SPECIAL REPORT N° 2/90 on the management and control of export refunds accompanied by the replies of the Commission (90/C 133/01)

(Observations pursuant to Article 206(a), paragraph 4, of the EEC Treaty)

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0. Prologue

1. One morning in May 1989, as part of the Court's enquiry into export refunds, two auditors found themselves at the German port of Hamburg to examine the physical controls over cereals shipments. The auditors were informed that the Russian ship, Kapitan Danilkin, which was moored alongside the port silos at the time of their visit, was being loaded with cereals under a special Community measure to relieve the German market of surplus German wheat. Upon observation of the operation the auditors saw that the bow of the ship was indeed being loaded with cereals. The two auditors observed also that a similar operation was taking place at the stern of the ship, except that upon closer inspection the mound of cereals there appeared to be rapidly diminishing, rather than increasing, in size. In fact the cereals were being transferred from the holds at the stern of the ship to holds at the bow of the ship via a portside silo, an operation of several days duration.

2. Later the auditors learnt that the ship had first been loaded with French wheat at Dunkerque and that, en route to the USSR, it had then docked at Hamburg for its cargo of wheat to be simultaneously unloaded and reloaded via a portside silo. Further investigation revealed that this was one of many similar operations which had either taken place or were planned to take place at Hamburg and other German ports. Yet clearly such an apparently superfluous activity, expensive in harbour and silo charges and wasteful of the time of both the ship and its crew, could not be motivated by normal commercial practice. The answer, indeed, lies elsewhere.

3. Wheat, having a common definition in all Member States can be sold into intervention storage throughout the Community, wherever the best deal is to be obtained. This had led in large part to up to 2 Mio tonnes of wheat per annum entering into German intervention stores over recent years. In October 1988 the German Ministry for Agriculture, mindful of this trend, informed the Commission that it forecast a worsening situation in 1989, with German production in excess of national requirements and a risk of 'massive quantities of wheat` being bought into intervention (). The Commission concurred and on the premise that the Community market overall would be unlikely to absorb the surplus (), they agreed to adopt a special measure on 27 January1989 to relieve the German market by granting a subsidy for the export to third countries of surplus German wheat ().

4. Trade response to the special measure was good. The original ceiling of 300 000 tonnes was increased to 500 000 tonnes and subsequently to 700 000 tonnes following the suspension of the general free market arrangements for the export of wheat as a further encouragement to traders to make use of the special measure. By 16 March 1989 the success of the measure was not in doubt as all 700 000 tonnes had been agreed for export at a cost of some 47,67 Mio ECU, or 68 ECU per tonne.

5. On 28 March, however, the Commission received a telephone facsimile from the German authorities which indicated that, of the wheat so far physically exported under the special measure (some 470 000 tonnes, of which the first shiploads had completely escaped physical control), none had been of German origin. Nor indeed had the wheat been taken from the German market. Apparently ships en route to the USSR and Poland, and loaded with French wheat taken on board at French ports, were docking at German ports for the simultaneous unloading and reloading of their cargoes in order that the wheat might be recognised as 'exported from the FR of Germany` and so qualify for the export refund payable under the special measure.

6. The Commission, believing themselves legally constrained from limiting the application of any intervention measure by reference to the origin of the agricultural produce concerned (notwithstanding previous precedents for Spanish barley and Greek durum), had attempted to restrict the scope of the special measure by requiring the wheat to be 'exported from the FR of Germany`. This device had apparently promised the double advantage of satisfying the lawyers and of enabling the Commission to target the German market. In practice, however, it seemed that the extra cost involved in exporting wheat not of German origin through German ports was not proving a deterrent to certain traders. Some traders needed export licences in order to complete an export deal with the USSR, others were attracted by the higher than normal refund level.

7. The Commission reaction, on 6 April, was to increase the quantity available under the special measure by a further 200 000 tonnes to a total of 900 000 tonnes and to introduce a requirement for a minimum protein content of 12,5 %. Both changes were linked as by this stage it was becoming clear that the quality of the German wheat harvest was perhaps the best in the Community with only wheat of German origin able to meet the protein requirement. A further 145 000 tonnes only were disposed of under the new conditions. The previous forecast surplus of 'massive quantities of wheat` was now seen to be significantly out of step with reality as the Community market proved a ready outlet for this high quality wheat.

8. The last deliveries under this programme were authorized on 25 May, when the Commission accepted bids totalling 55 000 tonnes at refund rates between 51 and 54 ECU per tonne. On the same day the Commission rejected a bid to export wheat from the open market at a refund rate fractionally less than 40 ECU per tonne, having decided to suspend all further market sales other than those under the special German measure.

9. The Commission does not know the origin of the wheat exported under the special measure to relieve the German market of surplus German wheat. The Commission believes that traders were unaware that for their cargoes of French wheat to be recognised as 'exported from the FR of Germany` they would have to physically unload and reload the wheat via a German port silo, (at a cost estimated by the Commission of up to 10$ per tonne) and therefore did not take the extra costs into account when submitting their bids for refunds under the special measure. The forecast by the German Ministry of Agriculture and the Commission of 'massive quantities` of wheat on the thresholds of German intervention stores was wide of the mark (in the event only 800 000 tonnes was bought in comparison with an annual intake of 2 Mio tonnes over recent years).

10. The Court estimates, on the basis of an analysis of 60 % of quantities exported, that of the 845 000 tonnes eventually subsidised for export, between 130 000 and 160 000 tonnes only was harvested in the FR of Germany. The balance of about 700 000 tonnes was transhipped via German ports, mainly from France but also from the United Kingdom and Denmark en route to the USSR and Poland. In contrast the Commission has cited a trade source which believes some 350-400 000 tonnes of the wheat exported to have been harvested in the FR of Germany. The justification for this claim is unclear to the Court. The total cost of the special measure to the Community budget was some 57,5 Mio ECU.

1. Introduction

1.1. Over the past two years the subsidised export of agricultural produce to countries ouside the Community has replaced intervention storage as the principal instrument by which the Community maintains the equilibrium of the internal market, thereby regulating its internal agricultural price level. The produce exported may be taken from the open or 'free` market or from intervention stores. The subsidy may take the form of an export refund, a low price sale from intervention storage or a combination of both. The subsidy enables exporters to compete in world markets where prevailing prices (in part influenced by the subsidies of other producers) are generally lower than Community prices. Rates of refund for produce exported depend on the precise classification of the goods concerned and they can also vary according to the country of final destination.

1.2. In 1988 the Community budget subsidised the export either from the market or from intervention stocks, of 24,8 Mio tonnes of cereals, 0,8 Mio tonnes of beefmeat and 16,8 Mio tonnes of milk and milk products with export refunds totalling 7 000 Mio ECU. In addition there are losses borne by the Community budget arising from the export of intervention stocks at low prices ().

1.3. Much of the day-to-day administration of the policy is delegated to Member States' paying agencies. Customs authorities also have a vital role to play in the control of export movements. All the important policy decisions are taken by the Commission. It is the Commission, usually following consultation of the Management Committees (see paragraph 2.3) for the relevant markets, which determines the level of subsidy in each case, principally by setting refund rates and determining minimum prices for low-price sales from intervention. The Commission also has a decisive voice over such key parameters as the timing, quantity and destination of subsidised exports.

1.4. Export refund rates may be set as a result of tendering, judgementally by reference to the perceived difference between Community and world market prices or by purely ad-hoc means. In order to qualify for export refund the trader is normally required to commit himself to export a determined quantity and quality of produce within a set period to a defined range of third countries. It is the licence, issued to the trader by Member States' paying agencies on behalf of the Commission, which is the legal expression of the contract struck between the Community and the trader. The present report does not examine the licensing system as such, but since many of the report's observations presuppose some knowledge of that system it is summarised in Annex 1.

1.5. From the point of view of the Community budget, the system of rate-setting and licences can be said to provide a basis for central control over expenditure. It also gives the Commission a flexible means of managing the export market. For example, the Commission may apply 'correctives` to previously agreed and published refund rates to discourage or encourage traders to export in particular situations or to a specific destination.

1.6. Table 1 shows how budgetary expenditure on export refunds developed over the last 10 years and Table 2 indicates how export refunds have superseded public intervention storage as the key-stone of the price guarantee system under the common agricultural policy (CAP). A characteristic feature of export refunds which is not revealed by the tables is that for certain products the value of the export refund payable on a single export consignment will often exceed the price payable by the third country customer. By way of illustration the Court found the following examples (based on rates applicable in 1986/87) during the course of its audit:

(a)a single container of beefmeat exported to Libya export refund: 34 700 ECU invoice value: 18 600 ECU

(b)a consignment of 161 tonnes of butter oil to Abu Dhabi export refund: 347 850 ECU invoice value: 218 000 ECU

(c)a contract for the exporting of 450 tonnes of butter to USSR export refund: 867 850 ECU invoice value: 150 620 ECU

(d)a contract for 2 000 tonnes of milk powder to Algeria export refund: 2 515 000 ECU invoice value: 1 536 430 ECU

(e)a consignment of feta cheese to Iran export refund: 2 720 000 ECU invoice value: 2 511 000 ECU

The significance of such cases for the Community and the Community's auditors is that the financial risks of the transaction are potentially bigger for the Community than for the purchaser.

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1.7. More than 35 % of EAGGF Guarantee expenditure is taken by export refunds and more than 70 % of this lies within three market areas: beefmeat, cereals and milk products. Export refunds in these three market areas are the subject of this report. The aspects examined are, firstly, the Commission's central role in setting refund rates and determining minimum prices for low price sales (chapter 2) and secondly (chapter 3), national controls over export consignments in the Member States principally concerned, viz., Denmark, FR of Germany, France, Ireland, Italy, Netherlands, United Kingdom. This second part of the report results from an extension to the cereals and milk products sectors of earlier audit work done by the Court in certain countries in the beef sector of which a first instalment of conclusions appeared in the Court's 1987 Annual Report.

