Examination of Witnesses (Questions 40-59)
LORD BACH,
MR JOHNSTON
MCNEILL,
MR IAN
HEWETT AND
MR JOHN
O'GORMAN
11 JANUARY 2006
Q40 (11.01.06) David Lepper: Should
it become necessary to make interim payments, I have in mind what
has happened to some of my constituents in relation to child tax
credit. We are not likely to have a situation, are we—I
am assuming not—where a farmer might be told at some future
date, "Sorry, we have paid you too much and we want some
back, please"?
Mr Hewett: That is one of the
reasons why we are suggesting a cautious approach to the rate
of payment so that if there is any over-calculation in the whole
population we would be able to recover that in the balance payments.
Q41 (11.01.06) Daniel Kawczynski: I
would like to raise again with the Minister this point about the
£25 million interest charges which my colleague, the Member
from Brecon, raised with him. You have said that no businesses
will fold as a result of these charges. If either you or I submitted
our tax payments to the government late, we would be charged interest
and the government would make sure they got that money out of
us. Who is going to fund this £25 million interest? Why should
it be only the farmers who have to fund it? Will the government
not give any assistance for them to fund it, because it is the
fault of government ultimately for the lateness of the payments.
Lord Bach: I said that no viable
business would fall on the basis that that is what the banks were
telling me in the discussions that I have had with them. I do
not know from my own knowledge whether businesses will fall or
not but that was the banks' view a couple of months ago when I
went through the discussion that we are having today. As far as
the interest payment is concerned, I am afraid it will fall onto
the farmers.
Q42 (11.01.06) Mr Williams: Delay
in payments does not just have an effect on the cash situation
in the bank for English farmers; it can have other complications
as well. Will that delayed payment have any effect on the administration
of the 2006 scheme?
Lord Bach: One of the reasons
why we are so keen to start making full payments is because an
interim payment, of whatever proportion, is bound to have some
effect on the 2006 scheme. It is one of the main reasons, apart
from the justice of the case anyway, for wanting to make the full
payments. If there is a partial payment and we then have to make
the final payment by the end of June, that is bound to take resources
away from dealing with what we have to deal with now, which is
the 2006 payment. That is a long way of saying yes.
Q43 (11.01.06) Mr Williams: The Minister
has also mentioned a complication with the trading of entitlements.
I am very concerned about farmers who, for whatever reason, may
not be able to exercise those entitlements in 2006 and yet are
unable to trade them. Is there any compensation scheme contemplated
for helping those people out?
Mr McNeill: Yes. Our current planning
is that if we define entitlements in the middle of February we
will advise customers how to register with us that they wish to
trade entitlements. Having defined entitlements, we will also
be putting in place a system for them to do that. They have until
16 May[7]
to notify us of those trades.
Q44 (11.01.06) Mr Williams: I understood
that entitlements were not entirely definitive in terms of the
Commission until the money had been paid.
Mr Hewett: No. This is one of
the major differences between the previous set of schemes and
the current scheme. When Mr Taylor was talking about the previous
schemes and the money getting out earlier, we could validate and
clear claims iteratively. With this scheme you have to put everybody
in the pot, determine the entitlement for the whole population
and pay those valid claims individually. Once we have determined
entitlement, we would issue notifications to all of the eligible
customers, "This is your entitlement in Euros." That
is not a payment notification because we will then be paying our
customers in batches once we have determined that they are eligible
and confirmed everything is in order. We have talked very closely
with our stakeholders and industry representatives about how we
expedite the process of allowing them to trade entitlements and
notify us of those trades in entitlements. What we are doing is
setting up a pre-registration system for those customers who wish
to trade entitlements so that we can send them a partly populated
notification form in advance or at the same time as they are receiving
their entitlement statements so that they can notify us at the
earliest opportunity.
Q45 (11.01.06) Mr Reed: I am interested
in the concept of viability and I accept that it is a definition
which has been brought about by the banks. Clearly for any business
viability and cash flow over time are related concepts. Has any
thought been given at all to the earliest payments possible being
made to those businesses which are perhaps on the borderline of
being viable and non-viable?
Lord Bach: One of the reasons
I saw the banks was to find out what they thought was the likelihood
of good businesses collapsing as a result of delay. If they would
say that there really was a chance that this was likely to happen
to any scale at all, obvious government would have to think if
it had a role to play in that. From what they told me—many
leading banks that do lend to farmers were involved—they
did not believe that it would lead to large or even small scale
closures of business. If there were to be large closures of business
as a consequence, we would obviously as a government have to look
to see if there was anything we could or should do but I cannot
say more than that. I do not anticipate that there will be any.
