Special report No 4/91 on the operation of the common organization of the market in the sugar and isoglucose sector accompanied by the replies of the Commission
Date: 1991-09-12
Institutions: European Court of Auditors
Subjects: common organisation of markets, isoglucose, sugar













EUR-Lex - 31991Y1107(02) - EN






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31991Y1107(02)

Special report No 4/91 on the operation of the common organization of the market in the sugar and isoglucose sector accompanied by the replies of the Commission  


Official Journal C 290 , 07/11/1991 P. 0001 - 0056 





SPECIAL REPORT N° 4/91 on the operation of the common organization of the market in the sugar and isoglucose sector together with the replies of the Commission (91/C 290/01) (Observations pursuant to Article 206a (4) of the EEC Treaty) The first part of this report consists of a  presentation of the common organization of the sugar  market, whereas the second, third and fourth parts analyse  the consequences of the way the organization that has been  thus created operates.Those readers who have not the time to read all of  the report will find its conclusions set out in the fifth  part.>TABLE>1. Presentation of the common organization of the marketSugar and isoglucose in the Community: agricultural and industrial aspectsGeneral matters1.1. Sugar is traditionally a basic foodstuff. It  corresponds to one of the four essential tastes, the  others being acid, bitter and salty. Its widespread use  dates back to the early 19th century, when the sugar beet  was discovered and the industrial development of cane-sugar refining began. Whilst sugar consumption has reached  saturation level in the developed countries, this does not  apply to the poor countries where consumption is directly  dependent on income and the price of sugar. The world  average per capita consumption amounts at present to about  20 kg of white sugar a year. Total world consumption rose  by more than 60 % between 1968 and 1988 and this upward  trend is continuing, mainly because of increasing use in  the developing countries. Average per capita consumption  in the European Community is about 34 kg of white sugar a  year, with the national averages ranging from 25 kg (in  Spain) to 40 kg (in the United Kingdom). Overall, per  capita sugar consumption is more or less stable in the  Community, whereas more sugar substitute products are  starting to penetrate the market. It is important to note  that only some of the sugar consumed is sugar as such, the  majority being incorporated into foodstuffs. The ratio  between these two amounts varies according to the country  but for the Community as a whole it is around one third  for direct use and two thirds for consumption in the form  of processed products. It is above all in the latter  category that sugar substitutes are being used.Agricultural aspect1.2. Sugar (sucrose) is, chemically speaking, a  disaccharide which is made up of equal parts of fructose  and glucose and can be obtained from sugar beet in  temperate regions and from sugar cane in tropical areas.  Isoglucose is a liquid with the same chemical properties  which can be manufactured from (preferably) maize starch  or from wheat or even potatoes. Most of the sugar  production in Europe is based on the sugar-beet crop,  introduced by Napoleon at the time of the Continental  System. Within a very short space of time, sugar-beet  factories sprang up all over Europe. Since then, the world  sugar economy has been characterized by the cane/beet  duality, depending on the climate of the area, thus making  sugar a truly international product. Today, about 63 % of  world sugar production comes from sugar cane and 37 % from  beet. Sugar beet is a plant which is sown in spring and  harvested in autumn. The cane crop, by contrast, has a  seven-year cycle. The yields from both crops are strongly  influenced by climatic and weather conditions. Cane  plantations are exposed to tropical storms and may be in  the path of hurricanes. The yields of a beet crop, in  terms of both the amount harvested per hectare and the  sucrose content, depend firstly on the climatic area - the  north of Europe giving better yields than the south - and  secondly on the weather conditions. The latter factor may  result in good or bad harvests, marked by a difference in  yield of between 15 % and 20 %. The yield of the beet crop  is steadily improving as a result of new developments in  biotechnology and mechanization of farms. In the field of  biotechnology, the introduction of monogerm seed  (eliminating the laborious job of thinning-out) and the  development of varieties which are resistant to some  diseases have helped to improve yields considerably: over  the last 20 years, the average increase in yield in the Community (expressed in terms of white sugar per hectare)  has been in the order of 1,2 % per year.Industrial aspect: a heavy industry1.3. One of the main features of sugar is that the basic  agricultural production has of necessity to be combined  with an industrial process. Neither sugar beet nor sugar  cane can be consumed in its natural state; both have to be  converted into sugar by means of a relatively complex  extraction and refining process, which requires  specialized, technologically advanced, heavy-investment  plant. A modern sugar-beet mill, processing about  10 000 tonnes of beet a day, represents an investment of  some 150 Mio ECU. It is a heavy industry in the true sense  of the word, i.e. complexes of large-scale technical  plant. Furthermore, the raw material, beet, poses an  economic problem relating to transport costs, because of  the transportation of unnecessary weight (between 85 % and  90 % of low-value residue). Consequently, the sugar-beet  factories have to be located near to the beet fields, at a  distance of no more than 50 km or at the very most 100 km.1.4. The final product - crystals of white sugar -  resulting from the process of extracting and refining the  beets is indistinguishable both physically and chemically  from that obtained from sugar cane. Brown or unrefined  cane sugar is an intermediate product, based on cane,  which has undergone an initial refining on the spot so  that it can be stored and which is then in most cases  transported to the regions where it is to be consumed, for  final refining. The reason for this division of the labour  is threefold: raw sugar is relatively easy to transport in  bulk; the cost of the plant needed for the final refining  is high and special skills are required to operate it;  and, traditionally, there has been a desire to exercise economic control. The refineries which process the raw  cane sugar thus have a considerable economic advantage  over sugar-beet factories insofar as they can run  continuously whereas sugar-beet mills operate only during  a 'season` lasting about three months per year. Brownish-coloured sugars for consumption, such as soft brown sugar  or brown candy sugar, can be obtained either from beet or  cane: they are refinery products which differ from white  sugar only by their type of crystals and by the fact that  they contain a small quantity of molasses (a syrupy,  impure by-product).1.5. The fact that an industrial complex forms an  integral part of this basically agricultural sector of  production has a number of important consequences:a)firstly, the sugar factories represent a relatively  small number of compulsory transition points. At  present, the Community has no more than 200 sugar  mills, belonging to fewer than 100 companies. This is a  great advantage in the field of both physical and  financial checks and consequently makes it easier to  implement effective market-management instruments. But  this arrangement means that it is easy for the  companies to confer together in order to defend their  common interests. This concentration has been increased  in recent years by a trend towards mergers;b)at the same time, technological changes are helping to  modernize and enlarge the average size of the  production units, thus allowing an increase in the  industry's productivity. If to the latter one adds the  improvement, mentioned in paragraph 1.2, of the  technical agricultural yield, the overall increase in  technical productivity in the sugar sector represents on average 1,4 % per year, for the Community countries,  over the last 20 years;c)with regard to isoglucose, the relationship between the  industrial and the agricultural aspects is weaker:  isoglucose is a product obtained from another product  which is already intermediate (starch); it is only one  of many other derivatives of starch, all of which are  marketed. Moreover, the economic problem which is a  feature of sugar beet - that of having to transport  unnecessary weight (see paragraph 1.3) - does not apply  to the same extent, with the result that there are far  fewer restrictions applying to the geographic location  of the factory in relation to the agricultural  production land;d)a further consequence of the role played by a high-investment industrial complex is the need for  management planning: the level of production cannot be  changed from one year to the next without creating  economic problems for the firms. If production needs to  be altered, these changes have to be made known several  years in advance so that the companies can take account  of them in their modernization and restructuring plans.  