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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 226-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENT, FOOD AND RURAL AFFAIRS COMMITTEE

 

IMPLEMENTATION OF CAP REFORM IN THE UK

 

Wednesday 11 February 2004

DR JAMES JONES, MR RICHARD LOLE and MR STEVE ELLWOOD

LORD WHITTY and DAVID HUNTER

Evidence heard in Public Questions 183 - 274

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 11 February 2004

Members present

Mr Michael Jack, in the Chair

Mr Colin Breed

Mr David Drew

Mr Mark Lazarowicz

Mr Austin Mitchell

Alan Simpson

David Taylor

Paddy Tipping

Mr Bill Wiggin

________________

Memoranda submitted by Dr James Jones and Barclays plc

Examination of Witnesses

Witnesses: Dr James Jones, Head of Farm Management at the Royal Agricultural College, Cirencester and a Member of the RICS Countryside Policy Panel, Royal Institution of Chartered Surveyors; Mr Richard Lole, National Agricultural Policy Manager, Barclays plc; and Mr Steve Ellwood, Head of Agriculture, HSBC Bank, examined.

Chairman: Can I welcome our witnesses this afternoon and thank them in advance for their written submissions to the Committee, they were much appreciated. For the record we have Dr James Jones, Head of Farm Management at the Royal Agricultural College, Cirencester and a Member of the Royal Institution of Chartered Surveyors' Countryside Policy Panel; from Barclays Bank, Mr Richard Lole, who is their National Agricultural Policy Manager; and from HSCB, Head of Agriculture, Steve Ellwood. Gentlemen, you are very welcome. Apologies that the usual problems with the House of Commons voting delayed us starting and we will not delay any more. I would like Bill Wiggin to start with a question.

Q183 Mr Wiggin: A nice easy one to kick off with. What effect do you think the Single Farm Payment will have on land values?

Dr Jones: This has been set out in a paper recently by Professor Alan Buckwell from the CLA. He set it out in some detail and I think you have had a copy of that paper. I would broadly support all his conclusions. I think the difficulty is it depends whether the Single Farm Payment will be a separate tradable entity, not just legally, because we know that that is going to be the case regardless of the system, but actually in practice, and it will be most effective as a tradable entity under the historic system. If we move to a regional average payment system then effectively it will not be tradable. If it is not tradable then obviously the value attached to the subsidy can only attach to the land because it is referenced against it. Under the historic system the Single Farm Payment itself can be detached from the land and has an independent value, so I think it rather depends on the system.

Q184 Mr Wiggin: Of course.

Dr Jones: I think I would broadly agree with Professor Buckwell in that there are some pluses and minuses. Effectively, the subsidy becomes worth more because it is not attached to the same sort of farming obligations as it has been in the past; it is attached to some cross-compliance obligations but arguably that is a smaller requirement than having to keep suckler cows or keep sheep or whatever in terms of the costs. As a result of that it might be worth more but in turn the income stream from it will be reduced in time, so the two effects will counteract each other and I think the effect on land values broadly will be neutral.

Q185 Mr Wiggin: You do not think that the type of model used will have an effect on the land value and rental value as well?

Dr Jones: I think the type of model really affects individual cases because if we move, say, to an historic system then it is not only more tradable and therefore it is a separate entity that can be detached from the land so you would have to make your valuations separately, but it is also going to be more variable from one farm to another. If the payments are averaged and there is just a flat rate entitlement it then simply has to attach to land at a flat rate.

Q186 Chairman: What do the bankers think? Which one do you want?

Mr Lole: Just expanding on that, although I agree with the majority of what has been said, with a couple of other thoughts. One is that the existing arable land value usually has some value associated with that payment capitalised within it and that is not the case in the livestock sector, so the impact on land values could be different according to different sectors. The other point is obviously a caution that land value is not directly related to productivity but there are amenity values potentially which will inch lay land value from the straightforward productivity of the land.

Q187 Chairman: What does Mr Ellwood have to say on behalf of his bank?

Mr Ellwood: The only other comment I would make that adds to that is that it would be fair and accurate to say that it is not just in farm incomes or even a part of farm incomes that Single Farm Payments affect land value. There is plenty of evidence over the last decade or two that land values are affected by the value of rural property by non-farm buyers as well as by agricultural issues. That is the only other bit that I would add to that equation. One further point if I may, clearly, the different sectors can be affected in different ways if we go for either an historic or regional payment basis. I would have expected to see more discrepancy or distortion in the livestock sector than the arable sector. I would not make a prediction as to what the percentage is but within that percentage there is more distortion within the livestock sector than the arable sector.

Q188 Alan Simpson: Are we not being conned by all this into deciding which group of extremely rich people we subsidise? It seems to me that you have taken us into this trap that says, "Where is our angst, and should we stick with a model that funds historic payments to those large farm owners who produce arable crops or should we switch to a system based on acreage so we reward the largest landowners?" Surely this is just a scam to ensure that one way or another we continue to provide subsidies to the extremely rich?

Dr Jones: It has another name, which is the Common Agricultural Policy! We are members of the European Union, we are members of the Common Agricultural Policy, and therefore this amount of money has to be made available to our farmers, and we are simply trying to decide which is the most effective, fairest and most desirable means of delivering it.

Q189 Alan Simpson: Would we have been better off going for the proposals that came up at the Commission last year that suggested a cap on the payments to the largest farmers or landholders, the 187,000 ceiling on payments? That would still be redistributing the money but in terms of the objective of transfers towards sustainable farming and towards land management, would it not have been better to say that infrastructure payments will go to farming on a sustainable scale would and would have been a better system than one that locked us into this debate as to which group of rich landowners we want to shovel lots of cash to?

Dr Jones: That has happened before. We have had those sorts of proposals coming up from time to time since the early 1990s. One of the reasons why it has never been adopted is partly because we have larger farms in the UK, for example, than is common elsewhere in Europe, so if you applied a larger farm cut-off in payments you would be cutting payments to the UK whereas you would not then be cutting payments to Portugal, say, where the farm size is very, very much smaller. That is one of the reasons why it has not been adopted. The other one is that you end up spending a lot of money chasing around after people who have taken professional advice to divide up their businesses so that they no longer appear to be large farms - and you are familiar with it in other contexts - and I think it is generally believed that it is simply not worthwhile. There is another Member State angle on this which is that there are some very large farms in Eastern Germany and of course there are some very large farms in the accession states. It is this business about the skewed farm structure that would cause a problem with capping.

Q190 Alan Simpson: In terms of the land value aspect of this, if we take the current situation, as I understand it, if you take someone who is a definite beneficiary like Sir Gerald Cavendish Grosvenor, the Duke of Westminster, his farm, Grosvenor Farm in Chester, is eligible for subsidy payments which currently work out at about the rate of 1,000 a day. That is based on the historic payments model. If we shifted to another subsidy system would he end up having to struggle to work out who he would have to pay to get out of bed to pick up the subsidy for him on a larger scale or on a smaller scale if we changed the model?

Dr Jones: If you average payments on an area basis, then obviously the larger the area you farm the more payments you get, so it does not necessarily mean that by spreading the farm payments out that larger farmers will be worse off. It has different sorts of redistribution effects and sometimes smaller farmers tend to be more intensive so that their subsidy per hectare might be higher even if they are farming less hectares. I am not sure that this idea that one system or another will redistribute wealth is quite the case.

Q191 David Taylor: Can we move from Alan's subsidy payment that dare not speak its name to the area of taxation. You have said that you believe broadly that there will be little impact on land values if we went down the Single Farm Payment route. Can we infer from that also that there would be relatively little effect on capital tax payments due?

Dr Jones: There are some specific capital tax issues tied up with any type of quota or any type of entitlement. We have already got that with the milk quota, beef quota, sheep quota, and so on. The system which attracts the highest entitlement value, if you like, because it is the most tradable, is the historic entitlement basis, so there are some specific capital issues tied up in that. There is only a finite amount of value in subsidy converted into a capital sum. Quite rightly, as Alan Buckwell points out in his paper, if you have a system where it is focused on a moveable element of subsidy then there has got to be rather less value in the land. In terms of the proportion it is still pretty small because the underlying value of the land is its amenity and its long-term value and the fact that, as Mark Twain pointed out, they do not make it any more. Obviously I would support what my colleagues here have said about the fact that we are not talking about a vast difference in land values based on the subsidy movement.

Q192 David Taylor: So moving from capital tax to revenue tax, on the precedent of how set-aside payments are treated, there will be a situation, and you said so in your evidence Dr Jones, where the SFP will be treated as an income and the recipient of the payments will be regarded as a farmer engaging in a trade in most circumstances. There will be a temptation for a good number of farmers to simply abandon land, will there not, but that will be constrained by the tax implications of that which seem to sit between abandoning productive farming and merely doing a minimum for cross-compliance activity? Where will that boundary lie? At which point do you feel that the Inland Revenue say this is not a trading activity, we are not going to treat it as such and we will not allow expenses to be charged against it in terms of transport and buildings and so on? There is a dilemma here, is there not, for farmers?

