ABBREVIATIONS

CAP : common agricultural policy

CATS : Clearance Audit Trail System (database collecting information related to European agricultural funds payments)

EAGF : European Agricultural Guarantee Fund

EAFRD : European Agricultural Fund for Rural Development

Eurostat : statistical office of the European Union

GAEC : good agricultural and environmental condition

LFA : less-favoured area

LSU : livestock units

SMR : statutory management requirements

SAPS : Single Area Payment Scheme

SPS : Single Payment Scheme

URAA : Uruguay Round Agreement on Agriculture

WTO : World Trade Organisation (Geneva)

GLOSSARY

1992 reform : The first major reform of the CAP ("MacSharry reform") in which intervention prices in the arable and the beef sectors were reduced. As a compensation for expected losses of income the reform introduced direct payments to arable crop producers and for land to be taken out of production (set-aside).

WTO Agreement on Agriculture : Result of negotiations in the 1986–94 Uruguay Round where WTO member countries agreed to improve market access and reduce trade-distorting subsidies in agriculture.

Agenda 2000 : This reform put the CAP on two main pillars which the Community budget finances through two European agricultural funds. The first pillar (European Agricultural Guarantee Fund (EAGF)) provides for market measures and income support in the form of direct payments. The second pillar (European Agricultural Fund for Rural Development (EAFRD)) co-finances rural development measures in areas such as agri-environment, the promotion of food quality, higher technical standards and animal welfare.

2003 reform : CAP reform ("Mid-Term Review") which aimed to reduce price support and compensate for this reduction by direct income aid continuing a process that had begun in 1992 (MacSharry reform), and confirmed in 1999 (Agenda 2000 reform). The 2003 reform introduced the decoupling of aid and cross-compliance while reinforcing rural development assistance

Health Check : 2008 review of the 2003 CAP reform. Adoption of Commission proposals for further decoupling of direct aids and additional flexibility for the SPS, higher transfers of expenditure to rural development measures, modifications to the intervention system, increase of milk quotas and other sector-specific measures.

Agricultural factor income : Indicates the net value added of agricultural activities (as well as inseparable non-agricultural, secondary activities) at factor cost. It is calculated by subtracting the value of intermediate consumption, the consumption of fixed capital and production taxes from the value of agricultural output at basic prices and adding the value of (other) subsidies on production. Households often receive income from other sources (non-agricultural activities, salaries, social benefits, income from property) so that agricultural income is not necessarily identical with the actual income of agricultural households.

Agricultural entrepreneurial income : Income generated by farming activities which is used to reward own production factors (work and/or enterprise, own capital and owned land). It corresponds to factor income minus costs linked to borrowing capital and hiring labour.

Decoupling : Process of separation of direct aid payments from the actual agricultural production.

Executive summary

I. The Single Payment Scheme (SPS) is a key feature of the 2003 reform of the common agricultural policy. Its objectives are to encourage farmers to better respond to market demand and to support their income. The SPS is currently applied in 17 of the 27 EU Member States and expenditure on the scheme amounted to some 28,8 billion euro in 2009.

II. The Court’s audit of the implementation of the SPS focused on the following:

- the beneficiaries of the policy, the access to single payments and the definition of eligible land;

- the contribution of the scheme to the objectives of supporting farmers’ income and maintaining land in good agricultural and environmental condition;

- the specific effects arising from the various implementing models of the scheme.

III. The beneficiaries of the SPS are "farmers" engaged in an "agricultural activity" and having "eligible land" at their "disposal". However, a lack of precision in the definition of these terms and the manner in which the related provisions were subsequently applied permitted persons or entities having no or only marginal agricultural activity to benefit from SPS payments.

IV. In 2008, the Commission and the Council undertook a review of the CAP, known as the "Health Check", which led to the acknowledgement that SPS aid should not go to "natural or legal persons whose agricultural activities form only an insignificant part of their overall economic activities or whose principal business or company objects do not consist of exercising an agricultural activity". However, no Member State has yet made use of this option to better target the beneficiaries of SPS aid.

V. Access of new entrants to the SPS was sometimes limited. Furthermore, the criteria for eligibility of land were not clear enough and the required minimal agricultural activity was sometimes reduced to no activity at all.

VI. Direct payments, comprising SPS and coupled aid, represent an important share of farm income.The major part of the aid goes to a small number of large beneficiaries while the large majority of beneficiaries each receive only a small amount of aid.

VII. The receipt of SPS aid is conditional upon respecting cross-compliance obligations. However, the Court noted that there is no direct link between SPS aid and the costs incurred by farmers for complying with such obligations. Similarly, it is not possible to establish a direct link between SPS aid and the positive public externalities that agricultural activities generate.

VIII. Several options ("models") were made available to Member States for the implementation of the SPS. The choice between the available models significantly influenced the distribution of aid within Member States (among farmers). This means that, currently, the SPS is a poorly targeted method to support farmers’ income.

IX. Most Member States that have so far introduced the SPS have retained the historic model where the amounts of aid are essentially based on parameters set in 2000 to 2002 which no longer correspond to current activity. Where the Member States authorities have not set up proper restrictions, this model can also be associated with speculative transfers and accumulation of payment entitlements by beneficiaries.

X. The regional model favours a more equal distribution of aid. However, it has been shown that it aggravates the "capitalisation" of the aid in land prices and land leases. Such capitalisation exists in all aid systems based on the surface of land farmed, but more so in the regional form of implementation of the SPS.

XI. Overall, while the SPS has contributed to the objectives of the CAP, notably by encouraging farmers to better respond to market demand and by supporting the income of the agricultural sector as a whole, the Court invites the Commission to consider whether such features should be reviewed along the lines set out in the recommendations below.

XII. The Court recommends that;

- the present legislation should be amended to ensure that SPS aid is directed to active farmers, in particular by excluding beneficiaries who have no or only insignificant agricultural activities;

- eligible land and agricultural activities should be more clearly defined with a view to excluding from the benefit of SPS aid non-agricultural parcels and activities that do not contribute to increasing agricultural productivity (Article 39 of the Treaty, see footnote 5) or actively maintaining the environmental value of the land;

- the calculation of SPS aid should be modified to better reflect the cost of environmental and other externalities;

- GAEC standards should require concrete and regular activities to be carried out by farmers for them to receive the full amount of the aid. Payment reductions for failure to respect cross-compliance obligations should be made more dissuasive;

- a more balanced distribution of aid between farmers should be sought either by further modulation of payments, or by capping higher individual payments, or by taking into consideration the specific circumstances of farms;

- the calculation of entitlements should be based on current farming conditions in the different regions.

INTRODUCTION

BACKGROUND

1. Until its reform in 1992, the CAP relied on a price support system in most agricultural sectors combined with public intervention in agricultural markets as well as border protection [1]. Price support came to generate almost permanent surpluses of the major farm commodities and market stabilisation could only be achieved, at a high budgetary cost, through measures such as private storage, disposal measures, export subsidies or even destruction of agricultural products. In addition, price support had been systematically criticised in multilateral trade negotiations.

2. The 1992 reform of the CAP reduced intervention prices for cereals and beef and obliged larger farms to set aside part of their land. In parallel, the reform introduced accompanying measures for the protection of the environment, early retirement for farmers and afforestation measures. In compensation for the expected income losses that followed the decrease of cereal and beef prices, producers received direct payments which were coupled to areas sown or animal numbers. The overall amounts of these payments were restricted by sector-specific regional or national ceilings.

BOX 1

FARM INCOME SUPPORT AND THE EUROPEAN UNION’S INTERNATIONAL COMMITMENTS

In 1994, the European Union and the member countries of the World Trade Organisation signed the Uruguay Round Agreement on Agriculture (URAA). This agreement classifies the various forms of farm support according to their impact on the distortion of international trade. Direct price support is considered as particularly distorting and the WTO member countries committed themselves to reduce this form of support. Direct payments "decoupled" from production are considered not to distort trade and are therefore permitted [2].

3. In 1999, the European Council in Berlin agreed upon a further reform of the CAP. Support to agriculture was organised around two main "pillars" that the Community budget finances through two funds. The European Agricultural Guarantee Fund (EAGF) continues to provide for the financing of market measures and includes income support in the form of direct payments coupled to production. The European Agricultural Fund for Rural Development (EAFRD) co-finances rural development measures such as protection of the environment and sustainable agriculture, promotion of food quality, and higher technical and animal welfare standards.

THE 2003 REFORM OF THE CAP INTRODUCED THE SINGLE PAYMENT SCHEME

4. Implementation of the URAA and changing political priorities led to the 2003 reform of the CAP. This reform was designed to encourage farmers to respond to market demand and to promote agricultural practices considered to be protective of the environment.

5. As regards the first pillar of the CAP (EAGF) which finances market and direct aids, the 2003 reform was based on four key elements:

- Introduction of the Single Payment Scheme (SPS). This scheme replaces most existing direct aid payments. Under the SPS, aid is "decoupled" from any obligation to produce.

- Full payment of direct aid is subject to the condition that farmers keep all their land in good agricultural and environmental condition (GAEC) and respect statutory management requirements (SMRs). This is called "cross-compliance". GAEC and SMRs prescribe or prohibit practices related to the protection of the productive potential of agricultural land, the environment, animal health and welfare, plants and food safety.

- Introduction of a compulsory mechanism to reduce all direct payments exceeding 5000 euro per calendar year by a fixed percentage ("modulation") [3]. The funds resulting from the modulation are transferred to the EAFRD.

- A financial discipline mechanism to ensure that the amounts agreed upon for the financing of Pillar I of the CAP are not exceeded in any year [4]. This mechanism came into effect in 2007 but has not so far been triggered.

6. The SPS is designed to be consistent with the overall objectives of the common agricultural policy aiming to "increase agricultural productivity" and "thus ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture" [5]. Hence, the income of farmers, which had been one of the principal concerns of the CAP since its introduction, remained a major policy concern.

7. For the application year 2008 (financial year 2009), the national ceilings available for distributing payment entitlements in the 17 Member States that have introduced the SPS so far amounted to a total of 31,5 billion euro [6]. In the 2009 budget the SPS accounted for 72,1 % of the EU direct support payments and 49,8 % of the budget for agriculture and rural development.

