certainty is vital if the restructuring plans which may result from your response to the quinquennial review are, if you like, to provide a lasting basis to sort out HRI's problems, because there are some very big issues such as the number of sites, the number of people they employ, as the Chairman indicated the commercial and intellectual relationships they have, their commercial activity, all of that requires some underpinning?

(Lord Whitty) Yes, and I accept that changes in the total amount of DEFRA support have contributed to the uncertainty and the instability of HRI. The absolute commitment would need to be at a level which would be the minimum commitment and, therefore, at a stroke you are not resolving their future financial position, they have also got to operate on competition and in the market.

Chairman

305. Minister, thank you very much. I am tempted, but I will contain my temptation, to ask you about the Saphir report on Covent Garden as well but you are not here to do all the sweeping up of previous inquiries, although horticultural research was a very topical one. Thank you very much for giving us your assistance on the subject of the Mid-Term Review. We will no doubt see you again anon.

(Lord Whitty) Thank you very much indeed.

Chairman: A happy Christmas if we do not see you before then.