DEFRA's cash squeeze hits aggregates fund, environmental regulation

Acute financial pressures at the Department for Environment, Food and Rural Affairs are eating deeper into budgets for environmental protection. The Aggregates Levy Sustainability Fund has been slashed by a third for 2004/05, while the Environment Agency has cut its routine inspections by up to a quarter and shelved plans to do more to combat fly-tipping after having its grant-in-aid cut. Businesses are also set to pay higher charges as DEFRA scrabbles for extra sources of revenue.

DEFRA's budget has been under severe pressure since the foot and mouth disease outbreak, and environmental protection continues to pay for being bundled in with the old Ministry of Agriculture four years ago. With no expectation of any significant relief from the Treasury, DEFRA's management appears to have decided to create financial headroom for the coming year by cutting external budgets where it can.

The Aggregates Levy Sustainability Fund (ALSF) is one victim. It received £29.3 million in 2003/04 to spend on environmental initiatives around quarries and on recycling research.

The pre-Budget report in December was unambiguous about the future financial position. It said that the Fund would be "continued for a further three years with the current level of funding."

However, the Quarry Products Association revealed in March that it had been told by DEFRA officials that the Fund's budget for 2004/05 will in fact be cut to £20 million "in order to cover funding gaps elsewhere in the Department." This could only have been done in a deal with the Treasury.

DEFRA has already suffered grave embarrassment over the ALSF after an in-house review found "a significant breakdown in internal programme management processes" in its oversight of the Fund (ENDS Report 347, pp 26-28 ).

The review was also critical of the Fund's design, which includes a ban on carrying funds over from one year to the next. This has put the ten distributing bodies under pressure to support only short-term projects capable of a quick start-up.

The unexpected one-third cut in the ALSF's budget a month before the new financial year will compound the problem, according to the QPA. "One of the things [DEFRA] don't seem to have grasped is makes the whole administration and control of the Fund very difficult for the distributing bodies," a spokesman commented.

Meanwhile, the Environment Agency has been working out how to live with DEFRA's decision to cut grant-in-aid for its environmental protection work by £4 million for 2004/05, bringing the figure down to £113.4 million.

The move has accentuated a trend which has seen the Agency awarded insufficient grant-in-aid to cover pay and price inflation for several years, while its cost recovery charges have mostly been pegged at the level of inflation.

The Agency's management has responded with revisions to its service levels which will see routine inspections of industrial sites cut by around 25% next year.

The Agency insists that this will not put its regulatory standards at risk. According to operations director Paul Leinster, there will be no reduction in the overall effort devoted to "compliance assessment". Some inspection resources will be switched to in-depth audits, mostly of waste sites, with 240 planned for next year. There will also be a greater effort to tackle illegal waste sites.

Nevertheless, the reduction in routine inspections seems bound to provoke concern because of its sheer scale. Industry inspections have already been cut by around half since peaking six years ago, while inspections of waste management facilities have declined by a third (ENDS Report 346, pp 9-10 ).

Dr Leinster says that the reduction of grant-in-aid will be felt more in areas where regulatory activity is not paid for out of charges on business. The politically most sensitive is fly-tipping.

According to an Agency board paper, provisional data suggest that the trend which saw a 19% increase in fly-tipping incidents in 2002 continued last year. There is also growing evidence of involvement by organised crime in more serious cases, and concern about possible increases in illegal activity when the ban on landfill co-disposal of hazardous wastes takes effect this summer.

However, the paper reveals that the Agency will be limiting its work to "big, bad and nasty" cases of waste dumping from April, with local authorities being expected to tackle more of the lesser incidents. It also frankly acknowledges that "resource pressures...may limit [the Agency's] capacity to meet expectations in the face of a growing problem."

MPs are unlikely to be happy that there will be no extra spending to combat waste dumping. A parliamentary inquiry in 1999 recommended that some of the growing revenue from the landfill tax should be awarded to the Agency to combat fly-tipping (ENDS Report 294, pp 34-35 ). The plea fell on deaf ears.

Last spring, the Environmental Audit Committee followed up by pressing DEFRA to give "urgent and sympathetic consideration" to an Agency bid for a fly-tipping task force costing £14 million to start up and £1 million per year to run (ENDS Report 340, p 20 ). But this is now caught up in the current spending review, which is unlikely to yield new money before 2006/07.

The cut in grant-in-aid also means at best a freeze on spending on prosecutions and responses to pollution incidents.

Environmental surveillance is another area where there is serious under-funding. The Agency is required by EU water Directives to carry out a minimum of monitoring for certain hazardous substances, even though some are now banned or little used. But it has "very little money" to spend on understanding the fate and effects of other chemicals, said Dr Leinster. The cash shortage could undermine the Agency's new chemicals strategy (ENDS Report 345, pp 39-40 ).

Beyond 2004/05, the signs are that businesses will be expected to pay more towards the cost of environmental regulation. A joint review of cost recovery charges is being carried out by DEFRA and the Agency and will feed into their bids for the 2004 spending review.

According to the Agency's draft corporate plan, the review "will take stock of existing charging schemes and consider how the approach to charging might be improved [sic]."

Among the issues under consideration are whether the Agency currently under-recovers its costs and "whether there is potential for extending the scope of recoverable costs." It is also examining whether enforcement against illegal activities should be paid for by charge-payers rather than grant-in-aid. And DEFRA is facing tricky decisions over how to pay for regulation of agriculture - especially if its plans for new controls on diffuse pollution are not to be stifled at birth.

The Agency is going into the spending review with low expectations. The "priority of the environment on the Government agenda is not high," according to finance director Nigel Reader. "A good outcome will be to retain what we already have in real terms."