TABLE 1

ANNUAL BUDGETARY CEILINGS FOR THE SINGLE PAYMENT SCHEME

(1000 euro) |

Member State | Application year |

| 2006 | 2007 | 2008 |

Belgium | 475641 | 488660 | 502200 |

Denmark | 981539 | 987356 | 993338 |

Germany | 5644898 | 5693330 | 5741963 |

Ireland | 1335311 | 1337919 | 1340752 |

Greece | 2041887 | 2069049 | 2234039 |

Spain | 3529453 | 3542583 | 3600357 |

France | 6060555 | 6107448 | 6159613 |

Italy | 3593132 | 3612988 | 3827342 |

Luxembourg | 36602 | 37051 | 37051 |

Malta | | 1668 | 3017 |

Netherlands | 325103 | 730632 | 743163 |

Austria | 540440 | 643956 | 649473 |

Portugal | 365645 | 413774 | 434232 |

Slovenia | | 50454 | 62902 |

Finland | 519628 | 521285 | 523362 |

Sweden | 630000 | 714201 | 719414 |

United Kingdom | 3914945 | 3931186 | 3947375 |

Total | 29994779 | 30883540 | 31519593 |

KEY ELEMENTS OF THE SPS AND MODELS OF IMPLEMENTATION

8. As indicated above, the SPS was the cornerstone of the 2003 reform of the CAP and replaced most existing direct aid payments [7]. Only farmers are eligible for SPS. A farmer is a person who carries out an agricultural activity. An agricultural activity is defined as the production of plants, the rearing of animals or the maintenance of land in good agricultural and environmental condition (GAEC) [8].

9. To benefit from SPS aid, a farmer must hold "payment entitlements" and have eligible agricultural land at his disposal. Every payment entitlement declared together with one hectare of eligible land gives right to an SPS payment equal to the unit value of the payment entitlement declared [9]. Payment entitlements are, in essence, a conditional right to being paid EU income support, i.e. an asset. They may be separated from land and traded independently.

10. Payment entitlements are granted by the national authorities. The national ceilings correspond to the value of all payment entitlements available that farmers can activate with eligible land within the territory of the same Member State. This value is higher than the amounts actually paid, because all direct payments to farmers, including SPS payments, are reduced as a result of modulation (for example 5 % in 2008), Member States have not fully allocated all available amounts, farmers have not used ("activated") all payment entitlements (for example, because in a given year they farm fewer hectares than the number of entitlements they possess) or payments were reduced as a result of administrative sanctions (for example in the case of late presentation of the aid application). Thus, total payments made under the scheme amounted to 28,8 billion euro in financial year 2009 [10].

11. Belgium, Denmark, Germany, Ireland, Italy, Luxembourg, Austria, Portugal, Sweden and the United Kingdom introduced the SPS in 2005. Spain, France, the Netherlands, Finland and Greece used a transitional period and introduced the SPS one year later, in 2006.

12. Specific rules apply for the new Member States that joined the EU in 2004 or 2007. They could, in principle, introduce the SPS like other Member States but so far only Malta and Slovenia have done so in 2007. Bulgaria, the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Romania, Poland and Slovakia availed themselves of an option that allows them to postpone the introduction of the SPS until 2013. In the meantime, they apply a simplified area-based support scheme (SAPS) [11]. SAPS was not included within the scope of the audit reported in the present report.

13. Several implementing options were opened as regards the calculation and allocation of payment entitlements, thus defining a number of "models" among which Member States could choose: the historic model; the regional (flat-rate) model; and mixed models, which are a combination of both:

(a) The historic model [12]: Each farmer is granted payment entitlements which are as a rule based on the average amount of aid payments received during the three-year (2000, 2001 and 2002) reference period (the historical reference amount) and the average number of hectares farmed during that period under any of the former coupled support schemes (the reference area) [13]. Thus the unit value of a payment entitlement is equal to the reference amount divided by the number of entitlements. This mode of calculation results in significant differences in the unit value of payment entitlements that arise from the disparity of support to specific agricultural sectors during the reference period.

(b) The regional (flat-rate) model [14]: Under the regional model, all payment entitlements allocated to the farmers of a defined region/sub-region have the same value ("flat-rate") and each farmer is allocated a payment entitlement for every eligible hectare declared in the first year of application or, alternatively, in the last year preceding the year of introduction of the SPS.

(c) Mixed ("hybrid") models: These models combine elements of the historic and the regional models. Farmers receive a basic flat rate amount per eligible hectare plus a fixed percentage of the aid payments that they had received in the reference period. Hybrid models may be static or dynamic, i.e. the combination of historic and flat rate values may remain unchanged or it may vary over time and evolve towards a full regional, flat-rate, model. The models chosen by the 17 Member States that apply SPS for the calculation and allocation of payment entitlements are shown in Annex I.

14. Member States were entitled to allocate part of the historical payments to a national reserve which could be used to grant payment entitlements to new farmers who had started their activities after the reference period, farmers in special situations or farmers affected by restructuring or development programmes.

MODIFICATIONS INTRODUCED BY THE 2008 "HEALTH CHECK" OF THE COMMON AGRICULTURAL POLICY

15. In 2008, the Commission and the Council undertook a review of the CAP known as the "Health Check". The Council accepted the Commission proposals to further decouple direct support schemes that were still coupled to production [15]. Remaining coupled aid schemes for dried fodder, starch, flax and hemp will also be decoupled and incorporated into the SPS by 2013. Also, the Health Check further simplified the rules and abolished the obligation for farmers to keep part of their land fallow (compulsory set-aside).

16. The Council also authorised Member States to revise their original decision to opt for a particular model of implementation of the SPS. Member States that had chosen the historic model may either decide to narrow the gap between the unit values of payment entitlements or to change over to a (full or hybrid) regional model. Member States which had already introduced a hybrid regional model may decide to reduce the historical component of the value of the payment entitlements and thus adjust them closer to the regional value. Member States may also revise the composition of the regions [16]. Finally, Member States were also authorised to use up to 10 % of their "national ceilings" for supporting specific issues [17].

AUDIT SCOPE, OBJECTIVES AND APPROACH.

17. The Court has already audited the implementation of the SPS in the 17 Member States applying the system since 2006. The results of these audits were reported in the respective Annual Reports.

18. The Court also decided to carry out supplementary audit work in 2009 and 2010 for the purpose of the present report. This included further audit visits to the European Commission and three Member States (France, United Kingdom, Italy) as well as documentary analysis and review of studies and evaluations.

19. This report focuses on the following:

- the definition of the beneficiaries of the policy, the conditions of access to single payments and the definition of eligible land;

- the contribution of the scheme to the objectives of supporting farmers’ income and maintaining agricultural land in good agricultural and environmental condition;

- the specific effects arising from the various implementing models of the scheme;

- the errors linked to the complicated calculations required for the establishment of the payment entitlements.

OBSERVATIONS

THE BENEFICIARIES OF THE POLICY, THE CONDITIONS OF ACCESS TO SINGLE PAYMENTS AND THE SETTING UP OF KEY ELEMENTS OF THE SCHEME

20. The audit identified a lack of precision in the definition of the beneficiaries of the SPS, of eligible activities and eligible land as well as significant discretion in the setting up and implementation of key elements of the scheme by Member States.

DEFINITIONS OF "HOLDING", "AGRICULTURAL ACTIVITY" AND "LAND AT THE FARMER’S DISPOSAL"

21. The beneficiaries of the SPS are "farmers" engaged in an "agricultural activity" and having "eligible land" at their "disposal". However, the lack of precision in the definition of these elements (farmer, agricultural activity etc.) and the manner in which they were subsequently applied permitted persons or entities having no or only marginal agricultural activity to benefit from the SPS payments.

22. Legal provisions [18] define a holding as the totality of the production units which the farmer manages within the territory of the same Member State. A production unit is a plot of agricultural land (including forage areas) or an animal which has given right to direct payments in the reference period. Agricultural activity is the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes or maintaining the land in GAEC.

23. The legal framework therefore does not require beneficiaries:

(a) to own land or any other means of agricultural production,

(b) to be a producer of agricultural goods; and

(c) to earn one’s income from the selling of the product of one’s agricultural activity on a market.

24. With respect to the availability of land, the initial legal framework for the SPS required applicants to have had at their disposal, for a period of at least 10 months [19], eligible land corresponding to the number of payment entitlements they had in their possession. The provision, which was considered to be too restrictive, was replaced in 2008 by the obligation that land be at the farmer’s disposal on a fixed date [20]. However, the legal provisions do not define the term "at the farmer’s disposal" or "management of production units". As a result, the declared land may be at the disposal of any other person for any period of time outside of this fixed date during the same calendar year, without this affecting the qualification of the claimant as a "farmer".

25. Certain Member States have endeavoured to target SPS aid to specific categories of farmers. As an example, Luxembourg requires applicants to have the necessary agricultural machinery or equipment. In France, the authorities consider that a farmer is the person who bears the economic risks of the agricultural activities which he conducts on the land declared for SPS. This is the person who takes the economic decisions i.e. who acquires input factors (such as land, machinery, seeds, etc.) and derives his income from selling the produce of the farm.

26. A beneficiary who carries out the agricultural activity required through salaried workers is considered to be a farmer. However, when the land is leased and the tenant bears the economic risk of the agricultural activity, he does not receive the SPS aid if the provisions of the lease agreement specify that the landowner remains the economic beneficiary of the activity carried out. The audit revealed a number of cases of this kind [21]. In such cases, SPS aid was paid to landowners on condition that the tenants maintain the land in GAEC on their behalf.

BOX 2

BENEFICIARIES OF SPS AID WHO DO NOT BEAR THE ECONOMIC RISK OF FARMING

The Court’s audit revealed a number of cases where a tenant farmer had been paid under a support scheme for less-favoured areas but where the single payment attached to this same parcel was paid to another beneficiary (the landowner). Such cases were frequent under the regional (hybrid) model because, in the year of introduction of the scheme, payment entitlements were allocated to every person who declared eligible land, regardless of whether he was or had been an agricultural producer.

PAYMENT TO RETIRED FARMERS FOR MEETING MINIMAL GAEC OBLIGATIONS

27. Prior to the SPS, i.e. under the former coupled payment schemes, when a farmer retired, he was no longer entitled to direct aid as he had ceased agricultural production. With the introduction of SPS, farmers who had disposed of their original holding could keep their entitlements and activate them on rented land on which they had no activity by entering into complex constructs designed to meet the requirements of the regulations. In such cases, those who took over the original holding could receive new entitlements from the national reserve.

