Environment, Food and Rural Affairs CommitteeWritten evidence from the Department from Environment Food and Rural Affairs

This memorandum provides the Committee with background information relating to the Common Agricultural Policy (CAP) and the Government’s approach to implementation in England.

Executive Summary

A new European Union (EU) CAP deal has been almost finalised, but negotiations on the detailed Implementing and Delegated Acts continue, to be completed in 2014.

Implementation in the UK is a devolved matter. In England we plan to implement the new CAP as in ways which are simple, affordable and effective as possible. We have learned the lessons of previous rounds of CAP reform.

We are working closely with those interested in the new CAP to implement it in England, in line with the principles identified by the Farming Regulation Task Force.

We are developing a new IT system to support the implementation of the new CAP. Progress to date has been good and we are engaging with users of the system to develop a system that is intuitive and easy to use.

Many factors affect the competiveness of English farmers not just the level of Pillar 1 Direct Payment.

We are planning to submit our proposals for the new Rural Development Programme to the European Commission in the first quarter of 2014.

We have already published Status Reports on Direct Payments and the next Rural development Programme in England.

Introduction

2.1 Defra led for the UK on the EU negotiations on the new CAP, working closely with all Devolved Administrations. As EU negotiations draw to a conclusion, Defra is increasing the emphasis on how the new CAP is implemented in England. The Devolved Administrations are similarly looking at how they will implement the new CAP.

2.2 Defra is responsible for negotiations at UK level, for the development of implementing policies and regulations in England and for the development of the supporting delivery mechanisms including the necessary IT systems, administrative and inspection functions.

2.3 The outcome of negotiations did not move the CAP anything like as far as the UK wanted in the direction of reform. From a UK perspective, the CAP should be about helping the EU agriculture sector to become more competitive and market-oriented whilst providing environmental public goods that the market does not reward. Nevertheless, Defra is aiming to implement the deal in a way which is as simple, affordable and effective as possible.

2.4 In August we published two Status Reports, one on the new Rural Development Programme in England1 and one on Direct Payments.2 The former presented an update on developments with some factual background on Rural Development Programme (RDP), whilst the latter we provided a summary of what has been agreed about the new direct payments system and set out our approach to implementation in England.

2.5 Defra wants to see a competitive farming industry that faces less red tape, takes advantage of export opportunities and is less reliant on public subsidy. Over the next seven years the UK is expected to receive about £17.8 billion under Pillar 1 on direct subsidies and £1.84 billion under Pillar 2 on the environment and rural development (subject to confirmation, both figures are 2011 prices). Where Defra has greater discretion on how CAP money is spent, we need to make sure it is spent efficiently, in the right places and where it adds greatest public value. Whatever decisions are taken on the implementation of the CAP, and specifically in relation to the potential transfer of money from Pillar 1 to Pillar 2, the majority of CAP payments will still be to farmers through the Pillar 1 Direct Payment Scheme.

2.6 The next CAP can make a significant contribution through rural development funding to improving the environment, investing in farming competitiveness and growing the wider rural economy in England.

Negotiations on the new EU CAP

UK Reaction to the European Commission’s original proposals

3.1 While Defra felt the Commission had identified the right challenges in its Communication of 2010—the need to increase agricultural productivity to meet growing world demand for food and at the same time reduce environmental impact—we were disappointed at the lack of ambition the Commission showed in the package of CAP proposals published on 12 October 2011. The UK did not see how the initial proposals would address the objectives the Commission had identified.

The outcome to date from CAP negotiations and remaining stages

3.2 This was the first CAP Reform to be co-decided with the European Parliament (EP), following the entry into force of the Treaty on the Functioning of the European Union (Lisbon Treaty).

3.3 After months of detailed negotiations, the Council of Ministers, European Parliament (EP) and European Commission agreed a new CAP deal in principle in June 2013.

3.4 At the time of the June deal, MEPs had insisted that agreement was still outstanding on elements of the CAP package linked to the EU Budget agreement in February 2013. These outstanding issues were discussed and resolved with minimal changes to the CAP package in September 2013. The EP is now expected to vote on the CAP package in mid-November followed by final approval from the Council of Ministers in December 2013.