Dr Jones: There is a dilemma. The background to the dilemma is that the whole reason why we are decoupling subsidies is largely to avoid the trade distorting effects of subsidy. We must, as far as the WTO is concerned, put these subsidy payments into the "green box" and that means that they cannot be linked to agricultural production, even tenuously. On the other hand, it is hard to then argue with the Inland Revenue that they are linked with agriculture because they are not, they are simply linked with some cross-compliance conditions, and those cross-compliance conditions, whilst they might possibly encompass things like minimum stocking rates, if those minimum stocking rates are anything other than very slight and very focused on environmental care, then the subsidy will no longer be in the green box and we will have to start all over again. The answer is that they are under threat in terms of their tax status and I think the Inland Revenue will probably start to look differently at them if people are de facto not really engaged in farming.

Q193 David Taylor: Have the RICS sounded out the Inland Revenue in any way to assess in what way tax treatment might change?

Dr Jones: No, we have not. Although there has been a meeting of the Agricultural Law Association that discussed what the implications might be, we have not got as far as discussing it with the Revenue.

Q194 Chairman: Can I ask the bankers have you had your tax experts crawl over this? If one of your customers came to you and said, "Right, well, I am going for the minimalist farm approach now," are you giving them some advice that they ought to take some professional tax advice because they might lose their position as a result of that?

Mr Lole: We will be awaiting a clear understanding of what the finished situation looks like because the level of activity required for cross-compliance will clearly have an impact on that and some of the implementation will clearly have an impact on that.

Q195 Chairman: Have either of you had any dialogue with the farming community in discussing with them their choice either of historic or regional averaging in terms of the implications that we have discussed both in terms of land value and tax so far? Have they come to you and said, "What do you as bankers to the agricultural industry think about it", or do they see you waiting to give judgment when the facts are known?

Mr Ellwood: I think in answer to your first question, and just to be clear, the answer is no, the HSBC have had no conversations whatsoever with tax experts. Clearly interacting with the farming community on a regular basis then all sorts of hypotheses are put forward as to what might be the outcome, but I can honestly say that no-one has talked to me about taxation in those conversations. At this moment in time income tax is not the primary concern for a lot of farmers.

Q196 Mr Drew: I am sorry to have missed the early part of what you were saying, but if I can move us on to production and the environment. This is principally to Dr Jones. Can you give us a very quick synopsis of whether you think the view that there will be quite a production cut is likely to be what is now fulfilled or is there a rationalist view, which I gather is what Ben Gill has been putting around, that in fact there are some compromises that can be made which is going to result in less of a production cut for them than was originally anticipated?

Dr Jones: I suppose it is difficult because Ben Gill made the point in his evidence, which I read from your last session, that whilst decoupling might mean something rather drastic to an economist, to a farmer, who is dedicated to farming, it might provide him with an opportunity of receiving his subsidy in a different way, possibly with different sorts of strings attached but otherwise he might carry on pretty much as he is at the moment. Personally I do not quite share that view. I think farmers are astute as businessmen as well as enjoying a certain lifestyle and I think they look pretty carefully at their costs and if something really is not making sense they will not necessarily continue with it. Of course it will vary considerably because production levels vary across the country and all the rest of it. I would like to take issue, if I may, with his response to a question that the Chairman asked him in the evidence last time which is this issue about beef farming which in particular I have suggested will see a downturn. I have suggested that that is on the basis that calves for beef fattening come either from the dairy herd, which we know is going to go through a process of rationalisation, and also from beef suckler herds, and beef suckler herds are supported by subsidy to an extraordinary extent. The level of headage payment at the moment is 158 a head. I have calculated that the possible amount of subsidy coming back through the calf, if you like, because of its fattening subsidies later on in the chain, might be worth, say, another 75 a head. The gross margin, which is the income from a beef suckler cow less its direct costs of feed and so forth, is around 212-215 a head. That is less than the subsidy. So if you take the subsidy away you get a negative result, and I cannot see under those circumstances quite why people would want to keep them unless they are getting premium prices for their calves. His response to that was that beef is a "Cinderella" enterprise, it is maybe the second, third or fourth enterprise on a farm, but really, even if it is, under those circumstances and if subsidy is now being paid in a different form, why on earth do it?

Q197 Mr Drew: We will take that as an imponderable about what really is going to happen with production but we do on the back of that then have a fairly stark situation with regard to the impact on the environment and there are those who say less farming potentially a better environment, particularly if you pay farmers then to be stewards of the countryside to put some positive public good back into the countryside. There are those who will then argue, well, if you have lost that subsidy the only way that farmers can really react is to farm more intensively with more artificial aids. Which of those points of view are likely to be the more predominant or will both be the case and it will depend on where and who is doing it?

Dr Jones: In a rational market you would expect that if something were not profitable any longer enough people would get out of it, that supply would shorten and the price would strengthen and you would hit a new equilibrium. It might be at a lower level of output but nevertheless the thing would sort itself out by free market economics. The problem is that elsewhere in Europe three-quarters of the suckler cows might well continue to receive their full payment. We operate in a European market or a global market so what we do not really know is the extent to which these cutbacks in production might be compensated by better prices for farmers. We know that where it is in a particular production supplied to a local market there has to be a point at which the price starts to rise and compensate.

Q198 Chairman: Can I ask our two bankers what are your initial thoughts about how a farmer should actually view these payments? Should they tuck them away in the back pocket and say, "Well, that is money I can use to do something else on the enterprise known as my farm" or should I devise some accounting method to effectively cross-subsidise activities, going back to the point Dr Jones was making a second ago, do not in themselves pay. What is your financial advice going to be to farmers who may seek an indication as to how to treat these monies by whatever mechanism they get to them?

Mr Lole: We have been trying to work with our customers to help them understand that they do not need to continue an existing enterprise if it is not profitable in its own right and also to view the payments as a means of making a change and possibly a transitional payment as something they should try to grasp earlier rather than later along with the change so that their end positioning improves.

Q199 Chairman: Because we have talked about the payment and the attitude to it. The money going to farming is going to be top-sliced in various ways. There is going to be a net leaching of cash out of farming in addition to a different view to it that will be taken as a payment as opposed to a subsidy which is directly related to production. In terms of the general health of agricultural finance - and perhaps Mr Ellwood would like to comment on this - is farming going to be able to cope, say, over the next five years with the movement of some money out of direct payment to farmers and this very focused, market-based decision-making process to which Mr Lole referred?

Mr Ellwood: I think the answer is we do not know.

Q200 Chairman: But what does your intuition as a man of long experience in this field tell you?

Mr Ellwood: What it tells me is that we might be arguing about the extent of this but over a period there is no doubt in my mind that farmers will increasingly see Single Farm Payments as something that they have and there are certain costs and obligations that they will need to comply with to fulfil that cross-compliance. And then they will have the job of producing food or other goods for the market-place and over the period that will happen to a greater or lesser extent. What happens in terms of the market-place depends on a whole myriad of signals. To name but two: exchange rates in the UK have a big influence on farmers' incomes because they are primarily producers of commodities; and there is also the general issue of market price. Whilst I can see in the short term that many farmers would use their support payments to cross-subsidise loss-making farming enterprises, over a period that will change and so this will have implications not just for UK farmers but also for UK processors and others who are using food as part of the food chain.

Q201 Paddy Tipping: The decision on decoupling was taken in the middle of last year. How do you rate the consultation process that has gone on since then? You have mentioned Alan Buckwell but does there seem to have been a lot of work going on to try and bring forward a model that will work?

Dr Jones: I think Defra have done a good job in getting their stakeholders together and consulting with us and there have been many, many meetings going on now over almost a two-year period. I think what has been lacking in that process is enough hard information to go by. Particularly when we are looking at the effects of these various models for the delivery of the Single Farm Payment system, I think we needed more detailed information than we even have now, and what information has been provided has been slow in coming.

Q202 Paddy Tipping: Conceptually we were entering a negotiation and one really ought to have had before last summer a set of options, a set of illustrations of what might happen. As I understand it, it was only fairly recently that we have had some of those illustrations.

Dr Jones: I agree with that entirely. I think the amount of money that we have put behind research to try and anticipate what the effects might be of decoupling in particular is very small in comparison to the overall research budget and we are still, even once the cat was let out of the bag in July 2002, sponsoring research into things that would be fundamentally impacted by decoupling but not looking at the decoupling itself. I think that is a very good point.

Q203 Paddy Tipping: Are we going to get the new way of payments in place by 2005? Can anything go wrong

Dr Jones: I am sorry, I did not quite catch that?