28. According to a study contracted by the Commission [22], the introduction of the SPS delayed actual retirement of farmers, because the scheme allows them to keep their payment entitlements and holdings (which may only consist of low value rented land with minimal GAEC obligations). However, the national authorities could not provide the Court with reliable information about the scale of such cases. The Court found that in one Member State (France), in order to avoid such cases, the legislation provides that access to the national farmer pension scheme is only permitted if farmers transfer all their payment entitlements and land, with the possible exception of a subsistence parcel. In general, however, there is a risk that delayed exit from farming, encouraged by the introduction of the SPS, negatively impacts on the restructuring of the agricultural sector.

BOX 3

BENEFICIARIES OF SPS WHO DISPOSED OF THEIR ORIGINAL HOLDINGS

In Italy, the Court found former producers of cereals and tobacco holding high-value payment entitlements who had transferred all their land to other farmers and rented at low cost poor pasture land in mountain regions considerably distant from their original holdings as well as from their residence. In practice, local farmers were allowed to graze their animals on that land free of charge which was considered adequate to maintain it in GAEC. In another case, a retired farmer had transferred his holding to family members and declared public land for the sole purpose of activating his entitlements without having any right of use of the declared land [23].

NEW BENEFICIARIES

29. Following the introduction of the SPS, the Court has identified a number of new beneficiaries whose agricultural activities form only an insignificant part of their overall economic activities or whose principal business does not consist of exercising an agricultural activity. Cases in point include recreational and sports clubs, railway companies, nature reserves, airports and city councils, hunting and sporting estates, government bodies, schools and camping sites.

30. Among these new beneficiaries, the audit identified investors who purchased payment entitlements (sometimes of high value) which they activated on low-value land, thus making very attractive guaranteed returns on their investments (see paragraphs 66 and 67).

31. During the Health Check, it was acknowledged that agricultural income support should not be allocated to "natural or legal persons whose agricultural activities form only an insignificant part of their overall economic activities or whose principal business or company objects do not consist of exercising an agricultural activity" [24]. However, the regulation left it to the Member States to exclude such beneficiaries through appropriate legal provisions. No Member State has yet made use of this option and SPS aid is still paid to these beneficiaries. Neither the Member States visited nor the Commission have precise information on the number of such beneficiaries and the amount of SPS aid they received. Given that the national ceilings are fixed, the acceptance of such new beneficiaries reduces the amount of aid available for the principal target beneficiaries of SPS aid.

MEMBER STATES SET UP IN VERY DIFFERENT WAYS KEY ELEMENTS OF THE SPS SCHEME

32. The detailed implementation of a number of key elements of the SPS is left to the Member States. Cases in point include the access of new entrants, the definition of the minimum agricultural activities that have to be carried out on the land declared or the conditions for benefiting from the consolidation of payment entitlements.

ACCESS OF NEW ENTRANTS TO THE SPS IS LARGELY DEPENDENT ON MEMBER STATES’ IMPLEMENTATION POLICIES

33. Persons who wish to take up farming activities have in principle no right to aid under the SPS, unless they acquire an eligible agricultural holding together with the attached payment entitlements, or buy such entitlements on the market. Member States are also authorised to use their national reserves to grant payment entitlements to new farmers who commence their agricultural activity. This is under condition that they had no agricultural activities in their own name or at their own risk in the five years preceding the start of their agricultural activity [25].

34. The audit found that some Member States used the reserve as a policy instrument to promote entry into the agricultural sector by providing new farmers with payment entitlements.

35. In other Member States, however, in spite of a demand for payment entitlements by new farmers, there is no specific policy and there are no appropriations available in the national reserve. Hence, new entrants have to acquire payment entitlements which may entail substantial investments and place significant barriers to entry. With the passage of time, more and more new farmers may experience difficulty in obtaining payment entitlements. Meanwhile, 57,5 % of farmers in the European Union are over 55 years and one in three is over 65 years old [26]. It is therefore in the interest of a dynamic and innovative farming sector to facilitate the establishment of new active farmers.

ELIGIBLE LAND AND MINIMUM AGRICULTURAL ACTIVITIES REQUIRED HAVE NOT ALWAYS BEEN CLEARLY DEFINED

36. There are three types of eligible land — arable land, permanent pastures and permanent crops [27]. However, the detailed specifications as to what constitutes an eligible parcel are left to Member States. In some Member States marginal land and wooded areas traditionally used for occasional grazing are accepted as being eligible while, in other Member States, such land is excluded from SPS aid. Such marginal land can quickly become overgrown with shrubs and forest, making it unsuitable for agricultural purposes.

37. As regards the definition of the concrete activities farmers have to carry out to maintain their land in GAEC, the EU legislation sets out only general objectives with respect to soil erosion, soil organic matter, soil structure and the minimum level of maintenance required. This latter aspect is of particular importance for land that is no longer used for production purposes. The definition of the minimum standards to be observed is left to the discretion of Member States, which adapt them to the specific characteristics of the regions. As a consequence farmers may receive annual payments without having to carry out any specific maintenance activity or only minimal infrequent activity, such as combating encroachment of unwanted vegetation or cutting grass once every three or five years. Where farmers fail to do even the minimum stipulated, they risk a moderate reduction of SPS payments under the cross-compliance rules [28].

BOX 4

BROAD DEFINITION OF ELIGIBLE LAND AND MINIMUM AGRICULTURAL ACTIVITIES

The provisions concerning GAEC have a considerable impact in the United Kingdom (Scotland), where the major part of agricultural land is rough grazing land, nearly half of which is declared under the SPS [29]. Most of this land is situated in less-favoured areas. The applicable national rules for less-favoured areas require that the land be actively farmed. In contrast, under the SPS the same land is eligible on the sole condition that claimants commit themselvesnotto carry outspecific activities that would change the natural state of the land e.g. drainage works or ploughing. The Court identified individual beneficiaries in receipt of between several hundred thousand and up to more than 1 million euro per year in SPS aid without having any agricultural activity on such land, including a nature reserve which for decades has not been used for farming. It is estimated that SPS aid is currently paid in relation to approximately 150000 hectares of such parcels.

+++++ TIFF +++++

Source: European Court of Auditors.

In Spain, partially wooded and rocky mountain grazing land was considered eligible even though farmers were not required to carry out any particular maintenance. Stocking density requirements to ensure the maintenance of permanent pastures at an appropriate level were only optional.

+++++ TIFF +++++

Source: European Court of Auditors.

In Italy, permanent pasture has to be mowed or grazed by animals. This obligation applies also to wooded or mountain areas used for grazing. The national authorities introduced a system of reduction coefficients to identify ineligible areas devoid of grass vegetation. As the Court has already pointed out in its Annual Report for the financial year 2007, the reduction coefficients underestimated such areas.

+++++ TIFF +++++

Source: European Court of Auditors.

The Court also found that, in Italy, beneficiaries are still paid on the basis of incorrect land use information, although the parcels declared have reverted to their natural state and can no longer be used for grazing farm animals.

In France, the national rules oblige farmers to maintain land in GAEC through the grazing of animals or annual mowing of the land, but specific standards can be adopted at local level. This has resulted in a situation where, in certain regions, full payment of the SPS aid can be obtained for parcels that contain up to 30 % of ineligible areas, such as rocks, bushes and trees.

+++++ TIFF +++++

Source: European Court of Auditors.

TEMPORARY USE OF LAND FOR NON-AGRICULTURAL ACTIVITIES

38. When the SPS was introduced, the legislation did not allow the payment of aid when parcels were used for non-agricultural activities. As a result of the Health Check [30], such land is now considered as eligible as long as the agricultural activity can be exercised without being significantly hampered by the intensity, nature, duration and timing of the non-agricultural activity [31]. However, the precise definition of such situations is left to the Member States. The Court found cases where the national authorities had allocated payment entitlements which were activated for parcels of land used primarily for recreational activities.

ADVERSE EFFECTS OF THE CONSOLIDATION OF PAYMENT ENTITLEMENTS

39. The payment of SPS aid is associated with the objective of avoiding the abandonment of agricultural land [32]. Under the historical model, to obtain the full theoretical amount of payments, farmers must continue to farm the same number of hectares which they farmed during the reference period [33]. The legislation [34] provides for exceptions for farmers who were affected by restructuring and development programmes. Farmers affected by such measures could have their historical payment entitlements exchanged for a smaller number of entitlements with a higher unit value. This procedure is called "consolidation". Farmers need less land to activate their payment entitlements while they maintain their historical level of aid. Cases in point include agricultural land that was afforested under a public programme or farmers who had lost some of their parcels due to the reorganisation of agricultural land in the framework of re-parcelling.

40. The Court found that consolidation of payment entitlements occurred in circumstances other than those foreseen by the legislation.

41. As farmers who benefited from such consolidation need less land to receive the same amount of aid, the remaining land can be taken up by any other farmer who can activate his own payment entitlements on it or by a new farmer who receives payment entitlements from the national reserve. As a result, more aid is paid in relation to the same area. Alternatively, there is a risk that the excess land is abandoned and no longer maintained in GAEC.

BOX 5

CONSOLIDATION IN CIRCUMSTANCES NOT PROVIDED FOR BY THE REGULATIONS

In France, the Court found that the authorities did not take into account the totality of agricultural land which certain milk producers had in their possession when the dairy premium was decoupled in 2006 and apportioned the amount of this premium to a much smaller surface of land. In one case the farmer who had previously used 70 ha had his entitlements apportioned to only 2 ha. By the same token, common pasture land which beneficiaries of extensification payments had used in the reference period as forage areas was also not taken into account. This effectively allowed beneficiaries to consolidate their payment entitlements on smaller land areas in circumstances not provided for by the regulations.

A HIGH PROPORTION OF SPS AID GOES TO LARGER FARMS AND THE SCHEME’S CONTRIBUTION TO ENVIRONMENTALLY FRIENDLY AGRICULTURE IS LIMITED

SPS AID REPRESENTS AN IMPORTANT SHARE OF FARMERS’ INCOME BUT NO DISTINCTION IS MADE BETWEEN LOW AND HIGH-INCOME FARMERS

42. In 2008, there were 4,49 million beneficiaries of SPS aid while total payments under the scheme amounted to 28,7 billion euro for application year 2008 [35]. However the level of income support varies significantly between Member States and between farmers. The distribution of SPS between Member States largely depends on their size and on the importance of their agricultural sectors as reflected in the national ceilings. The distribution between individual beneficiaries depends on the implementation model chosen by the Member State, the surface of the agricultural land farmed during the reference period, the level of subsidy in the sector in which the farmers were engaged in the reference period and the number of hectares they currently farm.

GRAPH 1

DIR ECT PAYMENTS PER HOLDING IN 2008

+++++ TIFF +++++

Source: European Court of Auditors on the basis of payment data from the European Commission.