A fitting comparison is that of sailing a super-tanker:  in order to change course, manoeuvres have to be  started well in advance;e)the size of the investments also means that the sugar  refineries are part of large companies, some of which  are highly diversified, in the agri-foodstuffs sector.  Especially in the last few years, these companies have  increasingly been the target of transnational mergers.Production and consumption in the Community1.6. During the Eighties, total sugar consumption in the  Community remained relatively stable: around 9,5 Mio t of  white sugar prior to the accession of Spain and Portugal  and about 10,9 mio t afterwards. Present production stands  at nearly 14 Mio t, plus about 1,7 Mio t of imports. Given  domestic consumption needs, these quantities result in  exports of some 4,8 Mio t per year. Table 1 shows the  sugar supply balances for the Community since 1981.The common market in sugar and isoglucoseSetting-up of a common organization of the market1.7. When the common organization of the market (COM) in  sugar was set up in 1968, it replaced the national sugar  policies of the Member States of that time. In order to do  that, a major alignment was needed to bridge the  differences between these national policies.  Traditionally, in all the sugar-producing countries, this  sector has always been highly regulated and protected by  the national authorities. Since the natural conditions for  beet production vary from one country to another, the  regulating arrangements and, in particular, the  institutional price levels differed considerably between  the Member States concerned in 1968. For example, in Italy  and the FR of Germany production was guaranteed at a price  level that was much higher than for the production of  other countries, the disparity being in some cases as much  as 50 %.Periodic reviews1.8. The basic regulations governing the sugar market are  subject to periodic reviews, in theory every five years,  except for the first Regulation, which was to be  reviewed after seven years. The second Regulation, of  19 December 1974, was to be renewed after five years, i.e.  with effect from 1 July 1980. Because of the political  difficulties which arose during the negotiations, the  third sugar scheme was not able to start in 1980 and,  after the 1975-1980 scheme had been extended for one year,  came into force on 1 July 1981. The following review  was carried out as planned in 1986, with the result that  the next renewal of the basic regulations is due on  1 July 1991. On 6 August 1990, however, the Commission  proposed for the most part to extend the 1986-1991  arrangements by two years. The Council accepted the  principle of such an extension and adopted, for this  purpose, Regulation N° 305/91 of 4 February 1991.Accessions1.9. The reviews of the sugar regulations have more or  less coincided with the accession of new Member States to  the Community, a fact which has not been without  consequence. The second Regulation, dating from 1975, was  heavily influenced by the accession in 1973 of Denmark,  Ireland and above all the United Kingdom. The 1981 review  coincided with the Greek accession and that of 1986 with  the accession of Spain and Portugal. Similarly, the  preparations for the scheme's renewal, planned for  July 1991, took place just at the time when the territory  of the former German Democratic Republic was being  integrated into the area of application of the common  organization of the market in sugar. In all these cases,  the sugar sector has assumed considerable significance in the political negotiations and the organization of the  market reflects the consequences of this.Isoglucose>TABLE>1.10. During the Seventies, isoglucose was introduced  onto the market as a substitute sweetening agent, first in  the United States and Japan and then in Europe. It was  once a certain production capacity had been set up in  Europe and isoglucose began to compete with sugar that  restrictive measures against it were taken, in 1977 and  then in 1979. Isoglucose was dissociated from the starch  arrangements and incorporated instead in the common  organization of the market in sugar. Since then its  production has been restricted by the quota system.The mechanisms by which the system is managedProduction quotas1.11. From the outset (1968), a main feature of the sugar  scheme was the limitation of the guaranteed prices, which  made it unique at the time. This limitation takes the form  of production quotas. These quotas are allocated in two  stages. Firstly, a maximum quota is fixed for each Member  State. These are recorded in the basic Regulation  governing the COM. Secondly, the Member States allocate  quotas to the companies in accordance with rules laid down  for this purpose by the Council.1.12. The maximum quota is made up of a basic or A quota  and a specialization quota or B quota. In the first  Regulation, that of 1967, the B quota was fixed at 35 %  of the A quota. The B quota was intended at the  outset to be a specialization quota and therefore its  price level was lower, as a result of the charging of levies. This additional production was intended to  compensate, where necessary, for a poor harvest in some  regions of the Community or, usually, for export. It was  supposed, logically, to be produced in the regions where  it was economically profitable.1.13. Quantities produced over and above each company's  maximum quota (so-called 'C` sugar) do not receive any  Community guarantee and have to be exported entirely at  the expense of the company concerned within a period  stipulated in the Regulation. This principle is  nevertheless made more flexible by the possibility,  provided for in the Regulation, of carrying over part  of the C sugar to the following marketing year, thus  enabling it to be entered in advance against the new  year's production. The quantities in question then have to  be stored for a period of twelve months. This facility is  limited to 20 % of the company's A quota. It is combined  with a permanent obligation imposed on sugar producers to  keep a minimum stock of 5 % of their annual production of A  sugar.1.14. The production-quota mechanism described above was  incorporated into the basic Regulation governing the first  sugar scheme as a transitional provision. The first  Regulation expressly stated that these transitional  provisions were to be repealed on 1 July 1975. The  quota system has, however, for the most part been  prolonged (in 1975, 1981 and 1986) and still applies  today. Isoglucose, since being incorporated into the sugar  COM regulations, is part of the same system.1.15. The basic Regulation provides for yet more  flexibility, throughout the duration of the system,  insofar as Member States may redistribute part of the  sugar and isoglucose quotas amongst the companies in relation to the situation at the beginning of the period.  