Overview of costs and benefits associated with regulation in Scottish agriculture

2. Scottish Statutory Instruments 2005 No. 225 The Land Management Contracts (Menu Scheme) (Scotland) Regulations 2005

Abstract

Introduced in 2005 as the Tier II element of Land Management Contracts, the Menu Scheme ( MS) was a non-competitive payment scheme operating under the Rural Development Regulation ( RDR). It has subsequently evolved into Land Management Options under Rural Development Contracts, but still offers some insights as a case study. The MS rationale stemmed from seeking to address various forms of market failure to deliver economic, environmental and social benefits, with the novel non-competitive element potentially easing transition to wider uptake of RDR measures. No RIA was conducted in advance and a formal evaluation of costs and benefits has yet to be undertaken, but the MS appears to have performed reasonably against criteria of transparency, accountability, proportionality, and consistency and, given that individual measures were guided by experience of various previous grant schemes, a degree of effectiveness was anticipated. However, a large proportion of potential applicants never applied and, of those that did, the average claim was only for around 60% of the funding allowance available. Given that guaranteed funding was available via a relatively easy application process, this suggests that perceived proportionality was poor for some measures for some land managers. However, overall budget constraints and RDR/ WTO requirements on payment calculations mean that this would have been difficult to address. Take-up was highest for measures that were perceived as easiest to comply with, raising possible concerns over the degree of additionality achieved through non-competitive public funding.

Introduction

Land Management Contracts ( LMCs) were introduced in Scotland as an administrative vehicle - a "wrapper" - for a variety of payment schemes under the reformed Common Agricultural Policy ( CAP). A three-tier structure was created, with Tier I equating to the new Single Farm Payment ( SFP) under Pillar I of the CAP and Tiers II and III relating to expenditure under Pillar II of the CAP, governed by the Rural Development Regulation ( RDR).

Whilst Tier III represented an attempt to brigade a range of (mostly pre-existing) competitive land management and rural development grant schemes in order to simplify their application and administrative processes (mirroring the supposed simplification of multiple schemes into the SFP under Pillar I), Tier II represented the novel introduction of non-competitive funding for selected rural development activities. That is, whereas granting of a Tier III application would depend on how it ranked relative to other applications when judged against a set of evaluative criteria, granting of a Tier II application would depend solely upon it meeting minimum eligibility criteria.

More specifically, each individual eligible applicant was allocated a budgetary allowance based on their area of land and invited to seek funding up to this maximum by choosing to adopt one or more measures from a menu of options. Standard payment rates were set for each option according to RDR guidelines, relating to either a proportion of costs incurred and/or income foregone. The menu spanned the three main axes of the RDR, offering options relating to improving competitiveness, delivering agri-environmental benefits and encouraging wider rural development ( SG, 2005). Although governed by the RDR and requiring approval from the European Commission, the menu was constructed following extensive discussions with various stakeholder groups and drew heavily on experience with previous, competitive grant schemes.

The LMCMS was open to new applicants for only two years (2005 and 2006) under the previous Scottish Rural Development Plan ( SRDP), but has evolved into a related mechanism called Land Managers' Options ( LMOs) under the rebranded Rural Development Contracts ( RDCs). Although there are some differences in the specific measures available, the overall approach remains the same. Moreover, since some LMCMS options were entered into for a five-year period, some legacy aspects of the arrangements have carried-forward, as they did for 2007 ( SG, 2008a). The initial Tier II application process was, and remains, tightly linked to that for Tier I and is based on the common Single Application Form ( SAF) with guidance and advice available through the same official channels for subsequent stages.