Q204 Paddy Tipping: Are we going to get the new system in place for 2005? Is it achievable?

Dr Jones: I think it has to be. We do not have a choice about that. Well, we do have a choice about that and the UK had that choice and it has made its decision that we will have a new system in place for 2005.

Q205 Chairman: Given that this process represents a transfer from Pillar One to Pillar Two, do you think we have enough information in the geographic sense in the United Kingdom of winners and losers and of the regional impact and of the flows of money around agriculture?

Dr Jones: I suppose that is another issue. We have got the issue of the redistribution of the Single Farm Payment which is within Pillar One, if you like. We also then have this movement of money from Pillar One to Pillar Two. I think that is more adequately researched than purely the decoupling effect and then also the effects of delivering the Single Farm Payment in different ways.

Q206 Alan Simpson: Chairman, what I just wanted to ask about was this issue about trade in entitlements. Some of the figures were quite hard going but you certainly livened things up at the mention of "naked acres" and "virtually naked" and "scantily clad". I am sure you will defend yourselves against the charge of "sexing up" the documentation but can you try and tell us what are the differences between naked, virtually naked and scantily clad?

Dr Jones: Certainly. I think the reason why we have all been a bit fixated by naked acres is that unless you have an area of land - and the subsidies are based on an area and you need eligible acres in order to exercise the subsidy under the historic allocation - that effectively does not have subsidy or possibly has a very low entitlement per hectare, sufficiently low that you might just choose not to exercise it, then you have not got a basis for trade because the subsidy can only be bought by somebody who is not already using his land to reference the Single Farm Payment against. It could end up being a bit like a game of musical chairs in the sense that one person buys a Single Farm Payment from somebody who is already using a certain area of land. That then becomes naked as a result of having moved the subsidy so other subsidy can move in from somewhere else, and that makes that area naked, and so on. If you are relying purely on this wonderful great game of musical chairs, which might take place at Michaelmas when tenants move off farms and so forth, then you will not really have a big enough basis for a market or it will be a very strange sort of market because it will be very incestuous because you are all trading amongst yourselves. What you therefore want to anticipate is how many people might be in a position to buy because they have land that has not already got subsidy referenced against it and, secondly, would they want to by it, ie, would they feel it was worthwhile? Are they interested in buying subsidy to reference against it? We have identified in the RCIS paper nearly one million acres in England that might be naked acres. An estimate that was used by Alan Buckwell in his paper also came to a similar sort of figure by a rather different route. Nevertheless, it appears that there is quite a lot of land under the historic system that would be not clothed in subsidy, if I can put if that way, and as a result there is a basis of trade with those people who own that or have control over those million acres. Would those people be interested in buying it? Personally I think that is a matter of price and whether it is worthwhile. It is a business decision. Basically if you have got land that is capable of being used with reference to the subsidy and the subsidy look likes quite a good deal, if, let us say, it is worth twice the annual level of payment, well, that is a very good rate of return really. It would be hard to find investments that could offer you much more, so you would. If it was five times, well, that is not quite so good, it is a 20 per cent return and it is a declining level of income. It then simply becomes an investment decision and some farmers will be attracted by that; some will not.

Q207 Alan Simpson: Have you been working on a reference value of what you think a per acre or per hectare entitlement would be?

Dr Jones: One of the other issues is that there are some subsidies, particularly once they become available, the dairy subsidies, once the reform process is complete, that will be very high value per hectare and high value per hectare subsidies are going to be worth more than low value per hectare subsidies. So there will be subsidies that come from the hills that will be very diluted and very low value per hectare. There will not only be a low income potential from these subsidies but the capital value as a multiplier of that income will be even less because people will need a very large area in order to get the same amount of money. I am not ducking the question. I put an example in my paper which was based on an arable farm where the subsidy levels are much easier to reference against, and using a discounted cashflow of the income stream and building in some assumptions about the way in which that income would reduce over time, we thought that it might be in the order of three times the current level of payment or five times the discounted level of payment in rough terms. It is also affected by scheme rules and we did not know the scheme rules then and we do not know the scheme rules now but there are such things, for example, as siphons. This occurs with the beef and sheep quotas at the moment. A proportion of the subsidy each time it is traded gets taken and put into the national reserve and can be used for worthy cases. If that sort of process goes on, obviously it undermines the value of the subsidy.

Q208 Chairman: Can I jump in here and ask a question. Does the concept of decoupling work better with a tradable element in it?

Dr Jones: The decoupling is taking place anyway so regardless of whether it is tradable or not I suppose we are looking at a separate entity here. We are looking at delivery of subsidy in return for cross-compliance and as a compensation for subsidies received in the past that are no longer available.

Q209 Chairman: What I was driving at, just to help you, was if we have got assets which are moving around agriculture, under the historic arrangement where trading is possible, then assets can move to different land for different purposes and people can make commercial decisions and financial decisions. With regional averaging it is locked in place and you cannot trade it, there is no point in doing it, so in terms of the economic outcome for agriculture as a whole does trading represent a better buy than a position with no trading of entitlement?

Dr Jones: I think that is quite a difficult question to answer because one comes back to the fact that it is not coupled any more.

Q210 Chairman: But it does have an impact on what farmers do because you talked about naked acres, and those are acres currently without any cash. People are going to make a financial decision, as our bankers reflected in their paper, to acquire the right to monies and they are doing it for a purpose because they want to do something different with the land.

Mr Ellwood: Taking that question in absolute isolation, it strikes me that if we had an historic system that enabled trading of payments then the element of the payment that related to subsidies for incomes foregone, if you use that argument, the original owner of that entitlement would sell that and he would take a simple decision to sell that and cash in his chips at the beginning rather than taking an annual payment. Anybody else buying it subsequently is going to be influenced by two things, one of which is the simple rate of return, does he feel that he is going to get a good rate of return, and the cost or benefit (but more likely cost) of cross-compliance that then comes with and having to fit with that. Frankly, it has got very little to do with food production at that point. Looking at that point in isolation.

Q211 Alan Simpson: Chairman, I can see how if you are a banker or a land valuer that there are attractions to a market in the trade in entitlements without land but, as Mr Ellwood said, this does not have much to do with food production any more. I was just wondering, if you were looking at this from the perspective of the taxpayer, would you see any value at all in there being such a market? Why do we just not have a system that says use it or lose it? Why create a trade in entitlements without land?

Mr Lole: If this is intended to be a transition to a market value, what this provides the opportunity for is for businesses to have the option on how they restructure and how they use that value from past expectation.

Q212 Mr Lazarowicz: How do the banks envisage that a market in entitlements would operate, the mechanics of it, how do we envisage it functioning?

Mr Lole: If we assume for a moment that we are looking at the historic basis, which is the one which allows a market function, we have plenty of precedent of other quotas being traded and the industry is well supplied with brokers to be able to make that trade.

Mr Ellwood: I have no view on that. I think that as far as I am concerned at the moment it is just a hypothetical possibility and it has, as I have said, little bearing on the production value. The maths of this become relatively straightforward as an investment if we get to that point at some future date.

Mr Lole: To briefly come back if I may, the question was what do bankers think of it What will make that market a more attractive market to lend to is if this becomes a separate asset, then it would give bankers comfort to be able to secure a charge against that asset and to become an interested party at the time of transfer of that asset. In other words, that charge would be registered with the administrative body and the lender with a charge on that asset would have to consent to sale.

Dr Jones: Because the payment is decoupled, in theory at least, it should not really make any difference to production decisions because what a farmer does with his land is conditioned by other things. The fact that at the moment he is conditioned in what he can do by receipt of the subsidy payment because it comes with a whole lot of conditions means that in a sense there is a new world out there which means that production will follow the market rather than follow the subsidy. Another difference needs to be brought out which is the balance of power between landlord and tenant. I am reluctant to walk into that because you know from the evidence that you have received already that the views are polarised and I think there is a lot of discomfort in the industry about it. There is little doubt that despite the fact that the receipt of payment is quite firmly in the hands of the occupier, and therefore the tenant under any of these systems, because that is a requirement of the CAP reform, in practice a system in which a tenant can sell the entitlement gives him a lot of power whereas a system that has no market for the entitlement, which is the regional averaging system, does not give him that opportunity, and that is a crucial difference. That is really why I think the views that you have had from various organisations have been quite so polarised on the subject.

Chairman: Gentlemen, thank you very much for the perspectives that you have been able to bring on to what is as we have gone into it an incredibly complicated subject. There may be one or two other points we would like through our Clerks to take up with you for further education on this subject. May I thank all three of you, as I did at the beginning, for the papers you have put in and for your very helpful answers this afternoon.