This part, called the 'reserve quantity`, is at present  limited to 10 % of the maximum quota.The prices1.16. The sugar scheme differs little from most of the  other markets, with regard to the system of official  prices. It has a target price, an intervention price and a  threshold price. A special, fundamental feature, however,  is that the price system is applied to the final product,  sugar, in such a way that the price of the agricultural  raw material, sugar beet, is derived from it. The  cornerstones of the present system are as follows:a)a target price for white sugar: this represents the  level of market price considered by the Council to be  the most desirable; it is fixed for the standard  quality, ex-factory;b)an intervention price for white sugar: this is 5 % lower  than the target price and represents the price at which  the intervention agencies have to purchase the sugar  brought to them;c)a derived intervention price for white sugar: in  regions of the Community regarded as having a sugar  deficit, a slightly higher intervention price is  applied in order to take account of the transport costs  from the regions having a sugar surplus to those with a  deficit. In practice, this means three Member States:  Ireland, Italy and the United Kingdom. In Spain and  Portugal, a higher price has been applied as a  transitional measure following their accession in 1986;d)a threshold price: this is equal to the target price in  surplus areas, plus transport costs, calculated at a  flat rate, from the area having the largest surplus  (northern France) to the most distant deficit area  (southern Italy) and plus a lump sum taking account of  the storage levy. This price is used mainly for fixing  the levies and refunds referred to in paragraphs 1.17  and 1.18 below;e)an intervention price for raw sugar: this is derived  from the intervention price for white sugar by applying  a uniform processing margin and a white/raw yield  coefficient of 0,92;f)a minimum price for beet: this is established on the  basis of the intervention price for white sugar, by  deducting from that price uniform rates for the  processing margin and, where appropriate, for the costs  incurred in delivering beets to factories, adding to it  receipts from sales of molasses and taking into account  a standard yield (130 kg of white sugar for one tonne  of standard quality beets, i.e. with a 16 % sugar  content). The beet growers and the sugar manufacturers  are free to agree a higher price in their trade  contracts. Also, instead of fixing a price for A beets  and a price for B beets, they may fix a mixed price for  the two combined. The Regulation stipulates that  agreements within the trade and contracts concluded  between buyers and sellers of beet must conform to  outline provisions, in particular in respect of  conditions governing purchasing, delivery, reception  and payment of beets.These prices are used as a basis for calculating the  amounts of the levies, refunds and aid referred to in the  following paragraphs. The prices are usually fixed before the beginning of each marketing year, which runs from  1 July to 30 June. The Regulation even lays down that the  intervention price must be fixed prior to 1 August of the  year preceding the marketing year beginning on 1 July of  the following calendar year.The other aspectsRules on importation1.17. Like the other products subject to a common market  organization, sugar and isoglucose are protected at the  Community frontiers from imports coming from third  countries; this protection takes the form of a system of  import levies. This levy is calculated as being the  difference between on the one hand the threshold price and  on the other a c.i.f. price representing the most  favourable purchasing price on the world market. In  practice, very little sugar is imported into the normal  scheme in the Community. The same is not true for  molasses, a syrupy residue from the manufacture of sugar,  containing 40 % to 50 % of sugar and used mainly for cattle  feed. The Community has a molasses deficit of about  3 million tonnes and on these imports a levy is charged.  By contrast, there are major exceptions to the normal  importing system: a quantity consisting chiefly of raw  sugar to be refined in the Community, equivalent to around  1,3 million tonnes of white sugar, is imported every year  from a number of ACP countries, without an import levy and  at prices similar to the guaranteed Community prices (see  the second part and paragraphs 3.21-3.22 of the third part  of this report). In addition, a large quantity of raw  sugar has been imported each year since 1986 at a reduced  tariff rate, in order to guarantee supplies to the  Portuguese refineries. This concession was granted in the  Accession Treaty and during the 1989/90 marketing year the quantity imported under this arrangement amounted to  281 000 tonnes of white sugar equivalent.Rules on exportation1.18. As on the other markets, there are export rules  intended to bridge the gap between the guaranteed  Community price and the (usually lower) world price by  means of export refunds or export levies in the (very  rare) event of the world price being higher. For sugar,  there are two procedures, designed to meet the needs of  the trade: that of weekly invitations to tender  (submission of tenders of proposed refund rates for given  quantities with the lodging of a deposit in the Member  States; decision on the maximum amount taken by the  Commission in consultation with the Management Committee)  and that of periodic fixing (i.e. a rate fixed by the  Commission once or twice a month, with the possibility of  adjusting it in between in keeping with changes in the  world price). In practice, by far the majority of exports  are subject to the weekly invitations to tender. Smooth  running of operations is ensured by a system of export  licences, issued by the competent authorities of the  Member States and accompanied by the lodging of a deposit,  to be released on presentation of proof that the goods  have in fact been duly exported within the period of  validity of the licence. A system of licences is also  provided for in the case of C sugar, which, if no export  refund can be claimed, must, however, be exported within a  period of time laid down in the Regulation.Food aid1.19. As in other agricultural sectors, the Community may  make white sugar available as food aid. This may be done  under special arrangements, whose aim is primarily  humanitarian and which are implemented according to rules  applicable to all the agricultural sectors. There are no  arrangements peculiar to sugar. On average, the Community  spends around 2 Mio ECU a year on sugar food aid, although  in 1990 and 1991 this amount was rising.The system of production refunds for the chemical industry1.20. A measure which is virtually comparable to the  export provisions and at any rate serves the same purpose,  i.e. the disposal of surpluses, has been implemented to  subsidize the use of sugar by the pharmaceutical and  chemical industries. This measure, which previously  existed in another form, was reintroduced in 1986. Its aim  is to put the manufacturers concerned on an equal footing  with their competitors outside Europe, who are able to  obtain their raw material at world prices; at the same  time, within the Community, it aims to make sugar  competitive with starch products. The amount of the refund  is fixed every quarter and the calculation of the amount  used to take account of the price of sugar, the price of  maize, production aid granted to starch products and  changes in the price of sugar on the world market. Since  1 July 1990 the system has been completely separated from  the glucose market and refund rates are now calculated  exclusively on the basis of Community and world sugar  prices. The administrative implementation of the measure,  by the competent authorities of the Member States, is  based on a system of issuing refund orders accompanied by  the lodging of deposits, which are released once it has  been ascertained that the orders have been used properly.Storage1.21. The sugar scheme includes, in principle, an  intervention mechanism in the form of public storage. Any  sugar owner may offer quantities of sugar to an  intervention agency designated for this purpose and the  agency is obliged to buy it at the intervention price or  the derived intervention price, depending on the case. In  practice, however, operators use this measure only in very  rare cases, since the sugar scheme has a unique  compensation system for storage costs, which enables the  operators to keep control of the sugar. This compensation  system involves paying to sugar stock-holders situated in  the circuit of the producing-processing industry and the  wholesale trade monthly allowances for storage costs. The  latter are financed by levies charged to sugar  manufacturers for the quantities produced as part of their  maximum quota. These storage allowances are also paid on  quantities of C sugar carried over to the following  marketing year, during their compulsory 12-month storage  period. The amount of the allowance is fixed by the  Council for each marketing year, taking into consideration  the financial costs, insurance costs and technical storage  costs as such. The amount of the levy is established by  the Commission, for each marketing year, according to the  Management Committee procedure, so that the estimated  total sum of the allowances is equal to the estimated  total sum of the levies, whilst at the same time  eliminating any disparity between the two which may have  arisen from the preceding period. Financially speaking and  seen over a number of years, it is therefore a closed,  balanced circuit.The COM's financial and budgetary systemBudgetary nomenclature1.22. In the Community budget, there are specific  headings for sugar in both the revenue part and the  