1.8. The report also updates previous observations as to the national arrangements for compliance with Council Directive 77/435/EEC of 27 June 1977 () [now replaced by Commission Regulation (EEC) 4045/89] () which requires Member States to carry out systematic a posteriori checks of the commercial documents of undertakings receiving payments from or making payments to the CAP. Such checks are complementary to the controls normally carried out by Customs and Paying Agencies.

1.9. The main issues considered by the enquiry are whether:

(a)Commission procedures for setting refund rates, concluding special deals and arranging low cost disposals, are consistent with the principles of sound financial management, and are effective;

(b)appropriate controls are foreseen and in operation at both Community and national level to ensure the legality and regularity of all Community expenditure in relation to export refunds;

(c)appropriate independent controls are provided for and effectively performed on the export refund transactions.

1.10. The Court regrets the tone adopted by the Commission in its replies to the Court's observations.

Table 2 - Evolution of expenditure for export refunds, intervention and consumption aids for three key products (cereals - milk and milk products - beefmeat)

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<? D><?þ><?þ><?þ><?þ> <? 3><?×42><?þ><? 8>

<? 3><?þ><?Ð7><?²>Mio ECU

<? 8><?þ><?ue><?û>

<?Ð7><?±><?þ><?×04><? ©><? ¨> BUDGET <?¾>

<?Ð7><?±><?þ><?×11><?©><?º>Export refunds <?½> <?í><?ue><?ue><?»>Intervention storage (public and private, excluding depreciations) <?½> <?í><?ue><?ue><?»>Consumption aids

<?Ð7><?±><? 8> <?×09><?ú><?×18><?©>Consumption aids

<?Ð7><?±><? 8><?×19><?ú><?×25><?©>Intervention storage

<?Ð7> <?±><? 8><?×31><?ú><?×25><?©>Export refunds

<?Â"END OF GRAPHIC>

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Table 5 - Sales of skimmed milk powder (1 000 tonnes) from intervention storage under Special Regulations (1) in 1987/88

>START OF GRAPHIC>

<?ue><?Ð7><?²>(1 <? >000 tonnes)

<? D><?þ><?þ><?þ><? 3><?×30><?þ> <? 8>

<?Dl70506><? 8><?þ><?ue><?©><?©><?¦><?Ð7><?±>April 1987 <?½> May <?¿> June <?¿> July <?¿> Aug. <?¿> Sept. <?¿> Oct. <?¿> Nov. <?¿> Dec. <?¿> Jan. 1988 <?¿> Feb. <?¿> March <?¿> April <?¿>

<?Ð7><?±><?þ><?ue><?©><?©><?¨>(<?ó>1<?ò>) <? ><?º>a) <? >Regulation (EEC) No 727/87 of 13 March 1987 (SMP for export) <? ><?oe><?AE4><?¤><?¤><?¤><?¤><?¤><?ae> <?¼><?Ð7><?±><?ue><?»>b) <? > Regulation (EEC) No 2213/76 of 10 September 1976 (SMP for internal sales) <? ><?÷><?oe><?DLH300006N> <? ><?DLH300006N> <? ><?DLH300006N> <? ><?DLH300006N> <? ><?DLH300006N> <? ><?DLH300006N> <? ><?DLH300006N><?ue><?ue>

<?Â"END OF GRAPHIC>

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2. Commission Management of Exports

The regulatory framework

2.1. The basic regulations establishing the common organization of the markets in milk and beef were published in June 1968 (). The EEC grain market regulation was established in 1962. The present market organization is laid down in Council Regulation (EEC) N° 2727/75 (). All three regulations make a common provision for the use of export refunds to facilitate the exportation of products for which world prices are below those ruling within the Community. Refunds for many of the most important export contracts are fixed by tender. In other cases the applicable rates are those published by the Commission. The latter rates are required to be fixed at regular intervals but the Commission may alter them at any time, either on its own initiative or at the request of a Member State.

2.2. Export refund rates are the same for the whole Community. They vary by product and may be differentiated according to destination. For cereals and beef there is significant differentiation but in the milk sector this only applies to cheese. Licences are required for all cereals, beef, butter and skimmed milk powder (SMP) exports and are required for all other milk products if the exporter exercises the option to fix the rate of refund in advance (a procedure known as pre-fixing) ().

2.3. The regulations also established Management Committees for each market comprising representatives from the Member States presided over by a representative of the Commission. Although the Commission can change the level of refund rates at any time, it is required to consult the appropriate Management Committee periodically about the refund rates, with a view to confirming or changing them. The Committee is required to give an opinion. Should the Committee vote against the proposal the Commission must refer the proposal to the Council which has one month in which to reach a different decision by qualified majority.

2.4. General rules for granting export refunds on milk, beef and cereals are laid down in Council Regulations (EEC) N° 876/68, N° 885/68 and N° 2746/75 respectively (). The criteria to be taken into account when determining refunds are essentially the same for the three markets and are summarised in Annex 2.

2.5. The legislative framework for the system of export refunds has burgeoned since the market organisations were established. There are numerous regulations concerning export licences, pre-fixing, advance payment, sales from intervention by tender or at fixed price and many which are market specific, for example, deboning of meat, transformation of butter into oil and cereal co-efficients for flour.

General agreement on tariffs and trade (GATT)

2.6. Within the framework of GATT a series of negotiations (known as the Uruguay Round) has been in progress since September 1986 with the objective inter alia of reducing levels of agricultural support and protection. This is particularly pertinent to the USA and the EEC with respect to the world grain trade in which they continue to compete by offering subsidised exports. The American Export Enhancement Programme (EEP) which was launched in 1985 has to date resulted in 102 initiatives aimed at 65 countries covering 12 commodities.

2.7. It is Commission policy to match the subsidies on US agricultural exports in order to protect traditional markets and particularly in the milk sector to promote exports of products with a high value-added element. On occasions the policy of matching has led to the award of exceptionally high refund rates, for example for wheat to Egypt (paragraph 2.65 refers) and the 20 % increase in rates for pure bred cattle (paragraph 2.40 refers).

Setting the level of subsidy

2.8. The premise which underpins the Community policy of subsidising agricultural exports is that it would not be possible to export the quantities of cereals, milk products and beef necessary to stabilise internal market prices at the desired level without the provision of financial assistance to exporters in order to bridge the gap which normally exists between the level of prices obtainable in world markets and the (higher) Community price level. If the level of financial assistance exceeds the minimum necessary for that purpose, exporters are over-compensated at the expense of the Community budget (and - because of the consequence for internal prices - the Community consumer). The dilemma for the Commission is how to achieve what is a fine balance between effectiveness (i.e. the exportation of surplus Community products) and economy.

2.9. The Commission uses two main instruments for subsidising the export of agricultural products: low price sales from intervention and the offer of export refunds for the export of products either from the free market or from intervention. The relative importance of each instrument varies from case to case, as does the extent of Commission involvement. There are published refund rates for all three sectors covered by the present review. These are the rates which are available to any trader at any time; they are sometimes referred to as 'standing refunds`. They may be enhanced or reduced in a number of ways, e.g. by 'correctives` valid for particular destinations and periods.

2.10. The Commission can draw on two main sources of external information to guide its decisions about refund rates. One is such data as are published or are available in Member States about Community and world price levels. The other is the evidence of market prices derived from tenders. Neither source can be regarded as wholly reliable or objective.

2.11. Ultimately, it is the Commission's judgement which is paramount in determining the rate of refund and the price level at which low-price sales take place. Whatever the objective mechanisms theoretically available to the Commission it would be unrealistic to imagine that such mechanisms could be sufficiently fine-tuned and responsive to substitute finally for the exercise of what is essentially commercial judgement. The management problem for the Commission is how to apply such judgement whilst satisfying the requirements of public accountability. The most pertinent of these are in the Court's view that: information is maintained in a form suited for the requirements of management and of independent control by third parties; economy is exercised in determining rates and low-price sales with their budgetary cost ascertained and monitored; the effectiveness of measures taken is assessed to determine performance against plan and whether remedial action is necessary; correct procedures for the information and consultation of traders are followed.

2.12. The Court has examined Commission decisions determining export refunds and low price sales in the three markets under review. The Court's examination was principally concerned with decisions taken in the years 1987 and 1988. The control problem, whether from the standpoint of the Court of Auditors or that of Financial Control, is how to determine with reasonable assurance whether sound judgements have been made. In principle this is possible only through discussion with the officials concerned, evaluation of procedures followed and scrutiny of the documentation which records their evaluation of particular cases. In this way it should be possible to establish a clear link between the facts of the case as perceived by the Commission and the judgement made as to the appropriate rate of refund or price level for low price sales. In the absence of a satisfactory documentary record for these important decisions the requirements of accountability cannot be met in form or in substance.

2.13. The export operations which are the subject of the present chapter are broadly of three sorts. There are, firstly, standard operations in which export sales are made from the free market either with the aid of published export refunds or by open tendering. Secondly, there are low price sales from intervention stocks, in which the level of subsidy (often a combination of low price and export refund) is determined by tender or pre-determined by the Commission. Lastly, there are 'special measures`, which are initiated either to take advantage of a specific export opportunity or to match the terms of competing offers from the US or other producers. This sequence is reflected in the three sections below (paragraphs 2.14 to 2.78) which present the Court's findings with regard to the Commission's management of export subsidies in each of the three markets under review.