Memorandum submitted by Department for Environment, Food and Rural Affairs

Examination of Witnesses

Witnesses: Lord Whitty, a Member of the House of Lords, Parliamentary Under-Secretary of State (Food, Farming and Sustainable Energy), and Mr David Hunter, Director, European Union and International Policy, Department for Environment, Food and Rural Affairs, examined.

Q213 Chairman: Lord Whitty, the chair beckons! This is a bit like Mastermind; answering questions on the new CAP, Lord Whitty, ably assisted by the Director of European Union and International Policy from the Environment, Food and Rural Affairs Department, David Hunter. The witnesses may confer in coming forward with their answers! Can I welcome you both to this area. Lord Whitty, as you can gather, we have been trying very hard to understand the complexity of this in a fairly forensic way in going through our evidence and we could proceed in the same direction with you, but, on the other hand, if you were minded to assist the Committee we could, I suspect, focus our attention on the central issue if you are able to answer a very simple question at the outset. As far as England is concerned - bearing in mind that Northern Ireland and in fact Wales have now announced how they are going to introduce the new Single Farm Payment - have you and the Secretary of State come to a conclusion on this matter?

Lord Whitty: Well, we ---

Q214 Chairman: Could it be a yes or no?

Lord Whitty: We have come very close to a conclusion.

Q215 Chairman: If we were looking on a percentage scale up to 100 per cent, how close have you come because, as I understand it, you have had a meeting with your stakeholder group on this and so I suspect you have probably given a fairly good indication, going perhaps beyond your Oxford Farming Conference speech which certainly whet everybody's appetite as to what your thinking was. Where on the scale of 0 to 100 is "close"?

Lord Whitty: It is more than 50 per cent and we do intend to make an announcement very shortly. The final detail of that announcement, however, is yet to be determined. We hope it will be determined very shortly.

Q216 Chairman: Why is it that you are effectively coming towards the end of the announcement chain and why has it been possible, as I learnt on Farming Today, for the Northern Ireland Agriculture Department to carry out an analysis of 30 different models before coming to their intriguing and complex hybrid model? If they can do that, and they are much smaller and not as well-resourced as your gigantic department, why have they been able to make this announcement? You are telling us it is only over 50 per cent. If it is only 50 per cent then you have a long way to go in a short time.

Lord Whitty: Over 50 per cent covers everything from 50 to 99.9 of course.

Q217 Chairman: I suspect you are nearer the 99.9.

Lord Whitty: You can draw that inference, Mr Chairman. But ---

Q218 Chairman: So why are you behind the game?

Lord Whitty: We are not behind the game, we are in the same timescale as our other colleagues and ahead of most other European Member States. I suspect we will have made an announcement before most other Member States have given the details of how they intend to implement this. It has taken a lot of time, a substantial period of consultation, looking at various different models and discussions with the stakeholders and I do not regret that time and, strictly speaking of course, under European law we have until August 1 to make up our minds, not that we intend to take that amount of time I can assure you.

Q219 Chairman: Can you answer this simple question: when are you going to make this announcement?

Lord Whitty: Very shortly, Mr Chairman.

Chairman: "Very shortly" is not good enough because "very shortly" in ministerial terms has that wonderful characteristic of elasticity. Are you going to make the announcement within the next 24 hours?

Mr Wiggin: The next ten minutes?

Chairman: We could invite you to do it now. I am trying to be helpful to you.

Q220 Mr Wiggin: Do it! Go on!

Lord Whitty: Tempted though I am, I think the announcement should be made through one of the normal parliamentary processes and not at this Committee.

Q221 Chairman: Would you like to tell us which process is going to be employed to make this announcement?

Lord Whitty: I am not yet in a position to say that.

Q222 Chairman: So we do not know quite when and you cannot tell us by what means. It is disappointing that in the discussion with stakeholders, perhaps one of the most important, namely Parliament, has not been involved in any way, shape or form via a debate in the House. One hundred and twelve Parliamentary Questions have been asked about it. Why has your Department not wanted to have an open discussion in Parliament on this matter to help in an additional way to inform your thinking?

Lord Whitty: Well, I am not responsible for the way in which the House of Commons, let alone the House of Lords, runs its business, and at any time you could have had -----

Q223 Chairman: Well, put simply, have you or your Secretary of State ever asked the business managers for such a debate and, if not, why not?

Lord Whitty: Well, because we believe that the appropriate stakeholders are really those who are involved in the industry, in the environment, in the countryside generally, and that Parliament, if it were so minded, could have asked for a debate. This Committee could have asked for my presence or the Secretary of State's presence at a much earlier stage in the proceedings.

Q224 Chairman: Well, I did and you have not.

Lord Whitty: You have not asked or I have certainly never refused to come before this Committee.

Q225 Chairman: No, I am talking about a parliamentary debate. I asked the Leader of the House.

Lord Whitty: The Leader of the House job is not mine. I am not responsible for the Leader of the House.

Q226 Chairman: The Leader of the House tells me that whenever sensible requests like that are put forward by people who take a serious interest in the subject, that information is communicated to the appropriate Secretary of State, so there has been no doubt that a request has been made to have a debate in the House of Commons ahead of an announcement so that the people who represent constituencies with a strong agricultural and rural interest might have had an opportunity to discuss it. I have not heard anything yet to explain to me why your Department has not seen fit to have such a debate.

Lord Whitty: Well, I suspect, without wishing to malign the Leader of the House, he gives rather similar answers to everybody if there is an interest in a parliamentary debate and clearly there is limited parliamentary time. We have felt that it is more sensible to discuss with those who are directly involved than it is to provide government time for a debate within either House, but of course it was still up to the House to decide whether they wanted a debate in Opposition time or in the various procedures which operate in either House, so I do not think you can lay that at the door of the Department.

Chairman: Well, I think the Committee will have drawn a clear message that the Government did not want to have its own time for that debate.

Q227 Paddy Tipping: You have told us you are to make an announcement soon through the normal parliamentary process. You must be going to make the announcement tomorrow at half past twelve.

Lord Whitty: Well, people can make guesses, but it is a matter of the parliamentary timetable and I am not in a position to confirm or deny any particular arrangement.

Q228 Paddy Tipping: Why is there some secrecy about this? Why is it difficult to say, "We want to make an announcement. We want to make it before the NFU Conference, so we are doing to do it this week, tomorrow or Friday"?

Lord Whitty: Well, we will either make it tomorrow or we will make it very shortly.

Q229 Paddy Tipping: I do not see why it should be a State secret.

Lord Whitty: Well, I am not sure whether it is a State secret or it is not. I am not the person who makes the announcements about parliamentary business.

Q230 Chairman: Well, could you help the Committee, therefore, to understand the difficult further considerations that clearly you are still having to make on this by just providing us with a simple and easy-to-understand list of the issues which are still remaining to be decided? What is the barrier to the final decision being made? What further analysis, for example, have you yet to do to decide how England is going to introduce the Single Farm Payment?

Lord Whitty: We have completed the analysis and it is the conclusions from that analysis and how they are expressed which will be finalised, as I say, very shortly, possibly even in the timetable that Mr Tipping suggests, but I am, as I say, not responsible for the timing of parliamentary business.

Q231 Chairman: So the honourable Member for Morecambe and Lunesdale, who has a written Parliamentary Question on the Order Paper, might be getting an answer tomorrow?

Lord Whitty: He might.

Q232 Chairman: Well, it is a she actually! Let's focus for a second on the analysis that you have done. Northern Ireland made it clear in their public statement that they have analysed 30 different models of the payment scheme. How many have you analysed?

Lord Whitty: Well, we took some principal decisions, mainly that we were going to decouple and decouple fully, although there was a question mark over the timetable. Northern Ireland of course looked at various mixes of decoupling and not decoupling which are allowable under the Regulations. That is how they got to 30 separate options. We did not look at anything which does not go for decoupling. Our focus was on the form of decoupling and the form of Single Farm Payment with decoupling of all the regimes which are covered by the June announcement. Within that, I do not know if we can estimate, David, how many versions we looked at of that, but it would not be as many as Northern Ireland.

Q233 Chairman: Were these pieces of economic analysis to work out the impact on farming in England of different ways of making the Single Farm Payment?

Lord Whitty: In effect, yes.

Q234 Chairman: So perhaps you could give us an indication of the various models that you looked at of which is the best buy? Which has the best effect on UK farming? Could you describe its characteristics to us?

Lord Whitty: Well, we are looking for a scheme, and this has been spelt out in various pronouncements, whose objectives are to provide a system of support for farming which has public acceptability, which delivers public goods, which provides a basis on which farmers can operate and decide how they meet market requirements rather than have their production determined by particular and specific subsidies, and which delivers environmental benefits, so we have a number of objectives and the combination of those objectives has been measured against various different forms.

