Special report No 2/90 on the management and control of export refunds accompanied by the replies of the Commission
Date: 1990-04-05
Institutions: European Court of Auditors
Subjects: agricultural product, customs formalities, export aid, export monitoring, export refund, terms for aid













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31990Y0531(05)

Special report No 2/90 on the management and control of export refunds accompanied by the replies of the Commission  


Official Journal C 133 , 31/05/1990 P. 0001 - 0045 





SPECIAL REPORT N° 2/90 on the management  and control of export refunds accompanied by the replies of the Commission (90/C 133/01) (Observations pursuant to Article 206(a), paragraph 4, of the EEC Treaty) >TABLE> 0. Prologue1. One morning in May 1989, as part of the Court's enquiry into export  refunds, two auditors found themselves at the German port of Hamburg to examine the physical  controls over cereals shipments. The auditors were informed that the Russian ship, Kapitan  Danilkin, which was moored alongside the port silos at the time of their visit, was being loaded  with cereals under a special Community measure to relieve the German market of surplus German  wheat. Upon observation of the operation the auditors saw that the bow of the ship was indeed being  loaded with cereals. The two auditors observed also that a similar operation was taking place at  the stern of the ship, except that upon closer inspection the mound of cereals there appeared to be  rapidly diminishing, rather than increasing, in size. In fact the cereals were being transferred  from the holds at the stern of the ship to holds at the bow of the ship via a portside silo, an  operation of several days duration. 2. Later the auditors learnt that the ship had first been loaded with French wheat at Dunkerque and  that, en route to the USSR, it had then docked at Hamburg for its cargo of wheat to be  simultaneously unloaded and reloaded via a portside silo. Further investigation revealed that this  was one of many similar operations which had either taken place or were planned to take place at  Hamburg and other German ports. Yet clearly such an apparently superfluous activity, expensive in  harbour and silo charges and wasteful of the time of both the ship and its crew, could not be  motivated by normal commercial practice. The answer, indeed, lies elsewhere. 3. Wheat, having a common definition in all Member States can be sold into intervention storage  throughout the Community, wherever the best deal is to be obtained. This had led in large part to  up to 2  Mio tonnes of wheat per annum entering into German intervention stores over recent years.  In October 1988 the German Ministry for Agriculture, mindful of this trend, informed the Commission  that it forecast a worsening situation in 1989, with German production in excess of national  requirements and a risk of 'massive quantities of wheat` being bought into intervention (). The  Commission concurred and on the premise that the Community market overall would be unlikely to  absorb the surplus (), they agreed to adopt a special measure on 27 January1989 to relieve the  German market by granting a subsidy for the export to third countries of surplus German wheat (). 4. Trade response to the special measure was good. The original ceiling of 300  000 tonnes was  increased to 500  000 tonnes and subsequently to 700  000 tonnes following the suspension of the  general free market arrangements for the export of wheat as a further encouragement to traders to  make use of the special measure. By 16 March 1989 the success of the measure was not in doubt as  all 700  000 tonnes had been agreed for export at a cost of some 47,67  Mio ECU, or 68 ECU per  tonne. 5. On 28 March, however, the Commission received a telephone facsimile from the German authorities  which indicated that, of the wheat so far physically exported under the special measure (some 470   000 tonnes, of which the first shiploads had completely escaped physical control), none had been of  German origin. Nor indeed had the wheat been taken from the German market. Apparently ships en  route to the USSR and Poland, and loaded with French wheat taken on board at French ports, were  docking at German ports for the simultaneous unloading and reloading of their cargoes in order that  the wheat might be recognised as 'exported from the FR of Germany` and so qualify for the export  refund payable under the special measure. 6. The Commission, believing themselves legally constrained from limiting the application of any  intervention measure by reference to the origin of the agricultural produce concerned  (notwithstanding previous precedents for Spanish barley and Greek durum), had attempted to restrict  the scope of the special measure by requiring the wheat to be 'exported from the FR of Germany`.  This device had apparently promised the double advantage of satisfying the lawyers and of enabling  the Commission to target the German market. In practice, however, it seemed that the extra cost  involved in exporting wheat not of German origin through German ports was not proving a deterrent  to certain traders. Some traders needed export licences in order to complete an export deal with  the USSR, others were attracted by the higher than normal refund level. 7. The Commission reaction, on 6 April, was to increase the quantity available under the special  measure by a further 200  000 tonnes to a total of 900  000 tonnes and to introduce a requirement  for a minimum protein content of 12,5  %. Both changes were linked as by this stage it was becoming  clear that the quality of the German wheat harvest was perhaps the best in the Community with only  wheat of German origin able to meet the protein requirement. A further 145  000 tonnes only were  disposed of under the new conditions. The previous forecast surplus of 'massive quantities of  wheat` was now seen to be significantly out of step with reality as the Community market proved a  ready outlet for this high quality wheat. 8. The last deliveries under this programme were authorized on 25 May, when the Commission accepted  bids totalling 55  000 tonnes at refund rates between 51 and 54 ECU per tonne. On the same day the  Commission rejected a bid to export wheat from the open market at a refund rate fractionally less  than 40 ECU per tonne, having decided to suspend all further market sales other than those under  the special German measure. 9. The Commission does not know the origin of the wheat exported under the special measure to  relieve the German market of surplus German wheat. The Commission believes that traders were  unaware that for their cargoes of French wheat to be recognised as 'exported from the FR of  Germany` they would have to physically unload and reload the wheat via a German port silo, (at a  cost estimated by the Commission of up to 10$ per tonne) and therefore did not take the extra costs  into account when submitting their bids for refunds under the special measure. The forecast by the  German Ministry of Agriculture and the Commission of 'massive quantities` of wheat on the  thresholds of German intervention stores was wide of the mark (in the event only 800  000 tonnes  was bought in comparison with an annual intake of 2  Mio tonnes over recent years). 10. The Court estimates, on the basis of an analysis of 60  % of quantities exported, that of the  845  000 tonnes eventually subsidised for export, between 130  000 and 160  000 tonnes only was  harvested in the FR of Germany. The balance of about 700  000 tonnes was transhipped via German  ports, mainly from France but also from the United Kingdom and Denmark en route to the USSR and  Poland. In contrast the Commission has cited a trade source which believes some 350-400  000 tonnes  of the wheat exported to have been harvested in the FR of Germany. The justification for this claim  is unclear to the Court. The total cost of the special measure to the Community budget was some  57,5  Mio ECU. 1. Introduction1.1. Over the past two years the subsidised export of  agricultural produce to countries ouside the Community has replaced intervention storage as the  principal instrument by which the Community maintains the equilibrium of the internal market,  thereby regulating its internal agricultural price level. The produce exported may be taken from  the open or 'free` market or from intervention stores. The subsidy may take the form of an export  refund, a low price sale from intervention storage or a combination of both. The subsidy enables  exporters to compete in world markets where prevailing prices (in part influenced by the subsidies  of other producers) are generally lower than Community prices. Rates of refund for produce exported  depend on the precise classification of the goods concerned and they can also vary according to the  country of final destination. 1.2. In 1988 the Community budget subsidised the export either from the market or from intervention  stocks, of 24,8  Mio tonnes of cereals, 0,8  Mio tonnes of beefmeat and 16,8  Mio tonnes of milk  and milk products with export refunds totalling 7  000  Mio ECU. In addition there are losses borne  by the Community budget arising from the export of intervention stocks at low prices (). 1.3. Much of the day-to-day administration of the policy is delegated to Member States' paying  agencies. Customs authorities also have a vital role to play in the control of export movements.  All the important policy decisions are taken by the Commission. It is the Commission, usually  following consultation of the Management Committees (see paragraph 2.3) for the relevant markets,  which determines the level of subsidy in each case, principally by setting refund rates and  determining minimum prices for low-price sales from intervention. The Commission also has a  decisive voice over such key parameters as the timing, quantity and destination of subsidised  exports. 1.4. Export refund rates may be set as a result of tendering, judgementally by reference to the  perceived difference between Community and world market prices or by purely ad-hoc means. In order  to qualify for export refund the trader is normally required to commit himself to export a  determined quantity and quality of produce within a set period to a defined range of third  countries. It is the licence, issued to the trader by Member States' paying agencies on behalf of  the Commission, which is the legal expression of the contract struck between the Community and the  trader. The present report does not examine the licensing system as such, but since many of the  report's observations presuppose some knowledge of that system it is summarised in Annex 1. 1.5. From the point of view of the Community budget, the system of rate-setting and licences can be  said to provide a basis for central control over expenditure. It also gives the Commission a  flexible means of managing the export market. For example, the Commission may apply 'correctives`  to previously agreed and published refund rates to discourage or encourage traders to export in  particular situations or to a specific destination. 1.6. Table 1 shows how budgetary expenditure on export refunds developed over the last 10 years and  Table 2 indicates how export refunds have superseded public intervention storage as the key-stone  of the price guarantee system under the common agricultural policy (CAP). A characteristic feature  of export refunds which is not revealed by the tables is that for certain products the value of the  export refund payable on a single export consignment will often exceed the price payable by the  third country customer. By way of illustration the Court found the following examples (based on  rates applicable in 1986/87) during the course of its audit: (a)a single container of beefmeat exported to Libya export refund: 34  700 ECU invoice value: 18   600 ECU(b)a consignment of 161 tonnes of butter oil to Abu Dhabi export refund: 347  850 ECU  invoice value: 218  000 ECU(c)a contract for the exporting of 450 tonnes of butter to USSR export  refund: 867  850 ECU invoice value: 150  620 ECU(d)a contract for 2  000 tonnes of milk powder to  Algeria export refund: 2  515  000 ECU invoice value: 1  536  430 ECU(e)a consignment of feta  cheese to Iran export refund: 2  720  000 ECU invoice value: 2  511  000 ECUThe significance of  such cases for the Community and the Community's auditors is that the financial risks of the  transaction are potentially bigger for the Community than for the purchaser. >TABLE>1.7. More than 35  % of EAGGF Guarantee expenditure is taken by export refunds  and more than 70  % of this lies within three market areas: beefmeat, cereals and milk products.  Export refunds in these three market areas are the subject of this report. The aspects examined  are, firstly, the Commission's central role in setting refund rates and determining minimum prices  for low price sales (chapter 2) and secondly (chapter 3), national controls over export  consignments in the Member States principally concerned, viz., Denmark, FR of Germany, France,  Ireland, Italy, Netherlands, United Kingdom. This second part of the report results from an  extension to the cereals and milk products sectors of earlier audit work done by the Court in  certain countries in the beef sector of which a first instalment of conclusions appeared in the  Court's 1987 Annual Report. 1.8. The report also updates previous observations as to the national arrangements for compliance  with Council Directive 77/435/EEC of 27 June 1977 () [now replaced by Commission Regulation (EEC)  4045/89] () which requires Member States to carry out systematic a posteriori checks of the  commercial documents of undertakings receiving payments from or making payments to the CAP. Such  checks are complementary to the controls normally carried out by Customs and Paying Agencies. 1.9. The main issues considered by the enquiry are whether: (a)Commission procedures for setting refund rates, concluding special deals and arranging low cost  disposals, are consistent with the principles of sound financial management, and are effective; (b)appropriate controls are foreseen and in operation at both Community and national level to  ensure the legality and regularity of all Community expenditure in relation to export refunds; (c)appropriate independent controls are provided for and effectively performed on the export refund  transactions. 1.10. The Court regrets the tone adopted by the Commission in its replies to the Court's  observations. Table 2 - Evolution of expenditure for export refunds, intervention and consumption aids for three  key products (cereals - milk and milk products - beefmeat)>START OF GRAPHIC><? D><?þ><?þ><?þ><?þ> <? 3><?×42><?þ><? 8> <? 3><?þ><?Ð7><?²>Mio ECU<? 8><?þ><?ue><?û><?Ð7><?±><?þ><?×04><? ©><? ¨> BUDGET <?¾><?Ð7><?±><?þ><?×11><?©><?º>Export refunds <?½> <?í><?ue><?ue><?»>Intervention storage  (public and private, excluding depreciations) <?½> <?í><?ue><?ue><?»>Consumption aids<?Ð7><?±><? 8> <?×09><?ú><?×18><?©>Consumption aids<?Ð7><?±><? 8><?×19><?ú><?×25><?©>Intervention storage<?Ð7> <?±><? 8><?×31><?ú><?×25><?©>Export refunds<?Â"END OF GRAPHIC>>REFERENCE TO A FILM>Table 5 -  Sales of skimmed milk powder (1  000 tonnes) from intervention storage under Special Regulations   (1) in 1987/88>START OF GRAPHIC><?ue><?Ð7><?²>(1  <? >000 tonnes)<? D><?þ><?þ><?þ><? 3><?×30><?þ> <? 8><?Dl70506><? 8><?þ><?ue><?©><?©><?¦><?Ð7><?±>April 1987 <?½>  May <?¿> June <?¿> July <?¿>  Aug. <?¿> Sept. <?¿> Oct. <?¿> Nov. <?¿> Dec. <?¿> Jan. 1988 <?¿> Feb. <?¿> March <?¿> April <?¿> <?Ð7><?±><?þ><?ue><?©><?©><?¨>(<?ó>1<?ò>)  <? ><?º>a)  <? >Regulation (EEC) No 727/87 of 13 March  1987 (SMP for export)  <? ><?oe><?AE4><?¤><?¤><?¤><?¤><?¤><?ae> <?¼><?Ð7><?±><?ue><?»>b)  <? > Regulation (EEC) No 2213/76 of 10 September 1976 (SMP for internal sales)  <? ><?÷><?oe><?DLH300006N>   <? ><?DLH300006N>  <? ><?DLH300006N>  <? ><?DLH300006N>  <? ><?DLH300006N>  <? ><?DLH300006N>   <? ><?DLH300006N><?ue><?ue><?Â"END OF GRAPHIC>>REFERENCE TO A FILM>2.  Commission Management of ExportsThe regulatory framework2.1. The basic regulations establishing  the common organization of the markets in milk and beef were published in June 1968 (). The EEC  grain market regulation was established in 1962. The present market organization is laid down in  Council Regulation (EEC) N° 2727/75 (). All three regulations make a common provision for the use  of export refunds to facilitate the exportation of products for which world prices are below those  ruling within the Community. Refunds for many of the most important export contracts are fixed by  tender. In other cases the applicable rates are those published by the Commission. The latter rates  are required to be fixed at regular intervals but the Commission may alter them at any time, either  on its own initiative or at the request of a Member State. 2.2. Export refund rates are the same for the whole Community. They vary by product and may be  differentiated according to destination. For cereals and beef there is significant differentiation  but in the milk sector this only applies to cheese. Licences are required for all cereals, beef,  butter and skimmed milk powder (SMP) exports and are required for all other milk products if the  exporter exercises the option to fix the rate of refund in advance (a procedure known as  pre-fixing) (). 2.3. The regulations also established Management Committees for each market comprising  representatives from the Member States presided over by a representative of the Commission.  Although the Commission can change the level of refund rates at any time, it is required to consult  the appropriate Management Committee periodically about the refund rates, with a view to confirming  or changing them. The Committee is required to give an opinion. Should the Committee vote against  the proposal the Commission must refer the proposal to the Council which has one month in which to  reach a different decision by qualified majority. 2.4. General rules for granting export refunds on milk, beef and cereals are laid down in Council  Regulations (EEC) N° 876/68, N° 885/68 and N° 2746/75 respectively (). The criteria to be taken  into account when determining refunds are essentially the same for the three markets and are  summarised in Annex 2. 2.5. The legislative framework for the system of export refunds has burgeoned since the market  organisations were established. There are numerous regulations concerning export licences,  pre-fixing, advance payment, sales from intervention by tender or at fixed price and many which are  market specific, for example, deboning of meat, transformation of butter into oil and cereal  co-efficients for flour. General agreement on tariffs and trade (GATT)2.6. Within the framework of GATT a series of  negotiations (known as the Uruguay Round) has been in progress since September 1986 with the  objective inter alia of reducing levels of agricultural support and protection. This is  particularly pertinent to the USA and the EEC with respect to the world grain trade in which they  continue to compete by offering subsidised exports. The American Export Enhancement Programme (EEP)  which was launched in 1985 has to date resulted in 102 initiatives aimed at 65 countries covering  12 commodities. 2.7. It is Commission policy to match the subsidies on US agricultural exports in order to protect  traditional markets and particularly in the milk sector to promote exports of products with a high  value-added element. On occasions the policy of matching has led to the award of exceptionally high  refund rates, for example for wheat to Egypt (paragraph 2.65 refers) and the 20  % increase in  rates for pure bred cattle (paragraph 2.40 refers). Setting the level of subsidy2.8. The premise which underpins the Community policy of subsidising  agricultural exports is that it would not be possible to export the quantities of cereals, milk  products and beef necessary to stabilise internal market prices at the desired level without the  provision of financial assistance to exporters in order to bridge the gap which normally exists  between the level of prices obtainable in world markets and the (higher) Community price level. If  the level of financial assistance exceeds the minimum necessary for that purpose, exporters are  over-compensated at the expense of the Community budget (and - because of the consequence for  internal prices - the Community consumer). The dilemma for the Commission is how to achieve what is  a fine balance between effectiveness (i.e. the exportation of surplus Community products) and  economy. 2.9. The Commission uses two main instruments for subsidising the export of agricultural products:  low price sales from intervention and the offer of export refunds for the export of products either  from the free market or from intervention. The relative importance of each instrument varies from  case to case, as does the extent of Commission involvement. There are published refund rates for  all three sectors covered by the present review. These are the rates which are available to any  trader at any time; they are sometimes referred to as 'standing refunds`. They may be enhanced or  reduced in a number of ways, e.g. by 'correctives` valid for particular destinations and periods. 2.10. The Commission can draw on two main sources of external information to guide its decisions  about refund rates. One is such data as are published or are available in Member States about  Community and world price levels. The other is the evidence of market prices derived from tenders.  Neither source can be regarded as wholly reliable or objective. 2.11. Ultimately, it is the Commission's judgement which is paramount in determining the rate of  refund and the price level at which low-price sales take place. Whatever the objective mechanisms  theoretically available to the Commission it would be unrealistic to imagine that such mechanisms  could be sufficiently fine-tuned and responsive to substitute finally for the exercise of what is  essentially commercial judgement. The management problem for the Commission is how to apply such  judgement whilst satisfying the requirements of public accountability. The most pertinent of these  are in the Court's view that: information is maintained in a form suited for the requirements of  management and of independent control by third parties; economy is exercised in determining rates  and low-price sales with their budgetary cost ascertained and monitored; the effectiveness of  measures taken is assessed to determine performance against plan and whether remedial action is  necessary; correct procedures for the information and consultation of traders are followed. 2.12. The Court has examined Commission decisions determining export refunds and low price sales in  the three markets under review. The Court's examination was principally concerned with decisions  taken in the years 1987 and 1988. The control problem, whether from the standpoint of the Court of  Auditors or that of Financial Control, is how to determine with reasonable assurance whether sound  judgements have been made. In principle this is possible only through discussion with the officials  concerned, evaluation of procedures followed and scrutiny of the documentation which records their  evaluation of particular cases. In this way it should be possible to establish a clear link between  the facts of the case as perceived by the Commission and the judgement made as to the appropriate  rate of refund or price level for low price sales. In the absence of a satisfactory documentary  record for these important decisions the requirements of accountability cannot be met in form or in  substance. 2.13. The export operations which are the subject of the present chapter are broadly of three  sorts. There are, firstly, standard operations in which export sales are made from the free market  either with the aid of published export refunds or by open tendering. Secondly, there are low price  sales from intervention stocks, in which the level of subsidy (often a combination of low price and  export refund) is determined by tender or pre-determined by the Commission. Lastly, there are  'special measures`, which are initiated either to take advantage of a specific export opportunity  or to match the terms of competing offers from the US or other producers. This sequence is  reflected in the three sections below (paragraphs 2.14 to 2.78) which present the Court's findings  with regard to the Commission's management of export subsidies in each of the three markets under  review. MilkIntroduction2.14. The export market in milk products comprises bulk products (namely butter  and SMP) and so-called derived products such as cheese, enriched whole milk powder (WMP) and  condensed milk. The market as a whole lacks a recognised 'barometer` for world prices. However, the  minimum price levels set by GATT effectively determine the floor of the world market for the main  products. The reduction in EC stocks of the two bulk products - butter and SMP - has been  remarkable. This has been achieved largely as a result of special disposal programmes (mainly for  butter) and more favourable market conditions facilitating export (especially for SMP). Butter  stocks of 1,3  Mio tonnes as at the end of 1986 had been reduced to 64  000 tonnes by March 1989  and SMP stocks had been eliminated. 2.15. The world market is shared principally between the Community, New Zealand and to a lesser  extent the USA. Competition is intense with the direct commercial involvement of the New Zealand  Dairy Board in export transactions, providing it with the information necessary for setting the  most competitive export subsidy without the risk of transgressing GATT minimum prices. 2.16. One problem for the Commission is how to establish and maintain a reliable indicator of  current world prices. Another is how to intervene effectively in the market without infringing GATT  minimum prices. A further difficulty for the Commission in this particularly competitive market is  how to fulfil the requirements of accountability, such as through the publication of refund rates,  without alerting foreign competitors to its trade intentions (with obvious risks to the success of  its initiatives). Setting the level of subsidyPublished Rates2.17. The key rates are those for butter, SMP, WMP and  certain cheeses from which all other milk product rates are derived. The rates represent the  difference between the Commission's estimations for world and Community prices. The Community price  is calculated weekly by reference to price information supplied by Member States' Paying Agencies  and that for the world market by reference to various trade and published sources. The Court found  that certain Paying Agencies were not always forthcoming with the information required and that  consequently there were examples of the same prices being used over several months by default. The  Court found also that there was no systematic collation, analysis or recording of sources for world  prices by the Commission, although a weekly report is produced for internal use which covers  significant events and quotes some prices. 2.18. The Commission claims to apply a standard methodology in calculating refund rates based on  the difference between world and Community prices. The Court's auditors attempted to re-perform the  calculation of the refund rates for butter, SMP and cheddar as published in Commission Regulation  (EEC) N° 701/89 of 17 March 1989 (). The results of the auditors' calculation are set out in Table  3. There was no record of the Commission's own calculation of these rates. Indeed for SMP and  butter the published refund rates were based on oral instructions from the Commissioner. One of the  elements of the auditors' calculations was the information about world prices published in 'Dairy  Market News` (Volume 56 N° 13 of 31 March 1989) this being the only independent source of evidence  about world prices which was available in the Commission for that period. The Community price was  taken as the lowest of the ex-factory prices of the four main Community exporting countries. >TABLE>2.19. In view of the difficulty which they had experienced in ascertaining the  basis on which previous rates had been fixed, the auditors also examined the latest published rates  at the time of audit [Commission Regulation (EEC) N° 1476/89 of 25 May 1989] (). At the time of  audit, no documentary evidence in support of these rates appeared to be available. However,  following a meeting with the Director General documents were later produced. These showed  appreciable discrepancies between the decreases for SMP, WMP and butter proposed by the market  division and those adopted. Unpublished Rates2.20. At the end of 1986 the Commission's published rates for certain export  markets were frequently being undercut by the New Zealand Dairy Board and stocks of butter and SMP  remained high (Table 4 refers). Faced with this unhappy combination of circumstances the Commission  took the decision to adopt an alternative approach for setting refund rates. The objectives of this  new approach were to exploit the lower transport costs (which are not always fully reflected in  available price data) of Community exporters due to their relative proximity to the main export  markets and to set the most competitive rates possible without transgressing GATT minimum prices.  