Milk

Introduction

2.14. The export market in milk products comprises bulk products (namely butter and SMP) and so-called derived products such as cheese, enriched whole milk powder (WMP) and condensed milk. The market as a whole lacks a recognised 'barometer` for world prices. However, the minimum price levels set by GATT effectively determine the floor of the world market for the main products. The reduction in EC stocks of the two bulk products - butter and SMP - has been remarkable. This has been achieved largely as a result of special disposal programmes (mainly for butter) and more favourable market conditions facilitating export (especially for SMP). Butter stocks of 1,3 Mio tonnes as at the end of 1986 had been reduced to 64 000 tonnes by March 1989 and SMP stocks had been eliminated.

2.15. The world market is shared principally between the Community, New Zealand and to a lesser extent the USA. Competition is intense with the direct commercial involvement of the New Zealand Dairy Board in export transactions, providing it with the information necessary for setting the most competitive export subsidy without the risk of transgressing GATT minimum prices.

2.16. One problem for the Commission is how to establish and maintain a reliable indicator of current world prices. Another is how to intervene effectively in the market without infringing GATT minimum prices. A further difficulty for the Commission in this particularly competitive market is how to fulfil the requirements of accountability, such as through the publication of refund rates, without alerting foreign competitors to its trade intentions (with obvious risks to the success of its initiatives).

Setting the level of subsidy

Published Rates

2.17. The key rates are those for butter, SMP, WMP and certain cheeses from which all other milk product rates are derived. The rates represent the difference between the Commission's estimations for world and Community prices. The Community price is calculated weekly by reference to price information supplied by Member States' Paying Agencies and that for the world market by reference to various trade and published sources. The Court found that certain Paying Agencies were not always forthcoming with the information required and that consequently there were examples of the same prices being used over several months by default. The Court found also that there was no systematic collation, analysis or recording of sources for world prices by the Commission, although a weekly report is produced for internal use which covers significant events and quotes some prices.

2.18. The Commission claims to apply a standard methodology in calculating refund rates based on the difference between world and Community prices. The Court's auditors attempted to re-perform the calculation of the refund rates for butter, SMP and cheddar as published in Commission Regulation (EEC) N° 701/89 of 17 March 1989 (). The results of the auditors' calculation are set out in Table 3. There was no record of the Commission's own calculation of these rates. Indeed for SMP and butter the published refund rates were based on oral instructions from the Commissioner. One of the elements of the auditors' calculations was the information about world prices published in 'Dairy Market News` (Volume 56 N° 13 of 31 March 1989) this being the only independent source of evidence about world prices which was available in the Commission for that period. The Community price was taken as the lowest of the ex-factory prices of the four main Community exporting countries.

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2.19. In view of the difficulty which they had experienced in ascertaining the basis on which previous rates had been fixed, the auditors also examined the latest published rates at the time of audit [Commission Regulation (EEC) N° 1476/89 of 25 May 1989] (). At the time of audit, no documentary evidence in support of these rates appeared to be available. However, following a meeting with the Director General documents were later produced. These showed appreciable discrepancies between the decreases for SMP, WMP and butter proposed by the market division and those adopted.

Unpublished Rates

2.20. At the end of 1986 the Commission's published rates for certain export markets were frequently being undercut by the New Zealand Dairy Board and stocks of butter and SMP remained high (Table 4 refers). Faced with this unhappy combination of circumstances the Commission took the decision to adopt an alternative approach for setting refund rates. The objectives of this new approach were to exploit the lower transport costs (which are not always fully reflected in available price data) of Community exporters due to their relative proximity to the main export markets and to set the most competitive rates possible without transgressing GATT minimum prices. In order not to reveal publicly the Commission's trade intentions, the rates would not be published in the Official Journal, nor would public tendering be entered into. The Commission's intention was to compensate for the operational advantage which the New Zealand Dairy Board enjoyed by virtue of its position as sole exporter.

2.21. The Commission clearly needed to contact the trade in order to obtain the information necessary for meeting the objectives set out above. However it did not want to deal directly. The procedure which it adopted had a superficial resemblance to tendering in that intervention agencies were asked to request offers from regular traders in terms of the refund they would require in order to export SMP, butter or butteroil to specific destinations. The offers received were collated on a weekly basis and forwarded to the Commission. The market division would examine the offers and calculate a rate close to the GATT minima based on the latest US dollar exchange rate. The refund rate(s) would be set out in a Decision document for signature by the Commissioner. Signed Decisions were handed over to Member States' representatives to disseminate to the traders involved via the intervention agencies. Those wishing to trade would apply for licences in the normal way but prefixing at the unpublished rates. Traders were not bound by the offers previously submitted to paying agencies. Those whose offers had been at a higher rate were still eligible to benefit from the unpublished rate as were those who had not bid. Conversely, those who had requested a lower refund rate received the (higher) unpublished rate.

2.22. The first unpublished rates (for SMP, butter and butteroil) were set in Decision 86/2508/EEC for the period 18 December 1986 to 5 January 1987. There were a further 32 Decisions in 1987 and 17 in 1988 after which the practice was suspended. The number of special rates so determined was 108. The average validity period for these rates was 8 days and the average premium over published rates was as follows:

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Several of the Decisions relate to a single destination (Algeria, Mexico, India). For these decisions the file notes explain the methodology of the calculations but do not reveal either the underlying price data or the nature of the offers received.

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2.23. Although the Commission tended to accept or set rates at the lower end of the range of offers received, the absence of working files precludes any view as to the economy of the operation overall. The Court calculates that some 300 000 tonnes of SMP and 450 000 tonnes of butter/butteroil were exported with the benefit of unpublished rates.

Special sales

2.24. These are one-off sales of bulk products which are initiated either to take advantage of a specific export opportunity or to match the terms of competing offers from other producers. In the dairy sector special sales are exceptional and relate to the disposal of intervention stocks only, i.e. SMP and butter. During the period under review there have been three special export operations, of which the following two are significant:

(a)Commission Regulation (EEC) N° 765/86 (): Sale of intervention butter for export to India, Pakistan, Mongolia and USSR;

(b) Commission Regulation (EEC) N° 727/87 (): Sale of SMP from public stocks for export.

2.25. The first-mentioned operation illustrates the difficulties of the Commission in relying upon tendering to set an appropriate level of refund when a particular export market is accessible through a single trader only, such as is the case for many deals with Eastern-bloc countries. The second operation, which took place in a market with numerous traders, demonstrates the possible consequences of not allowing prices to be determined by market forces, as facilitated by open-tendering.

Commission Regulation (EEC) N° 765/86: Butter for Russia

2.26. The large stocks of butter and SMP, once held in Community intervention stores, raised expectations that the Commission would be selling at low prices in the near future. These expectations depressed world prices. This phenomenon was acknowledged by GATT which, in order to relieve the world butter market of this particular burden, gave the Community dispensation to conclude special disposal arrangements with certain third countries at prices which were considerably below the GATT minima. As a result Regulation (EEC) N° 765/86 was adopted in March 1986 for highly subsidised sales of butter to India, Pakistan, Mongolia and the USSR.

2.27. EEC intervention stocks were 1,15 Mio tonnes as at the end of February 1986. Until 31 December 1986 the sales under Regulation (EEC) N° 765/86 were by tender at a little less than 70 % of the intervention price level. Published rates of export refund were also payable. The combined effect of the low price and the refund effectively meant that the butter was sold below the GATT minimum price of 1 000 USD/tonne. The special concession should have ended on 31 December 1986 [Commission Regulation (EEC) N° 3535/86 refers] () but because the USSR held off buying in the anticipation that they would be able to obtain even lower prices only 105 000 tonnes were sold during the year. Given the measure's relative lack of success, GATT agreed that for contracts signed with the USSR prior to this date, the concession would remain valid. Only one company held such a contract.

2.28. As of 1 January 1987 the combination of export refund and low prices was stopped by Commission Regulation (EEC) N° 155/87 (). Instead, export subsidy was provided simply by means of low price sales for which prices were reduced by an amount more or less equal to the refund which was previously payable. Prices continued to be set by means of monthly adjudications even though the Commission was dealing with only one trader.

2.29. The Court examined the bids received at the German intervention agency. The Commission rejected all bids submitted for adjudication on 27 January 1987, the first for which export refunds were not payable. For the next adjudication (10 February 1987) one German bid was 20 ECU/tonne higher than five other bids from the FR of Germany and corresponded exactly to the rates bid by four companies in France and another in the Netherlands. In later adjudications the German bids were uniform. An examination of Commission records revealed that this was also the case for bids submitted in other Member States. The bids were orchestrated by the contract holder. Licences for 610 000 tonnes were awarded at an average price of 215 ECU/tonne reflecting subsidies of more than 90 % of the intervention price. Total sales under Regulation (EEC) N° 765/86 were 715 300 tonnes.

Commission Regulation (EEC) N° 727/87 of 13 March 1987: SMP for export

2.30. Under this Regulation 261 381 tonnes of SMP were sold at the buying-in price applied by the intervention agency on the day of sale, minus 30 ECU per tonne. The prevailing rates of export refund were also payable. 92 % of sales were from German intervention.

2.31. Sales were modest until December 1987 when they reached 83 000 tonnes (more than three times the previous month's total). The Commission did not react to this upturn, although they were aware of the sales situation. In January 1988, monthly sales reached 91 000 tonnes and a similar escalation was observed for sales of SMP on the internal market at intervention price [Commission Regulation (EEC) N° 2213/76] () (see Table 5).

2.32. At the Management Committee meeting held on 22 January 1988 it was decided to suspend sales at intervention price minus 30 ECU/tonne amidst fears of speculation by traders. In this way the price was brought up to that prevailing for internal sales under Regulation (EEC) N° 2213/76. No further sales for export took place at the higher price but sales for the Community market continued apace: 138 500 tonnes left intervention during April alone. The first four months of 1988 saw stocks fall from 473 000 to around 100 000 tonnes.