43. Direct payments, comprising SPS and coupled aid, represent an important share of farm income [36], which indicates the high dependency of the farm sector as a whole on EU support. The Court notes, however, that across the EU 74,4 % of farmers work part-time i.e. they do not earn their full income from agriculture [37].

44. While the SPS appears to meet its objective of contributing significantly to farmers’ income, the distribution of subsidies to individual farmers remains essentially based on the surface of land farmed and thus a high proportion of SPS aid still goes to large farms, as was the case under the previous system. There is a contradiction in the design of the SPS which is on the one hand intended as a support to individual income and the fact that its distribution takes little account of the specific circumstances of the recipient.

ANALYSIS OF DISTRIBUTION: THE SPS PRIMARILY BENEFITS FEW BUT LARGE BENEFICIARIES

45. The 2003 CAP reform retained the concept of compensation payments, meaning that the new SPS should result in maintaining approximately the amount of subsidies a farmer formerly received under the previous direct aid scheme. In all models, large farms have a higher level of income support [38].

46. At farmer level, the historic and, to a certain extent, the hybrid models conserve the significant sector-specific individual differences of past support levels. The Commission’s analysis of the distribution of payment entitlements in terms of value per hectare shows that this has resulted in significant differences between Member States having opted for the historical model and those which introduced a hybrid model [39]. This is particularly evident in Member States with sectors that benefited from high support levels per hectare such as olive oil, cotton or raw tobacco, even though the size of the individual holdings could be relatively small. In Member States with intensive animal production, such as the Netherlands, SPS aid per hectare can also be high where farms have little land in relation to their animal production activities while, in areas with extensive farming, payments per hectare can be very low. Only in Denmark, Germany and the United Kingdom (England) is this situation going to gradually disappear by 2013, because these Member States have decided to reduce the historical component in favour of a uniform value of each payment entitlement.

BOX 6

DIFFERENCES IN UNIT VALUES OF ENTITLEMENTS UNDER THE HISTORIC MODEL

Depending on the intensity of production, in the olive oil sector, aid to production varied between several hundred and several thousand euro per hectare. In the tobacco sector, aid amounted to several thousand euro per hectare. In the cotton sector, coupled aid included in the reference amount was between 966 euro per hectare in Greece and 1202 euro per hectare in Portugal. Payment entitlements for animal premiums can have unit values per hectare of up to 5000 euro in cases of intensive production. On the other hand the unit value of payment entitlements in areas with extensive farming of sheep and goats can have negligible value.

47. The analysis of the distribution of SPS aid among beneficiaries highlights the concentration of support on a small number of farmers. In 2009 (for the application year 2008), 84 % of beneficiaries received less than 10000 euro, representing 25 % of the total value of payments. Conversely, 0,41 % of beneficiaries received over 100000 euro, representing 12,78 % of the total value of payments [40]. This is illustrated by Table 2 and Graph 2.

48. In the framework of the Health Check of the CAP, the Commission considered capping direct payments to individual beneficiaries. The Council finally decided [41] to marginally increase the compulsory modulation for very large beneficiaries and to subject payments in excess of 300000 euro to an additional modulation of 4 %. This additional adjustment which affects a very limited number of beneficiaries (approximately 2 500) does not significantly impact the overall distribution of the aid.

TABLE 2

DISTRIBUTION OF SPS PAYMENTS (APPLICATION YEAR 2008)

Source: European Court of Auditors based on European Commission payment data (CATS).

Annual payment of SPS support (euro) | Number of beneficiaries | % out of total beneficiaries | % of amount received out of total payments |

< 500 | 1395721 | 31,08 % | 1,18 % |

≥ 500 and <5 000 | 1912824 | 42,60 % | 12,48 % |

≥ 5000 and <10 000 | 458464 | 10,21 % | 11,43 % |

≥10 000 and < 50000 | 642954 | 14,32 % | 47,67 % |

≥ 50000 and < 100000 | 62210 | 1,39 % | 14,46 % |

≥ 100000 and < 300000 | 15927 | 0,35 % | 8,30 % |

≥ 300000 and < 500000 | 1500 | 0,03 % | 1,99 % |

≥ 500000 and < 1000000 | 783 | 0,02 % | 1,81 % |

≥ 1000000 | 144 | 0,00 % | 0,68 % |

Grand total | 4490527 | | |

THE SPS SUPPORT REFLECTS NEITHER THE COSTS OF MAINTENANCE OF LAND NOR THE POSITIVE PUBLIC EXTERNALITIES

49. The 2003 reform made full payment of SPS aid to farmers conditional upon complying with environmental and sustainable farming obligations (so-called cross-compliance obligations) introduced by that reform. Cross-compliance has, thus, become an important argument in justifying payments to farmers. These standards, most of which already existed before the 2003 reform, are considered to "entail … an increase in the costs of production for agricultural holdings in the Community" [42].

50. Maintenance of land in GAEC is of public interest, because the production potential of the land is conserved and because of other positive effects that can result from regular maintenance, for example protection of water against pollution, prevention of fire or preservation of landscape features and habitats.

GRAPH 2

DIS TRIBUTION OF SPS INCOME SUPPORT IN 2008 (EURO PER YEAR)

+++++ TIFF +++++

Source: European Court of Auditors based on European Commission payment data (CATS).

51. There is no direct link between SPS aid and the costs incurred by farmers for complying with compulsory standards for farming practices under cross-compliance nor have such costs been quantified. It is therefore possible that farms in high- yield areas receive a high level of aid without particularly exacting GAEC obligations while, on the other hand, a farm in a low-yield area with heavy GAEC obligations will receive only a low level of aid.

52. Failure to comply with cross-compliance obligations, as a rule, only results in a reduction of the full amount of SPS and other aid paid to the non-compliant farmer. The Court has noted that in practice such reduction is negligible for the most part and seldom applied (if only because it often goes undetected, as the number of farmers annually checked for cross-compliance is very low) [43] .

53. It is also not possible, at present, to establish a direct link between SPS aid and the positive public externalities resulting from agricultural activities, i.e. the services beneficiaries of SPS aid render to the public at large in respecting environmental requirements in the operation of their farm and in maintaining agricultural land in GAEC.

SPECIFIC EFFECTS ARISING FROM THE DESIGN OF THE SCHEME AND MEMBER STATES’ IMPLEMENTATION POLICIES

A PATCHWORK OF MODELS, VARIANTS AND IMPLEMENTATION POLICIES ACROSS MEMBER STATES

54. As mentioned above, numerous implementing options are opened to Member States, each model involving complicated calculations of individual entitlements to aid.

55. Most Member States of the EU-17 opted for the historic model. Only Malta and Slovenia opted for immediate transition to a regional flat-rate model. In Denmark, Germany and one region of the United Kingdom (England), after a transitory period for farmers to adjust to new conditions, the dynamic hybrid model will result in a full regional model so that farmers in the same region will hold payment entitlements of a uniform value per hectare.

56. For specific sectors, Member States could opt for either partial or full decoupling. They could also introduce new specific aids that were linked to quality production in specific farm sectors [44].

57. As a consequence of the wide gamut of options, each of the 17 Member States has implemented the scheme in its own way. Currently, 20 different models and variants are applied [45].This situation has not allowed for the intended simplification of the income support system to produce its full effect, particularly in Member States where part of direct payments remains coupled to production. The new options opened to Member States within the framework of the Health Check, whereby they could move towards a "flatter" rate system, have not substantially changed the situation.

58. The wide gamut of implementing options has important consequences on the distribution of SPS among farmers across Member States. This distribution varies depending largely on the model adopted. This means that the SPS is currently a poorly targeted method to provide income support.

OVER TIME, THE HISTORIC MODEL HAS BECOME DIVORCED FROM PRODUCTION …

SPS AID IS NOT BASED ON CURRENT ACTIVITY

59. In the historic model, the level of SPS aid depends on whether the farmer’s activity benefited from direct aid in the reference period (as a rule years 2000, 2001 and 2002). Similarly, in the hybrid model, the historical component of the value of the payment entitlement still reflects the level of the sector-specific aid received by each farmer. As mentioned earlier, the concept of "compensation" in the context of reducing intervention prices was the guiding principle. However, there is only a tenuous link between historical support levels and current market demand, the agricultural potential of the land farmed, farm structures and environmental criteria.

60. Farmers who did not receive payment entitlements, because in the reference period their activity was not eligible for direct aid to production, do not benefit from SPS aid, even if they have in the meantime changed production. In order to benefit from such aid, they must purchase payment entitlements on the market.

61. This can lead to situations whereby two farmers, currently growing the same crop on surfaces of the same size in the same region, are treated very differently depending on what they produced in the reference period and on whether as a consequence they received payment entitlements.

62. As a result of the Health Check, the Council recognised that, with the passage of time, it was becoming increasingly difficult to justify significant individual differences in support levels which were only based on past activities. In this regard, it was the Commission’s intention to introduce a "flatter" system, i.e. levelling out the wide divergences in individual payment entitlements. However, no Member State has yet decided to apply any of the options made available to them under the Health Check reforms and to revise the model chosen.

UNDER THE HISTORIC MODEL, TRADING OF PAYMENT ENTITLEMENTS ALLOWED SPECULATIVE [46]TRANSFERS AND ACCUMULATION OF PAYMENT ENTITLEMENTS TO OCCUR

63. With the introduction of the SPS, entitlement to payment was separated from the land: payment entitlements may be traded independently of the transfer of the land on which they were generated and they can be activated on whatever type of eligible land, whatever the agricultural activity carried out on this land. This paved the way for the emergence of markets for payment entitlements which are traded in and outside the regions of their establishment.

64. A market for payment entitlements was considered as a means of increasing the efficiency of the support scheme. The economic reasoning behind this assumption is that, once payment entitlements have been allocated, farmers can only increase their level of aid by acquiring additional payment entitlements from other holders, either with or without land. It is anticipated that, in an open and transparent market, payments entitlements will go to those farmers who are willing to pay the most for them, which contributes to an efficient allocation of support.

65. EU legislation provides for several options regarding the transfer of payment entitlements [47]. Certain Member States restricted the trading of payment entitlements without land by limiting the activation of such entitlements to the regions where they had been generated (France, United Kingdom (England)) or by applying "retentions" to certain transfers of entitlements with or without land (e.g. France). In this latter case, the value of each payment entitlement transferred is reduced by a certain percentage. Other Member States did not consider restricting transfers of entitlements (United Kingdom (Scotland)) or even abolished the application of retentions to encourage trading [48]. The latter choice was motivated by concerns that farmers wishing to sell payment entitlements were hesitating to do so, because the retentions would have significantly reduced the value of the future payments and therefore the sale price of each payment entitlement.