In order not to reveal publicly the Commission's trade intentions, the rates would not be published  in the Official Journal, nor would public tendering be entered into. The Commission's intention was  to compensate for the operational advantage which the New Zealand Dairy Board enjoyed by virtue of  its position as sole exporter. 2.21. The Commission clearly needed to contact the trade in order to obtain the information  necessary for meeting the objectives set out above. However it did not want to deal directly. The  procedure which it adopted had a superficial resemblance to tendering in that intervention agencies  were asked to request offers from regular traders in terms of the refund they would require in  order to export SMP, butter or butteroil to specific destinations. The offers received were  collated on a weekly basis and forwarded to the Commission. The market division would examine the  offers and calculate a rate close to the GATT minima based on the latest US dollar exchange rate.  The refund rate(s) would be set out in a Decision document for signature by the Commissioner.  Signed Decisions were handed over to Member States' representatives to disseminate to the traders  involved via the intervention agencies. Those wishing to trade would apply for licences in the  normal way but prefixing at the unpublished rates. Traders were not bound by the offers previously  submitted to paying agencies. Those whose offers had been at a higher rate were still eligible to  benefit from the unpublished rate as were those who had not bid. Conversely, those who had  requested a lower refund rate received the (higher) unpublished rate. 2.22. The first unpublished rates (for SMP, butter and butteroil) were set in Decision 86/2508/EEC  for the period 18 December 1986 to 5 January 1987. There were a further 32 Decisions in 1987 and 17  in 1988 after which the practice was suspended. The number of special rates so determined was 108.  The average validity period for these rates was 8 days and the average premium over published rates  was as follows: >TABLE>Several of the Decisions relate to a single destination (Algeria, Mexico, India).  For these decisions the file notes explain the methodology of the calculations but do not reveal  either the underlying price data or the nature of the offers received. >TABLE>2.23. Although the Commission tended to accept or set rates at the lower end of  the range of offers received, the absence of working files precludes any view as to the economy of  the operation overall. The Court calculates that some 300  000 tonnes of SMP and 450  000 tonnes of  butter/butteroil were exported with the benefit of unpublished rates. Special sales2.24. These are one-off sales of bulk products which are initiated either to take  advantage of a specific export opportunity or to match the terms of competing offers from other  producers. In the dairy sector special sales are exceptional and relate to the disposal of  intervention stocks only, i.e. SMP and butter. During the period under review there have been three  special export operations, of which the following two are significant: (a)Commission Regulation (EEC) N° 765/86 (): Sale of intervention butter for export to India,  Pakistan, Mongolia and USSR; (b) Commission Regulation (EEC) N° 727/87 (): Sale of SMP from public stocks for export. 2.25. The first-mentioned operation illustrates the difficulties of the Commission in relying upon  tendering to set an appropriate level of refund when a particular export market is accessible  through a single trader only, such as is the case for many deals with Eastern-bloc countries. The  second operation, which took place in a market with numerous traders, demonstrates the possible  consequences of not allowing prices to be determined by market forces, as facilitated by  open-tendering. Commission Regulation (EEC) N° 765/86: Butter for Russia2.26. The large stocks of butter and SMP,  once held in Community intervention stores, raised expectations that the Commission would be  selling at low prices in the near future. These expectations depressed world prices. This  phenomenon was acknowledged by GATT which, in order to relieve the world butter market of this  particular burden, gave the Community dispensation to conclude special disposal arrangements with  certain third countries at prices which were considerably below the GATT minima. As a result  Regulation (EEC) N° 765/86 was adopted in March 1986 for highly subsidised sales of butter to  India, Pakistan, Mongolia and the USSR. 2.27. EEC intervention stocks were 1,15  Mio tonnes as at the end of February 1986. Until 31  December 1986 the sales under Regulation (EEC) N° 765/86 were by tender at a little less than 70  %  of the intervention price level. Published rates of export refund were also payable. The combined  effect of the low price and the refund effectively meant that the butter was sold below the GATT  minimum price of 1  000 USD/tonne. The special concession should have ended on 31 December 1986  [Commission Regulation (EEC) N° 3535/86 refers] () but because the USSR held off buying in the  anticipation that they would be able to obtain even lower prices only 105  000 tonnes were sold  during the year. Given the measure's relative lack of success, GATT agreed that for contracts  signed with the USSR prior to this date, the concession would remain valid. Only one company held  such a contract. 2.28. As of 1 January 1987 the combination of export refund and low prices was stopped by  Commission Regulation (EEC) N° 155/87 (). Instead, export subsidy was provided simply by means of  low price sales for which prices were reduced by an amount more or less equal to the refund which  was previously payable. Prices continued to be set by means of monthly adjudications even though  the Commission was dealing with only one trader. 2.29. The Court examined the bids received at the German intervention agency. The Commission  rejected all bids submitted for adjudication on 27 January 1987, the first for which export refunds  were not payable. For the next adjudication (10 February 1987) one German bid was 20 ECU/tonne  higher than five other bids from the FR of Germany and corresponded exactly to the rates bid by  four companies in France and another in the Netherlands. In later adjudications the German bids  were uniform. An examination of Commission records revealed that this was also the case for bids  submitted in other Member States. The bids were orchestrated by the contract holder. Licences for  610  000 tonnes were awarded at an average price of 215 ECU/tonne reflecting subsidies of more than  90  % of the intervention price. Total sales under Regulation (EEC) N° 765/86 were 715  300  tonnes. Commission Regulation (EEC) N° 727/87 of 13 March 1987: SMP for export2.30. Under this Regulation  261  381 tonnes of SMP were sold at the buying-in price applied by the intervention agency on the  day of sale, minus 30 ECU per tonne. The prevailing rates of export refund were also payable. 92  %  of sales were from German intervention. 2.31. Sales were modest until December 1987 when they reached 83  000 tonnes (more than three times  the previous month's total). The Commission did not react to this upturn, although they were aware  of the sales situation. In January 1988, monthly sales reached 91  000 tonnes and a similar  escalation was observed for sales of SMP on the internal market at intervention price [Commission  Regulation (EEC) N° 2213/76] () (see Table 5). 2.32. At the Management Committee meeting held on 22 January 1988 it was decided to suspend sales  at intervention price minus 30 ECU/tonne amidst fears of speculation by traders. In this way the  price was brought up to that prevailing for internal sales under Regulation (EEC) N° 2213/76. No  further sales for export took place at the higher price but sales for the Community market  continued apace: 138  500 tonnes left intervention during April alone. The first four months of  1988 saw stocks fall from 473  000 to around 100  000 tonnes. 2.33. The 'cost` of Regulation (EEC) N° 727/87 amounted to 265,8  Mio ECU for refunds, plus 7,8   Mio ECU in terms of intervention sale price reduction. The objective of the Commission was to  reduce stocks of SMP as quickly as possible by encouraging exports to third countries. The  ex-intervention price was accordingly set by reference to available price information and  judgement. A marked and continuing improvement in world and Community market conditions meant that  the ex-intervention price set by the Community quickly became much too low. However, the Commission  did not take advantage of the changed market conditions and sold SMP for export cheaply when it did  not need to do so. In fact given the strong demand for SMP on the internal market () it is unlikely  that the disposal of intervention SMP to third countries was justified at all. BeefIntroduction2.34. The Community is one of the market leaders with 20  % of world beef exports  in 1988. From 1984 the normal internal supply of meat was augmented by the slaughtering of milk  cows as a consequence of the introduction of milk quotas. Since 1987 a fall in cattle numbers and  hence the breeding stock has resulted in an overall reduction of 4,5  % in 1988. A further decline  of some 3  % is envisaged for 1989. Total production of beef and veal was 8,1  Mio tonnes in 1987  and 7,7  Mio tonnes in 1988. Consumption within the Community is around 7,5  Mio tonnes in gross  terms. With imports of nearly 0,5  Mio tonnes the Community has an annual surplus in the region of  1  Mio tonnes. Community export subsidies can have a significant effect on world prices in this  market. In 1987  909  000 tonnes were exported mainly to the Middle East (28  %) and Egypt (20  %).  In 1988 exports fell to 789  000 tonnes. Sales of intervention meat accounted for 535  000 tonnes,  meat exports from the free market were 186  000 and the remainder (8  %) was in the form of meat  products or live cattle. In 1988  10 countries bought 74  % of all exports, the three most  important purchasers being Egypt, Iran and Poland, each taking well in excess of 100  000 tonnes. 2.35. The EEC export market is characterised by a small number of major trading companies. Even  fewer operators are involved where the export is to Eastern bloc countries. Due to the high  financial risks involved and the need to put up guarantees for transactions which are normally for  substantial amounts, smaller traders are only able to participate indirectly in sales by tender by  obtaining export rights (in the form of sub-licences) from the larger companies. For free market  sales there is greater scope for the smaller trader and for more competition. Setting the level of subsidy2.36. For export sales from the open or 'free` market the Commission,  in principle, sets refund rates by reference to available price information. These rates are then  published in the Official Journal. In the case of intervention sales, the level of subsidy is  determined by 'mini-tenders`, based on a published minimum acceptable price, although in certain  circumstances refunds may be payable in addition. 2.37. In the absence of an index of world and Community prices the Commission maintains its own  indicators based on available price information. In practice, Member States' Intervention Agencies  telex the Commission every week with details of national producer prices. Information as to world  prices is obtained chiefly from traders operating in third countries but also from producer  association publications. Published Rates2.38. Rates for the numerous different qualities and cuts of meat, including rates  for live animals and products, have a common base in the sense that they are all derived from the  rate for a full carcass, which reflects the Commission's estimate of the difference between  Community and world prices. The forequarter rate is equal to 70 - 80  % of the carcass rate in  terms of ECU per tonne and the hindquarter rate equals 120 - 130  %. The rate for live cattle is  equal to some 59  %. 2.39. Some rates were originally set several years ago and have subsequently been subjected to  incremental and ad hoc changes. For example, in November 1986 in order to limit budgetary  expenditure on refunds, all meat rates were reduced by an average of 10  %. This decrease had no  noticeable effect on export trade. 2.40. In setting rates for certain export markets the Commission may have to take into account not  only the difference between Community and world prices, but also the extent of any export subsidy  offered by foreign competitors (which may not be reflected in reported prices). In the face of  aggressive initiatives by competitors in the world market the Commission would appear to have  little choice but to increase rates accordingly if it is to maintain the volume of exports. Such a  situation occurred in March 1988 when in response to the United States' Export Enhancement  Programme (EEP) and Austria's special subsidy on sales to Spain the rate for pure bred cattle was  increased by 20  %. 2.41. Where it sees opportunities to export to third countries the Commission has sometimes taken  existing published rates as a base and increased them until exports are stimulated. Two such cases  occurred in October 1988: (a)deboned frozen meat destined for the USA. The refund was increased from 90 ECU/100 kg to 100 ECU  in March 1988 and to 112 ECU in October 1988. The reason for this was to stimulate exports in order  to meet the annual 5 000 tonne quota agreed with the USA. The first increase proved inadequate.  Exports for October through December totalled 3  590 tonnes; (b)in response to an opportunity to sell some 120  000 tonnes to Iran, Algeria and Tunisia,  following the Iran/Iraq ceasefire, the rate for fresh male meat (half carcass) destined for North  Africa, Near and Middle East was increased by 10  % from 152,5 to 168 ECU/100 kg. By the end of May  1989  123  000 tonnes had been sold. On 26 June 1989 the refund was reduced to the pre-October 1988  rate. 2.42. Both initiatives have been effective. However, it is less certain whether the quantities  disposed of through these sales could not have been exported elsewhere (or sold on the Community  market) at lower cost to the budget, bearing in mind the rundown of nearly 700  000 tonnes of  intervention stocks of beefmeat in the eighteen months to June 1989 (Table 4 refers). Sales from intervention2.43. Commission policy currently favours the use of tendering in this  market, in contrast with the previous policy of fixed price sales. The form of tender adopted by  the Commission is a two stage system [the so-called 'mini-tender` under Commission Regulations  (EEC) N° 2173/79 () and N° 2539/84 ()] whereby bids are invited in excess of a minimum price  published in the Regulation announcing the sale. Any meat remaining after the adjudication has been  held is put up for sale at this minimum price. The minimum price in effect serves as a reserve  price in that it is the minimum acceptable bid price. The Court found that in 1989 between 20 to 35   % of quantities on offer were sold by tender, and that these sales were either at the minimum  price or at prices which were marginally above it. The Court recognises the attractions from the  traders' point of view of a procedure which minimises the hazards of tendering but believes that a  more competitive procedure would benefit both the budget and export policy. In the Court's view the  publication of minimum prices is of doubtful value. 2.44. Regulation (EEC) N° 2173/79 (Article 6) requires a minimum period of 14 days between date of  publication in the Official Journal and the deadline for submission of bids to the intervention  agencies. This article does not apply to mini-tenders. The annex to the Regulation announcing the  sales serves as the notification. In 1987 in four cases only 2 days elapsed between publication and  the deadline. During 1988 the average was 5 days but one Regulation was published the same day as  the deadline and another just one day before it. According to the Commission, members of the  Management Committee relay details of forthcoming tenders to the intervention agencies immediately  after their meetings, and publication merely fulfils a legal requirement. The effect of this is to  place the onus on the Intervention Agencies to notify interested parties which may mean that  competition is unnecessarily restricted. Special sales2.45. There have been four special export sales since 1986, only two of which are  significant in terms of the quantities sold: (a) Commission Regulation (EEC) N° 1812/86 (): 200  000 tonnes of beef for Brazil; (b) Commission Regulation (EEC) N° 2415/88 (): 206  000 tonnes of beef for Eastern bloc countries. The Court offers the following observations on these two sales. Brazil2.46. An opportunity arose for the export of 200  000 tonnes of Community intervention beef  to Brazil. Beyond setting a ceiling for exports of 200  000 tonnes the extent of Commission  involvement is unclear. Apparently the Commission did not seek to arrive at any sort of prior  understanding on prices with the sole Brazilian importer, rather this aspect was left to be settled  by tender between the importer and individual exporters. The negotiating strength of the Commission  is, of course, much greater in the first eventuality than in the second, with important  consequences for the budget. 2.47. An invitation to tender was published in the Official Journal on 12 June 1986. The Regulation  required that the operation draw on stocks of at least three Member States and it stipulated that  at least 40  % by quantity was to be taken from Italian intervention stores. In this way the  Commission apparently intended to draw down stocks more or less evenly between Member States whilst  correcting an imbalance in the size of the Italian stockholding. 2.48. The minimum bid quantity was set at 10  000 tonnes and no ceiling was indicated. The export  subsidy was entirely by way of a low price sale. A condition attached to the sale of the first 100   000 tonnes was the Commission's agreement to the import from Brazil of 5  000 tonnes of so-called  Hilton beef and to the import of 2  000 tonnes of beef from Argentina and 1  000 tonnes from  Uruguay by way of compensation for loss of trade. The value of the imported beef on the European  market is estimated at some 30  Mio ECU. 2.49. All offers for round one (26 June 1986) were rejected; all those for round two (9 July 1986)  totalling 100  000 tonnes were accepted and of the 170  000 tonnes bid for in round three (13  August 1986) only 100  000 tonnes were accepted. For rounds two and three the Commission fixed  separate prices for each Member State, taking as its guide price that which was apparently obtained  by the USA in a recent sale to Brazil involving a comparable quantity of beef. In both rounds the  Italian price was the lowest. This is consistent with the Commission's desire to promote sales from  Italian intervention although Council Regulation (EEC) N° 2388/86 () of 29 July 1986 reduced the  requirement from 40  % to 30  %. 2.50. It is apparent from an analysis of the bids received that traders were co-operating, with  bids from different traders identical for each Member State concerned. It is also worth mentioning  that in advance of any formal notification of the sale, one company approached the Commission with  a proposal to export 100  000 tonnes of intervention beef to Brazil. The same company won a total  of 45  000 tonnes for export through the tendering procedures as did another company which  submitted identical bids for each round of bidding. Eastern European Countries2.51. The Court has been unable to establish the terms of an agreement  with the USSR which apparently linked the sale of 110  000 tonnes of butter to that for 200  000  tonnes of beef (a goal established in July 1988). The butter was delivered in August but no beef  sales had taken place. Given the high level of intervention stocks at this time (770  000 tonnes in  June 1988) the Commission decided to open a sale by tender. The invitation was published on 2  August 1988. The special features of this invitation were: (a)export had to be to Eastern European countries (Bulgaria, Czechoslovakia, Hungary, Poland,  Romania, USSR and Yugoslavia); (b) a high minimum tendering quantity (25  000 tonnes); (c) the quantity sold from a single Member State could not exceed 50  %. 2.52. It is not clear why the sale was restricted to Eastern European countries. The first evidence  on Commission files of any Eastern bloc interest in a sale came from Poland and is dated two weeks  after publication of the invitation to tender. The regulation states that the high minimum  tendering quantity was for 'purposes of control`. The effect was to exclude medium and small scale  traders from the tendering procedure. In fact the minimum tender quantity was doubled after the  first adjudication by introducing a requirement to submit bids of at least 25  000 tonnes in two  Member States [Commission Regulation (EEC) N° 2602/88 of 19 August 1988] (). Despite repeated  requests from the traders to reduce this minimum, the Commission chose to maintain it. The 50  %  limit was designed to facilitate the disposal of hormonized meat. 2.53. For the first adjudication only one company submitted bids (one through the French  intervention agency and another through the German intervention agency). Both were rejected as too  low: average value 1  385 ECU/tonnes. In the second adjudication the same company increased its  bids to an average of 1  397,5 ECU/tonne and was successful. There were no bids for round three.  For the subsequent adjudication (10 October 1988) a second company matched the bids made by the  first, again at an average price of 1  397,5 ECU/tonne. There were no bids for the adjudication  held on 8 November 1988. For the sixth round (13 December 1988) the two companies showed the same  degree of co-operation in submitting identical bids. Only the French bids were accepted, at 1  351  ECU/tonne. A final adjudication was held in January 1989, when again both companies submitted  identical bids for a combined total of 100  000 tonnes. The bids submitted in the FR of Germany (50   000 tonnes) were at 1  410 ECU/tonne, some 4 ECU/tonne higher than successful bids in rounds two  and four. Despite this the Commission rejected all bids on the grounds that they had achieved the  200  000 tonnes envisaged and had promised the Manangement Committee not to accept further bids  without discussing the possibility of reducing the minimum tender quantity. 2.54. In total 206  000 tonnes of beef were sold. The Commission does not know with certainty how  much went to each country but it is thought that at least half went to Poland and some 40  000  tonnes went to the USSR. As with the export of beef to Brazil, this special sale was effective in  that the target quantity for disposal was fully met. However allowing for the export refund paid  (895 ECU/tonne) the beef was sold at a net 500 ECU/tonne at a time when hindquarters were being  sold to the Community processing industry at four times the sale price to the Eastern bloc. CerealsIntroduction2.55. Whilst total world production has recently tended to fall below current  consumption, within the EEC productivity is increasing and is likely to grow by some 2 to 3  % per  annum, despite the reductions in guarantee prices and the introduction of the set-aside scheme. The  major cereal producing countries in the EEC are France, the FR of Germany, Spain, Italy and the  United Kingdom. 1988 EC cereal production was some 162,5  Mio tonnes; estimates for 1989 vary  around 160,5  Mio tonnes. Domestic consumption is predicted to decline by 4 to 7  Mio tonnes  between 1989 and 1995. 2.56. Estimated world trade in wheat and grains during 1988/89 was some 200  Mio tonnes, equivalent  to 16  % of world production. Although the EEC's share of grain exports increased during 1988/89 to  15  % the United States dominates this market taking more than 50  % of all trade. The Chicago Corn  Exchange makes the market and prices are therefore closely tied to the value of the dollar. The  Community's cereal surplus for 1988/89 was some 30  Mio tonnes; for all but sorghum and maize it is  self-sufficient. The EEC's biggest customers are the USSR, China, Algeria and, more recently,  Poland and Egypt. 2.57. The export market for cereals is dominated by even fewer and bigger operators than the beef  market. These companies include multinationals with a complex network covering all the Member  States in which cereals are grown for export. Often they have branches or subsidiaries in non-EEC  countries. Indeed such companies can and do trade between their constituent parts. Thus an export  refund may be granted to a subsidiary within the Community that exports to another of the same  company outside the EEC. From a regulatory point of view this is permitted: so long as the cereals  leave the EEC for consumption in a third country, refunds are payable. There is no requirement for  change of ownership. Setting the level of subsidy2.58. Some 90  % of all cereals exports from the EEC take place as a  result of tendering. This tendering takes one of two forms: (a) for a price to buy from intervention; (b) for an export refund. The remainder take place either using the published refund rates although these are often enhanced  by 'correctives` (also published) or using special rates. The various options are described in more  detail below. Published Rates2.59. Basic published rates apply to both intervention and free market sales. Over  the past two years they have varied between 20 and 60 ECU/tonne for main cereals. They are  judgement based (i.e. not calculated by reference to a formula). In practice the basic published  rates are rarely used. The effective rates for exports from the free market and from intervention  are determined by tender with the addition in some cases of correctives. Correctives2.60. Correctives are additions to or deductions from the published rates for specific  destinations and are a unique feature of cereals market management. They may also be applied to  tendered refund rates and it is in this context that they are generally used. The Commission  believes that the advantage of correctives over special rates is that they are a flexible  instrument for reacting to developments in different markets. 2.61. Correctives are normally published weekly but may be changed more frequently. They serve a  dual purpose: (a) to encourage exports to a specific destination (positive correctives); (b) to ensure that exports take place sooner rather than later (negative correctives). 2.62. Positive correctives are generally low in relation to the export refund itself, typically 3  or 4,5 ECU/tonne. However, the audit team noted that the exceptions had significant budgetary  consequences. For example, in September 1987 a corrective of 20 ECU/tonne was granted for the  export of 850  000 tonnes of barley and 650  000 tonnes of feedwheat to Russia. Similarly a  corrective of 30 ECU/tonne was granted on the 900  000 tonnes of wheat exported to Russia under  Commission Regulation (EEC) N° 395/89 (paragraph 2.76 refers). The cost of these two correctives  alone amounted to 57  Mio ECU. It is not known how much is spent on correctives generally since the  Commission does not have this information. 2.63. The negative correctives are much greater:  P30,  P40 or  P50 ECU/tonne. Typically they  become operative two or three months after publication and are designed to encourage the trader to  export his cereals sooner than the normal expiry date of the export licence would dictate. Negative  correctives are also intended to reduce speculation in licences between traders. 