3.5 CAP implementing legislation will follow from the European Commission; to be agreed by in the first half of 2014. This legislation will provide the detail to the main CAP regulations agreed this year. The full CAP package will take effect from 2015 with the sCMO coming fully into effect before then in 2014. A transitional regulation for 2014 is being agreed in parallel with the main CAP regulations and will also be subject to final approval in December 2013.

3.6 The UK negotiated hard to secure a final outcome on the CAP regulations that overall was a significant improvement on the Commission’s original proposals. However, it is still very disappointing and does not move CAP anything like as far as we’d have wanted in the direction of reform.

Approach to Implementation

4.1 Many scheme rules are set out in the EU regulations and we have no choice other than to follow them. However there are aspects where we have options on how we implement elements of CAP. Where there is scope to do so, Defra is aiming to implement the new CAP in England in ways which are simple, affordable and effective. Simplicity for those applying for CAP funding as well as for our delivery bodies administering the systems will not only be more efficient but will also help reduce the risk of disallowance. Defra’s approach to implementing the revised CAP is intended to meet wider government better regulation commitments and to minimise as much as possible the potential burdens on CAP customers.

Lessons learned

4.2 Defra is determined to learn from and avoid repeating the mistakes of 2005, when policy choices were made that did not work well on the ground. This caused unnecessary uncertainty and delayed payments to a significant number of farmers and ultimately cost the taxpayer dearly in EU fines.

4.3 We have reviewed the recommendations from the multiple reports that looked in detail at the 2005 implementation to make sure we understand what went wrong then and to ensure it does not happen again. We have identified six themes that run through the problems in 2005 that we continuously monitor. These are:

(a)Ensuring policy is deliverable on the ground and striving for early certainty where it is possible to minimise the effect of policy uncertainty;

(b)Ensure shared understanding of requirements and new policies from the outset between policy makers and delivery bodies;

(c)Maintaining continuity of key people and expertise;

(d)Introduce clearer accountabilities and responsibilities between Defra, RPA and other delivery partners;

(e)Better use of programme risk management to ensure all risks and issues can be monitored, managed and correctly reported on; and,

(f)Ensure that lines of communication between Defra, agencies and Stakeholders are clear.

Timeline

4.4 Key stages in the coming months include the following, which may be subject to change:

Autumn 2013—formal consultation on the overall shape of CAP implementation, inter-pillar transfer, etc.

31 December 2013—notify the European Commission of the level of Pillar 1 to Pillar 2 transfer we propose.

January 1, 2014—revised Single Common Market (sCMO) regulation will come into force.

Quarter 1 2014—submit Rural Development Programmee (RDP) programme document to the European Commission.

Quarter 2 2014—European implementing regulations finalised.

Summer 2014—release 1 of IT system.

Autumn 2014—European Commission approve the RDP programme document.

December 2014—domestic Statutory Instruments in place.

January 2015—bulk of new CAP implemented.

4.5 Beyond January 2015, we will be looking ahead to the next round of CAP negotiations; in particular, what can be done to help ensure a better set of Commission proposals for the next CAP regulations that will take effect after 2020.

Stakeholder Engagement and Consultation

5.1 We are committed to the principles of co-design and early involvement by working with the interested parties on the best ways to implement the various elements of CAP. Consulting widely and engaging openly with the farming industry and other interested groups will help ensure we make the right decisions for customers and the public purse. This will also help us ensure we don’t repeat the mistakes of 2005. We have sought to listen to the widest variety of views on CAP Reform during EU negotiations and have maintained this approach as we prepare for implementation in England.

5.2 Our approach addresses recommendations from the Farm Regulation Task Force. For example, we have been working closely with the farming organisations, our delivery bodies and other interested parties on the development of proposals on the implementation of the Direct Payment Schemes and the new environmental land management schemes.

