Government response
Introduction
1. The Government would like to take this opportunity
to express its thanks to the Environment Food and Rural Affairs
Committee (EFRA Committee) for producing a Report on the Collapse
of the Dairy Farmers of Britain (DFB) that was thoroughly researched,
very clearly presented, and exceptionally wide-ranging in its
scope. The issues raised by the Report include areas of increasing
interest across Government. Both the Coalition Agreement, and
the Queen's Speech, indicated the Government's intention to enhance
the current role for co-operatives.
2. The EFRA Committee report made a number of recommendations,
many of which relate to a range of Government departments' areas
of responsibility, and the departments in question are working
together on these issues. The one issue that resonated most significantly
across departmental boundaries related to the need for a good
governance structure for co-operative organisations. This is a
complex area which the Government will seek to address.
3. There is full engagement across the departments
concerned on addressing both the generic subjects within this
report, and further interrelated legislative and regulatory issues
that go beyond the scope of this report. It would be premature
at this stage to set out what may or may not come out of those
wider discussions across Government.
4. This response is structured to aid the reader
by addressing the points made in the conclusions and recommendations
to the report in a thematic way; the thematic arrangement will
be as follows:
- Background to the Inquiry and
Governance Issues
- Financial and Tax Issues
- Regulation, Audit and Pensions
- Issues specific to Defra
5. It should be noted that this response covers some
policy areas that in Scotland, Wales and Northern Ireland are
the responsibility of the Devolved Administrations, and others
that are not devolved. Full consultation has been made with all
Devolved Administrations in the preparation of this response.
In relation to the references in this report to the Financial
Services Authority, it should also be noted that the Chancellor
of the Exchequer, in his Mansion House speech on 16 June 2010,
outlined the proposed reform of the institutional framework for
financial regulation. The new regime will be in place by 2012.
The FSA will be working closely with Government to determine the
future arrangements for its mutuals' registration function.
Background to the Inquiry and Governance Issues
6. The Government accepts that upholding open, honest
governance, maintaining clear communication with shareholders,
and ensuring that board members have the training necessary for
the decisions they have to make, are factors that are essential
to sustainable co-operative organisations, and that taken together,
these represent a standard of good practice that all co-operatives
should aim towards.
7. The Co-operative and Community Benefit Societies
and Credit Unions Act received Royal Assent on 10 April. The Government
is currently considering how and when it should be implemented.
The Government intends to explore further how the legislative
and regulatory framework to which co-operatives are subject can
be further enhanced and modernised.
8. The Legislative Reform (Industrial and Provident
Societies and Credit Unions) Order 2010 (LRO), due to come into
force later this year under Section 1 of the Legislative and Regulatory
Reform Act 2006, and other ongoing activities across Government
(many of which are referred to later in this report) will also
aid the building of confidence in the operation of co-operatives.
9. The Financial Services Authority (FSA) is facilitating
the development of a Code of Best Practice, with Co-operatives
UK taking a lead role. The aim of the Code will be to uphold the
integrity of the co-operative brand through the development of
requirements for governance. This development will be of far-reaching
impact for co-operatives in all sectors, not just those in agriculture,
and will require a broad strategy to be developed, aimed at putting
appropriate regulatory structures in place, with a particular
emphasis on governance issues. Defra is fully engaged in this
cross-Government process, and the partners with which Defra and
FSA will be working in order to elaborate the Code are Co-operatives
UK, English Farming and Food Partnerships and the Scottish Agricultural
Organisation Society. Further participants may be invited to join
the group once a broad outline of the Code has been agreed.
Financial and Tax Considerations
10. The Government recognises the importance of issues
concerned with the raising of capital for the future well-being
of the co-operatives sector, and Defra will work with the Department
of Business, Innovation and Skills, HM Treasury and others to
identify ways in which methods of capital raising might be clarified.
The provisions of the LRO which, as noted in paragraph 8, is due
to come into force later this year (2010) will support this aim.
11. The Government will continue to keep all taxes
under review but does not believe the tax system disincentivises
investment in agricultural co-operatives. The starting point for
the calculation of taxable profits for any business is the profits
computed in accordance with Generally Accepted Accounting Practice
(GAAP). Where GAAP requires the full amount of sales to be recognised
as income, irrespective of whether some of the proceeds are retained,
the income tax rules follow GAAP and include the full amount of
sales in arriving at the taxable trading profits. This treatment
is not confined to agricultural co-operatives and applies in any
case where a trader operates under arrangements like the ones
used by Dairy Farmers of Britain. Consequently, the tax system
provides equitable treatment to businesses operating in similar
ways; providing special treatment to agricultural co-operatives
would raise state aid concerns.
