Section II: The need for fundamental reappraisal
Introduction
32. Prompted by Cabinet Office guidance on the management of non-departmental public bodies, the four SFIA sponsor Departments invited us to undertake a routine periodic review of SFIA. In line with other exercises of this type across Government, our terms of reference suggested a fundamental review going to the heart of the case for maintaining SFIA. Our initial contacts with our sponsors suggested, however, that their expectation was for modest reform rather than radical change. Earlier reviewers (the last periodic review was in 1998) had not found cause seriously to question the existence of SFIA.
33. Our work on the review has led us to more uncomfortable conclusions. Though there is much positive to be said about SFIA's current management and aspects of its activities, the overall picture is less reassuring. We have been told that many of SFIA's levy payers are largely ignorant of its activities; some have major concerns about aspects of its work, or about the direction in which they believe it is moving; and some indeed are opposed outright to its continued existence. SFIA's relations with sponsor government departments have been difficult at times; for example, SFIA's most recent Corporate Plan has not been formally endorsed by all. SFIA management itself has still fully to develop a clear vision for the future of the organisation and priorities for action.
34. We do not believe that the difficulties, ambiguities and uncertainties as to priorities stem from poor management or lack of board leadership. Indeed, many who commented to us emphasised the significant improvements which a refreshed management team have recently effected, with positive support from the appointed Board. The difficulties stem rather from tensions and contradictions at the heart of SFIA's constitution and funding. These need to be exposed and resolved if the SFIA is to move forwards on a sound footing.
35. These tensions and contradictions are discussed below under the three headings of:
(i) The fishing industry v. the seafood industry: where should SFIA's focus lie?
(ii) Levy funding and market distortions.
(iii) Divided accountabilities.
The fishing industry v. the seafood industry
36. SFIA was set up in 1981 to take the place of two fishing-related bodies, the White Fish Authority and the Herring Industry Board. In moving the second reading of the bill which established the Authority, the then Minister of Agriculture, Fisheries and Food said that its purpose was "to enable the fishing industry to succeed in the 1980s". The fishing industry is not defined as such, but it is clear from the debate that the concern was with the health of the UK catching sector, and the related downstream processing and sales-related businesses.
37. Over the 25 years since 1981, there has been a very substantial increase in the amount of fish which is imported into the UK from foreign catchers for processing and/or consumption. Only a relatively small proportion of the fish now consumed in the UK is caught by the UK fleet while much of the fish caught by the UK fleet is exported. The health of the UK catching sector is no longer of such central importance to the UK seafood industry.
38. SFIA is now caught uncomfortably between meeting the needs of the UK-based fishing industry which has traditionally been at the heart of its business, and providing a valued service to the wider seafood industry sourced largely by imported fish. The technical expertise which SFIA has built up over the years, the expectations of the industry, and demands placed on the organisation by sponsor Government Departments all tend to push the Authority towards a continuing focus on the UK fishing industry. This is also the part of the sea food supply chain which most clearly meets the levy tests of 'fragmentation' and 'scale of change' sketched out in the report of the Review of the Agricultural Levy Bodies recently published 1. But the fact that SFIA now derives some three quarters of its levy income from fish imports provides strong pressure on the organisation to move away from its roots and to provide a service which is of value to the seafood industry at large.
39. In the industry and among wider stakeholders, there are a range of views on how the Authority should deal with these changing pressures. Consultation respondents from the catching sector tend to emphasise the importance of SFIA's traditional surveying and technical services, with one respondent for example referring to the survey department as the Authority's "jewel in the crown". They have some support in this view from the Food and Drink Federation, representing some of the largest levy payers in the processing sector, whose members are said to be happy to support SFIA in its traditional work "to ensure a successful UK fishing industry" 2.
40. On the other hand, another major levy payer from the importing/processing sector commented that "things like technology training, flume tanks, industry developments etc surely must be a thing from the past", and that "the only obvious thing a levy like this should be used for is marketing and PR which would build a better base for imports to supply the UK market". Their argument again is that "the ones who pay …must see a better use of funds".
41. SFIA management have recognised the imbalance in their activities between those who pay and those who benefit, and gone some way over the last couple of years to build up their services to support imports. They have also in recent years built up those of their services which support the seafood industry at large, such as sea food promotion, market analysis and support on new legislation. At the time of writing, however, they remain ambivalent about whether their aim for the future should be to provide a service back to the industry more directly in proportion to what different sectors pay, or whether they should aim rather to decide their programme on the basis of where there is greatest need and greatest potential benefit. There is more discussion of the 'proportionality' issue in paras 52 and 53 below.