5.3 The openness of our approach does not mean everyone with an interest in the new CAP will agree on everything. There will undoubtedly be strong and divergent views, as there were during the negotiations. There will be difficult decisions. Some elements of the new CAP will increase complexity and it is important that we minimise these where we can.

5.4 The Secretary of State, other Ministers, and officials have engaged directly and frequently with the farming industry and other interested groups. Defra has held several events in recent months, attended by Ministers, to hear first-hand from a broad range of interested groups on their thoughts about CAP implementation. These events have been informative and have helped to shape the formal public consultation. For example, Ministers took account of views expressed in deciding to consult on as much of the CAP package as possible at this stage, and in framing the consultation questions.

5.5 CAP touches a wide range of agricultural, rural, environmental and other interests. Defra and its delivery bodies are working closely together to ensure a coherent and consistent approach to engaging with this wide range of interested groups and individuals, drawing on the expertise and understanding shared between the organisations. At a practical level, the relevant teams meet monthly to plan activity.

Consultation on the implementation of CAP reform in England

5.6 We will consult formally on the implementation of CAP shortly. Our intention is to make the consultation as comprehensive as possible to help interested parties to reach an informed view on interrelated issues. In some cases the Government already has a clear view on the way forward, or has already had to make decisions due to the long lead time for implementing aspects of the schemes or the need for farmers to have certainty. In these cases the consultation document will set out what we have decided. In other areas we will be seeking views in order to make the best informed choices.

5.7 There are some constraints that affect the timetable for consultation. We need to notify the Commission formally by 31 December 2013 on whether and to what extent we wish to transfer funds from the CAP budget for direct payments (Pillar 1) to fund rural development (Pillar 2), which is part of this consultation.

5.8 There are some detailed issues on which it would not be sensible to reach a view until we have more information from the European Commission about the application of the rules. We plan to engage closely with stakeholders on these issues as the details from the EU processes emerge.

5.9 The consultation is part of a much broader approach to engagement with interested parties.

5.10 With the consultation we propose to publish an analysis of the main impacts of the new CAP. This will include evidence on the impact of the decisions to be taken, but also considers the value for money for tax payers, and the costs to consumers of CAP as a whole.

Progress with Developing the CAP IT System

6.1 Defra is aiming to improve customer service and value for money and reduce disallowance risk through developing a new single online CAP application and payment system, ready for scheme year 2015. While the CAP negotiations have been underway the CAP Delivery programme has been able to continue development of the system as it is being built it in a flexible way that will allow us to integrate any changes in implementation as they occur.

6.2 The programme has been consulting with interest groups from to understand user needs and inform the development of a system which is easy to use and intuitive. Fortnightly user research is carried out with farmers, land managers, agents and future applicants, who provide feedback on iterations of the system as part of continuous improvement to the design and functionality. The programme is also more broadly engaging stakeholders, individually and via established consultative groups, customers and staff to get ready for the shift to both this new system and new schemes.

A digital service

6.3 In line with the government’s digital agenda, the new CAP service is designed to be “digital by design”. The programme recognises in the early days of the new service, customers will require support to cope with a lot of change and some may have a “genuine need” to assisted digital entry. The programme is listening to stakeholders’ concerns about the digital by design approach given shortfalls in rural broadband coverage and is working with them and the Government Digital Service to encourage digital uptake and to formulate options for those who genuinely can’t access the new system; these may include a role for telephone channels and utilising delivery body advisers. The Secretary of State will take the final decision on which options are available.

Developing the new system

6.4 The programme has reduced delivery risks and the costs of development by integrating existing tried and tested CAP software where available with bespoke development where needed. This includes the procurement of a system which is used across three European countries and manages 2 million farmers’ CAP payments. This system will meet some of the development needs, is compliant with the requirements of the current CAP regulations and has not resulted in any disallowance costs. The contract for the Scheme Accounting and Payment function has been awarded to Hitachi.