12. The position regarding the losses of members
is set out in HMRC's guidance published in February 2010 in Revenue
and Customs Brief 05/10 http://www.hmrc.gov.uk/briefs/income-tax/brief0510.html
On the basis of the information available to HMRC, there are no
grounds for altering the view that the value of the shares at
the time they were received was nil. As the Brief states, HMRC
remains open to receiving any new information that might have
a bearing on the issue. The Exchequer Secretary to the Treasury
has been made aware of the position.
13. A power was taken in the Enterprise Act 2002
which would allow the "rescue" procedures of the Insolvency
Act 1986 to be extended to Industrial and Provident Societies
(IPSs). To date this power has not been exercised; a further consultation
document on this may follow in due course.
14. Section 55 of the Industrial and Provident Societies
Act 1965 applies the Insolvency Act 1986 to IPSs, but with limitations.
As the law currently stands the administration procedure does
not apply to IPSs. This gap in the law can be resolved by exercising
the powers at section 255 of the Enterprise Act 2002, which allows
company insolvency law to be applied to IPSs.
15. The LRO will enable modifications to the provisions
on minimum age for membership of an IPS and minimum age for becoming
an officer of an IPS, the rules on share capital. It will modify
the provision on fees for copy of the society's rules, it will
facilitate easier dissolution of registered societies, it will
give societies the flexibility to choose their own year-ends and
remove the requirement on societies to have interim accounts audited.
All of these changes will enable co-operatives to maintain their
core aim of operating for the benefit of their members, which
is the essence of what it is to be a co-operative.
16. The LRO, currently before Parliament, is part
of continuing work across Government in modernising the regulatory
and legislative framework for the mutuals sector.
Regulation, Audit and Pensions
17. The Legislative Reform Order will, amongst other
key changes, change the maximum holding in co-operatives and will
also enable the Directors of a co-operative to be held responsible
for the actions of the co-operative; this change in the law will
increase public confidence in the operation of co-operatives.
18. The Government has considered carefully the Committee's
recommendation that Defra establish a task force with the remit
of investigating ways to overcome constraints on capitalising
UK agricultural co-operatives. The Government sees considerable
value in addressing the issue highlighted by the Committee, and
accepts that establishing a task force could be a means of doing
so. However a task force is not the only option.
19. The Government is committed to promoting the
mutuals more widely across both public and non public services
and is exploring how this can be achieved most effectively, including
issues of capitalisation within the sector. The Government intends
to examine ways of overcoming constraints on capitalising UK co-operatives,
including agricultural co-operatives, within this wider context.
20. The Government has recognised that the process
for obtaining copies of documents relating to IPS needs modernising,
and a project has already commenced to address this.
21. The FSA are working to phase in a web based document
retrieval service that will allow the public to purchase and download
documents online that pertain to IPSs in a similar manner to Companies
House online document download facility; this will enable important
documents such as accounts to become accessible for a fee.
22. The FSA has no promotional or supervisory role
for co-operative societies and its functions in relation to societies
are limited to their registration under the Industrial & Provident
Societies Act. The Act does not define a co-operative, so the
FSA must look to representative bodies such as Co-operatives UK
to assist it in determining the essential characteristics of a
qualifying co-operative and in developing the best practice for
their governance. In this way, the FSA is able to reflect the
views of the co-operative movement.
23. Legislation on the Pension Protection Fund (PPF)
is contained for the most part within the Pensions Act 2004 and
supporting regulations.
24. The policy objective is that schemes eligible
for the PPF are required to pay the pension protection levy and
the PPF administration levy, and that entry into the PPF is considered
when eligible schemes have had a qualifying "insolvency event"
as defined in section 121 of the Act and regulation 5 of the PPF
Entry Rules Regulations 2005.
25. Regulation 5(1) (b) sets out when an insolvency
event may occur in relation to a "relevant body". Regulation
5(2) sets out that the term "relevant body" includes
a society which is registered as an industrial and provident society
under the Industrial and Provident Societies Act 1965.
26. Under regulation 5(1) (b) an insolvency event
can be:
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(i) |
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any event listed within section 121(3) of the
Act which occurs by virtue of the application of the Insolvency
Act 1986 by or under any other enactment; or |
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(ii) |
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an administration order that places the management
of the relevant body into the hands of a person appointed by the
court by virtue of any enactment that applies Part 2 of the Insolvency
Act 1986. |
27. Section 255 of the Enterprise Act 2002 contains
an order-making power which could be used to apply parts of the
Insolvency Act 1986 to registered industrial and provident societies.
