Farm Ireland

Monday 17 December 2018

How some EU farmers have used the Basic Payment Scheme to realise windfall profits

  • Basic Payment Scheme for farmers has inherent limitations, say EU Auditors
  • Farmer who has never been involved in agri production will see €103k increase in payments
(Stock photo)
(Stock photo)
Ciaran Moran

Ciaran Moran

The Basic Payment Scheme (BPS) for farmers, introduced in 2015 in the framework of the 2013 reform of the Common Agricultural Policy, has inherent limitations, according to a new report by the European Court of Auditors.

The BPS aims to provide basic income support to farmers and contribute to viable food production in the EU without distorting production decisions.

With an annual expenditure of around €18 billion granted to some four million farmers, it is the EU’s biggest income support scheme for farmers.

Simplification was a guiding principle of the 2013 reform. But the complex rules on BPS and eligible land contained numerous options and exceptions, say the auditors.

The rules chosen by Member States sometimes added complexity, increased the burden on national administrations, and allowed some farmers to realise windfall profits.

The reform extended the categories of land on which support is payable because Member States had various approaches in defining key terms such as “agricultural land” and “agricultural activity” to target support better towards “active“ farmers. But it could also create significant implementation problems.

Member States’ choices also had a significant impact on the degree of redistribution of support, and farmers could in some cases maintain particularly high support levels resulting from past levels of subsidy.

As a scheme essentially related to areas rather than income, say the auditors, BPS support tends to favour larger farms.

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“The Basic Payment Scheme is an important source of income for many farmers, but it has inherent limitations,” said João Figueiredo, the Member of the European Court of Auditors responsible for the report.

“It does not take account of market conditions, use of agricultural land or the individual circumstances of the holding, and is not based on an analysis of the overall income situation of farmers”.

The 2013 CAP reform ensures that by the year 2019 farmers will receive a minimum support per hectare.

The auditors found that a standard amount of support per hectare, by definition, does not take account of the specific conditions of the farm such as the cost of farming, the income generated, the profitability of the farm or the need for EU income support.

“As the overall amount of support paid to a holding is proportional to the number of hectares farmed, BPS tends to favour larger farms who can realise economies of size more than smaller farms.

“Some large-scale extensive farms or land managers with a historically low level of support could be affected by substantial increases in EU income support without this being associated with a change in the way they farm, in their costs or in the market,” the report found.

Examples of windfall profits due to a reduction of holding sizes

"The size of windfall profits could be significant. In Spain the authorities clawed back reference amounts of more than €75m from more than 7,000 farmers which they could use for allocation to start-up farmers. This represents around 3pc of the BPS support paid in Spain.

"As France did not apply the windfall profit clause, the total level of windfall profits which farmers realised is not known. However, we found individual farmers who had received direct payments in 2014 but who in 2015 transferred nearly all their land to other farmers, including family members.

"In extreme cases they kept just a small piece of land, sometimes only 0.01 ha on which they were allowed to accumulate their entire reference amount which resulted in BPS entitlement values of up to €9,000 and more. This was legally possible, because France, unlike other Member States, had not established a minimum area of land that farmers needed in order to claim for BPS entitlements."

Examples of redistribution as a result of the 2013 reform without changes in farming:

“In Italy we found an extensive sheep and cattle breeder with around 270 ha of eligible land, mostly public poor grassland. Before 2015 the farmer had received around €5,000 in annual direct support. With the introduction of the BPS the farmer received BPS entitlements whose value increased to around €61,000.

“In the United Kingdom (Scotland), we found a farmer who owned several thousand hectares of poor permanent grassland. The farmer had never been involved in agricultural production but before the reform he had bought payment entitlements from other farmers and thus benefitted from around €27,000 in SPS support. With the introduction of the BPS, he received BPS entitlements of a total value of more than €34,000. Due to convergence their value will go up to around €130,000 by the year 2019.”

The auditors concluded that the scheme is operationally on track, but that its impact on simplification, targeting and the convergence of aid levels is limited.

Control systems in the visited Member States largely reduced the risk of incorrect calculation, and payments overall were not materially affected by error.

However, in some cases, entitlement values were inaccurate, calculated only provisionally or based on estimates.

The Commission provided Member States with extensive guidance, but it could not always ensure that the rules were applied consistently; it also lacked important monitoring information.

For the current BPS scheme (applicable until 2020), the auditors make a number of recommendations to the Commission concerning the allocation and calculation of BPS entitlements, addressing the national paying agencies’ key controls, the Commission’s systems for disseminating information among Member States, and the role of national certification bodies.

For the period after 2020, they recommend that the Commission should analyse the factors impacting income for all groups of farmers, their income support needs and the value of the public goods that farmers provide.

From the outset, it should link the proposed measures to appropriate operational objectives and baselines against which performance could be compared.

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