SPECIAL REPORT No 1/87 on THE QUALITY OF FOOD AID The extent to which food aid products comply with the applicable rules as regards quality, quantity, packaging, time and place together with the Commission's replies (Observations pursuant to Article 206 a (4) of the EEC Treaty) (87/C 219/01)

TABLE OF CONTENTS

Paragraph

reference

1.Introduction1.1 -1.5

2.The applicable rules2.1 -2.17

The supply agreements2.4 -2.7

The comprehensiveness of the agreements2.4

Applicability of the agreements2.5 -2.7

The regulations on the mobilization of aid2.8 -2.17

Sphere of application2.8

Complexity2.9 -2.10

Homogeneity2.11

Content2.12-2.17

Packaging2.12-2.14

Markings2.15

Transport2.16-217

3.Monitoring the application of the rules3.1 -3.42

Non-specific checks3.3 -3.21

Adequacy of the non-specific checks3.3 -3.8

Lack of sufficient evidentiary effect3.3 -3.7

Failure to take account of requirements peculiar to food aid3.8

Complementarity with the specific checks3.9 -3.21

The approval of the manufacturer3.9 -3.12

Manufacturing supervision3.13-3.19

Quality control at the time of or with a view to shipment3.20-3.21

Specific checks3.22-3.42

Approval of contractors3.22

The quality control carried out by contractors3.23-3.24

The quality control carried out at the initiative of the intervention agency at the time of or with a view to shipment3.25-3.28

The checks requested by the recipient3.29

The checks financed by the Commission3.30-3.32

Common observations in respect of checks with a view to shipment3.33-3.39

Shipment, the decisive stage of quality control3.33-3.34

Excessive importance attached to taking-over or compliance certificates on shipment3.35-3.39

Control and monitoring of implementation after shipment3.40-3.42

4.Responsibilities and guarantees4.1 -4.54

Unequal value of the various delivery stages as regards quality4.1 -4.4

Obligations, guarantees and penalties at the various stages4.5 -4.18

The economic operator's obligations4.5 -4.8

The contractor's obligation to implement the aid4.5

The contractor's obligation to 'reimplement' the aid where implementation is unsatisfactory4.6

The intervention agencies' obligations4.7 -4.8

Insurance4.9 -4.11

Insurance of cereals withdrawn from intervention storage4.9

Marine transport insurance of products delivered CIF4.10

Transport insurance at the 'delivered place of destination' stage4.11

Securities4.12-4.14

Tendering security4.12

Delivery securities4.13

Securities for advances4.14

The financial responsibility of the economic operators4.15-4.17

The contractor's financial responsibility4.15

Deduction from payments made to the successful contractor and equivalent guarantee4.16

Rejection by the Commission of expenditure incurred by an intervention agency4.17

The Community's guarantee4.18

Comparative assessment in the light of the quality objective4.19-4.54

Who benefits from the guarantee?4.19-4.23

Full guarantees or guarantees that only cover one stage in the implementation of the aid4.24-4.26

Guarantees which may be mobilized directly or via a third party4.27-4.33

Guarantees to maintain the value of the aid or dissuasive penalties4.34-4.36

Extent of financial responsibility and definition of obligations4.37-4.50

Very often the guarantee holder does not put the guarantee into effect

4.39-4.42

The contractor's obligations are not strict enough4.43-4.50

The Community's guarantee: the final guarantee or the first?4.51-4.54

5.Points for discussion with a view to reforming the system5.1 -5.24

Simplifying and speeding up the procedures5.1 -5.11

Overcoming the political complexity of food aid5.1

Taking the simplest existing procedures as a basis5.2 -5.4

Triangular operations5.2

Aid in the form of oleaginous products5.3

Emergency aid (Articles 950 of the budget and 137 of the Second Lomé Convention)5.4

Suggestions for reform5.5 -5.11

Ensuring the consistency of management documents5.12-5.14

Better definition of controls and responsibilities5.15-5.24

Monitoring the execution of the operation is indispensable, regardless of whether there is any legal responsibility to do so5.15

Need for separate checks at the various stages of carrying out the aid operations5.16

Without precise definition of responsibilities, the best checks are useless

5.17

Awarding more contracts with an obligation to achieve a result5.18-5.20

Setting up a taking-delivery procedure involving all parties to the agreement as a condition for paying the contractor5.21

Revising the coverage of the insurance policies5.22-5.24

6.Conclusion6.1 -6.3

Annexes

pages

Annex 1:List and description of deliveries of sub-standard goods noted by the Court25-34

Annex 2:Differences between the system for mobilizing cereals and that for milk products which may affect the quality of aid35-37

Annex 3:Glossary38-42

The Commission's replies42-52

17. 8. 87No C 219/ 1. INTRODUCTION

1.1. Food aid cannot properly meet the needs which it is intended to satisfy unless it arrives at its destination on the right date and in the stipulated quantity and unless the nature, characteristics and packaging of the products are satisfactory and comply with the conditions laid down in the supply agreement and the applicable regulations. Legislation cannot, however, provide for all possible cases and will never serve as a substitute for common sense and obvious facts.

1.2. The operations leading up to the distribution of food aid are numerous, complex and politically sensitive:

(a)they include the processing, packing, handling, storage, transport and analysis of products;

(b)the Council and the Commission plus a whole host of economic operators, acting both within and outside the Community, make up the links in a long chain of responsibility;

(c)the inter-institutional balance within the Community and the latter's relations with the Member States are to be understood in the light of the overall development-aid policy and the common agricultural policy.

1.3. In a previous special report, adopted on 30 October 1980, the Court of Auditors presented a general survey of the system for managing food aid. This report takes that analysis a stage further by examining whether or not the products delivered comply with the standards required by law and common sense. The Court has compiled a list of all the unsatisfactory cases - about 90, some relating to one single consignment and others to a series of consignments - which it found during audit visits performed between 1981 and 1985 in over 20 countries and as a result of an enquiry into the cases handled by the food-aid disputes department at the Commission's Directorate-General for Development. These cases are classified and described in Annex 1.

1.4. The number of lots(1) of food aid delivered during the period in question (1976-1985) is large and may be estimated at about 8 000. As for the 90 cases of faulty deliveries described in Annex 1, they represent a number of lots to which it is difficult to put a figure, but which must be in the region of between 200 and 400. In any case, the problem is not so much one of assessing how representative these few hundred lots are in relation to the 8 000, as of

using this sample to analyse the reasons for the shortcomings and to suggest remedies. The shortcomings and contradictions in the present system, which are to blame for these failings, have been detected with regard to:

(a)the applicable rules;

(b)the checks made;

(c)and the guarantees implemented.

The report concludes with recommendations for reforming the system.

1.5. This report was sent for the first time by the Court of Auditors to the Commission on 16 January 1987 in order to allow the latter to draw up its replies. A few days beforehand the basic regulation on food-aid policy and food-aid management (Council Regulation (EEC) No 3972/86, published in the Official Journal of the European Communities of 30 December 1986) had entered into force. Obviously, all the observations in the report concern operations which took place before the entry into force of Regulation (EEC) No 3972/86, on 2 January 1987. However, the Court has noted that the reforms introduced by this new regulation, which should soon be supplemented by the reform and standardization of mobilization procedures relating to these products, (the draft regulation of the Commission having already been made), agree with its own recommendations on several important points.

2. THE APPLICABLE RULES

2.1. The basis for any supply of food aid is a supply agreement. The Community undertakes to deliver a certain tonnage of a particular product. The recipient undertakes to abide by certain terms regarding the taking-over and use of the product and to account for the way it has been used. The supply agreement, which is drawn up and negotiated by the Directorate-General for Development (DG VIII), lays down the recipient's rights and duties.

2.2. Food aid is governed by a number of regulations:

(a)the only text that is entirely general in scope is Council Regulation (EEC) No 3331/82 of 3 December 1982(2) on food-aid policy and food-aid management, which remained in force until 1 January 1987;

(b)two regulations lay down implementing provisions for the mobilization of products:

i(i)Commission Regulation (EEC) No 1974/80 of

22 July 1980 (cereals and rice)(3)(4);

(ii)Commission Regulation (EEC) No 1354/83 of

17 May 1983 (skimmed-milk powder, butter and butteroil)(5)(6);

(c)furthermore, food aid is governed by various agricultural policy regulations, not only when aid is drawn from intervention stocks but also when it has to be mobilized on the European market;

(d)the aid must also comply with the law in the Member States, for example, certain health standards;

(e)each aid operation must be carried out in accordance with a specific mobilization regulation and a suitable notice of invitation to tender, drawn up by the Directorate-General for Agriculture (DG VI) and adopted by the Commission after it has obtained on opinion from a management committee.

2.3. The annual programme is defined by:

(a)the budget, which lays down the appropriations per category of product;

(b)the Council Regulation laying down the implementing rules for the year in question (total quantities to be delivered of each category of product, detailed list of products likely to be used as food aid, list of countries and organisations likely to receive aid) (these rules were in force until the end of 1986);

(c)the special aid allocations, decided on a case-by-case basis by the Commission.

