Summary

I. Sugar is manufactured by EU producers mostly from sugar beet which is cultivated by growers. Prior to the reform of the market, the EU was one of the largest producers of sugar in the world and is the second largest consumer. In 2006 a reform of the sugar market was approved in order to align it with the fundamental principles of the new common agricultural policy of increased market orientation and to comply with the Union’s international commitments.

II. The principal objectives pursued by the reform were:

- to ensure the competitiveness of the EU sugar industry;

- to stabilise the markets and to guarantee the availability of sugar supplies;

- to contribute to providing a fair standard of living for the agricultural community via instruments put in place to mitigate the significant direct and indirect social and economic impact on the agricultural community in the regions affected.

III. The main features of the reform were:

- reduction in production quotas by 6 million tonnes, around 30 % of total quota production, by September 2010, to a production level which the Commission estimated would preserve the market balance;

- gradual reductions in the prices per tonne of sugar and sugar beet, the latter reductions being partly compensated via direct payments to growers;

- a temporary restructuring fund, financed via a contribution paid by producers on their quota totalling 6,2 billion euro and funding principally restructuring aid (4,7 billion euro), diversification aid (0,7 billion euro) and transitional aid to full time refiners (0,2 billion euro).

IV. The Court’s audit assessed the extent to which the objectives of the reform have been achieved to date.

V. With regard to the competitiveness of the EU sugar industry, the Court concludes that overall the reform process did not fully ensure the future competitiveness of the EU sugar industry via a selective reduction of unprofitable production capacity. In the first two years of the reform, the expected level of voluntary quota renunciations was not achieved. From the third year of the reform, key modifications were made and the overall 6 million tonnes target was largely achieved although a significant portion of quotas was also abandoned by producers that were not in the least competitive regions. The Court also notes that the reform simultaneously provided incentives to reduce the level of quotas but also allocated additional quotas, ostensibly to the most efficient producers but that some of these additional quotas were subsequently abandoned. Additionally, the measures introduced had limited impact on increasing the competitiveness of individual growers and the current quota system maintains past rigidities and constraints. Accordingly, it is likely that the prevailing external pressures will continue to weigh heavily on the EU sugar sector.

VI. As to the objective of stabilising the market and guaranteeing the availability of sugar supplies, the Court found that while relative market stability has been assured thus far and prices on the EU sugar market have been stable to date around the reference prices, it has been achieved through the use of production quotas which currently set the maximum allowed internal production at a level of production markedly below internal market requirements, at 85 % of EU consumption. As a result, EU supplies are increasingly dependent on imports while new uses for sugar place increased demand on supplies. The Court also notes the increasing risk of displacement of production facilities due to the opening up of imports from EBA beneficiary countries. Furthermore, the Court draws attention to the risk that downward movements in sugar price are not passed on to consumers. For processed products most of the cost savings are likely to be retained by producers, while for retail sugar, price transmission is affected by the concentration of distribution networks.

VII. As to whether the specific instruments/ mechanisms were successful in addressing and alleviating the adaptation problems arising from reform, the Court notes that, overall, it is not yet possible to conclude on the extent to which the instruments put in place have mitigated the significant direct and indirect social and economic impact on the agricultural community in the regions affected. As a result of the reform, some 80 factories were closed. The Commission and the Member States have given inadequate attention to monitoring the direct social impact of the production facility dismantlement. The Court noted in certain Member States delays in the implementation of the diversification measures intended to develop alternatives to sugar production as well as in the compliance with environmental obligations. Furthermore, no evidence was available to demonstrate that the transitional aid amounting to 150 million euro paid to traditional refiners of cane sugar was based on objective parameters of the effects of the sugar reform other than a loss of "certain benefits" previously enjoyed by the affected refiners.

VIII. The Court notes that, while it is likely that an amount of around 640 million euro will be available in the restructuring fund to be assigned to the EAGF, on the other hand, there are significant additional related costs, not directly charged to the agricultural section of the budget, for compensating traditional ACP country exporters for their loss of income, which lead to the overall cost of the reform being 1,2 billion euro higher than the average budgetary support before the reform.

IX. Taking these factors into consideration, the Court recommends that:

- for any further adjustment of internal production deemed necessary, instruments and measures should be designed so as to ensure overall consistency and be based on a thorough technical assessment of needs and on objective criteria;

- the Commission proposes measures to remove the rigidities and constraints in the current quota system which affect adversely the competitiveness of growers and producers;

- any future decisions which impact EU sugar production take into account the level of internal sugar production which is considered necessary given the Treaty objective of assuring availability of supply;

- price formation be subject to regular monitoring by the Commission and that the Commission and the Member States ensure that competition law is correctly enforced in the sector thus ensuring the Treaty objective that supplies reach consumers at reasonable prices;

- the Commission and the Member States take urgent measures to ensure the diversification measures become rapidly operational and produce the intended impact;

- the Commission and the Member States become more actively involved in ensuring that the environmental obligations entered into by the closed factories are fully complied with.

Introduction

Background and pre-reform situation

1. Sugar is manufactured by EU producers either from sugar beet [1] which is cultivated by growers, or refined using imported raw sugar made from sugar cane. Sugar beet cultivation should ideally be located on land in the vicinity of the factories in order to maintain transport costs at reasonable levels and because the sugar content of the beet deteriorates soon after harvesting. Most sugar beet growers make use of the services of machinery contractors who carry out activities such as seeding and harvesting the beet. The sugar beet is then transported to the producers’ factories for processing. The sugar producers finally sell the sugar in bulk to food and non-food industrial users or in packaged form to retailers.

2. The sugar common market organisation (CMO) was set up in 1967 [2] to ensure a fair income to Community producers and to stabilise the market. EU producers could sell sugar at guaranteed prices, i.e. intervention prices which in the period 1996–2006 were significantly higher than the world market price (see Graph 1).

Graph 1

Prices for white sugar from 1996 to 2006

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1 Arithmetic mean of spot prices of white sugar, loaded fob designated European ports, in new bags.

Source: The Commission (DG AGRI) — "Agriculture in the European Union — Statistical and Economic Information (2000-08)".

3. Production quotas distributed amongst the Member States kept the overall production within certain limits. Import levies were applied on external production and sugar surpluses were exported. Sugar which had been produced within the quotas but was surplus to market requirements was exported with export refunds [3]. No export refunds were granted for the export of sugar which had been produced in excess of the quotas.

4. Prior to the reform, the EU was the third largest sugar producer in the world with annual production in excess of 20 million tonnes and was the second largest consumer [4]. The EU also had a limited production of isoglucose which is derived from processing starch usually extracted from maize or from wheat or potatoes. Isoglucose is largely used in the food industry and in many cases, for instance in soft drinks, is a potential substitute for sugar. EU production of isoglucose has been limited by the establishment of a quota of marginal magnitude [5]. Quotas of limited importance also exist for the production of inulin syrup, a sweetener obtained from a fibre extracted from the chicory root. Table 1 provides key figures for the sugar sector pre and post reform.

5. In the years preceding the reform, the EU came under increasing pressure to avoid exporting surplus quantities of sugar at subsidised rates on the world market. This pressure finally resulted in a WTO ruling in 2005 which obliged the EU to include out-of-quota sugar exports and re-exports of the ACP imports in its sugar export limit. Thus, from 2006 onwards, the EU cannot export more than 1,37 million tonnes of subsidised white sugar, instead of the previous annual average exports of 6,5 million tonnes [6] — Box 1 contains some additional information on the WTO ruling.

Table 1

The sugar sector pre and post reform

Pre-reform EU-25 data | Post-reform EU-27 data [1001] |

Over 20 million tonnes of annual sugar production (bioethanol use not included). | 14 to 15,5 million tonnes of annual sugar production (without bioethanol use). |

285000 sugar beet growers cultivating 2,1 million ha of beet for sugar and making use of the services of machinery contractors; over 8000 cane growers cultivating 43000 ha of sugar cane, mainly in EU overseas territories. | 164000 sugar beet growers cultivating 1,4 million ha of beet for sugar and making use of the services of machinery contractors; and less than 8000 sugar cane growers. |

189 sugar factories employing 50000 workers. | 114 sugar factories employing 30000 workers (including four factories located in the two new EU Member States). |

16 isoglucose and four inulin syrup producers, producing 820000 tonnes. | 10 isoglucose producers, producing 690000 tonnes (and no inulin syrup producer). |

7 full time refiners importing and processing annually 2 million tonnes of raw sugar derived from sugar cane. | 26 full-time refiners (of which 15 in new Members Bulgaria and Romania) importing and processing annually 2,7 million tonnes of raw sugar derived from sugar cane. |

Exports amounting to 7,5 million tonnes, of which 2,5 million tonnes with export refunds. | Exports not exceeding 1,37 million tonnes out of quota sugar, not supported by export refunds. |

EU consumption of more than 15 million tonnes (without bioethanol use). | EU consumption of more than 17 million tonnes (without bioethanol use). |

6. Moreover, in 2001 the EU had already adopted the so-called "Everything but Arms" (EBA) initiative which suspended all import tariffs for products from 49 developing countries. This initiative had a direct impact on the sugar sector as the EBA initiative beneficiaries included six [7] of the signatories of the Africa, Caribbean and Pacific (ACP) Sugar Protocol. Exports of 3,5 million tonnes from the EBA and ACP countries to the EU constitute one of the thresholds of the safeguard mechanism designed under the EPA (Economic Partnership Agreement) Regulation. The suspension of duties on their sugar was introduced in 2001 on limited quantities earmarked for the refining industry. The quantities were subsequently gradually increased until free unrestricted access was granted from 1 October 2009 onwards.

Box 1

The WTO ruling

Signatory Members of the 1994 Marrakesh protocol to the General Agreement on Tariffs and Trade (GATT) agreed, amongst other things, to reduce export subsidies by 36 % and subsidised quantities by 21 % over a six-year period. Each signatory Member presented the details of its commitments in a separate Schedule of concessions, annexed to the Marrakesh Protocol, to become Schedules to GATT 1994.

In its schedule of concessions, the European Community considered that its out of quota (C sugar) exports were not subsidised, as they did not benefit from export refunds; in addition, being a major importer and exporter at the same time, it decided to include in its reduction schedule only such export refunds as corresponded to its exports net of imports. On that basis, it calculated its reference subsidised quantity as 1,612 million tonnes, to be reduced by 21 % to 1,273 million tonnes, a threshold which became 1,37 million tonnes after new Member States EU accession. Hence, depending on the level of C sugar production, total exports could fluctuate in the 4 to 7 million tonnes range. Conformity with limits was ensured through management of export licences.