2.64. The bigger customers often get better rates, for example a corrective of 4,5 ECU/tonne has  become the norm for exports to the USSR and was also granted to China for one day on 23 December  1988, when certificates for 1,3 million tonnes were requested. Special Rates2.65. The markets for certain cereal derivatives are particularly restricted or  subject to intense competition between the USA and the Community. In the case of flour for example,  the USA paid bonuses of around 100 USD per tonne in August 1988. Community refund rates for flour  are based on coefficients applied to the rates for wheat which vary according to ash content. The  basic coefficients for flour are those given in Commission Regulation (EEC) N° 162/67 (). For flour  two coefficients apply to international trade, 1,51 for ash content less than 521 mg. per 100  grammes and 1,43 for ash content equal to or greater than this. However, since 1985 the Commission  has applied what they call an internationally agreed average coefficient of 1,40. Applying the 1,4  coefficient to the refund rates for wheat as set by tender in August 1988 gives a refund rate of  approximately 85 ECU/tonne. However, in order to match the American subsidy the rate has been  enhanced for specific destinations, for example to Egypt the effective rate was 116,8 ECU/tonne.2.66. For semolina the refund is calculated with a coefficient based on its cereal input. The  official coefficient is 1,58 [Regulation (EEC) N° 162/67], but since 1985 the Commission has  applied a coefficient of 1,67. Semolina for export to Algeria (where it is used to make couscous)  enjoys a specially favourable refund rate. The main supplier is Italy. Commission Regulation (EEC)  N° 330/89 of 9 February 1989 () fixed a refund of 230 ECU/tonne for export of semolina to Algeria,  which is 51 ECU/tonne higher than that obtained by applying the official coefficient of 1,58. Under  the terms of this regulation the Commission allowed the issue of export licences for 300  000  tonnes [Commission Regulation (EEC) N° 355/89 of 13 February 1989] (). If all deliveries under this  regulation went to Algeria [as is probable, though uncertain ()], the extra cost for these exports  would be 15  Mio ECU. For the export of the said 300  000 tonnes the Commission received export  licence requests for a total of 5,01  Mio tonnes. These requests were from the two companies that  dominate the export market for semolina from Italy to Algeria. The requests were made in the  knowledge that the Commission would scale down the quantities accepted. The Council has in the past  refused to allow tendering for processed products which might have introduced some competition. TenderingFree Market2.67. Tenders are initiated by the Commission in order to dispose of surplus  produce resulting from the current year's harvest and thereby to reduce or avoid the need for  intervention purchases later in the marketing year. There is normally only one tendering operation  per year for each cereal unless the first operation fails to achieve the desired level of sales.  The quantities of cereals put up for sale by tender can range from 100  000 tonnes to several  million tonnes. The Commission usually places emphasis on this activity earlier in the marketing  year and gives it priority over intervention sales for export. Weekly adjudications are held. Bids  may be submitted to the appropriate agencies in any Member State who forward them, in anonymous  format, to the Commission. The Cereals Management Committee meets on Thursday afternoons to  consider the bids and the Commission then decides whether to set a ceiling on the rate of refund  which it is willing to pay, and if so at what level. 2.68. All bids at or below this rate are accepted within the limits of the quantities available. If  the trader's bid is lower than the maximum rate set, he will be entitled to the bid rate only. In  1987/88 the Commission tried to sell a total of 11,3  Mio tonnes of cereals by tender from the free  market and achieved 8,5  Mio or 75  %. 2.69. As a cross-check on the results of free market tenders, the Commission calculates a guideline  refund based on the theoretical refunds required to export wheat and barley from French and British  ports. The calculation is based on the latest FOB price adjusted to arrive at a final port price.  This price is compared with the current world price and the difference having been adjusted by the  monetary co-efficient is the guideline refund. But the Commission can and frequently has chosen to  set higher maximum refund rates, usually to match the subsidies offered by the USA under the terms  of the EEP. Intervention Sales2.70. Tenders may be invited on the initiative of the Commission or at the  request of a Member State. Requests to tender are published in the form of Regulations in the  Official Journal and set out the stockholding by depot/warehouse. Traders are required to bid for  these lots in terms of the price delivered but not unloaded at the nominated port (ECU per tonne).  Mutatis mutandis adjudication procedures are the same as those for free market tenders. The  published refund rate is paid to all traders who have been successful, i.e. who have submitted bids  at or above the minimum price determined by the Commission. In 1987/88 tenders were opened for a  total quantity of 7,2  Mio tonnes against which the Commission recorded 'sales` of 6,1  Mio  tonnes. Bids2.71. The Court examined a sample of bids made for free market and intervention tenders at the  Commission and carried out a detailed examination of these and further bids at three intervention  agencies - BALM (FR of Germany) ONIC (France) and IBAP (United Kingdom). The Court makes the  following observations. (a) deadlines: the regulations stipulate deadlines for the submission of bids to the paying agency  - 10.00 hrs. (Brussels time) Thursdays for free market sales and 13.00 hrs. on Wednesdays for  intervention sales. In several cases the Court's auditors were unable to verify the time bids were  received because the telexes were untimed and/or undated, wrongly timed or dated. Moreover,  interpretation of the deadline varied from agency to agency. Thus one of the key principles of  tendering (equal treatment of bidders) was negated, and the Court was unable to establish whether  the bids had been received in time and were eligible for consideration by the Commission; (b)rejection of bids: in the context of Commission Regulation (EEC) N° 2735/87 () (intervention  sale of breadmaking wheat) three traders submitted bids at BALM for the adjudication of 9 December  1987. The lowest of these bids (53,25 ECU/tonne) was accepted whilst bids at higher prices (55,13  and 56,33) were rejected. The lowest bid related to destination USSR; the remainder were for other  third countries. The Commission is not legally bound to accept the best bid and in this instance  chose not to. The Commission apparently decided to pay a premium for exports to the USSR because it  is an important customer and subject to American initiatives under the EEP; (c)transfer of licences: although some transfers take place in the beef sector, the trade in  licences is modest in that sector by comparison with the cereals sector where export licences have  become a 'commodity` in their own right. Frequently the large operators perform the role of  'brokers`. They do not themselves export (and may not possess) the grain in respect of which they  have acquired entitlement to refund. Having been awarded the right to apply for export licences  following successful bids for cereals put up for tender, they may transfer the rights to other  traders in the form of 'extracts` or sub-licences. Traders can therefore submit bids for high rates  of export refunds which they know will have little chance of being accepted on the assumption that  they will be able to obtain sub-licences at a price agreed with the successful bidder. The Court  found that often those receiving these extracts were traders whose bids had been rejected at the  adjudication. 2.72. Another risk arising from the lack of genuine competition in this market is that a trader has  little incentive to obtain the best price from his customer since he knows that the Commission must  pay a refund sufficient to make exporting worthwhile for him if it wants the grain to be exported.  In this scenario the third country buyer pays less than he otherwise might and the trader's margin  is covered by the granting of a larger refund than would be necessary under conditions of open  competition. Special Sales2.73. In 1987 there were two special export measures to avoid intervention: one for  200  000 tonnes of maize and another for 1,2  Mio tonnes of barley, both from Spain. In 1988 four  measures were opened: (a)100  000 tonnes of breadmaking wheat exported from the FR of Germany [Commission Regulation  (EEC) N° 633/88] (). This was initially restricted to Poland as a destination. The regulation was  later modified to cover all zones. Sales subsequently took place with refunds of 112,50 ECU and  109,89 ECU/tonne at a time when sales from the free market attracted 104 ECU/tonne. The total  quantity on offer was sold; (b) 200  000 tonnes of wheat to be exported to Algeria and/or Tunisia [Commission Regulation (EEC)  N° 2191/88] (). This measure failed to attract any interest and was abandoned; (c)1  Mio tonnes of barley produced in Spain [Commission Regulation (EEC) N° 2444/88] (). This  measure specified that the barley must have been produced in Spain in order to qualify for a  refund, and 407  300 tonnes were sold; (d)600  000 tonnes of durum wheat from Greece [Commission Regulation (EEC) N° 2751/88] (). 300  000  tonnes were sold under this measure of which 250  000 attracted a maximum refund of 130 ECU/tonne  when free market sales were taking place at 122-123 ECU/tonne. The justification for the extra cost  is uncertain. 2.74. During 1989 three special measures were introduced. Once again a tender referring to barley  produced in Spain (300  000 tonnes) has been opened. The two other measures each relate to 900  000  tonnes of common wheat. One of these measures is the subject of the prologue to this report. The  other is considered in detail below. Tender for the refund for the export of common wheat to the Soviet Union2.75. In November 1988  certain traders signed a contract to export 1,5  Mio tonnes of wheat to the USSR for delivery in  January - March 1989. The Commission does not appear to have been involved during the negotiations  at this stage. At this time world prices were relatively low and this was reflected in the contract  made with the USSR which is thought to have been concluded at 5 USD-10 USD/tonne below market  prices. The traders believed that world prices would continue to fall. Nevertheless, they bought  grain on the internal market in anticipation of acquiring export licences at higher refund rates.  Contrary to expectations the grain market picked up, prices on the world market began to rise and  the traders' bids for export refunds under the tender for free market wheat [Commission Regulation  (EEC) N° 2470/88] () proved uncompetitive and were rejected. In December some 2,2  Mio tonnes worth  of licences were issued with a corrective of 4,5 ECU/tonne valid for China and the USSR. These  licences were obtained by traders who were successful in the bidding for export refunds in the free  market tender, but - a fact of which the Commission only subsequently became aware - these were not  the same as the traders with the Russian contract. Nor were the latter able to buy licences on the  market. They were therefore not in a position to meet the delivery requirements of the Russian  contract and the grain remained in the silos of certain major ports, causing congestion, as it  could not be loaded on the waiting Russian ships (some of which departed empty). 2.76. In January 1989 the Commission was prepared to cover the 'licence deficit` by a specific  regulation. On 16 February Commission Regulation (EEC) N° 395/89 () was published offering 900  000  tonnes for export to the USSR; at the same time the USSR was withdrawn as an eligible destination  from the free market tender [Commission Regulation (EEC) N° 2470/88]. 2.77. The 900  000 tonnes up for offer was awarded to the sole bidder in the adjudication of 23  February 1989 for which day a corrective of 30 ECU was granted, giving an effective rate of 71  ECU/tonne. The special corrective was published on the same day as the adjudication took place. At  the same time a bid of 61,9 ECU/tonne under the free market tender [Commission Regulation (EEC) N°  2470/88] was rejected as too high. 2.78. The Court was unable to obtain a satisfactory explanation for the corrective of 30 ECU  introduced by the Commission, or to establish how the export deal was agreed. The Commission  believes that the trader incurred losses on this deal despite the preferential rate granted. Planning and monitoring of export sales2.79. The Commission draws up a supply balance sheet at the  beginning of each year. For the cereals campaign 1988/89 see Table 6. This contains global  quantities which form the basis of an estimation of the financial cost of achieving the exports  envisaged. Based on the average export pattern and prevailing refund rates, the Commission  estimates the probable cost in terms of refunds. 2.80. The Commission produces the internal weekly reports referred to in paragraph 2.17 which  record all decisions reached, both inside and outside the Management Committee meeting. They also  highlight any significant events in the relevant markets. Member States provide regular returns  showing the tonnage for which certificates have been requested/issued. >TABLE>2.81. The Commission has to rely on Member States to keep them informed of  progress on sales. In the past, this has not always happened. The Commission has had to make  repeated requests for the information which has often been provided orally. Following the  introduction of Commission Regulation (EEC) N° 859/89 of 29 March 1989 () which relates to the beef  and veal sector, the situation for this market has improved. Member States are now required to send  the Commission details of amounts sold from intervention analysed by sales Regulation. However, for  mini-tenders no details of the split between tender and fixed price sales are given and prices are  not communicated. Under Commission Regulation EEC 2377/80 of 4 September 1980 () [as amended by  Commission Regulation EEC 3988/87 of 22 December 1987 ()] Member States are required to report each  week the quantities for which licences have been issued. This information is provided for 14 groups  of combined nomenclature codes and would not therefore enable the Commission to monitor the export  of specific cuts of meat within each of these groups. The decision-making process2.82. Hitherto the proposals put by the Commission to the Management  Committees have not been supported by full information about the financial implications, e.g. in  terms of the budgetary impact of an increase (or decrease) in refund rates and the loss on sale  resulting from setting minimum prices. The Commission is aware of this shortcoming and has gone  some way towards addressing the problem. Proposals put before the Management Committee are now to  be accompanied by a pro forma statement of the financial consequences of the measure concerned.  This includes a section on financing and implications for the following financial year. The market  division is required to complete this statement three days before the Management Committee is due  to consider the measure. This document has only recently been introduced and did not exist for the  transactions relating to 1987 and 1988 examined by the Court. 2.83. Within the Commission services the initiation and implementation of policy with regard to  subsidization of exports is primarily (though not exclusively) the responsibility of the  appropriate market divisions of DG VI. The Financial Controller follows and is represented at  Management Committee meetings, and has on occasions raised questions about particular decisions  after the event. At the external level the Management Committees in principle offer a forum for  expert scrutiny of Commission proposals by Member States' representatives, but their effectiveness  in this respect is difficult to gauge. There are no comprehensive minutes of discussion, the only  record being a summary list of decisions taken. 2.84. The Commission intends to use a computer programme in order to follow up certain of its  decisions (taken after consultation with the Management Committee) with regard to the cereals  market. The programme is based on a model established for sugar. The programme will permit the  results of weekly tenders to be evaluated and will provide a continuous follow up of financial  obligations resulting from the decisions. However, at the time of audit, the system for cereals did  not work due to programming problems. ConclusionsThe cost of the policy2.85. The payment of subsidies on exports is one of the most  important instruments available to the Commission for the management of agricultural markets. It is  also complex and costly, roughly one-third of the whole Community budget being spent on export  subsidies (i.e. refunds plus low-price sales). The complexity of the export subsidy system as it  has evolved over the years is in striking contrast with the basic legislation. As regards the  objectives of export refunds, the regulations contain broad statements of intent. The Community  basic legislation is silent on the use of low-price sales as an instrument of export promotion. 2.86. In practice, the export refund system has developed into the principal instrument of internal  market management. In addition, the export subsidy system has developed into a flexible instrument  of commercial and external relations policy. Both developments carry risks for the Community  budget. The risk in the former case (exemplified by the special measure for German wheat and the  SMP for export initiative) is that the budget will be used to finance the export of products which  the home market could have absorbed. Thus, the export subsidy system has a tendency to increase the  level of Community prices in some markets and is one factor, along with the low value of the  dollar, which helps to depress world prices in others, for example beefmeat. The result is that the  gap which the system is designed to bridge is widened; hence increasing the cost of disposals. 2.87. In the latter case the risk is that by attaching geographical conditions (e.g. specifying a  single country as destination or source) to export sales the Commission will reduce the level of  trader interest and thus increase the cost to the Community budget. The prologue and several cases  described in this chapter suggest that this risk is a real one, e.g. paragraphs 2.42, 2.73(a) and  (b), 2.77. 2.88. In its management of the subsidised export of agricultural products the Commission is in  effect responsible for a commercial operation on an international scale. By comparison with the  commercial firms with which much of its business is conducted, the Commission suffers from several  disadvantages. One disadvantage is that for most of the past decade it has been a forced seller in  markets which tend to be dominated by a small number of big traders. 2.89. But some of the Commission's disadvantages are of its own creation: for example, the failure  in many cases to document, monitor or evaluate decisions. The Commission's use of tendering and its  analysis of price information to set the appropriate level of subsidy could be improved. Tendering  has been carried out in the context of imperfect markets (i.e. with too few traders to facilitate  real competition or only a single trader) or under conditions which may be classified as  'uncompetitive` (e.g. due to a requirement for large bid quantites such as in Commission Regulation  (EEC) N° 2415/88 which set the minimum bid at 25  000 tonnes of beef). The reliability and  completeness of the Commission's price information are uncertain. Significant increases in the  level of subsidy have occurred but the Commission was unable to provide the Court with any  justification for such changes. The present chapter contains evidence that the cost of subsidy may  often be higher than is necessary for the achievement of the Commission's export objectives (e.g.  paragraphs 2.21, 2.33, 2.46, 2.66). Accountability2.90. By whatever means the Commission obtains the information necessary for  determining the appropriate level of subsidy, the whole is subject to the Commission's judgement or  discretion for reasons set out in paragraph 2.11. This would not necessarily be a point of concern  if adequate documentation were maintained of the facts, the Commission's consideration of the  facts, the decisions taken and of the outcome. However, this is not the case and the consequences  are serious for independent control by third parties and for management. The Court has been unable  to gather from Commission records the information necessary for more than the most elementary  evaluation of many aspects of export subsidies. In view of the Court's findings it is unclear how  management can function properly and the various Management Committees can act as an effective  check on the Commission. Tendering2.91. In theory the level of subsidy represents the difference between prevailing world  and Community prices. In practice the equation is not quite so straightforward since factors such  as US export initiatives, transport and handling costs, and the response of competitors are  unlikely to be reflected adequately in available price information. In such circumstances tendering  would appear to be the only solution available to the Commission to enable the independent  yardstick of market forces to be brought to bear on the determination of rates and prices whilst  ensuring that the level of subsidy provided does not exceed the minimum necessary to ensure export.  Tendering in theory has the additional advantage of ensuring equality of treatment between  bidders. 2.92. In the case of SMP exports (paragraphs 2.30 - 2.33) recourse to tendering would have alerted  the Commission to the extent of market demand and possibly encouraged reconsideration of the need  for the Community to subsidise the sale of SMP. There is little doubt, too, that the level of  subsidy so determined would have better reflected market conditions than that which was actually  set, at a considerable saving to the budget. 2.93. The Court recommends that the Commission consider extending the use of tendering,  particularly for the bulk products. Bearing in mind the lack of genuine competition in certain  markets, the Commission should decide on a minimum or reserve price in each case before the  invitation to tender is issued. All such decisions should be documented but (in contrast with  present practice in the beefmeat sector) minimum or reserve prices should not be published. In  cases where exports to third countries are sold to a sole buyer, the Commission should negotiate  directly to agree a price, tendering for other elements. For sales from intervention this would  effectively mean the Commission tendering for transport and handling costs, the sale price out of  intervention being within their competence. 3. National controlsIntroduction3.1. Under the general arrangements for the  management of EAGGF-Guarantee expenditure the primary responsibility for examining the goods  exported and for vetting the refund claims lies with the Member States. The Community has, however,  defined some of the essential central requirements. Commission Regulation (EEC) N° 3665/87 of 27  November 1987 () consolidates common detailed rules for the application of the system of export  refunds on agricultural products, including rules for the supporting documents needed to  substantiate a claim: the required evidence of export and of arrival for home consumption in the  country of final destination; the calculation of the rates of refund; and the special arrangements  for the prefinancing of refunds. And Council Directive 77/435/EEC of 27 June 1977 () [replaced by  Commission Regulation EEC 4045/89 of 21.12.89 ()] requires Member States to carry out a posteriori  checks of the commercial documents of undertakings receiving payments from the EAGGF, including  payments of export refunds. 3.2. The present chapter summarises the results of the Court's audit of the controls exercised by  Member States over the expenditure on export refunds for the three principal products of cereals,  milk products and beef. The audit covered paying agency and customs controls in the United Kingdom,  Ireland, the Netherlands, France, the FR of Germany, Italy and Denmark. In addition customs  controls over export refund transactions were examined in Belgium and Greece. At customs stations  selected as far as possible according to the importance of export refund transactions, the Court  evaluated the theoretical and actual procedures for physical control of export refund consignments  and the eventual certification of export. At paying agencies, the Court tested evidence of export  and evidence of arrival at final destination. 3.3. The main issues considered were whether: (a)the appropriate evidence had been submitted in support of refund claims; (b)the refund payments were based on the correct rate for date, description, quantity and  destination; (c)the appropriate controls leading to certification of date, description, quantity, quality and  export were provided for and effectively performed; (d)the appropriate a posteriori controls over the authenticity of the transaction were effective  both in their scope and frequency. 3.4. The cooperation received from Member States in carrying out this enquiry was good. However, in  certain Member States the Court was unable to obtain full access to reports and documentation  concerning the work carried out under Directive 77/435/EEC  (2). This problem arose in Ireland and  the United Kingdom in 1987, and in France in 1988. In addition, one Member State (United Kingdom)  refused direct access to accounting data relating to expenditure on export refunds. The United  Kingdom authorities have since indicated their willingness to reconsider this restriction, case by  case and the political authorities in Ireland, having had the matter brought to their attention,  have directed the national administration to give the Court access to all necessary information in  future. Conversely certain Member States (notably Denmark and the Netherlands) provided high  quality management information. The scope of the observations in the succeeding paragraphs  necessarily reflects the difference in the extent of the audit in the different Member States and  cooperation and information received. In accordance with the Court's normal practice, the factual  content of the observations concerning Member States contained in this chapter was formally brought  to the attention of the competent national authorities on a bilateral basis and their comments have  been taken into account. 3.5. Export refunds are a high risk area. This is due above all to the complexity of the governing  legislation and the size of the sums which can be involved in individual transactions. A vivid  illustration of the complexity of the legislation is provided by the rates applicable to certain  types of cheese in December 1988, which were as follows: (a)Cheese, Parmigiano Reggiano, not grated or powdered, of a fat content by weight, not exceeding  40  %, and a water content calculated by weight, of the non-fatty matter not exceeding 47  % would  attract a refund rate of 190 ECU per 100 kg if exported to Sweden but zero if exported to Norway  and Finland, all three countries being members of the European Free Trade Association (EFTA);(b)the same cheese if not grated or powdered attracts a refund rate of 170 ECU per 100 kg if  exported to USA but if grated attracts a maximum refund of 118,75 for that destination; (c)for other cheeses exported to third countries the difference of fat content by weight in the dry  matter between 18,9  % and 19,1  % will increase the refund from 100,50 ECU per 100 kg to 114,22  ECU per 100 kg. 3.6. A first instalment of the Court's findings with regard to national controls over export  refunds for beefmeat was published in the Court's 1987 Annual Report (). The Court believes that  many of these findings gain added force and relevance in the wider context of the present report,  and some of them therefore reappear in this context. 3.7. The Court notes that in recent weeks some important changes have been introduced in the  regulations governing the control of export refunds. Annex III comprises a list of the main  changes. The observations which follow should, of course, be read in the light of these recent  developments. The Court is pleased to note the extent to which the Commission, in drafting these  changes, has taken account of the suggestions of the Court in the present report and in earlier  reports, in particular the 1987 Annual Report. Customs ControlsThe sequence of controls3.8. Customs in all Member States have responsibility for  accepting goods into customs control prior to export and for certifying export. In fulfilling this  responsibility Customs may carry out physical examinations to verify declared quantities and  qualities of consignments at any point between the trader's premises and eventual export from the  Community. 