Rationale

The rationale for the LMCMS stemmed from two main sources. First, as with the underpinning RDR, the various measures were intended to address various types of market failure. In particular, the structure of the land management sector can cause information and co-ordination failures that lead to individual and collective under-investment in business competitiveness and in economic diversification and community initiatives. Axes I and III of the RDR address such problems through (for example) offering support for training and for capital investment and were used to guide the design of some LMCMS options aimed at economic and social benefits. Equally, the failure of markets to account sufficiently for environmental public goods and externalities - such as attractive landscapes and biodiversity - associated with land management is addressed by Axis II of the RDR and led to several agri-environment-type options being included in the LMCMS.

Second, the non-competitive nature of the LMCMS was also justified in the context of easing the transition to a decoupled Pillar I with higher rates of modulation. That is, the CAP reforms marked a significant change in the nature of agricultural support arrangements and the LMCMS was viewed as an (albeit modest) attempt to provide some stability and an opportunity for SFP-recipients to recoup modulated funds taken from Pillar I. It also potentially offered a low-risk route for increasing land managers' familiarity with rural development measures as a lead-in to perhaps then bidding for Tier III measures at a later date.

Regulatory Burden Analysis

The LMCMS ran under the EU's Rural Development Regulation and was enacted domestically under the "Scottish Statutory Instruments 2005 No. 225 AGRICULTURE The Land Management Contracts (Menu Scheme) (Scotland) Regulations 2005" ( OFQPS, 2005). However, unlike other case studies presented in this report, it is an example of a payment scheme rather than regulatory controls per se. That is, compliance with the prescribed measures was on a voluntary basis in return for payment rather than being a compulsory obligation with penalties applied for non-compliance. Nevertheless, it is still possible to analyse the scheme on a similar basis to the other cases studies presented in this report.

Transparency - High

Initially, stakeholders were apparently wary of the LMCMS due to unfamiliarity with the concept blending with general concern regarding the whole process of CAP reform - an issue that led to deterioration in applicants' reported satisfaction with overall administration of CAP payment schemes (Campbell-Jack et al., 2006).

However, LUC/ STAR (2006) suggest that a sustained information campaign by the Scottish Government ( SG) and stakeholder bodies allayed a lot of worries and the (somewhat lengthy) guidance notes were deemed to be very helpful by those that had actually read them. Further publicity for LMOs may be needed to overcome persistent wariness amongst some groups and over-reliance on providing information electronically may risk alienating some groups.

Perhaps more importantly, financial aspects of the scheme were highly transparent. That is, calculation of the level of funding (the allowance) available to an applicant was based simply on the area of land managed, with rates tapering such that the differential between small and large farm allowances was reduced. Equally, the payment rates available for adopting individual menu options were publicised in advance, either as a rate per unit or a percentage share of actual costs incurred.

Accountability - High

The RDR underpins the LMCMS and thus accountability runs through elected members of UK government and of the European Parliament in terms of the high-level policy decisions and political negotiations that led to RDR and the reformed CAP. In practice, accountability for the design and implementation of the LMCMS was more generally viewed as lying with elected members and officials of the SG - although extensive stakeholder involvement in the consultation process may suggest some shared ownership and responsibilities.

Administrative accountability for the practical operation of the scheme in terms of processing applications, conducting inspections, making payments and handling appeals lies with SG officials, although elected members of the SG are ultimately held to be responsible.

Proportionality - Medium

The process of applying for the LMCMS and then complying with chosen prescriptive measures does require some effort on the part of scheme participants. However, the application process was relatively straightforward once understood and was well-integrated with the Single Application Form ( SAF) for the SFP in Tier I of the LMC. Consequently, for most applicants, the additional effort required was fairly modest. Moreover, since the non-competitive nature of the scheme led to a guaranteed level of funding, there was no payment risk involved in wasting time on a potentially unsuccessful application (a problem cited for Tier III measures).

Hence most claimants apparently accept the administrative burden of the scheme as proportionate - otherwise they would not have applied. However, it should be noted that the number of applicants is significantly less than the population of potential applicants and the proportion of individual allowances actually claimed by applicants is only around 60%. This suggests that administrative burdens may have indeed been sufficient to deter some applications. Whilst there are a range of possible reasons for low uptake, the fact that allocated, guaranteed funding was available via a relatively easy application process suggests that the perceived burden was not proportionate in all cases.