Q235 Chairman: You mentioned just a second ago that the decision should have public acceptability. What about acceptability within the farming industry? Could you say a word or two about how you are deciding what may be acceptable? What are the criteria that you have employed to date to determine the question of acceptability of your proposal to the farming industry?

Lord Whitty: Acceptability to the farming industry is obviously a dimension, but it is the taxpayer in general that is paying for this support and the taxpayer, therefore, expects to see public good out of it both in terms of improved efficiency and focus for farming and in terms of the public goods like the environment and the landscape. Therefore, it is public acceptability which is the key criterion. Now, within that clearly different measures may be of different attractiveness to the various sectors of farming and it is true that some sectors of farming have favoured one form of paying the Single Farm Payment, and probably the majority have favoured historic payment and others have favoured something close to an area payment or some form of hybrid, and we have had representations on all of them, so there is not a uniform farming view as to which of the forms of payment, once having decoupled, is most acceptable to farming. What English farming has done, and I think it is right to recognise the very big shift in opinion in English farming which has taken place, is that they have all or virtually all favoured decoupling which is a significant shift in attitude and one which I think is very much in line with that of the Government.

Q236 Mr Wiggin: Over the border from my constituency, in Wales, Carl Wyn Jones has said that he is going for a historic model. Why is it that he has been able to make that decision and what has he got wrong or why will we not have that here?

Lord Whitty: I think the pattern of farming is somewhat different in Wales than it is in England as a whole. In particular, they have a much larger area of less favoured areas of farming and smaller farms and, therefore, any change in the basic situation is going to hit more farms and more immediately than it would in England. I think in the long run the historic system is not sustainable. I think that applies in Wales and in Scotland as it does in England, and I suspect it also applies in various areas of the Continent, and I hope some of you have heard me quote before my Hungarian opposite number, who says, "Instead of paying a farmer for having ten cows, you are going to be paying for having had ten cows ten years ago". That has limited public appeal or logic and I suspect that those who go for the purely historic system will at some point in those ten years or certainly by those ten years have to face up to the fact that that system is no longer viable, whereas we would intend to move, not overnight, but move to a system which is more acceptable.

Q237 Chairman: In your Oxford Farming Conference speech you talked about the requirement for what you described as a "sustainable framework" for the implementation of the decision that we are discussing. Could you just elaborate on what exactly you meant by that phrase?

Lord Whitty: Well, some of what I just said of one which is defensible through the process, one which does not cause excessive disruption, although it may cause some disruption, but that we end up with a system which is more robust than the past system of subsidy and the system which simply perpetuated the past system of subsidy, but decoupling it from actual output.

Q238 Paddy Tipping: We were joking earlier on about phoning a friend to confer about a question. I do not think Commissioner Fischler has quite been phoning you, but certainly he has been firing off some letters about what he thought was agreed last summer. Could you just explain what missives you have received and what the kind of approach is of what the Commission has sent to you?

Lord Whitty: We have had quite a lot of phone calls and face-to-face discussions with Commissioner Fischler because clearly there is a slight difficulty with the Commission position in that whilst we have the broad Regulations in black and white, we do not have the detailed Regulations and, therefore, we need to check out, as do all other Member States, quite whether what they propose or we propose fits in with what the Commission are likely to lay down in the final Regulations. This is not particularly helpful, but it is the reality. At the same time the industry understand that they are going to have to make an early decision so that they can make decisions on the basis of it, and that is completely understandable and right. So we have been in very close contact at both Commissioner to Minister level and Secretary of State level and other levels within the Commission. Now, the letter which Fischler sent or the round robin to all countries and which was rather over-interpreted in some of the farming press was effectively saying, "Well, remember that the core proposition in June was to pay on the basis of historic payments. That is, that remains the default position and that any departure from that position, therefore, has to be justified on an objective and reasonably equitable basis". It was, as I say, rather over-interpreted that Fischler was telling us that we could not go down to an area-based system or a hybrid-based system or some other departure from what was clearly allowable within the Regulations. Now, there may be details which constrain us to the degree to which we can go down that both on the Single Farm Payment itself and on other aspects of the package, but he was clearly right that the historic thing is the core proposition, but there is also the ability for any country to regionalise and move away from that to an area payment or a hybrid system or a less dynamic system which moved from one to the other.

Q239 Paddy Tipping: But the Commission is not in a position to block any proposal that you put forward, provided it starts with a historic base and then moves forward?

Lord Whitty: Well, it is not so much starting with a historic base. We do have to indicate to the Commission whether we are going for an area-based system or simply a historic system and we have to do that by August 1, and if you say, "In principle, we want an area-based system", you can still have historic elements of it if you phase it in, but you have to choose one or the other for the long-term position. That is really what Fischler was saying, that, "If you go for the area basis, make sure you are within the Regulations". Clearly if were outwith the Regulations, then the Commission could block this, but we do not intend to be outwith the Regulations, either those that exist already or those that we are yet awaiting.

Q240 Paddy Tipping: So you have got a feel for the Regulations coming?

Lord Whitty: We have got a feel, but I could not answer all questions on it and I doubt if even Commissioner Fischler could.

Q241 Paddy Tipping: So suppose very shortly that you announce a hybrid model that is dynamic in the sense that maybe it starts more on a historic basis, but over time moves towards an area basis, you do not believe that you will have difficulties with the Commission on this?

Lord Whitty: We are pretty clear if it ends up being the principle of that, then that is allowable under the Regulations.

Q242 Chairman: Let's just probe that a little bit further because in the quotations which are suggested to have come from the letter, the Commissioner says, "What we have to avoid here are unjustified, politically motivated attempts at using regional models to redistribute subsidies", so it recognised that anything other than the historic approach has a redistributive element in it.

Lord Whitty: Yes.

Q243 Chairman: If you were thinking, as you perhaps were when you spoke at the Oxford Farming Conference, of the dynamic, hybrid model that Mr Tipping has just referred to, what elements would you describe to the Committee would be lines of reassurance to the Commission that such a model would not have an adverse redistributive effect on English agriculture?

Lord Whitty: Well, the first reassurance, if you like, is that it is not an objective of policy to redistribute per se. The objective is to move to a more equitable, acceptable and environmentally and market-oriented farming system.

Q244 Chairman: But it might be a consequence.

Lord Whitty: It may be a consequence. It may well be a consequence and almost any system which moves away from the historic has a redistributional effect, or any in fact, so the degree of redistribution, the differential redistribution does have to be taken into account in reaching details of the decision, and Commissioner Fischler is right that we should not ignore that, but the interpretation of him is wrong to suggest that part of the motivation for us is to take away from Peter and give to Paul. It is not. It is to provide a long-term, more equitable base for farming support.

Q245 Chairman: Can I just ask you for your definition of what "long-term" is in the context of a hybrid, dynamic model? What kind of timescale do you think such a model ought to evolve over to avoid the kind of short, sharp shock that could result if you went from the current system, for example, to a regional average model and did not have a sort of hybrid moment in between?

Lord Whitty: Well, there are arguments for different time periods.

Q246 Chairman: But you will have looked, because you have told us that you have analysed all of these things with enormous care, detail and attention, so you must have come to a conclusion about the timescale because one of the many models you will no doubt have looked at is the one to which you alluded at the Oxford Farming Conference, so what kind of a timescale does that work on?

Lord Whitty: Clearly our final announcement will have a timetable attached to it.

Q247 Chairman: I am asking you now. You have done some analysis. Surely as you put into the public domain the fact that one of the models that you had considered was the one you referred to in January and, being the careful Minister you are, you will have thought very carefully about the way that you put that idea into the public domain, you would not have done it unless you had some confidence that it had been carefully researched, so I ask you again, over what kind of timescale did the model that you referred to in January operate?

Lord Whitty: I think, just to clarify my motivation for the Oxford speech, it was to get the discussion going and to ----

Q248 Chairman: Well, you got it going, hence my question.

Lord Whitty: ---- and to tell the industry that it is a simple historical outcome and there are alternatives, and there are alternatives which may well be favoured, so I was not necessarily saying what my view at that time was of what the most desirable outcome was.

Q249 Chairman: No, I am not asking for your view. I am asking for a simple piece of factual information because having a little insight into the very careful way in which Government makes major decisions, all of these different analyses, as we witnessed with Northern Ireland, for example, are looked at one by one and recommendations are ultimately put to ministers and ministers get background papers showing how conclusions have been reached, so I ask you again, with the kind of dynamic, hybrid model, over what kind of timescale could such a model work effectively without causing problems in terms of the concerns over redistribution put forward by the Commissioner?