Q46 (11.01.06) David Taylor: We have
just about done interim partial payments to death but one of the
things that surprised Mr Williams and me when we went to Reading
was to hear that no real planning or resources were allocated
to the possibility of developing an interim partial payment system
until the regulation had been agreed on 12 October 2005. That
is broadly the case, is it not?
Mr McNeill: We made it clear to
our supplier that we would require a partial payment contingency
system in place. They were of the view in discussions that it
would be much wiser for us to be clear as to what the requirements
were before we went through a similar process of starting and
having to rebuild the system. As a consequence, we needed that
clarity from the discussions with the Commission as to what would
be acceptable to them.
Q47 (11.01.06) David Taylor: That
formal approval was just seven weeks from the start of the payment
window when any rational system, one is tempted to say, that was
going to allow for the possibility of interim payments would have
had those interim payments right at the start of the payment window.
Mr Hewett: We did have a contingency
in place all the time, running in parallel with our primary solution.
Once we got into the validation part of our primary solution,
we felt that was not an appropriate contingency and it was at
that point that we approached ministers and policy colleagues
about having a different type of contingency around partial payments.
As the Minister said, he could offer you a long and tortuous history
of partial payments. When we first approached the European Commission,
the type of partial payment system that they were mooting would
not have been something that we could have lived with and would
not have been of any significant benefit to the farming population
because it would have required a security to be put up equal to
the level of partial payment given. It was only very late in the
day that we had sight of a form of payment which we thought we
could develop. Bearing in mind what we found with the main solution,
late changes in policy impacting on system delivery, we did not
want to learn that lesson again.
David Taylor: RPA senior staff made great
play of the fact that they need to have all of the information
from all farmers before they can pay accurately a single payment
to any one farmer. That is seriously misleading. The vast bulk
of the year one payment is based on historic entitlements which
will not have changed and will not be influenced by the aggregate
of all farmers. I am not particularly attracted by the merits
of that argument.
Q48 (11.01.06) Mr Williams: Can I
ask the Minister when Defra decided to adopt the dynamic hybrid
solution to the single farm payment? Did it take into account
the complexity and the fact that it is the most complex system
in the UK?
Lord Bach: When ministers made
that decision in February 2004, it was done deliberately. We were
very much in the forefront of the CAP reform process. I think
we had general agreement across party for this. A new decoupling
scheme was essential. We wanted to bring it in as soon as we could
so that industry could benefit from decoupling as soon as possible
and settle on a model which would in principle apply to 2012 the
best bits of the objectives that the Curry Commission, and subsequently
the sustainable farming and food strategy, had set out. Yes, ministers
did know that it was more challenging to choose a system like
this rather than one just based, for example, solely on historic
criteria. We thought there should be a flat rate element and of
course that historic element tapers off to 2012. From where I
am, I have to say that even though there were extra risks involved—and
that is part of what we are discussing and indeed something which
was pointed out, if I may say so with respect, by your Committee's
last report on this in April 2004—we took the decision for
what I believe were perfectly sound reasons. I do not think there
is any need to make apologies for it. If we look back on this
or people look back on this in a few years' time, most people
will say, I hope, that an extra three or four months in receipt
of payments in the first year of this major scheme was an acceptable
price to pay for the model of the payment we have introduced.
History may prove us wrong on that but that is my firm belief.
Q49 (11.01.06) Mr Williams: Nevertheless,
it was available to Defra to postpone the introduction of the
single farm payment for one year and to carry on the old schemes.
In light of the very complex nature of this scheme and the difficulty
of introducing it, in retrospect, would you not have thought that
that would have been a better solution?
Lord Bach: No. I have thought
about this and I do not. We were in the forefront for wanting
change to the CAP in Europe in 2003. We were one of those leading
the way. Although a number of countries who were more reluctant
to see change in the CAP opted to start the new scheme a year
later, it would have looked very peculiar if the United Kingdom
had done that.
Q50 (11.01.06) Chairman: The language
you used a moment ago almost implied that it was farmers who chose
the model. It was ministers who chose the model. In the 2004 report
which you referred to, I remember the phrase "The UK's initial
negotiating position was drawn up in close consultation with our
delivery bodies, principally the RPA, who were involved at every
subsequent stage." With such close consultation it does now
draw into question just how good the advice was at the beginning
of the process, given the problems we are now facing at the end
of it.
Lord Bach: I am not suggesting
for a moment it was the farmers' model. It was ministers who decided
on that model but it has been a model that has been accepted and
supported, I believe it is fair to say, by farming organisations.
Chairman: The point underlying my remarks
was that you chose a very complex route. I am concerned that some
of the things that have emerged as you have travelled that route
were not anticipated for reasons which perhaps we might be able
to establish.
