Report

by the Comptroller
and Auditor General

Department for Environment, Food & Rural Affairs

Progress on the Common Agricultural Policy Delivery Programme

HC 727 Session 2016-17 24 October 2016

Our vision is to help the nation spend wisely.

Our public audit perspective helps Parliament hold government to account and improve public services.

The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.21 billion in 2015.

Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 24 October 2016

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act

Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office

14 October 2016

The National Audit Office reported in December 2015 on progress by Department for the Environment, Food & Rural Affairs and the Rural Payments Agency in implementing a new Common Agricultural Policy (CAP) Delivery programme to process new CAP scheme payments to farmers in England.

© National Audit Office 2016

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11309 10/16 NAO

The National Audit Office study team consisted of:
Richard Davis, Sebastian Groth, Asif Malik and Emma Parkinson, under the direction of Simon Helps.

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Key facts

Introduction

1 The National Audit Office (NAO) reported in December 2015 on the progress that the Department for the Environment, Food & Rural Affairs (the Department) and the Rural Payments Agency (RPA) had made in implementing a new Common Agricultural Policy (CAP) Delivery programme to process new CAP scheme payments to farmers in England.1

2 The Committee of Public Accounts held a hearing on the NAO’s report in December 2015 and reported its findings and recommendations in March 2016.2 The government provided its response to the Committee’s report in April 2016.3

3 The NAO report highlighted that significant challenges remained to make sure the payments due to be made from December 2015 were timely and accurate, to prepare for future years, maximise Programme benefits and minimise disallowance penalties. This memorandum sets out how well the Department and the RPA have met those challenges.

4 The RPA issued the first payments made under the new schemes and IT systems in December 2015, and committed to three payment targets between December 2015 and March 2016 alongside a regulatory target for 30 June 2016.

Background

5 The Department has overall responsibility for the CAP, paying English farmers and landowners under two funding ‘pillars’:

Pillar 1 primarily provides direct support to farmers through the Basic Payment Scheme (BPS), including additional payments to assist young farmers and a ‘greening’ element which aims to provide ecological benefits such as crop diversification under the ‘three crop’ rule. This is usually fully reimbursed by the European Union from its funding for farmers; and

Pillar 2 provides funding for rural development programmes, such as the Environmental Stewardship Scheme and the Countryside Stewardship Scheme that replaces it. This is jointly funded by the European Union and the UK Exchequer.

6 The RPA, which runs BPS for the Department, encountered problems with the implementation of the previous CAP changes in 2005 leading to inaccurate and late payments to farmers, but it had addressed most of these problems by 2014.4 The targets to make 90% of payments in December each year and for 99% accuracy in first payments were met by the RPA for many years.

7 We highlighted in our previous report the difficulties that the Department had encountered in implementing the CAP Delivery Programme. These included the failure of the online application system leading to a return to paper-based applications, and evolving system functionality and data control weaknesses, which made it difficult for the RPA to maintain its payment record.

Scope and structure of the memorandum

8 This memorandum provides an update on the reports by the NAO and Committee of Public Accounts on the early progress of the CAP Delivery Programme. It focuses primarily on BPS payments. These make up around 80% of the total payments made under CAP and it was the RPA’s priority to develop the functionality to make these payments. The functionality to enable online applications for the Countryside Stewardship Scheme under pillar 2 is expected to be ready for use by December 2016. The memorandum is based primarily on analysis of RPA’s payment data and our interviews with Department and RPA officials.

Part One sets out the Department’s performance on the timing of payments under the 2015 BPS;

Part Two assesses the accuracy of payments under the 2015 BPS; and

Part Three examines developments in the Department and the RPA to improve delivery of the Programme in 2016 and beyond, including reporting on the government’s progress against the recommendations included in the Committee’s March 2016 report.

1 Comptroller and Auditor General, Early review of the Common Agricultural Policy Delivery Programme, Session 2015-16, HC 606, National Audit Office, December 2015.

2 HC Committee of Public Accounts, The Common Agricultural Policy Delivery Programme, Twenty-sixth Report of Session 2015-16, HC 642, March 2016.

3 HM Government, Government responses on the twenty-first to the twenty-sixth reports from the Committee of Public Accounts: Session 2015-16, Cm 9260, April 2016.

4 Comptroller and Auditor General, Department for Environment, Food & Rural Affairs, and Rural Payments Agency, The delays in administering the 2005 Single Payment Scheme in England, Session 2005-06, HC 1631, National Audit Office, October 2006.