Lord Whitty: I think if a model which ran for anything from, say, four or so years to the full period of the deal, namely 2012, would be acceptable in the Commissioner's terms and in our terms. The issue is what is the trade-off between signalling a new system and how heavily you signal the new system which would argue for a shorter timescale and limiting the disruptive and detrimental effects of redistribution which would argue for a longer one. Clearly you were asking earlier in terms of the acceptability to the industry and that also has a role to play in those decisions because clearly disruption can operate in a number of different ways, but I think we are not going for the shortest of those options because we do recognise the possibility of quite serious disruption hitting particular sectors which would not be helpful for the long term. The exact answer will come in the main statement.

Q250 Mr Drew: I am just very interested in how we got to where we have got to and now in a sense it would appear that we are rowing back quite dramatically. I understand that you are in a dilemma because you have got the farming industry pretty starkly divided and giving you some fairly - how can I put it - clear views that if you went the other way, that was the end of their co-operation on this, so you are on a very sticky wicket. I am interested in the sort of politics of this because you have got to turn the politics of this into the reality of what is going to happen when and if you introduce this and I think it would be quite useful if you gave us a feel for what sort of advice you were getting from your own officials and also from the industry on whether there was a compromise position that could be arrived at.

Lord Whitty: Well, you know what the formal position of the NFU was and has remained, which was that any departure from the historic approach would not be acceptable to them. That has remained fairly consistent throughout. It is true of course that various elements within the NFU have separately informed us of a rather different position and other bodies, such as the CLA, came up with the hybrid, much more area-oriented position, so as far as the industry's view is concerned, I think the industry have not shifted their formal position. Clearly from roughly the Oxford Conference, but I am not saying my words entirely altered it, there has been some recognition in the industry that we might move to something which was not the purely historic basis and they have been prepared at least to contemplate that while maintaining their formal opposition to it. As to advice from the Department, clearly we had advice both on the historic basis and on various forms of moving to an area basis and officials have been working extraordinarily hard, not least Mr Hunter here, on working up the various options and looking at the pros and cons of that, so at what point the advice has become focused down has been relatively recent. The form of the final proposition will be the result of a lot of considerations, including discussions within the Department, discussions with the industry, discussions with the environmental lobby and so forth because we have kept in pretty close touch with all stakeholders on this. I do not think it is true to say, as Mr Drew said, that we rowed back because I am not sure what it is we are supposed to have rowed back from because we have said that we want a system which does provide for the objective which I set out and I think what we will announce at some time very shortly will do that.

Q251 Mr Drew: I was being polite because I was reminded of that wonderful quote from Rhodri Morgan about the one-legged duck and whether the duck swims, and the analogy was that it would go round in circles, so I was hoping that you were going in some direction.

Lord Whitty: I am not quite sure about Welsh ducks!

Mr Drew: Neither was Rhodri at the time, but he became Leader.

Chairman: What, the Welsh duck did?

Q252 Mr Drew: Clearly we are expecting this announcement. Somebody somewhere is going to be disappointed. I suppose the other point, after what you were saying earlier, is about the degree of freedom and you have to except yourself from some of the pressures from Brussels. I suppose the danger of this is that we end up with sort of the idea of the crawling peg. When I used to teach economics, it was a wonderful compromise. In those days you could not have freely floating currencies, but you wanted to move away from the fixed exchange rates, so you ended up with this wonderful compromise which lasted a few months and then of course it just got completely blown open and you went to freely floating exchange rates. Is there a danger that we can be looking at this here, that we come up with a decision and then you have to move away from that position because of the pressures from Brussels, the pressures from farmers and, in reality, it just gets too complicated and you have got to simplify it?

Lord Whitty: Well, there is a danger there of not being as simple as we were hoping, but nevertheless it will be a darn sight simpler than the 21 different regimes which operated prior to the reform in June and, on the simplification scale, we will definitely score positively at the end of this process. As to comparability with exchange rates and floating pegs and so on, the difference in this case is that whatever complexity comes out, we will be moving in a very clear direction, whereas exchange rates regrettably do not or not for very long.

Mr Drew: I was just making an analogy, not trying to further complicate the position on whether or not we should be looking for further relationships to enter outside of the normal subsidy regime. I think I will leave it at that.

Q253 Mr Wiggin: Earlier on in answer to me, you talked about the ten years of not having cattle. I am quite concerned, and I wonder how worried you are, about pursuing regional averaging where we will simply replace one future problem with another as flat-rate payments will expose all too clearly the differences between payments received by farmers in different parts of the EU and that may lead to demands for rebalancing within the Community. What do you feel about that? Are you worried?

Lord Whitty: I am sure that the EU budget is not settled for all time. I think at some point that will be looked at again and clearly agricultural policy takes up a fair chunk of the EU budget, but at any given time the system ensured that the UK as a whole retained its share of the CAP, as was under the old system, and, if you recall, it is not always likely to be the case during the negotiations because originally a cap was going to be put on individual farm receipts which would have seriously reduced the total amount to the United Kingdom. However, given that we and every other country are receiving the aggregate sum that we were previously receiving, I do not think that there is much of a political case for any country to complain that on the individual basis they are getting a slightly different figure from their components within the UK, whether England, Scotland or Wales, so I do not think that is likely to be the political pressure which would change this settlement. A more likely one may well be the pressures on the EU budget as a whole and indeed the system does build in some financial discipline which will kick in at some point in the future, so I think that point will be reached well before there is any Lithuanian farmer who is claiming that he is not getting as much as somebody in Snowdonia.

Q254 Mr Wiggin: It will be the other way round, will it not? The northern farmers will be better value for taxpayers' money than the new entrants and perhaps the southern States?

Lord Whitty: Well, it will work both ways, will it not? It will depend. The UK is a net contributor to the CAP budget and in that sense the UK position is less well off than some of the rest of them, but of course with the new-entrant countries, they will not receive the full benefit of the old systems, repaid largely through area payments, for some time and then for some time they will be less well off.

Q255 Chairman: Could we move on to the question of the preparedness of the administrative systems for what we are about to embark on. You said that Mr Hunter had been working with his officials very hard to devise a mechanism to ensure that whatever model it is, you finally bring it to the public gaze in a very short space of time. Mr Hunter, perhaps you could give us an indication as to what are the administrative implications of moving from where we are now to wherever we are going and what kind of preparations Defra is making to ensure that whatever finally emerges into the public domain will be effectively and efficiently implemented to people who would like to follow that with some more detailed points.

Mr Hunter: Well, without wishing to sound facetious, it does depend exactly where we are going of course and that decision has not been announced.

Q256 Chairman: But you have got a pretty good idea by now, so I am sure you can distil out of the direction that you are travelling some words of comfort for the Committee and for the farming industry on this point.

Mr Hunter: My colleagues in the Rural Payments Agency will be the interface with farmers. It is they who pay the money to farmers. As the Minister said, there will be a reduction in the number of schemes to a single scheme and that will in time mean a simplification in the relationship between individual farmers and the bureaucracy. Behind that, there will need to be a very considerable investment in IT processes both to deliver the new scheme and to improve the electronic interface between the Department, its agencies and the individual farmer. There is a lot of work being put into this in terms of what needs to be done and when it needs to be done by. It happens to have occurred at the same time as my colleagues in the RPA are already embarking on a substantial change programme at the moment which would have led to considerable efficiencies and savings as a result of greater and better use of IT, so there is one continuing programme over which now there needs to be laid another programme to deliver these schemes.

Q257 Chairman: Let me just go for a very simple question. Whatever scheme you ultimately settle upon will require a firm database of the status quo, that is, the amounts of money that have been paid to farmers. Are you satisfied that your records over all sectors of farming, either on the holding basis or collectively, are robust, up to date and without dispute so that when ministers press the button, saying, "This is what we're going to do", you will be in a position to move forward without inviting a vast army of dispute to gather outside the doors of Defra?

Mr Hunter: I think there are three points to make in response. The first is just to correct your opening statement that the historic element would not apply if we went to a flat-rate payment immediately and I am not expressing any hint as to what final decision may be made on that. Secondly, it is not a question of a single database, but actually a mass of databases which contain the records of payment to farmers under the existing schemes. Thirdly, we are putting in a lot of work to try and ensure that when the button is pressed and the information needs to be extracted from those databases, it is the right information. I do not doubt that there will be quite a few difficulties in all of that; businesses change, people enter their claims under different initials from year to year, family businesses do not always identify themselves consistently and so on, and there will have to be a cleansing of that information to make sure it is accurate. There will also need to be some kind of appeals mechanism put in place to deal with those disputes which do not fall under the rather trivial categories that I have just described, and it is for my colleagues in the RPA to answer on any more details at any time. One of the things I think we will need to do and they will need to do is to have a run on some of the data with, if you like, a focus group of farmers of sufficient size to see that the answers to the questions we are putting into the system look credible to the people they apply to, and that is something we will hope to do well before we go live with the system.