Q51 (11.01.06) Patrick Hall: When
ministers were advised to go for the particular model that England
has and made that decision in February 2004, it must have been
on the basis of advice. Was it then the case that officials thought
that Brussels was not going to issue further documents and amendments
vis-a"-vis the detail of the scheme? Was it thought
then by officials that the bulk of the detail was then known;
therefore, officials were in a strong position to give advice
to ministers and for ministers to make a decision? Was the further
detail a surprise?
Mr O'Gorman: Lord Bach was not
there at the time. I can confirm a considerable volume of advice
was given to ministers over a period of time because this was
a very significant decision that they took. We certainly knew
that there was a risk that, whatever the model that was initially
devised, it would evolve and it would be practically impossible
to believe that you would have a regulation which would be perfect
first time and would never need change. We knew that there would
be risks. What we did not know was where were the imperfections
at that point and what would need to be changed. We did not know
if that would be in an area which was relatively insignificant
in delivery terms, as many of the changes have been, or were there
bits which would prove to be significant. As it has turned out,
there were some in the latter of 2004.
Q52 (11.01.06) David Taylor: One
of the stated attractions of the single farm payment was that
it was simpler and less costly both for farmers and government
in relation to the cost of administering the new schemes that
it replaced. That is correct, is it not?
Lord Bach: Yes.
Q53 (11.01.06) David Taylor: What
do you estimate the revenue cost of the single farm payment to
be in the first year of implementation—ie, in the year 2006?
How does it contrast or compare with the CAP last year of 2004?
Lord Bach: You are quite right.
We do think this scheme is a much better scheme in terms of costs
over a period of time. The old subsidy schemes were extremely
costly and extremely inefficient. There was a huge amount of over-regulation
involved with them and they had been there for years and years.
Q54 (11.01.06) David Taylor: What
was the cost of these hugely cumbersome schemes in the 2004 administration?
What will be the cost of this scheme in 2006? I am sure you have
those figures.
Lord Bach: I think I have. Are
you talking about the administrative costs in the single payment
scheme?
Q55 (11.01.06) David Taylor: Yes,
of course.
Lord Bach: On the basis of the
best estimate, the cost of processing the £1.6 billion of
the single payment scheme for English claims will be 5.4 pence
per pound.
Q56 (11.01.06) David Taylor: What
was the administrative cost of the old CAP scheme that you have
been very critical of?
Lord Bach: I am afraid I do not
have that figure. Of course I will write to you with that figure.
Even if it is a lesser figure this year compared to the 2005 figure,
I honestly think you have to judge the new scheme on the years
ahead as much as on this year. To bring in a new scheme is bound
to be costly.
Q57 (11.01.06) David Taylor: I was
careful to say that we were talking about the revenue costs, not
set-up costs. Systems do bed in and they may become less costly.
I will accept that. I am disappointed that the 2004 figures were
not available.
Lord Bach: I am sorry and I will
make sure the Committee is written to.
Q58 (11.01.06) David Taylor: When
we visited the RPA—I place on record our thanks for the
welcome and the investment in time that we had from the people
who were there, people were very frank and we are grateful for
that—it was made clear that some of the investment in labour
saving devices—optical reading technology, would be an example—had
been postponed so that you could get on with implementing the
main system. As a result there had been various manual work-arounds
introduced to allow completion in advance of the new technology
coming in at a later time. Do you have any estimate, I am sure
you do, of the total cost of these manual work-arounds that you
had to introduce because I guess they would be part of the reduced
revenue costs to which the Minister just referred in future years?
Mr McNeill: I think it would be
best if we were to write with that information, it is not as easily
abstracted as you might think. We are very happy to supply it
in some detail. We do not have it to hand at this time.
Q59 (11.01.06) Chairman: Why did
you end up with manual work-arounds if you planned this thing
so carefully?
Mr McNeill: Chairman, the difficulty
arose that in order to meet the timetable in working with our
supplier they made it clear that it would not be possible to complete
the development work required to deliver this other functionality,
the character recognition, optical character recognition, et cetera.
The view was taken that to push on and to make the payments it
would be wiser, indeed prudent, for us from a project programme
management point of view to defer that. In fact, a lot of that
functionality will now be part of the delivery from Accenture
in the next year. We would hope to use large parts of that for
the 2006 year. Also, of course, the more we introduce new technology
the more risk we run of having teething troubles, et cetera. We
felt that we had quite a challenge, to be frank, in getting the
scheme in with the Rural Land Register and Customer Service Centre
and the use of a lot of the functionality we had already developed
and it was probably wiser not to go a bridge too far and too costly
to do so.
7 Note by witness: should read "19 March
with transfers of land, and 2 April without transfers of land". Back
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