Evaluation of the Community Animal Health Policy:

Compensation Rules and Mechanisms in the EU

Brainstorming on Avian Influenza Compensation Issues in Developing Countries

13 July 2006

Draft conclusions of a pre-feasibility study conducted for the European Commission by Civic Consulting of the

Food Chain Evaluation Consortium - FCEC(Civic Consulting - Agra CEAS Consulting - Arcadia International - Bureau van Dijk)

FCEC – CAHP evaluation WB Brainstorming 13 July 20062

Context of the study

• Broad scale evaluation of the European Community Animal Health Policy (1995-2004) conducted by FCEC since July 2005.

• Aim is to prepare the basis for the new Community Animal Health Strategy, due mid of next year.

• Study conducted on basis of extensive consultation with stakeholders, surveys, case studies.

• Report (including part II, the pre-feasibility study on cost sharing schemes) is in the process of being accepted by the Commission. Results presented are therefore still confidential in nature and Final Report will only be published after formal acceptance (likely end of July).

• Contact: alleweldt@civic-consulting.de

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Current EU framework for compensation /1

• Generally 100% of direct losses of farmers (animal value, slaughter, disinfection etc) compensated by EU Member States.

• EU “Veterinary Fund” contributes to eligible costs (Decision 90/424) – roughly 1 billion € between 1997-2005).

• Exceptional market support measures (ad hoc, several billion € between 1997-2005, mainly BSE and CSF, currently less frequently used).

Contributed to implementation of rapid and effective control measures, although in several cases deficiencies have led to insufficient control of disease spread (e.g. FMD 2001, CSF 1997/98).

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Current EU framework for compensation /2

• Deficiencies of current system:– Transfer of funds from low-risk to high-risk areas (85% of

Veterinary Fund expenditure 1997-2005 to UK and NL).– Focus on compensation of direct losses can result in adverse

incentives, because operators with infected herds may be better off than operators with healthy herds under veterinary movement restrictions.

– Community co-financing rules are complex leading to significant administrative burden.

• Implementation (selected MS schemes). Where cost-sharing schemes exist, they seem to have led farmers to take on more responsibility. However, current schemes lack a harmonised approach and only partially provide incentives for prevention.

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Cost-sharing scheme: Animal Health Fund NL

• Animal Health Fund compensates farmers.

• Product Boards repay expenses up to negotiated ceiling (species/disease).

• Ceiling are valid for five years and established in a bargaining process (e.g. 18 m€ for AI 2005 and 2009).

• Levies on farmers increase after outbreak.

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Cost-sharing scheme: Tierseuchenkassen Germany• Financed by state

governments and farmers (no ceiling of contributions).

• Levies differentiated among livestock species (e.g cattle 3.80€, chicken 0.02€/year).

• Large outbreaks refinanced by higher levies.

• Funds finance prevention programmes.

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Cost-sharing scheme: Agroseguro Spain

• Agroseguro is pool of private insurers, complementing public scheme for direct losses.

• Currently most epidemic livestock diseases not covered (however FMD policy planned).

• Government subsidises premium payments and provides re-insurance.

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Main principles of harmonised EU framework

Developed on basis of several criteria, including categorisation of diseases, incentive compatibility, avoiding distortion of competition, and flexibility of implementation.

Participation of operators in cost-sharing schemes has to be compulsory.

Cost-sharing schemes usually focus on farmers. Other operators from the livestock industry (e.g. traders) can be included. Rule: Only those operators that are compensated for losses should contribute to a cost-sharing scheme.

Cost-sharing schemes have to be regionally oriented, coverage depending on public relevance of disease (impact on human health or animal health/welfare, wider economy).

FCEC – CAHP evaluation WB Brainstorming 13 July 20069

Contributions to harmonised schemes

Contributions of operators to cost-sharing scheme have to be adjusted to individual risk• Number of animals• Species and type of animals• Regional risk adjustment

Bonus system for prevention measures• “Safety bonus” – rewards observable biosecurity measures (e.g.

premium reduction for all-in-all-out production).• “Disease-free bonus” – further incentive for unobservable

measures of farmers. Granted if farm remains disease free for a certain period (increasing with number of years). Once a disease outbreak occurs, the bonus has to be cut immediately.

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Compensation payments to operators

General rule: One category of losses of farmers may not be indemnified at a different rate than another when losses can be transferred (risk of intentional infection).