2.33. The 'cost` of Regulation (EEC) N° 727/87 amounted to 265,8 Mio ECU for refunds, plus 7,8 Mio ECU in terms of intervention sale price reduction. The objective of the Commission was to reduce stocks of SMP as quickly as possible by encouraging exports to third countries. The ex-intervention price was accordingly set by reference to available price information and judgement. A marked and continuing improvement in world and Community market conditions meant that the ex-intervention price set by the Community quickly became much too low. However, the Commission did not take advantage of the changed market conditions and sold SMP for export cheaply when it did not need to do so. In fact given the strong demand for SMP on the internal market () it is unlikely that the disposal of intervention SMP to third countries was justified at all.

Beef

Introduction

2.34. The Community is one of the market leaders with 20 % of world beef exports in 1988. From 1984 the normal internal supply of meat was augmented by the slaughtering of milk cows as a consequence of the introduction of milk quotas. Since 1987 a fall in cattle numbers and hence the breeding stock has resulted in an overall reduction of 4,5 % in 1988. A further decline of some 3 % is envisaged for 1989. Total production of beef and veal was 8,1 Mio tonnes in 1987 and 7,7 Mio tonnes in 1988. Consumption within the Community is around 7,5 Mio tonnes in gross terms. With imports of nearly 0,5 Mio tonnes the Community has an annual surplus in the region of 1 Mio tonnes. Community export subsidies can have a significant effect on world prices in this market. In 1987 909 000 tonnes were exported mainly to the Middle East (28 %) and Egypt (20 %). In 1988 exports fell to 789 000 tonnes. Sales of intervention meat accounted for 535 000 tonnes, meat exports from the free market were 186 000 and the remainder (8 %) was in the form of meat products or live cattle. In 1988 10 countries bought 74 % of all exports, the three most important purchasers being Egypt, Iran and Poland, each taking well in excess of 100 000 tonnes.

2.35. The EEC export market is characterised by a small number of major trading companies. Even fewer operators are involved where the export is to Eastern bloc countries. Due to the high financial risks involved and the need to put up guarantees for transactions which are normally for substantial amounts, smaller traders are only able to participate indirectly in sales by tender by obtaining export rights (in the form of sub-licences) from the larger companies. For free market sales there is greater scope for the smaller trader and for more competition.

Setting the level of subsidy

2.36. For export sales from the open or 'free` market the Commission, in principle, sets refund rates by reference to available price information. These rates are then published in the Official Journal. In the case of intervention sales, the level of subsidy is determined by 'mini-tenders`, based on a published minimum acceptable price, although in certain circumstances refunds may be payable in addition.

2.37. In the absence of an index of world and Community prices the Commission maintains its own indicators based on available price information. In practice, Member States' Intervention Agencies telex the Commission every week with details of national producer prices. Information as to world prices is obtained chiefly from traders operating in third countries but also from producer association publications.

Published Rates

2.38. Rates for the numerous different qualities and cuts of meat, including rates for live animals and products, have a common base in the sense that they are all derived from the rate for a full carcass, which reflects the Commission's estimate of the difference between Community and world prices. The forequarter rate is equal to 70 - 80 % of the carcass rate in terms of ECU per tonne and the hindquarter rate equals 120 - 130 %. The rate for live cattle is equal to some 59 %.

2.39. Some rates were originally set several years ago and have subsequently been subjected to incremental and ad hoc changes. For example, in November 1986 in order to limit budgetary expenditure on refunds, all meat rates were reduced by an average of 10 %. This decrease had no noticeable effect on export trade.

2.40. In setting rates for certain export markets the Commission may have to take into account not only the difference between Community and world prices, but also the extent of any export subsidy offered by foreign competitors (which may not be reflected in reported prices). In the face of aggressive initiatives by competitors in the world market the Commission would appear to have little choice but to increase rates accordingly if it is to maintain the volume of exports. Such a situation occurred in March 1988 when in response to the United States' Export Enhancement Programme (EEP) and Austria's special subsidy on sales to Spain the rate for pure bred cattle was increased by 20 %.

2.41. Where it sees opportunities to export to third countries the Commission has sometimes taken existing published rates as a base and increased them until exports are stimulated. Two such cases occurred in October 1988:

(a)deboned frozen meat destined for the USA. The refund was increased from 90 ECU/100 kg to 100 ECU in March 1988 and to 112 ECU in October 1988. The reason for this was to stimulate exports in order to meet the annual 5 000 tonne quota agreed with the USA. The first increase proved inadequate. Exports for October through December totalled 3 590 tonnes;

(b)in response to an opportunity to sell some 120 000 tonnes to Iran, Algeria and Tunisia, following the Iran/Iraq ceasefire, the rate for fresh male meat (half carcass) destined for North Africa, Near and Middle East was increased by 10 % from 152,5 to 168 ECU/100 kg. By the end of May 1989 123 000 tonnes had been sold. On 26 June 1989 the refund was reduced to the pre-October 1988 rate.

2.42. Both initiatives have been effective. However, it is less certain whether the quantities disposed of through these sales could not have been exported elsewhere (or sold on the Community market) at lower cost to the budget, bearing in mind the rundown of nearly 700 000 tonnes of intervention stocks of beefmeat in the eighteen months to June 1989 (Table 4 refers).

Sales from intervention

2.43. Commission policy currently favours the use of tendering in this market, in contrast with the previous policy of fixed price sales. The form of tender adopted by the Commission is a two stage system [the so-called 'mini-tender` under Commission Regulations (EEC) N° 2173/79 () and N° 2539/84 ()] whereby bids are invited in excess of a minimum price published in the Regulation announcing the sale. Any meat remaining after the adjudication has been held is put up for sale at this minimum price. The minimum price in effect serves as a reserve price in that it is the minimum acceptable bid price. The Court found that in 1989 between 20 to 35 % of quantities on offer were sold by tender, and that these sales were either at the minimum price or at prices which were marginally above it. The Court recognises the attractions from the traders' point of view of a procedure which minimises the hazards of tendering but believes that a more competitive procedure would benefit both the budget and export policy. In the Court's view the publication of minimum prices is of doubtful value.

2.44. Regulation (EEC) N° 2173/79 (Article 6) requires a minimum period of 14 days between date of publication in the Official Journal and the deadline for submission of bids to the intervention agencies. This article does not apply to mini-tenders. The annex to the Regulation announcing the sales serves as the notification. In 1987 in four cases only 2 days elapsed between publication and the deadline. During 1988 the average was 5 days but one Regulation was published the same day as the deadline and another just one day before it. According to the Commission, members of the Management Committee relay details of forthcoming tenders to the intervention agencies immediately after their meetings, and publication merely fulfils a legal requirement. The effect of this is to place the onus on the Intervention Agencies to notify interested parties which may mean that competition is unnecessarily restricted.

Special sales

2.45. There have been four special export sales since 1986, only two of which are significant in terms of the quantities sold:

(a) Commission Regulation (EEC) N° 1812/86 (): 200 000 tonnes of beef for Brazil;

(b) Commission Regulation (EEC) N° 2415/88 (): 206 000 tonnes of beef for Eastern bloc countries.

The Court offers the following observations on these two sales.

Brazil

2.46. An opportunity arose for the export of 200 000 tonnes of Community intervention beef to Brazil. Beyond setting a ceiling for exports of 200 000 tonnes the extent of Commission involvement is unclear. Apparently the Commission did not seek to arrive at any sort of prior understanding on prices with the sole Brazilian importer, rather this aspect was left to be settled by tender between the importer and individual exporters. The negotiating strength of the Commission is, of course, much greater in the first eventuality than in the second, with important consequences for the budget.

2.47. An invitation to tender was published in the Official Journal on 12 June 1986. The Regulation required that the operation draw on stocks of at least three Member States and it stipulated that at least 40 % by quantity was to be taken from Italian intervention stores. In this way the Commission apparently intended to draw down stocks more or less evenly between Member States whilst correcting an imbalance in the size of the Italian stockholding.

2.48. The minimum bid quantity was set at 10 000 tonnes and no ceiling was indicated. The export subsidy was entirely by way of a low price sale. A condition attached to the sale of the first 100 000 tonnes was the Commission's agreement to the import from Brazil of 5 000 tonnes of so-called Hilton beef and to the import of 2 000 tonnes of beef from Argentina and 1 000 tonnes from Uruguay by way of compensation for loss of trade. The value of the imported beef on the European market is estimated at some 30 Mio ECU.

2.49. All offers for round one (26 June 1986) were rejected; all those for round two (9 July 1986) totalling 100 000 tonnes were accepted and of the 170 000 tonnes bid for in round three (13 August 1986) only 100 000 tonnes were accepted. For rounds two and three the Commission fixed separate prices for each Member State, taking as its guide price that which was apparently obtained by the USA in a recent sale to Brazil involving a comparable quantity of beef. In both rounds the Italian price was the lowest. This is consistent with the Commission's desire to promote sales from Italian intervention although Council Regulation (EEC) N° 2388/86 () of 29 July 1986 reduced the requirement from 40 % to 30 %.

2.50. It is apparent from an analysis of the bids received that traders were co-operating, with bids from different traders identical for each Member State concerned. It is also worth mentioning that in advance of any formal notification of the sale, one company approached the Commission with a proposal to export 100 000 tonnes of intervention beef to Brazil. The same company won a total of 45 000 tonnes for export through the tendering procedures as did another company which submitted identical bids for each round of bidding.

