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Co-financing rates in Pillar 2

The Agricultural Council meeting on 18 June held a discussion on the proposed rural development regulation in response to a Presidency questionnaire (the webcast of the Council discussion is here). One of the questions posed by the Presidency was:

Is the proposed provision concerning increased EAFRD contribution rates relevant for meeting the objectives of the rural development policy, or should alternative operations qualify to receive a higher rate of co-financing?

According to the minutes of the Council meeting:

Co-financing rates for rural development support are part of the negotiating box for the MFF (2014- 2020). Member states spoke in general terms of the need for a simple and targeted system for financing activities to meet the EU objectives for rural development. In its proposal, the Commission envisages a single maximum co-financing rate for most of the measures supported by the European agricultural fund for rural development (EAFRD) with only a few exceptions which could benefit from higher co-financing rates. Some delegations expressed support for this proposal as it stands while others made a number of suggestions for a higher standard rate and higher rates for operations contributing to the objectives of environment and climate change mitigation and adaptation, as well as risk management and innovation.
Many member states requested that there should be no national co-financing for all transfers from pillar I to pillar II.

The Commission proposal

The Commission proposal on co-financing rates has three elements:
• A single contribution rate for EAFRD measures
• A higher rate for less developed regions
• A higher rate for a limited number of EAFRD measures deemed to be of particular European importance such as knowledge transfer, producer groups, cooperation, young farmers and Leader.
In general, the EU contribution rate proposed is 50%/85% (where the second figure is the rate in less developed regions). However, contribution rates of 80%/90% are proposed for the knowledge transfer, producer groups, cooperation, young farmers and Leader measures. In addition, a contribution rate of 100% is proposed for innovation operations receiving funding under the modulation of funds resulting from capping. This is the only instance where the Commission is proposing 100% co-financing, and the funds modulated from Pillar 1 are restricted to innovation operations.
The single contribution rate for EAFRD measures is a departure from the practice in the current rural development programming period, where the contribution rates were 50%/75% for measures in Axis 1 and Axis 3, but 55%/80% for measures in Axis 2 (land management) and LEADER.
Co-financing rate increased for programme countries

In August 2011 the Commission adopted a proposal that allowed temporary increase of EU co-financing up to 10 percentage points for countries receiving special macro-economic assistance (Ireland, Latvia, Greece, Portugal and Romania). The proposal was adopted in a record time by both the Council and the European Parliament in December 2011. Without raising the overall EU allocation of available funds for the financial planning period from 2007 until 2013, it is now possible that regions in Greece, Portugal, Latvia and Romania under the convergence objective can have projects co-financed up to 95% for the period that they are programme countries, while the contribution rate for other regions including Ireland can go up to 60% 85% (corrected 2 July). Any increase of the co-financing rate only takes place at request of the Member State concerned. The higher rates apply as long as a country is in a bailout programme but in any case only until 31 December 2013. The intention is that in this way the level of execution can be increased, absorption augmented and extra money injected into the economy faster.
Higher co-financing rates for specific measures

Commission Ciolos has argued that a single co-financing rate brings simplification. Differences should only be introduced when they contribute to added value across the Union, although it is difficult to see this precise logic reflected in the measures selected in the Commission proposal. For example, aids to young farmers are singled out as warranting a higher contribution rate on the grounds that a Community approach is needed – but it is hard to see why generational renewal (even assuming that installation aids contribute effectively to this objective, which may be doubted) should be seen as a higher European priority than, for example, climate change mitigation and adaptation.
A number of member states have also questioned this logic. France, in particular, has objected to the reduced rate of co-financing for agri-environment and climate change measures in the coming programming period compared to the current one. The COMAGRI rapporteur’s report suggests that EU co-funding rates for agri-environment schemes should be increased to 60%/90%.
Other suggestions made are that the single rates should be raised from 50%/85% to 55%/90% across the board, and even that co-financing rates for individual measures should be left up to member states to decide within a minimum and maximum range.
Another vexed issue is whether there should be higher co-financing rates for transition regions (regions which are currently classified as less developed and thus benefit from the higher rates, but which in the next period will become more developed regions and thus lose the entitlement to a higher co-financing rate).
Some observations

