Improving governance of the future CAP

The proposed CAP legislation launched in 2018 made two important innovations in the governance of the CAP. First, it gave much greater flexibility to Member States in the way CAP interventions and CAP rules could be defined in individual countries. Second, it proposed to change the monitoring of Member State actions and the use made of the EU CAP budget from detailed compliance with very specific rules set out in legislation to a more performance-based approach.

The Commission’s motivation was clear. It expected that giving greater flexibility to Member States to design their own CAP interventions and rules would ensure better value for money because the interventions would be more effective. As former Commissioner Hogan noted when launching the policy proposal, the ‘one size fits all’ approach is no longer appropriate in a Union with very diverse agricultural structures and challenges. He also defended this approach on the grounds that it would lead to greater simplification of the policy for national administrations and farmers, though we can agree that this was never really going to convince anyone.

Ensuring that the resulting national agricultural policy interventions remain consistent with the framework of a common agricultural policy and avoid advantaging farmers in some Member States at the expense of others requires a strong governance framework. There are reasons to believe that the governance framework proposed for the future CAP is not up to the task. It can be useful to examine how similar issues are addressed in other EU policy areas and what solutions have been proposed. In this post, we look specifically at the governance structure for the Recovery and Resilience Fund which was adopted by Council and Parliament earlier this month, with a view to identifying lessons that might be carried over into the CAP.

The proposed governance proposal

Giving greater flexibility to Member States within a strategic planning framework is, in my view, the right way to go, but it clearly also has dangers. It opens the possibility that farmers in different Member States will receive different payments for similar actions (e.g., depending on the presence or absence of voluntary coupled support, or depending on the share of eco-schemes in Pillar 1 direct payments). This can lead to distortions in competition which undermine the principle of a level playing field in the single market. However, it can be argued that the CAP has already lived with significant differences in payment levels across Member States, as well as differences in the value of payment entitlements within Member States, for many years and that the new CAP does not really make much difference in this respect.

However, the new CAP opens much greater scope for competition distortions arising from differences in environmental standards, given the greater importance attached to higher environmental and climate ambition in the new CAP. Again, this kind of environmental competition is not unknown in the current CAP. Member States have considerable flexibility to specify the exact requirements that farmers must follow when defining GAEC standards for cross-compliance, for example. It is clear the obligations on farmers can be significantly different from one Member State to another (for example, see the different obligations for GAECs 4, 5 and 6 in selected Member States in Table 29 p. 90 of this report on climate action in the CAP by Alliance Environnment).

But because it is intended that a higher proportion of the CAP budget should be linked to environmental and climate action in the next CAP (particularly through the allocation of between 20% and 30% of Pillar 1 payments to eco-schemes) and because there are no minimum objectives set for eco-schemes (as is the case for GAEC standards), the scope for environmental competition between Member States in the future CAP is much greater.

Some Member States might indeed make use of the potential in the new legislation to pursue interventions to address the urgent challenges of transitioning to a more sustainable model of agricultural production. Other Member States can equally decide to largely continue business as usual, continuing to provide area-based payments to farmers with minimal obligations attached. Farmers in the first group of Member States will complain loudly, and with some justification, about unfair competition arising from differences in environmental standards. The net result will be a race to the bottom in environmental and climate standards as national administrations keep looking over their shoulders at what other Member States are doing to avoid putting their own farmers at too great a disadvantage.

This is where the other change in the governance structure, the change from compliance to performance monitoring, should kick in. The specification of nine common specific objectives for the CAP (of which three relate to the environment and climate), the requirement for Member States to draw up national Strategic Plans showing how they intend to use CAP resources to address these objectives, the design of interventions and the setting of targets and milestones to monitor progress, and overall Commission oversight of the process, are all intended to ensure that Member States drive environmental and climate ambition upwards rather than downwards. Setting out indicative targets for desired changes in agricultural practices in the Farm to Fork and Biodiversity Strategies, which came after the initial CAP reform proposal, is another signal in the same direction.

Weaknesses in the CAP’s proposed governance structure

Nonetheless, academics and other critics have highlighted various weaknesses in the governance system proposed for the new CAP which are likely to render it toothless. Three are worth highlighting.