66. The Court found that the absence of regulation of such transfers and the heterogeneous agricultural potential of land resulted in adverse effects: the possibility to lease marginal land with low opportunity costs and for which beneficiaries do not have to respect particularly exacting GAEC obligations helped pave the way for speculative acquisitions and the accumulation of payment entitlements without land by investors who activate these entitlements on parcels of land not requiring any "real" agricultural activity.

67. The Court’s audit confirmed cases of investors who had acquired high-value payment entitlements which had been generated in fertile regions and in intensive production sectors but which the investor activated on marginal land of little market value, distant from their own holding or residence and requiring no or minimal agricultural activity. As underlined above, this has already resulted in the creation of a category of beneficiaries complying with minimal GAEC obligations but receiving substantial guaranteed income.

BOX 7

EXAMPLES OF INVESTMENT CASES

In its Annual Report concerning the financial year 2008, the Court reported cases of claimants in the United Kingdom (Scotland) who purchased high-value payment entitlements and rented at very low rates large tracts of land requiring only minimal or even no maintenance activity. In 2007 and 2008 40 % of the payment entitlements transferred without land had been activated on rough grazing land. Almost all the additional land that has been declared in Scotland for SPS since 2007 (ca. 58000 ha) was rough grazing land (ca. 50000 ha), even though the number of sheep in Scotland has been declining for a number of years.

In Italy, where the GAEC standards require that the land be mowed or grazed, the Court identified beneficiaries who had acquired payment entitlements and leased pasture land in marginal areas. For example, one beneficiary acquired payment entitlements without land in 2008 at almost their face value of ca. 197000 euro. After modulation, the payment entitlements under current conditions would provide the beneficiary, until 2013, total income support of ca. 1088000 euro. The beneficiary activated almost all of these payment entitlements on 45 ha of leased poor pasture land located 400 km away from his permanent residence. The annual lease price for the land was 7650 euro. The beneficiary does not carry out any agricultural activity on this land while grazing rights are assigned to a local farmer, free of charge, to respect the GAEC obligations of the beneficiary.

68. The EU legislation opened to Member States the possibility to adopt appropriate rules to avoid speculative transfers leading to the accumulation of payment entitlements by beneficiaries without a corresponding agricultural basis [49]. However, such provisions are optional.

INEFFECTIVE CORRECTION MECHANISMS TO DEAL WITH WINDFALL PROFITS

69. Under the historic and regional (hybrid) models, farmers who had ceased or reduced their activity after the reference period could be subjected to the "windfall profit clause" [50]. This provided for their entitlements based on their activity during the reference period to be reduced by up to 90 %. The proceeds of these reductions are credited to the national reserve. The windfall profit clause however only applied to transfers that occurred up to 15 May 2004.

70. Belgium, France, Denmark, Italy, Luxembourg, Greece and Sweden chose to apply this clause, although limiting it to farmers in certain sectors. In the other Member States, farmers were allowed to keep all of their historical entitlements.

71. In Italy and France, the Court found cases where farmers had transferred tobacco premium rights after 15 May 2004 and thus received the high-value payment entitlements deriving from their former production of tobacco without the authorities being entitled to "claw back" a part of the corresponding amounts.

72. Another case was disclosed in the Court’s 2006 Annual Report [51]: "Payment entitlements from the national reserve may be allocated to farmers who made investments in production capacity or purchased land. In the United Kingdom a 10 % increase in income was considered sufficient evidence of an investment. Paradoxically by increasing the number of cattle slaughtered during 2002 (i.e. destocking) farmers could meet this investment criterion. Consequently there was a general run on cattle premiums". As a result, farmers who slaughtered all cattle on the holding before the end of the reference period were entitled to keep all their historic reference amounts for the duration of the SPS.

73. In 2009, the Council adopted the Commission’s proposal to modify the windfall profit rules and open an option for Member States to claw back up to 100 % of the reference amounts on windfall profits that farmers may realise in the sectors where the remaining coupled support will be integrated into the SPS by 2012 [52]. However, such provisions are optional and do not correct any of the old cases in which the clause had not been applied.

… BUT THE REGIONAL MODEL GENERATES OTHER ADVERSE EFFECTS

ALTHOUGH REGIONALISATION LEADS TO A MORE EQUAL DISTRIBUTION OF AID, IT STILL FAVOURS LARGER FARMS

74. The regional model is associated with uniform unit values of payment entitlements across the region concerned, irrespective of the type of agricultural activity carried out before the introduction of the SPS. In the dynamic hybrid version, where the regional model is gradually introduced and that is currently applied in Denmark, Germany and the United Kingdom (England), the historical component is being gradually reduced and redistributed across all payment entitlements in the region. The Court already highlighted in its Annual Report 2006 that "there will be a significant redistribution effect on EU direct aid away from those actually farming and towards landowners, who will see the value of their entitlements multiplied by four in Denmark and Germany and tenfold in England" [53]. This applies, in particular, to new beneficiaries who did not receive direct payments under the former coupled scheme.

75. Notwithstanding this specific redistribution effect, payment entitlements under the regional or hybrid model are allocated in the first year on a strict per hectare basis so that large farms remain the main beneficiaries of the aid. Consequently, farmers using a smaller surface of land, for example intensive bovine farmers, see their income support reduced compared to their historical level of coupled payments. Moreover, according to the Commission, sectors that currently face economic difficulties, such as milk production, would suffer losses in the amount of aid they receive if the Member States in which they operate were moving towards regionalisation, because they farm on average less agricultural land than farmers in other sectors [54].

REGIONALISATION AND POSSIBLE CAPITALISATION OF SUPPORT IN LAND PRICES

76. Under the regional (and hybrid) models, the number of payment entitlements is very close to the overall number of hectares of eligible agricultural land [55]. This situation had an important effect on land prices, because farmers with more payment entitlements than land were prompted to lease land for the purpose of activating the largest part possible of their payment entitlements. This pushes up the overall demand for leased land and results in higher land lease prices.

77. While "capitalisation" of the aid in land prices could be observed under the former area-related aid schemes, several studies concluded, independently from one another, that the introduction of the SPS has not reduced and sometimes aggravated this effect, particularly in Member States that opted for the regional model and where there is a high dependence on leased agricultural land. This reduces the efficiency of the support payments, because farmers have to pay more for agricultural land than before the reform. The impact of SPS on land rents is considered to be stronger than on land sale prices and the "capitalisation" depends on the percentage of leased farmland available. The Court sees in this situation a risk that the extension of regionalisation to other Member States, as envisaged in the framework of the Health Check, could significantly affect the profitability of farms [56].

ADJUSTMENT TO REGIONAL DIVISION AND REVISION OF UNIT VALUES OF ENTITLEMENTS ARE OPTIONAL

78. When the SPS was introduced, Member States which preferred a regional form of implementation had to define the perimeter of the regions on the basis of objective criteria. They justified their decisions on this matter on the basis of their administrative structure [57], the agricultural potential of the regions defined [58] or specific farming patterns [59].

79. As a result of the Health Check, the Council adopted a Commission proposal which allowed Member States applying the historic model to bring the unit values of payment entitlements closer to one another or to change over to a (full or hybrid) regional model. Member States that had opted for a regional model may review their decisions, revise the design of the regions and bring the value of the entitlements across regions closer to one another. These decisions have to be taken "on the basis of the objectives laid down in Article 33 of the Treaty" (now Article 39) and on the basis of objective and non-discriminatory criteria such as the agricultural potential and environmental considerations. These measures are intended to give Member States an increased flexibility to target direct support. To date, no Member State has decided to revise its model.

THE INTRODUCTION OF THE SPS REQUIRED COMPLICATED CALCULATIONS AND RESULTED IN CASES OF ERRORS

80. The Court’s audit established that, in general, national authorities calculated the value of payment entitlements in accordance with the EU legislation. However, errors were noted as a result of erroneous or missing historical reference data, of failure to update such data where changes in holdings or status had occurred, of defective treatment of applications for payment entitlements from the national reserve. To date such errors have not yet been completely corrected.

81. In its Annual Reports for financial years 2006, 2007 and 2008, the Court reported shortcomings in the calculation of payment entitlements and in the application of rules governing the operations of national reserves [60].

82. The Court reviewed the follow-up work that the Commission had carried out on the errors that occurred during the implementation of the SPS. At the time of the audit, procedures were still under way and only one formal conformity clearance decision had been taken and published [61].

83. The Court notes that the Council decided [62] that all payment entitlements allocated before 1 January 2009 be deemed legal and regular as from 1 January 2010 unless they had been allocated on the basis of factually incorrect applications. While this gives legal certainty to farmers, it means that financial corrections decided pursuant to the conformity clearance procedure will not apply to payments posterior to 2009 [63]. As a result of this decision, erroneous payment entitlements will be "legalised" and rendered definitive, resulting in annual payments being made on such bases in future years.

CONCLUSIONS AND RECOMMENDATIONS

84. The SPS has contributed to the achievement of two main objectives of the common agricultural policy: encouraging farmers to better respond to market demand and supporting the income of the agricultural sector as a whole. However, the overall conclusion of the present report is that the implementation of the scheme resulted in a number of questionable features relating to the definition of the beneficiaries of the policy, the nature of eligible parcels and activities, the environmental impact of the scheme, the distribution of aid across and within Member States and the specific effects of the historic and regional models. Therefore, the Court invites the Commission to consider whether such features should be reviewed along the lines set out in the recommendations below.

BENEFICIARIES, ELIGIBLE LAND AND AGRICULTURAL ACTIVITIES

85. The definition of the beneficiaries of the scheme was formulated, and subsequently applied, in a way that permitted persons or entities not or only marginally engaged in an agricultural activity to benefit from SPS payments.

86. The Court previously reported on this situation in its annual reports and this was recognised during the "Health Check" examination of the CAP, in 2008. The legislator then allowed Member States to exclude such beneficiaries from SPS aid. However, at the time of the audit, no Member State had made use of this option and the situation described above persists.

87. Where Member States failed to put up effective restrictions, the complete separation of payment entitlements from the land on which they were originally generated encouraged investments by operators who have little interest in farming as an activity but who exploit the guaranteed returns that SPS provides.

88. The entrance of new farmers into the agricultural sector is often hampered by present conditions of access to payment entitlements.