The supply agreements

The comprehensiveness of the agreements

2.4. The supply agreements(7) specify the nature of the product, the quantity, the packaging and, sometimes, what is to be marked on the packages. However:

(a)they fail to mention the delivery period, which is arranged informally between the Commission and the recipient. Other donors are not reluctant to commit themselves to a delivery time in their own agreements. This failure to specify the delivery period leaves the door wide open to delays in the mobilization of aid;

(b)similarly, the port of shipment for an FOB(8) delivery is never specified in the agreements. The tenderers select the port of shipment unilaterally. This practice is such as to increase the sea transport costs for the recipient. In many cases of CIF(9) deliveries, the port of unloading is also not mentioned in the agreement;

(c)lastly, the agreements generally confine themselves to indicating the nature of the product without specifying further details. This may result in a product being

supplied which does not meet the precise local requirements. The case of 240 t of butteroil supplied in 1983 to the Word Food Programme (WFP) for Morocco is interesting in this respect: the percentage of aerobic germs was higher than the maximum authorized under Moroccan rules. The only way of making national regulations such as these binding would be to include them in the agreement and the mobilization regulation, because, as things are, the intervention agencies and the successful tenderers are not bound by the recipient country's regulations.

Applicability of the agreements

2.5. In the broad sense, the supply agreement is the official letter signed by the two parties, preceded and followed by less formal correspondence, which lays down certain details of the aid (e. g. the delivery period). DG VIII defines the operations and concludes the supply agreements and then sends a 'mobilization request'(10) to DG VI, which mobilizes the aid, or arranges for the intervention agencies to do so, by drawing up the mobilization regulation(11) and the notice of invitation to tender(12).

2.6. Often the date planned for the delivery and notified by DG VIII to DG VI is not kept to because of the sluggishness of the mobilization process. Above all, the process is slow because some of the specifications in the agreements have to be transcribed by DG VIII in the mobilization request in order to be sent to DG VI and included in the mobilization regulation. Experience has shown that these three documents sometimes contradict each other:

(a)for 15 000 t of maize granted to Mozambique, the agreement laid down that the grain would be taken over at the port of unloading, whereas the mobilization regulation specified the port of shipment, in accordance with the mobilization request;

(b)for a delivery to Lebanon in 1983 of 250 t of soya oil via the UNRWA(13), under the 1982 programme, there was a contradiction in the official letter which made it unclear as to the point where the costs were divided, especially with regard to unloading costs and the transfer of total liability for the goods from the successful tenderer to the recipient. According to one interpretation, the transfer took place at the port of shipment and according to the other, at the port of unloading. The notice of invitation to tender, by defining the delivery stage as CIF, without further details, stated, by implication, that the goods were to be taken over at the port of shipment, in accordance with the recognized acceptation in commercial practice of the term 'CIF';

(c)in respect of 500 t of skimmed-milk powder granted to Mauritius and delivered in 1982 without any added vitamins, the agreement laid down that the product should be vitaminized. The mobilization request failed to repeat this stipulation;

(d)in the case of a delivery to India in 1982 of 5 000 t of skimmed-milk powder that was too old, the agreement specified powder which was at the most six months old at the time of shipment. The mobilization regulation authorized powder up to nine and a half months old. DG VI argued that stocks did not make it possible to supply more recent powder. In fact, the stocks of powder less than six months old at no time dropped below 5 515 t, and it was possible to make up the 5 000 t by calling on only two Member States (United Kingdom 3 140 t; Denmark 1 900 t; the remaining 475 t were located in Germany).

2.7. Situations of this kind sometimes occur because no one document serves as the basic common point of reference for all the parties concerned. The supply agreement is binding upon the recipient and the Community. The mobilization regulation is aimed at the intervention agency and the contractor. Two separate documents are therefore involved, drawn up by two separate Directorates-General. A third liaison document, the mobilization request, ought to ensure that these two documents are consistent with each other, but this is not always the case.

The regulations on the mobilization of aid

Sphere of application

2.8. Rules for mobilizing aid have been drawn up for cereals (Regulation (EEC) No 1974/80)(14) and for milk products (Regulation (EEC) No 1354/83)(15), but there are no equivalent regulations for vegetable oils, sugar or 'other products'. This serious shortcoming is compensated for by provisions inserted on an ad hoc basis in each notice of invitation to tender relating to these products, but this cannot be a substitute for a properly thought-out, permanent regulation. 'Delivered place of destination' deliveries are customary for all categories of products and yet Regulation (EEC) No 1974/80 on the mobilization of cereals makes no mention of them.

Complexity

2.9. A feature of the mobilization of food aid is the repetition in regulations issued for a particular, limited purpose of provisions that are permanent and

general. Admittedly, for cereals delivered at the FOB or CIF stages, and for milk products, the mobilization rules have been codified. In all other cases, however, the rules are reiterated in each mobilization regulation or notice of invitation to tender in exactly the same terms (nature of the quality controls, list of documents which the successful tenderer has to supply in order to be paid, rules regarding the packaging, compulsory lodging of a security, etc.). Conversely, separating general rules from specific provisions and incorporating them in different legislation should not be taken to ridiculous lengths: a mistake in the markings on bags of milk was due to a special regulation, requiring that the bags be marked 'to the Republic of Tunisia'. This requirement was in addition to the words 'Gift of the European Economic Community', which are stipulated as a general rule by Regulation (EEC)

No 1354/83(16) on the mobilization of milk products. The bags bore only the marking - itself improperly abbreviated - 'Gift of the EEC'.

2.10. The regulations are complex in another way too: some provisions relating to the agricultural policy apply to food aid but to an extent which varies from case to case. The standards as regards quality and packaging that must be observed when a product is taken into intervention are numerous and this is to the advantage of food aid if the product is drawn from intervention stocks. Furthermore, some of these standards apply to some of the food-aid products mobilized on the market (e. g. milk products).

Homogeneity

2.11. Regulation (EEC) No 1974/80(17) (cereals) and Regulation (EEC) No 1354/83(18) (milk products) differ in many ways that are likely to be of relevance with regard to questions of quality, and which, for the most part, cannot be justified by reference to the nature of the products themselves (see Annex 2).

Content

Packaging

2.12. In the case of butteroil, no stipulations are made concerning the shape of the canisters nor the thickness or weight of the sheet metal from which they are made. Experience has made it abundantly clear that the most commonly-used canister, which has a 5 kg capacity, is not sturdy enough. The checks made on the strength of the cartons containing these canisters are inadequate and the cartons frequently arrive damaged and open. The stipulation as to the water-resistance of the glue used does not guarantee that it will also be long-lasting. No provision is made for securing the cartons with metal hoops. The Commission will succeed in preventing damage only by laying down technical specifications, defined after investigating the cases of damage.

2.13. As regards the milk-powder bags, Regulation (EEC) No 1354/83(19) quite simply refers back to the provisions of Commission Regulation (EEC) No 625/78(20) of

30 March 1978 on public storage of skimmed-milk powder in the Community. The conditions prevailing overseas do not make it possible simply to use the same packaging as is specified for Europe.

2.14. For vitaminized milk, Regulation (EEC) No 1354/83(21) provides for the possibility of shipping the powder in 1-kg or 2-kg sachets packed in lots of 20 kg. This method is better but is little used, and it clearly cannot compare with the method adopted by Switzerland and the United States, which is to use tins containing between 2 kg and 5 kg.

Markings

2.15. As regards the markings on the packages, some defects can be attributed to the contractors, as in cases where the words 'Gift of the European Economic Community to (name of country)' or the product's date of manufacture are missing. It is the regulations that are at fault, however, for failing to specify the instructions for use and the last date for consumption for milk products.

Transport

2.16. The stipulation 'Community port of shipment with regular connections with the country of destination', which DG VIII was trying to make compulsory in its mobilization requests at the FOB stage, was often curtailed in the mobilization regulations to 'Community port'. It was therefore left up to the contractor to select the port and the recipient sometimes had to charter a ship to transport the goods from this port. A new clause was inserted into the milk products Regulation (EEC) No 1354/83(22); 'This port shall be selected because of the existence of a connection with the country of destination during the shipment period specified in the notice of invitation to tender. This connection may involve one transhipment in another European Community port'. This clause, which does not appear in the cereals Regulation (EEC) No 1974/80(23), is included in every mobilization regulation relating to an FOB delivery of cereals. The fact still remains that it is the contractor who unilaterally selects the port of shipment. This choice may affect the costs borne by the recipient just as much as, and probably more than, it affects those which the contractor has to pay, and may thus reduce the net economic value of the aid.

2.17. Similarly, the stipulations regarding sanitary conditions and the age of the ships are laid down only for the CIF stage and not for the 'delivered place of destination' stage. The Commission should take steps to eliminate the many unscrupulous shipowners whose prices appear to be

competitive only because of the dangerous conditions under which they transport goods and the deplorable state of the ships they transport them in, or because of dumping practices on the part of some countries.

3.Monitoring the application of the rules

3.1. The following checks exist to safeguard the quality of food aid and to ensure that it conforms with the rules:

(a)procedure for approving the contractor;

(b)procedure for approving the manufacturer of the product;

(c)supervision of manufacture of the product;

(d)the Member State's health check;

(e)check to determine whether goods may enter intervention stores;

(f)quality control carried out by the contractor;

(g)customs check on the quantity;

(h)quality control with a view to shipment, conducted on the initiative of the intervention agency;

(i)the recipient's quality control with a view to shipment;

and, in some cases:

(j)a check at the time of unloading;

(k)a check upon arrival at the destination.

3.2. Some checks are specific to food aid - for example, those referred to under (a), (f), (h), (i) and, when they apply, (j) and (k). Food-aid operations are subject to the other checks that apply under the ordinary law of the Member States or of the Community. This applies to the checks mentioned under (d), (e) and (g). Depending on the case, the checks referred to under (b) and (c) may or may not be specific to food aid.