expenditure part. For 1990 and 1991, the part of the  budget devoted to sugar was presented as described in  Table 2. To be complete, this table ought to include  import levies in the revenue section and export refunds  for the sugar content of processed products in the  expenditure section, but these items cannot be identified  separately in the accounts. It should, moreover, be noted  that the remark relating to budget heading 1119,  expenditure for 'other intervention`, is incorrect. It  mentions denaturing premiums, a measure which has not been  used for a long time. What is in fact booked to this  heading is aid, in particular aid for refining.Financing provisions1.23. After the quota system described in paragraphs 1.10-1.14, the second major original aspect of  the scheme, which has been a feature of it since the very  outset, is the principle of co-responsibility of producers  for financing the costs engendered by disposing of surplus  production. Unlike the disposal of C sugar, the costs of  which are borne by the individual manufacturers  themselves, there is a true sharing of the costs arising  from the production of quota sugar destined for export,  therefore roughly speaking B sugar. To this end, the  Member States charge the sugar manufacturers production  levies, the unit amount of which is calculated by dividing  the overall cost of disposing of the surplus by the  quantities produced, without, however, exceeding a  maximum. The amount of the levy varies as a rule from one marketing year to another. It is calculated provisionally  for each marketing year and then adjusted in accordance  with actual changes in the quantities and costs. The sugar  manufacturers bear 40 % of the levies themselves and pass  on 60 % to the beet growers by means of the price actually  paid for the beets.1.24. The detailed rules of this system have changed over  the years. Initially, only quantities produced over and  above the basic Community quota, within the limit of the  companies' maximum individual quotas, were concerned, i.e.  B sugar. The amount of the levy, in the Regulation  governing the 1968-1975 system, was subject to an upper  limit of 40 % of the intervention price. The second sugar  Regulation brought this ceiling down to 30 %.1.25. Furthermore, when imports of sugar (whether or not  preferential) enter the Community to supply the common  market, either on conditions that treat them as equivalent  to Community-produced sugar (usually more than  1 300 000 tonnes) or at the reduced tariff rate (almost  300 000 tonnes) or at the normal tariff rate (negligible  quantities compared with total market volume), these  imports have the effect of increasing by a similar amount  the quantities to be exported from the Community, which is  already more than self-sufficient in sugar. But these  exports are not - rightfully - taken into account when  charging the production levies and their costs are  therefore borne by the budget.1.26. The provisions relating to the levies have  subsequently changed in accordance with the detailed rules  analysed below in paragraph 2.19 onwards.The audit's objectives and detailed arrangementsThe Court's earlier observations1.27. In the past, the Court has made observations on the  sugar market, in particular in its annual reports on the  financial years 1985, 1986 and 1988. In its 1985 and  1986 reports, the Court examined the situation with regard  to the self-financing by producers of the costs of  disposing of surplus production, a mechanism which was  provided for in the 1981 sugar Regulation but which was  not achieving its objective. The Court pointed out that a  considerable deficit had accumulated in this sector and  stressed the need for immediate measures to ensure that  this deficit was rapidly covered by adequate levies, that  new deficits did not arise and that the specific financial  situation was shown clearly in the budget and accounts. In  its report on the financial year 1988, the Court presented  its observations following an examination of, firstly, the  procedures implemented by some Member States with regard  to the management and checking of export refunds and,  secondly, the Commission's expenditure and revenue  accounts. On the first subject, the Court found that there  were disparities between the systems implemented by the  different Member States and that there were shortcomings  in Community checks. Furthermore, the Court presented an  evaluation of the cost to the Community budget of exports  of French or Belgian sugar which pass through Dutch ports  and are declared at the Dutch paying agency, thus giving  the operator an advantage stemming in particular from  exchange rate differences. With regard to the central  accounting system, which was examined in particular from  the point of view of the self-financing objective, the  Court found that the accounting system, in its present  form, did not lend itself to an ex post facto check on  whether the objective was being met. In order to comply with the request made by the Council in its  recommendations on the 1988 discharge and with the  Parliament's resolution on this discharge, the latter  problem will be dealt with in more detail in this report.The audit's objectives1.28. Bearing in mind that the COM is now more than  20 years old and that the fourth scheme is drawing to an  end, the Court decided to carry out an audit of the whole  of the scheme in order to assess 'whether the financial  management has been sound` (in accordance with Article  206a(2) of the EEC Treaty). The purpose of the audit was,  more particularly, to examine the economic effectiveness  of the organization of this market, with particular  reference to the principles set out in Articles 39 and 40  of the Treaty and those concerning the control of  surpluses in the agricultural sector, and the related  expenditure, which emerged during the 1980s. It drew the  conclusions that followed, as far as the Community  finances are concerned, from the characteristics thus  brought to light. In view of the forthcoming periodic  review of the system (in principle planned for 1991 but  now, after the decision to grant a two-year extension,  postponed until 1993), it is essential in this context  to establish what lessons can be learnt, for the purpose  of determining the new scheme, from the practice followed  in the past and from the present situation which has thus  arisen.Arrangements for the audit1.29. In order to take stock of the present state of the  market and how it actually operates, the Court staff  visited all the Community's sugar-producing countries,  i.e. all the Member States except Luxembourg. During these visits, they interviewed representatives of all the  parties involved, i.e. the beet-sugar manufacturers and  cane-sugar refiners, the isoglucose manufacturers, the  beet growers, the sugar traders and exporters, the  representatives of the agri-foodstuffs industry which uses  sugar and/or isoglucose, and of the chemical industry  which uses sugar in return for production refunds, the  consumers' unions, the national departments responsible  for the management of the market at national level and the  competent departments of the European Commission. They  also consulted representatives from university circles and  from international organizations, such as the ISO  (International Sugar Organization). Statistical and  economic analyses are mainly based on data gathered from  the European Commission, the CEFS (European Committee of  Sugar Manufacturers), the FIRS (Fonds d'Intervention et de  Régularisation du marché du Sucre, the French managing  body) and the ISO. Furthermore, the Court commissioned the  Institute of Agricultural Economics of the University of  Kiel to make an in-depth study of the economic aspects of  C sugar.2. The internal macro-economic consequences of the Community schemeBackground to the quota systemThe first sugar scheme (1968-1975)2.1. With the institution of the first sugar scheme, which  entered into force in 1968, a system of production quotas  was devised in order both to limit the price guarantees to producers in quantity terms and to demarcate the various  production areas. In its introduction to the Regulation of 18 December 1967 the Council stated that during  previous years Community production had exceeded  consumption on several occasions and that the world market situation was one of large surpluses. It had  concluded from that that provision should be made for  measures to limit production and promote regional  special ization. A limit on production was  ensured by laying down basic quantities, determined  specifically for each Member State in the  Regulation.2.2. These quantities were based on past production, on  the one hand and