Weak legislative basis for approving Strategic Plans. The main tool the Commission has to steer the direction of the future CAP is its power to approve the national Strategic Plans. But, in practice, this means only that it can direct comments and recommendations to Member States when their draft Plans are submitted, which the Member States can take on board or not as they see fit. Article 106 sets out the criteria the Commission should examine before it approves a national Plan. While the criteria are reasonable, their evaluation is highly subjective and there is no clear threshold which national Strategic Plans must meet. If Member States’ draft Plans have been prepared in line with the consultative process set out in Article 94 of the Strategic Plans Regulation, and have the support of the partnership bodies mentioned there, I cannot see that the Commission has the power in practice to refuse approval,

The weak legislative basis for Commission decision-making is underlined by the way it proposes to integrate the Green Deal priorities into the CAP. The Commission’s own Staff Working Document in May 2020 analysing the links between CAP reform and the Green Deal concluded, not unreasonably, that “The Commission’s CAP reform proposal is compatible with the Green Deal and its associated strategies such as the Farm to Fork Strategy and the Biodiversity Strategy. It has the potential to accommodate the Green Deal’s ambitions.” However, it also noted that the capacity of the future CAP to accommodate the Green Deal’s ambitions would be dependent on key provisions of the Commission’s proposal being retained in the final legislation.  It also identified certain improvements in the final legislation that could close identified gaps and strengthen the final CAP legal texts. Finally, it identified a number of practical actions that it could take to help achieve the ambition of the Green Deal, including creating a structured dialogue for preparation of CAP Strategic Plans by providing recommendations to Member States on the nine CAP specific objectives. It also noted that Member States would be asked to address the new quantified Green Deal targets in their CAP Strategic Plans.

The problem again is that the indicator targets in the Farm to Fork and Biodiversity Strategies do not have a legislative basis and it is also unclear how much political support they have. The Council gave its positions separately on the Farm to Fork Strategy and the Biodiversity Strategy in October 2020, welcoming the proposals in principle but falling short of endorsing specific quantitative targets. The European Parliament has yet to adopt its positions (see here for the relevant Procedure File for the F2F Strategy and here for the Procedure File for the Biodiversity Strategy). Ominously, the Council has further proposed an amendment to the CAP Strategic Plans Regulation (Article 106), not yet discussed in the trilogues, which would require the assessment of national Strategic Plans by the Commission to be based exclusively on acts that are legally binding on Member States.

Weak instruments to monitor and correct performance. A comprehensive set of monitoring indicators is proposed in Annex I of the Regulation based on the existing Common Monitoring and Evaluation Framework. This divides indicators into Impact, Output and the unfortunately named Results indicators (there is also a set of Context indicators though they overlap considerably with the set of Impact indicators). The problem is that the only indicators where Member States will set targets and milestones in their Strategic Plans are for the Results indicators (which only measure how successful the interventions were) and not the Impact indicators (which measure how effective the interventions were).

To give an example, one of the CAP specific objectives is to enhance farm income and resilience, where a relevant Impact indicator is to reduce farm income volatility. For example, at least 20% of farms in the EU each year experience an income drop of 30% or more compared with their average income in the previous three years and this proportion has been increasing. Member States might subsidise a risk management tool to reduce this proportion. The Results indicator would measure the share of farmers using this tool.  But to measure how effective this instrument has been we really want the Member State to set a target to reduce the proportion of farms suffering high income volatility and to monitor its performance against that Impact target. In the CAP performance framework Impact indicators are only considered in ex-post evaluations when it is too late to do anything about under-performance.

The trilogues (based on the outcome after the fifth trilogue) have recognised this weakness in the performance reporting by Member States. Member States will submit performance reports annually containing both quantitative data on realised outputs and expenditure in relation to milestones as well as a more qualitative review of the state of implementation of the Plan and any issues affecting its performance. Every year, a review meeting will be organised with each Member State to examine progress towards established targets.

The Commission’s original proposal had a rather soft requirement that, where the reported value of one or more Result indicators reveals a gap of more than 25% from the respective milestone for the reporting year concerned, the Commission may ask the Member State to submit an action plan describing the intended remedial actions and the expected timeframe. The Council submitted an amendment that this review would only take place at the time of biennial performance reviews which it proposed should substitute for annual reviews (i.e. in 2025 and 2027) and raised the thresholds for action to a shortfall of 45% in 2025 and 35% in 2027. However, following the fifth trilogue, it appears any requirements in the case of under-performance with respect to Results indicators have now been deleted.

