APPENDIX
1. We welcome the assertion that the Mid-Term
Review has not been postponed or seriously damaged, though we
are less confident in that assertion than Lord Whitty. Like the
Government, we welcome the broad thrust of the Mid-Term Review
proposals. But, as we indicated in our Report on the Future of
UK Agriculture, we regret that proposals for a number of sectors
are missing from the Mid-Term Review (paragraph 16).
The Government supports the Committee's view in welcoming
the main body of the Commission's proposals, and also supports
the above assertion that the proposals did not go as far as we
would have liked. The European Commission proposals for modulation
arrangements have been modified since July 2002, and some provision
has been made to finance market reform (e.g. dairy and cereals).
If agreed, these reforms should ensure a sustainable
future for EU agriculture and reduce the negative impact of the
CAP on developing countries. The publication on 22 January of
formal legislative proposals demonstrates that the reform process
is still on track, but we have to maintain realistic expectations
of the negotiations ahead. Securing significant reform will not
be easy given the different interests of other Member States,
but the Government will keep the pressure on to agree real and
fundamental and affordable CAP reform.
2. We regret that the European Commission
only presented options on the reform of the dairy sector rather
than detailed and clearly timetabled proposals to bring
to an end the current system of milk quotas (paragraph 17).
3. We urge the Government to continue to
lobby the European Commission for the earliest possible phasing
out of milk quotas and we hope that the Commission brings forward
such proposals when it brings forward the MidTerm Review
legal proposals (paragraph 17).
The UK Government shares the Committee's concern
that the Commission's options paper for dairy reform was not more
closely aligned with the conclusion of the 1999 Berlin Summit
which required the Commission to review the dairy quota system
with a view to allowing the current arrangements to run out after
2006. The latest Commission legal texts also do not fulfil that
important requirement.
Some of the elements now proposed are welcome as
a further stage in the transition to a quotafree system,
such as additional, differentiated cuts in support prices over
and above those agreed in Agenda 2000 together with further increases
in national reference quantities. However, this approach is not
taken to its logical conclusion and we do not accept the extension
of milk quota. It is not clear what the Commission see as the
ultimate objective for this process, or why it cannot map out
a route now that would take the regime to the point where supply
controls and related intervention were no longer needed.
The present dairy regime acts to the detriment of
consumers, taxpayers and producers. The industry needs to have
certainty so that it can plan effectively for the future. The
UK Government will, therefore, continue to press for a clear end
point for the quota system and an orderly progression towards
it.
4. As proposals for the reform of the sugar
regime are due in 2003, we hope that they come forward early in
the year (paragraph 18).
The Government has consistently argued the case for
early and radical reform of the EU sugar regime. When the Council
agreed in May 2001 to extend the existing regime, with certain
modifications, to June 2006, we did secure a commitment to a further
review in 2003.
The European Commission has made clear that they
see the reform proposals as providing a framework for this further
examination of the sugar regime and have now said that they will
be bringing forward their ideas later this year. The Government
welcomes this and remains strongly committed to early progress
on sugar reform.
5. We strongly support the principle of reducing
CAP spending (particularly under Pillar I) (paragraph 20).
The UK Government agrees with this principle. We
support the direction of the Commission's proposals on degression
and modulation but we will continue to argue both for a greater
transfer of funds to rural development, and further reductions
in the overall level of CAP expenditure.
6. The European Commission's modulation proposal
would transfer all Pillar I savings to Pillar II. We believe that
there should be a very rigorous analysis of the scope and purpose
of rural development measures and a procedure put in place to
assess value for money. Rural development programmes should not
be regarded as virtuous simply because they are not
production aids. Funding from Pillar I should only go to wellfounded
schemes: if, as a result, there are total savings in expenditure
so much the better. Equally, funding required under Pillar II
to deliver measures which really will deliver clear measurable
benefits should be provided. A proper assessment of the measures
required would form a more intellectuallysustainable basis
for funding (paragraph 20).
