3Future financial uncertainties
17.The accounts provided with Defra’s Annual Report identify policy areas within its remit where potential future financial liabilities may fall, including possible costs arising from infringements of EU rules and regulations, relating primarily to the CAP and resultant fines (known as disallowance penalties). It takes some time for such infractions to translate into specific fines on Defra or its delivery organisations, so some liabilities already incurred are not quantifiable at this stage. Nonetheless, these penalties are potentially substantial and there is a strong imperative on Defra to develop policies to achieve compliance at the earliest point.
Disallowance penalties: Common Agricultural Policy
18.Disallowance penalties arise when the EU Commission considers a Member State has not taken action to control and administer CAP payments in a manner compliant with scheme rules. Although Defra has overall responsibility for managing disallowance, its delivery partners play a key role: the Rural Payments Agency (RPA) pays out all Pillar 1 and part of Pillar 2 funds, and Natural England together with the Forestry Commission administer most of Pillar 2.
19.The National Audit Office (NAO) noted in its report on Managing Disallowance that the UK ranks sixth highest of all 28 Member States in incurring disallowance penalties (as a proportion of total funds each receives). Disallowance has cost the UK some £642 million since 2005 in lost CAP funding.25 The NAO has qualified Defra’s accounts over a number of years because of disallowance: the 2014–15 accounts are again qualified in relation to £90 million of penalties since these represent a “material loss to the Exchequer”. The latest Accounts assume a continued provision for disallowance is needed beyond 2014–15, while noting that the amount is uncertain and unquantifiable until EC audits are completed.26
20.The NAO also notes that both Defra and the RPA expect “further increases in disallowance” owing to a more complex CAP, more stringent flat-rate penalties, more audits by the EU with more controls, and more attention to the hitherto less-audited Pillar 2.27 The NAO’s Early review of the Common Agricultural Policy Delivery Programme notes that successful delivery of the programme would have contained disallowance at 2% of total scheme value, or £44 million each year. However, the review concludes that disallowance penalties for the early years of the new CAP could be as high as 10% due to a combination of changes to the way the EU calculates penalties, delays in the RPA implementing its Land Management System, and an increased risk of error arising from the reversion to a paper-assisted digital approach for 2015.28
21.CAP simplification is a stated aim of both Defra and the EU’s Agriculture Commissioner, Phil Hogan, but the new scheme, under which English farmers started in December to receive their first payments, is widely acknowledged to be more complex than its predecessor. A mid-term review of the new CAP, including its complex ‘greening’ rules, is due to begin in 2016.
22.The new Common Agricultural Policy has a highly complex set of rules to which farmers and government agencies must strictly adhere if EU funding is not to be jeopardised. This complexity means that there is a high likelihood of further disallowance penalties being incurred which will be payable by Defra in future years. It is essential that Defra continues to press the EU for simplified CAP arrangements, including a more effective set of rules which minimise financial risk and deliver the optimum outcomes for farmers, food supply and the environment.
23.Our predecessor Committee reported a number of times during the last Parliament on difficulties with payments to farmers under the previous CAP as well as new problems with the IT systems intended to process Basic Payment Scheme claims. We have questioned Mark Grimshaw, RPA Chief Executive, closely on the latter issue,29 and he and the Secretary of State have expressed confidence that most payments will be made in the December payment window and the vast majority of payments would be made by the end of January. The RPA reported that some 33,000 farmers in England received their 2015 Basic Payment Scheme claim in full on 1 December, the first day of the payment window. Farming Minister George Eustice MP also told us on 5 November that the payments from the EU’s aid package for the dairy and other sectors would be made from 16 November, two weeks ahead of schedule.30
24.We welcome the commitment from Defra and the Rural Payments Agency to making CAP payments to farmers promptly and the promising start made in December to paying 2015 Basic Payment Scheme claims, but in view of long-running problems with such payments, we will continue to monitor over the coming months the performance of the Agency and its new IT claims processing systems.