Part One

Timeliness of payments

1.1 Expectations regarding the timeliness of payments have been created through statements by the Rural Payments Agency (RPA) and the Department for Environment, Food & Rural Affairs (the Department), and performance in previous years.

1.2 In this part we explain:

the RPA’s performance and the difficulties encountered in meeting the payment targets;

how the Department and RPA have sought to mitigate the impact of payment delays; and

performance against the commitment to prioritise farmers most impacted by the winter 2015 floods.

Payment targets and performance

1.3 While not adopting formal payment targets, the RPA set a number of commitments on the timeliness of payments to farmers. It committed to pay the “majority” of farmers by 31 December 2015, the “vast majority” of farmers by 31 January 2016 and “almost all” farmers by 31 March 2016. The RPA later clarified these targets, indicating in September 2015 that the majority meant greater than 50%, and in March 2016 that vast majority should be taken to mean greater than 75%, and almost all to mean 92%–95%.

1.4 The European Commission sets a statutory payment window for the Basic Payment Scheme (BPS) that runs from 1 December to 30 June. If a member state does not pay 95.24% of payments, by value, by the end of the payment window the Commission is able to apply late payment penalties to European Union (EU) member states. In recognition of the difficulties that many EU member states have encountered in implementing the new BPS, the European Commission has suspended late payment penalties between 1 July 2016 and 15 October 2016, although the payment window itself has not been extended.

1.5 The RPA met its targets for December and January, but missed its March 2016 target by a margin of 8 percentage points (Figure 1). The RPA also made, in England, the level of payments expected by the European Commission within the payment window. However, this will be formally judged at the member state (that is, United Kingdom) level, which means that payment performance in Scotland, Wales and Northern Ireland will also be taken into account.

Challenges meeting payment targets

1.6 System failures, and the consequent move to paper-based applications, underpinned the difficulty making timely payments and were reflected in the targets set. The system that was created for the BPS payment cycle relies on electronic data to perform calculations and generate payments. For applications received on paper, every line of each application form had to be manually transcribed into the system in order to validate applications and calculate payments. This created a significant administrative burden of both staff and time necessary to make payments. Despite these difficulties, the RPA met the December 2015 and January 2016 targets.

1.7 The target to pay almost all farmers by the end of March 2016 was not met largely as a result of issues in three areas:

Common land (that is, land where more than one applicant has rights to use the eligible land, for example for grazing animals): following a legal ruling in 2014, the calculation of payments on common land now depends on how many other eligible applicants apply for payments on each common. The RPA cannot calculate payments on a piece of common land until they have received and validated all applications that include that common. Any changes submitted by, or made to, one common land claimant may have a knock-on effect for all the other associated claimants. Where claims include more than one common, this creates a dependency between multiple commons. This new calculation basis was applied for the first time for the 2015 scheme, and proved more complicated than the RPA anticipated.

Cross-border applications (that is, applications where farmers have eligible land in two nations of the UK): before the RPA can calculate these payments, data relevant to each application need to be validated and shared between the different nations’ paying agencies. In England, the RPA has encountered delays in obtaining information from other paying agencies, particularly Scotland, due to their own difficulties applying the new scheme rules.

Inspections: the RPA is required to inspect 5% of applicants each year to prove the validity of the applications. System functionality to process inspection findings was delayed beyond 31 March 2016, preventing applications subject to an inspection being paid before this date, even where the inspection showed that their application was correct.

1.8 By March 2016, one in six farmers (16%) had yet to receive any BPS payment. Complex cases have always taken a long time to process, but these functionality gaps meant that affected payments were delayed further than in previous years. Of the 14,300 farmers who had not received any BPS payment as at 31 March 2016, 5,700 were affected by inspections, 3,600 were affected by common land claims, and 600 were affected by cross-border applications. In total, approximately 9,900 of the 14,300 could therefore not be processed because of these issues.

1.9 The challenges faced did not affect all areas of the country equally, causing regional variation in the timing of payments which is affected by a number of local factors. There were therefore a significant number of areas where the national performance level was not replicated locally. Progress at a local level can be seen in Figure 2. It should be noted that the data shown relate to the address of the person receiving the payment which may not always be the same as the farm location.

Use of Exchequer funds to mitigate payment delays

1.10 The RPA is only reimbursed by the EU for BPS payments once they have been fully validated. In some cases, in order to make payments to farmers where there had been delays, the RPA made hardship and bridging payments to farmers from UK Exchequer funds bearing the risk that the full amount of such payments would not be reimbursed or would take longer to be reimbursed.