The European Commission proposals for modulation
arrangements have been modified since July 2002. The original
'dynamic' modulation model would have diverted Pillar 1 direct
payments into Pillar 2 at a rate of 3% in 2005 rising by 3% per
year to a maximum of 20% in 2011. Under the Commission's latest
proposals direct payments would be reduced by progressive percentages
starting at a rate of 1% in 2006 rising to 19% in 2012. However,
the percentage that would be redirected to rural development would
be reduced to 1% in 2006 rising to 6% in 2012. The remainder would
be used to finance market reforms (cereals and dairy).
The Government agrees that a rigorous analysis of
rural development measures is required. Pillar 2 schemes must
generate clear public benefit from the public funds involved.
The Government is not yet convinced, for example, that the additional
measures now proposed by the Commission pass this test.
All Member States are required to carry out a MidTerm
Evaluation of their rural development programmes, by the end of
2003. This will provide an opportunity for the Commission to consider
the extent to which this expenditure generates real valueformoney
public benefits in all Member States, and should contribute to
consideration of how best to target this expenditure.
7. The agreement on CAP spending reached in
Brussels in October 2002 limits Pillar I spending. Dynamic modulation,
proposed in the MidTerm Review, would transfer money from
Pillar I to Pillar II. The Government should therefore seek guarantees
that the Pillar I budget limit will be reduced commensurately
as funds are transferred to Pillar II, otherwise the CAP budget
disciplines agreed in Brussels would not be adhered to (paragraph
21).
The UK Government agrees that the budget frameworks
agreed to at the Berlin Council in 1999 and the Brussels Council
in 2002 should be strictly adhered to.
8. It seems likely that the modalities offer
for the WTO negotiations will not point to more than minimal progress
on these issues as well. The European Union and individual Member
States expressed commitment to developing countries at the Johannesburg
Sustainable Development Summit. It will be interesting to see
if that commitment is reflected in the legal proposals emanating
from the MidTerm Review and in the subsequent debate upon
them (paragraph 32).
The EU modalities proposals submitted to the WTO
offer as much as is possible within existing CAP constraints.
To this extent they are welcome but we have made clear that they
will need to go much further, and soon; early progress on CAP
reform will provide the key. Proposals for decoupling, modulation
and cuts in market support, as contained within the recently published
legal texts, should lead to reductions in trade barriers and subsidies,
thus helping us to meet our Doha and Johannesburg summit commitments
to developing countries.
9. We believe that the most appropriate response
to pressure for change as a result of the WTO negotiations is
to embrace it and work towards a much more liberal CAP, rather
than to attempt to protect farmers from the inevitable for as
long as possible (paragraph 39).
The Government fully agrees with the Committee. We
have been in the vanguard of those pressing for ambitious liberalisation
in both CAP and WTO negotiations. The Chairman of the WTO committee
responsible for the agriculture negotiations has recently published
his own modalities proposals for a new Agreement on Agriculture.
We welcome the level of ambition contained therein, which will
bring further pressure to bear for early reform of the CAP.
10. We believe that the proposals for decoupling
and dynamic modulation would make the transition to the full CAP
easier for the new Member States.
We share the Committee's view. Decoupling will minimise
the distortion of market signals in the candidates when the CAP
is extended to them. Many of the candidates' agricultural sectors
are in need of significant restructuring. We believe enhanced
rural development measures would be the best way to support this.
11. We believe that a farreaching Mid-Term
Review that ensures European agriculture is able to offer meaningful
progress on trade liberalisation talks and ensure its own budgetary
stability would be far better for farmers across the European
Union than a continuing cycle of repeated minor reforms of the
CAP (paragraph 41).
The Government agrees with the Committee's assertion
that a fundamentally reformed CAP would be better for EU farmers.
The Government will be negotiating hard for reform of the CAP,
which will benefit farmers, consumers, the environment, the tax
payer and developing countries.
12. We hope our concern (about the form of
payments to new Member States) is unjustified and that this is
simply an expression of the European Commission's intent to secure
agreement for its proposals to decouple direct payments from production
completely.
We believe that your concern that rather than specify
that "subject to the outcome of the Mid-Term Review, new
Member States will adopt the decoupled single income payment",
the new Member States will "at the end of the transitional
period, ... enter the regular system of direct income support
in the form then applicable" is unfounded.