3.9. The acceptance of goods into customs control, signified by the application of a customs stamp  and signature to the appropriate box on the export declaration, validates the declaration submitted  by the exporter. It provides confirmation of the basic elements essential to determining the  justification of a claim for, and the calculation of, an export refund, namely that goods of a  declared quantity and quality exist on a given date. 3.10. The first point at which goods may be taken into customs control and may be subject to  physical examination is at the point of loading, which is normally at the trader's premises. For  this control to be effective the exporter should be required to provide advance notification of his  intention to load, of the cargo and of the timing of the operation to his local customs office. 3.11. An alternative procedure in existence in some Member States is for the container to be  presented fully loaded, along with the export declaration at the responsible local customs office,  where customs may similarly confirm existence and carry out a physical examination. 3.12. In both these cases after acceptance the container will travel under seal to the customs  office at the port of exit from national territory where export formalities will be completed. 3.13. A third possibility is for goods to be accepted into customs control directly at the customs  office at the point of exit from national territory. Here again the container is presented fully  loaded along with the customs declaration. Its arrival is registered so that the declaration can be  certified with the date of acceptance into customs control. 3.14. The container will then be placed in a storage area pending loading on board ship. Physical  examination of goods in containers presented directly at the customs office of exit may occur at  any time between arrival and loading on board ship. 3.15. In order to qualify for payment of export refund under any of these three procedures the  exporter must complete export formalities within 60 days from the date when the goods have been  accepted into customs control. Customs' final responsibility therefore is to certify export within  this period. The risks3.16. The risks inherent in the export operations of agricultural produce are: (a)that the quantity of the product may be overstated (in extremis, the product may not exist); (b)that the quality of the product may be misstated; (c)that the product may be misdescribed; (d)substitution by quality or quantity (or both) of the product taken under customs control in  advance of actual export, at some subsequent stage, i.e. during storage or during transfer from  stores to ship, train or other form of transport; (e)the non-export of goods and either their re-presentation for export or their entry on to the  home market. 3.17. In all of these cases the Community budget may finance unjustified amounts of export refunds.  In the case of (e) the operation is frustrated in its main objective of removing produce from the  market for export to third countries. 3.18. In the course of the enquiry the Court noted a number of weaknesses in control procedures and  administrative arrangements which accentuate the risks outlined above. These weaknesses are  explained in some detail below and are illustrated by examples drawn from all the Member States  visited. Whilst the weaknesses are presented individually, in practice the Court found that most  applied at any one time to each of the customs authorities visited on both local and national  levels. Notice of intention to place goods under customs control3.19. When goods are taken into control by  an inland customs office sufficient advance notice should be provided by the exporter to customs of  the description and quantity of the goods and of the times of starting and finishing of the loading  to allow customs the opportunity to attend. This is particularly important if Customs are to make  the most effective use of their physical controls, for the reasons given in paragraph 3.28. The  deterrent value of customs controls is of course lost if the exporter is able to gauge the  likelihood of customs attendance in advance. 3.20. This important principle was negated in the following cases observed by the Court: (a)in Ireland for companies with more than one set of premises, arrangements for prior notification  of placing beefmeat under customs control did not allow customs sufficient time to carry out an  examination should they have wished to do so. In these circumstances it is not surprising that a  major exporter visited by the Court had never been subject to such an examination; (b)in the United Kingdom a major exporter of beefmeat visited by the Court was always allowed to  wait until after the deadline for customs attendance before filling in the declaration; (c)in the FR of Germany, the customs officer for one major producer of milk products had never  received prior notification; for another, 24 hours telephone notice was received but with no  indication of quantities or descriptions; (d)in the case of the latter and of another customs office in the FR of Germany responsible for 4  major exporters of milk products, it was the practice to inform the trader by telephone when the  customs officer wished to carry out a physical examination and to request a company car to collect  the examining officer; (e)at Wilhelmshaven (FR of Germany), prefinanced goods removed from warehouse for export were only  declared to customs when they had been loaded on board ship; (f)at St. Quentin (France) the first export refund consignments leave the factory at 9 a.m. each  day. In order to meet this deadline, packing commences at 5 a.m. Since the customs office is 45  minutes from the factory, and since the control staff have no authority to work outside normal  hours, there has never been a physical control at the start of a packing of goods scheduled to  leave the trader's premises at 9 a.m. Acceptance of goods into customs control3.21. The act of placing goods under customs control  determines the date for refund rate for non-prefixed transactions. In cases where the rate has been  prefixed (cf. Annex 1, paragraph 6), there is a time limit within which the exporter must place his  goods under customs control in order to benefit from the prefixed rate. There is therefore a risk  of manipulation of the date of acceptance either to benefit from the consequences of rate changes  or to comply with the expiry date provided for on the prefixing certificate. 3.22. The Court noted the following examples where confirmation of the existence of the declared  quantities was not obtainable on the date of acceptance: (a)in France cereals were accepted into customs control without the customs officer having verified  from the silo operator's records that the declarant had sufficient cereals in store on the date of  acceptance to match the quantity declared for export; (b)in Italy cereals stored at several distant locations were accepted into customs control on a  single declaration without satisfactory confirmation of existence on the date of acceptance from  the customs offices responsible for all of the locations; (c)in Italy total quantities of cereals were accepted into customs control on the date of  presentation of the first part of the consignment even though the remainder of the consignment was  presented over succeeding days; (d)in Belgium direct trader input declarations were recorded with the date of acceptance being that  of computer input. In reality the exporters disposed of a further 6 days to present the goods for  customs control. Documentary controls3.23. The purpose of current documentary controls is to ensure that the  description and quantities on the export declarations are consistent with supporting commercial  documentation. Inconsistencies noted at this stage will also assist in determining which  consignments should be subject to physical control. 3.24. The Court found that, in contrast to the procedures regarding import duties and levies, where  the average transaction size is much smaller, commercial invoices are only required to be presented  with the declaration in two Member States, (Denmark, Netherlands). In the remaining Member States  there is therefore no automatic check of export declarations against supporting commercial  documentation. 3.25. Even in the two Member States where the invoices are required by law the Court noted  weaknesses: (a)in Denmark certain large exporters are allowed to present their invoices on a monthly basis. The  initial control point is already passed and in most cases the goods have been exported. Further,  the Court found that when invoices were received it was not the practice to compare them with the  export declarations even on a sample basis; (b)in the Netherlands the auditors found examples where photocopies of a single invoice were  accepted in support of several claims. The originals were not even genuine commercial invoices but  had been prepared specifically for the purposes of presentation with export declarations. 3.26. The performance of documentary controls was also far from convincing. For example: (a)in the Netherlands certain export refund declarations had been certified by customs although the  supporting documents did not agree in regard to weight and export refund nomenclature. Some  declarations had also been certified where the destination was intra-Community; (b)in Italy, certain declarations for cheese were certified by customs although the composition of  the product according to the certificate of origin did not correspond to that defined by the  declared export refund nomenclature. Physical controls3.27. The purpose of physical controls is to obtain assurance from a  representative sample of the goods declared, that the classification, condition and weight are  correctly declared: in other words, that the declaration accurately reflects reality. In all Member  States visited responsibility for physical controls rests with the customs services. 3.28. 100 % physical control of exports attracting refunds is neither desirable nor feasible; there  are too few customs officers and such an intensity of control would stifle the export trade.  Physical controls should therefore be selective and directed towards consignments which present the  highest risk in terms of refund value, product and destination risk, and trader reliability. They  should be of sufficient frequency and quality to have the desired preventive effect and to detect  irregularities. The Court's examination of this key control however revealed the weaknesses  described in the succeeding paragraphs. Criteria for selection for physical control3.29. There is a lack of defined criteria for risk  identification to ensure that physical checks and sample taking with a view to analysis are  directed towards high risk areas. The Court's auditors found only one Member State (France) which  had set up an adequate - if perfectible - system of risk analysis. It includes criteria such as  Common Customs Tariff classification but it excludes the export refund classification, financial  importance of refund, and destination. All export declarations for a Customs authority are input  directly through computer terminals to the local Customs computer which permits a limited risk  analysis to be applied systematically to every declaration. The local nature of the arrangements  enables criteria for risk identification to reflect local conditions. 3.30. In Belgium a similar initiative has been taken to select consignments for physical control.  Selection by the computer does not necessarily mean that a physical control will be carried out,  however, for the final decision is left to the examining officer. The only parameter in use at the  time of the Court's visit to Antwerp was 'All CAP products` which is too vague a criterion to allow  identification of risk transactions only. 3.31. In practice the lack of detailed criteria for risk identification has meant a rather  haphazard targeting of transactions. The Court noted that some customs stations concentrated on  products which: (a)did not attract refunds (France); (b)were so-called preparations and therefore attracted lower rates of refund (United Kingdom,  Netherlands); and(c)were of a refund value so low that the exporter had often made no refund claim  (France, Belgium). Frequency and quality of controls3.32. Until the 12th February 1990 when the Council finally  adopted the regulation on monitoring of payments in respect of the export of agricultural produce  there was no Community standard for the frequency and depth of physical controls. The risk to the  Community is that in the absence of any agreed benchmark, the performance of physical controls will  decline until the lowest level is reached. In other words, the more effective the controls of a  particular Customs authority the greater the incentive to the trader to export to third countries  via an alternative Customs authority where controls are known to be less frequent and less  searching. This is true for Customs authorities on local, regional and national levels. Statistics  concerning the frequency of physical controls did not exist at national level in any of the Member  States visited. Of the customs offices at the major ports only United Kingdom ports and Rotterdam  maintained statistics although even here there was no separation between CAP exports to other  Member States and those to third countries. For the most part therefore the information concerning  the frequency of physical controls was not known to management and it had to be established either  at the specific request of the Court or by analysing information wherever available during the  course of the audit. Table 7 reveals rates of physical control which were well below the 5  % now  adopted as the minimum acceptable level of check by the Council. 3.33. If frequency is an indicator of the quantitative aspect of physical controls, then it is the  depth of testing which indicates quality. In this respect the Court notes an unsatisfactory  position in all Member States visited with at best confusion and a lack of rigour in applying  nationally set levels of checks and at worst the absence of any guidance, national or otherwise,  for Customs Officers. In particular, the Court's auditors were concerned to note a general lack of  understanding as to the importance of obtaining representative samples from consignments and as to  the means by which this might be achieved. There are no statistics as to the type of checks at the  national level and on an ad hoc basis only at local and regional levels. The following cases,  observed by the Court's auditors, illustrate the extent of the problem with regard to frequency and  quality of controls: (a)at Genoa (Italy) there had been no full turn-out of a container for at least 18 months; (b)at Livorno (Italy), customs claimed to have a full turn-out rate of 5  %, details of which were  recorded on export declarations. Examination of export declarations for the 4 month period ending  28 February 1989 revealed no evidence of full turn-outs; (c)at Salerno (Italy), Bari (Italy), Harwich Parkestone Quay (United Kingdom) and Navy Dockyard  (United Kingdom), there had been no full turn-outs in 1988 nor at Barnstaple (United Kingdom) in  1987; (d)at Rotterdam (Netherlands) physical identification was usually obtained by examination of marks  and numbers on the packages. Similarly net weights were rarely checked, reliance being placed on  the quantities marked on the packaging; (e)at Berg Autoweg (Netherlands) and Rotterdam (Netherlands) it was evident from the absence of  arrangements for the replacement of health seals in the event of removal for customs examination  purposes, that the opening of vehicles/containers with health seals was a rare occurrence; (f)at Berg Autoweg (Netherlands), of the two vehicles subjected to physical control during the  Court's audit mission, one involved no check weighing whatsoever and the other, checked by means of  the weighbridge, revealed a gross weight difference of about 1  000 Kg; (g)at Leeuwarden (Netherlands), the choice of which carton to sample depended upon which cartons  were dropped or broken during loading; (h)at Frederikshavn (Denmark) for the 12 month period ending December 1988, no check weighing  whatsoever had been carried out; (i)at Padborg (Denmark) where 58,500 consignments of CAP goods were accepted into customs control  in 1988, not one had been subjected to a weight check; (j)at Le Havre (France), the Court's auditors were witnesses to a problem with the weighing of  three sacks of 25 kg of skimmed milk powder. The scales at the customs control office only weighed  up to 10 kg. The scales at the nearest other control office were out of action and looked as if  they had been for many years. The scales in the next nearest office had no batteries. When some had  been obtained the check weighing was carried out. In all, this had taken nearly 1 hour and had  demonstrated that control over quantity of products in packages of 25 kg and over by this office  was not a regular occurrence. (The particular container from which these sacks were taken was also  found to contain undeclared clocks and wine); >TABLE>(k)at Ulm, (FR of Germany) there was no test weighing, reliance being placed on  the certificate provided by an auxiliary customs person (whose salary is paid by the exporter). He  in turn relied solely on company internal controls and never test weighed. At all other customs  stations visited in the FR of Germany reliance was always placed on the auxiliary customs person.  In other words, quantities were accepted as declared; indeed, at Leer the exporter was so confident  of the outcome of customs controls that he completed the box reserved for details of customs  examination with the word 'KONFORM`; (l)at Harwich Parkestone Quay (United Kingdom) there was no test weighing in 1988; (m)at Vlissingen (Netherlands) the physical control of 216,000 x 50 kg bags of sugar with an export  refund value of 5,4  Mio ECU, presented fully loaded on board ship, consisted of the examination of  3 bags from the top layer. This was not an isolated occurrence. In the 9 months ending 30 September  1988, 340  995 tonnes of wheat, 118  500 tonnes of barley, 144  000 tonnes of maize and 156  000  tonnes of sugar were declared in this way. Laboratory analysis3.34. The classification claimed by a trader for export refund purposes for  nearly all milk products, cereals and certain beef products can only be verified by laboratory  analysis. In these cases visual examination alone will not enable the Customs Officer to identify a  product for the purposes of export refund classification. Table 8 identifies rates of sampling  which the Court considers are unacceptably low. As with the rates of physical examination the  information was frequently not readily accessible and had to be established from individual  declarations. 3.35. Statistics concerning the error rate found as a result of sampling were not maintained either  by customs offices or by the responsible laboratories. As a result of the Court's observations,  three Member States have made some progress towards identifying error rates by export refund  classifications, although none as yet can identify to the level of the customs office of origin.  Nevertheless even these limited results demonstrate that laboratory analysis is essential in  determining the export refund classification of a great many products and that knowledge of these  results is essential in determining high risk areas. The results are as follows: (a)in the Netherlands in 1988 of 338 samples of meat products attracting export refunds which were  subject to analysis, 104 (31  %) resulted in incorrect export refund classification leading to an  overclaim of export refunds; (b)in the United Kingdom an analysis of the results of 172 samples from the year 1987/88 covering  intra-Community and third country exports of CAP products, revealed an error rate in the  classification of 48  %; >TABLE>(c)in the FR of Germany the overall sampling rate for 1988 is acceptable (4,8   %). Nevertheless a close examination of the results demonstrates a lack of direction in sample  taking, as can be seen from the examples in Table 9. >TABLE>Facilities for control purposes3.36. Traders are not prohibited from presenting  export consignments for customs control where the necessary facilities for control are lacking. In  one Member State (United Kingdom) the import of meat via a particular port is prohibited because of  an acknowledged lack of basic facilities such as scales and a refrigerated unloading area and the  absence of a Health Inspector. Common sense would dictate that exports should also be prohibited  for the same reasons, yet traders are freely allowed to export meat via the same port. The Court  also found that: (a)there were no scales at 2 customs stations in the port of Antwerp (Belgium); (b)weighbridges were out of action at Portsmouth (United Kingdom), Castellamare (Italy) and Aarhus  (Denmark); (c)there were no facilities for unloading (and therefore checking) frozen or chilled goods at  Immingham (United Kingdom); (d)export of live animals is allowed from Parkstone Quay and Portsmouth (United Kingdom) even  though there are no lairage facilities; (e)at Rouen Rive Gauche (France), at a new container terminal there was no examination shed, no  scales and no weighbridge; (f)at Rotterdam 8 station (Netherlands), cold stores and unloading areas were located at a distance  of 6 km from the container depot where the goods were accepted into customs control. The location and timing of physical controls3.37. Particularly for containers and lorry and rail  traffic, physical controls are most effective if they are carried out during the loading of a  consignment. Customs controls can take place at the trader's premises, at a customs station, at  storage facilities under customs control or at the point of export. The essential distinction is  that in the case of the first mentioned location, Customs Officers are able to be present before  and during loading of the goods, whereas in each of the alternative locations consignments are  presented packed for export. At the trader's premises, the customs officer has ready access to each  item of the whole consignment as it is loaded and he can therefore draw a representative sample of  items for control purposes. Once a consignment is loaded, however, the Customs Officer can only  have access to each item by requiring the consignment to be unpacked and repacked in his presence.  Such an operation (a 'turnout') is expensive in time and effort for the trader and Customs alike  and therefore occurs infrequently in practice. So if sampling does not take place during routine  loading, it is highly unlikely that any sampling carried out subsequently may be representative  (and therefore valid for the purpose intended), restricted as it is to those parts of the  consignment which are most readily accessible. The best that may be hoped from the control of  consignments which are already loaded is that the control will reveal either blatant fraud (i.e.  the container is full of red beans instead of black beans) or give rise to sufficient suspicion to  invite the Customs Officer to instigate a partial or full unloading when a valid control may be  carried out. 3.38. Attendance at trader's premises for control purposes is not obligatory or even foreseen in  all Member States. The Court found that in relation to the three products under review: (a)in Italy attendance at traders' premises occurred only in exceptional cases, due to the lack of  a legal provision for this in normal circumstances; (b)in the Netherlands over 90  % of all export consignments are presented for customs control at  the point of exit from Dutch territory; (c)in Denmark and in Belgium there is no attendance at traders' premises for control purposes; (d)in France, Ireland and the United Kingdom the majority of exports are presented for customs  control at the point of exit; (e)in the FR of Germany the great majority of controls take place at inland customs offices where  packed consignments are presented by local companies for the completion of export formalities.  Attendance at traders' premises is foreseen also, although at two inland offices visited by the  Court at Ulm and Oldenburg no such examinations had been carried out. Cut-off time3.39. Traders are often able to present consignments for export up to the moment of  loading of the ship/aeroplane or other form of transport, thereby denying Customs officials  adequate time in which to carry out anything other than a cursory check. Seals3.40. Seals are not systematically applied once customs procedures are complete; seal  references are not systematically recorded on the export documentation; and seals are not  systematically checked at the point of departure from the Community. Examples noted in the Member  States visited include: (a)at an important customs post on a land boundary between the FR of Germany and Austria, the Court  found that 20  % of vehicles and containers conveying produce under the Community Transit System  had not been sealed in the Member State of departure. Despite this, the customs service at the  point of final exit from the Community cleared them as presented without further physical  examination and provided the exporter with a certificate to substantiate the refund claim. In the  Court's opinion the weakness of these controls entails a high risk that export refunds are being  paid on goods which never leave the Community. The Court found a similar situation at another  German border crossing, where, although aware of the problem, the local customs post had not  brought it to the attention of the responsible authorities; (b)at St-Quentin (France), under a simplified procedure, a multinational company had been accorded  the right to use commercial seals on vehicles, containers and wagons carrying export refund goods.  Such approval entails the keeping of a record of the receipt and use of such seals by individual  numbers. The company kept such a record. However the customs officer carrying out the physical  control in the auditors' presence had no knowledge that the seals were individually numbered, nor  was he aware that the trader had to keep a record of their use. Further, since the seal numbers  were not noted on the export declarations, the officer at the point of exit from the Community  territory checking that seals were intact had no knowledge that he was examining the same seal  which had been applied at the point of loading; (c)at two offices in Denmark, Frederikshavn and Padborg, seal presses were in use which failed to  imprint on the seal the identifying number of the customs office; (d)in the United Kingdom there was no systematic and consistent approach to checking seals; (e)in Ireland, where Department of Agriculture veterinary seals were applied to containers carrying  beefmeat, there was no procedure for verification against Department of Agriculture records by the  customs office at the point of exit from Irish Territory to ensure that the seals had not been  removed and replaced. Evidence of export3.41. Customs Services face the practical problem at ports of obtaining  'first-hand' evidence of the export of a particular consignment. Apart from one Member State  (Italy) where each consignment is tallied on board ship by the Guardia de Finanza, Customs Services  do not have the resources to verify directly the export of consignments from the Community. They  therefore have to rely upon the 'second-hand' evidence provided by the shipping companies, namely a  final ship's manifest signed by the Captain or his representative which signifies acceptance on his  responsibility of the goods and containers listed as loaded on ship. The Court found, however,  that: (a)in Rotterdam (Netherlands), Harwich (United Kingdom), Le Havre and Rouen, Rive Gauche (France)  the check was carried out against either unsigned draft ships' manifests or loading lists; (b)in Denmark, generally there was no evidence of the checks being performed; and at Aarhus close  examination of two declarations revealed one container which could not be identified on the  manifest and another with a minor weight discrepancy; (c)at the inland customs station of St. Quentin (France) export was certified before confirmation  had been received from the customs office at the point of exit from Community territory; (d)exports from the free port of Hamburg (FR of Germany) are certified by the free port  administration. Certification is not, however, carried out on the basis of the port  administration's records, but on the basis of ship manifests provided by shipbrokers. Paying agency control procedures3.42. Paying agency systems must provide for adequate verification  of claims, for prompt payment and for the accuracy and reliability of records. 