1.11 Hardship payments were available where farmers could demonstrate financial hardship, and were not due to receive their full payment imminently. Farmers could apply through charities such as the Farming Community Network for funds to be released. The value of hardship payments was up to 60% of the value of their prior year claim under the Single Payment Scheme, paid in advance of the processing of their current year BPS claim. Hardship payments were made to 580 farmers with a total value of £9 million.

1.12 The RPA also introduced bridging payments in April 2016 following its failure to meet its March 2016 target. These were in recognition of the financial pressures farmers faced as a result of delayed payments. In most cases, farmers received 50% of the estimated value of their BPS claim, prior to its validation.

1.13 As the hardship and bridging payments did not follow EU rules, the RPA was not able to seek reimbursement for these payments at the time they were made. Once the applications are fully processed and validated, and full payments are made, the RPA will seek reimbursement from the EU for these full payments. If the fully validated claims are for a lower amount than the hardship or bridging payments made, the UK Exchequer bears the risk of recovering these excess amounts.

Prioritising farmers in flood-affected areas

1.14 The Department’s Permanent Secretary made a commitment in her evidence to the Committee of Public Accounts in December 2015 that the RPA would seek to prioritise BPS payments to flood-affected farmers.5 In response, the RPA waived several requirements in the process, including the need to inspect flooded land, provided additional application advice and clarified which rules and exemptions will apply for farmers to avoid any cross-compliance penalties.6 The goal of these measures was to simplify the claims process for flood-affected farmers. In response to the floods, the government also established the Farming Recovery Fund and has allocated £9 million to over 1,000 farmers across northern England.

1.15 Using satellite images and Ordnance Survey maps, the RPA identified around 900 individual farms in Cumbria and North Yorkshire that were worst affected by floods with a view to prioritising BPS payments to these farms. The number of these farms that were paid was monitored on a daily basis by the RPA Chief Executive Officer. The farms identified by the RPA did not include any in Lancashire where there was also severe flooding.

1.16 These measures appear to have had some impact on the timing of payments made to flood-affected farms. By the end of March 2016, the proportion of the farms identified by the RPA that had received their payments exceeded the rate of payment for their neighbours in the rest of the county (Figure 3).

1.17 The farms identified by the RPA did not include any in Lancashire nor did they include farms that were indirectly affected in areas of widespread flooding. We therefore looked at payment performance across the whole of the three counties. Our analysis shows that payments in these three counties have lagged behind the rest of England (Figure 4). Payment performance is impacted by a number of factors, including farm size and claim complexity. The RPA told us that it was difficult to speed up payments in those areas because they are more complex due to a higher proportion of common land and cross-border claims.

5 HC Committee of Public Accounts, The Common Agricultural Policy Delivery Programme, Twenty-Sixth Report of Session 2015-16, HC 642, March 2016.

6 December 2015 Flooding and the Basic Payment Scheme: Useful reminders. Available at: www.gov.uk/guidance/december-2015-flooding-and-the-basic-payment-scheme-useful-reminders

Part Two

Accuracy of payments

2.1 The Department for Environment, Food & Rural Affairs (the Department) and the Rural Payments Agency (RPA) aim to provide full, accurate payments under the Basic Payments Scheme (BPS) as early as possible, although European regulations allow for payments to be made in two instalments. The problems faced by the Common Agricultural Policy (CAP) Delivery programme in 2015, and the consequent move to paper applications, inevitably increased the difficulty of making payments accurately. The RPA has subsequently commenced a planned reconciliation process to review payments to farmers who may not have received full payment initially. Its analysis in June 2016 revealed 13,600 claimants that may require an additional payment, around one in six of the 87,500 total claimants.

2.2 In this part we outline:

why the problems of 2015 increased the risk of inaccurate payments;

the outcome of the planned reconciliation process; and

how the RPA used 2016 claims to review 2015 payments.

Why the problems of 2015 increased the risk of inaccurate payments

2.3 The issues identified in our earlier report on the CAP Delivery Programme presented significant risks to the accuracy of payments. The paper-based application process for all but the simplest applications prevented the RPA from being able to process payments in a timely and accurate manner. All paper applications were manually transcribed into the new system, introducing the risk of human error. In addition, the commitments made by the RPA to make payments to farmers in a timely manner put significant pressure on the RPA’s staff and resulted in less experienced staff being used to provide additional processing capacity.