The treaty has been negotiated on the basis of the
acquis in force the treaty cannot preempt
separate CAP reform discussions. However, we secured the wording
"in the form then applicable" in order that changes
in the CAP could be adopted by the new Member States on accession.
13. The Government should seek to ensure that
the temporary permission given to new Member States to transfer
money from Pillar II to Pillar I is not extended, either beyond
2006 or to existing Member States who might find it an attractive
proposition.
We share the Committee's view and secured wording
in the accession treaty to make clear this was a 'temporary and
sui generis measure' for the 20042006 period only.
Transferring money from pillar II to pillar I runs directly counter
to our wishes for CAP reform.
14. During the course of our inquiry a number
of issues that arise from the Mid-Term Review were identified
as having a particularly disadvantageous impact on the United
Kingdom. Concern stemmed from the fact that we have an average
farm size larger than the European Union average, that we have
already implemented a modulation scheme under the existing voluntary
system, and that we currently receive a low share of European
Union money under the rural development regulation. We explored
issues such as the implementation of decoupling, the role of crosscompliance,
the impact of modulation and the potential distortions that could
arise as a result of capping and franchises with those who gave
us oral evidence. We also sought evidence on the implications
of the new approach to animal welfare that the Mid-Term Review
signalled (paragraph 44).
The Government also agrees with the Committee, that
the Commission's proposals discriminate against the UK because
of its larger than average farm size. In the Commission's formal
proposals released on 22 January 2003, the _300,000 ceiling on
direct payments per farm has disappeared. However, the suggested
mechanism for degression and modulation will still have an adverse
impact on larger, efficient farms, and will impact heavily on
Member States such as the UK and Germany. The Government will
negotiate hard for a fairer, simpler system such as that which
operates in the UK at the moment.
The UK Government also shares the Committee's concerns
over the UK share of the European Union Rural Development money.
The January proposals do not go far enough in redressing the imbalance
and the Government will be negotiating hard for a fairer sum for
the UK.
On decoupling, the Commission and the UK Government
have undertaken impact studies (see the response to 15 below).
The detail of implementation is currently being worked out in
Working Groups in Brussels.
In regard to animal welfare, the Government welcomes
these proposals, but seeks to find a flexible, and costeffective
system of crosscompliance, with the minimum of bureaucracy.
15. We welcome the fact that some economic analysis
is now planned as far as the farmlevel impact of the Mid-Term
Review is concerned. However, both at Commission and national
Government level this work should in future develop in parallel
with the development of new CAP reform policies otherwise all
those with an interest in these matters are going to be asked
to agree proposals without having any real idea of who in the
United Kingdom are going to be the winners and losers. In terms
of future CAP reform the Commission should also be encouraged
to provide a commentary explaining the rationale for the ideas
underpinning their proposals (paragraph 71).
We agree that the Commission should explain the rationale
of their proposals and we recognise the need to carry out economic
analysis. Research carried out by OECD and others over a number
of years shows that decoupled payments offer a more efficient
means of supporting agricultural incomes. In presenting their
detailed proposals in January the Commission also published a
number of impact assessments. Defra has commissioned a range of
research to consider the impact of decoupling and these were discussed
at a seminar of stakeholders on 16 January. In addition, a Defra
commissioned report on the environmental effects of CAP reform
has been completed. These reports are available on the Defra website
(http://www.defra.gov.uk/esg/m_decoupling.htm).
16. We welcome the proposal to decouple the
vast majority of direct support payments from production (paragraph
73).
The UK Government agrees with the Committee and welcomes
the decoupling of direct support payments. This would remove some
of the perverse incentives to overproduction in the present
system and allow producers to optimise, rather than maximise,
production. A reduction in production would also mean that EU
surpluses would no longer need to be disposed of on world markets
distorting trade and destroying opportunities for developing countries.
Decoupling would therefore greatly strengthen the EU's negotiating
position in the WTO Round.
Decoupling is also expected to lead to environmental
benefits as damage caused by the incentive to overproduce
(e.g. high stocking densities, intensive use of agrochemicals
and cultivation of marginal land) reduces.
17. We hope that the principle will be extended
to any future reforms of CAP product regimes that involve the
introduction of direct payments to compensate for price cuts (paragraph
73).