6.5 The first piece of completed development is a Rural Land Registry (RLR) map viewer, due to be released to RPA customers in November. This is aimed to encourage customers to make the transition to online systems. The build is now focusing on development of the CAP services screens and the process for customer registration which will be ready for release in summer 2014. Other workstreams are delivering the migration of customer data, business transition and integration with existing systems that will be required.

Pillar 1 — Market Measures

7.1 The Single Common Market Organisation (sCMO) regulation lays down rules for the common organisation of agricultural markets. Market measures set out in the sCMO regulation include the tools used to provide a safety net at times of market crisis inside the EU, trade and competition rules, quota systems, specific marketing standards that apply to certain sectors and/or products, individual aid schemes and the promotion of producer organisations (POs) and inter-branch organisations (IBOs) that operate more widely than POs by working along the supply chain. The safety net includes intervention, export refunds, private storage aid and the provision of a new crisis reserve. The quota systems in the sugar and wine sectors will now be in place for extended periods.

7.2 In most cases, the new sCMO regulation updates existing provisions rather than representing a radical reform, however several of the changes that have been made rollback previous CAP reforms and went against the Lisbon Treaty in transferring additional powers to the EP. At Agriculture Council in June 2013 the UK and Germany could not support the sCMO regulation due to the amendments that had been made in order to reach a compromise with the European Parliament. The UK and Germany therefore abstained in the sCMO vote to enable agreement on the overall CAP package.

7.3 The revised sCMO regulation will:

Maintain an effective safety net for EU farmers, by simplifying and updating existing systems of public intervention and private storage aid.

Bring an end to the EU sugar quota regime on 30 September 2017.

Introduce new crisis management tools, including the provision of a crisis reserve.

Largely maintain existing trade and competition rules.

Provide Member States with the option to extend the formation of POs and IBOs in all sectors, including an additional facility for POs to collectively negotiate contract terms in the olive oil, arable crops and beef and veal sectors only.

Maintain the current approach to marketing standards (although the Commission now has delegated powers to adopt additional marketing standards in future subject to an impact assessment).

Introduce, as from 2016, a new planting-authorisation management mechanism in the wine sector with a fixed planting limit of 1% for vines per year (although the UK will continue to be excluded from these restrictions).

7.4 The sCMO regulation is directly applicable in the UK. However, there are 2 key provisions in the regulation where Member States can decide what approach they wish to take: whether to extend formal recognition of POs to all sectors, and whether or not to make it compulsory for farmers to have written contracts with processors or distributors. At this stage the Government is yet to be convinced that choosing to implement either of these options would add significant value, as other forms of co-operation are already available to producers that do not necessitate them meeting requirements set by Europe, and the vast majority of domestic farmers already have a written contract with the processing company or distributor that buys their produce.

7.5 The sCMO regulation will come into force from January 1, 2014.

Pillar 1 — Direct Payments Scheme

8.1 The current Single Payments Scheme (SPS) will be replaced under CAP reform from 2015 with a new system of Direct Payments.

8.2 The Status Report on Direct Payments, referred to above, describes in detail what has been agreed in the EU, although we still await the final text of the European Direct Payments regulation which is likely to be agreed only in November. Many of the main parameters of the scheme will be defined in that regulation and in the Commission implementing regulations which will be agreed in Brussels over the coming months. This section therefore gives only an overview of the Direct Payments system, and reference may be made to the Status Report for further information.

8.3 We expect the Autumn 2013 consultation on CAP reform to include our proposals for implementation of Direct Payments, insofar as the European Direct Payments regulation affords discretion to Member States. The consultation paper will (among other things) invite views on a series of strategic Direct Payments implementation issues, including:

the distribution of Direct Payments between the lowland, uplands, and moorland regions;

how reductions should apply to the largest payments;

whether to extend the “negative list” of business types which will be ineligible to apply for direct payment; and

how to operate the young farmers scheme.

8.4 Many features of the Single Payment Scheme (SPS) will continue, but there are significant changes too. Farmers will continue to qualify to receive an annual payment if they meet the conditions defined in the EU regulations. As under SPS, the key conditions will be that the farmer holds entitlements and has eligible land at their disposal for the relevant scheme year. In the case of tenanted land in England, it will be the tenant who has the land at his disposal and therefore qualifies for the direct payment.