2.4 Identifying the land cover for some 200,000 land parcels also proved problematic, and the RPA was not able to migrate these from the previous land registry system. The RPA did not hold these data as it was not relevant to applications under the Single Payment Scheme that the BPS replaced. The RPA inferred land cover where it could from existing information and aerial photography but was unable to do so for 9% of the land parcels held within the system. This information was required to calculate the BPS payments due to farmers.

2.5 Until 2014-15, accuracy of payments was measured against a target of 99% by value for the RPA’s three main areas of grant expenditure. This was replaced in 2015-16 by a target for 99% of customers to receive accurate payments for two of these areas, but no target was set for BPS payment accuracy.

The planned reconciliation process

2.6 As a result of the problems encountered, the RPA had to investigate many validation queries. In order to hasten payments, the RPA decided to pay validated parts of payments where it had confirmed at least 85% of the expected payment value, and was confident that it would not make overpayments that could lead to the application of penalties by the European Commission. Unvalidated elements of BPS claims were not paid. The Comptroller and Auditor General’s audit of the Department’s Annual Report and Accounts indicated that the most common cause for partial payments was the RPA not updating its systems to include all of the information provided by the farmer.

2.7 The RPA instigated a planned reconciliation process to resolve remaining processing tasks and make top-up payments to farmers affected by these and other issues. For example, the land cover data that were missing from 200,000 land parcels were reintroduced into the system by the middle of July 2016. The RPA could therefore quantify the effect of the missing parcels on each claim, creating a recalculation of the final amount payable. This process initially covered applicants with potential underpayments exceeding €100.

2.8 On 29 June 2016, the RPA announced that some 13,000 applicants that had received an initial payment by 31 March 2016, but who may be owed €100 or more, were to be reviewed through the planned reconciliation process.7 Of these applications to be reviewed, the RPA told us some 5,500 related to applicants that had officially queried their initial payment with the RPA.

2.9 The RPA reported to us that, as at 17 October 2016, it has identified 13,600 claims that need to be reviewed. So far, it has determined that 2,100 of these are not due any further payment and 10,500 top-up payments amounting to a total of £27.4 million have been made. About two-thirds (65%) of the payments made so far have exceeded €1,000. Just over 1,000 are still being processed (Figure 5).

2.10 The RPA reanalysed improved data in October 2016, and as a result identified further farmers who have been potentially underpaid by €100 or more. The RPA also expects further cases to arise as farmers will continue to write to the RPA to query the amount of their payment. These farmers’ payments will now also be reviewed in the reconciliation process. The RPA has not yet determined whether they will review the claims of farmers that have been identified as potentially having been underpaid by €100 or less.

Use of 2016 claims to review 2015 payments

2.11 Data collected through 2016 BPS applications is being used by the RPA to identify potential errors that may have arisen through manual data entry in 2015. For a significant proportion of farmers there is a high degree of consistency between BPS claims made in consecutive years. The RPA has therefore identified a number of criteria to trigger a review of 2015 claims, for example if claimants have only identified themselves as a young farmer in one year, or submitted a form to record additional land parcels in only one year. These reviews will help improve data quality, and identify and correct potential incorrect 2015 payments.

7 Available at: www.gov.uk/government/news/rpa-sets-out-plans-for-resolving-farmers-bps-2015-queries

Part Three

Further developments during 2016

3.1 The Rural Payments Agency (RPA) is addressing issues encountered in 2015 to improve the timeliness and accuracy of payments, and has made significant improvements to the process for 2016 and future years. In addition to improved progress with the applications this year, there have been technical improvements that have either been made or are in the process of being made.

3.2 The Committee of Public Accounts made a number of recommendations following its session on the Common Agricultural Policy (CAP) Delivery programme (the Programme) in December 2015 and we report here on the government’s response and recent progress against these recommendations.

Improvements in the 2016 application process

3.3 Improvements made by the RPA allowed the online application system to be used for 2016 applications, albeit with lower functionality than initially planned for 2015. A significant number of farmers have used the online application functionality for the 2016 scheme. Some 80% of farmers (amounting to around 70,000 claimants) applied through the online system, with some 17,000 applying on paper. These digital applications will significantly reduce the amount of data processing required by the RPA.

3.4 The data processing and input procedures for the 17,000 2016 paper applications have been improved. The RPA has outsourced data entry to a company that specialises in data entry from manual forms, with stronger controls over input accuracy. Subsequent processes for these applications will remain broadly in line with the previous year, when manual forms were scanned and transcribed into the system to then be validated, calculated and paid.