Following a "request for consultations" by Brazil, Thailand and Australia in 2002, the WTO’s Dispute Settlement Body (DSB) re-examined the EC’s commitments and export policy and in an April 28, 2005 final report, it found that the wording of the EC’s schedule of concessions did not imply that export of quantities corresponding to ACP imports could be made in excess of the limit indicated and the exports of C sugar (out of quota) were to be regarded as subsidised, thus could not be made in excess of that limit either.

In practice, this meant a further decrease in European exports of a 5 million tonnes order of magnitude. The marketing year 2006/07 was the first to be fully subject to the export limits.

The sugar reform and its objectives

7. A reform of the sugar market was therefore considered necessary in order to align the CMO with the fundamental principles of the new common agricultural policy of increased market orientation and to maintain market balance while complying with the Union’s international commitments, namely the WTO ruling that all subsidised EU exports should be kept within 1,3 million tonnes (see paragraph 5) and the EBA initiative in favour of least developed countries granting them unlimited duty free access to the EU as from 2009 (see paragraph 6).

8. Following a Commission proposal, a reform of the sugar market was approved by the Council and came into effect in July 2006 [8]. It was preceded by an extensive consultation with the principal stakeholders and by a series of impact assessment papers which formed the basis of the Commission proposal in 2005.

9. The reform pursued a variety of objectives, which were partly conflicting and therefore difficult to fulfil simultaneously. The principal objectives set were:

- to ensure future competitiveness of the EU sugar industry by a reduction of unprofitable production capacity;

- to stabilise the markets and to guarantee the availability of sugar supplies;

- to contribute to providing a fair standard of living for the agricultural community via instruments put in place to mitigate the significant direct and indirect social and economic impact on the agricultural community in the regions affected.

The main features of the reform

10. The main features of the reform are:

(a) maintenance of production quotas but a reduction in their volume by 6 million tonnes (around 30 % of total quota production) [9] by September 2010 which the Commission estimated would preserve the market balance. However, some flexibility was provided through making available to producers additional quota, of some 1,5 million tonnes, mostly for purchase by those that considered themselves to be competitive in the new market environment;

(b) gradual reductions in the price per tonne of white sugar from the intervention price [10] of 631,9 euro prior to the marketing year 2006/07 to a reference price [11] of 404,4 euro as from the marketing year 2009/10;

(c) gradual reductions in the minimum price per tonne of quota sugar beet paid to growers from 44,01 euro prior to 2006/07 [12] to 26,29 euro as from the marketing year 2009/10;

(d) the export refunds mechanism for quota sugar exports was not abolished, however it was foreseen that, as from the marketing year 2007/08, it would no longer be used. Nevertheless, because of market imbalance in that marketing year, the Commission agreed to one more campaign of subsidised exports for 2007/08 and it was not until as from 26 September 2008 that it decided to suspend export refunds for sugar [13];

(e) partial [14] compensation to sugar beet growers for the effect of the reductions in the sugar beet price via the introduction of payment entitlements into the decoupled Single Payment Scheme (SPS) or a separate sugar payment in the new Member States not applying SPS. Under certain conditions growers could also be granted an additional payment retained as coupled aid for a five-year transitionary period. In contrast, compensation was not granted to cereals producers supplying isoglucose producers, under the assumption that the reform would not entail significant change in the cereals prices;

(f) a temporary restructuring fund, financed via a contribution paid by producers on their quota totalling 6,2 billion euro. The temporary restructuring fund was set up largely to fund compensatory payments for voluntary production quota renunciations. The restructuring fund is managed by the Commission under EU budget provisions [15] and it is foreseen that any funds remaining at the closure of the fund in September 2012 will be assigned to the EAGF [16]. The fund was intended to finance:

(i) restructuring aid (4 750 million euro) to producers who abandon quota production and renounce the quotas concerned. 10 % [17] of the restructuring aid was to be reserved for sugar beet growers affected by the renunciations and for machinery contractors who provided them with specialised services (see Graph 2);

(ii) diversification aid (675 million euro) to encourage the development of alternatives to sugar beet and cane growing and sugar production in regions affected by the restructuring of the sugar industry.

(iii) transitional aid to full time refiners (150 million euro) so as to allow them to adapt to the restructuring of the sugar industry [18].

11. The breakdown of the income and expenditure of the restructuring fund is shown in Annex I.

Graph 2

Overview of the restructuring fund

Revenue | Aid to be granted and its beneficiaries [1002] |

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|

Overview of the management systems

12. The procedures to be followed by producers applying for restructuring aid are detailed in Box 2.

Box 2

The application process for restructuring aid

In order to participate in the restructuring process, a producer had to renounce all or part of its quota and submit an application for restructuring aid to the Member State. The application had to include a restructuring plan with the following elements:

- a social plan detailing the actions planned, in particular with respect to retraining, redeployment and early retirement of the workforce concerned;

- an environmental plan detailing the actions planned so as to respect environmental obligations;

- a business plan detailing the modalities, timetable and costs for the closure of the factory or factories and the full or partial dismantling of production facilities; and

- a financial plan detailing all the costs in relation to the restructuring plan.

The Member State authorities had to review the application to ensure it satisfied the EU and national requirements. After approval, the producer could start carrying out the activities envisaged in the restructuring plan and had to provide an annual progress report. The producer received the restructuring aid in two instalments upon receipt of a security deposit of 120 % of the aid receivable. The security is released in line with the completion of the activities in the restructuring plan and the related checks done by the national authorities.

13. Member States are responsible for establishing national restructuring programmes and, as far as the restructuring fund is concerned, for:

(a) checking the eligibility of producers’ applications for restructuring aid;

(b) imposing social and environmental requirements on producers, provided that this does not restrict the restructuring process;

(c) deciding upon the aid to be awarded to beneficiaries where this is envisaged by the Regulations;

(d) paying restructuring and diversification aid to beneficiaries; and

(e) monitoring, verifying and reporting on the implementation of restructuring and diversification aid.

14. The Commission is responsible for monitoring the implementation of the reform proposing corrective actions when needed and for administering the restructuring fund. The Commission shall receive from Member States the lists of applications for aid (and copies thereof), the national restructuring programmes and reports on the implementation of restructuring aid activities.

Audit scope and approach

15. The Court’s audit assessed the extent to which the objectives of the reform of the sugar market have been achieved by addressing the following specific questions:

(a) Has the sugar market reform ensured the future competitiveness of the EU sugar industry?

(b) Has the sugar market reform stabilised the markets and guaranteed the availability of sugar supplies?

(c) Have the specific instruments/mechanisms been successful in addressing and alleviating the adaptation problems related to the reform?

16. Additionally, the audit examined the compliance with the environmental obligations linked to factory dismantling and the likely impact for consumers of sugar price reduction. Furthermore, the audit examined the cost of the reform.

17. Audit evidence was collected and examined by means of interviews and analysis of systems, documents and data at the Commission and in a sample of eight Member States: the Czech Republic, France, Germany, Greece, Ireland, Italy, Poland and Spain [19]. The fieldwork took place between end 2008 and mid 2009, and covered the operations of the restructuring fund during the first three marketing years of the reform (2006/07 to 2008/09). Meetings were held with representatives of the European Committee of Sugar Manufacturers, the International Confederation of European Beet Growers and the Committee of Industrial Users of Sugar to obtain their views on the sugar reform.

18. In the Member States visited, the audit included a review of the paying agency’s systems for implementing the reform and the examination, including on-the-spot inspections, of a sample of payments of restructuring aid. In addition, the representatives of stakeholders in the sugar sector (producers, growers, machinery contractors and sugar factory workers) were interviewed.

Previous audit report

19. The Court had previously reported on the management of the sugar CMO in a special report in 2001 [20] that reviewed the achievement of the overall objectives of the CAP. The report highlighted the high prices imposed on the EU sugar user, excessive rigidities in the production quota system which were concentrated in the hands of a limited number of producers and recommended taking steps to increase the industry’s competitiveness.

Observations

Has the sugar market reform ensured the future competitiveness of the eu sugar industry?

20. The reform intended to "launch a profound restructuring process leading to a significant reduction of unprofitable production capacity in the Community" [21] providing an economic incentive for producers with the lowest productivity to voluntarily give up their quota production, taking into account the respect of social and environmental commitments linked to abandoning production [22].

21. The Commission anticipated that the economic incentives offered would lead the undertakings with the lowest productivity, i.e. with factories that would not be competitive after the price reductions envisaged by the reform, to renounce their quota by accepting the compensation by the restructuring fund without the need for the instruments to target either specific factories or regions.

22. Therefore, the rationale for the reform was that the renunciation of 6 million tonnes from lower productivity production facilities would increase the average productivity and thus ensure the future competitiveness of the EU industry. However, some flexibility was provided through making available to producers additional quota, of some 1,5 million tonnes, mostly for purchase by those producers that considered themselves to be competitive in the new market environment.

23. The competitiveness of the EU sugar industry is dependent, on the one hand, on the efficiency of the producers to produce sugar and, on the other hand, on the ability of beet growers to deliver sugar beet to the producers at competitive prices. Notwithstanding the general aim of the reform that undertakings with the lowest productivity give up their production quotas, the audit found that no comparison of the productivity of individual producers or factories was available either within the Commission or in Member States Managing Authorities. Furthermore, the Commission did not require the Member States and/or the industry to provide the data needed to assess the implementation of the reform in terms of the productivity of individual producers or factories.

24. In this regard, the impact assessment merely referred to studies [23] which have ranked the sugar-producing regions according to the combined profitability of growers and producers, categorising the regions as: low, medium and high combined profitability. Table 2 provides details on the ranking as well as on the level of initial quotas of white sugar. The ranking was based on 2001 data for the EU sugar industry. However, the data had not been updated when the Commission made its proposal in 2005, notwithstanding that certain significant changes had taken place, such as increases in sugar beet yields in Spain and the United Kingdom and producer consolidation/rationalisation in Ireland.

25. Based on the profitability ranking contained in the impact assessment, given the unavailability of more precise Commission data on competitiveness of individual producers or sugar factories, the extent of white sugar quotas renunciation coming from producers in the low and medium profitability regions is used as an indicator of the achievement of the targeting of the reform. However, as these are average figures they do not show the existence of individual high profitability producers and/or growers in low profitability areas or vice versa.