3.43. The verification of claims by paying agencies is based on documentary evidence which is  provided by third parties, including the declarant, customs and various authorities in third  countries. It is customs which provides evidence of export and third country authorities, evidence  of arrival. Paying agencies themselves are not in a position to verify the documentation proffered  against the consignment to which it relates for many of the key parameters involved in the  calculation of the export refund payable, such as quantity, quality and destination. They are  therefore obliged to proceed on the premise that in the absence of reasonable doubt the  documentation provided by customs and third country authorities is reliable. It is the basic  Commission Regulation (EEC) N° 3665/87 () which specifies the documentation which is relevant and  sufficient for the purpose of establishing the accuracy and validity of claims. The principal risk  is that claims may be paid on the basis of unreliable or insufficient evidence, or both. 3.44. The importance of the documentation provided by customs is clear in that it provides evidence  of export. The importance of the documentation validated by third country authorities arises from  the way in which the Commission has differentiated refund rates for many products by final  destination. Thus varying rates of refund are payable for the export of the same product depending  upon the country of import. The checking of evidence of arrival for destinations which attract high  rates of refund is therefore particularly important. Evidence of arrival3.45. Obtaining evidence of arrival from third countries is not without  problems. Principally this is because there is no obvious incentive for third country officials to  raise or to validate a document which is of no bureaucratic consequence to them. There may be other  more concrete reasons such as the absence of an appropriate official at the point of arrival and an  unwillingness to cooperate without financial inducement. It was undoubtedly with some of these  problems in mind that the Commission drafted regulations which define a limited, but not  particularly stringent range of alternative documentary evidence acceptable for the purposes of  establishing entitlement to payment of an export refund. Thus proof of arrival can be in the form  of: (a)a primary customs entry document from the importing third country or an officially certified  copy of it; (b)any other document endorsed by the customs service of the importing country which identifies the  products and demonstrates that they have been imported for consumption in that country; (c)the common form of customs entry certificate (Annex II)  (1) bearing the stamp of the customs  service of the importing country. (Use of this document as proof of arrival has been abolished with  effect from 16.2.90, see Annex III). 3.46. The Court has calculated that during the period under audit, over half of all the claims for  export refunds which were based upon evidence of arrival, were supported by so-called Annex II  documents. This is a disturbing statistic in the light of the reservations, enumerated below, held  by the Court as to the adequacy of the Annex II document to provide the required assurance. The  Annex II document is: (a)not an 'accountable' document of the third country; (b)as a general rule, completed by the exporter; (c)validated simply by a stamp and signature of the customs service of the importing country; (d)without provision for supplementary and important detail such as the customs import entry number  and date, information about variances in quality and quantity, and customs and export refund  classifications. 3.47. The Court's doubts about the reliability of Annex II documents are underlined by the fact  that in one case of reported fraud it was discovered that two major exporters, operating in  different Member States, were in possession of customs stamps identical to those in use by the  customs services of the main countries with which they traded. 3.48. If owing to circumstances beyond the control of the exporter none of the standard documents  can be produced, the regulation provides for specified substitute or secondary proofs. In the  course of the Court's examination of these proofs, which were accepted in support of export refund  claims, the following examples were noted: (a)a certificate of importation to Libya with a letter heading 'Foreign Office, Bucharest' (United  Kingdom); (b)certificates of importation dated prior to the arrival of the goods concerned (France, United  Kingdom); (c)certificates provided by a commercial superintendents company with apparently no presence in the  country concerned nor expertise in the commodity traded, and dated sometimes long after the arrival  of the goods concerned (United Kingdom); (d)bank certificates showing that the invoices for the goods had been settled but which gave no  evidence as to the source of the funds (United Kingdom); (e)certificates which are issued by Member States embassies and similar bodies for a fee on the  basis of an affidavit by the trader's representative. These bodies have, of course, no direct  knowledge of the transaction concerned (Denmark, FR of Germany, France, Italy, Netherlands, United  Kingdom). Verification of claims3.49. A first step in verifying claims is to establish the authenticity of  the documentation received for this purpose. The key factors are whether the documentation has been  validated by the stated customs station or third country authority and whether it has been received  without undergoing unauthorised alteration. Authenticity of validation3.50. The documentation forwarded by customs comprises validated export  declaration forms. Validation by customs is signified by the signature of a customs officer and by  a series of stamps on the form, the most important of which confirm the date of customs control and  the date of eventual export from the Community. The documentation validated by third country  authorities is signified again by a combination of stamps and signature. 3.51. Ideally, in checking the authenticity of validated documents paying agency staff should be  able to refer to a catalogue of specimen stamps. For customs stamps, the audit team found that none  of the paying agencies visited hold specimens. 3.52. For third country authorities' stamps it was found that paying agencies do maintain a  catalogue of specimen stamps. However, with the exception of two paying agencies (FR of Germany and  Netherlands), the catalogues were all out of date and incomplete, to the extent that it is  extremely doubtful whether they could be used for the purpose intended. This is a serious weakness  in control because it denies paying agency staff the only means they have routinely to verify the  authenticity of third country validation. In cases of doubt or of receipt of a document bearing an  unfamiliar stamp, the audit team noted that four paying agencies (FR of Germany, France, Ireland,  Netherlands) had on occasion taken action intended to clarify the position. This took the form of a  request for additional evidence from the importing country's customs authority, which is  communicated usually via the claimant but sometimes directly. In addition a direct request for  confirmation might be made to the local diplomatic mission of the third country concerned or to the  appropriate diplomatic mission of the Member State concerned. Occasionally advice has been sought  by all paying agencies from the Commission, but in the absence of their own catalogue of stamps and  network of overseas missions, it has comprised little more than a reminder of the need to fulfil  the requirements of the Regulation. Unauthorised alteration3.53. The direct transmission of validated export declarations from customs  to paying agencies in 5 Member States (Denmark, FR of Germany, Ireland, Netherlands and United  Kingdom) reduces the risk of unauthorised tampering to a negligible level. In adopting the practice  of returning the stamped and signed declarations from customs to the claimant for subsequent  presentation by the claimant to the paying agency, the two Member States concerned (France and  Italy) have had to establish control procedures to compensate for the risk of tampering entailed by  such administrative arrangements. The greatest risk attaches to the export refund nomenclature  which represents the codification of the product by type and quality (by up to 11 numeric elements)  and determines the refund rate payable. 3.54. In France the controls are effected by a cross-check of paying agency information with export  data provided by customs. For the most part the exercise is computerised. This system has the  following defects: (a)the data provided by customs does not identify export refund nomenclature in full. This means  that whereas cereals can be identified in sufficient detail for type and quality (because the final  six elements of the nomenclature are redundant), products of a more complex composition, such as  milk products, cannot; (b)in the case of major exporters who have adopted the so-called simplified procedure for export  approval, the data provided by customs is derived directly from the exporters' own records rather  than from the export documentation in custom's possession; (c)the key data of customs control and export can be reconciled by month but not by day which means  that the validity of the specified refund rates (which are set on a daily basis) cannot be  checked; (d)the administrative arrangements for cereals and beefmeat do not provide for the follow-up of  discrepancies identified as a result of the cross-check. 3.55. In Italy a sample of declarations is sent twice yearly by the paying agency to customs to  determine whether tampering has occurred. Each sample is drawn from unpaid claims which have been  received in the 40 working days prior to the date of sampling. This method of selection  systematically excludes all paid claims, and all unpaid claims which fall outside the four months  (i.e. 2 x 40 days) in the year subject to sampling. 3.56. In the case of documents validated by third country authorities which are in all cases  submitted to the paying agency by the claimant, it is likely that only the most blatant of  unauthorised amendments would be identified. Reconciliation of supporting documentation3.57. The verification process rests upon a  reconciliation of the documents submitted in support of an export refund claim. The reconciliation  includes product classification, quality, quantity, departure and arrival details and  correspondence of dates, for example. Much of the work is numeric but an important part involves an  intelligent review of the narrative and comments added to the documentation by customs and third  country officials. A fundamental problem for paying agency staff is comprehending the written  comments which often accompany the stamps and signatures on the documents apparently validated by  third country authorities. Commission Regulation (EEC) N° 3665/87 of 27 November 1987 () rightly  foresees the systematic submission of a translation of any remarks written on third country  documentation. However, in practice the situation is far from straightforward as the following  examples illustrate: (a)documents certifying lower quantities on arrival than those declared at export were not  translated, therefore refunds were paid on the incorrect higher weight (Denmark, FR of Germany,  France, Italy); (b)customs documents certifying different descriptions on arrival from those at export were again  not translated and refunds were therefore paid at the incorrect higher rate. (This case involves  two companies and a substantial amount of refund. It is currently under fraud investigation as a  result of the Court's observations); (c)documents accompanied by uncertified translations or translations which indicated that customs  stamps, signatures and comments were illegible, and documents which were not translated at all  (Denmark, FR of Germany, France, Italy, United Kingdom). Advance payment3.58. Community arrangements foresee that, on application by the exporter, advance  payment of the refund is possible as soon as the export declaration has been accepted by customs,  on condition that a security is lodged (). The security will be forfeited if proof of actual export  from the Community within a specified time limit and proofs of arrival at final destination are not  presented to the paying agency within 12 months of export. 3.59. In Denmark advance payments had been made to two companies without a proper claim solely  against a computer list from the companies which simply signalled the intention of starting up an  export transaction. The payments were subsequently to be regularised and supported by claims  presented at customs and sent to the paying agency. 3.60. The system, which as a result of the Court's observations has now been suspended, was  irregular because there was no application signed by the company and because at the time of making  the advance the paying agency could have no certainty that the export declaration had been accepted  by customs. The reference numbers referred to by the Commission in its reply are internal to the  company concerned and do not provide conclusive proof of prior acceptance by customs of the export  declaration. In addition there were no double checks of approval for payment and no checks of the  computer output because the processing of these claims was handled by just one person. These  payments bypassed all the normal internal controls. 3.61. Since May 1988 when this system started, approximately 30  Mio ECU has been advanced to the  two companies. Of this there was some 600  000 ECU for which the paying agency could not provide,  at the time of the audit, the necessary documentation certified by Customs. For one of the claims  no export declaration had been presented at the time of export and a special retrospective  declaration was certified by customs some 6 months after the alleged date of export. 3.62. Examination of control records revealed many instances of securities apparently outstanding  long after the final date for presentation of proofs. In some cases the securities should clearly  have been forfeited yet no action had been taken. By way of example: (a)one trader in the United Kingdom had outstanding securities of 4,7  Mio ECU, some of which dated  from 1984. The time limits for presentation of proofs had expired but the paying agency had taken  no steps at the time of the Court's audit to recover the overdue funds; (b)as a result of a request from the Court a review of beefmeat guarantees was carried out by the  UK paying agency in August 1988 which revealed a further 1  Mio ECU outstanding after the expiry  date for presentation of proofs, some of which dated back to 1982, 1983 and 1984, where either  recovery action had not even been commenced or where the exporters concerned had simply been  invoiced for the reimbursement due. A further 2  Mio ECU dating back as far as 1982 again related  to unpaid invoices in dispute but not yet at the stage of legal proceedings; (c)in France, where the control of securities is shared between customs and the paying agency, the  securities outstanding according to customs amounted to 1,4  Mio ECU for one trader, whilst the  paying agency records for the same trader indicated a nil balance. The authorities concerned had  made no attempt to reconcile the two sets of figures outstanding. A posteriori controls3.63. As explained in para 1.8 above the Court has continued and extended its  examination of the a posteriori controls carried out by Member States under Directive 77/435/EEC  (). 3.64. In Denmark, where the policy is to place more emphasis on a posteriori controls than physical  controls, the Court evaluated the a posteriori audits of 15 companies which in 1988 received more  than 50  % of export refunds on milk. The Court found that: (a)the method of selection of transactions was entirely judgemental. Control officers receive no  guidance on minimum standards concerning refund values, numbers of transactions, products,  destinations or periods to be covered, nor on the requirement for representativity of transactions  selected; (b)many companies in receipt of export refunds on milk products had not been audited for several  years. For example company A which received 80  Mio ECU in 1987 and 60  Mio ECU in 1988 had not  been audited since 1983; company B which received 7  Mio ECU in 1987 and 28  Mio ECU in 1988 had  not been audited since 1984 until the week before the Court's audit mission to the responsible  Customs office in 1988, and Company C which received 73  Mio ECU had not been audited since 1985,  until the day before the Court's audit mission; (c)the scope of audit checks for the most part (with the exception of one Customs office) was  limited to verifying the transactions by reference to commercial invoices, bills of lading, haulage  invoices and payment thereof, and in some instances settlement of the transaction. In all, these  checks provide little additional assurance to controls already performed at the current documentary  control stage or to the evidence held by the paying agency. For example there was no evidence of  verification of quantities from production and stock records nor of composition of products, in  terms of fat content, etc., from the traders own quality control and laboratory test records. 3.65. In France, in 1988, 157 undertakings received payments for export refunds on cereals; 72 of  these (which all received more than 100  000 ECU) accounted for 99  % of expenditure. However, only  21 (29  %) had received their last Directive 77/435/EEC  (1) audit by customs during the preceding  four years. A similar situation existed with regard to export refunds on milk products. 3.66. In the United Kingdom, 20  % of the traders receiving more than 100  000 ECU p.a. in export  refunds on beefmeat had never been audited, and there were numerous examples of other companies who  had received no audit visits in the previous 5 years. 3.67. In the Netherlands, an enquiry was carried out as a result of a query raised during the  Court's audit, which revealed that a major recipient of export refunds on milk products was in fact  no more than a 'brass-plate` company set up to enable companies based in other Member States to  claim refunds in the Netherlands. The company received 60  Mio ECU in 1987. The company office in  the Netherlands had no evidence concerning transactions other than that relating to commission  received. An effective audit could therefore not be carried out. No requests had ever been made to  Member States to carry out a check at the head offices of the companies concerned. 3.68. In the FR of Germany, 7 companies who received more than 33  % of export refunds on milk  products were based in other Member States. The responsibility for the control of these companies  had been allocated to a Berlin-based department of the Ministry of Finance, who, the Court  discovered, were unaware of this responsibility. The German paying agency had no record that  refunds paid to these companies had ever been audited. A similar situation was found in the  Netherlands where 3 companies which in 1987 alone had been paid some 100  Mio ECU in refunds, had  not been audited at all. 3.69. The frequency of audit of German based companies also gave cause for concern. For example  company A which received 41  Mio ECU in 1988 for exports of milk products had not been audited  since 1982; Company B which received 69  Mio ECU in 1988 had not been audited since 1983; Company C  which received refunds of 13  Mio ECU in 1988 had not been audited since 1984 and Company D which  received refunds of 6  Mio ECU in 1988 had not been audited since 1980. 3.70. Evaluation of reports in the FR of Germany also revealed that audits were not extended to  production and quality control records of producers. Recommendations on national controls3.71. The Court considers it imperative that Member States  should bring their controls up to an effective level and that the Commission should take a more  active role in the monitoring of these controls including the validation of proofs of arrival. The  Court is therefore pleased to note that in March 1989, the Commission undertook to adopt a series  of measures to step up the fight against fraud. In May 1989 this was translated into an anti-fraud  policy work programme. This programme covers three areas: prevention, cooperation and counteraction  and contains subjects such as the simplification of differentiated refund arrangements; improved  mutual assistance arrangements; fraud awareness seminars; use of analytical methods for fraud  detection, etc. Many of the initiatives are still in their infancy. The Court is therefore not in a  position to assess their impact on the control of payments of export refunds. However, the Court is  pleased to see that recently in the framework of this programme a new Regulation has been adopted  on the monitoring of payments granted in respect of the export of agricultural produce [Commission  Regulation (EEC) N° 386/90 of 12 February 1990 ()]; that the proof of arrival in the form of Annex  II to Regulation (EEC) N° 3665/87 is no longer acceptable [Commission Regulation (EEC) N° 137/90 of  4 January 1990 ()] and that Directive 77/435/EEC () has been replaced by a strengthened Regulation  which inter alia addresses for the first time the problem of transnational payments [Commission  Regulation (EEC) N° 4045/89 of 21 December 1989] (). (cf. paragraphs 3.67 and 3.68, also Annex  III). 3.72. In this context the Court makes the following main recommendations for the improvement of the  controls over export refund expenditure: (a)genuine commercial invoices should be required in support of every export refund declaration and  should be scrutinised as part of the current documentary control; (b)when goods are taken into customs control at traders premises, declarations should be lodged at  least 24 hours in advance; (c)physical controls during loading should always be unannounced and unpredictable; (d)facilities at all customs offices should be sufficient to enable effective physical controls to  be carried out; (e)adequate cut-off times for presentation of declarations before loading or before closing of  offices should be introduced at all ports; (f)physical controls should be selected according to risk analysis which should include criteria  such as export refund value, product risk, destination risk and trader compliance; (g)as regards the frequency of physical controls, the Court supports the Commission's proposal for  a minimum of not less than 5  %, but considers that this should be linked to the value of refunds  rather than to the number of declarations; (h)samples for laboratory analysis should achieve the same frequency particularly where the export  refund classification cannot be confirmed by visual examination; (i)the quality of physical controls should be improved by full or partial unloading of containers  of sufficient order to obtain representative samples. In this context the Court notes that there  are detailed rules for drawing samples for laboratory analysis in respect of certain products. For  example, animal feedstuffs [Council Directive 76/371/EEC of 1 March 1976 refers ()]; (j)physical examination at traders premises should be the normal procedure in all Member States -  if necessary backed by legislation at Community level; (k)all control activities relating to individual traders should be coordinated under the  responsibility of nominated customs offices; (l)all export refund declarations once certified by customs in respect of exit from Community  customs territory, should be transmitted directly by customs to paying agencies; (m)the Commission should establish, maintain and circulate to all Member States information  concerning valid and invalid customs entry forms and stamps for third countries; (n)all proofs of arrival should be translated into the language of Member States making the  payments; (o)the frequency of a posteriori audit should be determined on the basis of risk analyses to  include factors such as value of refunds involved; trader compliance, date of last audit, product  risk and destination risk; (p)the scope of a posteriori audits should include examination of production and quality control  records; (q)management information statistics should be maintained by customs offices by export refund  classification summarising the number of declarations, refund value, the number of physical  controls, error rates, number of samples for laboratory analysis and resulting error rates. These  statistics should also be consolidated and summarised by each Member State and reported to the  Commission annually; (r)centralised statistics should be maintained concerning the total population of traders to be  considered for a posteriori audit, annual amounts paid to such traders and the dates of the last  audits. 4. Overall conclusions4.1. As one consequence of the emergence of structural  surpluses in European agriculture, the Commission has in recent years been required to play an  increasingly active and difficult role on the stage of the international trade in agricultural  products. For this purpose it has selected its own priorities, for example with regard to targeting  of destinations, matching US subsidised export prices, preserving traditional markets and promoting  the export of value added products. The basic Community legislation on export refunds was designed  to meet temporary fluctuations and antedates the emergence of structural surpluses. It therefore  states the purpose of export refunds only in very broad terms and does not appear to envisage the  use of low-price sales in this context. The Council has never adapted the objectives of the basic  legislation to the changed circumstances of the agricultural market. 4.2. Given the level of guaranteed prices in the Community, the export of surplus agricultural  products will normally involve budgetary costs for the Community. But the cost effectiveness of the  policy is unclear. Irrespective of the success of the stabiliser policy, doubts on this score will  remain until Commission procedures for setting rates and determining prices are strengthened, in  particular by the introduction of systematic documentation and evaluation. It is apparent to the  Court that in the implementation of its export policy economy of operations has not been a priority  objective for the Commission. 4.3. Reform of the Commission's procedures must be matched by rationalisation and simplification of  export refund rates. The export refund system has two key characteristics: its complexity, and the  size of individual refund payments, both absolutely and in relation to the value of the export  consignment. It is this combination which makes the system so vulnerable to fraudulent  exploitation. The bulk of export refunds are paid to a small number of substantial commercial  operators. In designing a cost efficient system, therefore, account needs to be taken of the fact  that large professional operators in international trade have the experience, the resources, and  the opportunities to exploit at the Community's expense complicated provisions and control  weaknesses. The rationalisation of zones and to a lesser extent the number of rates that has taken  place in the beef sector has gone some way towards reducing the scope for misunderstanding and  abuse, but needs to be extended to other markets. 4.4. It is Member States which are responsible, day to day, for ensuring compliance with Community  requirements in the control and propriety of expenditure on export refunds. A fundamental  requirement is that the Community funds for which Member States are responsible (and for which they  are accountable to the Commission) are properly safeguarded with independent and effective control  procedures. Customs Services ensure that adequate arrangements exist for securing effective control  over consignments for which export refunds are claimed, and that the arrangements are properly and  consistently applied. Customs Services are also responsible for the efficient and economical use of  the resources allocated to the control of export refunds. In the case of the latter, however,  Customs' responsibility is to the national administration as paymaster. In determining operational  priorities, therefore, Customs Services are faced with the difficulty of obtaining national funds  to meet the resource implications of control activities arising from Community policies. Ideally,  one would count upon Member States' enlightened self-interest to resolve any such difficulties. In  its 1986 Annual Report () the Court drew attention to the reductions made by Member States in the  manpower of customs services despite receiving from the Community, towards the costs of those  services, ten per cent of traditional own resources (1  268,5  Mio ECU in 1988). The Court's latest  findings raise serious doubts as to whether national support for Custom's staffing, training and  other organisational arrangements is adequate to enable the required objectives and standards for  Community controls to be met. The Court considers that positive action needs to be taken on the  basis of Commission proposals for improving national customs' services to safeguard Community  funds. 