8.5 The amount of the payment will depend on the number, and value, of entitlements supported by eligible land. Farmers will not have to grow crops or keep livestock to be eligible for payment but will continue to have to meet the rules on cross compliance,3 which will be subject to some amendments. In addition, farmers will have to meet a new “active farmer test”, and 30% of the payment will depend on implementing greening measures (covered in the next section). There will be a system under which large payments are subject to a reduction. There is also a new scheme for young farmers.

8.6 The consultation will not cover the question of whether entitlements should be carried forward from the current scheme or reissued at the start of the new scheme, as stakeholder organisations have stressed to us importance of giving farmers a decision as soon as possible to help with business planning. We therefore plan to announce a decision on this as soon as possible.

8.7 There are a number of other issues where it would not be sensible to decide how we should implement the scheme in England until we have clarity about the detailed rules which will be defined in the implementing regulations. The Commission will be publishing their proposals for these rules in stages over the coming weeks, and we expect the implementing regulations to be agreed by Easter 2014. We will be discussing the detailed aspects of scheme design with stakeholder organisations in the first half of 2014.

8.8 These issues include a number of detailed aspects of scheme design albeit ones which will be important to the farmers concerned. They include:

Aspects of the active farmer test, particularly the definition of a minimum level of activity required on land which is “naturally kept in a state suitable for grazing or cultivation”, and the criteria by which farmers who may initially be excluded from payments by the “negative list” of activities, may prove that their farming activity is significant and hence may be readmitted to a payment.

The basis on which payments are calculated for common land.

8.9 In addition to the formal consultation in Autumn, we will continue to discuss Direct Payments implementation issues with key stakeholders in the Direct Payments Consultative Group, which meets at approximately monthly intervals.

Comparison with other Member States

8.10 As Figure 1 shows, UK farmers may receive less per hectare than some other EU Member States but they receive more per farmer than most. However, there are many factors which affect competitiveness in agriculture within the EU and the impact of differing levels of direct payments in Pillar 1 between Member States has limited effect. The factors which have a greater impact on competitiveness include natural resources, wage levels, tax and regulatory policies, and investment in innovation and training.

Figure 1

AVERAGE DIRECT PAYMENTS PER BENEFICIARY AND PER HECTARE IN EACH MEMBER STATE

(Source: European Commission)

Greening

8.11 The new CAP includes a provision that 30% of a farmer’s Direct Payment should be conditional on them meeting certain criteria intended to be beneficial to the wider environment. This is referred to as “greening”. Ministers have decided that the broad approach to greening in England should be to adhere to the agricultural practices set out in the Direct Payments Regulation and is announced as part of the consultation package.

8.12 There has been an appetite from stakeholders for early clarity on the approach to greening. Arable farmers need the information as early as possible so that they can begin to make crop plans for the 2015 calendar year. Stakeholder organisations wished for clarity to help put into context their views on such issues as the level of financial transfer between pillars of the CAP and the approach that should be taken to successor agri-environment schemes.

8.13 Two broad approaches to greening are realistically possible: the one where we adhere to the specified agricultural practices, or another based on the option to implement greening through a National Certification Scheme that includes additional measures that are equivalent to the specified agricultural practices. Ministers are minded not to choose the second approach because, although it has the potential to bring enhanced environmental benefit, we could only do this at increased cost and increased risk. There would be increased costs to farmers who chose the equivalent measures, increased implementation costs and delivery risk to delivery agencies and increased risk of disallowance as we moved away from the basic model which we expect to be implemented elsewhere in the EU. Set against this we consider that the additional environmental benefits might be small in the context of a Certification Scheme in which farmers were able to choose simpler and cheaper alternatives and so where uptake of the more beneficial options might be low.

8.14 This approach is consistent with the Government’s view that it is Pillar II of the CAP, not Pillar I initiatives such as greening, which provides the optimum mechanism to deliver the majority of environmental outcomes from English farmland.