42. To deal with these tensions and ambiguities about its role, SFIA and sponsor Departments need to develop and publish an agreed statement of how they now interpret the scope of the term 'sea fish industry', and where they consider that its common interests lie. We are not suggesting that a focus on the wider sea food industry implies the necessary exclusion of all activities which support the fishing industry, but it will influence the basis for their selection. The Authority must know what its core remit is if it is to have a sound basis for deciding its programme and priorities.
Levy funding and market distortions
43. SFIA aside, statutory levy funded bodies which impose a compulsory charge on industry members exist only in the agriculture sector in the UK, and as a result the principles that underpin statutory levy funding are not widely debated or understood. The recently published independent review report on the five agricultural levy boards provides a valuable additional statement on the rationale and purpose of such bodies. Our thinking was also influenced by principles developed by the Australian government, which are reproduced at Annex C.
44. Any group of businesses within an industry sector may get together to pay for collective activities where they feel that their individual business interests are best served by joint action. Trade associations are an obvious example of voluntary commitment to collective action, set up often with the core purpose of representing their industries on legislative and regulatory issues. Membership fees can be substantial, but relevant businesses are of course free to join or leave depending on whether they feel that the service provided offers value for money. This is an important discipline in ensuring that the collective action is well targeted to offer market advantage to the businesses which support it.
45. A compulsory levy may be justified where it is clearly in the interests of an industry to act collectively for defined purposes, but where for some reason the industry is unable to take the necessary action on a voluntary basis. This is usually because of the problem of 'free riders', businesses who would benefit from collective action but who would not contribute voluntarily to the costs. Our consultation responses suggest that a majority in the sea fish industry accept that there is a case for a mandatory levy supporting some collective activity (although it is worth noting that just under a half of the actual levy payers who responded did not). SFIA's management and sponsor Departments also believe that there are many ways in which the profitability of the sea fish industry can benefit from collective action.
46. To be defensible, however, it is not enough to show that a compulsory levy supports activities which promote the profitability of some of those who pay the levy. It is necessary also to show that the burden of levy payments fall equitably on all who benefit from the services provided, and that, taking one period with another, all who contribute benefit more or less proportionately. Otherwise the service becomes a windfall for some businesses and a tax for others, distorting the market within which they operate.
47. The SFIA regime as currently operated is responsible for a number of market distortions. For reasons which had some logic historically, the levy is payable at first point of sale on all fish and fish products except salmon and migratory trout and canned and bottled fish. This means that those sectors benefit from SFIA's work to support and promote the fish food industry without having to contribute to the cost. It means that salmon has a competitive advantage over other fish in terms of cost. And it means that levy is payable on fish that is canned or bottled in this country while it is not payable on canned and bottled fish which is imported, thus creating a perverse incentive to invest in processing abroad. None of this has any logic in the context of today's market.
48. There is potential also for market distortions in terms of the relative benefits derived by different sectors of the industry when compared to the amount of levy that they pay. For example, the proportion of levy paid on home landings (26% in 2004/05) is significantly less than the proportion of its spend which SFIA deploys on the UK fishing industry (an estimated 40% of total spend), which may imply some cross-subsidy from the wider industry to the catching sector. More generally, there is a widespread perception among SFIA levy payers that the benefits which SFIA delivers to them fall short of the amounts of levy which they pay, and that other parts of the industry are benefiting disproportionately. This is particularly marked among levy payers whose businesses rely heavily on imported fish. Some understatement of the benefits received may be expected from businesses faced with a compulsory levy, but the breadth and depth of feeling among SFIA levy payers seems to us to be too great to be simply brushed aside and ignored.
49. This is not just an academic issue, nor just a question of fairness. If SFIA is supporting one part of the UK industry at the expense of another, then there is a danger that it is reinforcing inefficient practices at the expense of more efficient ones, to the ultimate detriment of the industry as a whole. If it is engaging in activities which are not justified in terms of the greater profitability of the industry as a whole, then it is undermining the competitiveness of the sea food industry as against other parts of the UK food industry.
50. To avoid market distortions as described, the underlying principle should be to bring all those with a common interest within the scope of the levy, and to focus the programme on activities that promote the common interest. Two sets of actions are required to achieve this. First, having reviewed the definition of the industry which SFIA is intended to serve, sponsor Departments should take whatever legislative steps may be needed to apply the levy requirement to all businesses in the sea fish industry as defined. We discuss further what may be involved in paras 73 and 74 below. Second, SFIA should review its work programme to ensure that levy income is devoted to activities which conform with two key levy principles. These are described below.