As something new, and based on an amendment from the European Parliament, available information on relevant impacts will also be included in these bilateral discussions between the Commission and Member States on their performance reviews. However, because Member States have made no commitments for targets regarding these impacts and they are not an integral part of the Plans themselves, the Commission will at best be able to use these discussions to suggest to Member State Managing Authorities that some revision of the Plans could be desirable. But there is no obligation on Member States to listen or act on foot of these observations.

Misaligned incentives. At the root of many of the governance problems of the CAP is the fact that Member States consider their pre-allocated amounts as their entitlement. Once these amounts are agreed in the negotiations on the Multi-annual Financial Framework, the natural tendency for any Agriculture Ministry is to try to minimise the constraints and difficulties in disbursing this money to farmers. Stricter environmental and climate standards just get in the way of this objective. There is no incentive for Agriculture Ministries to up their game because, in the inter-Ministerial turf wars, any kudos for improvements in outcomes will accrue to other Ministers (for Climate, or Environment, or whoever) and they also will be in line for complaints and criticisms. There is no reward for higher ambition and lots of downsides if it gets in the way of an Agriculture Minister’s primary (political) task which is get payments to farmers as painlessly and quickly as possible. At the end of the day, the Commission has no power to sanction a Member State for under-performance. Its CAP funds are never at risk. The Commission’s proposal to introduce a performance bonus as an incentive element for good environmental and climate performance recognised that this is a problem but could even end up having a perverse impact.

Learning from the Resilience and Recovery Fund

There are several alternative governance models in use in the EU which could provide guidance on ways to strengthen governance in the CAP, for example, the governance of the EU’s energy and climate framework. Here we ask what ideas might be learned from the governance framework for the recently agreed Resilience and Recovery Fund (RRF), the main part of the Next Generation EU initiative to boost recovery from the Covid-19 pandemic.

The RRF process has many similarities to the new CAP strategic planning process. It is built around six pillars (similar to the nine CAP objectives): green transition; digital transformation; economic cohesion, productivity and competitiveness; social and territorial cohesion; health, economic, social and institutional resilience; policies for the next generation. Some of the funding is ring-fenced (like ring-fencing of eco-schemes in the CAP). At least 37% of total expenditure should be allocated to investments and reforms that support climate objectives. Furthermore, all investments and reforms, and a minimum of 20% of expenditure should support the digital transition. Funding is also expected to contribute to effectively addressing the relevant challenges identified in country-specific recommendations under the European Semester (similar to the Commission’s recommendations to Member States on integrating Green Deal objectives into Strategic Plans). Member States must prepare recovery and resilience plans that set out a coherent package of reforms and investment initiatives to be implemented up to 2026 that will be supported by the RRF (like CAP Strategic Plans). Funds are pre-allocated to Member States based on objective criteria (as in the CAP). A scoreboard will be established to provide information on progress in the implementation of the RRF and national plans (like the indicators and performance reviews foreseen under the CAP).

In addition, the RRF Regulation introduces some governance innovations that could be considered for adoption in the CAP to help overcome of the weaknesses previously identified.

Approval of Plans. Both the criteria for Plan approval and the process of approval are significantly enhanced in the RRF Regulation. First, the criteria to be used by the Commission in approving Member State RRF Plans are made more explicit. There are eleven transparent criteria set out in the Regulation itself (Article 19), but these are elaborated in a separate six-page Annex. This in itself is an important step forward because it both gives Member States a much clearer idea of how to ‘pitch’ their Plans but, and more importantly, it gives a clearer legislative basis for the Commission assessment and for any decision to refuse to approve a Plan. The Commission, in its May 2020 document analysing the links between CAP reform and the European Green Deal, announced that it would publicly share additional documents on how CAP Strategic Plans will be assessed as well as sharing observations regarding the assessment of the targets proposed under the different CAP Strategic Plans. When these appear they will be welcome, but they do not substitute for legislative authority in the Regulation itself.

Of particular interest is the use of a rating system in the RRF Plan approval process. For each of the eleven criteria, the Commission in its assessment must assign a rating from A to C, where A is where the Plan fulfils the criterion to a large extent and C is where the criterion is fulfilled to only a small extent. These ratings then enter into the assessment in various ways. For some criteria, an A rating is a prerequisite for the Plan to be approved. For the remaining criteria, the number of B ratings cannot exceed the number of A ratings, and there must be no C ratings. A C rating on any criterion is sufficient to ensure rejection of the Plan. While there will also be some subjectivity in assigning ratings, this procedure is more transparent than what is proposed for approval of the CAP Strategic Plans. Importantly, the Commission can be assisted by an expert group in making these assessments.