The Government agrees with the Committee that the
principle of decoupling payments from support should be extended
to the future reform of other sectors.
18. In the short term the decoupling of support
will cause problems: (a) new structures for channelling support
to farmers will be required, once the mechanism for attaching
the single decoupled income payment is decided upon; (b) there
will undoubtedly be difficult questions over entitlement, and
the United Kingdom Government will have to pay particular attention
to the impact of the new system on tenant farmers and on farms
with a mix of previously supported and previously not supported
enterprises; and (c) there will also be implications for the buying,
selling and renting of land with potentially different levels
of entitlement to the decoupled single income payment (paragraph
74).
(a) Defra is working closely with the Rural Payments
Agency and the Devolved Administrations on implementation of a
decoupled system.
(b) Under the Commission's January proposals the
decoupled payment would be linked to land, but not necessarily
to the same land which generated the claim. And the payment is
specifically destined for 'the actual farmer'. This means that
a tenant who has earned a decoupled payment entitlement through
receipts in the reference period can take his entitlement with
him when he leaves a farm, as long as he can find other eligible
land elsewhere to farm and on which to base his claim. There are
many different implications of the proposed system, which we are
exploring with interested organisations.
(c) In consultation with stakeholders, the Government
is examining the possible implications for land and rental values
of the proposed decoupled system.
19. Receipt of a single decoupled income payment
will not completely remove distortions from the agriculture sector.
The payment would allow inefficient operators to remain farming,
if they chose to subsidise their farming business with the decoupled
support payment. Therefore we hope that the concept of dynamic
modulation will be extended and lead to a yearonyear
reduction in the size of the decoupled single income payment beyond
2010 (when modulation reaches 20 per cent) (paragraph 75).
In the legislative proposals for reform presented
on 22 January, the Commission intends that direct aid payments
should be gradually reduced over time, starting at 1% in 2006
and rising to 19% in 2012. The percentage reduction applying to
any particular farm will depend on the size of its receipts and
the effect of a national ceiling on total direct payments. The
UK Government agrees that the degression of direct payments should
continue beyond 2012, and wishes the degression to be applied
in such a way that genuine budgetary savings result.
20. Payments for environmental management and
improvement should come from Pillar II. Therefore, to 'greentinge'
Pillar I payments should not be necessary.
The Commission proposals envisage a considerable
continuing level of pillar 1 support. In these circumstances we
believe that the principle of crosscompliance should apply
to these payments. It cannot be right for an EU farmer to receive
public funds even if they are committing a serious breach of Community
legislation on the environment, for example, or on animal welfare.
By providing an additional, financial, incentive to comply with
legislation, crosscompliance should have a positive effect.
The main means of using CAP funds to generate environmental and
rural development benefits should, however, continue to be the
second pillar. The detailed implementation of crosscompliance
will of course need to be proportionate, and to avoid excessive
bureaucracy.
21. Rather than capping payments, we believe the
best solution is a steady, staged reduction in all spending under
Pillar 1 (paragraph 77).
The Government agrees. The Commission's legislative
proposals announced on 22 January no longer contain the _300,000
subsidy limit per farm. This is welcome news. However, the proposed
model for staged degression and modulation over time still places
the burden of reform very heavily on large farms. It is framed
in a way that will discourage improvements in efficiency and penalise
farmers in member states where rationalisation of farm structure
has already taken place. The Government would prefer all CAP payments
to be subject to 'degressivity': the progressive reduction of
direct payments across the board, diverting some but not all of
the savings to rural development.
22. The United Kingdom Government should continue
to promote its approach to modulation as a European Union-wide
system (paragraph 78).
The Government will continue to do so. An EUwide
system following the UK model, where a common modulation rate
applies to all payments, would be fairer, simpler to operate,
and less bureaucratic than the Commission's proposals.
23. It should, if the idea of a franchise
persists, seek to have it set as low as possible and to insist
that the European Commission has the means to prevent farm businesses
being reengineered to get below the franchise (paragraph
78).