on negotiations, including the offsetting  of the effects of agreements concluded in other sectors, on  the other hand. As a result, some countries, in particular  Belgium and Italy, were granted quotas that exceeded the  mathematical level of their reference production  quantities. It was then up to the Member States to  establish the following:a)for each factory or for each undertaking producing sugar  on their territory, a basic quota (or A quota),  established by applying a formula to calculate the ratio  of each factory's or undertaking's average annual production over a reference period to the Member State's  total production, as well as to the latter's statutory  basic quantity (3). These quotas benefited from the   intervention price guarantee;b)secondly, each Member State was to fix a maximum quota  for the factories or the undertakings for which it had  fixed a basic quota by applying a coefficient which was  initially set at 1,35 and which would consequently be  adjusted in the light of the actual trend of production  from the point of view of specialization and marketing  opportunities.2.3. Quantities produced by each producer that were in  excess of its basic quota but which did not exceed its  maximum quota (so-called B quota quantities) were subject  to the production levy. This levy was calculated  globally, on the basis of the disposal costs of the  quantity that was produced in the Community in excess of  the guaranteed quantity but within a certain ceiling.  Moreover, this levy was supposed to be passed on, in part,  to the cane or beet growers. In this way a principle of  limited co-responsibility was introduced into the system.2.4. Any quantities produced beyond the maximum quotas  (C sugar) would not benefit from any guarantee, except  where a grower wished to carry forward that part of his  production which was outside the basic quota to the  following marketing year. In that case it would be counted  as part of the basic production of that marketing year.  This facility was, however, limited in the 1967 Regulation  to 10 % of the basic quantity.2.5. In this first scheme the quantities produced outside  the guaranteed quantity were seen as 'specialized production`. This part of production was supposed to be  concentrated in those regions where it was possible to  produce profitably, taking into account the deduction of  the levy from the sales proceeds.2.6. Given that the basic quantities, and therefore the  maximum quantities, were fixed Member State by Member  State, they had the effect, besides limiting production, of  giving each Member State, and in fact each undertaking in a  Member State, the right to produce, at the guaranteed  price, at least its basic quantity, which depended on the  level of its previous production. This statutory apparatus  thus consisted in consolidating the existing situation  prior to the creation of the common market organization,  and then adding to it a facility for increasing production,   the disposal of which was to be financed, at least in part,  by the producers of the additional quantities. Throughout  the duration of the first scheme the specialized quantity  allowed varied between 30 and 45 % of the basic quantity.2.7. This aspect of the first scheme was intended to be a  transitory arrangement which would make it possible, over a  seven-year period, to align and harmonize the sugar  economies of the founding Member States. Article 22 of the  Regulation stipulated expressly that 'the provisions  concerning national basic quantities (and) their  distribution between factories or undertakings (....) shall  be repealed with effect from 1 July 1975`.2.8. Harmonization was facilitated by a common price level  which was clearly advantageous for producers in most of the  Member States, and it was accompanied by the authorization,  which was also temporary, to grant national aid for cases  where this price still posed a problem, i.e. in Italy.The second sugar regulation and the first enlargement of the Community (1975-1981)2.9. When the time came, in 1973 and 1974, to prepare the  renewal of the scheme, which was planned for 1975, the  market situation was quite unusual, in that it was  characterized by the coincidence of two significant  factors: the enlargement of the Community to include  Denmark, Ireland and the United Kingdom and a serious  world-wide sugar shortage.2.10. The accession of the three new Member States not  only posed a problem as to the geographical distribution of  production and consumption in Europe, but also brought with  it the problem of the traditional imports to the United  Kingdom of raw cane sugar, mainly from a number of  Commonwealth countries. Two-thirds of sugar consumption in  the U.K., i.e. approximately 1,8 Mio tonnes, were supplied  by British refineries, which processed raw sugar imported  largely from former colonies, and companies in this sector  wished to continue to do so after accession.2.11. During the same period there was a sugar shortage.  At the end of a succession of marketing years (beginning in  1971), during which world sugar production was lower than  consumption, end-of-year stocks were considerably lower  than their usual level (approximately 30 % of consumption,  which came down to 20 % in 1973/1974). The market reacted  with a sharp price increase, which reached five times its  normal level in November 1974. The upward trend was given a  further twist by the United States' policy of purchasing on  the world market. At that time, the USA imported 5 to 6 Mio  tonnes of sugar per year and had no intention of reducing  consumption merely on account of high prices. As a result,  the exporting countries sold to the highest bidders, so that part of the quantity that was to be supplied to the  United Kingdom in accordance with the 'Commonwealth  Agreement` was not delivered. There ensued a shortage on  the European market which had to be made up for at the very  high prices then prevailing on the open market.2.12. The revision of the sugar scheme in 1975 was greatly  affected by the supply crisis mentioned in 2.11, which was,  in fact, exceptionally severe (see the graph for the world  sugar price in Table 9). The experts, however, are well  aware that the world market is prone to brief crises at  regular intervals. The initial Commission proposal took  account of the fact that the Commonwealth imports would be  continued in the form of preferential imports in accordance  with a protocol established for this purpose within the  framework of the Lomé Convention. With the exception of  Australia, the former suppliers were authorized to make  physical deliveries, in their capacity as ACP countries, of  quantities of low-grade sugar to British refineries up to a  limit of about 1,3 Mio tonnes of white sugar equivalent per  year.2.13. Moreover, the Commission, in its memorandum of July  1973 and in its proposal of July 1974, respectively,  abandoned the idea of scrapping the quota system, which  had however been originally intended. It wanted to make use  of it in order to bring production under control - in  particular, in the context of an international agreement on  sugar that was then being negotiated. The memorandum of  July 1973 was particularly restrictive: it allowed for an  A quota of 8,4 Mio tonnes (equal to internal consumption of  9,8 Mio tonnes minus 1,4 Mio tonnes of import commitments),  a B quota equal to 15 % of the A quota and abolition of the  right to produce C sugar. In this way the Community would  have become a net importer of 600 000 tonnes of sugar. The proposal submitted by the Commission in July 1974 was more  favourable to producers. It allowed for an A quota of  8,54 Mio tonnes, a B quota equal to 25 % of the A quota and  limits on the production of C sugar only in the event of a  surplus on the world market, along with compulsory  direction of production to supply domestic needs in the  event of a shortage.2.14. The world market crisis, failure to deliver sugar by  certain Commonwealth countries, the effective defence of  its interests that was put up by the European sugar  industry and over-optimistic estimates of consumer trends  by certain experts had the effect of overturning  these initial proposals. The new scheme decided upon by the  Council was the opposite of the Commission's proposal: an  A quota of over 9 Mio tonnes, together with a B quota of  45 %, without any statutory limitation on the quantity of  sugar that could be produced outside the quota. The  distribution of quotas between the Member States was made  on the basis of their production between 1968 and 1973.  