In the first two years of the reform, the expected level of voluntary quota renunciations was not achieved

26. In the first two years of the reform, producers voluntarily renounced only 2,2 million tonnes compared to the targeted amount of 6 million tonnes, due to the slow uptake in the second year. This was a clear indication that the incentives offered were not considered by the industry as being sufficiently attractive to encourage abandonment of quota.

27. An essential element which affected the sugar producers’ decision whether or not to accept quota abandonment was the uncertainty surrounding the financial compensation offered. In effect Member States could decide how much restructuring aid was granted to producers, subject to at least 10 % being reserved for growers and machinery contractors. Producers did not therefore know at the time of applying for restructuring aid, how much compensation they would receive.

Table 2

Breakdown of member states by their combined profitability on sugar production

Source: The Commission (Unit C.5 of DG AGRI).

Member State | Level of combined profitability [1003] | Initial quota [1004] (tonnes of white sugar) |

Ireland | Low | 2143923 |

Greece |

Italy |

Portugal (mainland) |

Czech Republic | Medium | 2923655 |

Denmark |

Spain |

Latvia |

Lithuania |

Hungary |

Slovenia |

Slovakia |

Finland |

Belgium | High | 12895381 |

Germany | France (metropolitan) | Netherlands | Austria | Poland | Sweden | United Kingdom |

Other Member States [1005] | Not included | 604114 |

TOTAL | | 18567073 |

28. An additional factor which may have influenced growers’ decision to continue producing sugar beet was the level of aid which continued to be available. The legislation foresees that in Member States that renounced at least 50 % of quota an additional payment retained as coupled aid for a five-year transitionary period would be granted to growers remaining. This coupled aid has been granted in the four Member States, classified in the low or medium combined profitability categories, which renounced that level of quotas [24] and it constituted an incentive for those remaining growers to continue to produce sugar beet for the following five years.

29. Beyond the reasoning of single operators, the difference between targeted and actual renunciations should also be analysed in view of the overall size of the renunciations targeted. It was unlikely to be a realistic expectation that a substantial quota renunciation of roughly 30 % of the total could be achieved only via voluntary choices of the producers with the lowest productivity. In effect, the combined total quota for the producers in Member States classified by the Commission as "low" and "medium" productivity was 5,1 million tonnes, i.e. less then the targeted reduction. Furthermore, if all of these producers had renounced their quotas, sugar production would have ceased entirely in 13 Member States.

30. The audit found that in one MS the only producer, which before the sugar reform had undertaken a consolidation/rationalisation of its processing facilities and defined itself as one of Europe’s most efficient producers, closed down its large, modern and potentially efficient sugar factory justifying their decision on the risk of the lower prices reducing the supply of sugar beet to an uneconomic level.

From the third year of the reform, key modifications were made …

31. As indicated above, the voluntary renunciations in the first two marketing years 2006/07 and 2007/08 were less than expected.

32. In order to achieve the overall 6 million tonnes target, in 2007 the following key modifications were made to the restructuring fund [25]:

(a) the share of restructuring aid for sugar producers was increased and fixed at 90 % of the restructuring aid and, to ensure that affected growers were also compensated, they were granted a one-off payment of 237,50 euro per tonne foregone;

(b) companies renouncing at least 13,5 % of their 2008/09 quota were exempt from paying the 2007/08 temporary restructuring amount of 173,80 euro per tonne on 13,5 % of their quota;

(c) an obligatory uncompensated quota cut in 2010 was announced if voluntary renunciations were insufficient to meet the target. Producers which had not renounced any of their quotas would be most affected by this latter measure. Consequently, such producers also had to envisage a voluntary renunciation of production.

… and the 6 million tonnes target was largely achieved, including 0,5 million tonnes of isoglucose and inulin syrup …

33. These amendments aimed at achieving the desired EU sugar market balance through a 6 million tonnes reduction of the production of sugar, isoglucose and inulin syrup. As a consequence of the changes introduced, in 2008 and 2009 producers gave up around 3,6 million tonnes quotas. By 2009, some 80 factories were closed and total renunciations reached 5,77 million tonnes, of which 5,23 million tonnes relates to the sugar quota. Isoglucose producers renounced 0,22 million tonnes while inulin syrup producers renounced all the quotas available corresponding to 0,32 million tonne production (details shown in Annex II). Thus, the need for a significant final production cut was avoided.

… although quotas were also abandoned by producers that were not the least competitive

34. The Commission services confirmed that after the second year of the restructuring period, it had become evident that the required quota reduction could not be achieved only by the cessation of sugar production by the least competitive factories in regions least suited to beet cultivation. Therefore a strong incentive was created for all producers to renounce at least a certain percentage of their quota in order to reach the necessary reduction and to enable the sector to find a new market balance.

35. The audit found cases of undertakings which, considering themselves amongst the most productive, purchased additional sugar quotas and subsequently renounced those quotas, mainly to avoid the risk of an unpaid quota cut. In France, Germany and Poland, the producers’ representatives interviewed during the audit stated that the main reason for having renounced part of their quota was to reduce the risk of a final uncompensated cut.

36. Furthermore, the renunciations per marketing year and Member State indicate that quota production abandonment occurred across all productivity categories whereas the initial aim was to create an incentive for the least competitive sugar producers to renounce their quotas.

37. Overall, almost 6 million tonnes of quota were renounced of which 5,2 million tonnes of white sugar. While the proportion of available sugar production quota renounced was significantly higher in the regions considered to have low/medium productivity, 2,4 million tonnes, i.e. some 47 % representing 19 % of their initial quota, were abandoned by producers with factories located in regions considered by the Commission to be most competitive (see Annex III).

38. This situation calls into question the effectiveness of the measures introduced to ensure the future competitiveness of the sugar industry from the perspective of the producers. In particular, the measures introduced from third year of the reform were not sufficiently targeted to achieve the desired objective.

The reform provided incentives to reduce the level of quotas and at the same time allocated additional quotas

39. The sugar reform introduced a wide range of mechanisms which sometimes conflict with each other. One of these is the establishment of the desired level of quota production.

40. On the one hand the reform established a restructuring aid to provide incentives for sugar undertakings to give up their quota production in order to maintain market stability [26] and, on the other, in order to ensure a smooth changeover given the WTO ruling (paragraph 5) the reform simultaneously offered the same undertakings additional quota production totalling up to 1,5 million tonnes [27], divided as follows.

- Additional sugar quota: sugar undertakings could request the allocation of additional sugar quota up to a global amount of 1,1 million tonnes paying a one-off amount of 730 euro per tonne of additional quota allocated. Some 1 million tonnes were actually purchased.

- Additional isoglucose quota: 300000 tonnes of additional isoglucose quota were allocated to undertakings proportionately to the isoglucose quotas already held. These additional quotas were allocated free of charge.

- Supplementary isoglucose quota: undertakings in Italy, Lithuania and Sweden could request the allocation of supplementary isoglucose quota up to a global amount of 103000 tonnes paying a one-off amount of 730 euro per tonne of supplementary quota allocated. To the date of the audit no producer used the possibility to purchase the supplementary quota.

41. While the making available of additional quotas could be justified on grounds of competitiveness insofar as it was aimed at the more efficient producers, it inevitably increased the overall quota reduction requirements to achieve the desired market balance.

42. In effect, around 1 million tonnes of additional sugar quota have been allocated to undertakings which paid a one-off amount of 730 euro per tonne of quota allocated. The audit found cases of undertakings renouncing, for the equivalent compensation, these additional sugar quotas recently purchased, mainly in the second phase of the reform to avoid the risk of an unpaid quota cut as announced in 2007 (see paragraph 32(c)). The amount paid by the undertakings to purchase the additional quotas roughly corresponded to the amount they subsequently received to renounce them, with, as a consequence, that the financial impact can be considered as broadly neutral. However, there is no rationale for increasing quotas on the one hand and subsequently targeting their reduction on the other. Furthermore, this policy also had negative financial consequences for the EU budget as explained hereunder.

43. In this regard, while 300000 tonnes of additional isoglucose quota were allocated to undertakings free of charge, the same undertakings were subsequently paid incentives to renounce their quota. By 2009, isoglucose producers renounced 222316 tonnes of production and received restructuring aid as compensation at an estimated cost of around 97 million euro [28]. Consequently, it can be concluded that the reform paid undertakings to renounce quotas which were granted to them for free. The logic of including those additional quotas free of charge in the subsequent quota reductions is far from clear. Furthermore, the additional costs incurred in these decisions cannot be justified.

The measures introduced had a limited impact on the individual competitiveness of growers

44. The competitiveness of sugar beet growers, i.e. their ability to deliver sugar beet to the producers at competitive prices, depends on whether they can reduce their sugar beet growing costs per tonne to keep pace with the reduced sugar prices set by the reform. However, while the reforms through the Single Payment Scheme partly compensated the beet growers for the loss of revenue arising from the significant drop in the minimum prices to be paid for the sugar beet, the measures introduced had a limited impact on their individual competitiveness.

45. Indeed, for selected Member States the Commission’s impact assessment examined the break-even price, i.e. the level below which on average the grower decides to switch from sugar beet to other competing crops, and highlighted that beet growers in the majority of those producing Member States had a break even significantly higher (see Table 3) than the minimum price of around 26 euro per tonne set for sugar beet from October 2009.

Table 3

Breakdown of selected MS according to the estimated average break-even price for sugar beet at farm level

Source: Based on Commission SEC(2005) 808, p. 11.

Significantly higher than 25 euro/tonne | Close to 25 euro/tonne |

Member States | Break-even price euro/tonne | Member States | Break-even price euro/tonne |

Finland | 44 | Belgium/the Netherlands | 30 |

Italy | 42 | Denmark | 25 |

United Kingdom | 40 | France | 26 |

Austria | 40 | Germany | 30 |

Spain | 36 | |

Sweden | 34 |

Greece | 34 |

46. Additionally, as sugar beet cultivation should be located in the vicinity of the factories (see paragraph 1), it is difficult for a grower to deliver to a different factory if the local one closes down. Hence in a number of cases even those growers willing or able to increase efficiency by, for instance, increasing yields per hectare were deprived of the possibility to do so if the local producer decided to close the plant. The audit identified cases of sugar factories closed by the producers due to the relatively low capacity and obsolete technology even though the growers achieved the highest yields of sugar beet per hectare.

47. In the circumstances, the reform proposals did not provide incentives to increase the competitiveness of growers intending to remain in the sector.

