SPECIAL REPORT OF THE COURT OF AUDITORS

on the common organisation of the market in olive oil

(Opinion Article 206a (4) of the EEC Treaty)

(85/C 134/01)

The Court of Auditors has drawn up this report in response to a request made by the President of the European Parliament at the proposal of its Committee on Budgetary Control. The report was adopted by the Court at its meeting of 25 April 1985, in accordance with Article 206a (4) of the EEC Treaty. On 4 March 1985 the draft report was sent to the Commssion whose replies are attached.

TABLE OF CONTENTS

CHAPTER 1

INTRODUCTION

Paragraph

reference

Origin of this report .

1.1

The audit and its scope .

1.2 1.6

Background .

1.7 1.10

The common organisation of the market .

1.11 1.14

The basic regulation .

1.11 1.13

The market mechanism .

1.14

CHAPTER 2

REVIEW OF OLIVE OIL MARKET 1978/79 1981/82

Introduction .

2.1 2.2

Community production in the world context .

2.3

Analysis of Community production and consumption .

2.4 2.11

Production .

2.5 2.8

Consumption .

2.9 2.11

Trade between the Community and other countries .

2.12 2.14

Intra-Community trade .

2.15

Prices .

2.16 2.18

CHAPTER 3

EVOLUTION OF BUDGETARY APPROPRIATIONS

Expenditure trends .

3.1 3.3

Budgetary presentation .

3.4

Expenditure by Member State .

3.5

Accuracy of budget estimates .

3.6

CHAPTER 4

PRODUCTION AID

Historical background .

4.1 4.7

Original production aid .

4.1 4.5

The 1978 reform .

4.6 4.7

Outline of the system .

4.8 4.13

Key control requirements of the system .

4.13

Control provisions of the governing regulations .

4.14 4.30

Control responsibilities of producer organisations .

4.17 4.21

Controls over non-associated producers .

4.22

Control responsibilities of the national authorities .

4.23 4.28

Division of control responsibilities .

4.29 4.30

Operation of the scheme in the Member States .

4.31 4.70

Italy .

4.31 4.52

Audit findings .

4.35 4.52

Greece .

4.53 4.66

Audit findings .

4.59 4.66

France .

4.67 4.70

Management by the Commission Audit findings .

4.71 4.72

Conclusions on production aid .

4.73 4.82

CHAPTER 5

CONSUMPTION AID

Description of the system .

5.1 5.12

Operation of the scheme in the Member States .

5.13 5.35

Italy .

5.13 5.24

Audit findings .

5.24

Greece .

5.25 5.33

Audit findings .

5.33

France .

5.34 5.35

Audit findings .

5.35

Administration by the Commission .

5.36 5.43

Audit findings .

5.37 5.43

Conclusions on consumption aid .

5.44 5.50

CHAPTER 6

INTERVENTION STORAGE

General .

6.1 6.13

Operation of the scheme in the Member States .

6.14 6.48

Italy .

6.14 6.31

Audit findings .

6.23 6.31

Greece .

6.32 6.48

Audit findings .

6.41 6.48

Management by the Commission Audit findings .

6.49 6.54

Conclusions on intervention storage .

6.55 6.65CHAPTER 7

OTHER ELEMENTS OF PARLIAMENT'S REQUEST

Introduction .

7.1

Frauds and irregularities reported .

7.2 7.5

Proposals for improvement .

7.6 7.16

Production aid .

7.6 7.13

Consumption aid .

7.14 7.15

Intervention storage .

7.16

CHAPTER 8

OVERALL ASSESSMENT

The present system .

8.1 8.17

Production aid .

8.5 8.10

Consumption aid .

8.11 8.13

Intervention storage .

8.14 8.17

Towards a more reliable system .