Fines for infringements of EU water and air quality regulations
25.Defra’s Secretary of State is responsible for achieving emissions levels of various air pollutants under EU Directives and the Department co-ordinates assessment and air quality plans for the UK as a whole. Nitrogen dioxide is one of the main pollutants causing health problems on which a number of EU Member States are failing to meet EU emissions standards. Member States were required to prepare adequate plans to reduce by 2010, or 2015 at the latest, concentrations in outdoor air to acceptable levels.31 The UK failed to do so. Currently, Directive limits for nitrogen dioxide are not being met in 38 of the UK’s 43 air quality zones, including Greater Manchester and Leeds. In London, the limits will not be met until after 2025. Defra has drawn local authorities’ attention to the provisions in the Localism Act 2011 which could be used to require responsible authorities to pay all or part of any infringement fines incurred by the UK under this Directive.32 In April 2015, the Supreme Court ordered the Secretary of State to make plans by the end of 2015 for tackling the UK’s air pollution problem which would enable EU standards to be met. Defra is consulting on approaches ahead of the Supreme Court deadline.33
26.We have announced an inquiry into air quality issues in view of the health and environmental impacts of air pollution. In that we will assess not only whether Defra’s plans are adequate for meeting specific nitrogen dioxide limits so as to avoid wasting potentially significant sums of public money in paying EU fines, but also whether the Department has a sufficiently robust policy for reducing air-borne pollutants to levels that safeguard health and the natural environment.
27.The Urban Waste Water Treatment Directive requires EU Member States to ensure that agglomerates (towns, cities, settlements) properly collect and treat their urban waste water.34 Untreated waste water can be contaminated with harmful bacteria and viruses and can contain nutrients such as nitrogen and phosphorous which damage fresh and marine waters. In March, the European Commission announced it was referring the UK to the European Court of Justice over its failure to ensure that urban waste water is adequately treated in 17 agglomerations, despite deadlines for various categories having elapsed in 1998, 2000 and 2005 respectively. The Commission considers spill rates remain too high with compliance not foreseen before 2020.35 Defra told us that “innovative and environmentally positive sustainable urban drainage solutions” were now being implemented. However, risks to urban drainage may be increasing owing to more intense and more frequent rainfall and, in some locations, to increased population sizes and larger areas that have been built over.
28.If the UK is held to be in breach of the Directive, Defra could be required to pay a large lump-sum fine plus daily fines. This possibility is listed in Defra’s Annual Report as a contingent liability which is “unquantifiable due to its variable nature”.36 The EU Court of Justice has not specified the level of fine that the UK could incur; by way of illustration, Belgium was fined £8.5 million plus a fine of £734,533 for every six-month period of further delay for breach of the Directive in October 2013.37
29.Defra’s policies must not only ensure compliance with current EU rules for environmental standards but be future-proofed against coming challenges. Robust policies and adequately funded programmes are needed to tackle air and water pollution and to minimise the risk of being fined huge sums by the EU. Incurring large fines at a time of reducing budgets prejudices the delivery of vital services and is completely unacceptable since it removes money from delivery of vital services.
25 Report by the Comptroller and Auditor General, Defra and the RPA: Managing Disallowance Risk, HC 306
26 Department for Environment, Food and Rural Affairs, Annual Report and Accounts 2014-15, HC 30, pp56,57
27 Report by the Comptroller and Auditor General , Defra and the RPA: Managing Disallowance Risk, HC 306
28 Report by the Comptroller and Auditor General, Early Review of the Common Agricultural Policy Delivery Programme, HC 606
29 Evidence by Mark Grimshaw to the Environment, Food and Rural Affairs Committee inquiry into the Common Agricultural Policy, 19 September 2015, HC 405, Q1
30 Letter from George Eustice MP to Chair of the EFRA Committee, 5 November 2015
31 Council Directive 2008/50/EC on Ambient Air Quality and Cleaner Air for Europe
32 Letter to local authorities published on www.gov.uk website in reference to air quality (accessed December 2015)
33 Defra, Draft plans to improve air quality in the UK: Tackling nitrogen dioxide in our towns and cities, September 2015. These are considered under the Committee’s Air quality inquiry, HC 479
34 Council Directive 91/271/EEC of 21 May 1991 concerning urban waste-water treatment
35 “Environment: Commission refers the United Kingdom to Court over poor waste water collection and treatment”, European Commission press notice, 26 March 2015
© Parliamentary copyright 2015
Prepared 14 December 2015