89. The specifications as to what makes a parcel of land eligible for SPS aid and what constitutes an eligible agricultural activity are loosely defined and do not contribute to focusing such aid on activities and land that "increase agricultural productivity".

RECOMMENDATION 1

The present legislation and its implementing rules should be amended to ensure that SPS aid is directed to active farmers and excludes beneficiaries who have no or only insignificant agricultural activities.

RECOMMENDATION 2

Eligible land and agricultural activities need to be more clearly defined with a view to excluding from the benefit of SPS aid non-agricultural parcels and activities that do not contribute to increasing agricultural productivity [64] or to actively maintaining the environmental value of the land.

ENVIRONMENTAL IMPACT

90. With the introduction of cross-compliance, at the same time as the SPS, the full payment of aid was made conditional upon criteria based on environmental and other good agricultural practices. Cross-compliance thus became a key justification for the SPS payments. However, SPS aid is only indirectly linked to environmental obligations.

91. Firstly, the Court noted that there is no direct link between the level of SPS aid and the costs incurred by farmers to maintain land in GAEC or to comply with the specific statutory management requirements (SMR) applicable. Neither does it reflect the value of the positive externalities that agricultural activities generate.

92. Secondly, often the maintenance of land in GAEC does not require any or only sporadic actions.

RECOMMENDATION 3

The calculation of SPS aid should be modified to better reflect the cost of environmental and other externalities.

RECOMMENDATION 4

GAEC standards should require concrete and regular activities to be carried out by farmers for them to receive the full amount of the aid. Payment reductions for failure to respect cross-compliance obligations should be made more dissuasive.

DISTRIBUTION OF SPS AID

93. The determination of SPS payments to individual farmers remains based (a) on the number of hectares farmed and (b), in the historical model, on the amounts paid in the past (reference years from 2000 to 2002). It follows that this aid continues to benefit primarily larger farms.

94. The distribution of SPS aid is characterised by the fact that the major part goes to a small number of large beneficiaries while the large majority of beneficiaries each receive only a limited amount of aid. The modulation mechanism that reduces the amount paid to the largest farmers concerns a very limited number of recipients. Furthermore, it does not contribute to correcting the present distribution as its primary objective is to shift funds from direct aid to the rural development pillar of the CAP.

RECOMMENDATION 5

A more balanced distribution of SPS aid between farmers should be sought either by further modulation of payments, or by capping higher individual payments, or by taking into consideration the specific circumstances of farms.

SPECIFIC EFFECTS OF IMPLEMENTATION MODELS

95. Currently some 20 different variants of SPS are applied across the EU. This situation explains in large part the wide disparity in the levels of aid per hectare across Member States as well as in the distribution patterns within a Member State.

96. Two main models are implemented. On the one hand, the historic model has, over time, become divorced from present conditions of production.

97. On the other hand, the regional model is associated with uniform unit values of payment entitlements across the region concerned. However, the transition to this latter model may, in certain regions, negatively affect certain sectors of agricultural production and may result in an increase in the market price of agricultural land and land leases which would reduce the effectiveness of the aid.

RECOMMENDATION 6

The calculation of entitlements should be based on current farming conditions in the different regions. However, such a transition should ensure that undesirable effects, such as an increase in the price of leases and land, are limited.

This report was adopted by Chamber I, headed by Mr Olavi ALA-NISSILÄ, Member of the Court of Auditors, in Luxembourg at its meeting of 6 April 2011.

For the Court of Auditors

+++++ TIFF +++++

Vítor Manuel da Silva Caldeira

President

[1] In some agricultural sectors direct aid payments had been introduced to improve producer incomes. An example is Council Regulation No 136/66/EEC of 22 September 1966 on the establishment of a common organisation of the market in oils and fat (OJ 172, 30.9.1966, p. 3 025–66) that introduced an aid to the production of olive oil and table olives. In the case of cotton, producers were supported, indirectly, via an aid to the ginners.

[2] The Agreement on Agriculture (OJ L 336, 23.12.1994, p. 22) allows public farm support under specific conditions. According to Annex 2 to the agreement the eligibility for income support payments must be determined on the basis of criteria such as income level, status as a producer or landowner, factor use or production level in a reference period. The amount of such payments in any given year shall not be related to the type or volume of production (including livestock) after the reference period nor to the prices of any such production. Also, payments must not be based on the factors of production employed in any year after the reference period nor should farmers be obliged to produce in order to be entitled to the support.

[3] Direct payments were reduced by 3 % in 2005, 4 % in 2006 and 5 % from 2007 onwards. As from 2009, annual reductions for modulation will be further increased from 7 % in 2009 to 10 % in 2012. The Agenda 2000 reform had already introduced a voluntary modulation mechanism allowing Member States to modulate up to 20 % of the total amount of direct payments. Only the United Kingdom, France, Germany and Spain had chosen to apply these voluntary modulation measures. Under the 2003 CAP reform Member States may apply such a voluntary modulation mechanism in addition to the mandatory modulation. Currently, this is the case in the United Kingdom and in Portugal.

[4] Article 12 of Council Regulation (EC) No 1290/2005 of 21 June 2005 on the financing of the common agricultural policy (OJ L 209, 11.8.2005, p. 1).

[5] Article 39 of the Treaty on the functioning of the European Union (Treaty of Lisbon):"1.The objectives of the common agricultural policy shall be:(a)to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour;(b)thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture;(c)to stabilise markets;(d)to assure the availability of supplies;(e)to ensure that supplies reach consumers at reasonable prices.2.In working out the common agricultural policy and the special methods for its application, account shall be taken of:(a)the particular nature of agricultural activity, which results from the social structure of agriculture and from structural and natural disparities between the various agricultural regions;(b)the need to effect the appropriate adjustments by degrees;(c)the fact that in the Member States agriculture constitutes a sector closely linked with the economy as a whole."

[6] Article 41 and Annex VIII to Council Regulation (EC) No 1782/2003 (until 31.12.2008) (OJ L 270, 21.10.2003, p. 1) and Annex VIII to Council Regulation (EC) No 73/2009 (as from 1.1.2009) (OJ L 30, 31.1.2009, p. 16). Amounts in Annex VIII are calculated on the basis of a full decoupling of all direct payments. If a Member State opted for partial decoupling only, the ceiling for SPS is reduced and the ceiling for the appropriations available for coupled payment is increased accordingly (see for example Annex III to Commission Regulation (EC) No 674/2008 (OJ L 189, 17.7.2008, p. 5) modifying Annex VIII to Council Regulation (EC) No 1782/2003 and establishing budgetary ceilings for the partial or optional implementation).

[7] For details on the support schemes integrated into the SPS see Annex VI to Regulation (EC) No 1782/2003.

[8] See Article 1 and Article 2 (a) and (c) of Council Regulation (EC) No 1782/2003.

[9] Exceptions apply only for certain producers of beef, milk and sheep and goat without land. These producers receive income support under the condition that they maintain a minimum level of their historical animal production. Arable crop farmers received specific entitlements for their set-aside obligations.

[10] For details on income support payments effectively made under the SPS see Annex II.

[11] Article 122 of Regulation (EC) No 73/2009.

[12] Article 43 of Council Regulation (EC) No 1782/2003.

[13] Specific provisions applied in the sector of olive oil where the reference period comprised the marketing years 1999/2000, 2000/01, 2001/02 and 2002/03.

[14] Articles 58 and 59 of Regulation (EC) No 1782/2003.

[15] Member States which, since 2005, had only partially introduced the SPS were however authorised to keep premiums for suckler cows and sheep and goat coupled to production.

[16] Articles 45 to 48 of Regulation (EC) No 73/2009.

[17] Article 68 of Council Regulation (EC) No 73/2009. For further analysis of these issues see Annex I.

[18] Article 2 of Regulation (EC) No 1782/2003 and Article 2 of Commission Regulation (EC) No 795/2004 (OJ L 141, 30.4.2004, p. 1).

[19] Article 44(3) of Regulation (EC) No 1782/2003.

[20] Article 1(3) of Council Regulation (EC) No 146/2008 (OJ L 46, 21.2.2008, p. 1). Except in case of force majeure or exceptional circumstances, the parcels shall be at the farmer’s disposal on the date fixed by the Member State which shall be no later than the date fixed in that Member State for amending the application for single payment.

[21] The Court had already reported on this practice in its Annual Report for the financial year 2006, paragraph 5.21.

[22] Swinnen, J., Ciaian, P. and Kancs, D., "Study on the functioning of land markets in the EU Member States under the influence of measures applied under the common agricultural policy", Brussels 2008, pp. 149–150. Evidence from several country studies (e.g. Belgium, Finland, Ireland, Sweden, United Kingdom) indicates that the SPS may constrain farm exit. In the United Kingdom many farmers’ exit decisions appear to have been delayed until 2012 as they know the SPS will run at least until then. The study also suggests that this effect of the SPS works in combination with imperfect tradability of entitlements.

[23] See paragraph 3.21 of the Annual Report concerning financial year 2009.

[24] Article 28(2) of Regulation (EC) No 73/2009.

[25] Article 41(2) of Regulation (EC) No 73/2009 and Article 2(I) of Commission Regulation (EC) No 1120/2009 of 29 October 2009 laying down detailed rules for the implementation of the single payment scheme provided for in Title III of Council Regulation (EC) No 73/2009 (OJ L 316, 2.12.2009, p. 1).

[26] Eurostat pocketbooks — Agricultural statistics — Main results 2007–2008 (2009 edition).

[27] Article 2(h) of Regulation (EC) No 73/2009.

[28] The Court has already observed that the sanction system for cross-compliance is weak both in its conception and its application: Special Report No 8/2008: "Is cross-compliance an effective policy?" (http://eca.europa.eu/portal/page/portal/publications/auditreportsandopinions/specialreports).

[29] In 2008, some 2,375 million ha of the 4,557 million ha of agricultural land declared under the SPS were rough grazing land. This land — of which, according to statistical information, there are some 4,027 million ha — can be found on mountains, hills, moors and heaths. Rough grazing land is for the most part covered with heather and bracken and relatively unproductive. Traditional farmers use it usually only for extensive grazing of sheep.

[30] Article 34(2)(a) of Regulation (EC) No 73/2009.

[31] Article 9 of Regulation (EC) No 1120/2009.

[32] See recitals 2 and 3 of the preamble to Regulation (EC) No 1782/2003.

[33] These were as a general rule the average number of hectares on which they had cultivated subsidised crops or the forage areas that had been available throughout the year for the animals that had been subject to premium payments.

[34] Article 42(5) of Regulation (EC) No 1782/2003. This measure is continued for the direct aids that are still (partly) coupled to production and that will be integrated into the SPS by 2012.