Paddy Tipping: I guess in a sense there have been two sets of discussions going on. There has been a discussion about the design and the principles of the scheme and, Mr Hunter, you have now been talking to us about in a sense the process. One of the things that I am concerned about is that the RPA, let me put it this way, is not without criticism from farmers.

Chairman: Very delicately put, Mr Tipping!

Q258 Paddy Tipping: I do know, because I take an interest in the RPA, that there is this big change programme going on. If you will remind me, my impression was that it is only in the last couple of months that they have appointed a preferred contractor to decide on the change programme. Now, the sooner that you can announce very shortly the principles, the easier it is going to be for the RPA because I suspect the RPA is in limbo at the moment, not wanting to pursue the change programme until, like all of us, we know the direction of change.

Mr Hunter: Well, I am not responsible for the RPA myself, but I do not like to think of them as being a collection of lost souls in limbo waiting to know whether their salvation is at hand.

Q259 Paddy Tipping: That is just the farmers waiting for payment!

Mr Hunter: As a former board member of the Intervention Board, I am well aware that the Intervention Board, its predecessor, and the RPA does come in for a certain amount of flak from its customers. What is visible to the outside is not always what is going on in the inside and a lot of work has to be done behind the scenes and that is not always visible to the people outside. It is a great task, I do not underestimate that, but my colleagues in Reading and Newcastle are working very hard to make sure that when the time comes, they will deliver an efficient and effective scheme.

Q260 Paddy Tipping: In a sense if the announcement very shortly were to choose a hybrid model that was also dynamic, in a sense one has to set some parameters operating here because over a period of time, the dynamic element is going to change year on year. Is there a confidence that that can be achieved without major difficulties? I guess what I am saying is that people have always said to us, "Stick with the historic model because it's easy", so if one were to choose a dynamic, hybrid model, can it be delivered by the RPA without major problems?

Mr Hunter: My experience of washing machines is that the more programs they have, the more prone they are to playing up on you and I think the more complex an agricultural support scheme, the more the risks increase of mechanical failure at some point. I do not think that this scheme, however it is constructed and whatever the dynamic elements, is beyond the ability of the RPA systems to deliver in time. It would be unwise for anybody to sit here and say today that we will have a fault-free system in place at the beginning of next year. Our collective target, my colleagues in the RPA, is to have in place a system which enables farmers to make their first application for the new single payment scheme in whatever guise ministers choose to present it on 15 May next year.

Q261 Paddy Tipping: The hybrid model finalised by Lord Whitty's Oxford Conference Speech, just remind me, in all the consultation documents that the Department put out, including the last one, I think, in October, the hybrid model was not mentioned at all, so when did that come into the fray? When did it become a real policy option?

Lord Whitty: Well, there are two aspects of hybridity, are there not? There is the aspect of whether you treat different sectors in different ways or different types of land in different ways, and there is the question of whether over time you change from one system to another. Now, changing from one system to another arose as soon as it was clear that there was an area payments option. The hybridity by different sectors was introduced very early on in the response to that consultation and indeed you will know that the CLA, which I have already mentioned, went for a particular form of hybrid and there were other hybrids suggested during that process, so it is not a new thing and our model may well have an element of hybridity, it may well have an element of dynamism.

Q262 Paddy Tipping: Or both.

Lord Whitty: But not necessarily both, but either way, in respect of the RPA, we are not moving from a simple historical basis to a simple area basis or a complex area basis, but we are moving from a system which had 21 different regimes, all of which changed every year because you had a different number of sheep or a different number of hectares under grain every year, and of course the problems about changing land tenure and who owns what will exist under whatever system we are operating. The only additional complication of going in for an area payment is if there is some land which is not in the system which might come into the system, but apart from that, we are dealing actually with a less complex system than the one the RPA have had to operate on occasion with some difficulty in the past.

Mr Hunter: Can I just add that in terms of the options for implementing the Single Farm Payment, there was a period in the autumn when a lot of people were discussing what was known as Option G. Option G happened to be, I think, the penultimate of a series of families of options that my staff and colleagues had devised for the purposes of discussion with the industry and in a sense we, if you like, have been the victims of our own creativity. We have attempted to test the envelope in the Regulations to see precisely where the limits are in what can be devised and we have had a range of options which we have discussed with stakeholders through the autumn and the early part of this year.

Lord Whitty: I remember on that thinking that all the options which the staff would put up were all of equal value and being told in the middle of a carrot field in Leicestershire that we were all going for hybrid Option G, so it was pretty widely known amongst the farming community that these options were being considered.

Q263 Alan Simpson: Paddy Tipping said that the RPA was not without its critics in the farming community. I think it is fair to say that neither the RPA nor Defra have been without their critics in terms of the openness of the information that is available to the public and although David Hunter mentioned the issue about the IT systems and the database, can you just say why it is that at least in England we are not making the information about where the current subsidies go as open as the system will be in Scotland where freedom of information will actually be able to identify where the subsidies are going in most of the same way as regional development grants or grants to industry? Why are we so secretive about where the subsidies are going at the moment?

Lord Whitty: Well, in principle, we are not any more secretive than anybody else. We do not identify the individual farmers, but we do pretty much publish the type of subsidies that are going to different sectors, which regimes they occur under and there is a regional and even a sub-regional breakdown of that, so I do not really accept that we are being non-transparent.

Mr Hunter: There is a mass of information that we publish in places like Agriculture in the UK and in the Farm Business Survey and other material which is publicly available and we have from time to time answered questions, I think, about the total volume of subsidy going into particular regions of England and that we have done in some of our analysis in this case.

Q264 Alan Simpson: Well, I think the point about this is the criticism that actually in farming we are far more sensitive about non-disclosure in terms of subsidies going to farms than we would be in respect of regional development grants or to industry and that certainly does not apply in the United States where the subsidy per farm is a matter of open access as part of their Freedom of Information Act. I think there is this sense that the public accountability about where public subsidy is going is not a matter of whether there can be a sort of comfortable agreement between the Government or the subsidy distributing body and those who are its recipients, but the question is how accountable is that to the public?

Lord Whitty: Well, I am not sure that I accept the premise of the question because the way in which we provide, and the European law provides, subsidies is an entitlement to farmers who meet certain criteria. It is somewhat different from a grant given by a regional development agency for a particular purpose or a particular development. Now, you can argue whether or not that is right or wrong, but it is a different sort of subsidy and there is no secret about the total amount of money that we give out, as both David Hunter and I have said, and, to make the analogy, we do not put into the public arena how much everybody, as an individual, receives in social security. That is not in the public arena. That may be an inappropriate analogy, but we are talking about entitlement.

Q265 Alan Simpson: Let me feed into then the structure. I am not asking you whether a new announcement will be launched within 45 minutes or whatever ----

Lord Whitty: Getting close!

Q266 Alan Simpson: ---- but you will be aware that amongst the non-farming submissions which are coming to you, one of the submissions from Oxfam specifically sought to take you up on the issue of sustainability, not of the system, but of agriculture both in a national and an international context. Can you just say to the Committee whether, in the framework of what you are going to be announcing, the sustainable system you are going to try and develop would address any of the key points that Oxfam tried to set out, namely that there should be a cap on payments to individual producers, and they are suggesting 50,000 to begin with, scaling down to 20,000, that there should be an increase in spending on environment and social priorities under Pillar 2, that there should be full disclosure of payments and that the shift should be towards the investment in extensive agriculture rather than intensive agriculture? Is that the sustainability element that will go into the new model that you are going to be announcing?

Lord Whitty: Well, we do not either accept or seek to address every aspect of Oxfam's criticism. Oxfam are looking at, as befits them, the bigger picture as to how the impact of the way we subsidise and operate in European farms hits the world as a whole and particularly the developing world, but it will hit quite a number of them. After all, production subsidies which were related to quantity inevitably subsidise in Europe much more than they do in the developing world and even more than they do in the United States, although they are reducing in Europe whereas they are increasing in the United States. To that extent, they discriminate against and distort the trade opportunities of developing countries. Once you move the subsidy away from maximising production, then that distortion reduces and in WTO terms it moves from a production and trade-distorting subsidy to what they call a "green box", so we are addressing that central issue. We are also, I think, addressing sustainability in the sense that the outcome of an area payment and to some extent the outcome of the historic payment, if we were to adopt that, is attached to cross-compliance arrangements which meet, by and large, environmental criteria and, therefore, in a local sense we are addressing a sustainability issue. We are not addressing in this package, if you like, the social redistribution of putting a cap on payments to individual producers because under a system of support which is, by and large, to support the existence of farming and to make operations to improve the environment, then it is not particularly relevant whether it is a small farmer or a large farmer who is operating or owns that particular field or is the tenant on that particular field. There may be other social reasons for doing this, but we are not using it for a social policy in that sense. I heard you discussing as I was coming in some issues of balance between tenants and landowners which is one dimension of this which we may need to address, but not in the crude sense that Oxfam are suggesting we shift the balance towards smaller farmers. We were just discussing the issue of the identity of the recipients and I have really got nothing to add to that, which is another one of Oxfam's demands.