4.5. The Court's findings about the performance of paying agencies reveal as much about the  fundamental weakness of their function in respect of export refunds as they do about weaknesses in  procedures. The problem lies in the reliance paying agencies are obliged to place on the  documentation provided by third parties, particularly third country authorities, which they are not  in a position to verify for the key parameters in calculating the refund payable. 4.6. The Court starts from the premise that the Community has an obligation to protect its  finances. This is best achieved by prevention through effective control measures. Public perception  of a high chance of detection is an important deterrent to irregular practices. Detection, although  often after the fact, is useful in that it provides hard evidence that control risks and procedural  weaknesses such as those identified in this report are not merely theoretical. Such evidence may  also be useful in directing preventive action. Some of the results of such weaknesses can be seen  in the cases of fraud and irregularities reported to the Commission in recent years which involve  quantity, description and destination. Cases of suspected irregularities found during the course of  the Court's audit have been reported to the appropriate national authorities for further  investigation and report to the Commission. 4.7. In the Court's view the evidence of this report has established that the financial management  of export subsidies by the Commission and Member States is defective in the following respects: (a)the level of subsidy represented by export refunds and low-price sales from intervention,  although effective in disposing of much of surplus community agricultural production, has been  determined with insufficient regard to the need for economy; (b)the Commission's management of export subsidies has not satisfied the requirements of public  accountability as defined by the Court in paragraphs 2.11; (c)control of payments by national authorities provides insufficient safeguard against exploitation  of the complex export refund system by fraudulent operators. The present report was adopted by the Court of Auditors in Luxembourg at its  meeting of the 5th April 1990.  For the Court of Auditors Aldo ANGIOI PresidentIn his absence André MIDDELHOEK, Member REPLIES OF THE COMMISSIONGeneral remarksThe Commission notes first of all that the Court of  Auditors' draft report on the management and control of export refunds is addressed both to the  Commission itself and to the Member States, who share the responsibility for implementing the  Community's export policy. The Commission finds that the Court has drawn attention to certain facts and has described them in  terms which, taken at their face value, throw suspicion, if not discredit, on all aspects of the  Community arrangements for the fixing of export refunds and for checks on the granting of such  refunds. The Commission also finds that, in certain instances, the Court has adopted positions of principle  which call into question the very basis of the Community's policy on agricultural exports or the  rules for implementing that policy. Whilst acknowledging that the common agricultural policy is by no means sacrosanct and that a  number of the CAP mechanisms need to be reviewed (particulary those relating to export refunds),  the Commission wonders whether the contents of the draft special report should not be subjected to  fresh scrutiny in the light of the realities of the world market, to ensure that no hasty  conclusions are drawn and that certain data are not exploited to the detriment of the Community and  its fundamental interests. Having said this, the Commission will now deal with all those points in the draft special report  which are of such importance or have such serious implications that they call for some comment or  reservation. 0. PROLOGUEThe Commission would point out that in 1988/89 the Community exported some 35  million  t of cereals (and cereal products). The bulk of these exports qualified only for ordinary  refunds, irrespective of their origin or destination. The one or two special measures which have  attracted criticism from the Court (invitations to tender for the export of 0.9 million  t of wheat  from Germany and for the export of 0.9 million  t of wheat to the USSR) applied to relatively small  quantities. The special measure whereby tenders were invited for the export of 0.9 million  t from the German  market does not therefore merit the particular attention which it has received from the Court. The  wheat in question was to be exported from the German market as a special intervention measure.  Since the intervention rules apply to the Community as a whole (French wheat may, for example, be  placed in intervention storage in Germany), there is no requirement that the cereals exported under  such a measure must have been produced in a particular Member State. When the first deliveries were made it became clear to the Commission staff (who were of course  following this operation with particular interest) that some operators were trying to circumvent  the rules by taking advantage of the fact that the customs authorities at certain German ports did  not require the wheat to have been released for consumption in Germany before it qualified for the  export refund. Article  1 of the Regulation issuing the invitation to tender (Regulation N°   212/89) merely stipulated that the wheat had to be exported from Germany. This incorrect  interpretation was corrected once the problem came to light. The Commission immediately made it  clear, by agreement with the Ministry of Financial Affairs and the Ministry of Agriculture in Bonn,  that the wheat had to be physically exported from Germany itself and the customs authorities at the  ports were informed accordingly. If operators continued to apply for the special refund in respect of French or British wheat which  was merely passing through German ports, they could be required to pay the cost of unloading the  goods. On the other hand, there was no legal basis for refusing the refund on any wheat exported  after it had been unloaded. Since the unloading costs were at least as great as the 'profit` made from the refund, the  operators did not gain from this ploy in the end. Their attempt to circumvent the rules was thus  thwarted. To clarify the legal position the appropriate changes were made to any subsequent  regulations issuing invitations to tender under a special intervention measure [see for example  Regulation (EEC) N° 3950/89, OJ N° L 379, 28.12.1989, p.  41]; the new Article  1 explicity  stipulates that the cereals must be exported from the market of the Member State concerned. The origin of the wheat exported under the tendering procedure in question cannot be verified from  official statistics. According to the information obtained by the Commission the quantity of German  wheat amounted to 350  000  t. This figure was confirmed by the Ministry of Agriculture in Bonn on  the basis of its own assessment of the available wheat surpluses which had not been offered for  intervention. A total of 845  000 t was exported under the measure in question. The bulk of the first 500  000  t  exported from German ports seems to have consisted of French wheat (about 80  %) and British wheat  (about 20  %). The remaining tonnage consisted mainly of German wheat. The last 145  000  t must  have been entirely German since by that time the minimum quality requirement was a 12,5  % protein  content. The figure of ECU 57,5 million quoted by the Court represents the total cost of the measure. To  present this sum as an additional cost does not reflect the true position. Not only the German  wheat for which contracts were awarded but also the French and British wheat would still have had  to be exported because the purchase of these cereals by the intervention agency would have entailed  even greater expenditure. The Commission has also been informed by the German authorities that they have retained the  securities for a proportion of the wheat exported since it did not meet the quality requirements  laid down in the Regulation. 1. INTRODUCTIONGeneral remarksIn view of the Court's comments the Commission  feels that it should draw attention to certain factors which influence world trade in agricultural  produce. The question of the Community's export refunds must be seen in a wider context than the  Community market alone. Since world trade in agricultural products does not follow any organized pattern, the operation of  the world market for a given product depends mainly on the proportion of total production  represented by any surplus or shortfall. If necessary the Commission could find examples in the  recent past to prove that the quantities which certain countries have available for export can  suddenly show a five-fold or even fifteen-fold increase and that the import requirements of a  single country can vary from one marketing year to another by the equivalent of 25  % of total  imports. Supply and demand thus offset each other on a world market which is in fact a residual market where  price levels bear no relation to production costs. When surpluses are available, world prices are  usually much lower than the prices paid to farmers in the main producer countries. To see the world  price as the ideal price for the European consumer (as the Court would seem to do) is unrealistic  since supplies practically never reach the consumer at that price because of the numerous  mechanisms (taxes, custom duties, quotas etc.) which have the effect of raising prices on the  internal markets of the importing countries. As far as the Community market is concerned, the mechanisms used to stabilize imports and exports  (e.g. storage arrangements) are essential to the achievement of the objectives of the common  agricultural policy. The Community has been exporting cereal surpluses ever since the market organization was  established in 1967. As far as possible, the policy has been to avoid intervention storage, first  of all by encouraging low-price disposal to the internal market (e.g. butter, milk powder) and  secondly, and again for budget reasons, by encouraging exports, subject to the Community's  international commitments under GATT. It should be pointed out that in the cereals sector one of  the reasons for the surpluses has been the importation (free of any levy) of larges quantities of  cereal subsitutes for use as feedingstuffs, an arrangement which derives from the common commercial  policy. Cereals sold from intervention stocks and from the free market must be considered in a  similar light, in terms of selling prices.In the beef sector the situation is somewhat different. Intervention sales ('at reduced prices`)  cannot be treated in the same way as sales from the free market because of the different  characteristics of the product concerned. It would therefore be risky to draw any conclusions as  far as export refunds were concerned. Under the active stock-reduction policy pursued by the  Commission (and approved by the Court) sales from stocks increased appreciably over the period  concerned. In this sector the Commission intends to encourage exports from the free market and from  private storage since exports from public stocks entail considerably higher costs. To take account  of the individual characteristics of the various products concerned, the Commission also has to  employ different types of management arrangements in each case. In this context the export refund system represents a means whereby the Community can easily adapt  to the realities of the world market. Once the decision has been taken to export, the refunds  enable the Community to establish a presence on the world market by offsetting the difference  between the Community price (which is fixed for a given marketing year) and the variable world  price. Lastly, it should be pointed out that when the Community grants a given refund for a particular  destination, this does not oblige the purchasing country to place the product concerned on its own  national market at the price for which it was bought. The Court concerns itself too exclusively with the cost of the refunds themselves and not  sufficiently with the effectiveness of the system. 1.4. The Commission cannot accept, either here or elsewhere, any suggestion that it simply follows  its nose where refunds are concerned and has no methodical approach. This would apply, for  instance, to the word 'judgementally`. 1.6. The conclusion drawn by the Court that 'the financial risks of the transaction are potentially  bigger for the Community than for the purchaser` bears no relation to the five examples quoted. In 1986 the Community took the only measures which were feasible at the time: producer  co-responsibility was introduced to help meet surplus-disposal costs, stabilizers were introduced  to curb the expansion of agricultural production; and the way was paved for the negotiation of  international rules. 1.8. The situation will be improved now that the Directive has been replaced by Council Regulation  (EEC) N° 4045/89 (OJ N° L 338, 30  December 1989). 2. COMMISSION MANAGEMENT OF EXPORTSThe regulatory framework2.1  and  2.3.  Although there is some theoretical basis for the comment made by the Court at the end of paragraph   2.1, the Commission would point out that in practice it is rare for export refunds to be adjusted  at times other than the agreed intervals and that, with some rare exceptions, these have been  downward adjustments which the next Management Committee has then had to 'ratify`. The Commission would also point out that some months ago it was decided that the agenda of each  Management Committee meeting should include the item 'Export refunds` so that the mere inclusion of  such an item on the Committee's agenda should not lead (as had been the case in the past) to  anticipatory or speculative moves by operators which could be detrimental to the satisfactory  management of the EAGGF. General Agreement on Tariffs and Trade (GATT)2.6. The Commission would point out that the Export  Enhancement Programme is not the only export subsidy scheme used by the United States. The USA have  consistently maintained their export prices at a level which is independent of the guaranteed price  paid to producers. 2.7. When it says that the policy of matching subsidies appears to have entailed the granting of  exceptionally high refunds, does the Court mean to say that the refunds were excessively  high?Setting the level of subsidy2.8. As the Court points out, the difficulty facing the  Commission in the management of refunds is how to achieve the proper balance between effectiveness  and economy, but the constraints imposed by the legislation and the data which it uses as the basis  for its assessment of the situation are such that it is wrong to speak of over-compensation as do  the non-member countries, although they have never been able to provide any specific proof of this  allegation in the various attacks which they have mounted on the EEC within GATT over the past ten  years or so. Similary, it is incorrect to speak of under-compensation as do the operators on practically every  occasion. The claim that the 'minimum necessary` is exceeded, thus entailing excessive expenditure under the  Community budget, is no more valid than the claim that the level of compensation is insufficient.  Admittedly, an operator could take advantage of favourable circumstances on a given day and then,  in a transport of euphoria, lose large sums the following day. 2.10. There are regulations which govern the transmission of data from the Member States. The  Commission takes care, moreover, to adjust its requirements at regular intervals. On 2  February  1990, for example, it adopted Regulation (EEC) N° 301/90 on communications between Member States  and the Commission with regard to milk and milk products. On the other hand, the prices quoted in response to invitations to tender cannot always be  considered a reliable source of information since operators may occasionally submit bids without  any real intention of winning the contract. The Commission does, however, have other sources of information, such as the trade itself, farmers'  organizations and the specialized press. In the case of cereals, for example, the Commission has reliable sources of information on which to  base the calculation of export refunds. Firstly, there are the prices quoted (without a refund) at  Community ports of shipment. Secondly, there is obviously the exchange rate between the national  currency of the exporting Member State and the dollar. Thirdly, the world market level is  determined by the FOB selling prices charged by competitors (e.g. prices FOB Gulf for United States  wheat and maize). As a rule, it is quite straightforward to ascertain the parameters for the export refunds, given  the wealth of convergent sources. 2.11. The Commission would reaffirm that the calculation of export refunds is essentially based on  objective data and that these data are much more numerous and varied than those mentioned by the  Court. The said calculation is the fundamental basis for assessing what refund should be fixed, the  discretionary powers of the Commission being necessary but limited, contrary to what has been  claimed. In any case the Commission's responsibilities call for a degree of managerial flexibility  so that it can adjust to the situation obtaining at any given moment. 2.12. The Commission considers that its departments possess sufficient documentation concerning the  decisions taken on export refunds. In this context it attaches particular importance to the weekly  market-situation reports drawn up by each of its markets divisions. The Commission will, however,  investigate ways in which its documentation could be improved in those areas where this would seem  necessary. Milk and milk products2.14  to  2.17. Information on the world market for milk and milk products  may indeed seem fragmentary, since no commodity-exchange prices are quoted around the world as they  are for other basic products. Even so, the data obtained from trade organizations, the specialized  press and other useful sources (the Community's competitors, GATT etc.) make it possible to assess  and monitor trends in prices, including those set by other producer countries. Since the world market lacks transparency, however, it should be pointed out that in most of the  non-EEC countries competing with the Community the decisions relating to the export of milk  products are taken in each specific case by a single vendor (usually a marketing board) and the  'window prices` are not always those actually charged; the procedure used by the Commission, on the  other hand, means that the Community's competitive position is generally known, thanks to the  publication of the rates of export refund. As regards the recording of its sources for world prices, the Commission would again stress the  importance which it attaches to its weekly internal report on the market situation. 2.18  to  2.19. The Commission would first of all point out that the Community's export refunds are  in no circumstances calculated merely as the difference between two price levels (the internal  Community and the world market price). They also depend on an assessment of the market in terms  which are difficult to define and still more difficult to express as a mathematical formula. There  are many variables, including subjective variables such as the 'policy` to be pursued in the sector  concerned. Particularly since the introduction of the 'milk quota` system the Commission has  endeavoured, in view of the situation on the world market, to pursue a cautious export policy by  restricting the quantity of milk exported, with a view to preventing price shifts on the Community  market. The reference document which the Court mentions in support of the figures shown in Table  3  was only one of the sources used by the Commission. The data contained in that document cannot  therefore be described as the sole basis for the calculation of refunds. Secondly, the Commission is astonished by the Court's remark concerning the absence of records on  the estimation of Community and world prices. The relevant information was provided to the Court's  inspectors at the time of their second visit. Thirdly, the Commission would point out that all decisions on export refunds fall within the  competence of the Member of the Commission with responsibility for agriculture and rural  development. It would also point out that the decision in question resulted in a lowering of the  refunds and that this decision was taken in full awareness of the facts. 2.22. The Commission has provided the Court with examples of the documentation used as the basis  for the decisions on the unpublished rates for a single destination. Each week the Commission staff  also draw up reports which provide detailed information concerning the trends on the Community and  world markets. All this information is taken into account when the export refunds are fixed. 2.23. The Commission will propose legislation so that a closer track can be kept of the quantity  exported in this way. Special salesRegulation (EEC) N° 765/86: Butter for the USSR2.28. The Commission has no powers to  oblige the importing country to conclude joint contracts with several traders rather than a single  trader. Regulation (EEC) N° 727/87 of 13  March 1987: SMP for export2.30  to  2.33. Since the end of 1986,  when the Council reached agreement on a number of reforms in the milk sector the Commission has  pursued an active policy on the reduction of intervention stocks. In 1987 and 1988 stocks of skimmed-milk powder diminished rapidly since the Commission had ruled  out the keeping of public stocks as an instrument of market management. The run-down of stocks made it possible to speed up certain inevitable structural changes and the  restoration of balance to the Community and world markets. This in turn made for a more rapid  adjustment of subsidies and refunds. A sharp decline in public stocks and the subsequent  adjustments have had a very positive influence on expenditure, as may be seen from the trend in  export refund rates. On 21 December 1987, 80  000 t were sold, followed by a further 90  000  t on 4  January 1988.  These sales considerably improved the situation on the world and Community markets. The rate of  export refund for SMP, which had fluctuated between ECU 107 and ECU 100/100  kg during the 1987  financial year fell as a result of these massive sales to ECU 93 on 21  January 1988 and then to  ECU 50 on 30  May 1989. >TABLE>BeefIntroduction2.34  to  2.35. Exports of beef are by no means always handled  by a small number of major trading companies. Large number of EEC operators are engaged in  exporting from the 'free` market (including products covered by private storage aid schemes) and in  trading processed products and live cattle. Until recently, however, the State buying agencies in  Eastern Europe have had discretionary power as to which EEC operators to buy from. In making their  choice of trading partner they tended to follow a rather conservative pattern based on  well-established links over a number of years. The fact that traders do not participate in a particular sale of intervention beef may thus stem  from considerations other than the export guarantee as suggested by the Court. - Firstly, the total amount of guarantees to be lodged would normally only have a discouraging  effect when large minimum quantities are laid down in the selling provisions. If so, there are  specific reaons for this (e.g. control, need for rapid removal from storage, delivery of large  quantities, etc.). Only relatively large trading companies or a group of traders can provide the  necessary transport and expertise to handle export operations according to the above-mentioned  specifications. - Secondly, profound knowledge of a market with its various specifications in respect of policies,  culture, finance and commercial aspects gives a trader an immense advantage vis-à-vis his  competitor without such expertise. - Thirdly, in general, buyers in third countries tend to return to those Community traders who have  proved reliable and trustworthy in the past. Setting the level of subsidyPublished rates2.39. It is difficult to confirm or refute the Court's  conclusion that the lowering of the rate had little or no effect on the volume of exports from  December 1986 onwards, since export licences (with or without advance fixing of the refund) are  valid for almost six months and the effect of a lower refund is not reflected immediately or in  every respect. Moreover, operators still held export licences issued before 26  November 1986 at the earlier rate  of refund. These licences covered substantial quantities of fresh meat which had been placed in  storage to quality for private storage aid (over the period from 1  September to 7  November 1986  such aid was granted on 150  000 tonnes, over 90  % of which was intended for export). Depending on the year concerned, a quantity of this magnitude can represent between 30  % and 40  %  of all beef exports other than those from intervention stocks. Exporters thus had at their disposal substantial quantities with which they could cover the  requirements of non-EEC countries for several months. 2.41  to  2.42. The Commission would point out that exports are not just the outcome of some  mathematical calculation. Past experience (which cannot be expressed as a formula), is usually the  best way to avoid the errors which can arise from a purely scientific approach. In this context it should be pointed out that the higher refunds were only paid on fresh meat from  adult male cattle, since only this type of meat can be bought in. Exporting an additional 120  000   t over and above normal export sales greatly eased the pressure on prices in the Community, at a  time when the market is usually very sluggish. As a result the total quantities entering public  storage between November 1988 and February 1989 amounted to only 43  300  t, in terms of carcase  weight (as compared with 390  000  t in 1988). In France and Ireland, which exported the bulk of  the said 120  000  t, intervention purchases over the four-month period in question totalled 3  000   t and 2  200  t respectively. It may therefore be concluded that the operation proved less costly  than any alternative. Intervention sales2.43. The two-stage system is designed to meet a commercial need for a tender  scheme while maintaining as far as possible the possibility of buying intervention beef over a  certain length of time at fixed prices. Normally, an operator cannot afford to run the risk of  buying through tender sales without having secured his re-selling operation in a third country. In  general, trade negotiations take quite a long time to be concluded and the Community trader must  have some, if not full knowledge of the ex-coldstore selling price from intervention. Therefore,  the minimum price published is not only a reserve price but indeed an operative price which takes  account of specific aspects of international trade, while being adjusted at regular intervals in  the light of the prevailing price conditions on the world market. The tender part provides the  operator concerned with a tool to secure himself with a predetermined quantity if his bid is  sufficiently high whereas under a fixed price sale he might see his quantity being reduced in case  of oversubscription. Obviously, the financial benefits for the Commission are related to the advantage taken of the  tender prices and the flow out of intervention under the fixed price stage, a flow which most  certainly would not take place without that stage, resulting in further storage costs and ageing of  the beef. Notwithstanding the normal play of supply and demand the fact that some sales were made  either at the minimum price or at prices marginally above it proves, inter alia, that the minimum  prices have been set at appropriate levels and furthermore, that operators tend to minimize their  risk in a situation where no binding prices have yet been negotiated with a potential third-country  buyer. The Court indicates that 35  % of quantities offered for sale in 1989 were sold through tenders.  