Separately, from the perspective of scheme administrators, the cost of processing an application was reported as £91.63 in 2005 ( SG, 2006) but is no longer reported separately, reflecting its tighter administrative integration with other schemes. The overall administrative cost of processing the SFP and allied schemes was reported as £218.69 per claim in 2007 ( SG, 2008b). The separate 2005 figure equates to a cost of around £0.05 per £1 of payment. This is higher than some other payment schemes, but lower than most agri-environment schemes - presumably reflecting on one hand the simpler, non-competitive nature of LMCMS but also on the other hand the labour intensive nature of processing individual applicants' expenses claims and the effect of agri-environmental options on the overall administrative effort required.

Consistency - High

Over time, with the replacement of LMCs with RDCs and the MS by LMOs, the precise mix of options evolved slightly to reflect changes in the underlying RDR and policy priorities. However, at any given point in time, identical menu options and payment rates have been available to all applicants. Thus whilst there has been some inconsistency over time - most notably with the enforced absence of any new applications in 2007 due to delays in approval of the new SRDP and subsequently with the (possibly only temporary) withdrawal of some measures - there has been consistency of treatment across applicants: everybody has been treated the same.

Although not currently affecting Tier II, the identification by Regional Proposal Assessment Committees ( RPACS) of geographical variation in rural priorities for RDC Tier III measures may have some relevance to future evolution of Tier II measures in terms of regional consistency.

Targeting - Low

The LMCMS was targeted at land managers and the choice of menu options presumably reflected some attempt to target prioritised land management and rural development objectives. However, the non-competitive nature of the scheme meant that there was no scope for steering uptake of particular measures either nationally or regionally: in this sense, expenditure on individual measures was not targeted. This led to high uptake rates for some measures and low uptake rates for other measures, with the former being for those measures judged easier to comply with ( LUC/ STAR, 2006). This raises issues about the additionality achieved by public expenditure, a point reflected in concerns expressed subsequently by the European Commission.

Equally, although available to all land managers, the number of applicants never exceeded around twelve thousand against a known SFP-claimant population in excess of twenty-thousand and an estimated population of other land managers (e.g. foresters) of several thousand. This means that many potential applicants (and their land) were not targeted effectively.

Non-applicants may have been deterred by perceived complexity (i.e. lack of transparency) of the application process, but a more general complaint appears to have been that the payment rates and individual allowances were not proportional (i.e. sufficiently attractive) to the perceived effort of applying relative to other uses of land managers' time. That is, the absolute sums available may have been too small for some claimants to bother with and/or the payment rates insufficiently attractive. However, overall budgetary constraints and the RDR/ WTO restriction on payment calculations to costs incurred and income foregone would have made it difficult to increase take-up through more generous funding.

Some potential applicants may also have been discouraged by their specific circumstances restricting their ability to apply. In particular, crofters have argued that few menu options were relevant to them, partly because of geographical location but also partly because of additional constraints imposed by small-scale farming and the resulting very low effective payment rates (Smith & Shaw, 2006). In addition, although now addressed under RDCLMOs, the treatment of common land under the LMCMS arguably constrained attractiveness to crofters. Equally, tenant farmers may need their landlord's permission to adopt multi-year measures, again limiting relevance of the scheme. In both cases, these issues are not unique to Tier II but have also arisen for Tier III measures and similar grant schemes in the past.

Costs & Benefits

A formal evaluation of the LMCMS has yet to be undertaken, although one will be as part of the recently-commissioned evaluation of the full SRDP, and no RIA was taken in advance. Hence it is currently difficult to compare costs and benefits on a quantitative basis. However, it is possible to estimate the level of payments to applicants and the public administrative cost from a mix of published and unpublished figures supplied by the Scottish Government. These are summarised in Table 1 below. Private administrative costs to applicants are not known, but are likely to be modest for SFP-recipients given the close integration between Tier I and II applications on the SAF, although as noted some further effort will be entailed in complying with the subsequent compliance and payment processes and for at least a sub-section of applicants (potential or active) the costs were sufficient to discourage action.