Mr Hunter: Perhaps I can make two points in relation to that. If one were to look at the question of limiting the level of subsidies payable per farm or farmer, I do not doubt that there are plenty of very able solicitors around who could advise people on how to rejig their business to avoid such a cap being effective and there is experience in that area where people have rejigged their business rather artificially to maximise their subsidy take. The second point is in relation to the international standing of the CAP and its impact on developing countries. The Doha Round negotiations are still in process and agriculture will be a significant part of that outcome and we are working with colleagues across the community to try and produce the most positive outcome in that respect that will benefit the developing countries. There are a number of regimes under the CAP which are not covered by this reform, but which are still under negotiation, cotton and tobacco, for instance, which are of acute interest to a number of developing countries and they will come under the umbrella of reform in due course.

Q267 Mr Lazarowicz: On the question of identification of recipients of payments, presumably there is no technical difficulty in providing this information and somewhere there is a list within Defra of to whom and what payments are made, or within the RPA? Presumably there is no technical difficulty in doing that?

Mr Hunter: Well, we will have to have such a database in order to start this new system up and running.

Q268 Mr Lazarowicz: So there is no problem in doing it, it is just a policy decision?

Mr Hunter: Yes.

Lord Whitty: We have not had one hitherto in that sense because you were paid under different regimes for different purposes, so there is not necessarily a consolidated list for somebody who receives an Arable Payment, the Sheep Premium and so on, and this is one of the historic bits, whichever way we go down, where the RPA have to assemble each of those things to establish what the historic entitlement of a business was, but that does not automatically arise from the existing data, but we are having a go through that and we are reasonably confident that the RPA will manage to do that, although of course the configurations of businesses are also changing all the time.

Q269 Mr Lazarowicz: One area of complexity will be the national envelope. The impression from the consultation document certainly is that it is not a question of whether it should not actually be introduced in the UK, but how it should be introduced. If that is the case, can you tell us what are the main options that you have been considering for the use of that provision?

Lord Whitty: I think at the time of the consultations, we did believe that the national envelope was rather more flexible than I think the rules actually allow it to be and that it could address and may still be able to address some issues of offsetting negative distribution either in the historic model or in the area model, or addressing some of the environmental problems or helping certain sectors to get closer to the market, and that if you took the national envelope, which is basically creaming off the top and redistributing it, then we could meet some of those structural problems or some of those particular environmental problems. The way the Regulations are already written, this is without the final, technical Regulations, you can only redistribute through a national envelope to the sector that you took it from which somewhat limits the usefulness of national envelopes. I think we regret that and if we do use national envelopes, it would probably be for environmental outcomes in particular sectors, but the argument for using them across the board is rather less than I think we felt at the time of the consultation.

Mr Hunter: It is from milk to milk, from beef to beef or whatever else in terms of the money raised and the purposes to which that money can be applied are, broadly speaking, either to assist with certain environmentally valuable kinds of farming or environmentally sensitive sorts of farming or better marketing of the products of that farming.

Q270 Mr Lazarowicz: Can we assume that a firm decision will be announced on this aspect along with the rest of the decision which will be announced at some stage in the future?

Lord Whitty: A position on the national envelopes will be announced.

Q271 Mr Lazarowicz: It will be a question of further options and there will be a firm decision?

Lord Whitty: One of the other limits on the national envelope is that it appears in the Regulations that you have to decide now on how you use the national envelopes or by August how you use the national envelopes and you cannot leave the option open for three years down the line which is again a limitation because that is the point when you might actually need them. I think I can assure you that the national envelopes or the Government's position on national envelopes will be clear from the statement, but there are limits on what we could do with them.

Q272 Chairman: Can I ask, if we are shortly to get some form of announcement, would it be accompanied by some form of document to explain in more detail the conclusion that you ultimately reach and to give an indicative plan as to how the new arrangements, whatever they turn out to be, are actually going to be introduced? Clearly the sense I get is that you may very well have decided on the broad-brush framework, but there is an enormous amount of detailed work and, therefore, by definition, for farmers and landowners a lot of practical questions which they will seek answers to and where people will seek an understanding of the basis of your decision and will want some analysis. Is all of that going to be made available?

Lord Whitty: There will be some background documentation issues, as indeed there already are, in the public domain, but you are right that if the announcement is likely to be about the basic architecture of the proposal, there will be some details that will not be clear in that announcement and indeed some of them cannot be clear because we have not got the full Commission Regulations and we may not have them for some time.

Q273 Chairman: But, for example, when the first consultation document came out as opposed to the process of consultation, hybridity was not one of the options, from what I can gather, and it subsequently emerged as something which you may well have had to look at. I think people would be very interested to know how the decision, whatever it ultimately turns out to be, was reached and will there some analysis made available of your then assessment of the economic impact on UK farming of, first of all, the proposal for the Single Farm Payment and, secondly, the subsequent effects particularly in the context of the movement of monies from Pillar 1 to Pillar 2 and, if you do decide to have some kind of envelope, the sectoral impact of that?

Mr Hunter: Perhaps I can comment on a couple of points on that. We have shared with many of our stakeholders quite a lot of economic analysis that has been done over recent months. It has always been our intention to try and pull that together into a single, coherent document and put it on the Defra website for anybody to look at. We are in the process of finalising that document now and one reason why it has not been finalised before now is that there have been sort of iterative processes in all of this with new ideas coming forward, which we are attempting to analyse and reflect in that paper. It will be some 50-odd pages of analysis and data. The second point I would make in this context is that it is important to remember that the fact of decoupling is the bigger single driver of change in all this rather than the form of the payment that is eventually to be made. In very round terms, I think our estimate is that the fact of decoupling should or could lead to something like a 5 per cent increase in total income from farming in the UK compared with the figures for last year. Now, those are always estimates we make that people can choose to question, but it is the fact of decoupling which is the biggest issue here and the form of the payment is in one sense a secondary issue.

Q274 Chairman: Well, we are prepared to wait with bated breath to hear or read or possibly even be involved in questioning the Secretary of State once this announcement is made, but just before, Lord Whitty, you go, I would like to raise another matter with you on behalf of the Committee. It may well be that your bedtime reading in recent days has not been the annual report of our Committee for 2003, but in paragraph 15 of that document, we raised what we considered to be a very important point. In paragraph 15, it begins with this sentence: "Defra failed to respond to our recommendation last year that the Committee should receive advance notice of major appointments in case it wanted to talk to such appointees", and amongst those that we cited in this context, for example, were the Chief Veterinary Officer, filled on the 24 November last year, the Chairman of the Advisory Committee on Releases to the Environment, the Chairman of the Agricultural Wages Board, and the Chairman of the Advisory Panel on Air Quality. The conclusion that we reached was, "Once again this year we have not been specifically informed by Defra in advance of any of these appointments to posts in non-departmental public bodies. We recommend, as we did last year, that the Department put in place procedures to inform us in advance of all major appointments". I do not think that is an unreasonable request for a House of Commons Select Committee to raise and, therefore, it was with some concern that I learned, because I happen to get hold of a copy of your Department's news release dated 3 February, that first of all Defra had appointed a new Science Advisory Council and you yourself said, "The new Council is made up of people who are highly distinguished in their own fields", and you go on to talk about it, and we discover that Professor Roy Anderson has been appointed to chair that. Now, no notice of that was given to this Committee and clearly no opportunity was afforded to us to talk to Professor Anderson. Can I ask you, if people do go through our Report and if that is not an unreasonable request, why were we not told?

Lord Whitty: Certainly people go through your reports and I have to say I do think that it is a reasonable request and I do not know why it is not a matter of routine that you are not so informed, and I shall make enquiries. As to whether the persons involved should automatically be available to you to interview, I think that is a slightly separate point, but certainly you should have been informed and we should have taken that request, which is a quite reasonable request, seriously and I will endeavour to ensure that we put in procedures which ensure that happens systematically.

Chairman: Well, I think it would be helpful to the Committee because, as you know, science underpins your Department's working and it often forms a very important basis for many of our inquiries, so perhaps you might be kind enough to write to the Committee and advise us in a little more detail on the type of work that this Council is going to be doing and perhaps give us a signpost or two as to the areas of its potential investigation. With those words, can I thank you most sincerely for coming today, We are very pleased that you were here. We were not looking forward to the possibility of an empty chair because we would much rather have seen you and heard from you than wonder why it was, for whatever reason, you were not able to join us, but you have been able to and I think we have found it very interesting and obviously we look forward to the implementation soon as far as the announcement is concerned, and our thanks also go to Mr Hunter for his contributions to our proceedings. Thank you very much.