Non-specific checks

Adequacy of the non-specific checks

Lack of sufficient evidentiary effect

3.3. The evidentiary effect of the non-specific checks is sometimes questionable. They are not carried out with the active involvement of the other parties concerned, insofar as the recipient is not party to, nor even present at, the

check. With the exception of the customs check, moreover, all these checks are no longer up-to-date by the time of shipment. A quality certificate rapidly becomes out of date. This applies to the health checks carried out by the Member States with reference to their own standards. Furthermore, the results of these health checks in the Member States are sometimes shown to be incorrect by other subsequent checks.3.4. Products to be drawn from intervention stocks are subject to the standards and the checks required for entry into the intervention stores, where such standards and checks exist, which is not always the case:

(a)as regards cereals, there is no requirement that they should be subject to a full check before being taken into store. Samples taken by both parties have to be submitted for analysis by an approved laboratory only 'where agreement as to the quality and characteristics of the cereal offered cannot be reached'. Conversely, if agreement is reached, no provision is made for a laboratory analysis;

(b)for milk products, the procedure for approving the manufacturer constitutes an initial form of screening and a second screening is carried out through checks during the process of manufacture. But this does not apply to butter, which is produced by too large a number of farmers and cooperatives. When it is taken into store, samples are usually taken to check whether it conforms to quality standards. In addition, butter has to undergo a trial storage period of two months, after which, if quality standards are not met, it is rejected.

3.5. The Court's investigations into the quality of products in store cast doubt on whether all these checks are carried out (see the Court's annual report on the financial year 1985, Chapter 4). Furthermore, three comments must be made:

(a)once the product has been taken into store, the regulations do not provide for subsequent regular checks;

(b)by the time it is mobilized, the product may have deteriorated;

(c)instances of poor quality are most frequent where the product comes from intervention stocks.

3.6. The Commission became so concerned about this that it decided systematically to finance checks concerned specifically with supplies drawn from intervention stocks; the results were striking (see paragraph 3.30 below), thus providing proof a contrario that the checks carried out prior to entry into intervention stores are not sufficient.

3.7. The customs check on quantities that is supposed to be made prior to shipment covers no more than 0,8 %, 1 % or 2 % of the total quantities exported(24).

Failure to take account of requirements peculiar to food aid

3.8. The requirements regarding food aid are stricter than the rules applying under common law. For cereals and rice, the stipulated standards as regards quality are sometimes higher than the minimum conditions required for entry into intervention. The bags used for milk powder are sometimes different from those specified in the common agricultural policy regulations, and for cereals, which are usually stored in bulk, the process of putting them in bags is part of the act of mobilization. Lastly, the markings are specific to food aid. Thus, even if they were always reliable in themselves, the non-specific checks would not be adequate, because they do not take account of the requirements that are peculiar to food aid. The regulations do not always arrange for these checks to be supplemented by specific checks.

Complementarity with the specific checks

The approval of the manufacturer

3.9. There is no approval procedure for cereals. For milk products, things are somewhat complex:

(a)the process of manufacture may be in two stages:

(i)first stage: manufacture of butter or of skimmed-milk powder;

(ii)second (possible) stage: processing of the butter into butteroil;

(b)normally, vitamins are added to the powder during its manufacture and the two stages are then inseparable.

3.10. For the first stage of manufacture, the current provisions do not always have the same scope:

(a)where the product has been purchased on the market, Article 3(25) of Regulation (EEC) No 1354/83(26) refers back to the approval procedure for entry into intervention stocks. But it goes on to say that 'only undertakings which have the appropriate technical facilities for meeting the requirements laid down in this Regulation) (i. e. laid down specifically for food aid) 'may be approved';

(b)if they have been drawn from intervention stocks, the food-aid products automatically benefit from the approval procedure for the entry into store. But this does not mean that they necessarily 'meet the requirements' specific to food aid. Since the regulations on food aid are stricter than the general regulations, the possibility that they may fall short of the requirements does exist.

17. 8. 87No C 219/3.11. The approval of the manufacturer carrying out the second processing stage is not laid down any more uniformly by the regulations:

(a)for butteroil (manufactured almost solely for food aid), the approval procedure is specific and includes a stipulation requiring 'appropriate technical facilities for meeting the requirements' peculiar to food aid;

(b)in the case of the vitaminization of skimmed-milk powder, the Regulation contains no provision corresponding to that for butteroil. This omission could appear to be due to a simple oversight.

3.12. If there is an infringement of the conditions on which approval was granted, approval is temporarily or permanently withdrawn. This rather complex set of provisions results in a legal structure that lacks homogeneousness and certainty. One of the main consequences is that manufacturers supplying food aid from intervention stocks are not required to observe the approval conditions peculiar to food aid.

Manufacturing supervision

3.13. In respect of milk products, manufacturing supervision is specific and systematic only in the case of butteroil and the vitaminization of skimmed-milk powder. For butter, no manufacturing supervision is required by the Comunity regulations. For milk powder, Regulation (EEC) No 1354/83(27) extends the manufacturing supervision that is stipulated for products taken into intervention to products purchased on the market.

3.14. These inspections at the first manufacturing stage, being provided for by a common agricultural policy regulation, are not specific to the field of food aid. They are periodic, 'frequent', as the Regulation specifies, but not systematic, i. e. they are not carried out for all the batches. So in no way can they be considered to confer a guarantee of quality on every supply of food aid.

3.15. Checks on whether the raw materials used are solely milk or the permitted constituents of milk can only be carried out during manufacture. The laboratories say that, on the basis of existing analyses, it is impossible to establish with absolute accuracy whether or not the finished butteroil contains vegetable fats. From the point of view of the production cost, it is very tempting to substitute vegetable oil for butter: in 1986, vegetable oil was fetching about 1 100 ECU/tonne and butter 3 100 ECU/tonne. The same factors apply the skimmed-milk powder and to powdered whey.

3.16. Certain precautions are taken when approving the undertakings. For skimmed-milk powder, the production plant cannot be granted approval unless it undertakes to

keep permanent records listing the origin of the raw materials, the quantities treated and produced, the type of manufacturing process and the identification of each lot produced. Similarly, for the manufacture of butteroil, 'approval may be granted only to undertakings which have ... premises where any stocks of non-butter fats may be kept separately and identified'.

3.17. But even if the plant clearly separates the production rooms and lines relating to authorized products from those relating to other products, checks would still have to be made to ensure that there was no fraudulent interference during the process of manufacture and that no fraud had been committed in keeping the records. In order to be effective, these checks, even if they are not systematic, need at least to be unexpected and to be carried out at any time. An occasion has already occurred when, during a check on an undertaking manufacturing butteroil, the Court of Auditors chanced to find a large number of empty vats of vegetable oil on the premises. In order to ascertain what the oil had been used for, it would have been necessary either to have been present when it was utilized or else to have carried out a close examination of the commercial documents. A contractor who had committed a fraud of this type was identified by the Commission in connection with deliveries made in 1976 and 1977, but no financial sanctions were applied at the time of clearance. A Court audit visit to Indonesia found one case in which it was likewise suspected that vegetable fat had been used in making milk powder.

3.18. Article 7 of Regulation (EEC) No 1354/83(28) lays down very generally that 'Member States shall take the measures necessary to ensure that ... there is no fat other than butterfat in the products supplied' as food aid. The contractor undertakes, if the product is drawn from intervention stocks, 'to manufacture the butteroil to be supplied only from the butter removed from the intervention agency for that purpose'. All this offers only a theoretical guarantee.

3.19. Above all, manufacturing supervision is in many cases inadequate. These checks relate solely to the nature of the raw materials assumed to be used in manufacturing the product and the quantities produced, and also to the conformity of the packaging and marking, but do not usually include chemical and microbiological analyses of the final product.

Quality control at the time of or with a view to shipment

3.20. For cereals, this control is always obligatory. This does not apply to milk products, for which quality control is obligatory only:

(a)where the product is purchased on the market;

(b)in the case of the vitaminization of powder or the processing of butter into butteroil.

Thus, in respect of a product of first-stage processing - butter, non-vitaminized skimmed-milk powder - drawn from intervention stocks, no quality control is as a rule provided for prior to shipment.

3.21. Of course, if the recipient is not represented at the time of shipment of an FOB or CIF delivery to hand over the taking-over certificate (which must certify that the goods are of the quality specified) to the contractor, the intervention agency must act in his place and issue a certificate with the same content as a taking-over certificate. This means that the intervention agency must check that the goods are of the quality specified, even in the case of milk products drawn from intervention stocks. However, in the case of an FOB or CIF delivery at which the recipient is represented and does not ask for a check to be carried out, and in the case of a 'delivered place of destination' delivery for which the certificate does not have to be issued at shipment, there is no quality control with a view to shipment.Specific checks

Approval of contractors

3.22. No milk products may be supplied as food aid except by an approved undertaking, whether it manufactures the product or merely trades in or transports it. For cereals, no provision is made for approving the supplier. This omission has made it possible for one and the same contractor to make successive deliveries of 15 000 t of maize not of the specified quality to Mozambique, 8 000 t of maize not of the specified quality to Burkina Faso and several other consignments of maize of a quality disputed by the recipients.

The quality control carried out by contractors

3.23. For cereals, the contractor is not obliged to carry out any checks on the goods supplied to him. For milk products, he must verify the quantities made available to him and the quality of the packaging. There is no mention of the quality of the products, except in the case of butteroil, where the interested parties may examine the butter before committing themselves. No reason is given to justify this difference of treatment.