However, a similar quantity was actually sold at fixed prices, showing the importance of both  selling operations and indicating the success of the two-stage system. 2.44. The deadline of 14 days does not apply to sales under Regulation (EEC) N° 2539/84 which is  now always used when selling beef for export. The minimum selling price as fixed in each export Regulation reflects the appropriate price level  at the time of voting in the Management Committee. Postponing the start of the sale by almost one  month could lead to unrealistic prices at that point in time and in many cases be counterproductive  with prolonged storage of the beef. The Commission, however, accepts that an appropriate period  should elapse between the publication and start of the sale to enable traders to respond to the  call for tenders. In general that period is aimed at 5-7  days which, moreover, is accepted by the  European trade organizations as being sufficient. The Commission deplores the fact that due to  procedural difficulties, the above-mentioned period for a limited number of sales was shorter than  5  days but experience showed that irrespective of this fact, the sales turned out quite normal.  Procedures are now tightened up and the 5-7 day period is being respected for all tender sales for  export. Special SalesBrazil2.46. The proposal made by the Court that the Commission should enter into  commercial negotiations directly with a country or an importer in a third country seems to be  rather hazardous. Firstly, there are legal difficulties in the light of the Commission's legal  status in such trade. Secondly, a contract will not only include a price but also an obligation to  deliver before a certain date, non-compliance with which entails the usual commercial sanctions.  Because the Commission is unable to control intermediate transactions and because operators who can  actually manage large-scale operations will know about the Commission's commercial obligations,  bids for the intermediate transactions could therefore very well reach exorbitant levels. Thirdly,  what would the Commission's possibilities be in case of legal proceedings in a third country  (dispute over quantity, dispute over payment, etc.)?2.47  to  2.50. The Court raises the question  of the special sale to Brazil but draws no conclusions, except to suggest that preference may have  been given to two companies. Here again the Commission can merely point out that a non-member  country buying from the EEC is free to deal with one, two, five or ten companies and that the  Commission has no means of altering this practice other than by interfering in the internal affairs  of a non-member country. Eastern European countries2.54. The sale provided for by Regulation (EEC) N° 2415/88 should be  seen in the light of extremely large stocks in Germany and France. The Commission considers the  tender sales as successful, with a rather stable price of ECU 500/tonne of compensated quarters  throughout the sale.Rather than comparing two things which are not at all related to each other (as done by the Court  in the last sentence) one should evaluate the financial effect of prolonged storage of substantial  quantities, of which a large part could even turn out to be unsaleable or, alternatively, the  financial effect of dumping the products on the home market with the obvious devastating  implications. CerealsIntroduction2.57. The Commission does not agree with the Court's view that the cereals  market is dominated by a limited number of multi-national companies. Other operators are also  present on the market and competition is very keen. Nor does the Commission have the impression  that the multi-nationals have a monopoly of exports to the Community's main customers (USSR,  Algeria, Poland, Egypt). Lastly, when cereals are exported from the Community there is in most  cases a change of ownership. At the same time it is difficult to see what interest the Community  would have in making a change of ownership compulsory. Setting the level of subsidyPublished rates2.59. If there is any instance in which an export  refund is calculated mathematically then this is it, for the ordinary refunds which are fixed for  the export of cereals from the free market cover the difference between the Community and world  market prices. Ordinary refunds are also fixed for exports from intervention stocks, in particular so that the  destinations for which tenders are submitted can be identified and so that the operator can then be  required to export to the destination specified. Although there is no formula for fixing such  refunds, which do not reflect the difference between the Community and world market prices, no  formula is required since the operators submitting tenders for exports from intervention stocks  must offer as their purchase price the world price plus the refund which they are to be paid on the  export of the cereals concerned. Correctives2.60  to  2.61. As has already been explained to the Court's representatives on several  occasions, the correctives are an integral part of the refund. They are additions to or deductions  from the refunds fixed for each month of delivery during the period of the export licence's  validity. The correctives apply both to ordinary (basic) refunds and to the (basic) refunds fixed  by tendering procedure. Their purpose may be to encourage exports to a specific destination or to  reflect price fluctations on the world futures market, so that a correspondingly differentiated  refund (basic amount + corrective) is granted for each month of delivery. Positive or negative  correctives may be fixed, where necessary for a particular destination. This is done to ensure that  all the cereals are delivered within the period of the export licence's validity. 2.62  to  2.63. The positive correctives of ECU  3/t and ECU 4.50/t which the Court gives as  examples are additions to the refund granted for specific destinations, the basic refund being  applied to other destinations. Where larger correctives are applied (such as the + ECU 20/t or + ECU 30/t mentioned by the Court),  the situation is completely different and no comparision can be made between the two types of case.  The larger correctives are applied when the tenders invited for a list of countries have to be  temporarily restricted to a single destination or when it is necessary to ensure that delivery is  made within the period of the export licence's validity (as in the case of the invitation to tender  issued by Regulation 395/89, which applied only to the USSR). Since the correctives applied in such  cases are large, the operational refund (basic refund + corrective) is in fact fixed only for the  destination or delivery dates to which the correctives are applicable. When tendering, the operator  must take the correctives into account because the basic refund which will be fixed (and is  theoretically applicable to other destinations and other delivering dates) will not be sufficient  in itself. It must also be pointed out that the total amount of the refund, including the  corrective, is not always a special preferential amount which is greater than that which would have  been granted for other destinations or other delivery dates. Since the correctives are an integral  part of the refund the Commission has not calculated the budgetary cost separately and sees no  reason to do so. 2.64. Special refunds, which may take the form of a positive corrective for the destination  concerned or a special basic refund, are not automatically granted for the more important  customers. It all depends on the degree of competition on the world market, and in particular any  American measures under the Export Enchancement Programme which, by its very nature, is aimed at  the Community's main traditional markets. Special rates2.65. The Commission hereby gives an undertaking to amend Regulation N°  162/67 in  the near future, to take account of the new processing coefficients. It is true that the USA granted some particularly large bonuses on exports of processed products  such as flour and that these bonuses were unrelated to those for wheat. If the Community was to  compete, it was insufficient to calculate the refund on flour in the normal way, i.e. on the basis  of the refund for wheat and the wheat/flour processing coefficient. 2.66. Algeria is the Community's only traditional customer which buys semolina on a large scale.  For reasons of international competition beyond the Community's control, and to meet the  competition arising from the fact that European mills can use North American durum wheat under the  inward processing arrangements, refunds had sometime had to be fixed at rates higher than the usual  level. Bids2.71.  (a) The Commission acknowledges that the time limits for the submission of tenders to  national administrations (10.00 on Thursdays for free market sales and 13.00 on Wednesdays for  sales from intervention stocks) have not always been observed by the latter and that this has given  rise to distortions of competition. When carrying out checks for the clearance of accounts, the Commission has insisted on the need to  observe these time limits (the directive issued by the ONIC last autumn provides evidence of this).  The Commission will once more impress on the Member States that tenders submitted after the time  limit cannot be considered and that the date and time of arrival must be shown on the tender. (b) In the case mentioned by the Court, 8 tenders submitted for exports at normal prices (to other  non-member countries) were indeed rejected although they quoted a price higher than that which was  accepted in the case of the tenders relating to the USSR. At the same time, however, 14 even better  tenders had been submitted for the other non-member countries and these had been accepted. A  special price for the USSR was necessitated by the keen international competition (particulary as a  result of the Export Enhancement Programme). (c) In practice there is usually keen competition between the companies exporting cereals. The fact  that export licences are transferrable does not make the bids submitted less competitive, as the  Court would claim. Operators can take more risks if they know that they can cut their losses by  transferring their licence to others, particularly if they do not have or are unable to conclude a  contract. 2.72. The Court seems to suggest that the Commission allows itself to be manipulated by operators  obtaining cereals at the price set by their customer. If this were the case, why do buyers not  simply ask for the cereals to be delivered free of charge?The real situation is quite different.  Refunds are calculated on an objective basis. Competition between companies is sufficiently keen  for them to take the refunds calculated on that basis. Where companies have concluded sizeable  contracts with traditional customers who are buying large quantities (e.g. the USSR) the Commission  has consistently set a refund which corresponds to the price justified by the international  context, even if this meant losses for the companies selling below that level (the press has given  such cases considerable publicity in the recent past). Special sales2.73.  (d) Regulation (EEC) N° 2751/88 issued an invitation to tender for the export  of Greek durum wheat as a special intervention measure, with a view to preventing such wheat being  placed in intervention storage in that Member State. Such measures call for a higher refund than  that fixed under the general tendering proceedure, where the bids accepted usually entail  deliveries from the most competitive cereal-exporting countries. In this particular case, moreover,  some of the wheat dated from the 1986 harvest, which had suffered as a result of the Chernobyl  accident. 2.74. Detailed answers are given in response to the 'Prologue` (p.  2) and in sections 2.75 to 2.78  below. Tender for the refund on the export of common wheat to the Soviet Union2.75  to  2.78. In February  1989, the Commission issued a special invitation to tender for the export of 0.9 million  t of  wheat to the USSR, this quantity being partly covered by a contract concluded at the end of 1988  for 1.5 million  t to be delivered over the period January-March. By February 1989 the necessary  export licences had still not been issued, with the result that deliveries had been delayed, giving  rise to protests from the USSR. The refund fixed as a result of the tendering procedure (basic  refund + corrective = ECU 71/t) was calculated in the normal way on the basis of current data  (internal price and rate of exchange), and the export price obtained was perfectly in line with  those charged at that time by the Community's competitors for exports to 'sensitive` destinations. As a result of competitors' efforts to take a larger share of the Community's main traditional  markets, and in particular as a result of the Export Enhancement Programme, the world is no longer  uniform. In some cases, therefore, the Community has to grant special refunds in order to keep an  important customer. The invitation to tender for the export of 0.9 million  t to the USSR from all Member States was  issued by Regulation N° 395/89 in February 1989 in order to cover a contract for 1.5 million  t  which certain firms had concluded at the end of 1988, originally for delivery over the period  January-March but delayed for lack of export licences. Under the general procedure all the tenders  which the operators concerned had submitted since December had been refused, despite a corrective  of + ECU 4.50/t for the USSR, since they were not in line with the world market. By issuing a special invitation to tender the Community made a gesture towards the USSR which had  been protesting because of the delay and thus ensured that the deliveries could be made. The aim  was not therefore to help the operators out of their difficulties but to prevent any further  inconvenience to a traditional buyer whose custom was essential to the balance of the Community  market. When the first time limit for the special invitation to tender (for the USSR) expired on 23   February, a bid for 0.9 million  t was accepted at ECU 41/t. To this was added a USSR corrective of  + ECU 30/t for April/May, as published earlier in the Official Journal. On the same day, under the  general tendering procedure all bids for 0.53 million  t, at refunds of ECU 61.90 and ECU 75/t,  were rejected with the agreement of all the Member States on the Management Committee. The best  offers received under the general procedure had not been submitted to cover sales to the USSR. As  announced beforehand priority was given to the special procedure. The refund was nevertheless  calculated in the normal way, on the basis of the data recorded on the day when the refund was  fixed. The refund of ECU 71/t gave an FOB price of USD 144/t on 23  February (about USD 5/t above  the price agreed for the 1.5 million  t in November). Admittedly, the price for US wheat (SRW  non-EEP) was USD 152/t at that time but the USA had also sold some wheat to Algeria at USD 140/t  FOB. The EEC selling price was therefore perfectly in line with the real world market price. If the  full facts are to be known, it should be pointed out that the operators never managed to compensate  for their failure to cover their contract under the general tendering procedure held in December  1988, when refunds of almost ECU 69/t were awarded. With the positive corrective of ECU 4.50/t set  for the USSR at that time, the refund would have amounted to ECU 76.50/t in February (accounting  being taken of two monthly increments). The corrective of + ECU 30/t, which the Court singles out for criticism, was fixed for the purposes  of the special procedure whereby contracts were awarded on 23  February for exports to the USSR  over the period April-May and was intended to restrict cover to that period. The important point is  that the corrective added to the basic refund (i.e. 30 + 41 = ECU 71/t) was in line with the world  market. Although the corrective appeared to be a huge concession to the country concerned, in fact  it merely had the effect of restricting deliveries to the months in question. Since the special invitation to tender had been issued for only 0.9 million  t, the remaining 0.6  million  t for delivery in March had to be covered by other licences, and in particular those  issued in December under the general procedure with a positive corrective of + ECU 4.50/t for  January-February-March (total quantity awarded in December: 2.2 million  t). Since the operators  who had concluded the contract with the USSR did not have such licences, they had to buy them on  the market (at a loss). Planning and control of export sales2.80. The Commission notes that the facts which are mentioned  in this paragraph and which are therefore acknowledged by the Court could invalidate a good number  of the comments and criticisms in the earlier part of the report. 2.81. The Commission has no alternative but to 'rely on Member States to keep it informed of  progress on sales` since only the Member States have information on the movement of goods as they  pass through customs. The Commission does, however, obtain other information on Community exports  from the private sector and from the importing countries. It is incorrect to say that the Commission is unable to monitor exports of specific cuts and  categories of meat. For example, the Member States are required to forward the following  information under Regulation (EEC) 2377/80: - Twice per week, the quantities of fresh and frozen meat for which export licences have been  requested or issued, providing a breakdown for each subheading or group of subheadings in the  Combined Nomenclature. - Before the fifth day of each month, the quantities of beef products eligible for refunds for  which export licences have been issued during the past month, again providing a breakdown by  subheading. - In addition Member States must inform the Commission each month of the quantities of meat from  adult bovine animals on which special refunds have been granted. The Commission does not consider it necessary to collect such detailed information, particularly if  the rate of refund is unchanged. The decision-making process2.82. The Commission feels that the Court is not justified in claiming  that 'hitherto the proposals put by the Commission to the Management Committees have not been  supported by full information about the financial implications`. The EAGGF Directorate and the Directorate-General for Budgets have always maintained a close watch  over the day-to-day decisions taken by the Commission with regard to exports. Given the amounts  involved, moreover, the difference between the expenditure forecast (forecasts are made during the  previous budget year) and the expenditure actually incurred is very small; this could not be the  case unless the budgetary implications of any change in the refund were carefully analysed on each  occasion. 2.83. A record of each Management Committee meeting is kept, outlining the main points discussed  and not simply listing the decisions taken. ConclusionsThe cost of the policy2.85. As the Court points out, the refund system has become one  of the main instruments for the management of agricultural markets, as well as being extremely  costly and complicated. There are many reasons for this state of affairs, however: Community  production has increased; importers have made new claims on the world market; importers are  endeavouring to diversify their sources of supply and thus avoid dependent relationships; the world  markets for agricultural producers have become disorganized; intervention arrangements have been  dismantled because they were leading to a build-up of unsaleable stocks; the Community's open-door  policy on imports (the EEC is the world's main importer of agricultural and food products) has  resulted in the need to re-export. These are some of the most important reasons. The Commission does not share the Court's view that detailed legislation should cover all the  measures taken with regard to exports, since this would prevent the Community from adapting to any  given situation. In the beef sector low-price sales are not considered to be an instrument of export promotion. In  the framework of a sound stock management, profits should be taken from appropriate outlets  available on the world market as well as on the internal market. In cases of disposal to export  markets, quantities, prices and destinations have been carefully defined in order to apply an  active destocking policy as smoothly as possible. For instance, in setting a given price level,  attention should be paid not only to potential world market competitors in beef but also to the  risk of potential buyers switching to other sources of protein such as poultrymeat. Furthermore,  large overhanging stocks will have a much more detrimental effect on prices than any ad-hoc sale.  Consequently, hanging on to the stocks will have a serious impact on world trade as well as on EEC  trade while at the same time being extremely costly for the Community budget. 2.86. The Court states, firstly, that certain exports could have been absorbed by the Community  market and that, consequently, the financing of exports has a tendency to increase the level of  Community prices. This statement by the Court must be refuted since it does not take account of the following  considerations: - a supply balance is drawn up for each sector at the beginning of the marketing year and is  regularly updated; - if there was any chance of a surplus being absorbed over a given period, there would be signs of  the corresponding shortage beforehand and the mechanism for adjusting Community prices would come  into play. The purpose of the exports is, after all, to dispose of those quantities which the Community's  internal market cannot absorb. Secondly, the Court repeats the claim (never supported by evidence) that the refund system tends to  depress world prices. The Commission would like to see evidence of any cases where this may have  occurred, if only to take the necessary measures. The Commission does not share the Court's view that the lines along which the system is developing  could carry risks for the Community budget. 2.87. It is the exception rather than the rule to specify a single country as destination or source  when fixing export refunds. The reasons for such exceptions are given in the answers to other  points such as the Prologue and points 2.75  -  2.78. The Commission does not consider that the  cost to the Community budget has increased in the cases referred to by the Court, as is made clear  in the relevant answers. 2.89. The Commission does not consider its market information to be inadequate but is constantly  endeavouring to improve the quality of that information (2.10). As regards the claim that inappropriate recourse is had to tendering procedures (the use of which  is recommended by the Courts in 2.94) the Commission would refer the reader to its answers to 2.28  and 2.35. The Court's analysis does not take account of the need to ease the market situation in  certain sectors by means of special sales (e.g. to the countries of Eastern Europe). Lastly, the Commission disagrees with the Court's findings that 'the present chapter contains  evidence that the cost of subsidy may often be higher than necessary`. Evidence to the contrary has  been given in the answers to earlier points made by the Court. Accountability2.90. In the first place, the Commission considers that, where its own work is  concerned, sufficient documentation is available on important decisions. It intends, however, to consider ways in which the transparency of the documents concerned could be  further improved so that fuller inspection may be carried out by the Court. The Commission does not agree with the Court's conclusion that 'it is unclear how management can  function properly` in view of the lack of information. Nor does the Commission agree with the Court's conclusions regarding the role of the Management  Committees. It would point out that in these Committees the Member States are usually defending  their national interests, whereas the Community interest is defended by the Commission. To anyone  who has attended the Committee meetings, it will be clear that the Commission does not always gain  the upper hand. Tendering2.93  (a) The Commission is not convinced that tenders should be invited for all export  sales of bulk products. Such a procedure would not reflect normal commercial practice and could  easily become counterproductive. The Court also recommends that minimum prices should not be published but, as previously explained,  such prices are absolutely necessary 'in real life`. (b) Direct negotiations between the Commission and the importing country, as suggested by the  Court, would have several disadvantages. The Commission is not in a position to negotiate prices  with importing countries since it cannot oblige firms to conclude contracts for delivery at a  particular price. Serious doubts exist as to the Commission's legal capacity in such operations, in  particular in respect of entering into contractual commitments. 