The current quota system maintains past rigidities and constraints

48. The Court’s previous special report on the sugar CMO (see paragraph 18) drew attention to the rigidities linked to the quotas system and concluded that "national quotas have prevented production moving to the most efficient areas" [29], "normal competitive forces do not operate and in several cases sugar companies have been fined for abuses of competition" [30] and stated that the existence of barriers to entry for new sugar beet growers warranted consideration by the Commission [31].

49. In this regard a 2004 Commission Communication [32] initially proposed a sugar sector reform based on a uniform cut in quotas and intended to foster quotas transferability between producers in the EU. However, this proposal was not adopted because a majority of Member States opposed the idea of intra-Community quota transfers.

50. In terms of sugar industry processing efficiency, the maintenance of rigidities and constraints incorporated into the current quota system, i.e. such as the establishment of quantitative quotas per individual grower in certain Member States, the absence of tradability of quotas and the limited possibilities for their transferability, results in undue rigidity of production capacity and reduces scope for both growers and producers to increase efficiency. The audit confirmed that in some of the audited Member States, quota restrictions hamper the entry of possible new growers and delivery rights of existing growers may not be changed without their consent. This entails significant constraints in the sugar production market.

51. While certain producers attempted to mitigate this constraint through private initiatives, overall these constraints are a limiting factor in the application of the principle of economic sustainability which the impact assessment considered should be improved by "moving away from the principle of the apportionment of the production capacity, currently built into the sugar quota regime, towards a more competitive, more market-orientated sector".

Has the sugar market reform stabilised the markets and guaranteed the availability of sugar supplies?

52. One of the objectives of the sugar reform consisted in stabilising the markets and guaranteeing the availability of sugar supplies [33]. The Court audit examined the achievement of this objective.

Prices on the EU sugar market have been stable to date around the reference prices

53. The audit assessed the achievement of the market balance for sugar with reference to the need for consumption to be in line with production and imports minus exports and for market prices to correspond to reference prices.

54. The audit concluded that during the first three years, the EU sugar market was stable; as shown in Graph 3, price data indicate that the markets have been stable around the reference price since the start of the reform.

Guaranteeing the availability of supply: the level of production quotas is below EU consumption and eu is now a net importer

55. The sugar market was subjected to the twin effects of increased imports and reduced possibilities for subsidised exports. In effect, from 1 October 2009 onwards, there are no longer any quantitative restrictions imposed on imports from least developed countries (LDC’s) which benefit from the Everything But Arms (EBA) initiative.

Graph 3

Prices for white sugar during the reform

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Notes:

1 Average price for white sugar within the Community, communicated by EU sugar producers and refiners (ex-work prices for homogeneous granulated crystal, standard quality, in bulk or big bags).

2 Reference price as stated in Council Regulation (EC) No 318/2006.

3 Quoted future prices on London Liffe market (white sugar of standard quality, free on board ship and stowed).

Source:

(1-2) The Commission (Unit C.5 of DG AGRI).

(3) L’économie sucrière 2010 and monthly statistics — ONIGC France Agrimer.

56. Therefore, the level of internal production required to meet the EU needs has become the key market stabilising factor. The reform targeted and mainly achieved the required reduction in internal production via quota renunciation, but this has changed the EU market supply from a level of sugar production significantly above the internal consumption to a level of production markedly below consumption, the EU thus becoming a net importer, EU production covering 85 % of its consumption (see Graph 4).

57. Future increase in imports would have an adverse impact on the balance of the EU sugar market and the Commission may have to make use of its withdrawal mechanism to again reduce EU producers’ quotas, thus further reducing the EU’s sugar production capacity and likely resulting in additional factory closures. It is important to note that the lead-in time to bring production capacity on stream is relatively long and that, given the high capital costs, once capacity is reduced it is unlikely to be recovered in the short term.

Graph 4

EU sugar production and consumption from 2001/02 to 2008/09

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Note: Year 2006/07 (EU-25/27) has 15 months.

Source: The Commission (Unit C.5 of DG AGRI).

58. Thus, the EU has become more dependent on imports for what is a strategic product for the agri-food and chemical industries, while new uses for sugar, such as bioethanol, place increased demand on supplies. In addition, there is increased volatility of the world market where supplies are dominated by a limited number of exporting countries.

59. The available data suggests that the future availability of supplies and EU market stability will depend upon factors such as:

(a) whether producers will be able to pay growers a sufficiently high price for them to be willing to continue to supply sugar beet;

(b) to what extent third countries with which the EU has concluded bilateral trade agreements will find it attractive to export their sugar to the EU. This depends upon many factors, such as world sugar prices, transport costs, the cost of cultivating other crops, etc, and entails greater uncertainty in the supply of sugar to the EU market.

Delocalisation risk

60. The increased rights of access from third countries also provide an incentive for producers to invest in those third countries. This increases therefore the risk of displacement of certain EU production facilities which would increase EU dependency on imports and would possibly have negative effects on the social fabric of the EU areas affected.

61. The Court notes that at least three EU producer groups that received aid by renouncing quotas and closing down factories in the EU have invested in sugar production facilities or signed commercial agreements in third countries to which the EU has granted trade concessions. Some producers have therefore reacted to quota reductions within the EU by importing sugar from outside the EU.

Benefiting from sugar price reductions

62. The reform is designed to reduce prices of sugar by up to 36 % [34] and indeed the price of sugar in the EU has been following the reductions in its reference price. Graph 3 showed the downward trend in sugar prices since the start of the reform.

63. One of the objectives of the common agricultural policy [35] is to ensure that supplies reach consumers at reasonable prices. Consumer price formation is a complex process with prices being influenced not only by the cost of the raw material but also by other parameters such as energy and labour costs. Consequently it is very difficult to determine to what extent the reduction in the reference price of bulk sugar sold by producers will impact on the price paid by the final consumer. The Commission stressed the need "to ensure that downward movements in commodity prices are transmitted to consumers without delay" [36]. Nonetheless, studies [37] carried out on behalf of the Commission indicate that reductions in the price of bulk sugar are unlikely to be passed on to the final consumer. In the case of processed products, which account for over two thirds of the sugar consumption, most of the cost savings due to price reductions will be added to the profit margin of industrial producers [38]; in the case of the retail sugar price, which accounts for the remaining one third of consumption, price transmission is affected by the concentration of distribution networks [39].

64. Furthermore, following the reform, production has become even more concentrated such that 75 % of the EU internal production is now produced by only six industrial groups of companies.

Have the specific instruments/mechanisms been successful in addressing and alleviating the adaptation problems related to reform?

65. The legislative framework sets, amongst others, the objective of ensuring a fair standard of living for the agricultural community [40].

66. It was anticipated that the abandonment of sugar beet production and the closing down of factories related to the restructuring measures would have an important direct and indirect social impact on the agricultural community and regions concerned. The impact assessment predicted a significant number of job losses in the regions concerned, estimated at at least 4500 agricultural, 24500 industrial and 49000 indirect jobs [41].

67. Consequently, the legislation provided for the restructuring fund to finance specific instruments/mechanisms — i.e. restructuring aid, diversification aid, and transitional aid — to face and alleviate the adaptation problems, thereby contributing to a fair standard of living for the agricultural community involved in the sugar sector.

68. The audit examined these instruments/mechanisms as detailed in the following sections.

Restructuring aid to producers and their social and environmental commitments

69. Producers who abandoned quota production and renounced the quotas concerned were entitled to restructuring aid, calculated as a fixed amount per tonne of renounced quota [42]. In the case of sugar-quota renunciations, producers were granted roughly 90 % of the restructuring aid [43], the rest being reserved for sugar beet growers and machinery contractors. Similarly, inulin syrup producers were granted 90 % of the aid. Isoglucose producers renouncing their quota were entitled to 100 % of the restructuring aid compensation.

70. Sugar production within the EU is rather concentrated, so that the distribution of the restructuring aid is limited. In the eight Member States visited 45 factories were closed down, receiving restructuring aid of around 2,1 billion euro as a compensation for the renunciation of roughly 3,7 million tonnes of sugar quota (Annex IV).

71. Producers that gave up their quota production were required to respect their social and environmental commitments. In this regard, the governing regulations foresaw that the application for restructuring aid should include "a social plan detailing the actions planned in particular with respect to re-training, redeployment and early retirement of the workforce concerned" [44].

Wide variations in the restructuring aid net of direct dismantling cost

72. Restructuring aid was not intended and did not reimburse only the direct cost of dismantling factories. According to the Commission, the aid was also intended to meet the economic, social and environmental consequences linked to quota reduction. The audit examined the relationship between restructuring aid granted to producers in the audited Member States and their budgeted direct closure costs, i.e. closure costs excluding possible quotas valorisation. The audit identified that there was no clear definition of which costs had to be included in the Restructuring Plans and that the costs budgeted were not comparable amongst Member States. Consequently, the data available indicate very wide variations ranging from a net surplus of 390 euro per tonne renounced compared to the net closure costs to a net deficit of 226 euro per tonne (Annex IV).

Inadequate monitoring of social obligations

73. As a result of the reform, some 80 factories were closed across the EU. Member States were not required by the Commission to report on the direct social impact of the production facility dismantlement. The audit found that such information is not consistently available to the Commission and there is no comprehensive data on the impact of quota renunciations on the local economies, on how many jobs were lost or alternative employment of the staff previously employed at the factories which were dismantled. This hampers the assessment of the overall effect of the reform on the regions concerned.

Delays in environmental obligations

74. The closure of production facilities also entails serious environmental challenges, hence the governing regulations provide that the closure of production facilities is accompanied by appropriate measures to dismantle production facilities and restore the environmental condition of the factory sites. The audit found, however, that there were cases of serious delays and increasing uncertainty as regards the timely compliance of the producers with those environmental obligations. In December 2009 the Commission amended the legislation to allow for an extension of the deadlines until September 2011 [45].

Restructuring aid to growers and machinery contractors affected by the renunciations

75. In the case of sugar-quota renunciation, which covers the vast majority of quota renunciation, a part of the restructuring aid (at least 10 % until 2007, 10 % from 2007 onwards) was to be reserved for sugar beet growers affected by the renunciations and machinery contractors who provided them with specialised services [46]. Similarly, a part of the aid was reserved for chicory growers affected by inulin syrup quota renunciations. On the other hand, no aid was reserved for maize growers when isoglucose producers renounced their quota. The allocations were decided upon by the national authorities following consultations with representatives of growers and, where they existed [47], contractors. In 2007 a one-off payment of 237,50 euro per tonne foregone was granted [48] to the affected growers, which constituted the lion’s share of the compensation they received.