[35] For details on payments made under the SPS see Annex II.

[36] According to Eurostat, between 2005 and 2008 in the EU-15 the share of direct payments represented 30 % of the factor incomes and between 52 and 56 % of the entrepreneurial income. The agricultural factor income is the net value added at factor cost and is calculated by subtracting from the value of agricultural output at basic prices [= producer price + product related subsidies – product related taxes] the value of intermediate consumption, the consumption of fixed capital and production taxes, and adding the value of other subsidies on production. The agricultural entrepreneurial income represents the share of the income generated by the farming activities which is used to reward its own production factors (work and/or enterprise, own capital and owned land).

[37] According to Eurostat, in 2007, the share of part-time farmers varied from 33 % in Belgium to 90 % in Malta.

[38] Thus, in the historical model farms with a historically high level of direct payments still receive a high level of income support, provided they farm a similar number of hectares. In the hybrid and the regional models entitlements were allocated in the first year on a strict per hectare basis. Even though this has led to certain redistribution effects between farmers in various sectors (for example there could be income support losses for intensive dairy farms and income support gains for farms with extensive cattle and sheep production), the close association of entitlements with agricultural land resulted again in significant payments being made to the larger farms.

[39] The Commission analysed the distribution of payment entitlements in context of the 2008 Health Check of the CAP. See Annex I, Figure 3 of "Health Check — Impact Assessment Note No 1" dated 20.5.2008, document D (2008) AH/15325CAP.

[40] For more details see Annex III.

[41] Article 7(2) of Regulation (EC) No 73/2009.

[42] Recital 24 of Regulation (EC) No 1782/2003.

[43] Special Report No 8/2008 "Is cross-compliance an effective policy?"

[44] Article 69 of Regulation (EC) No 1782/2003.

[45] See Annex I.

[46] Speculative is used in this section in the sense of "transfer and accumulation of payment entitlements without a corresponding agricultural basis". Recital 28 of Regulation (EC) No 73/2009 and recital 30 of Regulation (EC) No 1782/2003 refer.

[47] Article 46 of Regulation (EC) No 1782/2003; Article 43 of Regulation (EC) No 73/2009.

[48] Since 2005 , Italy had applied "retentions" of up to 50 % on the value of payment entitlements sold without land (as permitted by Article 9 of Regulation (EC) No 795/2004). In 2007, these restrictions were abolished. As a consequence, the value of payment entitlements transferred without land increased from 1,3 million euro in 2006 to 65,2 million euro in 2009.

[49] See recital 30 of Regulation (EC) No 1782/2003 and recital 28 of Regulation (EC) No 73/2009.

[50] Article 42(9) of Regulation (EC) No 1782/2003 and Article 10 of Regulation (EC) No 795/2004.

[51] Annual Report concerning the financial year 2006, paragraphs 5.33 and 5.34.

[52] Article 41(6) of Regulation (EC) No 73/2009 as amended by Regulation (EC) No 1250/2009 (OJ L 338, 19.12.2009, p. 1).

[53] Annual Report concerning the financial year 2006, paragraph 5.28.

[54] "CAP Health Check — Impact Assessment — Impact of a change towards flatter rates of direct payments", European Commission, December 2007.

[55] This is due to the fact that the regional and the hybrid model included nearly all eligible land into the SPS, whereas in the historical model only the land farmed under a coupled aid scheme and forage areas were included into the number of payment entitlements.

[56] Swinnen, J., Ciaian, P., and Kancs, D., "Study on the functioning of land markets in the EU Member States under the influence of measures applied under the common agricultural policy", Brussels 2008, pp. 141–145; Salhofer, K., Röder, N., Kilian, S., Henter, S. and Zirnbauer, M., "Märkte für Zahlungsansprüche", Endbericht zum Forschungsauftrag 05HS041 des Bundesministeriums für Ernährung, Landwirtschaft und Verbraucherschutz, Bonn, 2009; von Witzke, H., Noleppa, S. and Kennedy, P. L., "Effects of the EU common agricultural policy and US farm policy on agricultural land markets", Washington DC, 2007.

[57] Germany, United Kingdom.

[58] In Sweden and Finland the design of regions was based on reference yields. In the United Kingdom (England) the decision for a regional form of implementation was primarily motivated by national strategies for sustainable farming. Support levels in England were however differentiated between severely disadvantaged areas (e.g. moorland) and normal land which indirectly takes account of the agricultural potential of the land.

[59] United Kingdom (Northern Ireland). In Denmark, a regional implementation was chosen that initially entailed the lowest redistribution among aid recipients.

[60] In France, the authorities had adopted several ineligible programmes under which farmers had received payment entitlements, had accepted short-term rented equipment as investments and had failed to systematically apply mandatory provisions to new farmers who commenced farming during the reference period. The undue allocations of payment entitlements materialised since 2006 in annual payments amounting to some 60 million euro (Annual Report concerning the financial year 2007, paragraphs 5.21 to 5.25). In Italy, irregular allocations of entitlements for new olive oil trees planted after the stipulated deadline and not covered by a specific programme and the generous recognition of hardship cases and for ineligible areas have not been corrected at the time of the audit (Annual Report concerning the financial year 2007, paragraph 5.14). In the United Kingdom (England), the authorities were still working, at the end of 2009, on the correction of entitlements that had been wrongly allocated in 2005 (Annual Report concerning the financial year 2006).

[61] Commission Decision 2009/721/EC of 24 September 2009 excluding from Community financing certain expenditure incurred by the Member States under the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF), under the European Agricultural Guarantee Fund (EAGF) and under the European Agricultural Fund for Rural Development (EAFRD) (OJ L 257, 24.9.2009, p. 28).

[62] Article 137 of Regulation (EC) No 73/2009.

[63] See Article 137(3) of Regulation (EC) No 73/2009.

[64] See footnote 5.

--------------------------------------------------

ANNEX I

IMPLEMENTATION OF SINGLE PAYMENT MODELS, FUTURE INTEGRATION OF COUPLED SUPPORT AND SPECIFIC AID

Member State | Start | Region | Model | Sectors remaining coupled | Year of decoupling | Optional implementation for specific types of farming and quality production 2005–09 (Art. 69 of Reg. (EC) No 1782/2003) | Optional implementation of specific support after 2009 (Art. 68 of Reg. (EC) No 73/2009) |

Belgium | 2005 | Flanders + Brussels | Historical | Nuts and seeds (some species) Slaughter premium calves 100 % Protein Suckler cow premium 100 % | 2010 2012 2012 — | | Quality production |

2005 | Wallonia | Historical | Nuts and seeds (some species) Protein Suckler cow premium 100 % | 2010 2012 — | | Grassland premium (breeding) |

Denmark | 2005 | One region | Dynamic hybrid moving to nearly full regional model | Protein Special male bovine premium 75 % Sheep and goat premium 50 % Potato starch | 2010 2012 2012 2012 | | Agri-environmental measures |

Germany | 2005 | Bundesländer (Berlin included in Brandenburg, Bremen in Lower Saxony and Hamburg in Schleswig-Holstein) | Dynamic hybrid moving to full regional model | Hops payments 25 % Tobacco 60 % Protein | 2009 2009 2012 | | Grassland premium (dairy sector) |

Ireland | 2005 | — | Historical | Protein | 2012 | | Grassland sheep scheme, grassland dairy programme, conservation in the Burren |

Greece | 2006 | — | Historical | Seeds Protein Rice Nuts Fruit and vegetables: other than annual crops Fruit and vegetable: processing of citrus fruits 60% Fruit and vegetable: tomatoes 30% Cotton 35 % | 2010 2010 2010 2010 2010 2013 2011 — | Tobacco, olive oil, sugar, arable crops, bovine sector, sheep and goats | Olive oil, durum wheat, sugar, beef sector (heifers and suckler cows), sheep and goats, dairy sector, new entitlements in LFA, crop insurance |

Spain | 2006 | — | Historical | Sheep and goat premiums 50 % Tobacco 60 % Olive oil Fruit and vegetables: processing of citrus fruits Fruit and vegetable: tomatoes Seeds 100 % Arable crops 25 % Slaughter premium calves 100 % Slaughter premium bovine adults 40 % Protein Rice Nuts Potato starch Suckler cow premium 100 % Outermost regions 100 % Cotton 35 % | 2010 2010 2010 2010 2011 2012 2012 2012 2012 2012 2012 2012 2012 — — — | Tobacco, cotton, sugar, bovine sector, dairy payments | Tobacco, legumes, sheep and goats, crop rotation, milk sector (quality and LFA) |

France | 2006 | — | Historical | Hops payments 25 % Tobacco 60 % Sheep and goat premium 50 % Suckler cow premium 100 % Slaughter premium calves 100 % Slaughter premium bovine adults Fruit and vegetable: tomatoes Arable crops 25 % Protein Rice Seeds (some species) 100 % Nuts Potato starch Outermost regions 100 % 98 % of respective national ceiling for orchards producing prunes, peaches, and pears intended for processing 75 % of respective national ceiling for orchards producing prunes, peaches, and pears intended for processing | 2010 2010 2010 25 % in 2010 2010 2010 2012 2012 2012 2012 2012 2012 2012 — until end 2010 from 2011 until end 2012 | | Protein crops, durum wheat, organic farming, crop rotation, calves, sheep and goats, milk producers in mountain areas, crop harvest insurance, mutual funds in case of diseases |

Italy | 2005 | — | Historical | Tobacco Fruit and vegetable tomatoes 50% Fruit and vegetable pears, peaches and prunes intended for processing 100% Fruit and vegetable prunes 75% Seeds Protein Rice Nuts | 2010 2011 25 % in 2011 25 % in 2011 2012 2012 2012 2012 | Sugar, arable sector, bovine sector, sheep and goats | Beef and veal sector, sheep and goat meat, olive oil, dairy products, tobacco , sugar, floricultural products, crop rotation, crop insurance |

Luxembourg | 2005 | One region | Static hybrid | Protein Nuts | 2010 2010 | | |

Malta | 2007 | One region | Regional model | None | None | | |

Netherlands | 2006 | — | Historical | Protein and nuts Slaughter premium calves 100 % Slaughter premium bovine adults 100 % Seeds for fibre flax 100 % Potato starch | 2010 2010 2010 2012 2012 | | Animal welfare, crop insurance, sheep and goats, water transport allowance |