Considering the large overall increase (+17 %), none of the  Member States suffered a net loss. At the same time, the  target price, which had just been raised by 12,3 % in 1974  in order to take account of the rise in energy costs, was  increased by 15 %, which resulted in an overall increase in  the price level of 29 %. Lastly, it was decided that ACP  sugar imports would have the benefit of the Community  institutional price, delivery expenses being charged to the  exporters.2.15. At the same time as the problem of traditional  imports of raw cane sugar into the United Kingdom had been  settled by means of the award of preferential Community  import quotas to ACP countries, an additional quantity was  included in the beet sugar production awarded to Denmark, to ensure that the latter continued to supply, as of  tradition, the Norwegian market. Prior to its accession to  the Common Market, Denmark in fact supplied Norway with  approximately 50 000 t of sugar per year. Since it had been  expected that Norway would also join the Common Market,  provision was made during the negotiations on accession  that Denmark would continue to supply this quantity to  Norway. The Danish quota was thus fixed accordingly, which  meant, for the Danish sugar industry, that these  deliveries, which had always been made at prices that were  roughly comparable to world prices, would from then onwards  be made at the Community guarantee price. When, following  the referendum, Norway did not after all join the  Community, the Danish quota was not corrected to reflect this new situation and Danish exports to the non-Member  State that Norway had become were able to benefit from  export refunds, thus giving the Danish sugar industry an  advantage corresponding to the difference between the world  price and the guaranteed Community price (see  paragraph 3.3) on the 50 000 tonnes in question.The third sugar regulation and the second enlargement (1981-1986)2.16. In 1979, the Commission again put forward  restrictive proposals with a view to revising the scheme,  which was planned for 1980. These proposals fell within the  context of the reform of the Common Agricultural Policy,  and aimed to reduce surpluses of Community agricultural  production. The Commission proposed one final renewal of  the quota system, for a period strictly limited to the  following five marketing years, and, at the same time a  reduction of the maximum quota by 11 %. This represented an  amount of production which exceeded consumption by 9 %, not  counting the preferential imports, which represented 14 % of consumption. These two figures together indicated a  structurally planned surplus of 23 %. At the same time, a  redistribution of quotas between Member States was  proposed, to be carried out on the basis of their reference  production, including a redistribution of B quotas, which  would concern approximately 20 % of the A quota for the  whole Community, but would vary, depending upon the Member  State, between 0 and 25 %. Meanwhile, isoglucose production  had also been included in the quota system, but since the  maximum quantity guaranteed had been established  definitively at the starting level for this industry, as  regards the question of financing the disposal of sugar  surpluses, it was proposed to place a ceiling on the  B sugar production levy at a rate of 40 % of the  intervention price. Moreover, it was intended to use 10 % of  the quotas initially granted for the purpose of  restructuring the market by redistributing this reserve  quantity between undertakings (see paragraph 1.15) (this  was to be managed by the Commission), to abolish the  quantitative limit on the carry-over of C sugar to the  following marketing year and to allow the quantities  carried over the benefit of the storage allowance, to  authorize the granting of national subsidies in Italy and  France (for the ODCT) and finally to abolish the practice  of regionalized prices for areas in deficit.2.17. The above-mentioned proposals provoked so heated a  debate that it was not possible to introduce the new scheme  in 1980: all that could be done, initially, was to extend  the arrangements in force under the existing scheme.  Subsequently, discussions again coincided with a shortage,  together with high prices on the world market, with the  result that between April 1980 and March 1981 the Community  was able to sell its sugar surpluses at higher prices than  the official Community price, thereby receiving export levies, which compensated for a part of the former disposal  expenditure.2.18. This being the situation, the Council finally  adopted a new Regulation in April 1981. The latter also  covered Greece, a new Member State, which was granted a  maximum quota equivalent to its own consumption, which also  corresponded roughly to the level of its production in  previous years.2.19. In general, the new regulation provided for a  consolidation of the A quotas and a redistribution of the B  quotas, implying increases and reductions at national level  but bringing the average down to 23,5 % of the basic quota  compared with the previous average of 27,5 %. The only  exception of note was Italy, which not only retained its  existing maximum quota but also had the benefit of the  conversion of not less than 90 000 tonnes of its B quota  into an A quota. Otherwise, the new B quotas were  calculated on the basis of the actual production of  B sugar, with a floor equal to 10 % of the A quota. Total  B quotas were reduced by 12 % and the overall maximum quota  by 1,8 %. The main innovation of the 1981 Regulation was the  introduction of the principle that producers should bear  the full cost of the disposal of their excess production.  To this end, the production levy was extended to include  A sugar, with a percentage of 2 %, and the 30 % B levy  already existing was increased by this 2 %, plus a  supplementary 7,5 % as from 1982/1985, making a total of  39,5 %. In addition, provision was made for it no longer to  be compulsory to store C sugar, and for the national aid  granted to Italy to be differentiated by region and  completed by an authorization to grant aid to alleviate the  financial costs of storage. A reserve quantity was  introduced into the legislation, but it was not conceived of as a Community redistribution instrument: the 10 % was to  be distributed by each of the Member States with, moreover,  the possibility of converting sugar quotas into isoglucose  quotas, or vice-versa.2.20. All in all, the Council rejected the Commission's  restrictive proposals three times. On the other hand, the  principle of full co-responsibility was indeed introduced  in the Regulation, by means of levies to be collected from  the producers, but the latter were passed on to the  institutional price and thus ultimately borne by the  consumers.The fourth sugar regulation and the third enlargement (1986-1991)2.21. Once again, when the five-year scheme came to an end  in 1986, its revision coincided with the enlargement of the  Community: the sugar scheme was in fact due to be renewed  with effect from 1 July 1986 and Spain and Portugal joined  the Common Market as from 1 January 1986.2.22. Spain, which produced more or less as much as it  consumed, but at a very high institutional price on account  of economically unfavourable production conditions, was  allocated a quota equal to its own consumption, including a  minimum B quota of 4 % and an intervention price 15,9 %  higher than the common intervention price, which was to be  aligned with the latter over a transitional period of seven  years. This period also applied to the national aid granted  under the Treaty of Accession.2.23. The Portuguese negotiators pointed to the precedent  of British accession and obtained the right for the  Portuguese refineries to be able to continue to import raw cane sugar at greatly reduced import levy rates, at least  for the seven-year transitional period.2.24. Besides a small such quota for the autonomous region  of the Azores, Portugal also received a beet sugar quota  of 60 000 tonnes, so that it could develop cultivation of a  crop which was previously unknown in continental Portugal.2.25. Spain and Portugal obtained higher isoglucose quotas  than the rest of the Community since an industry producing  this sugar substitute had meanwhile been set up in these  countries.2.26. These provisions, which appear in the Treaties of  Accession, were automatically incorporated into the new  sugar regulation, which, moreover, renewed the scheme as  such, without even redistributing either the A or B quotas.  