Pillar 2 — Rural Development Programme

9.1 The Status Report on the New Rural Development Programme in England (RDP) referred to above, set out our understanding of many aspects of the RDP at that time. The new RDP provides a major opportunity to invest in the rural economy and environment. Our plan is for the new programme to begin formally on 1 January 2015. The Government’s objectives for the next programme in England are to:

Promote strong rural economic growth.

Improve the environment, including helping to ensure that by 2021 the natural environment is improved as set out in the Natural Environment White Paper.

Increase the productivity and efficiency of farming and forestry businesses, in order to improve their competitiveness and reduce the reliance of farmers and land managers on subsidies.

9.2 The new programme will be governed by a new EU Rural Development Regulation, which forms part of the new CAP package being agreed.

9.3 The Regulation outlines six broad “priorities” for the EU for rural development. Member States must aim to meet at least four of the priorities in the design of their programmes. These priorities are broken down into a number of “focus areas” under which Member States are required to identify activity for funding through their programmes. The six priorities are:

Fostering knowledge transfer and innovation in agriculture, forestry and rural areas.

Enhancing farm viability and competitiveness of all types of agriculture in all regions and promoting innovative farm technologies and sustainable management of forests.

Promoting food chain organisation, including processing and marketing of agricultural products, animal welfare and risk management in agriculture.

Restoring, preserving and enhancing ecosystems related to agriculture and forestry.

Promoting resource efficiency and supporting the shift towards a low carbon and climate resilient economy in agriculture, food and forestry sectors.

Promoting social inclusion, poverty reduction and economic development in rural areas.

9.4 The RDP must include at least 30% of EU funding on measures to protect and enhance the environment and at least 5% through the local delivery mechanism known as the LEADER approach.

9.5 Defra will manage the next RDP. A proportion of RDP funds in England will be channelled through an EU growth programme along with the EU structural funds, with Local Enterprise Partnerships determining how that funding is used. This element of RDP funding will be used specifically in rural areas for building knowledge and skills; funding new and developing micro, small and medium sized business; funding small scale renewable and broadband Investments; and support for tourism activities.

9.6 We believe that rural development offers the best use of taxpayers’ money under the CAP. It provides crucial funding that helps improve the environment, improve farmers’ competitiveness and grow the rural economy. We are already committed to spend over £2bn in the next RDP on multi-annual agri-environment and forestry agreements signed up under the current programme.

9.7 The Government believes that rewarding farmers for the environmental goods they provide is a much better use of taxpayers’ money than providing direct income support. Transferring funding to rural development would also increase the ability to deliver improvements in the productivity and longer term competitiveness of UK agriculture and to help grow the rural economy in England. We therefore welcome the flexibility to transfer up to 15% of funds from Pillar 1 to Pillar 2. This is one of the key issues that we will be formally consulting on. It is one of the factors that will determine the available budget in England, along with the allocation of CAP funds between England, Northern Ireland, Scotland and Wales.

9.8 Whatever the final budget for the next RDP we expect farmers and land-based industries will continue to receive by far the majority share of funding.

9.9 We want to improve value for money from RDP and to look for opportunities to achieve multiple objectives. We will be looking for views on how to focus the available budget. More specifically we will be seeking views on:

a new more focused and targeted environmental land management scheme. This includes the potential to integrate agri-environment and forestry offers, help meet water, biodiversity and soil objectives, and to produce more connected habitats;

how best to improve farming and forestry productivity. This includes the potential to encourage innovation, knowledge transfer, cooperation, to improve business performance and practice and improve environmental practice and efficiency; and

how to improve the effectiveness of the LEADER approach, particularly in delivering jobs and growth in rural areas.

9.10 Much of the new programme will therefore be invested in environmental schemes that deliver multiple benefits and will be supported by investment in help to farmers to be more competitive and less reliant on subsidies and investment in long term.

9.11 We plan to submit our proposals for the RDP to the Commission in the first quarter of 2014.

October 2013