Diversification aid

76. As a result of the reform, some 80 sugar factories were closed. Sugar factories have a strong territorial link with the surrounding community. Particularly when the factories are located in remote and disadvantaged areas, their closure can provoke significant negative consequences for the social fabric of the areas affected.

77. There is no legal definition as to who is included in the concept of "agricultural community". Nonetheless it is assessed that as a result of the sugar reform, the wider local community was affected rather than just the key stakeholders of the sugar sector, which were earmarked in the regulation to receive the aid (producer and its employees, growers, machinery contractors).

78. The legislation provided for aid, amounting to 675 million euro, to encourage the development of alternatives to sugar beet and sugar production in regions affected by the restructuring of the sugar industry (see breakdown by Member States in Annex V).

- The aid for diversification [49] is primarily to finance measures intended to be identical to those supported under Axis 1 and Axis 3 on support by the European Agricultural Fund for Rural Development [50]. Typically these would finance specific projects to increase the competitiveness of the agricultural and forestry sector, to improve the quality of life in rural areas or to diversify the rural economy.

- An additional aid for diversification [51] is granted to a Member State once the quota renunciations are above 50 %, and is increased when the percentage is higher. The aid could be granted in the same way as diversification aid or may be paid directly to growers.

79. Member States which decide to grant aid for diversification shall establish national restructuring programmes detailing the diversification measures to be undertaken in the regions concerned and inform the Commission of these programmes. The Commission is not requested to approve the programmes.

80. The analysis of the national restructuring plans established by the Member States indicate that the allocation of diversification aid was based on a wide variety of criteria between Member States, as shown in Annex VI.

81. Additionally, the Court noted delays in certain Member States in the implementation of these measures, intended to develop alternatives to sugar beet growing and sugar production, that have yet to become fully operational. This delay caused a time lag of several years between factory closure and economic alternatives being operational, if at all. In December 2009 the Commission amended the legislation to allow for an extension of the deadline to implement the measure until September 2011 [52].

82. Moreover, the Commission has no overview of the impact on regions affected of the diversification aid, although Member States are required to communicate to the Commission annual progress reports concerning, inter alia, the national restructuring programmes [53]. However, the Commission has not established procedures to systematically review and evaluate this information [54].

Transitional aid to full time refiners

83. The legislation provided for a transitional aid to be granted to full time refiners (150 million euro) so as to allow them to adapt to the restructuring of the sugar industry [55]. Full-time refiners mean production units which refined imported raw cane sugar either as their sole activity or above a certain threshold [56].

84. These aids were not part of the Commission’s initial proposals but were subsequently introduced after Council discussions. The aid was paid to a very limited number of refiners (seven in total) for amounts varying from 1,5 to 94 million euro per refinery.

85. The audit found no evidence that the aid was based on a technical assessment of the needs of refiners and that the calculation of the amounts of aid was based on objective criteria. Furthermore, the vagueness of the objectives to be achieved (adapt to the restructuring of the sugar industry) [57] and of the actions which could be included in the business plan to receive the aid (including contributions to operational costs and other provisions considered to be necessary) [58] makes it impossible to evaluate the efficiency or effectiveness of the aid. Indications are that the aid was mainly of the nature of compensation for full-time refiners of imported raw cane sugar for the future loss of their monopoly in raw sugar imports. The Commission regulation merely refers to the loss of "certain benefits" [59] which were previously held.

86. In most of the MS concerned there is only one potential beneficiary. This pre-empted the legislative provision that Member States shall grant the aid on the basis of objective and non- discriminatory criteria [60].

The cost of the sugar reform

It is likely that an amount will be available in the restructuring fund to be assigned to the EAGF

87. According to the legislative provisions [61] "any amount that may be available in the restructuring fund after the financing of the expenditure referred to in paragraph 2 shall be assigned to the EAGF."

88. The low rate of quota renunciations, particularly in the second year of the reform, resulted in more income from temporary restructuring amounts than had been anticipated by the Commission. Any funds remaining in the restructuring fund when it is closed in September 2012 will be assigned to the EAGF. It is currently estimated that around 640 million euro will remain available.

Other factors affecting the overall cost

89. When it proposed the reform, the Commission estimated the cost to the EU budget of the sugar CMO for the seven years from 2007 to 2013 at 10,7 billion euro [62]. This is equal to approximately seven times the expenditure of the sugar CMO in 2006. On this basis, the Commission stated that the expenditure included in the agriculture section of the budget would equal that of the previous CMO [63].

90. However, the Court notes that there are two other issues related to the sugar market which impact the EU budget for a total of 1,2 billion euro, although they are not directly charged to the agricultural section of the budget:

(a) the production levy [64] that amounted to 498 million euro in 2006 was abolished and replaced by a flat-rate charge of 12 euro per tonne. However, due to the Community’s international commitments, the level of production levies as of 2006 would not have been maintained, as these levies were applicable only to the production exceeding consumption, and

(b) 1,2 billion euro has been earmarked during the seven-year period for accompanying measures for the sugar protocol countries. This aid has been proposed to the ACP countries for the loss of income due to the lower prices received for their historical preferential imports. Since this is included under title 21 "Development and relations with ACP States", it has not been considered to be part of the sugar CMO.

91. The sugar reform was designed to be budget neutral. In this context, the Court notes that if the above costs are taken into account, the overall cost to the EU budget after the reform for the period 2007–13 is likely to be 1,2 billion euro higher than before the reform.

Conclusions and recommendations

92. The reform of the sugar market was considered necessary in order to align the sugar sector with the fundamental principles of the new common agricultural policy of increased market orientation and to comply with the Union’s international commitments.

93. The reform pursued a variety of objectives, which were partly conflicting and therefore difficult to fulfil simultaneously. The Court’s audit assessed the extent to which the principal objectives have been achieved to date.

Has the sugar market reform ensured the future competitiveness of thE EU sugar industry?

94. The reform targeted a significant reduction (6 million tonnes) of unprofitable production capacity in the Community by introducing an important economic incentive for sugar undertakings with the lowest productivity to give up their quota production. The rationale was that the renunciation of low productivity production facilities would increase the average productivity and thus ensure the future competitiveness of the EU industry. However, neither the Commission nor the Member States had data available on the relative productivity of the individual producers. At the same time, some additional quota of 1,5 million tonnes was made available mostly for purchase, aimed at the more efficient producers.

95. Producers, in the first two years of the reform, voluntarily renounced only 2,2 million tonnes indicating that the incentives offered were not deemed to be sufficiently attractive by targeted producers. Therefore, in 2007 several modifications were made to the reform process creating a strong incentive for all producers to renounce at least a certain percentage of their quota. Thus, while the targeted quota reduction was achieved, it could not be achieved only by the cessation of production by the least competitive factories.

96. The audit found cases of undertakings renouncing the additional sugar quotas they had obtained or purchased. There is no rationale in initially making available additional quotas and later striving to reduce them. Moreover, in the case of additional isoglucose quota, undertakings were paid even when they renounced quotas which had just been granted for free. The costs involved amounting to around 97 million euro cannot be justified.

97. While the reforms partly compensated the beet growers for the loss of revenue arising from the significant drop in the minimum prices to be paid for the sugar beet, the measures introduced had limited impact on their individual competitiveness.

98. Furthermore, as already observed by the Court in its previous report [65], the maintenance of rigidities and constraints incorporated into the current quota system results in undue rigidity of production capacity and reduces scope for both growers and producers to increase efficiency.

99. Overall it can be concluded that the objective of stabilising the market via a voluntary reduction of quota production of 6 million tonnes was given priority over the objective of reduction of unprofitable production capacity in the Community. Consequently, the reform process did not fully ensure the future competitiveness of the EU sugar industry. Accordingly, it is likely that the prevailing external pressures will continue to weigh heavily on the EU sugar sector.

Recommendation 1

The prevailing external pressures may require the Commission to propose further adjustments of internal production. In such a case, the Court recommends that instruments and measures should be designed so as to ensure overall consistency and be based on thorough technical assessments of needs and objective and non-discriminatory criteria.

Recommendation 2

In view of the importance of sugar production in the agricultural economy, the Court recommends that the Commission proposes measures to remove the rigidities and constraints in the current quota system which affect adversely the competitiveness of growers and producers.

Has the sugar market reform stabilised the markets and guaranteed the availability of sugar supplies?

100. The sugar market was subjected to the twin effects of increased imports and reduced possibilities for subsidised exports. In the circumstances, the level of internal production required to meet the EU needs has become the key market-stabilising factor. Future increases in imports are likely to trigger further withdrawals of quotas with the consequent further reduction of EU sugar production.

101. The Court concludes that while market stability has been assured thus far, it has been achieved through the use of production quotas which currently set the maximum allowed internal production at a level approximately 85 % of EU consumption for what is a strategic product for the agri-food and chemical industries, thus increasing the EU dependence on imports, while world market supplies are dominated by a limited number of exporting countries.

Recommendation 3

The Court recommends that possible future decisions which impact EU sugar production take into account the level of internal sugar production which is considered necessary given the Treaty objective of assuring availability of supply.

102. Supplies should reach consumers at reasonable prices [66]. The reform is designed to reduce prices of sugar by up to 36 % [67]. Because of the complex process of price formation, it is very difficult to determine to what extent the reduction in the reference price of bulk sugar will impact on the price paid by the final consumer. While the Commission stressed the need to ensure that downward movements in commodity prices are transmitted to consumers without delay, studies carried out on its behalf indicate that reductions in the price of bulk sugar are unlikely to be passed on to the final consumer.

Recommendation 4

While acknowledging that price formation in the food sector is particularly complex, the Court considers that it must be subject to regular monitoring by the Commission. The Commission and the Member States must ensure that competition law is correctly enforced in the sector thus ensuring the Treaty objective that supplies reach consumers at reasonable prices.

Have the specific instruments/mechanisms been successful in addressing and alleviating the adaptation problems related to reform?

103. The abandonment of sugar beet production and the closing down of factories have an important direct and indirect impact on the agricultural community and regions concerned including a significant number of job losses. The legislation provided for the temporary restructuring fund to finance specific instruments to face and alleviate the adaptation problems.

