from Sunday Herald, 04 November 2007
It all started with a three-line email on 4 October 2006 from an official in the Scottish Executive Environment and Rural Affairs Department. There was a possibility of a "supplementary payment" to farmers.
"I have mentioned this idea informally to Mr Finnie and he is keen that we pursue it urgently", the official wrote. And so began the saga of the then rural development minister, Ross Finnie, and his £40 million for farmers.
The fascinating inside story of how decisions on subsidising Scotland's farmers were made, reversed and misrepresented emerges from a long trail of internal emails and memos released by the Scottish government under freedom of information law.
Every year 13,000 farmers across the country received £61 million in grants under the Less Favoured Area Support Scheme (LFASS). Partly financed by the European Commission (EC), this is meant to help hill farmers in remoter areas, and covers 85% of Scotland.
Because of a change in EC regulations and delays in getting the Executive's rural development plan agreed, it became apparent a year ago that LFASS payments were going to be postponed. Instead of being paid out in April or May 2007, the money would be given to farmers in December 2007 or January 2008.
Finnie was worried that this eight-month delay would cause farmers substantial cash-flow problems. He asked his officials to investigate and come up with a solution.
An initial suggestion that farmers should simply be paid the equivalent of an extra eight months of grant was quickly rejected. Such a large amount - estimated at the time as costing between £30 and £36 million - would be ruled out as unreasonable by the EC, officials warned.
"I would be astonished if the Commission were to agree such a proposal," wrote one finance expert on 5 October 2006, "which clearly would constitute gross over-compensation for any hardship caused by the likely delay in payments under the 2007 scheme."
Four days later a study by a government agricultural economist came to much the same conclusion. "A payment level this high would not be permitted," he said, because it "would almost certainly be regarded by the European Commission as significant over compensation."
So officials decided instead that the fairest way to compensate for the delay would be to give a grant to cover the extra cost of borrowing money for eight months. Potential interest charges over three years were estimated to come to about £10 million, and the EC was asked to agree the payment.
The offer of £10 million was announced on 1 November but was immediately and angrily rejected by the National Farmers' Union in Scotland (NFUS) as inadequate. Internally, government officials continued to defend the sum, with one arguing that offering any more had no "value for money rationale".
Finnie, however, went into rapid reverse, and at a meeting with NFUS on 8 November proposed a payment of £40 million. According to an official account of the meeting, he was "at pains" to point out that this was not additional money because a corresponding sum would be deducted from the next round of grant payments in late 2007.
Finnie made the same assurance to the Scottish Parliament's Environment and Rural Development Committee on 6 December 2006. Quizzed by the convenor at the time, Labour MSP Sarah Boyack, he insisted that the £40 million was an "interim" payment, leaving a balance of around £20 million to be paid in December 2007.
Because of Finnie's change of heart, officials had to go back to the EC for consent to increase the £10 million payment to £40 million. But this soon ran into problems because the EC expressed concern that it might be "over-compensation" and requested evidence to prove that it was not.
A draft response to the EC was prepared, setting out in detail the cash-flow problems that would be caused by the eight-month delay in payments, and why the £40 million was needed. But officials pointed out that this risked being rejected as illegal by the EC.
Instead the Scottish Executive should "provide something which will keep their lawyers happy", one official advised on 22 November. The solution was to link the £40 million payment to the subsidy already given in the previous year. A calculation was done to show the EU that such a payment could not be considered over-compensation. "The trick will be to relate it to the funding gap but keep it anchored in the 2000-2006 period which is not an easy circle to square."
As a result the response to the EC was drastically slimmed down to concentrate on a limited comparison between farmers in less favoured areas and those in other areas. This was done, explained another official, to "focus on the narrow question and avoid giving the lawyers any indication that this is a surrogate 2007 payment."
The ploy worked, and the EC approved the £40 million payment - to be paid entirely by the Scottish Executive with no EC contribution - on 11 December 2006. Another problem remained, however, because there wasn't time to actually issue the grants before the end of the year, as EC rules required.
This was overcome, according to one email, by loosely interpreting a remark made by an EC official. He had said that payments should "ideally" be made in 2006, and this was taken to mean that they could slip into 2007.
But in the rush to process applications and issue payments in January, normal procedures still had to be by-passed. An article in the 1998 Scotland Act requiring the statutory instrument implementing the £40 million payment to lie before parliament for 21 days was breached (pdf), with the instrument introduced only seven days before it came into force.
Meanwhile, agricultural officials still had the tricky job of convincing the Scottish Executive's finance division that the £40 million was justified. This lead to a series of tetchy memos between Finnie and the then Finance MInister, Labour MSP Tom McCabe.
Finnie insisted again that the £40 million was "not additional money" and accused McCabe of "a number of serious misunderstandings". But McCabe replied in equally robust terms, as he told the Sunday Herald last week, because he was "extremely concerned" that the payment was "a disproportionate response to the issue they were dealing with".
McCabe added: "This is an example that helps the case for a more corporate approach by senior government officials than at the moment. It underlies the need for an effective Treasury-style challenge within the Scottish Government."
On the £40 million, however, Finnie got his way and a news release was issued on 16 January 2007 announcing the pay-out. It included a sentence inserted by Finnie reiterating the claim that "the £40 million is not additional".
But this immediately provoked a private complaint from the NFUS, who said that its understanding was that the £40 million was a "top-up" to the 2006 payment. "Surely there is still £61m to pay out for 2007?", queried NFUS chief executive, Andy Robertson, in an email.
The NFUS knew what it was talking about. Behind the scenes the original plan to only pay a balance of £21 million in December 2007 had been quietly scrapped at the suggestion of the farmers in favour of making a full payment of £61 million - a process which is just now under way.
This was implicitly recognised on 26 February 2007 when the version of the news release posted on the government website was officially altered to remove Finnie's claim that "the £40 million is not additional". The pretence that the money was not extra was dropped.
On 5 March, a memo to Finnie confirmed what was happening. The total LFASS payments for 2006 had been £101 million, explained an official, and payments for 2007 "will be worth £61 million." The farmers, in other words, had won themselves a healthy £40 million bonus.
NFUS was understandably pleased. The prospect of "lifeline" LFASS payments arriving eight months late in 2007 had been "horrendous", according to the union's deputy chief executive, James Withers. "To avoid a financial crisis on many hill farms, a supplementary payment was needed to bridge the payment gap," he said.
Many crofters, however, have a different perspective. "We were highly bemused by this process," said Becky Shaw, a land use manager with the Scottish Crofting Foundation.
"We had sent members information based on the fact the money was effectively an advance, only to find a few days later that this wasn’t the case and that apparently it never had been."
Although the extra money was welcome, it often hadn't gone to those who most needed it, she argued. "The bizarre allocation of LFASS, which sees higher payments on better land, meant that farmers and crofters in the really disadvantaged areas didn’t actually see a huge proportion of this additional money anyway."Read the headline story on the £40 million scandal here.
PAYING FARMERS TOO MUCH?
May 2006: Farmers in less favoured areas receive annual £61 million in subsidies as usual.
October 2006: Extra £30-£36 million to cover expected 8-month delay in 2007 payment rejected as "gross over-compensation" by officials.
November 2006: £10 million payment proposed to compensate for delay condemned by farmers, then upped to £40 million.
January 2007: £40 million paid out, with repeated assurances it was "not additional" because money would be deducted from grants later in the year.
December 2007: Another £61 million now scheduled to be paid out, with nothing deducted.
OUTCOME: Instead of getting the £122 million they were due over two years, farmers netted £162 million, thanks to an extra £40 million from Scottish taxpayers.
Source: Scottish government