Such an order has not been made to date. As the law currently
stands, the administration procedure does not apply to IPSs. But
this can be resolved by exercising the powers as referred to above
within section 255.
28. Under regulation 5(1) (e) dissolution of an industrial
and provident society by consent of the members under section
58 of the Industrial and Provident Societies Act 1965 would also
be a qualifying insolvency event. The question of whether a qualifying
insolvency event has occurred and an individual scheme is eligible
can only be determined by the PPF in the light of all the circumstances
at the appropriate time.
29. With regards to the question of simplifying exit
from the receivership procedure, the relevant sections are sections
55 and 58 of IPSA 1965, which give rise to the administrative
problem that for any dissolution the consent of three quarters
of the members of the society is required, testified by their
signatures. An industrial and provident society cannot appoint
an administrative receiver within the meaning of the Insolvency
Act (and the Enterprise Act does not allow provisions on receivership
for companies to be applied to industrial and provident societies
s), but exercise of section 255 powers would enable application
of the administration procedure for IPSs. Such a procedure is
gradually replacing receivership for companies and would probably
constitute a valid alternative to receivership for IPSs as well.
Issues specific to Defra
30. UK dairy Co-operatives are indeed young compared
to many European or global examples but they were also formed
and funded under different trading conditions. The current issues
of governance, capital-raising, the legislative framework and
more besides go much wider than Defra's remit, so would require
a more expansive approach. There have already been meetings involving
representatives of UK Co-operative associations and government
departments, where these issues have been raised and we will be
encouraging these discussions to continue so that conditions in
which Co-operative trade are as equitable as possible.
31. Defra has, for some time now, encouraged the
dairy industry to restructure and consolidate to become more market
oriented and balance supply to meet market demands in the most
efficient manner possible (reduce surplus production). However,
the markets of mainland European and New Zealand should be compared
cautiously with the UK in competition terms. Discussions in the
European Commission's High Level Group on Milk have established
there are clear differences between Member States' understanding
and therefore interpretation of competition law. There appears
to be confusion around determining 'the relevant market' for (consolidating)
businesses and therefore whether they would have a dominant share.
The relevant market is determined according to many variable factors,
for example: the nature of product being marketed (raw milk for
drinking, raw milk for general use, value-added products, commodity
products); geographical & time (freshness) restrictions; socio-economic
(trade) conditions.
32. The UK dairy market is restricted by geography
and socio-economic factors to some degree, especially for milk
intended for drinking. The market has already consolidated more
than in most European countries and has many dedicated supply-chain
agreements where milk-swaps cannot be done, leaving swaps for
lower value including commodity trade only. There are fewer 'natural'
restrictions to trade across mainland Europe making it a more
open market than the UK experiences. New Zealand exports over
90% of production to the global market and the dominant company
has to observe tight marketing controls (notably on the internal
market) to avoid abusing their status.
33. The High Level Group report (released 15 June)
invites the European Commission to provide producers with greater
clarity on the scope of the relevant market for their sales of
raw milk to processors. The report also requests a special exemption
(within agricultural law) from competition law to make it clear
that producer-groups can be established and negotiate (including
price) with processors.
34. When considering consolidation in the UK, it
should also be noted that the Office of Fair Trading raised no
objections to the proposed 2007 merger of First Milk and Milk
Link. This demonstrated competition (law) does not inhibit the
potential for rationalisation within acceptable parameters (market
share, dominant positions or abuse thereof). Despite this favourable
view which demonstrated how competition law can already promote
collaboration to achieve efficiencies and increase competitiveness
of the sector, the two co-operatives decided not to complete the
merger.
35. The High Level Group on Milk has also discussed
the dairy industry becoming more market oriented—balancing
supply to consumer demand. So far as the United Kingdom is concerned
this means moving away from the old marketing-board set-ups (which
kept farm gate prices artificially high) and includes seeking
new behaviours in co-operatives. They both have a tradition of
taking every litre of production from their members at the same
price—whether or not they have a market for that milk. That
surplus tends to be marketed as cheap commodity products for which
demand and price are generally lower with many sales made on wider
European or global markets (where prices are usually lower) so
overall profitability and competitiveness are dragged-down.