51. The first key principle is that any activity supported must be justifiable on the basis of its contribution to the profitability of the levy paying community. This means - obviously - that SFIA should not embark on activities which are irrelevant to the sea fish industry. But, more controversially, it means that SFIA management should be careful to distinguish between activities which are in the interests of the levy paying community and those which are in the wider public interest, concentrating their efforts on the former. Much of the Government's sustainability agenda falls into the latter category. As the Agricultural Levy Body report makes clear, 3 levy monies should be used to benefit the levy paying community; other structures and arrangements should support the wider public interest agenda.
52. The second key principle is that - to avoid cross-subsidy within the industry - levy payers should benefit from activities financed by the levy broadly in proportion to their contribution. Levy should not be used to support one part of the industry at the expense of another. This does not rule out working with individual parts of the industry or in particular geographic areas where there is a wider industry benefit; for example, encouraging sustainable practices in the catching sector is likely to bring reputational advantage to the seafood industry as a whole; and supporting pilot schemes in one part of the UK may, if successful, be capable of adding value more widely. But it does suggest that levy should not be used to promote the interests of one region against another (an issue we return to in para 82 in the context of Seafood Scotland); and it argues also that there is a limit to the degree to which levy generated on fish imports should be applied to support the UK catching sector, and vice versa.
53. There is a tendency to interpret this 'proportionality' principle as a requirement to spend levy money on different industry sectors - catchers, importers, processors etc - broadly in proportion to what they contribute. This interpretation is unhelpful, and can lead to conflicts with value for money and the Chief Executive's Accounting Officer responsibilities. The Authority should not spend money on a particular industry sector if that spend would not offer good value. It should not be looking simply to give money back to the different industry sectors crudely in proportion to their contribution. It should rather be aiming to finance activities which bring benefits to the levy community as a whole, whether these be central services supporting the entire industry, or sectoral and local activities in which all levy payers have a common interest. Work on cross-industry co-ordination, such as support for the Fish Industry Forum, clearly falls within this definition, as does work in schools to promote fish consumption; but grant-aid for sectional industry representative bodies (such as the Frozen at Sea Fillets Association, the Shellfish Association of Great Britain) arguably does not.
54. Finally, by taking action centrally and achieving economies of scale, SFIA should at all points ensure that it adds more value than would have been achieved across the board had the levy monies been used by the subscribers at their own hand.
Divided accountabilities
55. As a statutory levy-funded body, SFIA is something of a cross between a standard non-Departmental public body and a voluntary co-operative or trade association. It is funded by a particular industry, and exists to serve the interests of that industry. At the same time, it is accountable to Parliaments in the various parts of the UK, and its members are appointed by Government Ministers. These mixed characteristics are unavoidable given the basic rationale for a levy body, which is that the industry sector in question is not in a position to take the collective action which is in its own best interests without intervention from a higher authority.
56. Because it is set up by statute, it is right that SFIA should be in some respects accountable to Ministers and Parliaments. But because it is paid for by industry and exists to serve their interests, it is important also that Authority is accountable to the industry.
57. There are dangers in this dual accountability. Unlike with a standard NDPB, Ministers have no direct financial interest in ensuring that the SFIA budget is kept to the minimum consistent with delivering its functions effectively. Nor do they have any benchmark against which to judge whether it is prioritising its programme effectively in terms of the best interests of the industry, rather than in terms of the Government's and the Devolved Administrations own policy priorities. Members of the industry are much better placed to judge where the priorities should lie for SFIA services, and whether the overall level of service should be reduced, increased or kept at the same levels, but they are in no position to give collective expression to, let alone enforce, their views. The result is that SFIA's overall level of expenditure is relatively free from regular scrutiny when compared to that of other public bodies (we are not aware that the option of reducing the levy has been given serious consideration in recent years); there is no rigorous external scrutiny of the programme against industry objectives; and there is a danger government priorities may be given precedence over industry ones.
58. The aim should be to put in place arrangements which ensure that the Authority is much more responsive to its levy payers while reserving the ultimate authority of Ministers as a back-stop. As discussed in paras 110 to 112 below, we do not consider that adequate accountability to the industry can be secured simply through a strengthening of industry control over Board appointments, or through strengthening the role of Advisory Committees. Other options are considered further in paras 115-124 below.