3. NATIONAL CONTROLSGeneral remarksThe Commission notes that the Court's  observations and conclusions are based on a large number of specific cases which have come to the  Court's attention in the course of on-the-spot checks on custom offices and paying agencies. The  Commission would request the Court to forward full details of these cases so that it can study them  in depth with a view to follow-up. The Commission is of the opinion that the cases in question must be assessed in the light of  existing Community legislation and national implementing rules, due account being taken of  particular situations at regional or even local level. Since the Commission became aware of the Court of Auditors' report, some of the cases mentioned  have been traced back in the course of EAGGF controls. In-depth investigation of these files does  not lead, however, to a sharing of the Court's conclusions. Details of this matter are included in  the Commission's answers given below. The Commission, which is aware of the shortcomings in the arrangements for checks on refunds, is  now carrying out an inspection programme, which includes checks on the customs authorities in the  Member States. The inspections carried out so far (F, NL, D, DK, and IRL) for the clearance of  accounts and for the detection of frauds and irregularities have borne out most of the Court's  findings. Particularly worrying is the extremely low percentage of physical checks, both on the  quantities declared and on the nature and characteristics of products. In addition, a question mark  hangs over the number and quality of the controls applied, given the lack of relevant instructions  and the shortage of staff and equipment. It was for these reasons that the Commission recently took the following initiatives: (a)On 12 February 1990 the Council adopted Regulation (EEC) N° 386/90 (OJ N° L 42, 16.2.1990) on  the monitoring, at the time of export, of agricultural products qualifying for refunds. This  Regulation requires physical checks to be made on a representative selection of at least 5  % of  the export declarations in respect of which applications have been submitted for refunds. (b)The Commission also decided that Member States should incur severe financial penalties if they  did not carry out the necessary controls (guidelines adopted by the Commission on 20  December  1989). (c)Commission Regulation (EEC) N° 354/90 of 9 February 1990 (OJ N° L 38, 10.2.1990) amends  Regulation (EEC) N° 3665/87 as regards proof of arrival at destination in third countries of  agricultural products qualifying for a variable refund. Annex  II of the latter Regulation has been  repealed. (d)Directives 81/177 and 82/347 deal with the general harmonization of customs rules relating to  export formalities. In the specific case of agricultural exports qualifying for refunds, Regulation  (EEC) N°  3665/87 is applicable. The Commission departments are now investigating the possibility  of amendments which would strengthen the arrangements for documentary and physical controls. (e)On 21 December 1989 the Council adopted Regulation (EEC) N°  4045/89 (OJ N° L 388, 30.12.1989,  p.  12) on scrutiny by Member States of transactions forming part of the system of financing by the  EAGGF Guarantee Section. This Regulation repeals Directive 77/435/EEC (OJ N° L 172, 12.7.1977, p.   17). It is concerned with a posteriori checks on the commercial documents of undertakings receiving  payments from or making payments to the EAGGF Guarantee Section, with particular emphasis on the  prevention and detection of fraud and irregularities. As compared with the Directive which was applicable hereto, the new Regulation contains several  important changes: the number of controls is considerably increased; the national control  programmes for harmonization at Community level are to be submitted to the Commission; in each  Member State a specific body will be responsible for controls or the coordination thereof. Customs controls3.8  to  3.26. The Commission is currently reconsidering the procedures for the  exportation of agricultural products qualifying for a refund, with a view to strengthening and  harmonizing the rules followed by the Member States. It is planning to introduce a number of  provisions concerning the presentation of the documents used to obtain a refund on exports and  concerning the arrangements for the examination of the products to be exported. As regards the notice of intention to place goods under customs control (3.19  -  3.20), the  Commission agrees that from a pragmatic viewpoint the control on goods to be exported can be best  performed at the place of packing and loading. The Commission's experience on this, gained in the  course of the EAGGF missions, confirms that in France and Germany the intention to commence this  operation has to be communicated to the customs authorities. This information has to reach these  authorities early enough to allow them the opportunity to carry out a control if they decide to do  so. An in-depth control on the customs authorities in Ireland and the United Kingdom is scheduled for  this year. The date on which export declarations are accepted (3.21  -  3.22) is defined in Article  6 of  Council Directive 81/177/EEC on the harmonisation of export procedures for Community goods. Where  necessary the Member States concerned will be reminded of this specific rule. 3.27  to  3.25. The criteria and rules governing physical checks on exported goods have been the  subject of an in-depth investigation by the Commission. As already mentioned, the Council adopted  on 12/13 February 1990 a Regulation on the monitoring, at the time of export, of agricultural  products qualifying for a refund [COM(89) 294 final of 16  June 1989]. This Regulation deals both  with physical checks on goods and with checks on documents. Article 3 lays down the following rules: - the physical checks must take the form of spot checks conducted frequently and without prior  warning and must cover not less than 5  % of the export declarations in respect of which  applications are submitted for a refund, such percentage being applied: - per customs office; - per calendar year; and- per product sector; - a scrutiny rate greater than 5  % may be fixed for specific cases and period, on the basis of  objective findings which indicate an increased risk of fraud. Article 6 provides for the adoption of implementing rules relating to: - the method for calculating the minimum percentage; - the coordination of controls between the national authorities and the Commission staff. The implementation of these principles should correct many of the shortcomings found by the Court. On the subject of physical controls (3.29) the Commission also wants to underline that turnouts of  goods are very difficult to perform, time-consuming and expensive. For those reasons any decision  to operate them can only be based on serious presumptions of fraud, and has to be assessed in  conjunction with other possible control measures applied in each ongoing export operation. 3.36  to  3.41. The implementation of the above-mentioned Regulation should eliminate the  shortcomings which beset physical controls. The Commission staff and the delegations of the Member  States are also reconsidering Article  3 of Commission Regulation (EEC) N° 3665/87 with a view to  introducing a more effective system of controls. Article 5 of the International Convention on the Harmonization of Frontier Controls on Goods  [adopted by Council Regulation (EEC) N° 1262/84] defines clearly the infrastructure which customs  offices should have at their disposal. The Commission is prepared to remind each Member State  involved of this obligation. As regards the location and timing of the physical checks (3.37  -  3.38) the Commission would  refer the reader to its answers to points 3.8  -  3.26. Sealing (3.40) is an important means of control which provides a reliable guarantee as to the  identity of goods transported. Article 18 of Council Regulation (EEC) N° 222/77 on Community  transit clearly defines the cases where sealing is compulsory as a method of identification. The  Commission is prepared to remind Member States involved of their obligations in this area. The Commission's experience has been that evidence of export (3.41) is often gained not only from  manifests but also through information obtained from the harbour authorities and from specific  customs units located near the open sea. Paying agency control procedures3.42  to  3.52. In cases where the refund is differentiated  according to the destination of the goods, payment of the refund is subject to the production of  evidence that the customs formalities for release to the market in the third country concerned have  been completed. The so-called 'Annex  II documents` provided for in Regulation N°  3665/87 proved  to be unreliable, largely because there was no link with the administrative and customs procedures  applicable in the third country of destination. The Commission has now altered the arrangements  relating to proof of arrival at destination and has repealed Annex  II [Regulation (EEC) N° 354/90  of 9  February 1990 - OJ N° L 38, 10.2.1990]. A catalogue of the specimen stamps (3.50 - 3.52) in use at customs offices can be a useful tool for  paying agencies. The lack of such a catalogue does not make controls impossible, however. Paying  agencies can, in cases of doubt, appeal to customs administrations, establish contact via embassies  or international representations or even call on their own administration to make comparisons with  other files concerning the same countries of destination. It is important to encourage the Member  States to make full use of these possibilities. The Commission will investigate the feasibility of drawing up such a catalogue. Unauthorized alteration3.53  to  3.56. The Commission agrees that the most appropriate way to  avoid alteration of customs documents is their direct transmission to paying agencies. In most of  the Member States, and not only the five mentioned in the Court's report, this is standard  practice. The necessary dialogue with those Member States where this is not yet current practice is  now in progress. As regards alterations to data contained in documents coming from third countries, it has to be  emphasized that any doubt whatsoever should automatically lead to further examination of the files  concerned [Article  5 of Regulation (EEC) N°  3665/87]. Advance payment3.58     3.62. The two cases mentioned in the Court's report reveal a particular  weakness in the advance payment procedure. The Member State involved has already taken steps to  prevent a recurrence of similar situations. The cases in question have also been audited by the  EAGGF in order to establish whether any irregularities to the detriment of the Fund had occurred.  The outcome of this audit does not lead the Commission to share the conclusions of the Court,  however. Contrary to what the Court states, the listings on which advance payment was made were  systematically drawn up with a reference to each customs export declaration concerned. Except for  one case quoted by the Court, the paying agency did not grant any advance prior to the actual  completion of export formalities. In the absence of further evidence the amount paid on that  particular export declaration will not be financed by the Community. The audit on all other  expenditure involved indicated that no overpayments were made. The problems relating to long-outstanding securities have already been covered by an investigation  carried out in the Member State concerned. The Commission agrees that files should be processed  within a reasonable period of time. On the matter of securities reference may also be made to  Article  29 of Regulation (EEC) N°  2220/85, which gives the precise time sequence to be followed  and specifies the action to be taken when securities are to be forfeited. A posteriori controls3.63  to  3.70. See the general remarks under (d). Recommendations on national controls3.72. The Commission will give careful consideration to the  Court's suggestions and to how they could be incorporated into the Community rules. (a)In the Commission's opinion, merely requiring commercial invoices to be submitted in support of  each application for a refund would not provide any additional safeguard (3.23  -  3.26). (b)The commencement of loading operations must be notified to the customs authorities with  sufficient advance notice (not necessarily 24 hours) for them to carry out any checks which they  consider necessary. (c)The Commission has found that, as a general rule, physical checks are unannounced. By the time  that the exporter is informed, the produce declared for export can no longer be altered in any  way. (d)Council Regulation (EEC) N° 1262/84 gives a satisfactory definition of the facilities which  should be available at customs offices. The Commission's review of its Regulation (EEC) N°  3665/87  will take account of the Court's remarks concerning this matter (points 3.36  -  3.41). (e)Directive 81/177/EEC defines the period for the submission of export declarations (point 3.39). (f)to  (i) The Commission will take the Court's recommendations into account when drawing up the  rules for the implementation of the Council Regulation on the monitoring of agricultural exports  qualifying for refunds [COM(89) 294 final] (see points 3.27  -  3.35). (j)The review of Commission Regulation (EEC) N° 3665/87 will take this point into account. (k)Article 11 of Regulation (EEC) N° 4045/89 provides for the coordination of a posteriori controls  by a single body. (l)The Commission agrees that it would be preferable if the customs office of departure forwarded  the export declaration directly to the paying agency. Talks are already being held with those  Member States where this procedure is not yet followed (points 3.53  -  3.56). (m)A catalogue of forms and seals would indeed be a useful instrument but the feasibility of such a  catalogue has still to be investigated (points 3.50  -  3.52). (n)The national bodies which make the payments must ensure that the basic documents are properly  understood; translation may not be necessary in every case. (o)to  (r) These recommendations will also be taken into account for the purposes of implementing  Regulation (EEC) N°  4045/89 as well as the Regulation on the scrutiny by Member States of  transactions forming part of the EAGGF Guarantee Section system of financing and the Regulation on  the monitoring of agricultural exports which qualify for a refund [see points (f) to (l) above]. 4. OVERALL CONCLUSIONS4.1 As already stated, the Commission will investigate  whether it is necessary and appropriate to adjust the objectives of the basic regulations in line  with current conditions on the Community market. It should be noted that, from the beginning, the  rules included provision for exports and the mechanisms necessary for that purpose. The multilateral trade negotiations within GATT could provide an opportunity for amending the  rules. 4.2. The Commission cannot accept the criticism that economy has not been one of its priority  objectives. The Commission attaches particular importance to budget discipline and keeps a close  watch, by means of the early warning system, on the trend in expenditure throughout the entire  period of the budget's implementation. 4.3. The Commission agrees with the Court that, as far as possible, export refund rates must be  rationalized and simplified. It has already initiated this process in the beef sector and intends  to pursue the same policy in other sectors. It would point out, however, that the purpose of the  refund nomenclature is to prevent substantial refunds being granted on products which do not  require such refunds and to prevent refunds being granted on certain qualities. The itemized  nomenclature enables the refund to be paid in proportion to the basic products exported rather than  on quantities as such. The nomenclature has been made more specific whenever any shortcomings have  been discovered. The Commission, being aware of the control problems involved, has submitted proposals for  legislation which it intends to follow through. At the same time it has initiated a programme of  checks on how the rules are applied in the Member States. 4.4     4.6. For Commission initiatives on control matters, the reader is referred to the general  remarks made in section  3. above. 4.7. The Commission acknowledges that nothing is perfect and will do its best to make further  improvements to the arrangements with regard to refunds. The Commission cannot, however, accept the criticism that it has failed in its task by not taking  sufficient account of the need for economy and not meeting the requirements of public  accountability. () Commission Regulation (EEC) N° 212/89 of 27 January 1989 (OJ N° L 25,  28.1.1989), preamble.  () Commission Regulation (EEC) N° 212/89 of 27 January 1989 (OJ N° L 25, 28.1.1989), 'Whereas the  possibility of that surplus being absorbed by the Community market is slight`.  () Commission Regulation (EEC) N° 212/89 of 27 January 1989 (OJ N° L 25, 28.1.1989), article 1.  () A full costing of Community export subsidies would have to take account of depreciation. No such  costing appears in the budget and accounts.  () Council Directive 77/435/EEC of 27 June 1977 (OJ N° L 172, 12.7.1977).  () Commission Regulation (EEC) N° 4045/89 (OJ N° L 388, 30.12.1989).  () Basic regulation for milk and milk products: Council Regulation (EEC) N° 804/68 of 27 June 1968  (OJ N° L 148, 28.6.1968, p. 13) as last amended by Council Regulation (EEC) N° 763/89 of 20 March  1989 (OJ N° L 84, 29.3.1989, p. 1); for beef meat: Council Regulation (EEC) N° 805/68 of 27 June  1968 (OJ N° L 148, 28.6.1968, p. 24) as last amended by Council Regulation (EEC) N° 571/89 (OJ N° L  61, 4.3.1989, p. 43).  () Council Regulation (EEC) N° 2727/75 of 29 October 1975 (OJ N° L 281, 1.11.1975) as last amended  by Council Regulation (EEC) N° 1213/89 of 3 May 1989 (OJ N° L 128, 11.5.1989, p.  1).  () For cereals article 12 of Council Regulation (EEC) N° 2727/75 of 29 October 1975 (OJ N° L 281,  1.11.1975, p. 1) as last amended by Council Regulation (EEC) N° 1213/89 of 3 May 1989 (OJ N° L 128,  11.5.1989); for beef meat article 15 of Council Regulation (EEC) N° 805/68 of 27 June 1968 (see  above); for milk and milk products article 13 of Council Regulation (EEC) N° 804/68 of 27 June 1968  (see above) and Commission Regulation (EEC) N° 2729/81 of 14 September 1981 (OJ N° L 272,  26.9.1981, p. 19) as last amended by Commission Regulation (EEC) N° 222/88 of 22 December 1987 (OJ  N° L 28, 1.2.1988, p. 1).  () Council Regulation (EEC) N° 876/68 (milk products) of 28 June 1968 (OJ N° L 155, 3.7.1968) as  last amended by Council Regulation (EEC) N° 1344/86 of 6 May 1986 (OJ N° L 119, 6.5.1986, p. 36);  Council Regulation (EEC) N° 885/68 (beef meat) of 28 June 1968 (OJ N° L 156, 4.7.1968, p. 2) as  last amended by Council Regulation (EEC) N° 427/77 (OJ N° L 61, 5.3.1977); Council Regulation (EEC)  N° 2746/75 (cereals) of 29 October 1975 (OJ N° L 281, 1.11.1975).  () Commission Regulation (EEC) N° 701/89 of 17 March 1989 (OJ N° L 76, 18.3.1989, p. 31).  () Commission Regulation (EEC) N° 1476/89 of 29 May 1989 (OJ N° L 146, 30.5.1989, p. 14).  () Commission Regulation (EEC) N° 765/86 of 14 March 1986 (OJ N° L 72, 15.3.1986, p. 11).  () Commission Regulation (EEC) N° 727/87 of 13 March 1987 (OJ N° L 71, 14.3.1987, p. 11).  () Commission Regulation (EEC) N° 3535/86 of 20 November 1986, modifying Commission Regulation  (EEC) N° 765/86 (OJ N° L 326, 21.11.1986, p. 17).  () Commission Regulation (EEC) N° 155/87 of 21 January 1987 modifying Commission Regulation (EEC)  N° 765/86 (OJ N° L 20, 22.1.1987, p. 17).  () Commission Regulation (EEC) N° 2213/76 of 10 September 1976 (OJ N° L 249, 11.9.1976, p. 6), last  amended by Commission Regulation (EEC) N° 1384/88 (OJ N° L 128, 21.5.1988).  () Annual Report on the 1988 financial year, OJ N° C 312, 12.12.1989, paragraph 6.70.  () Commission Regulation (EEC) N° 2173/79 of 14 October 1979 (OJ N° L 251, 5.10.1979, p. 12), last  amended by Commission Regulation (EEC) N° 1809/87 of 29 June 1987 (OJ N° L 170, 30.6.1987, p. 23).  () Commission Regulation (EEC) N° 2539/84 of 5 September 1984 (OJ N° L 238, 6.9.1984, p. 13), last  amended by Commission Regulation (EEC) N° 3333/88 of 27 October 1988 (OJ N° L 295, 28.10.1988, p.  34).  () Commission Regulation (EEC) N° 1812/86 of 11 June 1986 (OJ N° L 157, 12.6.1986, p. 43).  () Commission Regulation (EEC) N° 2415/88 of 1 August 1988 (OJ N° L 208, 2.8.1988, p. 11).  () Council Regulation (EEC) N° 2388/86 of 29 July 1986 (OJ N° L 206, 30.7.1986).  () Commission Regulation (EEC) N° 2602/88 of 19 August 1988 (OJ N° L 231, 20.8.1988).  () Commission Regulation (EEC) N° 162/67 of 23 June 1967 (OJ N° 128, 27.6.1967, p. 2574), amended  by Commission Regulation (EEC) N° 1607/71 of 26 July 1971 (OJ N° L 168, 27.7.1971, p. 16).  () Commission Regulation (EEC) N° 330/89 of 9 February 1989 (OJ N° L 38, 10.2.1989, p. 26).() Commission Regulation (EEC) N° 355/89 of 13 February 1989 (OJ N° L 42, 14.2.1989, p.  13).  () In 1988, 484  000 tonnes were exported from Italy to Algeria. During the first six months of  1989  420  000 tonnes had been exported.  () Commission Regulation (EEC) N° 2735/87 of 11 September 1987 (OJ N° L 262, 12.9.1987, p. 11).  () Commission Regulation (EEC) N° 633/88 of 8 March 1988 (OJ N° L 63, 9.3.1988, p. 9).  () Commission Regulation (EEC) N° 2191/88 of 22 July 1988 (OJ N° L 195, 23.7.1988, p. 31).  () Commission Regulation (EEC) N° 2444/88 of 3 August 1988 (OJ N° L 211, 4.8.1988, p. 15).  () Commission Regulation (EEC) N° 2751/88 of 2 September 1988 (OJ N° L 245, 3.9.1988, p. 13).  () Commission Regulation (EEC) N° 2470/88 of 5 August 1988 (OJ N° L 213, 6.8.1988, p. 7).  () Commission Regulation (EEC) N° 395/89 of 16 February 1989 (OJ N° L 45, 17.2.1989, p. 13).  () Commission Regulation (EEC) N° 859/89 of 29 March 1989 (OJ N° L 91, 4.4.1989, p. 5).  () Commission Regulation (EEC) N° 2377/80 of 4 September 1980 (OJ N° L 241, 13.9.1980).  () Commission Regulation (EEC) N° 3988/87 of 22 December 1987 (OJ N° L 376, 31.12.1987).  () Commission Regulation (EEC) N° 3665/87 of 27 November 1987 (OJ N° L 351, 14.12.1987).  () Council Directive 77/435/EEC of 27 June 1977 (OJ N° L 172, 12.7.1977).  () Commission Regulation (EEC) N° 4045/89 (OJ N° L 388, 30.12.1989).  () Annual Report on the 1987 financial year, OJ N° C 316, 12.12.1988, paragraph 4.20.  () Commission Regulation (EEC) N° 3665/87 of 27 November 1987 (OJ N° L 351, 14.12.1987).  () Commission Regulation (EEC) N° 3665/87 of 27 November 1987 (OJ N° L 351, 14.12.1987).  () There are two procedures for the payment of advances on export refunds. The first, foreseen by  Chapter 2 of Commission Regulation (EEC) N° 3665/87, permits the payment of advances on refunds for  direct exports as soon as the export declaration has been accepted. The second, foreseen by Chapter  3 of Commission Regulation (EEC) N° 3665/87 permits the payment of an advance when a declaration  has been accepted in respect of goods which are stored or processed under customs control prior to  export. This procedure is commonly known as prefinancing.  () Council Directive 77/435/EEC of 27 June 1977 (OJ N° L 172, 12.7.1977).  () Commission Regulation (EEC) N° 386/90 of 12 February 1990 (OJ N° L 42, 16.2.1990).  () Commission Regulation (EEC) N° 137/90 of 4 January 1990 (OJ N° L 16, 20.1.1990).  () Council Directive 77/435/EEC of 27 June 1977 (OJ N° L 172, 12.7.1977).  () Commission Regulation (EEC) N° 4045/89 (OJ N° L 388, 30.12.1989).  () Council Directive 371/76/EEC of 1 March 1976 (OJ N° L 102, 15.4.1976).  () OJ N° C 336, 15.12.1987. ANNEX 1Export licences1. This Annex describes those aspects of the Community's export  licensing system which are relevant to the payment of export refunds for exports of milk products,  beefmeat and cereals in the context of the common agricultural policy (CAP). The following  description is aimed at providing the reader with some background information about the legal  framework applied. There are numerous special rules, which apply for small consignments, for which  no export licences are required, or for special trades - such as ship and aircraft supply or  further processing in the food industry or supplies to armed forces stationed in the territory of a  Member State but not coming under its flag. These particularities are not described in this  outline. 2. One of the objectives of the EC market organisation is to maintain a certain minimum price level  in the Community. This requires a control of export and import activities which is done by  licences. Commission Regulation (EEC) N° 3719/88 of 16 November 1988 lays down common detailed  rules in this respect (). Under this regulation an export licence authorizes and obliges the holder  to export the specified quantity of the relevant product within the licence's period of validity.  The licence may also specify quality and destination. 3. As far as the quantity is concerned there is, however, a certain flexibility. The general rule  is that the obligation to carry out the export is fulfilled when 95 to 105 per cent of the quantity  for which a licence is issued is exported (93 to 107 per cent in the case of cereals) (). 4. Licences are required generally for the export of cereals and beef meat by the corresponding  basic regulations (). For the milk sector licences are required only for certain products, such as  butter, milk powder and some selected products for export in bulk (). For other milk products, such  as cheese, export licences are only required if the exporter wishes to prefix a current level of  export refund (). 5. Export licences are issued on request by the competent national agencies. Licences are valid in  all Member States. Rights deriving from licences can be transferred but the initial holder cannot  transfer his obligations (for example, the provision of guarantees). At the request of the holder  Member States issue 'extracts` of the initial licence, which are licences for smaller quantities in  replacement for part or the whole of the initial licence. This facilitates the handling of the  licence and also the transfer of rights. Where the application for an export licence is submitted  in connection with an invitation to tender, the licence is issued only for those quantities  accepted in the adjudication (). Prefixing6. An exporter in possession of a valid licence is entitled to the rate of refund in  force at the date of export (defined for this purpose as the date of acceptance of goods into  customs control). Alternatively, he can choose to fix his export refund at the published rate  prevailing when he applies for a licence. This practice is known as prefixing and is used  extensively in the milk/milk products sector where some 90  % of licences are prefixed. For beef  exports less than half of all exports were at prefixed rates during 1988. For cereals prefixing as  such is largely redundant given that 90  % are exported at refund rates determined by tender. 7. Prefixing protects traders against falls in the level of refund rates during the validity period  of the licences and enables them to negotiate contracts in which the rate is a known parameter.  However traders also run the risk that refund rates will increase and that importers may demand to  benefit from such increases. In order to dissuade exporters from deliberately allowing licences to  lapse and prefixing replacement licences at the higher rates, guarantees (securities) are required.  These guarantees are forfeit if the exporter fails to use the licence and vary according to product  and circumstance. Clearly, if the increase in refund rates exceeds the guarantee required, the  trader will benefit from allowing the licence to lapse. In practice the guarantees are relatively  high and since February 1987 in the milk product sector refund rates have gradually declined. 8. Securities requested for the issue of licences without prefixing vary between 0,60 ECU/tonne for  basic cereals and 20,00 ECU/tonne for beef meat. For licences with prefixing they vary between  16,00 ECU/tonne for basic cereals and 100,00 ECU/tonne for beef meat. The corresponding level for  milk products varies from 25,00 ECU/tonne to 100,00 ECU/tonne, depending on the product involved  (). The rates for milk products have been increased recently (). 9. It is necessary to restrict the period of validity of licences in order to exercise some control  over export markets. There are significant differences in validity periods both between and within  the markets. In the milk sector, export licences are normally valid 2 months without prefixation  and 6 months with prefixation (advance fixing) of a refund rate. In the beef meat sector, licences  are normally valid 5 months, whereas for basic cereals licences are valid 2 months. 10. Given that traders opt to prefix when they consider refund rates to be attractive (or  anticipate later reductions), the Commission uses data on the level of prefixing as an indicator as  to whether the refund rate is too high or too low. For the milk products and beef sectors prefixed  licences for the export of basic products are not issued until 5 days after they have been  requested. This enables the Commission to take appropriate action if it considers the level of  prefixing to be too high. The Commission may decide either to suspend prefixing for up to three  days or to alter the refund rates (). 11. For cereals, the regulation is slightly different. The Commission can also suspend prefixations  but different rules apply according to the product. For example, for semolina export licences with  prefixing of the refund are issued on the fourth working day following the day on which the  application has been lodged. The aim of this provision is to allow the Commission to fix a uniform  percentage reduction in the quantities where the quantities prefixed exceed the quantities the  Commission wishes to be exported (). () OJ N° L 331, 2.12.1988.  () Commission Regulation (EEC) N° 891/89 of 5 April 1989 (OJ N° L 94, 7.4.1989).  () For cereals Article 12 of Council Regulation (EEC) N° 2727/75 of 29 October 1975; for beef meat  Article 5a of Council Regulation (EEC) N° 885/68 of 28 June 1968 (OJ N° L 156, 4.7.1968).  () Council Regulation (EEC) N° 804/68 of 27 June 1968 in connection with Commission Regulation  (EEC) N° 2729/81 of 14 September 1981 (OJ N° L 272, 26.6.1981).  () Article 4 paragraph 2 of Commission Regulation (EEC) N° 2729/81.  () Article 3 of Commission Regulation (EEC) N° 891/89.  () The amount of securities requested is subject to particular regulations for each market sector:  for beef meat: Commission Regulation (EEC) N° 2377/80 of 4 September 1980 (OJ N° L 241, 13.9.1980);  for cereals: Commission Regulation (EEC) N° 891/89 of 5 April 1989; for milk and milk products:  Commission Regulation (EEC) N° 2729/81 of 14 September 1981.  () Commission Regulation (EEC) N° 1651/89 of 12 June 1989 (OJ N° L 162, 13.6.1989).  () Commission Regulation (EEC) N° 2729/81 of 14 September 1981 and Council Regulation (EEC) N°  885/68, 28 June 1968.  () Article 9 of Commission Regulation (EEC) N° 891/89.  ANNEX 2Criteria for determining export refund rates1. There are four basic criteria: (a) the existing situation and the future trend with regard to: - prices and availabilities on the Community market and in international trade; (b) the aims of the common organisation of the markets which are to ensure equilibrium and the  natural development of prices and trade; (c) the need to avoid disturbances on the Community markets, and(d) the economic aspect of the  proposed exports. 2. For beef and milk when prices within the Community are being determined, account should be taken  of the ruling prices which are most favourable for exportation. When prices in international trade  are being determined, particular account should be taken of: (a) prices ruling on third country markets; (b) the most favourable prices in third countries of destination for third country imports; (c) producer prices recorded in exporting third countries, account being taken, where appropriate,  of subsidies granted by those countries, and(d) free-at-Community-frontier offer prices. The factors to be considered for determining prices in the cereals market are similar.  ANNEX 3 >TABLE>