36. Further rationalisation of businesses in the
UK dairy industry may well not inhibit competition—depending
upon the market concerned—but this has already been possible
and not completed as described above. Whilst the dairy industry
does operate on a European or global scale, the UK industry markets
its high-value drinking milk and most speciality products on the
internal UK market. To become more competitive the UK industry
could look to re-balance exports (of mainly cheap commodity products)
and imports (of high added-value speciality products) as well
supply to market demand more generally.
37. Defra has been engaging stakeholders actively
through the Dairy Supply chain Forum (DSCF) Sub-Group handling
our reaction and input to the High Level Group. As part of this
work Defra commissioned a report by EFFP in January 2010 to explore
contracts and discussions show significant consensus on most elements
including coverage of one or other party running into serious
trading difficulty or other unforeseen events. This work shows
that improved contracts could be used to balance risk more equitably
whilst still encouraging innovation and promoting competitiveness
by establishing more transparent trading conditions which should
give confidence through the supply chain for long-term planning.
The sub-group is still exploring how best to allow parties the
opportunity to terminate contracts within a reasonably short time-frame
where trading terms or conditions change substantially.
38. There is however a delicate balance between welcoming
potentially positive features in contracts and becoming too prescriptive
so that contracts inhibit reactions to market signals or the natural
progression of businesses to more efficient and competitive states.
The DSCF stakeholder sub-group focussed on the key issues of balancing
'variations' clauses (notably price change) and related 'terminations
of contract' to ensure all parties interests are represented reasonably.
39. In the light of the work on contracts in the
High Level Group and in the DCSF sub-group, and the wider work
across government on Co-operatives that Defra is engaged in, we
do not propose to report back further in 12 months but will update
EFRA Committee later in the year on any developments.
40. Defra welcomes the Committee's commendation of
the positive response and actions immediately following the collapse
of DFB. The co-operation between Government and devolved administrations
and others that happened immediately following the announcement
on 6th June 2009 was effective and we would seek the
continuation of that close working.
41. Defra does not believe the Commission would have
looked favourably on a request to extend the deadline for compliance
with the slurry storage requirements for a further year for dairy
farmers as this would, in effect, have removed the requirement
from the current NVZ Action Programme for this sector.
42. The UK's case for derogation from the Livestock
Manure Nitrogen Farm Limit was based on evidence showing that,
on the assumption that dairy farmers complied with all Action
Programme requirements, the derogation would not have a detrimental
environmental impact.
43. It is likely that the Commission would have seen
any attempt to extend the deadline further beyond the three year
adjustment period previously negotiated as insufficient to meet
our obligations under the Nitrates Directive and, if so, that
would risk jeopardising our ability to successfully negotiate
an extension to the derogation from 2013.
44. The derogation is estimated to reduce the costs
to the dairy sector of complying with the Nitrates Directive by
up to 50% and has so far benefited 453 farmers who successfully
applied in 2010.
45. In order to provide the best possible service
to both former DFB members and the wider 2009 Single Payment Scheme
(SPS) claimant population, RPA focussed on making full payments
at the earliest possible date. As a result, RPA was able to pay
80% of 2009 SPS claimants a total of £1.31 billion within
two days of the payment window opening on 1 December and met its
formal payment targets five weeks ahead of schedule. Mindful of
the specific pressures felt by former DFB members, their claims
were prioritised where possible and 84% were paid in the first
payment run. However, there is still work to do with the RPA and,
in order to grip this issue and provide the necessary political
leadership, the Minister of State for Agriculture and Food will
in future chair the RPA Board.
In conclusion
46. The Government recognises the importance of the
UK dairy sector. It is the single largest agricultural sector
in the UK, and accounts for 18% of agricultural productivity.
Defra is keen to promote the development of a profitable, innovative
and competitive dairy industry.
47. Defra believes that co-operatives have an important
role to play in improving productivity and competitiveness of
farming, and is committed to participating actively in current
discussions involving other Government departments which will
enable them to perform that role effectively.
48. It is not for Government to determine what business
model farmers and others should follow, but it is the Government's
objective to ensure that the legislative and administrative framework
in which they operate is fit for purpose.
49. Across Government many pieces of work relating
to the regulatory, legislative and practical operation of co-operatives
are underway. Defra, along with other lead departments, will be
taking careful note of the lessons learned from the collapse of
DFB, and will be putting these lessons into effect as part of
its efforts to achieve an enhanced and more sustainable co-operatives
sector.
Department for Environment, Food and Rural Affairs
July 2010
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