Eastern European Countries

2.51. The Court has been unable to establish the terms of an agreement with the USSR which apparently linked the sale of 110 000 tonnes of butter to that for 200 000 tonnes of beef (a goal established in July 1988). The butter was delivered in August but no beef sales had taken place. Given the high level of intervention stocks at this time (770 000 tonnes in June 1988) the Commission decided to open a sale by tender. The invitation was published on 2 August 1988. The special features of this invitation were:

(a)export had to be to Eastern European countries (Bulgaria, Czechoslovakia, Hungary, Poland, Romania, USSR and Yugoslavia);

(b) a high minimum tendering quantity (25 000 tonnes);

(c) the quantity sold from a single Member State could not exceed 50 %.

2.52. It is not clear why the sale was restricted to Eastern European countries. The first evidence on Commission files of any Eastern bloc interest in a sale came from Poland and is dated two weeks after publication of the invitation to tender. The regulation states that the high minimum tendering quantity was for 'purposes of control`. The effect was to exclude medium and small scale traders from the tendering procedure. In fact the minimum tender quantity was doubled after the first adjudication by introducing a requirement to submit bids of at least 25 000 tonnes in two Member States [Commission Regulation (EEC) N° 2602/88 of 19 August 1988] (). Despite repeated requests from the traders to reduce this minimum, the Commission chose to maintain it. The 50 % limit was designed to facilitate the disposal of hormonized meat.

2.53. For the first adjudication only one company submitted bids (one through the French intervention agency and another through the German intervention agency). Both were rejected as too low: average value 1 385 ECU/tonnes. In the second adjudication the same company increased its bids to an average of 1 397,5 ECU/tonne and was successful. There were no bids for round three. For the subsequent adjudication (10 October 1988) a second company matched the bids made by the first, again at an average price of 1 397,5 ECU/tonne. There were no bids for the adjudication held on 8 November 1988. For the sixth round (13 December 1988) the two companies showed the same degree of co-operation in submitting identical bids. Only the French bids were accepted, at 1 351 ECU/tonne. A final adjudication was held in January 1989, when again both companies submitted identical bids for a combined total of 100 000 tonnes. The bids submitted in the FR of Germany (50 000 tonnes) were at 1 410 ECU/tonne, some 4 ECU/tonne higher than successful bids in rounds two and four. Despite this the Commission rejected all bids on the grounds that they had achieved the 200 000 tonnes envisaged and had promised the Manangement Committee not to accept further bids without discussing the possibility of reducing the minimum tender quantity.

2.54. In total 206 000 tonnes of beef were sold. The Commission does not know with certainty how much went to each country but it is thought that at least half went to Poland and some 40 000 tonnes went to the USSR. As with the export of beef to Brazil, this special sale was effective in that the target quantity for disposal was fully met. However allowing for the export refund paid (895 ECU/tonne) the beef was sold at a net 500 ECU/tonne at a time when hindquarters were being sold to the Community processing industry at four times the sale price to the Eastern bloc.

Cereals

Introduction

2.55. Whilst total world production has recently tended to fall below current consumption, within the EEC productivity is increasing and is likely to grow by some 2 to 3 % per annum, despite the reductions in guarantee prices and the introduction of the set-aside scheme. The major cereal producing countries in the EEC are France, the FR of Germany, Spain, Italy and the United Kingdom. 1988 EC cereal production was some 162,5 Mio tonnes; estimates for 1989 vary around 160,5 Mio tonnes. Domestic consumption is predicted to decline by 4 to 7 Mio tonnes between 1989 and 1995.

2.56. Estimated world trade in wheat and grains during 1988/89 was some 200 Mio tonnes, equivalent to 16 % of world production. Although the EEC's share of grain exports increased during 1988/89 to 15 % the United States dominates this market taking more than 50 % of all trade. The Chicago Corn Exchange makes the market and prices are therefore closely tied to the value of the dollar. The Community's cereal surplus for 1988/89 was some 30 Mio tonnes; for all but sorghum and maize it is self-sufficient. The EEC's biggest customers are the USSR, China, Algeria and, more recently, Poland and Egypt.

2.57. The export market for cereals is dominated by even fewer and bigger operators than the beef market. These companies include multinationals with a complex network covering all the Member States in which cereals are grown for export. Often they have branches or subsidiaries in non-EEC countries. Indeed such companies can and do trade between their constituent parts. Thus an export refund may be granted to a subsidiary within the Community that exports to another of the same company outside the EEC. From a regulatory point of view this is permitted: so long as the cereals leave the EEC for consumption in a third country, refunds are payable. There is no requirement for change of ownership.

Setting the level of subsidy

2.58. Some 90 % of all cereals exports from the EEC take place as a result of tendering. This tendering takes one of two forms:

(a) for a price to buy from intervention;

(b) for an export refund.

The remainder take place either using the published refund rates although these are often enhanced by 'correctives` (also published) or using special rates. The various options are described in more detail below.

Published Rates

2.59. Basic published rates apply to both intervention and free market sales. Over the past two years they have varied between 20 and 60 ECU/tonne for main cereals. They are judgement based (i.e. not calculated by reference to a formula). In practice the basic published rates are rarely used. The effective rates for exports from the free market and from intervention are determined by tender with the addition in some cases of correctives.

Correctives

2.60. Correctives are additions to or deductions from the published rates for specific destinations and are a unique feature of cereals market management. They may also be applied to tendered refund rates and it is in this context that they are generally used. The Commission believes that the advantage of correctives over special rates is that they are a flexible instrument for reacting to developments in different markets.

2.61. Correctives are normally published weekly but may be changed more frequently. They serve a dual purpose:

(a) to encourage exports to a specific destination (positive correctives);

(b) to ensure that exports take place sooner rather than later (negative correctives).

2.62. Positive correctives are generally low in relation to the export refund itself, typically 3 or 4,5 ECU/tonne. However, the audit team noted that the exceptions had significant budgetary consequences. For example, in September 1987 a corrective of 20 ECU/tonne was granted for the export of 850 000 tonnes of barley and 650 000 tonnes of feedwheat to Russia. Similarly a corrective of 30 ECU/tonne was granted on the 900 000 tonnes of wheat exported to Russia under Commission Regulation (EEC) N° 395/89 (paragraph 2.76 refers). The cost of these two correctives alone amounted to 57 Mio ECU. It is not known how much is spent on correctives generally since the Commission does not have this information.

2.63. The negative correctives are much greater: P30, P40 or P50 ECU/tonne. Typically they become operative two or three months after publication and are designed to encourage the trader to export his cereals sooner than the normal expiry date of the export licence would dictate. Negative correctives are also intended to reduce speculation in licences between traders.

2.64. The bigger customers often get better rates, for example a corrective of 4,5 ECU/tonne has become the norm for exports to the USSR and was also granted to China for one day on 23 December 1988, when certificates for 1,3 million tonnes were requested.

Special Rates

2.65. The markets for certain cereal derivatives are particularly restricted or subject to intense competition between the USA and the Community. In the case of flour for example, the USA paid bonuses of around 100 USD per tonne in August 1988. Community refund rates for flour are based on coefficients applied to the rates for wheat which vary according to ash content. The basic coefficients for flour are those given in Commission Regulation (EEC) N° 162/67 (). For flour two coefficients apply to international trade, 1,51 for ash content less than 521 mg. per 100 grammes and 1,43 for ash content equal to or greater than this. However, since 1985 the Commission has applied what they call an internationally agreed average coefficient of 1,40. Applying the 1,4 coefficient to the refund rates for wheat as set by tender in August 1988 gives a refund rate of approximately 85 ECU/tonne. However, in order to match the American subsidy the rate has been enhanced for specific destinations, for example to Egypt the effective rate was 116,8 ECU/tonne.

2.66. For semolina the refund is calculated with a coefficient based on its cereal input. The official coefficient is 1,58 [Regulation (EEC) N° 162/67], but since 1985 the Commission has applied a coefficient of 1,67. Semolina for export to Algeria (where it is used to make couscous) enjoys a specially favourable refund rate. The main supplier is Italy. Commission Regulation (EEC) N° 330/89 of 9 February 1989 () fixed a refund of 230 ECU/tonne for export of semolina to Algeria, which is 51 ECU/tonne higher than that obtained by applying the official coefficient of 1,58. Under the terms of this regulation the Commission allowed the issue of export licences for 300 000 tonnes [Commission Regulation (EEC) N° 355/89 of 13 February 1989] (). If all deliveries under this regulation went to Algeria [as is probable, though uncertain ()], the extra cost for these exports would be 15 Mio ECU. For the export of the said 300 000 tonnes the Commission received export licence requests for a total of 5,01 Mio tonnes. These requests were from the two companies that dominate the export market for semolina from Italy to Algeria. The requests were made in the knowledge that the Commission would scale down the quantities accepted. The Council has in the past refused to allow tendering for processed products which might have introduced some competition.

Tendering

Free Market

2.67. Tenders are initiated by the Commission in order to dispose of surplus produce resulting from the current year's harvest and thereby to reduce or avoid the need for intervention purchases later in the marketing year. There is normally only one tendering operation per year for each cereal unless the first operation fails to achieve the desired level of sales. The quantities of cereals put up for sale by tender can range from 100 000 tonnes to several million tonnes. The Commission usually places emphasis on this activity earlier in the marketing year and gives it priority over intervention sales for export. Weekly adjudications are held. Bids may be submitted to the appropriate agencies in any Member State who forward them, in anonymous format, to the Commission. The Cereals Management Committee meets on Thursday afternoons to consider the bids and the Commission then decides whether to set a ceiling on the rate of refund which it is willing to pay, and if so at what level.