8.18 8.21

ANNEXES

I

Uses of olives

II

Olive oil market mechanism

II(a)

Olive oil market mechanism Common prices

III

Reliabiliy of statistical data

IV

Olive cultivation register

V

The results of analyses of samples taken in Italy

THE COMMISSION'S REPLIES

ANNEX I USES OF OLIVES

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ANNEX II OLIVE OIL MARKET MECHANISM

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ANNEX II (a) Olive oil market mechanism: Common prices 1978/79 to 1983/84

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ANNEX III RELIABILITY OF STATISTICAL DATA

Introduction

1. A timely and reliable flow of market statistics is indispensable for sound market management and rational decision-making. In certain cases it can also be used to supplement control measures by indicating unusual trends or by acting as a credibility check on accounting data. The various systems weaknesses noted in this report are such as to leave open the possibility of fraud and irregularity. While it is beyond the scope of the report to go further and show, by extensive audit over a wide range, whether such irregularities are in fact occurring, and if so, on what scale, this annex presents some reflections on production and consumption statistics relating to olive oil, primarily from the control aspects.

2. As indicated in Chapter 5, consumption aid is payable on only a fraction of the total oil consumed while production aid is payable, in principle, on every kilogram produced. There can be no relationship therefore between the quantities qualifying for the two aids. For that reason, it is appropriate to concentrate on the production aspect, and to consider the consumption statistics only for the light which they may throw on real production. The examination is limited to Italy and Greece.

ITALY

Production statistics

3. A study of production statistics for Italy is complicated by the existence of three separate and, sometimes conflicting, sources of statistical information. These are:

(a) The figures published by the Italian statistical service (ISTAT), based on returns from its agents in the provinces. This is the basic source (see paragraph 5 below).

(b) Production data appearing in the supply balance sheets prepared by the Ministry of Agriculture and Forestry and supplied to EUROSTAT. In the balance sheets, the figures are adjusted in the light of the other factors such as net imports, changes in stocks and consumption, so as to produce an equality between sources and uses.

(c) Data published by the International Olive Oil Council (1) (IOOC).

4. Table 1 compares the three series, from 1974/75 to date.

The fact that in each of three years out of eight the International Olive Oil Council has estimated production at a level some 200 000 tonnes less than the official Italian estimates is, to say the least, alarming. The total difference for the eight-year period was 770 100 tonnes (or 506 000 tonnes if the lesser ISTAT figure is used). Commission officials stated, by way of explanation for the discrepancy, that the figures supplied to the IOOC were early estimates and that it was not the practice of the latter to publish revised figures when they became available. The differences between the ISTAT estimates and those of the Ministry (average 30 000 tonnes) are also a cause for concern. In an attempt to throw further light on the foregoing, the following paragraph analyses the basic source, that is to say the ISTAT estimates of olive production, and of the virgin oil derived therefrom.

5. Table 2 presents the official (ISTAT) production statistics of virgin olive oil in Italy, together with related production indicators such as growing area, olive production and yields in oil, for a sufficiently long period to detect significant departures from trend. A slow decline in the total area devoted to olive production appears to have been compensated for by a tendency to move from mixed (1) to specialised olive groves. Taking account of this factor, all the indicators show a high degree of internal consistency. The only exception is the significant increase (about 8,5 %) in yields of oil obtained from a given quantity of olives, which took place around mid-1960s when production aid was first introduced, and which appears to have been maintained since then. Increased yields may be due to improved cultivation techniques, such as irrigation, or to better extraction methods. A gradual conversion from traditional presses to centrifugal mills has certainly been taking place. Nevertheless, neither the suddenness of the increase, which, in terms of aidable oil, averaged out at an extra 40 000 tonnes per year, nor its timing can be fully accounted for by these factors alone.

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Aided production

6. Table 3 compares the official statistics with those derived from applications for production aid and the quantities finally admitted. Since aid is paid also for olive residue oil, on a quantity equal to 8 % (1) of virgin olive oil produced, the comparison should be made from column 2 onwards. There is a slight difference between the definition of the production year for statistical purposes and the marketing year for aid purposes. The difference appears to the Court the be of little practicable importance for the purposes of the comparison and is, in any case, subsumed in the comparison of the totals for the whole period.

7. The table shows that the aid applications (column 3) usually exceeded the estimated harvest (column 2) by an average of some 20 000 tonnes per annum. Over the period, however, and given the normal vagaries of statistics, the table gives no reason to suppose that the quantities admitted to aid (column 4) were consistently greater than the totals statistically estimated. In fact the contrary seems to be the case.

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8. The above comparison can only be valid to the extent that the two data-series are independent. In Italy, official statistics of olive oil production are derived from estimates of the olive harvest made on the spot, at successive stages during the growing season, by provincial agencies in each of the several thousand homogenous production zones, supplemented by samples, taken at selected mills, on the yields in oil from olives.