104. The audit found that neither the Commission nor the Member States concerned had put in place an adequate follow-up of the social consequences of the restructuring. There is thus no comprehensive data on the impact of quota renunciations on the local economies.

105. Furthermore, in various Member States the diversification aid measures had yet to become fully operational at the moment of the audit visits. The time lag between the factory closures and the implementation of diversification measures may result in hardship in those regions affected.

106. The closure of production facilities had to be accompanied by appropriate measures to dismantle production facilities and restore the environmental condition of the factory sites. The audit found, however, cases of delays as regards the compliance of the producers with those environmental obligations.

107. Regarding the transitional aid to be granted to full-time refiners, the audit found no data to indicate that the aid was based on a technical assessment of needs and that the calculation of the amounts of aid was based on objective criteria.

108. Overall, it is not yet possible to conclude on the extent to which the instruments put in place have mitigated the significant direct and indirect social and economic impact on the agricultural community in the regions affected.

Recommendation 5

The Court recommends that the Commission and the Member States take urgent measures to ensure the diversification measures become rapidly operational and produce the intended impact to promote alternatives to sugar beet and sugar production.

Recommendation 6

The Court recommends that the Commission and the Member States become more actively involved in ensuring that the environmental obligations entered into by the closed factories are fully complied with.

Cost of the reform

109. The Court notes that if additional costs, not directly charged to the agricultural section of the budget, namely the cost of accompanying measures for the ACP sugar protocol countries are taken into account, the overall cost to the EU budget after the reform for the period 2007–13 is likely to be 1,2 billion euro higher than before the reform.

This Report was adopted by Chamber I, headed by Mr Michel CRETIN, Member of the Court of Auditors, in Luxembourg at its meeting of 21 July 2010.

For the Court of Auditors

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Vítor Manuel da Silva Caldeira

President

[1] The only factory in the EU which produced sugar from sugar cane (except for those in the outermost regions) was closed in 2006.

[2] CMO was set up by Regulation No 1009/67/EEC of the Council (OJ 308, 18.12.1967, p. 1). Currently CMO is governed by Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products (Single CMO Regulation) (OJ L 299, 16.11.2007, p. 1).

[3] The cost of the export refund was partly covered by levies on producers. As indicated in Special Report No 20/2000, paragraph 46: "The annual cost to the EU budget of exports of surplus sugar is some 1500 million euro, of which 800 million is recovered through the production levy".

[4] In 2005 the EU produced 20,3 million tonnes of sugar and consumed 15,6 million tonnes. The EU imported 2,3 million tonnes of raw sugar while exports amounted to 7,5 million tonnes, of which 2,5 million tonnes were subsidised by the EU through export refunds.

[5] Council Regulation (EC) No 318/2006 (OJ L 58, 28.2.2006, p. 1) set isoglucose quota at 507680 tonnes (EU-25); this was updated several times to take into account new allocations as well as renunciations and is currently 690441 tonnes (EU-27) (last update by Regulation (EC) No 1234/2007). In the United States the production of isoglucose accounts for approximately half the production of natural sweetener.

[6] Annual average exports for marketing years 2003/04, 2004/05 and 2005/06 — The Commission: Agriculture in the European Union — Statistical and Economic Information 2007.

[1001] Where data for Bulgaria and Romania have a significant impact, this has been indicated.

[7] Madagascar, Malawi, Mozambique, Tanzania, Uganda, Zambia.

[8] Legal basis: Council Regulations (EC) No 318/2006, (EC) No 319/2006 and (EC) No 320/2006 (OJ L 58, 28.2.2006, p. 1, 32 and 42). Regulation (EC) No 318/2006 has since been repealed and replaced by Regulation (EC) No 1234/2007. Implementing rules for Regulation No 320/2006 are set by Commission Regulation (EC) No 968/2006 (OJ L 176, 30.6.2006, p. 32).

[9] This figure includes the sugar substitutes isoglucose and inulin syrup.

[10] In the previous sugar CMO producers could sell a standard quality of sugar to national intervention agencies at the intervention price thus providing a minimum wholesale price in the EU.

[11] In the current sugar CMO, there is no intervention price, but the Commission has set a reference price around which the wholesale market price should fluctuate.

[12] The weighted average of the A and B quota sugar beet minimum prices after deduction of levies for the marketing years 2003/04 and 2004/05.

[13] Commission Regulations (EC) No 900/2007 (OJ L 196, 28.7.2007, p. 26), (EC) No 947/2008, (EC) No 948/2008 and (EC) No 951/2008 (OJ L 258, 26.9.2008, p. 60, 61 and 66) for sugar in solid state, sugar syrups and sugar in the form of goods not covered by Annex I of the Treaty.

[14] SPS compensated sugar beet growers for around two thirds of the revenue reduction caused by the price reductions, i.e. one third is not compensated.

[15] Article 1 of Regulation (EC) No 320/2006: "The restructuring fund shall form part of the Guarantee Section of the European Agricultural Guidance and Guarantee Fund. As from 1 January 2007 it shall form part of the European Agricultural Guarantee Fund (EAGF) …. The temporary restructuring amount referred to in Article 11 shall be revenue assigned to the restructuring fund in accordance with Article 18(2) of Regulation (EC, Euratom) No 1605/2002. Any amount that may be available in the restructuring fund after the financing of the expenditure referred to in paragraph 2 shall be assigned to the EAGF."

[16] Article 1 of Regulation (EC) No 320/2006: "Any amount that may be available in the restructuring fund after the financing of the expenditure referred to in paragraph 2 shall be assigned to the EAGF." Deadline extended to 2012 by Commission Regulation (EU) No 1204/2009.

[17] Article 3(6) of Regulation (EC) No 320/2006; as amended by Council Regulation (EC) No 1261/2007 (OJ L 283, 27.10.2007, p. 8).

[18] Additionally, Regulation (EC) No 320/2006 foresaw 14 million euro as transitional aid to certain Member States (Austria 9 million euro, Sweden 5 million euro). According to Article 9: "In the context of the national restructuring programme referred to in Article 6(3): (a) an aid of not more than 9 million euro shall be granted in Austria for investments in collection centres of sugar beet and other logistical infrastructure needed as a consequence of restructuring; (b) an aid of not more than 5 million euro shall be granted in Sweden for the direct or indirect benefit of sugar beet growers in Gotland and Öland giving up sugar production as part of the national restructuring process."

[1002] Any remaining funds not used will be assigned to the EAGF (currently estimated at 0,64 billion euro).

[19] The producers of these Member States contributed over 70 % of the sugar quota renunciations made for each year of the restructuring fund.

[20] ECA Special Report No 20/2000 concerning the management of the common organisation of the market for sugar (OJ C 50, 15.2.2001).

[21] Recital 1 of Regulation (EC) No 320/2006.

[22] Recital 5 of Regulation (EC) No 320/2006.

[23] Update of impact assessment of 22 June 2005, SEC(2005) 808.

[1003] Breakdown of Member States according to combined profitability which would affect their likely reduction in sugar production. (Table 3 in the Commission "Update of impact assessment" [SEC(2003) 1022]).

[1004] The "Initial quota" equals the initial quota allocated to Member States as per Annex III of Regulation (EC) No 318/2006 for marketing year 2006/07 together with additional quotas purchased in 2006/07 and 2007/08.

[1005] "Other Member States" includes Romania, Bulgaria, French overseas departments and the autonomous region of the Azores.

[24] Greece, Hungary, Italy and Spain.

[25] Council Regulation (EC) No 1260/2007 of 9 October 2007 amending Regulation (EC) No 318/2006 on the common organisation of the markets in the sugar sector (OJ L 283, 27.10.2007, p. 1).

[26] Regulation (EC) No 320/2006.

[27] Article 8 and 9 of Regulation (EC) No 318/2006.

[28] Isoglucose producers were eligible to the aid for partial dismantling (unless they dismantled the whole starch plants), hence the amount is given by the compensation aid multiplied per tonne renounced in the marketing year, i.e. 547,50 euro × 32664 renounced in 2007/08 + 468,75 euro × 60568 tonnes renounced in 2008/09 + 390,00 euro × 129083 renounced in 2009/10.

[29] Special Report No 20/2000, paragraph 72(d).

[30] Special Report No 20/2000, paragraph 83.

[31] Special Report No 20/2000, paragraph 23(d).

[32] COM(2004) 0499 final from the Commission to the Council and the European Parliament — Accomplishing a sustainable agricultural model for Europe through the reformed CAP — sugar sector reform.

[33] The availability of supplies and stability of markets is a CAP objective which is laid down in Article 39 of the Treaty of the Functioning of the Union (so-called Lisbon Treaty), previously Article 33 of the EC Treaty, and therefore applies to the sugar CMO as well.

[34] 36 % being the difference between the pre-reform intervention price and the post-reform reference price.

[35] Article 39 of the Treaty of the Functioning of the Union (previously Article 33 of the EC Treaty).

[36] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on "Food Prices in Europe" — COM(2008) 821 Final.

[37] The "Evaluation of the Common Organisations of the Markets in the Sugar Sector" carried out by the Netherlands Economic Institute and a study on "Price transmission in the agri-food sector" carried out by AgraCEAS Consulting Ltd.

[38] "It should be remarked that sugar- containing products generally show a low price elasticity of demand. Industrial producers of these products will not be very concerned about a price increase of sugar, because they can pass on the higher costs to the final consumer without a large drop in sales volume. They will generally favour a decrease of the sugar price, because this enables them to add most of the cost savings to their profit margin. There will be no strong incentive to pass on these savings to the final consumer." Source: "Evaluation of the Common Organisation of the Markets in the Sugar Sector" by the Netherlands Economic Institute, p. 76.

[39] "Cost differences in the sugar distribution and retailing among Member States are caused by differences in market structure (the existence of monopolistic or monopsonistic-type markets, the (ab)use of market power), and the (macro)economic and policy environment. Differences are reflected in different transport costs, labour costs, investment costs, value added and profit taxes, etc, which together make up the cost side of the distribution and retail sector. These cost differences will be reflected in differences in retail market prices." Source: "Evaluation of the Common Organisation of the Markets in the Sugar Sector" by the Netherlands Economic Institute, p. 77.

[40] Recital 2 of Regulation (EC) No 318/2006.

[41] Similarly, the July 2003 "Study to assess the impact of future options for the future reform of the sugar CMO" carried out by EUROCARE estimated the secondary jobs connected to sugar factories as being twice the number of direct jobs.

[42] Article 3(5) of Regulation (EC) No 320/2006.