3.5 The RPA has also introduced changes to address the issues faced this year with regard to common land. Farmers can now notify changes online to their rights to common land, functionality that was not available from the start of last year’s application window. The RPA also intends to set a cut-off date to prevent late changes and consequent delays, and to work more closely with commons associations to facilitate agreement between all those with access rights at an early stage. It also intends to help them to understand the impact of late changes on other commoners.

3.6 Although the RPA undertook in its response to the Committee of Public Accounts’ recommendations to publish performance targets by May 2016, it first made its payment targets public in October 2016, when it published its key performance indicators.8 These included targets to pay 90% of Basic Payment Scheme (BPS) claimants by the end of December 2016 and 93% by the end of March 2017. No target for the end of June 2017 was included, nor was any target on the accuracy of payments set. RPA told us that the delay in publishing its payment targets was due to the European Union (EU) referendum and changes to ministerial teams.

Further system development

3.7 The RPA continues to make functionality improvements to the new systems. Many of these improvements aim to rectify the functionality gaps that prevented certain farmers from being paid before 31 March 2016. Other improvements have been made to enable payments under the planned reconciliation process.

3.8 The key developments from 2015 are that:

farmers can now input their data online;

land and entitlement transfers can now be submitted online;

applicants are able to view key details of their prior-year application; and

applicants are able to view their maps online.

3.9 The RPA is further developing the system, including improvements such as the ability to map hedges in England and to apply online for the Countryside Stewardship Scheme. It will also seek to allow farmers to change data and mapping for their claim to further reduce the need for manual forms and processes.

3.10 The Government Digital Service (GDS) had a significant involvement in the development of the IT systems and we reported previously that it did not provide the support the Department needed. The RPA has continued developing the IT environment without further significant involvement of GDS. The RPA told us that GDS’s withdrawal from the Programme has enabled a change in the implementation approach, including reverting to a more traditional deployment and release cycle rather than the continuous deployment approach that GDS had previously advocated.

Disallowance

3.11 Disallowance penalties are levied by the European Commission when it considers actions taken by member states to control and administer CAP payments have not complied with regulations. Disallowance can arise as a result of delayed or inaccurate payments to claimants, member states misinterpreting the regulations or the European Commission identifying control weaknesses that it considers to be a risk to EU funds. The Department for Environment, Food & Rural Affairs (the Department) anticipates increased risk under the new CAP because of its greater complexity and the imposition of more stringent flat-rate penalties by the European Commission.

3.12 The Department and the RPA have developed a disallowance strategy that seeks to understand the underlying causes of disallowance and to address systemic weaknesses in its previous approach to disallowance. The strategy was not approved before the EU referendum, and has been further delayed as a result, but ministerial approval for the strategy is now expected by the end of 2016. The strategy includes disallowance targets, and formalises the Department’s approach to reduce disallowance penalties in the short and medium term.

3.13 In the 2015 Spending Review, HM Treasury agreed a ring-fenced budget for disallowance over the period 2016-17 to 2019-20. Should disallowance exceed the ring-fenced amount and the Department is unable to fund it from underspend elsewhere, HM Treasury will seek to provide reserve funding, provided it is satisfied that the Department has done all it can to drive down disallowance and subject to wider affordability considerations. The terms of the agreement are that the Department should continue to drive down disallowance with the support of HM Treasury and agree shared governance arrangements with HM Treasury. In response to this, HM Treasury was made a member of the Disallowance Steering Group in early 2016.

3.14 The Department has indicated its expectation that disallowance relating to 2019 scheme payments will amount to approximately 2%. However, it has not set out publicly the levels of disallowance it expects in the intervening years, and has not yet explained and justified its expectation of 2% for 2019. In the longer term, disallowance penalties are expected to cease as a result of the decision to leave the EU, although the details and timings are not yet known.

3.15 Disallowance penalties usually arise from European Commission audits of the RPA. The first audit of BPS was conducted in September 2016 and, while initial results have been communicated to the RPA, these are subject to a potentially lengthy process of challenge in order to determine the final level of any penalty.

Progress against Committee of Public Accounts recommendations

3.16 The Committee of Public Accounts made six recommendations, and the government has provided a response for each of these in the associated Treasury Minute.9 Figure 6 summarises the committee recommendations, the responses to each, and the NAO’s assessment of progress to date against each recommendation.

8 Available at: www.gov.uk/government/publications/rural-payments-agency-performance-indicators-and-targets-2016-to-2017

9 HM Government, Government responses on the twenty-first to the twenty-sixth reports from the Committee of Public Accounts: Session 2015-16, Cm 9260, April 2016.

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