The fact that the provincial services responsible for overseeing this operation are, in some cases, also involved in the verification of applications for aid introduces a certain statistical bias into the comparison which, unfortunately, cannot be measured. A statistical bias of this nature does not cast doubts on the integrity of the services involved but simply places uncertainty on the value of the comparisons.

9. The verification 'effort', i.e. the differences between quantities presented for and those admitted to aid, shown in columns 5 and 6, have varied considerably over the period.

Consumption statistics

10. A commonly adopted method of arriving at consumption statistics is to use the commodity flow approach. This starts from production and, after adding imports and deducting exports (both known with reasonable accuracy) and allowing for changes of stocks (not so easily known, except for intervention stocks), calculates consumption as a residual. This is the method used in Italy. It is supplemented, as to human consumption, by credibility tests derived from household budget enquiries conducted each year on a sample of 36 000 households. The balance sheets so derived are presented in table 4.

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11. A striking feature of the table is the amplitude of the stock variations in certain years. In 1967/68, stocks are shown to have risen by 217 000 tonnes (1). Of this increase only 13 000 went into intervention.

This apparent increase in private commercial stocks which took place shortly after the introduction of the Community aid despite the introduction of public intervention stocks, and which averaged out at a level 140 000 tonnes higher than before, is such as to raise questions as to the accuracy of the entries for production and consumption in the balance sheets.

12. In a report to the Council dated 29 September 1972 (2) the Commission undertook a detailed study of the production and consumption statistics in Italy for the period 1966/67 to 1970/71. The study concluded that the level of consumption of olive oil implied from production aid applications could not be explained by available economic indicators. As a consequence the Commission (DG VI) has not since then presented official estimates of production or consumption, either to the Council, charged with the decisions on pricing policy, or in the annual reports on the 'situation of the agricultural markets'. Strangely enough the Court was informed that EUROSTAT, the Commission's own statistical service, has accepted Italian statistics without demur and, apparently, was unaware of the reserves of DG VI.

13. In documents presented for recent Council discussions of the consequences of enlargement, and particularly of the proposal to adopt a ratio of 2 : 1 between the price of olive oil and that of edible seed oils, DG VI presented its own estimated balance sheets, which show a substantially different consumption pattern from that in the official balance sheets, i.e. an annual average of some 11 000 tonnes less. However, the Commission's estimates are also suspect, principally because they ignore private stock changes altogether. The Commission's consumption figures are presented, for comparison purposes, in column 10 of table 4, and should be compared with column 6.

14. The appearance of a 'loss' of 60 000 tonnes in the balance sheet 1980/81 (column 7 of table 4) was drawn to the attention of EUROSTAT by the auditors of the Court. As EUROSTAT could not throw any light on the matter, it wrote to the Italian statistical authorities. In reply, the Italian authorities removed the 'loss' from the figures by adjusting a number of the balance sheet items for 1979/80, 1980/81 and 1981/82. The main changes were that domestic consumption in 1979/80 was increased by 41 000 tonnes and final stocks reduced accordingly. The 60 000 tonnes in 1980/81 was then transferred from an apparent loss to an increase in stocks. N° explanation was provided for the revised figures.

GREECE

15. As in the case of Italy, three sources of production statistics may be consulted. These are set out in

table 5.

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Though the series differ, they all show a substantial increase in production in 1980/81, the year in which production aid was introduced. At the request of the Court of Auditors, the Greek authorities offered as possible reasons:

(a) the fact that 26,5 million olive trees had been planted in the period 1960 to 1975 and

(b) since adhesion to the Community producers had intensified production.

16. Following is a comparison of production statistics with aid applications:

(1 000 tonnes)

1980/81

1981/82

Ministry of Agriculture estimates

371

259

Greek Statistical Office estimate of virgin oil plus 8 % for olive residue oil

407

n.a. (1)

Figures supplied by the Greek authorities to the Court of Auditors

330

230

Figures supplied by the Greek authorities to the Budgetary Control Commission of the European Parliament

337

242

Quantity for which production aid was requested

338

200

Quantity for which aid was paid

337

212

17. On 11 April 1984 the Commission drew the attention of the Greek authorities inter alia to the apparently excessive payment for 1981/82 and requested a blockage of further payments of aid pending an examination on the spot.

