In the OECD, the issue of PRTCs was raised in the context of work on the multifunctionality of agriculture. It was recognised in the analytical framework developed for the OECD’s conceptual work on multifunctionality (OECD, 2001a) that when the most efficient intervention to address market failures associated with multifunctionality is sought, “transaction costs, including administrative costs associated with various options, should also be taken into account”. This issue was explored at the Workshop on “Multifunctionality: Applying the OECD Analytical Framework – Guiding Policy Design” that took place on 2-3 July 2001, based on a framework paper prepared by the Secretariat (OECD, 2001b) and on two consultants’ papers (Challen, 2001; Vatn, 2001). The results of the discussion that took place are incorporated and further developed in a report on the policy implications of OECD work on multifunctionality (OECD, 2003a). Another OECD report Multifunctionality in agriculture: What role for private initiatives? looks at non policy-related transaction costs in the context of public good provision (OECD, 2005b).

As explained in the introduction, the question of PRTCs in policy choice arises from concerns that moving from direct market interventions to new forms of targeted and decoupled agricultural policies leads to implementation costs that might outweigh the benefits. This chapter examines the role of PRTCs in defining the most cost-effective and efficient policy option for achieving given policy objectives. Section 2.2 provides a framework for comparing policy options in the context of policy reform that includes a move away from production-linked support towards measures that are more decoupled from commodity production and better targeted to specific policy objectives and beneficiaries. The main economic issues raised when trying to compare policies are highlighted. Scenarios illustrating them are presented. Section 2.3 considers policies that pursue correction of market failures relating to nature, environment and rural viability, while Section 2.4 considers policies with multiple objectives. Finally, agricultural policies with income objectives are considered in Section 2.5.

In the general context of agricultural policy reform, this study suggests ways to reduce PRTCs and explores the role of policy-related transaction costs (PRTCs) in defining the most efficient option for achieving policy objectives. Although PRTCs have largely been neglected in agricultural policy design and analysis for a long time, they are attracting increasing interest with the development of more targeted policies. PRTCs are defined as all costs arising from interactions between and within government agencies, private organisations and programme participants at all stages of policy implementation, starting with the initial gathering of information and the policy design, the selection of eligible farmers, the distribution of transfers, the monitoring and control stages, and ending with the final evaluation of the policy outcomes relative to objectives. For budgetary payments, implementation costs are sometimes strictly defined as the costs of delivering payments and monitoring farmers’ eligibility and compliance. There are questions as to which costs can be considered as PRTCs. Technical assistance, for example, is sometimes excluded from PRTCs and considered as an outcome.

Under the PROCAMPO programme of Mexico, eligible farmers receive payments based on the area planted during an historical base period (1991-93) on the condition that the land is used for legal agricultural or livestock production, or within an environmental programme. In 2002, PROCAMPO granted payments to over 2.7 million farmers for an area corresponding to 13.9 million hectares (i.e. 58% of the total agricultural area). The PROCAMPO programme is administered by ASERCA, a decentralised body of the Secretariat for Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA). ASERCA distributes and processes application forms, checks the eligibility of applicants, proceeds with the payment and maintains the database containing information on registered farmers, land use and payment levels. ASERCA also uses a Geographical Information System to monitor eligibility, check compliance and evaluate the environmental impact of the programme.

This case study presents an estimate of the transaction costs generated by the Swiss direct payment system. The costs are estimated for two case studies concerning the cantons of Grisons and Zurich, for which the implementation and control costs are assessed at five levels; namely the State, the canton, the control organisations, the borough, and the farm. While the costs accruing to public authorities and control organisations can be determined with exactitude, the numerous factors which influence costs as well as the differences between farms result in uncertainties when assessing labour expenditure and labour costs at farm level.

The Conservation Reserve Program (CRP) has been the largest land retirement programme, and the largest US conservation programme of any kind. CRP is a voluntary programme that offers annual rental payments, incentive payments for certain activities, and cost-share assistance to establish approved cover on eligible cropland. As of June 2004, there were 34.8 million acres enrolled in CRP, with 2.8 million of those acres in partial-field enrolments under the continuous signup, Conservation Reserve Enhancement Program (CREP), and the Farmable Wetland Program (FWP). More than 660 000 contracts were in force with more than 390 000 farmers covering this acreage. The annual rental cost was almost USD 1.7 billion, and the average rental cost per acre was USD 48. About 60% of CRP acreage was planted to grasses, 16% to trees or woody vegetation for wildlife, and 5% was dedicated to wetland restoration. The programme is authorized at 39.7 million acres for enrolments under 10-15 year contracts through 2007. The current CRP program targets land retirement to increase the cost-effectiveness of the programme, and adjusts the payment to closely match the market value.