The UK Government will continue to argue for a fair,
transparent and simple method of degression, with flatrate,
acrosstheboard reductions. The UK's experience of
administering modulation supports this approach. The current proposal
discriminates against various Member States, including the UK,
on the basis of farm structures. A simpler approach would avoid
these discriminatory impacts, encourage efficient restructuring
in rural areas and provide a simple way of raising funds for rural
development. The recent legislative proposals for reform omit
the proposal, included in the July 2002 paper, to limit receipts
to individual farm businesses, following discussions in the Agriculture
Council when the UK Government expressed its objections.
24. The exact nature of the role to be played
by farm audits is unclear. We believe that it would be beneficial
for farmers to receive advice on the implications for the environment
of the farming practices they use. However, it is also important
that there is an efficient and effective way to monitor the huge
amount of money taxpayers transfer annually to agriculture. We
would like to see the Government develop the farm audit arrangements
in such a way that the process can fulfil both these roles (paragraph
79).
We are currently reviewing the policies and delivery
vehicles which actively support the knowledge, skills and understanding
necessary to run high performing rural businesses where growth
is in line with sustainable development principles. We also recognise
the need to make better use of information within Defra and other
Government Departments and agencies and are therefore developing
the whole farm approach to improve outcomes in all areas including
administration, business planning, management and enforcement.
Relying upon a single assessment or audit as the basis for monitoring
enforcement and making statutory payments is a long term objective
of our approach. However there are a number of significant hurdles
that must be overcome and which we are addressing, not least of
which are issues relating to privacy and data sharing and the
technology that could support that process. We are pressing to
ensure that the Commission proposals are framed in such a way
that they provide the flexibility necessary to achieve our objectives.
25. We also believe that all
farmers in receipt of public money should be able to demonstrate
that they are abiding by the crosscompliance conditions
associated with the decoupled single income payment. Therefore
some kind of audit process, proportionate to both the risk of
misuse of funds and the size of the decoupled payment, is necessary.
We request that the Government tell us how it would tailor farmlevel
audits to do this (paragraph 80).
We agree that appropriate conditions should be attached
to receipt of public funds. In principle, therefore, the Commission's
proposal to apply crosscompliance conditions to all direct
payments, not just the single payment scheme, is, welcome. However,
we need to consider with stakeholders whether the detailed requirements
will be effective, proportionate and transparent. It is also unlikely
that the same conditions could be applied to other forms of support
without suitable adaptation. For example, applying 'good agricultural
conditions' on the Commission model would run counter to the objective
of some payments under Pillar II agrienvironment schemes.
Any payments conditions which are set will need a
parallel enforcement regime. In developing the whole farm approach
we are trying to develop system of assessment that is proportionate
and delivers the objectives we aspire to. We feel that a major
plank in this approach will be the identification of core data
sets and a modular approach to self assessment packages that signpost
participants to additional schemes/measures or requirements as
appropriate. This is the path that we hope to follow, although
at present the Commission's proposals for the single payment and
other direct aids rely on the traditional onfarm inspection
model coupled with the equally resource intensive "farm assessment"
that we are not convinced would offer the value for money that
we hope to achieve. In the short term, while our work on the whole
farm approach is further developed, we will be arguing for the
maximum possible use to be made of existing enforcement agencies
so as to minimise bureaucracy and costs for the industry and the
payment authorities.
26. We recommend that the Government encourage
the European Commission to assess the environmental and social
objectives of Member States that fall within the ambit of Pillar
II in order to obtain a clear picture of their funding requirements.
The Commission would also need to determine the extent to which
it is prepared to let Member States emphasise environmental aspects
over social aspects (or vice versa) within the Rural Development
Programmes. We hope that support would be available to nonfarmers
who fulfil those policy objectives in rural areas (paragraph 85).
The Government agrees with this recommendation. The
Government will press for fair and objective criteria to be used
to allocate rural development funds in order to redress the UK's
relatively low share in EU Rural Development funds.
27. Over time funding should be directed to
Pillar II. The rate at which dynamic modulation [is] used to transfer
money from Pillar I should be higher [than] the rate of transfer
into Pillar II in order to bring about real CAP budgetary savings
(paragraph 86).
The UK Government will continue to press for market
reforms and rates of degression that will generate real and substantial
budgetary savings, while providing increased funding for rural
development.
Department for Environment, Food and Rural Affairs
March 2003
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