3.24. Of course, there is nothing to stop contractors carrying out their own quality controls, but such controls would be at their own expense. A contractor does not feel the need to make such controls as much as he would in the case of a commercial transaction, where the purchaser has

an obvious interest in ensuring that the merchandise is of good quality, since, if not, his client will hold him responsible. In a food-aid operation, the recipient, who plays the role of client, does not have the same power of inflicting a penalty as someone who is paying for the goods he receives. Furthermore, a poor country is not in a good position to take strong, effective action in European business relations. Moreover, there is the practical difficulty posed by the (sometimes extraordinary) dispersal of the warehouses from which one and the same lot has to be drawn. In the case of milk products delivered to Tunisia in 1983, 421 t of butter had to be taken from three different warehouses situated in two French departments that did not border on each other and 1 000 t of milk powder from five different warehouses spread out over the whole of France.

The quality control carried out at the initiative of the intervention agency at the time of or with a view to shipment

3.25. This quality control is carried out for cereals with the participation of both parties involved: 'The successful tenderer and the recipient's representative shall be invited to take part in the operation'. No such provision is made in respect of milk products and even in the case of cereals the sense of the word 'participer', used in the French version of the Regulation, needs to be clarified in certain language versions. The English 'take part' is a good rendering. The German 'teilnehmen' and Danish 'deltage' terms are likewise satisfactory. The Italian word 'presenziare' and the Dutch expression 'aanwezig zijn', on the other hand, have the much weaker meaning of 'be present at'.

3.26. Other differences between cereals and milk products:

(a)for cereals, the intervention agency 'arranges for' the check, which is entrusted to an independent laboratory; for milk products, the agency itself 'checks', which does not offer the same guarantee of objectivity;

(b)the checks are usually made at the port. The checks on vitaminized milk powder and on butteroil may be seen as identical to manufacturing supervision, the shortcomings of which have already been described. And by the time of shipment, this out-of-date check has lost some of its value.

3.27. In several cases, some intervention agencies have failed to apply the regulations correctly:

(a)for 500 t of milk powder delivered to China in November 1981, the Belgian intervention agency did not carry out the stipulated inspection to ascertain that the product satisfied requirements;

(b)the quality control at shipment of 15 000 t of maize delivered to Mozambique in July 1983 by the

Commission was performed by the French intervention agency itself:

ii(i)it should have been carried out by independent laboratories. In the context of the infringement procedure brought against France for this mobilization, the Commission overlooked this point;

i(ii)the agency declared that the goods were of the required quality, taking as its reference the minimum quality standards stipulated for entry into intervention, which are less strict than the applicable standard-quality rules;

(iii)the only excuse given by the intervention agency in its own defence was that the mobilization regulation did not specify that the maize had to be 'fit for human consumption'. This Regulation, which was similar to all the previous regulations, referred, as they did, to 'food aid' and to the general regulations on food aid, which specify, as if it were really necessary, that the aid is supplied 'for humanitarian purposes' in order 'to raise the standard of nutrition of the recipient peoples', thus ruling out any confusion with the supply of feedingstuffs for cattle.

3.28. The large number of instances of poor quality detected in goods that have, however, been certified as complying with the required standards, suggests that, in many cases, this attestation by the intervention agency is issued without thorough checks, because the recipient is not present at the time of shipment.

The checks reguested by the recipient

3.29. For milk products, the recipient can require that, prior to shipment, the quality, quantity and packaging of the goods supplied be checked. If the recipient then disputes the goods, the intervention agency arranges for a second check to be made, the results of which are final. For cereals, the regulations only allow the recipient the possibility of taking part in the quality control arranged by the intervention agency. He may challenge the results. This leads to a second, decisive control, which must be performed by a different laboratory. Until recently, the recipient was rarely represented at the time of shipment. He was not made aware in the supply agreement of the power granted him by the regulations. And the costs relating to the requested inspections were to be borne by the losing party, which was likely to cause quite a few recipients to hesitate before asking for checks to be made. But this situation has recently changed, now that the Commission itself is financing checks.

The checks financed by the Commission

3.30. The Commission is now using a larger proportion (64 % of 1,7 Mio ECU in 1985) of the appropriations which have been reserved for quality controls but which have remained unused for a long time (less than 10 % from

1981 to 1983). Particularly in the case of milk products from intervention, it has decided to become involved in the checks by financing them itself more often. According to the Commission, this has resulted in a considerable decrease in the number of complaints about poor quality.

3.31. Certain intervention agencies have since hindered the execution of such checks, alleging that there is no legal basis entitling the Commission to carry out quality controls in its own name. The Commission has responded by deciding in future to finance checks which will be carried out on the recipients' behalf and at their request, and no longer in its own name. The supply agreements have been amended in order to inform the recipients of this change and the Directorate-General for Development has been called upon to make the recipient countries aware of this option. Even if these are not the sole measures to be taken in the area of quality control, they should already involve the recipient to a greater extent in the monitoring of the implementation of the aid and greatly reduce the incidence of cases of poor quality. The intervention agencies, however, have already indicated their opposition in this case too, despite the existence of an undeniable legal justification, at least in respect of milk products.

3.32. The Court of Auditors cannot stress too strongly how much it would like to see the Commission pursue the course of incrased checks, by proposing an amendment to the legislation which would explicitly allow it also to carry out checks in its own name.

Common observations in respect of checks with a view to shipment

Shipment, the decisive stage of quality control

3.33. In comparison with all the upstream controls, the checks carried out with a view to shipment are of prime importance. They constitute the 'safety net' designed to check that the supplies satisfy not only general standards of hygiene but also the provisions specific to the aid in question, such as tonnage, specific characteristics of the products and their packaging. Their significance may also be appreciated in relation to all the subsequent downstream stages of aid implementation. With regard to the 'delivered place of destination' stage(29), although the quality is assessed finally on arrival at destination, the checks at the time of loading aim to remove immediately all goods that do not comply at this stage. In respect of aid financed only as far as the port of shipment(30) or port of unloading(31), which is by far the largest amount, discharge(32) is given to the European agents involved at the moment of shipment, and in particular to the contractor, who is entitled to demand full payment for his services immediately afterwards.

3.34. This has not always been the case. Under the former Regulation (EEC) No 303/77 of 14 February 1977(33) laying down rules for the mobilization of milk products, in one case of financing as far as the port of

unloading, the delivery had been made and the risks passed from the successful tenderer to the recipient at the time of unloading. Moreover, in the case of financing as far as the port of shipment, it was not the commercial notion of FOB(34) which applied but that of FAS(35). The Commission has changed this system in order to bring it into line with current commercial practices and current interpretations of the terms FOB and CIF(36)(37)·.

Excessive importance attached to taking-over or compliance certificates on shipment

3.35. The decisive importance, from the legal point of view, that is attached to the checks and taking-over procedure on shipment is not justified. Firstly, the checks carried out with a view to shipment are not complete and are not always reliable (see paragraphs 3.20, 3.21 and 3.25-3.28). Moreover, the recipient bears all the consequences of any incidents which may arise after shipment, even when the Community is financing the transaction as far as the moment of unloading. This approach is understandable within the framework of commercial exports, where the purchaser can penalize the seller for any shortcomings by refusing to pay for the delivery or by changing to another supplier in future. Such economic weapons are not, however, available to recipients of food aid. There is thus not much point in bringing the delivery stages of foodaid into line with commercial practices.

3.36. That is not all. The system of issuing taking-over certificates on shipment is based on the pretence that the results of the checks are drawn up and notified immediately to the interested parties, making it possible for the recipient (or the intervention agency) to issue the taking-over certificates (or compliance certificates) in full knowledge of the facts, 'immediately after loading'. This is far from what happens in reality. It takes several days, even several weeks, for the results of quality controls, especially those in respect of milk products, to be notified by the laboratories to the intervention agencies.

3.37. The same applies when it is the recipient who makes a special request for a check. The timetable for the dispatch of 1 000 t of skimmed-milk powder and 345 t of butteroil delivered to Tunisia under the 1982 programme is instructive in this respect:

-taking of samples on behalf of Tunisia

8. 11. 1983

-Tunisia asks the Central Laboratory of Food Hygiene (France) to carry out analyses:

10. 11. 1983

-shipment at Antwerp:

14. 11. 1983

-issue of taking-over certificates:

14. 11. 1983

-unloading in Tunis:

29. 11. 1983

-results of the analyses available:

12. 12. 1983

i. e. 28 days after the boat had set sail and 13 days even after unloading.

3.38. It is in fact unthinkable that a boat should patiently await these results before sailing. Very often the boat leaves before the results of the first inspection are made known and is far away when the results of the second, 'final' inspection (the check provided for by the regulations in the event that the results of the first check should be contested) are obtained.

3.39. The argument that these taking-over and compliance certificates have unqualified discharge value is thus untenable. They should contain a compliance clause, subject to any concealed defects, which may be called into question in the light of tests results that are of genuine scientific value. Moreover, case law in the commercial field, which is less strict than the Community legislation relating to food aid, points in this direction. It lays down that, in the case of CIF or FOB sales, the acceptance of goods on loading may be called into question at the time of arrival at destination if the poor quality of the goods in question was not detectable by means of an ordinary examination before the ship put to sea. The intervention agencies' experts acknowledge that it is impossible to carry out the present system of quality controls at the time of loading. Under the current legislation, the taking-over and compliance certificates, instead of providing effective protection of the recipient's interests, serve rather to provide the contractor with instant documents with which to claim payment for his services.