The B quotas were thus in effect institutionalized, or  rather, nationalized. The only innovation was the  institution of the absorption levy: given that ceilings of  2 and 39,5 % of the intervention price for A and B sugar  were placed on the production levies, and that the costs of  disposing of surpluses had been so high during the period  1981-1986 that the levy proceeds could not cover them, it  was not possible to comply with the principle of full co-responsibility, which had been introduced in the 1981  Regulation. The Council decided that an amount of  400 Mio ECU should be recovered to reduce the accumulated  deficit, by means of a linear increase in the levies  collected. This ad hoc supplementary levy was called an  'absorption levy` and was to be spread over the duration of  the 1986-1991 scheme.2.27. One year afterwards, when the authorities noticed  that a new deficit was beginning to accumulate in respect of the marketing years covered by the new scheme, a special  absorption levy was introduced with the aim of achieving a  balance, from one year to another and over all the  marketing years of the five-year scheme, between  expenditure on the disposal of surplus production and the  revenue intended to finance that expenditure. The  production level was thus maintained, but the budgetary  consequences were neutralized by the system of levies and  prices.The extension of the scheme decided upon in 19912.28. The present arrangement has just been renewed.  According to Council Regulation N° 305/91 of 4 February  1991, the scheme will essentially be renewed for a  period of two years, with effect from 1 July 1991. Once  again, renewal of the scheme coincided with the enlargement  of the Community. During the period of preparation of the  revision of the scheme, political events in Eastern Europe  led to the unification of Germany in 1990. The former  German Democratic Republic's sugar sector was characterized  by very low technical yields, obsolete industrial plant and  a relatively high level of per capita consumption. At the  end of the political negotiations on the conditions for  including the former GDR in the common market organization,  it was decided to increase the German maximum quota of  847 000 tonnes. This increase may be broken down  into 647 703 tonnes of A quota and 199 297 tonnes of B  quota, i.e. the same proportion as that which existed in  the Federal Republic prior to unification.General assessment of the evolution of the quota system2.29. The history of the system of production quotas for  sugar shows that it has been used as an instrument designed  for satisfying the industrial and national interests that  are at stake in this market, rather than as a means of  guiding production. Indeed, the system has consolidated the  situations existing prior to the creation of the common  organization of the market or before the accession of new  Member States. Long-term application of this system, which  was not originally intended, has created production rights  for holders of quotas, both at the level of industrial undertakings and farms and that of Member States. The  various adjustments to and extensions of the system have resulted in the preservation and maintenance of vested  interests, whether production was efficient or not, and  whether it was a case of processing domestic agricultural  production or imported raw materials, or even a substitute  product similarly based on specific domestic agricultural  production (isoglucose), the development of which has not  been made possible.Evolution of market supply conditionsThe supply surplus2.30. Table 3 shows for the Community, in its successive  forms, the evolution of the specific components of supply  on the sugar market. It can be seen that the third scheme  (1981-1986) holds the supply record, with an average of  154 %, including the absolute record of 173 % for the  marketing year 1981/1982. The average for the last ten  years amounts to 148 %. These percentages show that the  sugar market has the highest surplus of all agricultural  markets. In the second part of Table 3, (columns 6 to 13),  surplus supply is calculated and analysed according to its  origin: quota sugar production (A+B), imports and sugar  produced outside the quota (C sugar). By comparing the  figures in the first and fourth columns (production and  consumption figures, respectively), it may be seen that  throughout the existence of the sugar CMO there have been  only two years during which the Community was not self-sufficient: in 1973/1974 and 1974/1975, i.e. at the time of  the accession of the United Kingdom, a traditional importer  of raw sugar. After the 1981 revision this 'shortfall` was  more than made good and the Community had a surplus for the  remainder of the period. While the surplus may vary  depending upon climatic and economic conditions, it results  first and foremost from a structural discrepancy between the guarantee production and internal consumption (see  column 9 = 11,2 % in the first five years of the first  scheme, 11,8 % in the second scheme, 21 % over the 1981/1986  period and 15,8 % since 1986). Other contributory factors  are imports, in particular preferential imports (amounting  to a practically constant figure of 16 % since 1975) and,  lastly, the production of C sugar, which varies  significantly, but nearly always represents a considerable  and sometimes very large proportion. It should be pointed  out that the quantities given for A+B production and ex-quota production, respectively, are quantities adopted  after the carry-overs of C (or, in some cases, B) sugar as  A sugar for the following marketing year. The figures  therefore also reflect the use made of the carry-over mechanism by the producers.>TABLE>Security of supply2.31. It may be asked where the error lies in the planning  of production, disregarding this institutional context. In  other words, when the Community sugar beet growers make  their decisions, on the basis of contracts with the sugar  manufacturers, to sow a part of their land, how much  surplus do they all together sow? To put it another way, by  how much would it be possible to reduce the amount of land  sown with cereals in the Community without endangering the  security of market supply?2.32. Three factors should be taken into consideration in  this respect:a)the legislation governing preferential imports provokes  a preliminary question: do these imports form part of  the structural supply of the market or not? First of  all, they have been agreed upon within the context of the Lomé Convention since 1975; moreover, the provisions  of this protocol provide for sanctions in respect of  supplying countries which do not deliver their quota  (redistribution of the latter amongst the other  contracting parties), so that the shortcomings which  arose in 1974 will not occur again so easily; finally,  these imports are in fact treated as equivalent to  European production as far as price conditions are  concerned. They may therefore be considered to be a  structural element in supplying this market. This  conclusion does not prejudice the economic assessment of  this arrangement, which will be discussed later. The  Portuguese imports are not considered to be a structural  element of the market, insofar as they are defined less  precisely and appear as a temporary measure in the  Accession Treaty. The ACP imports are therefore treated  within the context of the Lomé Conventions;b)climatic risks, which have a considerable influence on  the volume of production, should also be taken into  consideration;c)account should also be taken of a constant increase in  yield due to progress in bio-technology and industrial  technology.2.33. Bearing in mind the statistical data for the last 20  years, it would appear realistic to take as a basis a  safety margin of 8 %, in order to take account of the  climatic factor, coupled with a constant increase in yield  of 1,5 % per year. Table 4, which compares production  achieved by the application of the actual annual yields by  area calculated on the basis of the actual consumption for  the same year, shows that sowing could in any case be  reduced by 20 % without endangering security of supply. The application of these rules would even result in an almost  permanent production surplus, and the few shortfalls that  arose could be made good by carry-over and strategic  stocks.The rational development of production, the distribution of  quotas and the attitude taken by the trade The concept of specialization2.34. One of the objectives of the Common Agricultural  Policy - indeed, the first objective mentioned under  Article 39 of the EEC Treaty - is to increase agricultural  productivity, by, amongst other things, ensuring the  rational development of production. This corresponds to the  idea that in a Community, all the Member States together  will benefit from an organization of production which  directs the various productive activities towards the most  efficient areas, and in particular towards those areas that  are most suited for a given crop. Thus, in Europe, crops  which specifically need light and heat would be best  located in the South, whereas those which are more  dependant on humidity should be cultivated in the North.  