[43] It should be noted that Article 3(6) of Regulation (EC) No 320/2006 provided for "at least 10 %" until it was changed into "10" by Regulation (EC) No 1261/2007.

[44] Article 4(3)(f) of Regulation (EC) No 320/2006.

[45] Commission Regulation (EU) No 1204/2009 of 4 December 2009 amending Regulation (EC) No 968/2006 laying down detailed rules for the implementation of Council Regulation (EC) No 320/2006 establishing a temporary scheme for the restructuring of the sugar industry in the Community (OJ L 323, 10.12.2009, p. 64).

[46] Article 3(6) of Regulation (EC) No 320/2006, as amended by Regulation (EC) No 1261/2007.

[47] In Poland, there was no association of machinery contractors, so the national authorities selected three contractors for consultations.

[48] Regulation (EC) No 1260/2007.

[49] Article 6 of Regulation (EC) No 320/2006.

[50] Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD) (OJ L 277, 21.10.2005, p. 1).

[51] Article 7 of Regulation (EC) No 320/2006.

[52] Regulation (EU) No 1204/2009.

[53] Article 24 of Regulation (EC) No 968/2006.

[54] The only checks carried out by the Commission in the Member States are those of the Clearance of Account unit of DG AGRI on their compliance with Regulations.

[55] Article 8 of Regulation (EC) No 320/2006.

[56] Article 2 of Regulation (EC) No 320/2006.

[57] Article 8 of Regulation (EC) No 320/2006.

[58] "Investments, dismantling of production facilities, contributions to operational costs, provisions for depreciation of equipment and other provisions considered to be necessary in order to adapt to the new situation" (Article 15 of Regulation (EC) No 968/2006).

[59] Regulation (EC) No 968/2006 implementing Regulation (EC) No 320/2006, Recital 10: "In order to make it easier for full-time refiners who have lost certain benefits which they held under Council Regulation (EC) No 1260/2001 of 19 June 2001 on the common organisation of the markets in the sugar sector to adapt to the new situation following the entry into force of Regulation (EC) No 318/2006 of 20 February 2006 on the common organisation of the markets in the sugar sector, Regulation (EC) No 320/2006 introduces a transitional aid allocated in those Member States where refiners within the meaning of Regulation (EC) No 1260/2001 were established in the past."

[60] Article 8(3) of Regulation (EC) No 320/2006.

[61] Article 1 of Regulation (EC) No 320/2006.

[62] This includes forecasts made for the 2007–2013 Financial Framework. The budget thereafter is subject to a future agreement.

[63] Section 5 on the budgetary impact of the proposals for the reform in the Commission’s proposal, COM(2005) 263 final.

[64] Production levy could be for a part of quotas (so-called B quota) up to 39,5 % of intervention price (631 euro per tonne), i.e. up to 249 euro per tonne (Article 15 of Regulation (EC) No 1260/2001).

[65] Special Report No 20/2000 concerning the management of the common organisation of the market for sugar.

[66] Article 33 of the EC Treaty, which became Article 39 of Treaty of the Functioning of the Union (so-called Lisbon Treaty) sets that one of the objectives of the common agricultural policy is to ensure that supplies reach consumers at reasonable prices.

[67] 36 % being the difference between the pre-reform intervention price and the post-reform reference price.

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ANNEX I

OVERVIEW OF THE ACTUAL REVENUE AND ESTIMATED EXPENDITURE OF THE RESTRUCTURING FUND

Source: The Commission (Unit C.5 of DG AGRI).

(million euro) |

Member State | Total revenue | Expenditure |

Restructuring aid [1] | Diversification aid [2] | Transitional aid [3] | Total |

(A) | (B) | (C) | (D) | (E) = (B) + (C) + (D) |

Belgium | 339 | 331 | 19 | 0 | 350 |

Bulgaria | 13 | 2 | 1 | 0 | 3 |

Czech Republic | 166 | 88 | 11 | 0 | 99 |

Denmark | 163 | 37 | 8 | 0 | 45 |

Germany | 1350 | 639 | 71 | 0 | 710 |

Ireland | 0 | 187 | 44 | 0 | 231 |

Greece | 88 | 130 | 26 | 0 | 156 |

Spain | 346 | 454 | 70 | 0 | 524 |

France | 1354 | 611 | 64 | 25 | 700 |

Italy | 293 | 981 | 167 | 0 | 1148 |

Latvia | 8 | 59 | 15 | 0 | 74 |

Lithuania | 40 | 17 | 2 | 0 | 19 |

Hungary | 152 | 260 | 52 | 0 | 312 |

Netherlands | 344 | 177 | 12 | 0 | 189 |

Austria | 152 | 25 | 5 | 9 | 39 |

Poland | 657 | 288 | 34 | 0 | 322 |

Portugal | 10 | 34 | 15 | 24 | 73 |

Romania | 32 | 10 | 0 | 0 | 10 |

Slovenia | 7 | 51 | 12 | 2 | 65 |

Slovakia | 76 | 77 | 16 | 0 | 93 |

Finland | 45 | 64 | 7 | 5 | 76 |

Sweden | 128 | 63 | 9 | 5 | 77 |

United Kingdom | 466 | 165 | 15 | 94 | 274 |

TOTAL | 6229 | 4750 | 675 | 164 | 5589 |

[1] Also includes the retroactive payment.

[2] Includes both aid for diversification and additional aid for diversification.

[3] "Other Member States" includes Romania, Bulgaria, French overseas departments and the autonomous region of the Azores.

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ANNEX II

OVERVIEW OF QUOTAS RENOUNCED BY THE MEMBER STATES

A — SUGAR

(tonnes of white sugar) |

Member State | Initial quotas [1] | Quota renounced for given marketing year | Quotas available from marketing year 2009/10 | Percentage of total quotas renounced |

| | 2006/07 | 2007/08 | 2008/09 | 2009/10 | | |

| (A) | (B) | (C) | (D) | (E) | (F) = (A+B+C+D+E) | (G) = Σ(B+C+D+E)/A |

France [2] | 4120687 | | | -683 655 | | 3437032 | 16,6 % |

Germany | 3655456 | | | -757 200 | | 2898256 | 20,7 % |

Poland | 1772477 | | | -366 869 | | 1405608 | 20,7 % |

United Kingdom | 1221474 | | | -165 000 | | 1056474 | 13,5 % |

Netherlands | 931435 | | | -126 547 | | 804888 | 13,6 % |

Belgium | 882301 | | | -206 066 | | 676235 | 23,4 % |

Italy | 1557443 | -778 737 | -24 861 | -245 467 | | 508378 | 67,4 % |

Spain | 996961 | -93 119 | -16 679 | -256 578 | -132 106 | 498479 | 50,0 % |

Czech Republic | 474932 | | -102 473 | | | 372459 | 21,6 % |

Denmark | 452466 | | | -80 083 | | 372383 | 17,7 % |

Austria | 405812 | | | -54 785 | | 351027 | 13,5 % |

Sweden | 385984 | -42 562 | | -50 236 | | 293186 | 24,0 % |

Greece | 317502 | | -158 800 | | | 158702 | 50,0 % |

Slovakia | 216037 | | -70 133 | -33 584 | | 112320 | 48,0 % |

Hungary | 406684 | | -108 093 | -193 171 | | 105420 | 74,1 % |

Romania [3] | 109164 | | | -4 475 | | 104689 | 4,1 % |

Lithuania | 111010 | | | -20 758 | | 90252 | 18,7 % |

Finland | 146087 | | -56 087 | -9 001 | | 80999 | 44,6 % |

Portugal [4] | 79671 | -35 218 | -19 500 | -15 000 | | 9953 | 87,5 % |

Slovenia | 52973 | | -52 973 | | | 0 | 100,0 % |

Latvia | 66505 | | -66 505 | | | 0 | 100,0 % |

Ireland | 199260 | -199 260 | | | | 0 | 100,0 % |

Bulgaria [3] | 4752 | | | -4 752 | | 0 | 100,0 % |

TOTAL | 18567073 | -1 148896 | -676 104 | -23 73227 | -132 106 | 13336740 | 28,2 % |

| Total sugar quotas renounced = 5230333 | |

B — INULIN SYRUP

(tonnes of sugar equivalent) |

Member State | Initial quotas1 | Quota renounced for given marketing year | Quotas available from marketing year 2009/10 | Percentage of total quotas renounced |

| | 2006/07 | 2007/08 | 2008/09 | 2009/10 | | |

| (A) | (B) | (C) | (D) | (E) | (F) = (A+B+C+D+E) | (G) = (B+C+D+E)/A |

Belgium | 215246 | -215 246 | | | | 0 | 100,0 % |

Netherlands | 80950 | -80 950 | | | | 0 | 100,0 % |

France | 24521 | -24 521 | | | | 0 | 100,0 % |

TOTAL | 320717 | -320 717 | 0 | 0 | 0 | 0 | 100,0 % |

| Total inulin syrup quotas renounced = 320717 | |

C — ISOGLUCOSE

Source: ECA based on data by the Commission (DG AGRI).

(tonnes of dry matter) |

Member State | Initial quotas [5] | Quota renounced for given marketing year | Quotas available from marketing year 2009/10 | Percentage of total quotas renounced |

| | 2006/07 | 2007/08 | 2008/09 | 2009/10 | | |

| (A) | (B) | (C) | (D) | (E) | (F) = (A+B+C+D+E) | (G) = (B+C+D+E)/A |

Hungary | 220266 | | | | | 220266 | 0,0 % |

Belgium | 114580 | | | | | 114580 | 0,0 % |

Bulgaria [6] | 89198 | | | | | 89198 | 0,0 % |

Slovakia | 68095 | | | | | 68095 | 0,0 % |

Germany | 56638 | | | | | 56638 | 0,0 % |

Spain | 131423 | | -5 000 | -3 000 | -69 613 | 53810 | 59,1 % |

Poland | 42861 | | | | | 42861 | 0,0 % |

Italy | 32493 | | | | | 32493 | 0,0 % |

Portugal | 15871 | | | -3 371 | | 12500 | 21,2 % |

France | 27664 | | -27 664 | | | 0 | 100,0 % |

United Kingdom | 43592 | | | | -43 592 | 0 | 100,0 % |

Netherlands | 14563 | | | -14 563 | | 0 | 100,0 % |

Greece | 20636 | | | -20 636 | | 0 | 100,0 % |

Romania [6] | 15879 | | | | -15 879 | 0 | 100,0 % |

Finland | 18999 | | | -18 999 | | 0 | 100,0 % |

TOTAL | 912758 | 0 | -32 664 | -60 569 | -129 084 | 690441 | 24,4 % |

| Total isoglucose quotas renounced = 222317 | |

[1] "Initial quota" equals initial quota allocated to Member States as per Annex III of Regulation (EC) No 318/2006 for marketing year 2006/07 together with additional purchased in 2006/07 and 2007/08.

