Economists have long been interested in the costs associated with policies transferring income support to farmers. These costs include not only the resource costs associated with distorting production and consumption choices away from the market optimum (assuming that market prices fully reflect the social value placed on resources and outputs), but also the transactions costs of administering and monitoring the policy, indirect costs associated with distortions in other markets (for example, if tax revenue has to be raised to pay for direct payments or export subsidies), as well as rent-seeking costs.
A recent report for DG Agri has shed light on some of the transactions costs associated with the Single Farm Payment scheme in five EU member states – Denmark, France, Germany, Ireland and Italy. The countries were chosen to reflect different models of SFP implementation. The study sets out to measure the administrative burden on farmers of applying for the SFP. Not included are the administrative costs to the public authorities of running the scheme, nor costs incurred by farmers in meeting cross-compliance criteria. The costs involved are mainly those of time in understanding, completing and returning the forms as well as those for external assistance used to claim eligibility for the SFP.
[For this reason, it is misleading to claim, as is done in the Commission’s press release on the subject, that “The burden of red tape on farmers resulting from compulsory standards of environmental protection, public, animal and plant health and animal welfare (so-called Cross-Compliance) is very limited, according to a new report carried out for the European Commission.” The costs measured in this report are much more limited. The same misunderstanding appears in a recent speech by Commissioner Fischer Boel who claimed that the report “found that the administrative burdens which cross-compliance places on farmers are relatively light”.]
The study reports that total administrative costs constitute between 3.0 and 9.3% of the total CAP payments received by the beneficiaries. In absolute terms, the cost per farmer varied between €110 in Italy to €1,300 in Germany. The low Italian figure is partly due to the small size of farm holding in Italy, and also because much of the cost is borne by publicly-funded extension centres which provide assistance to farmers on completing the forms.
While some of the differences in administrative costs across countries can be attributed to the differing complexities of the SFP implementation model chosen, the study finds that other factors such as the efficiency of public administration and the availability of, and ability to use, IT solutions are more important than the choice of SFP model in explaining these differences across countries. Simplification of the SFP scheme, as sought in the CAP Health Check, may well be desirable on a number of grounds, but on this evidence it is unlikely to have a great impact on the administrative burden perceived by farmers.
The study highlights that costs were higher in countries (France and Italy) where the SFP scheme was being implemented for the first time in 2006, the year of the study, compared to those countries which had already gained a year’s experience in its administration. It also noted that costs are likely to fall as farmers and their advisors gain familiarity with the scheme and as public administration becomes more efficient. It is thus not unreasonable to assume that the administrative cost will converge on a level equal to 2-3% of the value of payments.
The method used to measure administrative costs first identifies the amount of time spent by the farmer on the forms and then values this time by the average wage in the member state concerned and in the sector. On many smaller farms, the opportunity cost of the farmer’s time may be much lower than this, suggesting that the 2-3% figure may be an over-estimate. On the other hand, the cost to the public authorities of administering and monitoring the scheme should also be factored in which would tend to inflate the percentage figure.
On balance, the transactions costs of administered a direct payments scheme with a relatively unchanging base is shown to be modest, though not negligible. As the distortion costs associated with a (largely) decoupled direct payment scheme are also likely to be minimal (apart from the distortion costs associated with raising the taxation necessary to fund these payments), the study underlines that the transfer efficiency of direct payment schemes is high relative to other policy measures used in the CAP.