Control and monitoring of implementation after shipment

3.40. The legislation in force does not provide for any check at the time of unloading, whatever the stage of delivery. However the Court has noted that, over several years, the practice has gradually been introduced of making indiscriminate checks on all products with Community financing in the following conditions and in the following cases:

(a)on behalf of the recipient, it has become general practice for checks to be carried out at the time of shipment;

(b)in relation to CIF deliveries, selective checks have been carried out at the port of unloading in the case of destinations which present specific risks;

(c)in relation to delivered place of destination deliveries, systematic checks have been carried out at the place of destination, whenever material conditions have allowed;

(d)for triangular operations, in all cases the contracts provided for checks at the time of shipment and on arrival.

Checks at the point of arrival should be prescribed systematically.

3.41. It would be all the more necessary to lay down in detail the procedure applicable to these checks as the local conditions under which they are effected are more uncertain in countries where the European intervention agencies have no locus standi, where well equipped and reputable laboratories are rather rare and governments do not always know how to take the immediate precautions necessary in their own interests:

(a)the Mozambican authorities were caught unawares when it was established that part of the 1983 delivery of maize was sub-standard (see paragraph 3.27) and the various checks they carried out were so disorganized that, though there was no doubt that the quality was seriously belav standard, it proved impossible to measure it accurately, despite the despatch on the spot of a Commission official in October 1984 to take part in the enquiry;

(b)in Bangladesh the control tests carried out do not observe the same quality criteria as the checks provided for by the Community. There is a risk that this may make them unsuitable as a basis for complaint;

(c)if the complaint is at all late, it is no longer possible for a control team to decide how much damage was sustained during unloading and how much further damage occurred as a result of handling and storage conditions in the country. This comment was made by the adviser at the Delegation in Tunisia, who had come to inspect some milk powder, the quality of which had deteriorated and which was nevertheless stored by the Tunisians in very humid premises. The adviser had arrived on the day following the complaint, which was made by the Tunisian authorities on 21 February 1984, whereas the milk had arrived almost three months earlier.

3.42. In general, the Commission's monitoring of the implementation of the aid from shipment to final distribution leaves much to be desired. There is no justification for the taking-over certificates not being centralized so that they can all be checked by the same Commission department. The Commission delegates in the recipient countries are not sufficiently involved in the in situ implementation of the food aid and are not adequately informed by the Commission of impending arrivals, even though the contractors are obliged to inform them of the expected date of arrival of vessels at the port of shipment. To this may be added the inadequacy, or even absence, of reports on the implementation of the aid, which the recipients are, however, bound to compile in accordance with the supply agreements - and in this respect even organizations such as the World Food Programme (WFP) are not beyond reproach. The argument that, except in cases of goods 'delivered place of destination', the Commission is no longer responsible for transport downstream of the port of unloading and is never responsible for distribution, is quite untenable. The Community cannot wash its hands of the final outcome of its own measures.

4.RESPONSIBILITIES AND GUARANTEES

Unequal value of the various delivery stages as regards quality

4.1. Responsibilities and guarantees are demarcated and defined differently at each stage of delivery. For this reason the various stages are not of equal value from the point of view of the need for quality.

4.2. The FOB stage is the most consistent in this respect, but it leaves the recipient fully responsible for organizing the chartering and unloading of the ship, transport by land to the destination and insuring the product. While this stage perfectly suits some countries, on account of their administrative and commercial traditions, another stage would undoubtedly be more suitable for other countries, to which the Community at present only delivers its aid up to the FOB stage. Moreover the latter stage, like all the other stages, has weaknesses in respect of the check carried out at the moment of shipment (see paragraphs 3.35-3.39 above) which cannot be accepted.

4.3. The 'delivered place of destination' stage involves the greatest amount of 'technical assistance' for all operations organized up to arrival at destination. Only the distribution operations have to be organized by the recipient. This stage may thus be recommended for the poorest countries and for land-locked countries, which is in line with the criteria currently adopted. This delivery stage should, nevertheless, be improved as regards quality control and reception at destination (see paragraph 3.40 above) and also as regards the necessary introduction of a proper reception procedure for the goods with both parties present and open to challenges by either side. The Commission's on-the-spot delegation should also be involved in this procedure, as is the case for supply contracts within the framework of investment projects financed by the Community (see paragraph 5.15 below). The validity of this stage therefore depends on whether analyses can be carried out in reliable laboratories in the country of destination, a condition which, unfortunately, is not always met.

4.4. The CIF system is perfectly acceptable in the context of normal commercial relations where an operation takes place between two partners who have been party to the contract from the outset and the person receiving the goods has every possibility of defending his own interests. However, the CIF system becomes inappropriate as soon as it is applied to food aid. In this case the recipient state is not a party to the contract since the contract is signed between an intervention body, acting on behalf of the Community, and an operator. Furthermore the recipient state is hardly in a position to make sure that the contract is enforced. In practice, it is left to a public service employee who has little experience of commercial practices. It is difficult for the recipient state to dispute the quality of the product since the quality is supposed to have already been accepted as satisfactory at the time of shipment when a

certificate was drawn up, even in the absence of a representative from the recipient state. Although the goods are transferred to the recipient state as from the time of loading, it has even less chance of calling into question the maritime transport methods and the insurance of the product, since, from the outset, they are the responsibility of the operator. Furthermore, in order to claim against the insurance, the recipient must prove that an incident has occurred during transport, and this is very difficult. Finally, the CIF option does not automatically make the supplier responsible for unloading costs, since the inclusion, or not, of these costs in the charter contract depends on the prevailing policy as regards chartering. Some ports usually exclude these costs from the contracts. The Community legislation, however, aims in fact to guarantee 'CIF-landed'(38) conditions, which always include unloading costs. This ambiguity has resulted in legal disputes. On the whole, use of the CIF system for the delivery of food aid to a distant and underdeveloped country seems inappropriate in view of the actual conditions in which the system operates.

Obligations, guarantees and penalties at the various stages

The economic operator's obligations

The contractor's obligation to implement the aid

4.5. The contractor is obliged to render the service for which he has been awarded the contract. For this purpose, the legislation lays down that:

(a)once submitted, tenders may not be withdrawn;

(b)a successful tenderer may not withdraw from his undertaking to render the service for which he has been awarded the contract;

(c)a successful tenderer may not subcontract his contractual obligations;

(d)where delivery is at the FOB stage, the successful tenderer may be granted an extension of up to 60 days, within which to fulfil his obligations without being penalized;

(e)the tenderers enter into a series of quite varied commitments, all with the aim of observing the conditions of the invitation to tender and the applicable legislation.

The contractor's obligation to 'reimplement' the aid where implementation is unsatisfactory

4.6. The 'obligation to implement' is covered by an 'obligation to reimplement' where implementation has been unsatisfactory. Where quality does not comply with the required standard, the goods must be replaced; where there is a shortfall, the deficiency must be made good.

The intervention agencies' obligations

4.7. Even if the legislation does not state that the intervention agencies act as the Communities' agents in the field of food aid, the relations between these agencies and the Commission are marked by a series of obligations by which the former are bound to the latter: the obligation to comply with the statutory provisions; the obligation to pay the contractors if the conditions have been satisfied; the obligation to inform the Commission of the circumstances of any incidents that occur during the mobilization procedure; the obligation to obtain the Commission's prior agreement in certain cases, in particular for additional expenditure not provided for in the contract.

4.8. The intervention agencies not only have to fulfil their own obligations but, also and above all, they have to ensure that the contractor's obligations are fulfilled, if necessary by calling on existing guarantees. This may even be said to be their main responsibility.

Insurance

Insurance of cereals withdrawn from intervention storage

4.9. When mobilized goods are withdrawn from intervention storage, the tender only contains the transport costs and not the purchasing price of the goods made available to the successful contractor by the intervention agency. The Community pays the intervention agency directly in settlement of any expenditure relating to the value of the product. The goods withdrawn from intervention storage thus need to be covered by a serious guarantee. In the case of cereals, this guarantee consists of an insurance taken out by the contractor and covering the value of the product (the intervention price or, depending upon the case, the reference price). In the event of a loss, the insurer must pay compensation to the intervention agency. This insurance, laid down by Regulation (EEC) No 1974/80(39) for the FOB and CIF stages, covers the goods from the moment when they are received by the contractor from the intervention agency to the moment of actual shipment. Thereafter, the successful tenderer is in fact no longer responsible for the goods and is released from his obligations. Moreover, in the event of a CIF delivery, the marine transport insurance replaces this first insurance.

Marine transport insurance of products delivered CIF

4.10. With a view to covering the risks to which goods are exposed during transport by sea, the successful tenderer for a CIF delivery contract is required to take out an insurance policy endorsed to the order of the recipient. By

17. 8. 87No C 219/introducing this compulsory insurance requirement into Regulations (EEC) Nos 1974/80(40) and 1354/83(41) laying down the general procedures for mobilizing cereals and milk products, the Commission aimed to bring financing up to the port of unloading into line with commercial CIF conditions, where provision is made for such insurance.

Transport insurance at the 'delivered place of destination' stage

4.11. In the case of delivery at the 'delivered place of destination' stage, the contractor is required to take out 'appropriate insurance cover'.