Benefits are harder to estimate since they are either in the form of correcting marketing failures or facilitating a transition path from a predominantly coupled support system aimed at agricultural commodity production to a decoupled, rural development support system. In either case, quantification of benefits awaits formal evaluation of the effectiveness of individual measures and the additional impact of their funded adoption. That is, estimation of the benefits gained requires an understanding of how well individual measures were designed to achieve stated objectives and how widely and well they were adopted, plus some attempt to gauge the counter-factual situation of if they had not been funded.

Table 1: Estimated annual public cost details for LMCMS over period 2005 to 2007

	Year
	2005	2006	2007
Total payments	£17.7m	£21.7m	£19.8m
Total number of claimants	10017	11652	9541
Average options claimed per claimant	2.9	3.2	2.9
Average payment per claimant	£1824	£1860	£2075
Average allowance per claimant	£2982	£3064	£3041
Average % allowance claimed	62%	61%	68%
Total public administrative cost	£0.9m	£1.1m	£0.9m

Source: derived from LUC/ STAR (2006), SG (2006) and SG (2008b) plus unpublished SG data. All figures are illustrative rather than definitive due to incomplete data and assumptions made.

In most cases, the design of individual measures followed prior experience with established competitive grant schemes. Consequently, it may be reasonable to assume that a degree of effectiveness will have been achieved and that some desired outcomes will have been secured. For example, prior experience of agri-environment schemes has established some understanding of best management practices and the type of public benefits achieved (although not without some criticism).

By contrast, the market failure and therefore public need for measures such as subsidised membership of quality assurance schemes or animal health & welfare programmes can be less easy to demonstrate - as reflected by their current suspension from the SRDP pending further negotiations with the European Commission. Equally, the merits of non-competitive funding relative to the more usual - and more easily targeted - competitive funding perhaps need to be articulated in greater detail and ideally estimated (Conlon, 2005; OECD, 2007).

In the absence of quantified benefits, Tables 2a and 2b report the relative adoption rates and expenditure for individual measures. LUC/ STAR( 2006) and Smith & Shaw (2006) reported that, unsurprisingly, claimants typically opted for activities that were easier to adopt and possibly already in place prior to their funding under the LMCMS. This perhaps suggests limited additionality such that the apparent popularity of quality assurance, animal health & welfare and access measures may merit further attention to check that the additional benefits achieved through their funding do actually outweigh the public costs incurred.

Table 3 offers a subjective assessment of overall costs and benefits, suggesting that (for scheme participants) the private costs are low due to the streamlined application process but that public administration is reasonably expensive, relative to some other grant schemes. Although possible lack of additionality under some measures may represent a cost, the relatively small overall budget limits the potential size of this deadweight loss. Benefits to claimants include the perceived access to "their" modulated funds and the possibility of securing grant aid for on-farm improvements. Public benefits include overcoming information and co-ordination market failures to improve on-farm and supply-chain efficiencies, but also delivering some environmental benefits. However, whilst previous experience with similar measures suggests that some benefits are likely, again, the limited budget and individual allowances will constrain the overall size of such gains. The potential catalytic effect of familiarity with LMCMS options encouraging greater interest in Tier III measures has yet to be explored empirically.