2.68. All bids at or below this rate are accepted within the limits of the quantities available. If the trader's bid is lower than the maximum rate set, he will be entitled to the bid rate only. In 1987/88 the Commission tried to sell a total of 11,3 Mio tonnes of cereals by tender from the free market and achieved 8,5 Mio or 75 %.

2.69. As a cross-check on the results of free market tenders, the Commission calculates a guideline refund based on the theoretical refunds required to export wheat and barley from French and British ports. The calculation is based on the latest FOB price adjusted to arrive at a final port price. This price is compared with the current world price and the difference having been adjusted by the monetary co-efficient is the guideline refund. But the Commission can and frequently has chosen to set higher maximum refund rates, usually to match the subsidies offered by the USA under the terms of the EEP.

Intervention Sales

2.70. Tenders may be invited on the initiative of the Commission or at the request of a Member State. Requests to tender are published in the form of Regulations in the Official Journal and set out the stockholding by depot/warehouse. Traders are required to bid for these lots in terms of the price delivered but not unloaded at the nominated port (ECU per tonne). Mutatis mutandis adjudication procedures are the same as those for free market tenders. The published refund rate is paid to all traders who have been successful, i.e. who have submitted bids at or above the minimum price determined by the Commission. In 1987/88 tenders were opened for a total quantity of 7,2 Mio tonnes against which the Commission recorded 'sales` of 6,1 Mio tonnes.

Bids

2.71. The Court examined a sample of bids made for free market and intervention tenders at the Commission and carried out a detailed examination of these and further bids at three intervention agencies - BALM (FR of Germany) ONIC (France) and IBAP (United Kingdom). The Court makes the following observations.

(a) deadlines: the regulations stipulate deadlines for the submission of bids to the paying agency - 10.00 hrs. (Brussels time) Thursdays for free market sales and 13.00 hrs. on Wednesdays for intervention sales. In several cases the Court's auditors were unable to verify the time bids were received because the telexes were untimed and/or undated, wrongly timed or dated. Moreover, interpretation of the deadline varied from agency to agency. Thus one of the key principles of tendering (equal treatment of bidders) was negated, and the Court was unable to establish whether the bids had been received in time and were eligible for consideration by the Commission;

(b)rejection of bids: in the context of Commission Regulation (EEC) N° 2735/87 () (intervention sale of breadmaking wheat) three traders submitted bids at BALM for the adjudication of 9 December 1987. The lowest of these bids (53,25 ECU/tonne) was accepted whilst bids at higher prices (55,13 and 56,33) were rejected. The lowest bid related to destination USSR; the remainder were for other third countries. The Commission is not legally bound to accept the best bid and in this instance chose not to. The Commission apparently decided to pay a premium for exports to the USSR because it is an important customer and subject to American initiatives under the EEP;

(c)transfer of licences: although some transfers take place in the beef sector, the trade in licences is modest in that sector by comparison with the cereals sector where export licences have become a 'commodity` in their own right. Frequently the large operators perform the role of 'brokers`. They do not themselves export (and may not possess) the grain in respect of which they have acquired entitlement to refund. Having been awarded the right to apply for export licences following successful bids for cereals put up for tender, they may transfer the rights to other traders in the form of 'extracts` or sub-licences. Traders can therefore submit bids for high rates of export refunds which they know will have little chance of being accepted on the assumption that they will be able to obtain sub-licences at a price agreed with the successful bidder. The Court found that often those receiving these extracts were traders whose bids had been rejected at the adjudication.

2.72. Another risk arising from the lack of genuine competition in this market is that a trader has little incentive to obtain the best price from his customer since he knows that the Commission must pay a refund sufficient to make exporting worthwhile for him if it wants the grain to be exported. In this scenario the third country buyer pays less than he otherwise might and the trader's margin is covered by the granting of a larger refund than would be necessary under conditions of open competition.

Special Sales

2.73. In 1987 there were two special export measures to avoid intervention: one for 200 000 tonnes of maize and another for 1,2 Mio tonnes of barley, both from Spain. In 1988 four measures were opened:

(a)100 000 tonnes of breadmaking wheat exported from the FR of Germany [Commission Regulation (EEC) N° 633/88] (). This was initially restricted to Poland as a destination. The regulation was later modified to cover all zones. Sales subsequently took place with refunds of 112,50 ECU and 109,89 ECU/tonne at a time when sales from the free market attracted 104 ECU/tonne. The total quantity on offer was sold;

(b) 200 000 tonnes of wheat to be exported to Algeria and/or Tunisia [Commission Regulation (EEC) N° 2191/88] (). This measure failed to attract any interest and was abandoned;

(c)1 Mio tonnes of barley produced in Spain [Commission Regulation (EEC) N° 2444/88] (). This measure specified that the barley must have been produced in Spain in order to qualify for a refund, and 407 300 tonnes were sold;

(d)600 000 tonnes of durum wheat from Greece [Commission Regulation (EEC) N° 2751/88] (). 300 000 tonnes were sold under this measure of which 250 000 attracted a maximum refund of 130 ECU/tonne when free market sales were taking place at 122-123 ECU/tonne. The justification for the extra cost is uncertain.

2.74. During 1989 three special measures were introduced. Once again a tender referring to barley produced in Spain (300 000 tonnes) has been opened. The two other measures each relate to 900 000 tonnes of common wheat. One of these measures is the subject of the prologue to this report. The other is considered in detail below.

Tender for the refund for the export of common wheat to the Soviet Union

2.75. In November 1988 certain traders signed a contract to export 1,5 Mio tonnes of wheat to the USSR for delivery in January - March 1989. The Commission does not appear to have been involved during the negotiations at this stage. At this time world prices were relatively low and this was reflected in the contract made with the USSR which is thought to have been concluded at 5 USD-10 USD/tonne below market prices. The traders believed that world prices would continue to fall. Nevertheless, they bought grain on the internal market in anticipation of acquiring export licences at higher refund rates. Contrary to expectations the grain market picked up, prices on the world market began to rise and the traders' bids for export refunds under the tender for free market wheat [Commission Regulation (EEC) N° 2470/88] () proved uncompetitive and were rejected. In December some 2,2 Mio tonnes worth of licences were issued with a corrective of 4,5 ECU/tonne valid for China and the USSR. These licences were obtained by traders who were successful in the bidding for export refunds in the free market tender, but - a fact of which the Commission only subsequently became aware - these were not the same as the traders with the Russian contract. Nor were the latter able to buy licences on the market. They were therefore not in a position to meet the delivery requirements of the Russian contract and the grain remained in the silos of certain major ports, causing congestion, as it could not be loaded on the waiting Russian ships (some of which departed empty).

2.76. In January 1989 the Commission was prepared to cover the 'licence deficit` by a specific regulation. On 16 February Commission Regulation (EEC) N° 395/89 () was published offering 900 000 tonnes for export to the USSR; at the same time the USSR was withdrawn as an eligible destination from the free market tender [Commission Regulation (EEC) N° 2470/88].

2.77. The 900 000 tonnes up for offer was awarded to the sole bidder in the adjudication of 23 February 1989 for which day a corrective of 30 ECU was granted, giving an effective rate of 71 ECU/tonne. The special corrective was published on the same day as the adjudication took place. At the same time a bid of 61,9 ECU/tonne under the free market tender [Commission Regulation (EEC) N° 2470/88] was rejected as too high.

2.78. The Court was unable to obtain a satisfactory explanation for the corrective of 30 ECU introduced by the Commission, or to establish how the export deal was agreed. The Commission believes that the trader incurred losses on this deal despite the preferential rate granted.

Planning and monitoring of export sales

2.79. The Commission draws up a supply balance sheet at the beginning of each year. For the cereals campaign 1988/89 see Table 6. This contains global quantities which form the basis of an estimation of the financial cost of achieving the exports envisaged. Based on the average export pattern and prevailing refund rates, the Commission estimates the probable cost in terms of refunds.

2.80. The Commission produces the internal weekly reports referred to in paragraph 2.17 which record all decisions reached, both inside and outside the Management Committee meeting. They also highlight any significant events in the relevant markets. Member States provide regular returns showing the tonnage for which certificates have been requested/issued.

>TABLE>

2.81. The Commission has to rely on Member States to keep them informed of progress on sales. In the past, this has not always happened. The Commission has had to make repeated requests for the information which has often been provided orally. Following the introduction of Commission Regulation (EEC) N° 859/89 of 29 March 1989 () which relates to the beef and veal sector, the situation for this market has improved. Member States are now required to send the Commission details of amounts sold from intervention analysed by sales Regulation. However, for mini-tenders no details of the split between tender and fixed price sales are given and prices are not communicated. Under Commission Regulation EEC

2377/80 of 4 September 1980 () [as amended by Commission Regulation EEC 3988/87 of 22 December 1987 ()] Member States are required to report each week the quantities for which licences have been issued. This information is provided for 14 groups of combined nomenclature codes and would not therefore enable the Commission to monitor the export of specific cuts of meat within each of these groups.

The decision-making process

2.82. Hitherto the proposals put by the Commission to the Management Committees have not been supported by full information about the financial implications, e.g. in terms of the budgetary impact of an increase (or decrease) in refund rates and the loss on sale resulting from setting minimum prices. The Commission is aware of this shortcoming and has gone some way towards addressing the problem. Proposals put before the Management Committee are now to be accompanied by a pro forma statement of the financial consequences of the measure concerned. This includes a section on financing and implications for the following financial year. The market division is required to complete this statement three days before the Management Committee is due to consider the measure. This document has only recently been introduced and did not exist for the transactions relating to 1987 and 1988 examined by the Court.