Securities

Tendering security

4.12. The tendering security, which is stipulated both for cereals and milk products, is designed to guarantee that tenderers, and subsequently the successful tenderer, fulfil their obligations as from the stage when tenders are submitted. Since its purpose is not to guarantee the product itself but to ensure that the successful tenderer fulfils his obligations, the security is a small amount in relation to the value of the goods. There are two specific aspects of the way the amount is determined which are questionable:

(a)firstly, in the case of milk products, the amount for goods drawn from intervention stocks is not the same as that for goods purchased on the Community market (1 % of the intervention price in the first case and 3 % in the second). This difference is unjustified;

(b)secondly, in the case of cereals, the amount is 'laid down in the Regulation opening the tendering procedure'. This unjustified difference in relation to milk products and the referral to specific regulations governing mobilization are examples of the tendency to incorporate in successive pieces of legislation provisions which are in fact of permanent validity. Moreover, in the specific regulations, the security, which is fixed in absolute terms and not as a percentage, cannot but be different from product to product and over time. Such extra complications serve no useful purpose.

The tendering security is released for those tenderers who have failed to win the contract, but in the case of the successful tenderer it is not released until he has fulfilled his obligations up to the agreed stage and has thus fulfilled the conditions for being paid. In cases where it is necessary to lodge a delivery security, however, (see paragraph 4.13 below), the latter, when provided, replaces the tendering security, which is immediately released.

Delivery securities

4.13 It was seen in paragraph 4.9 that when cereals are withdrawn from intervention storage they are insured. When milk products are mobilized from intervention storage the guarantee system is different. The successful tenderer is required to lodge a 'delivery security', the amount of which is equal to the intervention price of the product in question, plus 10 %. The delivery security is released when the successful tenderer has fulfilled his obligations up to the agreed stage and has thus fulfilled the conditions for being paid.

Securities for advances

4.14. A tenderer who has been awarded the contract for a delivery of products bought on the Community market and to be delivered at the 'delivered place of destination' stage may, on request, obtain an advance of up to 90 % of the amount to be paid for milk products and up to 80 % only for cereals. The advance may not be paid, however, until after a security has been lodged which is equal to the advance or, in the case of milk products, to the value of the advance plus 10 %. In the case of milk products, the security is not released until the whole batch has been delivered and payment is due. In the case of cereals, the security is released when the successful tenderer has furnished proof that that part of the delivery corresponding to the advance, i.e. up to 80 % of the lot, has been duly delivered. This latter procedure does not take account of the indivisible nature of the contract. Indeed, had the successful tenderer not received an advance, he would not have been able to claim a pro rata payment in respect of a partial delivery, since the taking-over certificate may be withheld for as long as the delivery has not been completed.

The financial responsibility of the economic operators

The contractor's financial responsibility

4.15. The legislation stipulates that 'the successful tenderer shall bear all the financial consequences of the non-delivery of all or part of the goods under the conditions laid down' and that he is only paid in proportion to the quantities delivred. The stipulation requiring delivery 'under the conditions laid down' makes it possible to penalize any deviation from the agreed terms and, in particular, any quality defects.

Deduction from payments made to the successful contractor and equivalent guarantee

4.16. Save for the possibility of paying an advance in the case of deliveries at the 'delivered place of destination' stage, contractors are not paid until after the contract has been fulfilled. If an advance has been paid, the security lodged against the advance provides a guarantee equivalent to a deduction from the final payment. While it is possible

to pay in instalments for milk products, the payments may only be in proportion to the parts of the deliveries that have been completed. Payment is obviously only due unconditionally where a delivery complies to standard.

Rejection by the Commission of expenditure incurred by an intervention agency

4.17 The Commission may refuse to reimburse to the intervention agencies sums that they have wrongly or irregularly expended in the implementation of Community aid. It may thus penalize an intervention agency which has overlooked a delivery that did not comply to standard.

The Community's guarantee

4.18. The recipient concludes an agreement solely with the Community. It is the latter that undertakes to supply a given quantity of products of a certain nature and quality and obviously it must honour its commitments.

Comparative assessment in the light of the quality objective

Who benefits from the guarantee?

4.19. The obligation to implement and, where necessary, to 'reimplement', aid is primarily for the benefit of the recipient, as is marine transport insurance in the case of CIF delivery and, last but not least, the Community's guarantee.

4.20. Insurance taken out for intervention cereals primarily protects the intervention agency, which will receive any sums paid out against the policy, whereas insurance for goods 'delivered place of destination' is of benefit to the contractor and is of only indirect assistance as regards the sound implementation of the aid. The three cases where it is compulsory to insure a product, which at first sight appear to cover all the stages of transport, thus actually represent guarantees of very unequal value, especially for the recipient.

4.21. While the objective of the financial responsibilities placed on the contractor and the intervention agency is to protect Community resources, the three securities serve different purposes. If it is forfeited after the contract has been awarded, the tendering security reverts to the Community. The objective of the security against advances and the delivery security, on the other hand, is to cover an intervention agency that has paid an advance or supplied a contractor with a product without requiring him to pay for it first. But obviously, once the Community has reimbursed the intervention agency for the advance or for the value of the product, the corresponding security then only exists to protect the Community's interests.

4.22. Some of the obligations placed on the intervention agencies aim to ensure that the aid is implemented soundly and in the recipient's interest, whilst others aim to protect the Community; this is true, for example, of the obligation to obtain the Commission's agreement before any additional sums are expended.

4.23. The variety of purposes that these responsibilities and guarantees are intended to serve is significant when it comes to assessing the overall cohesion of the system. Only guarantees which effectively protect the recipient should be regarded as essential.

Full guarantees or guarantees that only cover one stage in the implementation of the aid

4.24. When FOB or CIF goods are mobilized on the market, the conservation and transport of the product up to the place of delivery are not necessarily covered by insurance, unlike the case of delivery at the 'delivered place of destination' stage. Even in this latter case, the obligation to take out 'appropriate insurance cover' is vague. More specific provisions in respect of the point at which the guarantee takes effect and the level of the risks covered would be welcome.

4.25. Except for marine transport insurance in the case of CIF delivery, there is no guarantee to cover the proper completion of the aid operation downstream of the place and after the time of taking-over. The guarantees expire at the port of unloading for FOB and CIF deliveries, and the 'delivered place of destination' stage must be selected if the operation is to be covered by a series of guarantees up to its arrival at destination. In particular, it is only in the case of delivery at the 'delivered place of destination' stage that the Commission and intervention agency retain a financial guarantee against the contractor up to the moment the goods arrive at their destination. The tendering security is itself retained up to the same stage (except in the case referred to under paragraph 4.12 above).

4.26. In all the other cases (FOB, CIF), which are by far the most frequent, the sum owing to the contractor is paid after shipment and he is not required to wait until it has been established whether the goods have been unloaded, much less whether they have arrived at their destination in good condition. The fact is that the contractor is in possession of all the documents required for payment just after shipment and the securities are released on presentation of these same documents. It is very unsatisfactory that the goods should thus leave Europe without any substantial sum being withheld or guarantee bieng lodged up to the moment of receipt in the beneficiary country. For such a guarantee to be meaningful, it would have to be combined with a serious procedure for the reception of goods on arrival at destination.

Guarantees which may be mobilized directly or via a third party

4.27. In general, guarantees whose implementation depends upon the cooperation of a third party are of much less value than those which may be mobilized directly by the holder. Thus, guaranteeing intervention cereals by insurance (paragraph 4.9 above) is less certain than guaranteeing milk products by the compulsory lodging of a security (paragraph 4.13) which cannot be released until after satisfactory completion of the services and which covers the value plus 10 %. Either the intervention agency or the Community assesses whether the conditions for the release of the securities have been met, while in the case of insurance pay-outs, both parties rely upon the insurance companies, who usually are not short of reasons for refusing payment, by citing one of the many restrictive clauses in the policy.

4.28. This is the great weakness of marine transport insurance in cases of CIF delivery. When insurance compensation is sought by the recipient, in most cases the companies back out of their responsibilities. In the case of 15 000 t of maize delivered to Mozambique, a flagrant case of poor quality on arrival combined with short weight, the insurance company refused to pay up. In the case of 974 t of wheat flour refused by Djibouti in 1982, the insurance company questioned the damage incurred, since the recipient had unwisely refused to unload the goods in question.

4.29. Similar difficulties arise when certain aspects of food-aid management are delegated in toto to the national intervention agencies. On the one hand, the intervention agencies, which are intermediaries between the Community, the recipient and the successful tenderer, are far from taking the view that they are always required to defend above all the formers' interests vis-à-vis the latter. Some of them sometimes fail to make use of guarantees which may be used against defaulting contractors.

4.30. With regard to an allocation of 2 000 t of milk powder to China in 1980, only 500 t of which was delivered and which, moreover, was not up to standard, the intervention agency reacted very slowly to the news of these infractions, which were established in November 1981. It was not until October 1983 that it informed the Commission that it intended to institute legal proceedings against the contractor.

4.31. On the other hand, the Commission was subjected to repeated pressures from an intervention agency which wanted the penalty imposed on the contractor to be quashed. This contractor had loaded food aid onto a boat which was older than the authorized age. He falsely claimed to have used this boat at the request of the Pakistan authorities, whereas in fact he had done so at the request of the Pakistani owner of the boat. In addition, some of the food aid was missing, so that withholding the tendering security was a good means of ensuring that the contractor fulfilled the contract. The Commission did not give way to these pressures.

4.32. In a ruling dated 27 November 1986, the Court of Justice considered that the contractor was not necessarily at fault in making a delivery on a vessel which was over 15 years old, in contravention of the statutory provisions. It also took the view that a certain sense of proportion should be kept between the penalty and the offence, and that, consequently, in cases of infringements of this type, only a part of the security lodged by the contractor deserved to be forfeited to the Community. The practical implications of this approach corroborate the Court of Auditor's findings on the ineffectiveness of the current system of securities.