Compensation of all financial consequences of production risks directly caused by control measures ordered by veterinary authorities (some costs such as losses caused by business interruption as flat-rate). Price risks and consequential losses of other sectors should not be covered by cost-sharing scheme.

Compensation of operators from the costs-sharing scheme based on animal value at time of culling (as long as not higher than pre-crisis values).

Penalise late reporting of disease cases (Best practice: Reduction of compensation for dead/visibly sick animals. Better: acceptable prevalence rate for each disease).

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Implementation of schemes

Flexibility of implementation at the regional/national level. Three options:

• Public fund: administered through a public authority

• Mutual fund/insurer: owned by the participating operators.

• Participation of private insurers (e.g. insurer’s pool)All options involve public-private partnership to different

degrees. Best practice that operators participate in setting of standards.

Certain level of public involvement needed for setting up the schemes and supervision (of standards, accountable operation).

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Public financial contributions

Level of public financial support for compensation payments of cost sharing schemes and the question whether low-risk regions should subsidise high-risk regions has to be decided at political level.

Two options for public financial support:

• “Peace time” support (more advantageous)

• Co-financing of lossesContingency capital: As animal health risk is highly

cumulative, it is likely that cost-sharing schemes in some cases will run dry. A public loan provided to a scheme at predefined conditions would be an adequate funding mechanism with low transaction costs.

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Cost-sharing: Costs/losses of operators to be covered by national/regional cost-sharing schemes

Not covered by this schemeLosses other sectors

Not covered by this schemePrice risks

Flat rate (negotiated in advance)

Business interruption costs

Full compensation or flat rate

Emergency vaccination, disinfection, testing diagnosis, slaughter / rendering costs

Full compensation of loss in animal value

Partial loss of animal value due to control measures

Full compensation of animal value

Pre-emptive slaughter/welfare slaughter

Co-financing of compensation payments possible. Two options:

a) Peace-time support to operational costs etc.;

b) Co-financing of losses

Also possible: two-stage approach where loss-dependent public financial support would be continued for a limited period of time before shifting more advantageous peace-time support

Partial compensation of animal value depending on time of reporting

Stamping-out of infected herds

Disease outbreak

losses

Support to selected prevention measures

To be borne by operator, some prevention programmes covered by cost-sharing schemes

Bio-security measuresPrevention

costs

Possible public financial supportCompensation by cost

sharing schemeDescription

Cost/Loss category

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Conclusions for transfer of the EU experience to developing countries /1

• Ad-hoc compensation in case of outbreaks does not provide appropriate incentives.

• Cost-sharing schemes are an adequate mechanism for a prevention-oriented AH policy. Already the existence of such a scheme is an incentive for farmers to increase bio-security this might justify a gradual approach with increasing coverage over time (e.g. start as simple as possible, not all relevant diseases covered in the first stage etc.).

• Recommendations for operating rules may be more adequate than detailed blueprints of institutional models, as cost-sharing schemes should built as much as possible on existing structures.

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Conclusions for transfer of the EU experience to developing countries /2

• Important issues when setting up a scheme:– Existing mechanisms for collecting levies, payments to farmers?– Trust of farmers in these mechanisms/institutions? Participation of

stakeholders?– Registers of relevant herds/flocks/movements? (Basic) traceability

requirements/systems in place?– Monitoring of market prices of animals?– Veterinary services that could assess prevalence of disease in a herd

(relevant for compensation)? – Significance of animals in backyards and small-scale producers?

• Should backyard animals be included in scheme, different contribution rules? No easy solution (Hobby farmers are included in existing cost-sharing schemes – in NL government pays all related costs, in Germany even for a single sheep the levy is to be paid issue of feasibility, increasing administrative costs).

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Conclusions for transfer of the EU experience to developing countries /3

• Public financial support is much easier when cost-sharing schemes are in place. With such schemes the complexity of compensation remains at the lowest appropriate level.

• The question of what types of costs a scheme should compensate may not be confused with the question how and at which level public financial support is provided.

• In any case public financial support to a scheme must be limited so that farmer’s contributions fund a significant share of the cost-sharing scheme’s expenses (to provide incentives for prevention).

• Significant issue is the provision of contingency capital for cost-sharing schemes in case of large scale outbreaks. Possible role for a multi-donor funded loan facility?