Austria | 2005 | — | Historical | Slaughter premium calves 100 % Slaughter premium bovine adults 40 % Hops payment 25 % Protein Nuts Potato starch Suckler cow premium 100 % | 2010 2010 2010 2010 2011 2012 — | | Dairy cow premium |

Portugal | 2005 | — | Historical | Tobacco Fruit and vegetable: tomatoes Protein Nuts Seeds 100 % Suckler cow premium 100 % Slaughter premium calves 100 % Slaughter premium bovine adults 40 % Sheep and goat premium 50 % Outermost regions 100 % Cotton 35 % | 2010 2011 2012 2012 2012 — — — — — — | Arable crops, rice, bovine and ovine sectors, olive oil, sugar | Extensive handling systems for authochtonous breeds, quality (crops and animals), milk and sheep sectors, agroenvironmental measures |

Slovenia | 2007 | One region | Regional model | Sheep and goat premium 50 % Hops payment 25 % Protein Nuts Special male bovine premium 75 % | 2010 2010 2012 2012 2012 | Bovine sector | Extensive rearing of female bovine animals, dairy payment, animal rearing on permanent pastures |

Finland | 2006 | Three regions (based on reference yield) | Dynamic hybrid moving to full regional model | Special male bovine premium 75 % Protein Potato starch Seeds (timothy seed) 100 % Sheep and goat premium 50 % | 2010 2011 2012 2012 — | Arable crops, bovine sector | Protein and oil seed crops, potato starch , slaughtered lambs, beef and veal production, dairy cow premium |

Sweden | 2005 | Five regions (based on reference yield) | Static hybrid regional model | Protein Potato starch Special male bovine premium 74,55% | 2010 2012 2012 | Quality and marketing measures | Quality and marketing measures |

United Kingdom | 2005 | England — normal areas | Dynamic hybrid moving to full regional model | Protein Nuts | 2012 2012 | | |

2005 | England — moorland |

2005 | England — severely disadvantaged areas (without moorland) |

2005 | Scotland | Historical | Protein Nuts | 2010 2010 | Bovine sector | |

2005 | Wales | Historical | Protein Nuts | 2010 2010 | | |

2005 | Northern Ireland | Static hybrid regional model | Protein Nuts | 2010 2010 |

--------------------------------------------------

ANNEX II

PAYMENTS UNDER THE SINGLE PAYMENT SCHEME (APPLICATION YEARS 2006 TO 2008 — FINANCIAL YEARS 2007 TO 2009) IN MILLION EURO

Budget Item 05 03 01 01 Single Payment Scheme — Regulation (EC) No 1782/2003 Title III |

Application year | 2006 | 2007 | 2008 |

Financial Year | 2007 | 2008 | 2009 | Total | 2008 | 2009 | Total | 2009 |

Belgium | 444,9 | 0,1 | | 445,0 | 453,4 | 0,4 | 453,8 | 467,3 |

Denmark | 927,9 | 0,1 | - 0,1 | 927,9 | 917,8 | 0,5 | 918,3 | 922,9 |

Germany | 5358,1 | 4,4 | 0,7 | 5363,2 | 5339,0 | 1,4 | 5340,4 | 5390,6 |

Ireland | 1242,7 | 7,4 | 1,1 | 1251,2 | 1240,8 | 4,7 | 1245,5 | 1246,8 |

Greece | 1905,0 | 7,3 | 4,3 | 1916,6 | 1886,8 | 16,2 | 1903,0 | 2056,6 |

Spain | 3294,0 | 30,0 | 14,8 | 3338,8 | 3246,5 | 29,6 | 3276,1 | 3342,8 |

France | 5722,1 | | 0,4 | 5722,5 | 5695,6 | 1,1 | 5696,7 | 5745,3 |

Italy | 3195,8 | 17,9 | 5,2 | 3218,9 | 3185,5 | 16,1 | 3201,6 | 3371,7 |

Luxembourg | 34,6 | | | 34,6 | 34,2 | | 34,2 | 34,1 |

Malta | | | | 0,0 | 1,6 | | 1,6 | 2,7 |

Netherlands | 293,8 | 1,7 | 0,6 | 296,1 | 659,2 | 7,0 | 666,2 | 682,0 |

Austria | 508,5 | 0,3 | 0,1 | 508,9 | 598,9 | -0,1 | 598,8 | 604,0 |

Portugal | 307,0 | 1,8 | 0,3 | 309,1 | 341,6 | 4,2 | 345,8 | 356,6 |

Slovenia | | | | 0,0 | 48,9 | 0,1 | 49,0 | 60,6 |

Finland | 493,9 | | | 493,9 | 488,9 | | 488,9 | 490,8 |

Sweden | 595,0 | 0,5 | | 595,5 | 661,3 | 0,2 | 661,5 | 661,5 |

United Kingdom | 3681,4 | 28,8 | - 6,2 | 3704,0 | 3316,2 | 7,4 | 3323,6 | 3263,3 |

Total | 28004,7 | 100,3 | 21,2 | 28126,2 | 28116,2 | 88,8 | 28205,0 | 28699,6 |

Source: European Commission, Directorate-General for Agriculture and Rural Development.

Budget Item 05 03 03 00 Additional amounts of aid - Article 12 of Regulation (EC) No 1782/2003 |

Application year | 2006 | 2007 | 2008 |

Financial Year | 2007 | 2008 | 2009 | Total | 2008 | 2009 | Total | 2009 |

Belgium | 6,2 | | | 6,2 | 7,6 | | 7,6 | 7,4 |

Denmark | 8,0 | | | 8,0 | 9,6 | | 9,6 | 9,3 |

Germany | 49,3 | | | 49,3 | 60,4 | | 60,4 | 59,6 |

Ireland | 19,3 | 0,2 | | 19,5 | 24,3 | 0,1 | 24,4 | 24,2 |

Greece | 60,2 | - 0,1 | | 60,1 | 73,7 | -0,1 | 73,6 | 74,9 |

Spain | 74,4 | 0,6 | 0,2 | 75,2 | 91,3 | 1,1 | 92,4 | 94,9 |

France | 66,5 | 1,0 | | 67,5 | 83,7 | 0,3 | 84,0 | 84,4 |

Italy | 72,8 | 0,3 | 0,1 | 73,2 | 89,8 | 0,3 | 90,1 | 92,2 |

Luxembourg | 0,3 | | | 0,3 | 0,4 | | 0,4 | 0,4 |

Malta | | | | 0,0 | | | 0,0 | |

Netherlands | 8,9 | | | 8,9 | 10,5 | 0,1 | 10,6 | 10,4 |

Austria | 15,7 | | | 15,7 | 19,1 | | 19,1 | 18,8 |

Portugal | 8,2 | | | 8,2 | 9,5 | | 9,5 | 9,4 |

Slovenia | | | | 0,0 | | | 0,0 | |

Finland | 10,2 | | | 10,2 | 12,5 | | 12,5 | 12,2 |

Sweden | 8,8 | | | 8,8 | 10,9 | | 10,9 | 10,8 |

United Kingdom | 22,5 | 0,6 | 0,1 | 23,2 | 26,0 | 3,1 | 29,1 | 27,7 |

Total | 431,3 | 2,6 | 0,4 | 434,3 | 529,3 | 4,9 | 534,2 | 536,6 |

Comment

Total expenditure per financial year corresponds to the sum of the amounts paid in that financial year (in respect of the different application years). For instance, the expenditure on SPS amounted to 28809 million euro in financial year 2009.

The additional amount of aid is equal to the amount resulting from the application of the modulation to the first 5000 euro or less of all direct payments (SPS and payments coupled to production). This amount is reimbursed to farmers. For technical reasons the part relating to SPS cannot be displayed separately .

--------------------------------------------------

ANNEX III

DISTRIBUTION OF INCOME SUPPORT UNDER THE SPS (APPLICATION YEAR 2008)

Annual payments of SPS support (euro) | Total EU-17 | Belgium | Denmark | Germany | Ireland | Greece | Spain | France | Italy |

< 500 | 1395721 | 2491 | 8013 | 49594 | 4571 | 277817 | 274088 | 28667 | 553801 |

≥ 500 and < 5000 | 1912824 | 12940 | 20648 | 123480 | 49347 | 399590 | 367149 | 100144 | 546431 |

≥ 5000 and < 10000 | 458464 | 6276 | 7398 | 53612 | 29810 | 76355 | 75198 | 55969 | 70478 |

≥ 10000 and < 50000 | 642954 | 15280 | 13984 | 108532 | 38059 | 38787 | 78126 | 156466 | 58074 |

≥ 50000 and < 100000 | 62210 | 808 | 4192 | 10844 | 1906 | 406 | 4493 | 18706 | 5003 |

≥ 100000 and < 300000 | 15927 | 106 | 1281 | 3972 | 267 | 26 | 1420 | 1869 | 1781 |

≥ 300000 and < 500000 | 1500 | 1 | 38 | 960 | 3 | 1 | 90 | 12 | 138 |

≥ 500000 and < 1000000 | 783 | | 8 | 616 | 1 | | 28 | 3 | 56 |

≥ 1000000 | 144 | | | 108 | | | 6 | | 16 |

Grand total | 4490527 | 37902 | 55562 | 351718 | 123964 | 792982 | 800598 | 361836 | 1235778 |

Annual Payments of SPS support (euro) | Luxembourg | Malta | Netherlands | Austria | Portugal | Slovenia | Finland | Sweden | United Kingdom |

< 500 | 85 | 4018 | 8493 | 20851 | 101840 | 30000 | 1261 | 11265 | 18866 |

≥ 500 and < 5000 | 345 | 612 | 20066 | 62813 | 47209 | 28038 | 31072 | 40311 | 62629 |

≥ 5000 and < 10000 | 220 | 66 | 7234 | 20296 | 4882 | 1092 | 16100 | 9961 | 23517 |

≥ 10000 and < 50000 | 1091 | 53 | 22357 | 16576 | 5881 | 302 | 16074 | 15796 | 57516 |

≥ 50000 and < 100000 | 85 | | 1036 | 261 | 829 | 8 | 234 | 1644 | 11755 |

≥ 100000 and < 300000 | 7 | | 142 | 63 | 302 | 7 | 18 | 365 | 4301 |

≥ 300000 and < 500000 | | | 6 | 3 | 15 | 1 | 1 | 14 | 217 |

≥ 500000 and < 1000000 | | | | 3 | 2 | 2 | | 4 | 60 |

≥ 1000000 | | | | | | | | | 14 |

Grand total | 1833 | 4749 | 59334 | 120866 | 160960 | 59450 | 64760 | 79360 | 178875 |

--------------------------------------------------