4.33. Where a contractor has defaulted, or even in cases where there is merely doubt as to whether he has correctly fulfilled his contract, responsibility for not paying over or releasing the securities and for referring the matter to the Commission lies in the first instance with the intervention agency. If an intervention agency has acted unwisely and paid a defaulting contractor and released his securities, the Community may, of course, as a second resort, refuse to reimburse the intervention agency. The immediate (that is, monthly) screening of expenditure by the intervention agencies is, however, of limited use. The intervention agencies' monthly statements are most often accepted as they are. It is not until several years afterwards, when the accounts are cleared, that the Commission makes a more thorough check of the agencies' expenditure. Clearance is effected purely by means of sampling and takes place long after the event. Only the 'additional expenditure' is given an immediate and detailed examination which takes place at the same time as clearance. This being so, the threat of a penalty in connection with the clearance procedure seems both slight and remote to the intervention agencies and, a fortiori, to the contractors: indeed, should expenditure be rejected because the contractor was at fault, the intervention agency would be obliged to follow a long and uncertain procedure in order to recover the sums that had been wrongly paid to the contractor. The back-log in clearance operations is currently being reduced.

Guarantees to maintain the value of the aid or dissuasive penalties

4.34. Obligations and guarantees may serve a dual purpose. On the one hand, they may represent the threat of a penalty for the contractor - or, where appropriate, for the intervention agency - and in this respect they constitute a more or less powerful incentive to correct performance of the contract. On the other hand, their objective may be to maintain or make good the financial value of the aid in the event of loss of or damage to the product or failure to implement the aid. The obligations and guarantees at present adopted do not fulfil both these functions.

4.35. The obligation to implement the aid correctly, and the obligation to 'reimplement' where implementation has been unsatisfactory, under penalty of non-payment, may

well have, taken together, a powerful hortatory effect, thus encouraging the successful tenderer to perform his contract correctly and protecting Community finances against the risk of expenditure that fails to produce a definite result. Similarly, the delivery security and advance security may well represent an almost absolute protection for the intervention agency's finances or for those of the Community and at the same time a very real financial threat for the contractor. The same is not, however, true of insurance cover and the tendering security.

4.36. Insurance covers offers protection - but not very good protection - of the interests of the insured party but does not constitute an incentive for the contractor. This is one of the weaknesses of insurance, as compared with securities. Conversely, tendering securities are designed solely as an incentive for the tenderers, and subsequently the successful tenderer, to observe their obligations, but since they only represent a small percentage of the total value of the supply, unlike the other securities, they do not have the effect of protecting the financial interest involved in the aid.

Extent of financial responsibility and definition of obligations

4.37. In theory, financial responsibility is an absolute weapon: if the service rendered by the economic operator is not up to standard, the Community is in a position to penalize him by withholding some or all of the payment. This guarantee works in two stages. Firstly, services which have been unsatisfactorily performed must be carried out again (see paragraph 4.6 above). Goods of sub-standard quality must be rejected and under-weight deliveries must be made good. Then, secondly, if the contractor fails to fulfil his obligations, financial penalties (refusal to pay or withholding of securities) may be imposed.

4.38. In practice, this system works very badly. On the one hand, the obligation to reimplement the aid is not systematically enforced. Of all the unsatisfactory deliveries recorded, the contractor himself only rectified deficiencies in kind in two cases, one of which followed a fraudulent supply of butter to Bangladesh. On the other hand, the financial penalties are rare and do not by any means reflect the number of cases of deficient quality found. There are two main reasons why this system does not work properly. The first may be ascribed to negligence on the part of the beneficiaries of the guarantees. The other, however, is due to an inadequate definition of the economic operator's obligations.

Very often the guarantee holder does not put

the guarantee into effect

4.39. Deliveries are accepted by the intervention agencies despite their non-compliance to standard. Either the intervention agency declares that they do comply when

they do not, as was the case for 15 000 t of maize delivered to Mozambique in 1983, or the goods are unloaded despite the fact that they have been found not to comply to standard. This was the case for 5 000 t of common wheat dispatched to Benin under the 1980 programme, in spite of the fact that the certificates stated that it was not up to standard. This was also the case for 1 000 t of skimmed-milk powder delivered in 1983 to Tunisia: in this last example the statement of non-compliance had been received after shipment (see paragraph 3.37 above).

4.40. Recipients often fail to make use of the option given them by the legislation to take part in the controls at the time of shipment or to request that such checks be made and to refuse to take the goods over at this stage. Just as frequently, they refrain from submitting any official complaint even though it has been established, after the arrival of the goods at their destination, that they are of poor quality, and they do not even approach the insurers. They are hesitant to criticize the quality of a gift and they do not always carry out a systematic check when the goods arrive. At the time of the Court's audit visit to Ghana in January 1985, the Ghanaian authorities had not yet submitted, several months after the goods' arrival, any claims to the insurers for losses of rice totalling 300 t in respect of two batches under the 1983 programme. The Commission delegation in Ghana did not react. The Tanzanian authorities, who experienced losses of wheat, milk powder and butteroil in 1980 and 1981, submitted their claim to the Commission, instead of applying to the insurers.

4.41. When, if all goes well, an insurance claim is paid, the money must then be used to replace the damaged or lost goods. The delivery agreements should make reference to this obligation. In Indonesia one NGO which had received compensation was authorized by the Commisson in 1984 to use the money to organize a seminar to discuss ways of improving the utilization of food aid.

4.42. It must be admitted that even the threat of the heaviest financial penalties is not always sufficient to sway some particularly unyielding contractors. The amount at stake in the case of 1 500 t of skimmed-milk powder delivered to China in December 1981 was almost 1 300 000 ECU. The contractor nevertheless refused to complete his contract. In extreme cases of this kind there remains, however, the ultimate weapon of withdrawal of approval but it was not used in this case. In general, and as far as the Court is aware, it is never used.

The contractor's obligations are not strict enough

Permitted discrepancies in respect of weight

4.43. The permitted discrepancy in respect of cereal tonnage is, depending upon the case, 2 % of the weight for

goods to be delivered in bulk on shipment and 5 % in the case of delivered, place of destination supply agreements. In the case of a batch of 5 000 t in bags (usual quantity), a shortage at destination of 250 t, i.e. 5 000 bags of 50 kg, is tolerated. These tolerances wrongly give preference to the contractor's interests. Of course, it is true that contractors are only paid for the quantities actually delivered, but, so long as the shortages stay within the limits authorized by the Community, the contractor is considered to have fulfilled his contract correctly. The quantity of aid decided upon and promised is deemed to have been given and the aid programme is deemed to have been carried out. The permitted weight discrepancy should be as low as possible at the moment of shipment and the contractor could, at a pinch, be requested to make up any deficiency. Once the goods arrive at destination, the permitted discrepancy should be far lower than is allowed at present since the transport conditions tend to increase the moisture content and thus the weight.

Cases where the contractor is released from his obligations

4.44. There are two exceptions - not equally justified - to the obligation to carry out the aid operation:

(i)the first does have some foundation. The successful tenderer is released from his obligations where the recipient has made it impossible to complete the delivery on the terms stipulated. Even so, this exception must doubtless be qualified. In many cases, delivery is still possible, on somewhat amended terms, even if it is at the recipient's expense ;

(ii)the second exception - the case of force majeure - needs to be looked at critically. The concept of force majeure, if interpreted loosely, could be considered to include situations normally covered by insurance. Admittedly, whenever it is possible to get insurance cover against a risk on reasonable terms, the Commission does endeavour to reject pleas of force majeure. But this eventuality ought to be ruled out by the regulations themselves.

Shortcomings in the regulations as regards the obligation to repeat the operation

4.45. For milk products, the obligation to replace goods or to make up a deficiency is specifically stipulated only in cases where checks are carried out at the request of the recipient, not where they are at the initiative of the intervention agency. For aid which is to be delivered CIF, where the sea-transport costs are borne by the contractor, the legislation stipulates, solely in respect of milk products, that 'in the event of default or of unsatisfactory transportation the successful tenderer shall, at the recipient's request, make all the necessary transport arrangements, including charter reservations'.

Obligation to carry out precise operations or obligation to achieve a result

4.46. The obligation to carry out strictly-defined services involves one major drawback: in most cases, it makes it impossible for the aggrieved party to obtain redress for a failure to complete a contract because he is unable to produce evidence to show that the failure did indeed relate to one of the stipulated services.

4.47. The example that best illustrates this weakness is that of the insurance of the goods during sea transport in the case of a CIF supply. The regulations stipulate that the insurance must cover all the risks of carriage. In order to receive compensation, the recipient therefore has to prove that the damage sustained has been caused by an occurrence during carriage, which will often be difficult, since the carrier is distinctly uninclined to mention hitches or accidents which occurred whilst the goods were in his hands.

4.48. Moreover, it is not true that the insurance policies cover all the risks of carriage. For example, as a result of 23 t being missing from a consignment of wheat upon arrival at its destination, the Commission found out that in France contractors never insure against shortages. The 'INCOTERMS' document on delivery stages, published by the International Chamber of Commerce in Paris, excludes, unless otherwise specified, insurance cover against risks of 'theft, pilferage, leakage, breakage, chipping, sweat' and 'contact with other cargoes', which are regarded as 'special risks'. The successful tenderers, given the price of comprehensive policies, prefer to sign these standard, restrictive policies. Indeed, it would be very expensive to demand cover for all these special risks. The regulations themselves, whilst on the one hand containing the stipulation that all the risks of carriage must be covered, seem on the other hand to allow for the possibility of a more lenient interpretation by referring in their recitals to the Community's wish to align its rules more closely on the trading practice described in the 'Incoterms' document.