Balance sheets

18. The balance sheets for Greece notified to EUROSTAT (see table 6) showed a substantial increase, from 170 000 to 283 000 tonnes, in human consumption of olive oil in 1980/81. When this was drawn to the notice of the Greek authorities by the Court they stated that it was due to an error. Shortly afterwards they informed EUROSTAT of a reduction of 60 000 tonnes in the consumption figure and a further increase in stocks of an equivalent amount. Thus the increase in stocks, already high by the standards of previous years at + 63 000 tonnes, rose to + 123 000 tonnes, of which some 74 000 tonnes can be explained by net sales to public intervention stocks (and the liquidation of abnormal carryover stocks envisaged in the Accession Treaty). The implications of the correction, i.e. that private commercial stocks rose by some 50 000 tonnes, are deserving of an explanation.

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Observations

19. In their present state the statistics of production and consumption of olive oil in Italy and Greece cannot be relied upon for serious analytical study. The existence of several statistical series, differing substantially one from the other, is a most unsatisfactory feature. The error noted during the audit in the Greek consumption figures, the changes to the Italian figures to remove the 'loss' in 1980/81, and the apparently volatile movements in the stock figures for both countries, add further elements of doubt. Despite the above caveats, however, the statistics do appear to show discernible breaks in continuity at or about the time of the commencement of the Community system in each of the two countries, breaks which are not fully explicable by known factors.

20. In the matter of statistical policy, the Commission's market division and its statistical service appear to be following in consistent lines. The lack of coordination between the two services has led to errors going undetected and unusual features not being investigated. More seriously, the resulting lack of impetus towards reform of the statistical machinery has deprived the legislative arm of the Community of an important element in the policy-making process.

(1) The IOOC represents most of the producer countries of the world, including the Community.

(1) Where olives are interspersed with other crops.

(1) Formerly 9 % and, earlier sill, 10 %.

(1) From 168 000 to 385 000 tonnes.

(2) Ref. 2022/72 (AGRI J 98/FIN J 42).

(1) n.a. = not available.

ANNEX IV OLIVE CULTIVATION REGISTER

The plans

1. Following the rejection of its proposals in the early 1970s, the Commission developed the idea of creating a register of olive cultivation in each producer Member State designed to provide accurate information on the potential production of olives and olive oil and to improve the operation of the aid system. An outline regulation (1) was adopted by the Council in January 1975, requiring the two existing producer Member States to set up such a register showing, for each holding:

(a) within two years of the entry intro force of the regulation (i.e. before 24 January 1977), the total olive-growing area with the cadastral reference of the parcels comprising it and the total number of trees;

(b) within a further four years (i.e. before 24 January 1981), more detailed information, such as ownership of the holding, the varieties of the olive trees and the precise conditions of cultivation.

The register was to be updated at regular intervals. The costs involved were to be charged to the Community budget (EAGGF-Guarantee Section) but, in compensation, the production aid fixed by the Community was to be reduced by varying percentages depending on the marketing year.

2. There followed a period of nearly five years before the scheme was launched. The lengthy delay has been attributed by the Commission to feasibility studies and experimental tests carried out under Community auspices. It was not until the adoption of Commission Regulation (EEC) N° 2276/79 (2) that more concrete details were evolved. Despite the immensity of the task, and the formidable problems involved, aerial photography was to be the preferred method of obtaining the basic information, such as the area and location of parcels and the number of trees, in Italy. For France, and, where feasible, for certain zones in Italy, this information was to be obtained by counting the trees on the ground and by verifying cadastral maps. In both cases the supplementary information as to ownership and cultivation conditions was to be collected from the growers or by on-the-spot visits. For the aerial survey operation, precise steps (eight in all) were laid down, comprising the preparatory zoning operations and acquisition and harmonisation of cadastral maps, as well as the aerial surveys and the construction of orthophotos with cadastral boundaries superimposed. It also dealt with the interpretation of the photographs to determine the exact area of each parcel and the number of trees and the checking and recording of the results in the form of tables.