Table 2a: Estimated number of claims for individual menu options by year

	Year
Menu option	2005	2006	2007
Animal Health & Welfare	3850	12080	12175
Biodiversity cropping on in-bye	58	57	55
Buffer Areas	900	966	961
Management of linear features	4350	5262	5236
Farm & woodland visit	350	308	N/A
Farm Woodland Management	120	150	148
Improving access	3765	4730	3943
Management of moorland grazing	200	217	218
Management of rush pasture	1800	2040	2022
Nutrient management	660	674	665
Off-farm talk	200	188	N/A
Quality Assurance Scheme	7400	7695	N/A
Retention of winter stubbles	950	967	954
Summer cattle grazing	390	398	392
Training	1650	1305	N/A
Wild bird seed mixture	350	429	429
Woodland plan	100	39	N/A

Source: as per Table 1, but some 2005 figures inferred from a chart. N/A for some 2007 figures relate to options withdrawn in that year. Columns sum to more than total number of LMCMS claimants since an individual claimant can claim for more than one option.

Table 2b: Approximate total payments per menu option by year

Menu option	Year
	2005	2006	2007
Animal Health & Welfare	£2452k	£3220k	£2868k
Biodiversity cropping on in-bye	£7k	£4k	£4k
Buffer Areas	£244k	£227k	£227k
Management of linear features	£2916k	£3205k	£3210k
Farm & woodland visit	£145k	£118k	-
Farm Woodland Management	£84k	£41k	£40k
Improving access	£6809k	£10117k	£10000k
Management of moorland grazing	£182k	£165k	£168k
Management of rush pasture	£2033k	£2289k	£2282k
Nutrient management	£184k	£167k	£165k
Off-farm talk	£48k	£31k	-
Quality Assurance Scheme	£838k	£668k	-
Retention of winter stubbles	£668k	£513k	£512k
Summer cattle grazing	£173k	£161k	£159k
Training	£756k	£567k	-
Wild bird seed mixture	£152k	£169k	£166k
Woodland plan	£52k	£6k	-

Source: as per Table 2a.

Table 3: Subjective assessment of costs and benefits of the LMCMS⁵
Costs

	Action	Scale of cost
Admin	Application process	Low
	Record keeping/inspection visits	Low
	Processing applications	Medium
	Compliance monitoring	Low
Policy	Income forgone/costs incurred	Low
	Deadweight loss	Low

Benefits

	Action	Scale of benefit
Private	Access to modulated funds	Low
	On-farm improvements	Low
Social	Improved farm/chain efficiency	Low
	Environmental improvements	Low

Discussion

The introduction of the LMCMS reflects the on-going evolution of government objectives for land management and rural development. That is, a changing emphasis away from simply supporting commodity production towards encouraging broader notions of sustainable land management and rural development has led to an increased focus on overcoming market failures such as under-investment in business structures and training or under-provision of environmental public goods. Whilst other instruments could be - and indeed are - deployed to address such issues, the use of payment schemes to incentivise the adoption of particular management practices and activities remains an important policy tool.

The LMCMS differs from other payment schemes in that it wss non-competitive, offering guaranteed funding (up to a pre-determined maximum allowance) for all eligible applicants. This offers some advantages to applicants in that the opportunities for funding are highly transparent and certain. Moreover, the design of the application process incurs relatively little additional administrative effort for most applicants and is thus generally (but not universally) judged by applicants to be proportionate to the payments on offer. Accountability and consistency are also viewed as largely acceptable.

However, this generally positive view is accompanied by a couple of serious concerns related to targeting. First, despite the apparent ease and certainty of gaining funding, a significant proportion of potential applicants chose not to apply for the LMCMS and of those that did apply, many did not use their full allowance. Stakeholder feedback suggests that this is partly due to some on-going confusion about the relationship with Tier III measures and a perception of bureaucratic requirements but more generally is attributable to perceived low payment rates and a poor range of options for different circumstances as found on different sizes and types of farms in different parts of Scotland ( LUC/ STAR, 2006; pers. comms. NFUS, SCF, SRPBA).

That is, the maximum allowance and funding available per option was insufficient to attract the attention of many potential applicants, plus the number of options actually of practical relevance to many applicants was often far fewer than implied by the full menu. This not only results in dissatisfaction amongst stakeholder groups but also in reduced delivery of public benefits.