4.49. In the case of an FOB, and especially a CIF, delivery, the fact that the obligations are divided up between the intervention agency, the contractor and the shipowner very often makes it impossible for the recipient to obtain redress for damage - even where it is undeniable - discovered at the time of unloading unless he can with certainty attribute the fault or the fraud to one of these three parties involved. The case of the 15 000 t of maize delivered to Mozambique in 1983 which was incomplete and unfit for human consumption is typical in this respect. The insurance company and the intervention agency managed to show that they had no liability, and the contractor was given the benefit of the doubt, pending the outcome of an enquiry which has been under way in the Member State since November 1984. A series of faulty deliveries of the same product to various countries, carried out in 1985, highlights the same set of problems. Even in

17. 8. 87No C 219/the case of a faulty delivery at the 'delivered place of destination' stage and in the absence of any ad hoc procedure (see paragraph 3.40), it is highly unlikely that any reaction on the part of the recipient will result in the goods being replaced for him. Here again, the recipient comes up against the difficulty of producing proof and of pinpointing who is responsible.

4.50. The Community will not escape from these legal dead-ends without a reversal of the burden of proof. And this can be obtained only by introducing a genuine obligation to achieve a result, entrusted to a single supplier of services, who has previously been deprived of the various existing legal loopholes, with the exception of the case of force majeure, itself very strictly delimited.

The Community's guarantee: the final guarantee or the first?

4.51. Under the agreement made with the recipient, is the Community obliged to guarantee that the delivery will be made as stipulated, and in the event of a faulty delivery, to agree to replace or supplement the goods as necessary, and to bear the financial consequences if none of the other guarantees can be brought into play?

4.52. Until recently, the Commission required proof that the fault lay with an operator involved in the execution of the aid operation before agreeing to make good the damage suffered by the recipient and it used this putative liability on the part of one of the operators as an excuse for not acting sooner. In the case of the 15 000 t of maize for Mozambique, the Commission decided that the damage suffered would not be made good unless the responsibility of the supplier or the insurer was brought into play. In a letter to the Mozambican authorities, it says: 'Insofar as the latter (the supplier's liability) is involved, the Commission will do all it can to obtain redress for the damage suffered by your country, but this action cannot be taken before the Commission knows how the insurers will deal with the claim, and the claim can only be lodged by the aid recipient'. Thus, the Commission does not contemplate making any direct redress itself. This would have been the most advisable course of action, however, especially since the delivery stage specified in the supply agreement made with the recipient was the port of unloading, the transfer of the risks to the recipient taking place only at this port, and not at the port of shipment, as implied by the rest of the letter, which is doubtless based on the mobilization regulation, which contradicts the agreement on this point. At one point, the Directorate-General for Development, after consulting the Commission's legal service, considered replacing 5 000 t, which was regarded as a fair assessment of the damage suffered, but then it followed the opinion of the Directorate-General for Agriculture, which suggested deferring any action until the outcome of an infringement enquiry against France was known. Since this enquiry has not so far come to a conclusion, it is becoming more and more improbable, as time goes by, that the goods will ever be replaced.

4.53. Take the case of sub-standard milk products that were delivered to Tunisia in November 1983: that country

will receive compensation from the Community only if an enquiry which the Member State has been asked to make establishes that the contractor or the intervention agency is liable. The Commission considers 'that the goods can be replaced only if it is clearly established, on the one hand, that the products were not of the required quality at the time of shipment and, on the other, that the responsibility for this lies with either the contractor or the agencies concerned'. In this case, however, the poor quality of the goods prior to shipment has already been established. As for the second condition, it is tantamount to ruling out the Commission's responsibility. The Commission has nevertheless authorized the recipient not to pay any counterpart funds for the unusable part of a consignment of milk powder. But this exemption obviously does not constitute redress of the damage suffered.

4.54. The Commission's attitude may perhaps be changing. In the case of the maize granted to Mozambique, the opinion of the Commission's legal service, dated

6 February 1985, for the first time clearly adopted the principle of the Community's direct responsibility in the event of a sub-standard delivery. Here are the main passages of this opinion:

'It would seem to have been established that the Community has not fulfilled the obligations arising from its exchange of letters with Mozambique, according to which it undertook to deliver CIF 15 000 tonnes of maize, insofar as a large part of this delivery proved to be unfit for human consumption. In view of the fact that no fault of a kind likely to diminish or eliminate the Community's responsibility can apparently be attributed to the recipient, the Community is obliged to supply quantities equivalent to those which could not be used for human consumption...'.

Thus, according to the legal service, only a fault on the part of the recipient, the co-signatory to the agreement, could, if the occasion were to arise, weaken the Community's responsibility. On the other hand, no condition is stipulated concerning possible responsibility on the part of an operator, whether contractor or intervention agency. The Commission, apparently in application of this doctrine, recently decided to replace 240 t of butteroil and a consignment of sub-standard durum wheat which had been delivered to Morocco via the WFP. This decision was taken without waiting for the findings of an enquiry intended to pinpoint responsibilities.

5.POINTS FOR DISCUSSION WITH A VIEW TO REFORMING THE SYSTEM

Simplifying and speeding up the procedures

Overcoming the political complexity of food aid

5.1. Food aid concerns both development policy and the common agricultural policy and, because of its political implications, requires careful monitoring by the Member

States and the Council. The Member States, either directly, or through the Council, have arranged matters in such a way that they are involved in the procedure for managing food aid at four stages (as the budgetary authority, then by means of the annual regulation laying down the quantities, then via the food-aid committee for each allocation and, lastly, for each mobilization, via a management committee). It should, however, be possible to cut down considerably the number of stages in the procedure and the number of parties involved in each stage.

Taking the simplest existing procedures as a basis

Triangular operations

5.2. A triangular operation is one involving food aid that is not mobilized in Europe but in a country located, if possible, in the same geographical region as the recipient country. The sole management body and paying agency is the Directorate-General for Development, which awards the contracts or selects the bodies responsible for awarding them (e.g. NGOs or Commission delegations on the spot). The Council retains its monitoring powers through

the food-aid committee. The Directorate-General for Agriculture and the intervention agencies play no part, since the products sent as aid are not of EEC origin.

Aid in the form of oleaginous products

5.3. The intervention agencies are not involved. The Directorate-General for Agriculture awards the contracts itself, after publishing invitations to tender in the Official Journal of the Communities. The Directorate-General for Development pays the successful tenderers. The link with the common agricultural policy nevertheless remains in cases where it is stipulated, as for the 'traditional products' (cereals and milk products), that the goods must be procured on the European market, as is the rule, with very few exceptions. Again, the Council retains its monitoring powers through the food-aid committee.

Emergency aid (Articles 950 of the budget and 137 of the Second Lomé Convention)

5.4. This aid is managed exclusively by the Directorate-General for Development, which designates the operators and pays for the services rendered. The link with the common agricultural policy is not broken because of the obligation, which is usually still stipulated, to procure the product on the European market, the successful tenderers thus receiving the refund by the normal channels and making their bids 'less the refund'. This aid is not subject to the approval of any committee. This procedure

has frequently been used in the context of emergency plans to combat famine in Africa and has produced good results (see the annual report of the Court of Auditors for the financial year 1985, paragraph 10.3).

Suggestions for reform

5.5. The preceding examples suggest that it must be possible to envisage speedier procedures, which, whilst ensuring good coordination with the mechanisms of the common agricultural policy and respecting the Council's powers, will take account of the specific aims of food aid, by means of suitable monitoring.

5.6. Consultation of the Member States could be done on one single occasion. This solution, which is far more practical than the present string of consultations, would in no way alter the inter-institutional balance, and would require only that the principle of granting the aid and the detailed arrangements for mobilizing it be decided at one and the same time. Since 1982, the Commission has been tending to move towards the proposed solution, in that it has been staggering its aid allocation decisions according to the desired delivery periods so that these decisions come only a short time before the start of mobilization.

5.7. At the same time, of course, the annual questioning of the recipient countries about their aid requirements should not be allowed to take too long. The 1982 reform should also make it possible for one single consultation to be held for each country in order to discuss the quantities to be delivered and to negotiate the delivery arrangements (exact nature and characteristics of the product, delivery stage, free distribution or sale, people to benefit from the aid, exact time of the delivery, use of counterpart funds, etc.).

5.8. As regards coordination with the common agricultural policy, the essential point is the product's origin, which must as a rule be European. This origin could be adequately safeguarded by means of restrictive regulations.

5.9. Food aid must be exempted from the system which is a characteristic feature of the EAGGF, Guarantee Section, whereby the Member States are granted periodic advances which are not settled until long after expenditure has been incurred. Specific needs must be satisfied by means of a specific management system. The product's supplier and the contractor responsible for transporting and delivering it to the recipient, who may be separate persons of one and the same, ought not to be paid until the services have been rendered, as is the rule for public contracts, even though this may mean granting suitable advance payments, which are settled after delivery.

5.10. It might even be useful to consider an arrangement whereby the contractor, and only the contractor, would be paid directly by the Commission, minus the refund, after

sending in supporting documents to prove the export and arrival at destination of the goods, which he himself would have purchased on the Community market or from intervention agencies. An arrangement of this kind would encourage the contractor to make his own checks on the quality of the products, as a quality control upon delivery would be introduced.

5.11. A syst