3. By Council Regulation (EEC) N° 3453/80 (3) Greece was included within the ambit of the 1975 Regulation and the time limits of two years and six years were fixed to run from 1 November 1982. It is not yet clear whether aerial photography will be imposed.

Execution

4. In the Member States work is at various stages of completion. France has carried out the preliminary steps but it is as yet too early to estimate when the register will be operational there.

5. In June 1981 Italy signed a contract with a business consortium of four specialist companies, to carry out and finalise the project. The work was to take six years. The four producer unions were also enlisted for data-collection purposes. The Court was informed that, in terms of the contract provisions, satisfactory progress was being made and that the project was expected to be completed ahead of contract time. In terms of the official timetable and even after allowing for the five-year launching delay, the completion of the first phase is already more than three years overdue. In fact the contract does not provide for the two phases mentioned in the Community provisions. In these circumstances it is not possible to give any reasonable estimate of when the register is likely to be fully operational in Italy.

6. Greece has no land registration system and cadastral maps do not exist. In these circumstances the Greek authorities look on the olive cultivation register as a long-term project, lasting at least 10 years. Initial proposals were made to the Commission some time ago for a pilot study but no final decision has yet been made.

Financial aspects

7. The percentages to be withheld from the production aid for financing the register are set out in table 1.

8. The register was embarked upon without a realistic and detailed assessment of its costs or benefits. The explanatory memorandum presented by the Commission with Regulation (EEC) N° 154/75 implied that the cost for Italy and France combined could be as low as 12 Mio ECU with the possibility of an excess. More recent indications suggest that the cost will be many times this amount. Even at the date of this report the Commission is unable to provide a firm figure for the ultimate cost. Total expenditure charged to the Community budget amounted, at end-1983, to 26,63 Mio ECU and total retentions at end-1982/83 came to 27,45 Mio ECU.

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(1) Council Regulation (EEC) N° 154/75 OJ L 19, 24. 1. 1975, p. 1.

(2) OJ L 262, 18. 10. 1979, p. 11.

(3) OJ L 360, 31. 12. 1980, p. 15.

ANNEX V THE RESULTS OF ANALYSES OF SAMPLES TAKEN IN ITALY

1. The organoleptic characteristics of one of the eight samples taken at the Bari centre, which was classified as 'fine', were such that it could only be classified as 'lampante'. The question is: did these characteristics escape detection at the point of entry or were they the consequence of poor storage conditions? Out of the seven other samples, only one remained after analysis in its nominal category.

2. The results of the analysis of the 15 samples of oil classified as 'fine' which had been taken at the Lecce centre, that is to say, 13 mediocre 'semi-fine' oils and two poor 'lampante' oils, suggest that the oils stored at this centre were systematically excluded from the reclassification operation carried out six months earlier.

3. The results of the analysis of the 10 samples taken at the Reggio Calabria centre were such that, apart from a problem regarding the coverage of the spectrophotometric analysis, there are grounds for seriously questioning whether the oil is stored with due care and attention, particularly as far as the maintenance and cleaning of the storage installations is concerned. Now, the fact is that

(a) in the case of two out of five samples of 'lampante' oil, the value of the extinction coefficient at the final stage of the analysis, that is, after neutralisation and decolorisation, was not within the limits established to define 'lampante' oil. In the absence of any adequate analysis at the point of entry, this phenomenon cannot be explained;

(b) the ss-sitosterol content of three of these five samples of 'lampante' oil was far below the regulation minimum of 93 %. If we assume that this characteristic (which is determined during each analysis) met the regulation criteria at the point of entry, the reason for the deterioration must be looked for in the storage conditions, for example:

(i)

contamination by traces of olive-residue oil or old 'lampante' oil which had accumulated at the bottom of the vat, or,

(ii)

contact with the cement of damaged vat walls, and,

(iii)

in any case, lack of technical care and attention;

(c) the humidity and impurities levels of all five samples of olive-residue oil were far too high (the water content alone was in excess of the limit of 2 % for the sample as a whole, whilst the total water and impurities content for the sample as a whole varied from 2,9 to 4,0 %). The most likely explanation is the accumulation of water and impurities at the bottom of the vat because the vat had not been cleaned out. The presence of such contaminants greatly encourages acidification and consequently a more rapid deterioration of the oil, and thus has a direct effect on the sales price.