2.83. Within the Commission services the initiation and implementation of policy with regard to subsidization of exports is primarily (though not exclusively) the responsibility of the appropriate market divisions of DG VI. The Financial Controller follows and is represented at Management Committee meetings, and has on occasions raised questions about particular decisions after the event. At the external level the Management Committees in principle offer a forum for expert scrutiny of Commission proposals by Member States' representatives, but their effectiveness in this respect is difficult to gauge. There are no comprehensive minutes of discussion, the only record being a summary list of decisions taken.

2.84. The Commission intends to use a computer programme in order to follow up certain of its decisions (taken after consultation with the Management Committee) with regard to the cereals market. The programme is based on a model established for sugar. The programme will permit the results of weekly tenders to be evaluated and will provide a continuous follow up of financial obligations resulting from the decisions. However, at the time of audit, the system for cereals did not work due to programming problems.

Conclusions

The cost of the policy

2.85. The payment of subsidies on exports is one of the most important instruments available to the Commission for the management of agricultural markets. It is also complex and costly, roughly one-third of the whole Community budget being spent on export subsidies (i.e. refunds plus low-price sales). The complexity of the export subsidy system as it has evolved over the years is in striking contrast with the basic legislation. As regards the objectives of export refunds, the regulations contain broad statements of intent. The Community basic legislation is silent on the use of low-price sales as an instrument of export promotion.

2.86. In practice, the export refund system has developed into the principal instrument of internal market management. In addition, the export subsidy system has developed into a flexible instrument of commercial and external relations policy. Both developments carry risks for the Community budget. The risk in the former case (exemplified by the special measure for German wheat and the SMP for export initiative) is that the budget will be used to finance the export of products which the home market could have absorbed. Thus, the export subsidy system has a tendency to increase the level of Community prices in some markets and is one factor, along with the low value of the dollar, which helps to depress world prices in others, for example beefmeat. The result is that the gap which the system is designed to bridge is widened; hence increasing the cost of disposals.

2.87. In the latter case the risk is that by attaching geographical conditions (e.g. specifying a single country as destination or source) to export sales the Commission will reduce the level of trader interest and thus increase the cost to the Community budget. The prologue and several cases described in this chapter suggest that this risk is a real one, e.g. paragraphs 2.42, 2.73(a) and (b), 2.77.

2.88. In its management of the subsidised export of agricultural products the Commission is in effect responsible for a commercial operation on an international scale. By comparison with the commercial firms with which much of its business is conducted, the Commission suffers from several disadvantages. One disadvantage is that for most of the past decade it has been a forced seller in markets which tend to be dominated by a small number of big traders.

2.89. But some of the Commission's disadvantages are of its own creation: for example, the failure in many cases to document, monitor or evaluate decisions. The Commission's use of tendering and its analysis of price information to set the appropriate level of subsidy could be improved. Tendering has been carried out in the context of imperfect markets (i.e. with too few traders to facilitate real competition or only a single trader) or under conditions which may be classified as 'uncompetitive` (e.g. due to a requirement for large bid quantites such as in Commission Regulation (EEC) N° 2415/88 which set the minimum bid at 25 000 tonnes of beef). The reliability and completeness of the Commission's price information are uncertain. Significant increases in the level of subsidy have occurred but the Commission was unable to provide the Court with any justification for such changes. The present chapter contains evidence that the cost of subsidy may often be higher than is necessary for the achievement of the Commission's export objectives (e.g. paragraphs 2.21, 2.33, 2.46, 2.66).

Accountability

2.90. By whatever means the Commission obtains the information necessary for determining the appropriate level of subsidy, the whole is subject to the Commission's judgement or discretion for reasons set out in paragraph 2.11. This would not necessarily be a point of concern if adequate documentation were maintained of the facts, the Commission's consideration of the facts, the decisions taken and of the outcome. However, this is not the case and the consequences are serious for independent control by third parties and for management. The Court has been unable to gather from Commission records the information necessary for more than the most elementary evaluation of many aspects of export subsidies. In view of the Court's findings it is unclear how management can function properly and the various Management Committees can act as an effective check on the Commission.

Tendering

2.91. In theory the level of subsidy represents the difference between prevailing world and Community prices. In practice the equation is not quite so straightforward since factors such as US export initiatives, transport and handling costs, and the response of competitors are unlikely to be reflected adequately in available price information. In such circumstances tendering would appear to be the only solution available to the Commission to enable the independent yardstick of market forces to be brought to bear on the determination of rates and prices whilst ensuring that the level of subsidy provided does not exceed the minimum necessary to ensure export. Tendering in theory has the additional advantage of ensuring equality of treatment between bidders.

2.92. In the case of SMP exports (paragraphs 2.30 - 2.33) recourse to tendering would have alerted the Commission to the extent of market demand and possibly encouraged reconsideration of the need for the Community to subsidise the sale of SMP. There is little doubt, too, that the level of subsidy so determined would have better reflected market conditions than that which was actually set, at a considerable saving to the budget.

2.93. The Court recommends that the Commission consider extending the use of tendering, particularly for the bulk products. Bearing in mind the lack of genuine competition in certain markets, the Commission should decide on a minimum or reserve price in each case before the invitation to tender is issued. All such decisions should be documented but (in contrast with present practice in the beefmeat sector) minimum or reserve prices should not be published. In cases where exports to third countries are sold to a sole buyer, the Commission should negotiate directly to agree a price, tendering for other elements. For sales from intervention this would effectively mean the Commission tendering for transport and handling costs, the sale price out of intervention being within their competence.

3. National controls

Introduction

3.1. Under the general arrangements for the management of EAGGF-Guarantee expenditure the primary responsibility for examining the goods exported and for vetting the refund claims lies with the Member States. The Community has, however, defined some of the essential central requirements. Commission Regulation (EEC) N° 3665/87 of 27 November 1987 () consolidates common detailed rules for the application of the system of export refunds on agricultural products, including rules for the supporting documents needed to substantiate a claim: the required evidence of export and of arrival for home consumption in the country of final destination; the calculation of the rates of refund; and the special arrangements for the prefinancing of refunds. And Council Directive 77/435/EEC of 27 June 1977 () [replaced by Commission Regulation EEC 4045/89 of 21.12.89 ()] requires Member States to carry out a posteriori checks of the commercial documents of undertakings receiving payments from the EAGGF, including payments of export refunds.

3.2. The present chapter summarises the results of the Court's audit of the controls exercised by Member States over the expenditure on export refunds for the three principal products of cereals, milk products and beef. The audit covered paying agency and customs controls in the United Kingdom, Ireland, the Netherlands, France, the FR of Germany, Italy and Denmark. In addition customs controls over export refund transactions were examined in Belgium and Greece. At customs stations selected as far as possible according to the importance of export refund transactions, the Court evaluated the theoretical and actual procedures for physical control of export refund consignments and the eventual certification of export. At paying agencies, the Court tested evidence of export and evidence of arrival at final destination.

3.3. The main issues considered were whether:

(a)the appropriate evidence had been submitted in support of refund claims;

(b)the refund payments were based on the correct rate for date, description, quantity and destination;

(c)the appropriate controls leading to certification of date, description, quantity, quality and export were provided for and effectively performed;

(d)the appropriate a posteriori controls over the authenticity of the transaction were effective both in their scope and frequency.

3.4. The cooperation received from Member States in carrying out this enquiry was good. However, in certain Member States the Court was unable to obtain full access to reports and documentation concerning the work carried out under Directive 77/435/EEC (2). This problem arose in Ireland and the United Kingdom in 1987, and in France in 1988. In addition, one Member State (United Kingdom) refused direct access to accounting data relating to expenditure on export refunds. The United Kingdom authorities have since indicated their willingness to reconsider this restriction, case by case and the political authorities in Ireland, having had the matter brought to their attention, have directed the national administration to give the Court access to all necessary information in future. Conversely certain Member States (notably Denmark and the Netherlands) provided high quality management information. The scope of the observations in the succeeding paragraphs necessarily reflects the difference in the extent of the audit in the different Member States and cooperation and information received. In accordance with the Court's normal practice, the factual content of the observations concerning Member States contained in this chapter was formally brought to the attention of the competent national authorities on a bilateral basis and their comments have been taken into account.

3.5. Export refunds are a high risk area. This is due above all to the complexity of the governing legislation and the size of the sums which can be involved in individual transactions. A vivid illustration of the complexity of the legislation is provided by the rates applicable to certain types of cheese in December 1988, which were as follows:

(a)Cheese, Parmigiano Reggiano, not grated or powdered, of a fat content by weight, not exceeding 40 %, and a water content calculated by weight, of the non-fatty matter not exceeding 47 % would attract a refund rate of 190 ECU per 100 kg if exported to Sweden but zero if exported to Norway and Finland, all three countries being members of the European Free Trade Association (EFTA);

(b)the same cheese if not grated or powdered attracts a refund rate of 170 ECU per 100 kg if exported to USA but if grated attracts a maximum refund of 118,75 for that destination;

(c)for other cheeses exported to third countries the difference of fat content by weight in the dry matter between 18,9 % and 19,1 % will increase the refund from 100,50 ECU per 100 kg to 114,22 ECU per 100 kg.

3.6. A first instalment of the Court's findings with regard to national controls over export refunds for beefmeat was published in the Court's 1987 Annual Report (). The Court believes that many of these findings gain added force and relevance in the wider context of the present report, and some of them therefore reappear in this context.

3.7. The Court notes that in recent weeks some important changes have been introduced in the regulations governing the control of export refunds. Annex III comprises a list of the main changes. The observations which follow should, of course, be read in the light of these recent developments. The Court is pleased to note the extent to which the Commission, in drafting these changes, has taken account of the suggestions of the Court in the present report and in earlier reports, in particular the 1987 Annual Report.