The other important process innovation is that it is not the Commission that finally approves the Plan but the Council. The Commission forwards its positive assessment to the Council, but the Council makes the final approval based on a qualified majority. This procedure could also be applied in the case of CAP Strategic Plans. It would provide an important safeguard for the integrity of the single market if Member States had the opportunity to object to a Plan submitted by another Member State on the grounds that its proposed environmental conditionality was too weak, or if it felt that the targets and milestones that were included in the Plan were too unambitious and likely to give rise to competitive distortions.

Monitoring of Plans and release of funds. It is one thing to prepare a Plan, another thing to ensure its successful implementation. We saw above the weaknesses in the proposed governance system for the future CAP and the danger of misaligned incentives. Unlike under the CAP proposal, the release of funds under the RRF is contingent on the satisfactory fulfilment of the relevant milestones and targets set out in the RRF Plans by Member States. Once these milestones and targets are met, the Member State submits a claim for payment. The Commission makes a preliminary assessment of the application, and where it makes a positive preliminary assessment, it then must seek the opinion of the Economic and Financial Committee (a committee of representatives of Ministries of Finance of the Member States). The Commission must take this opinion into account in arriving at its final assessment.

If introduced into the CAP, this would provide another opportunity for a Member State to raise concerns if it believed the way another Member State is implementing its Plan creates an unfair competitive advantage for its farmers. In fact, the RRF legislation provides (in one of the recitals) that if, exceptionally, one or more Member States considers that there are serious deviations from the satisfactory fulfilment of the relevant milestones and targets, they may request the President of the European Council to refer the matter to the next European Council. Payment from the RRF is blocked until the European Council has discussed the issue. This was a requirement of the fiscal hawks in the Council to allow them to keep a close eye on how the borrowed funds for the RRF are used.

Despite the similarities in structure noted previously, the RRF is a very different animal to the CAP in terms of its Treaty basis. The RRF targets and milestones on which Member States will be judged will be of a different nature to the indicators used in the CAP (e.g., they may refer to a date by which a government has promised to introduce legislation or the date when a particular investment should be made, which are easier to monitor that even the Results indicators of the CAP let alone Impact indicators). However, the involvement of Member States in the approval process would underline that the design and implementation of Strategic Plans is not just of national interest but had spillovers for farmers in other Member States. The proposed CAP governance structure lacks mechanisms to allow these spillovers to be adequately evaluated and addressed.

Conclusions

The process of agreeing the future CAP legislation is now in its final stages. Both the Council and Parliament have submitted detailed amendments. The Portuguese Presidency has expressed its determination to reach a final agreement in May. Thus, it can be argued that this is not an appropriate time to propose radical changes in the future CAP’s governance.

But the problems raised in this post will not disappear. They may become increasingly evident once the Strategic Plans are approved and implementation begins. Hence it seems important to start a discussion on how best the greater flexibility and responsibility given to Member States to shape and design their agricultural policies (which, in principle, is a desirable change) can be made consistent with the maintenance of a common agricultural policy and, in particular, a level playing field within the single market.

This post puts forward some suggestions based on an analysis of the governance structure for the Recovery and Resilience Facility that has just been approved. This is not a comprehensive ,reform agenda, for this I refer to the European Parliament study by Professor Emil Erjavec and colleagues and summarised in my earlier post. Further suggestions on this topic are very welcome.

This post was written by Alan Matthews.

Image courtesy of 3D Animation Production Company from Pixabay under a Creative Commons licence

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1 Reply to “Improving governance of the future CAP”

  1. Matching farm spending with the needs of farmers in each EU member state is made more difficult when farmers themselves aim to maximise their payments, whatever their real needs. If large farms are to be penalised, farmers will break up their holdings into multiple smaller units. Their land use alters with the subsidies available. The bold and nimble farmer will always get a larger proportion of the rewards available, while the ones reluctant to make change are left behind. Yet the proverb of being last is first comes true when looking at farm ecosystems. Getting every last square metre into production is not the cool thing to do today.

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