The debate on co-financing rates is a classic example of the inter-mingling of member states’ financial interests with agricultural policy-making. Member states (and the Commission) obviously see higher co-financing rates as a sign of priority for the measures concerned. But, assuming that the distribution of EU funds across measures in a member state’s (or region’s) rural development programme is unaltered, a higher EU co-financing rate would actually lead to less (combined) public expenditure on the measure, not more– which is a strange definition of a priority (a point made by Austria in the Council discussion).
Perhaps the member state will reshuffle its portfolio of measures in its rural development programme to avoid this outcome, in which case the main effect will be to lower (combined) total public expenditure on Pillar 2 measures overall. This is obviously also the effect of proposals to raise the overall single contribution rate and to have higher rates for transition regions. As the Commissioner has pointed out, the EU budget for rural development is not elastic – any increase in the co-financing rate given a fixed budget means savings in national budgets, yes, but less money overall for rural development.
Economists have argued in favour of co-financing in the past on the grounds that it may help to encourage good fiscal management. If member states are putting their own money into rural development measures, the argument goes, they have a greater incentive to choose these projects wisely than if the measures are fully funded by Brussels. Whether, in practice, there is empirical evidence for this assertion is unclear.
While general co-financing rates of 60% appear high, it is worth remembering that even with 100% co-financing member states make an (unbudgeted) contribution through the administration costs of running Pillar 2 schemes. These costs, as Anja Weber of the University of Giessen has pointed out, include both scheme implementation costs (such as informing farmers, negotiating scheme details with them and approving grant aid) and scheme compliance costs (the costs of monitoring and control, as well as reporting to the audit authorities in Brussels).
Researchers at the Johann Heinrich von Thünen-Institute (vTI) and Institute of Rural Studies in Braunschweig, Germany, drawing on ex-post evaluations of rural development programmes in five German states for the 2000-2006 period, calculated that these public transactions costs added 12% on average to the amount of Pillar 2 expenditure, with the shares varying from less than 1% to more than 80%. Administration costs are higher for the more discretionary Pillar 2 schemes compared to current Pillar 1 payments (at least before the complexities of greening are factored in) and are another reason why member states are reluctant to contemplate modulating funds between the two pillars.
If degressivity of Pillar 1 payments is not the basis for the next revision of the CAP regulations, there are good reasons to encourage member states to voluntarily shift funds from Pillar 1 to Pillar 2. It is clear this will only happen if 100% co-financing is available for such transfers, and the justification is that such funds would not require co-financing if left in Pillar 1.
Annex: The co-financing text in the MFF negotiating box as of June 2012

Co-financing rates for rural development support
62. The rural development programmes will establish a single EAFRD contribution rate applicable to all measures. Where applicable, a separate EAFRD contribution rate will be established for less developed regions [,transition regions] and for outermost regions and the smaller Aegean islands within the meaning of Regulation (EEC) No 2019/93. The maximum EAFRD contribution rate will be:
– [75 – 85]% of the eligible public expenditure in the less developed regions, the outermost regions and the smaller Aegean islands within the meaning of Regulation (EEC) No 2019/93 ;
– [[75]% of the eligible public expenditure for all regions whose GDP per capita for the 2007-2013 period was less than 75% of the average of the EU-25 for the reference period but whose GDP per capita is above 75% of the GDP average of the EU-27 ];
– [60] % of the eligible public expenditure for the transition regions other than those referred to in the previous indent ] ;
– [50 – 55]% of the eligible public expenditure in the other regions.
– [[75]% for operations contributing to the objectives of environment and climate change mitigation and adaptation.]
– amounts transferred from pillar I to pillar II referred to in paragraph 57 as additional support under rural development will be co-financed according the general co-financing rates OR [100] % for amounts transferred from pillar I to pillar II referred to in paragraph 57 as additional support under rural development.
The minimum EAFRD contribution rate will be 20%. Other maximum EAFRD contribution rates to specific measures will be set in the Regulation on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)].
Photo credit David Hallam-Jones A parade of independent craftsmens’ workshops constructed in 1993-94 as part of a joint development by the UK Rural Development Commission and the Annesley Estate funded with E.U. Regional Development Fund monies.

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