Customs Controls

The sequence of controls

3.8. Customs in all Member States have responsibility for accepting goods into customs control prior to export and for certifying export. In fulfilling this responsibility Customs may carry out physical examinations to verify declared quantities and qualities of consignments at any point between the trader's premises and eventual export from the Community.

3.9. The acceptance of goods into customs control, signified by the application of a customs stamp and signature to the appropriate box on the export declaration, validates the declaration submitted by the exporter. It provides confirmation of the basic elements essential to determining the justification of a claim for, and the calculation of, an export refund, namely that goods of a declared quantity and quality exist on a given date.

3.10. The first point at which goods may be taken into customs control and may be subject to physical examination is at the point of loading, which is normally at the trader's premises. For this control to be effective the exporter should be required to provide advance notification of his intention to load, of the cargo and of the timing of the operation to his local customs office.

3.11. An alternative procedure in existence in some Member States is for the container to be presented fully loaded, along with the export declaration at the responsible local customs office, where customs may similarly confirm existence and carry out a physical examination.

3.12. In both these cases after acceptance the container will travel under seal to the customs office at the port of exit from national territory where export formalities will be completed.

3.13. A third possibility is for goods to be accepted into customs control directly at the customs office at the point of exit from national territory. Here again the container is presented fully loaded along with the customs declaration. Its arrival is registered so that the declaration can be certified with the date of acceptance into customs control.

3.14. The container will then be placed in a storage area pending loading on board ship. Physical examination of goods in containers presented directly at the customs office of exit may occur at any time between arrival and loading on board ship.

3.15. In order to qualify for payment of export refund under any of these three procedures the exporter must complete export formalities within 60 days from the date when the goods have been accepted into customs control. Customs' final responsibility therefore is to certify export within this period.

The risks

3.16. The risks inherent in the export operations of agricultural produce are:

(a)that the quantity of the product may be overstated (in extremis, the product may not exist);

(b)that the quality of the product may be misstated;

(c)that the product may be misdescribed;

(d)substitution by quality or quantity (or both) of the product taken under customs control in advance of actual export, at some subsequent stage, i.e. during storage or during transfer from stores to ship, train or other form of transport;

(e)the non-export of goods and either their re-presentation for export or their entry on to the home market.

3.17. In all of these cases the Community budget may finance unjustified amounts of export refunds. In the case of (e) the operation is frustrated in its main objective of removing produce from the market for export to third countries.

3.18. In the course of the enquiry the Court noted a number of weaknesses in control procedures and administrative arrangements which accentuate the risks outlined above. These weaknesses are explained in some detail below and are illustrated by examples drawn from all the Member States visited. Whilst the weaknesses are presented individually, in practice the Court found that most applied at any one time to each of the customs authorities visited on both local and national levels.

Notice of intention to place goods under customs control

3.19. When goods are taken into control by an inland customs office sufficient advance notice should be provided by the exporter to customs of the description and quantity of the goods and of the times of starting and finishing of the loading to allow customs the opportunity to attend. This is particularly important if Customs are to make the most effective use of their physical controls, for the reasons given in paragraph 3.28. The deterrent value of customs controls is of course lost if the exporter is able to gauge the likelihood of customs attendance in advance.

3.20. This important principle was negated in the following cases observed by the Court:

(a)in Ireland for companies with more than one set of premises, arrangements for prior notification of placing beefmeat under customs control did not allow customs sufficient time to carry out an examination should they have wished to do so. In these circumstances it is not surprising that a major exporter visited by the Court had never been subject to such an examination;

(b)in the United Kingdom a major exporter of beefmeat visited by the Court was always allowed to wait until after the deadline for customs attendance before filling in the declaration;

(c)in the FR of Germany, the customs officer for one major producer of milk products had never received prior notification; for another, 24 hours telephone notice was received but with no indication of quantities or descriptions;

(d)in the case of the latter and of another customs office in the FR of Germany responsible for 4 major exporters of milk products, it was the practice to inform the trader by telephone when the customs officer wished to carry out a physical examination and to request a company car to collect the examining officer;

(e)at Wilhelmshaven (FR of Germany), prefinanced goods removed from warehouse for export were only declared to customs when they had been loaded on board ship;

(f)at St. Quentin (France) the first export refund consignments leave the factory at 9 a.m. each day. In order to meet this deadline, packing commences at 5 a.m. Since the customs office is 45 minutes from the factory, and since the control staff have no authority to work outside normal hours, there has never been a physical control at the start of a packing of goods scheduled to leave the trader's premises at 9 a.m.

Acceptance of goods into customs control

3.21. The act of placing goods under customs control determines the date for refund rate for non-prefixed transactions. In cases where the rate has been prefixed (cf. Annex 1, paragraph 6), there is a time limit within which the exporter must place his goods under customs control in order to benefit from the prefixed rate. There is therefore a risk of manipulation of the date of acceptance either to benefit from the consequences of rate changes or to comply with the expiry date provided for on the prefixing certificate.

3.22. The Court noted the following examples where confirmation of the existence of the declared quantities was not obtainable on the date of acceptance:

(a)in France cereals were accepted into customs control without the customs officer having verified from the silo operator's records that the declarant had sufficient cereals in store on the date of acceptance to match the quantity declared for export;

(b)in Italy cereals stored at several distant locations were accepted into customs control on a single declaration without satisfactory confirmation of existence on the date of acceptance from the customs offices responsible for all of the locations;

(c)in Italy total quantities of cereals were accepted into customs control on the date of presentation of the first part of the consignment even though the remainder of the consignment was presented over succeeding days;

(d)in Belgium direct trader input declarations were recorded with the date of acceptance being that of computer input. In reality the exporters disposed of a further 6 days to present the goods for customs control.

Documentary controls

3.23. The purpose of current documentary controls is to ensure that the description and quantities on the export declarations are consistent with supporting commercial documentation. Inconsistencies noted at this stage will also assist in determining which consignments should be subject to physical control.

3.24. The Court found that, in contrast to the procedures regarding import duties and levies, where the average transaction size is much smaller, commercial invoices are only required to be presented with the declaration in two Member States, (Denmark, Netherlands). In the remaining Member States there is therefore no automatic check of export declarations against supporting commercial documentation.

3.25. Even in the two Member States where the invoices are required by law the Court noted weaknesses:

(a)in Denmark certain large exporters are allowed to present their invoices on a monthly basis. The initial control point is already passed and in most cases the goods have been exported. Further, the Court found that when invoices were received it was not the practice to compare them with the export declarations even on a sample basis;

(b)in the Netherlands the auditors found examples where photocopies of a single invoice were accepted in support of several claims. The originals were not even genuine commercial invoices but had been prepared specifically for the purposes of presentation with export declarations.

3.26. The performance of documentary controls was also far from convincing. For example:

(a)in the Netherlands certain export refund declarations had been certified by customs although the supporting documents did not agree in regard to weight and export refund nomenclature. Some declarations had also been certified where the destination was intra-Community;

(b)in Italy, certain declarations for cheese were certified by customs although the composition of the product according to the certificate of origin did not correspond to that defined by the declared export refund nomenclature.

Physical controls

3.27. The purpose of physical controls is to obtain assurance from a representative sample of the goods declared, that the classification, condition and weight are correctly declared: in other words, that the declaration accurately reflects reality. In all Member States visited responsibility for physical controls rests with the customs services.

3.28. 100 % physical control of exports attracting refunds is neither desirable nor feasible; there are too few customs officers and such an intensity of control would stifle the export trade. Physical controls should therefore be selective and directed towards consignments which present the highest risk in terms of refund value, product and destination risk, and trader reliability. They should be of sufficient frequency and quality to have the desired preventive effect and to detect irregularities. The Court's examination of this key control however revealed the weaknesses described in the succeeding paragraphs.

Criteria for selection for physical control

3.29. There is a lack of defined criteria for risk identification to ensure that physical checks and sample taking with a view to analysis are directed towards high risk areas. The Court's auditors found only one Member State (France) which had set up an adequate - if perfectible - system of risk analysis. It includes criteria such as Common Customs Tariff classification but it excludes the export refund classification, financial importance of refund, and destination. All export declarations for a Customs authority are input directly through computer terminals to the local Customs computer which permits a limited risk analysis to be applied systematically to every declaration. The local nature of the arrangements enables criteria for risk identification to reflect local conditions.

3.30. In Belgium a similar initiative has been taken to select consignments for physical control. Selection by the computer does not necessarily mean that a physical control will be carried out, however, for the final decision is left to the examining officer. The only parameter in use at the time of the Court's visit to Antwerp was 'All CAP products` which is too vague a criterion to allow identification of risk transactions only.

3.31. In practice the lack of detailed criteria for risk identification has meant a rather haphazard targeting of transactions. The Court noted that some customs stations concentrated on products which:

(a)did not attract refunds (France);

(b)were so-called preparations and therefore attracted lower rates of refund (United Kingdom, Netherlands); and

(c)were of a refund value so low that the exporter had often made no refund claim (France, Belgium).

Frequency and quality of controls

3.32. Until the 12th February 1990 when the Council finally adopted the regulation on monitoring of payments in respect of the export of agricultural produce there was no Community standard for the frequency and depth of physical controls. The risk to the Community is that in the absence of any agreed benchmark, the performance of physical controls will decline until the lowest level is reached. In other words, the more effective the controls of a particular Customs authority the greater the incentive to the trader to export to third countries via an alternative Customs authority where controls are known to be less frequent and less searching. This is true for Customs authorities on local, regional and national levels. Statistics concerning the frequency of physical controls did not exist at national level in any of the Member States visited. Of the customs offices at the major ports only United Kingdom ports and Rotterdam maintained statistics although even here there was no separation between CAP exports to other Member States and tho