[2] Quotas for French overseas departments included (480 245 tonnes).

[3] Quotas available only from 2007/08 (new MS that joined the EU in 2007).

[4] Quotas for the autonomous region of the Azores included (9 953 tonnes).

[5] "Initial quota" equals initial quota allocated to Member States as per Annex III of Regulation (EC) No 318/2006 for marketing year 2006/07 together with additional quotas allocated from 2006/07, 2007/08, 2008/09.

[6] Quotas available only from 2007/08 (new MS that joined the EU in 2007) together with additional quotas allocated till 2009/10.

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ANNEX III

BREAKDOWN OF MEMBER STATES BY THEIR COMBINED PROFITABILITY AND SUGAR QUOTA RENOUNCED

Source: The Commission (Unit C.5 of DG AGRI).

(tonnes of white sugar) |

Member State | Level of combined profitability [1] | Actual impact of the reform |

Initial quotas [2] | Quota renounced in the first two years | Quota renounced for 2008/2009 [3] | Percentage of initial quota renounced | Percentage of the total quota renounced | Quota available from 2009/2010 |

(A) | (B) | (C) | (D) = (B+C)/(A) | (E) = (B+C)/ total B+total C | (F) = A+B+C |

Ireland | Low | 2143923 | -1 216376 | -260 466 | 68,9 % | 28,2 % | 667081 |

Greece |

Italy |

Portugal (mainland) |

Czech Republic | Medium | 2923655 | -566 062 | -725 282 | 44,2 % | 24,7 % | 1632311 |

Denmark |

Spain [3] |

Latvia |

Lithuania |

Hungary |

Slovakia |

Slovenia |

Finland |

Belgium | High | 12895381 | -42 562 | -2 410358 | 19,0 % | 46,9 % | 10442461 |

Germany |

France (metropolitan) |

Netherlands |

Austria |

Poland |

Sweden |

United Kingdom |

Other Member States [4] | Not included | 604114 | 0 | -9 227 | 1,5 % | 0,2 % | 594887 |

TOTAL | 18567073 | -1 825000 | -3 405333 | 28,2 % | 100,0 % | 13336740 |

[1] Breakdown of Member States according to combined profitability which would affect their likely reduction in sugar production (Table 3 in the Commission "Update of impact assessment" [SEC(2003) 1022]).

[2] The "Initial quota" equals the initial quota allocated to Member States as per Annex III of Regulation (EC) No 318/2006 for marketing year 2006/07 together with additional quotas purchased in 2006/07 and 2007/08.

[3] Quotas of 132 106 tonnes renounced in Spain for marketing year 2009/10 are included under 2008/09.

[4] "Other Member States" includes Romania, Bulgaria, French overseas departments and the autonomous regions of the Azores.

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ANNEX IV

OVERVIEW OF THE AID AVAILABLE TO PRODUCERS AND THEIR DIRECT CLOSURE COSTS

Source: Restructuring plans and progress (final) reports submitted by the producers in the audited Member States.

Member States audited | Czech Republic | Germany | Ireland | Greece [1] | Spain | France | Italy | Poland |

No of sugar factories closed | 3 | 5 | 1 | 2 | 7 | 5 | 14 | 8 |

(A)No of sugar quotas renounced for the factories closed (1 000 tonnes of white sugar) | 102 | 736 | 199 | 159 | 498 | 651 | 1049 | 296 |

(million euro) |

(B)Total restructuring aid available to the producer — incl. retroactive payment for the factories closed | 58 | 415 | 127 | 72 | 277 | 358 | 666 | 166 |

(C)Total direct closure costs [2] | 48 | 178 | 172 | 21 | 266 | 104 | 450 | 98 |

relating to assets, stocks and stores write-offs | 22 | 67 | 108 | 4 | 165 | 42 | 237 | 51 |

relating to social costs (redundancy, pension, training, redeployment) | 8 | 49 | 42 | 5 | 62 | 37 | 67 | 15 |

relating to dismantling and other closure costs | 18 | 62 | 22 | 12 | 39 | 25 | 146 | 32 |

Difference between the restructuring aid and the direct closure costs (B-C) | 10 | 237 | -45 | 51 | 11 | 254 | 216 | 68 |

Restructuring aid per tonne renounced net of direct closure costs (B-C)/A | 98 | 322 | -226 | 321 | 22 | 390 | 206 | 230 |

[1] The two factories should be converted into biomass production units (only aid for partial dismantling was applied for).

[2] Losses of future profits were not regarded as being direct closure costs.

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ANNEX V

IMPLEMENTATION OF THE DIVERSIFICATION AID

Source: The Commission (Unit C.5 of DG AGRI).

(euro) |

Member States | Diversification aid allocated for 2006–10 [1] |

Aid for diversification | Additional aid for diversification | Total |

(A) | (B) | (C) | (D) = (B)+(C) |

Belgium | 19328991 | 0 | 19328991 |

Bulgaria | 445738 | 445738 | 891475 |

Czech Republic | 11220772 | 0 | 11220772 |

Denmark | 7511785 | 0 | 7511785 |

Germany | 71025341 | 0 | 71025341 |

Ireland | 21818970 | 21818970 | 43637940 |

Greece | 17388600 | 8694300 | 26082900 |

Spain | 46394042 | 23197021 | 69591063 |

France (metropolitan) | 64126854 | 0 | 64126854 |

Italy | 111018706 | 55509353 | 166528059 |

Latvia | 7282298 | 7282298 | 14564595 |

Lithuania | 1947100 | 0 | 1947100 |

Hungary | 29955623 | 22466717 | 52422341 |

Netherlands | 11870109 | 0 | 11870109 |

Austria | 5138833 | 0 | 5138833 |

Poland | 34412305 | 0 | 34412305 |

Portugal (mainland) | 7398621 | 7398621 | 14797242 |

Romania | 419772 | 0 | 419772 |

Slovenia | 5800544 | 5800544 | 11601087 |

Slovakia | 10829743 | 5414871 | 16244614 |

Finland | 6985820 | 0 | 6985820 |

Sweden | 9372676 | 0 | 9372676 |

United Kingdom | 15477000 | 0 | 15477000 |

TOTAL | 517170242 | 158028432 | 675198674 |

[1] Diversification aid represents both aid for diversification (Article 6 of Regulation (EC) No 320/2006) and the additional aid for diversification (Article 7 of Regulation No 320/2006).

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ANNEX VI

EXAMPLES OF VARIETY OF CRITERIA BETWEEN MEMBER STATES IN THE ALLOCATION OF DIVERSIFICATION AID

The allocation of diversification aid was based on a wide variety of criteria between Member States, for example:

- in Ireland, all diversification aid was granted to growers who had lost their delivery rights without their needing to demonstrate any diversification costs;

- in the Czech Republic, growers also received all diversification aid but it was limited to part of the cost of newly acquired agricultural machinery;

- in Italy and Poland, diversification aid was allocated to diversification projects carried out by growers and other types of beneficiary, mainly small and medium enterprises;

- in France, Germany and Spain, the regional authorities allocated diversification aid to a variety of rural development-style measures, benefiting growers, small and medium enterprises and local authorities.

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ANNEX VII

GLOSSARY OF KEY TERMS AND ABBREVIATIONSACP: AFRICA, CARIBBEAN AND PACIFIC

ACP : Africa, Caribbean and Pacific

Beet sugar and cane sugar : sugar is manufactured either from sugar beet or from sugar cane. Cane (a type of reed) is normally grown in tropical regions and beet (a root) crop traditionally in temperate regions, although there is growing interest in promoting tropical sugar beet. Maximum sugar yields per hectare are potentially higher for the cane but this may be partly offset by the beet’s shorter production cycle. Currently, 80 % of world sugar production is based on cane.

Bioethanol from cane or beet : is obtained after fermentation of the raw juice (immediately after extraction from sugar cane or sugar beet) or thick juice (result of further processing including a concentration phase, which allows for intermediate storage) and distillation; the production process does not include production of sugar in solid form. Bioethanol may also be obtained from other crops; it may be used as fuel or as a fuel additive.

CAP : common agricultural policy

CMO : Common Market Organisation

C Sugar : see under "Quotas A, B and so-called C sugar"

Direct payments : payments directly granted to farmers under an income support scheme (such as the single payment scheme listed in Annex I of Council regulation (EC) No 1782/2003). Such payments could be coupled (i.e. linked to a specific production) or decoupled, based on entitlements based on receipts during historical reference periods.

Everything but arms (EBA) : a unilateral initiative adopted by the Council as Regulation (EC) No 416/2001; it allows duty-free and quota-free access to the European market for all products, except arms and arm munitions, originating in the least developed countries (LDCs: a category of countries established by the United Nations on the basis of specific development indicators); it is incorporated in a multiannual generalised scheme of tariff preferences. That initiative was presented as an all-sector extension of a preference already existing in most areas of the trade with LDCs: therefore, a high impact for the EU was not expected, except in the case of bananas, rice and sugar, so that full implementation was postponed for these for a transitional period ending 2006 for bananas and 2009 for rice and sugar.

Export refunds : mechanism of market support that consists in enabling producers or traders to export agricultural products available at prices higher than world market selling prices, by paying a subsidy compensating the difference between internal prices and export prices on each export operation.

Import duties : mechanism of market support that consists in collecting a specified taxation on quantities imported from the world market, thus making the price of these higher as compared to domestic production. Under a multilateral trade agreement in 1995, import duties have been partly dismantled for agricultural world trade and negotiations are underway at the World Trade Organisation (WTO) for further dismantling.

Intervention (public storage) : mechanism of market support that consists in enabling producers to sell an agricultural product in the Member State (Intervention Agency) at a price established by a Council regulation; this intervention price then operates as a minimum price on the domestic market. Initially, unlimited quantities were eligible to this mechanism. As regards the sugar sector, the 2006 reform first restricted this to limited quantities subject to discounted prices, then abolished the mechanism.

Inulin and inulin syrup : inulin is a fibre (made of a chain of fructose molecules) present in