Suggested ways to overcome this perceived problem include increasing the individual allowance and increasing payment rates. The former raises budgetary issues - including modulation rates - whilst the second is constrained by what is permissible under the RDR in terms of payment calculations. However, echoing moves under RDC Tier III, some local concerns could possibly be addressed by introducing additional measures for different types or sizes of farm under regional menus rather than the single national menu - although such regional variation can cause tensions with respect to accountability and consistency criteria (Moxey, 2007).

Second, due to a lack of information, it is currently difficult to judge the relative costs and benefits of individual menu options or of the use of non-competitive rather than competitive funding. Whilst market failure justifications can be articulated and prior experience suggests that public benefits can be secured through the types of measure offered by the LMCMS, overall effectiveness of targeting benefits -either through current or future uptake - has yet to be measured. It is hoped that the forthcoming formal evaluation will attempt to do so, and to compare the LMCMS with alternatives such as greater use of competitive Tier III measures or recourse to enhanced cross-compliance under the non-competitive Tier I, Single Farm Payment as well as further evolution of Tier II itself.

References

This case study was compiled primarily using information published on the Scottish Government ( SG) website, including a prior analysis of the LMCMS published in 2006, plus unpublished data supplied by the SG.and personal communications with selected relevant officials in the SG and representative stakeholder bodies.

Campbell-Jack, D., Clapton, R. & Granville, S. (2006) Annual survey of customer satisfaction in administration of grants for 2006. Final report by George Street Research to the Scottish Government, Edinburgh. http://www.scotland.gov.uk/Publications/2006/11/16152848/0

Conlon, T.J. (2005). Grants Management in the 21st Century: three innovative policy responses.IBM Center for the Business of Government, Washington.

http://www.businessofgovernment.org/main/publications/grant_reports/details/index.asp?GID=228

LUC/ STAR (2006) The LMC Menu Scheme Policy Analysis Research Project. Final report by Land Use Consultants and the Small Town and Rural Development group to SEERAD, Edinburgh http://www.scotland.gov.uk/Publications/2007/01/04103757/0

Moreddu, C. (2007) Effective Targeting of Agricultural Policies. OECD, Paris.

Moxey, A. (2007) Review of the operation and funding of agri-environmental schemes. Report by Pareto Consulting to Scottish Government, Edinburgh.

OFQPS (2005) Scottish Statutory Instruments 2005 No. 225 AGRICULTURE The Land Management Contracts (Menu Scheme) (Scotland) Regulations 2005. Office of the Queen's Printer for Scotland , http://www.oqps.gov.uk/legislation/ssi/ssi2005/ssi_20050225_en_1

SG (2005) Land Management Contracts. THELMC MENU SCHEME 2005. Scottish Government, Edinburgh. http://www.scotland.gov.uk/Publications/2005/03/20812/54230

SG (2006) The Administration of Common Agricultural Policy Schemes in Scotland: Annual Report 2005. Scottish Government, Edinburgh. http://www.scotland.gov.uk/Publications/2006/12/01164556/5

SG (2008a) Rural Development Contracts - Land Managers' Options. Scottish Government, Edinburgh http://www.scotland.gov.uk/Topics/Rural/SRDP/Land-Managers-Options

SG (2008b) Rural Payments And Inspections Directorate Annual Report 2007 Scottish Government, Edinburgh. http://www.scotland.gov.uk/Publications/2008/04/11094226/9

Smith, R. & Shaw, B. (2006) The effectiveness of Land Management Contracts as a policy tool for the protection of mountain landscapes; comparisons with other local approaches. EUROMOUNTAINS.NET THEME 3 Research into the defence and management of the fragile rural areas, landscapes and natural resources in mountains. http://www.euromountains.net/documents/theme3_DOCresults/Highland-Rep-Them3_EN.pdf