This regional specialization allows considerable savings to  be made for the whole of agricultural production, insofar  as each area concentrates on those activities which it does  best and gives up its less efficient production activities.Application to sugar beet cultivation and the creation of   specialization quotas2.35. The sugar beet is a plant that requires a humid  climate, exposure to the sun and a very fertile soil. It is  therefore considered to be a typical Northern European  crop or, more precisely, typical of the areas north of the Loire. The best technical yields (expressed globally in  tonnes of white sugar per hectare, or in its constituent  parts, tonnes of beet per hectare, sugar content and degree  of extraction) are therefore to be found in France, the  Netherlands and in Belgium, followed by the United Kingdom  and the Federal Republic of Germany. Certain areas of  Southern Europe may, however, fulfil the conditions  required for reasonably efficient production at the  technical level. This is true of Greece, for example.2.36. In the first sugar regulations (see paragraph 1.12  of this report), the B quotas were meant to be  specialization quotas. The quantities produced under this  quota were subject to the co-responsibility levies with the  dual objective of guiding production towards those areas  where it would still be profitable at a lower price and of  financing at the same time the cost of disposing of the  surplus. The initial idea was clearly one of 'migratory  quotas`, the practical implementation of which would move  to those regions where it could be carried out in the most  favourable conditions.>TABLE>The actual distribution of quotas2.37. As has been shown above (see paragraph 2.29),  production quotas have turned into real, individualized  rights. If account is taken, moreover, of the fact that the   institutional prices are fixed at a generous level by the  Community authorities, it is clear that the specialization  mechanism planned for in theory has obviously lacked  selectivity in reality. The wish of the parties directly  concerned, and of the national political authorities, to  obtain and conserve the highest possible quotas stems  understandably from a concern to safeguard the considerable  investments they have made in this area and from the idea  that such a basic consumer need should be satisfied at all times. Over the years, during the successive revisions of  the scheme, a situation has gradually come about where the  stabilization of A quotas per Member State was followed by  a comparable 'nationalization` of the B quotas, as shown in  Table 5. This trend has resulted in the common market in  sugar having a totally compartmentalized structure, like a  collection of national markets. The A+B quotas are  completely immovable as between the Member States, and  even, within the majority of the latter, as between  undertakings. This situation of total immobility is  preventing production from reaching its economically  optimum position at Community level.>TABLE>The 'nationalization` of quotas2.38. The compartmentalization of the market has  consequences that run counter to the initial spirit of the  Community legislation. Thus, a good example of the national  conception of the organization of this market may be seen  in the protests of certain Member States who complain of  the fact that the ratio between their A quota and their B  quota does not correspond to the ratio between their  national consumption and their exports, this latter  representing a smaller share of their production than their  B quota. They therefore consider that they are financing  the export costs of the other States through their B  levies. If we push this logic to its limit, the process of   nationalization of sugar policy would be complete if the  Community stopped collecting production levies to finance  exports and left the job of financing the cost of exporting  the share of production exceeding national consumption to  the Member States themselves. There would then no longer be  any kind of common market.The other general provisions affecting economic  effectivenessMixed prices2.39. The basic regulation lays down that minimum prices  should be fixed each year for A beet, as for B beet. These  minimum prices are calculated on the basis of the basic  price for beet, by applying coefficients fixed, in  principle, at 98 % and 68 % respectively. The basic price is  in turn derived from the intervention price for white  sugar. In the contracts between the beet-growers and the  factories for the delivery of beet, a distinction should in  principle be made between the quantities of beet intended  for the production of A sugar, B sugar or sugar other than  A or B.2.40. However, an inter-trade agreement may, with the  approval of the Member State, derogate from this  obligation. Such a derogation may, in practice, result in  the application of a single price to the entire quantity of  beet provided for by the contract. In that case the beet-grower receives the same price, the so-called 'mixed  price`, for its A and B beet and the distinction between  the two disappears and, with it, the option of deciding   whether or not to produce specialization quantities. Of  course, in situations where the price of B beet would in  any case have been a sufficient incentive, it would not  have made any difference. In the case of economically  marginal farms, however, this practice may lead to the  production of B beet that otherwise would not have been  produced.2.41. Such is a fortiori the case if the possibility of  including a quantity of C beet is explicitly (for example, in the form of a percentage) or implicitly (by reference to  the area sown or the quantity of beet) provided for in the  contract, or if a sliding-scale price schedule is applied  to production beyond the basic quantity. This system of  mixed prices is convenient both for the manufacturers and  for the growers, insofar as the cost for the former or the  income for the latter remains the same for each unit  delivered within the limit of the contractual estimate, and  in that it protects growers from awkward questions about  the relative profitability of one or the other constituent  part of this production.2.42. Nevertheless, it does encourage additional  production in the case of economically marginal farms, and  above all in cases where a C constituent part has been  included. That was the reason why the first sugar  regulations provided for an automatic reduction in the B  quota for countries applying the system of mixed prices. At  that time, only Belgium and the Netherlands applied a mixed  price. Since the waiver of the automatic reduction rule in  1981, practically all the countries concerned (except for Den- mark, Germany and France) applied mixed prices for beet,  several of which included a section for C sugar.2.43. Even if it is difficult to quantify this mechanism's  impact on production, it is obvious that it constitutes a  factor which runs counter to the principle of  specialization. Insofar as the mixed price for beet  conceals the element of differentiation between the three  levels of guarantee price represented by categories A, B  and C, it reduces the dissuasive effect that the  differentiated price schedule is supposed to have on less  efficient producers. It results in sugar being produced  which, in accordance with Community economic logic, should,   for economic reasons, not be produced.Regionalized prices2.44. Since the setting-up of the common organization of  the market in sugar, the legislation has provided for a  geographical differentiation of the intervention price (see  paragraph 1.16). For those areas considered as having a  sugar deficit, a so-called 'derived` price is fixed,  representing the common intervention price plus 1,21  ECU/100kg (for Ireland and the United Kingdom) or 1,94  ECU/100 kg (for Italy), if the intervention price of 53,01  ECU/100 kg, which is applicable during the 1990/1991  marketing year, is used as a basis. A separate derived  price is also fixed for the French ODTs. The initial  objective of this regionalization of the intervention price  was to encourage a trade flow that would bring sugar from  the surplus areas to the deficit areas. Consequently, the  amounts of the price increases were supposed to reflect the  cost of transport from one to the other. In fact, if the  figures for national production and consumption are  compared today, the countries in question are no longer  (Ireland) or hardly ever (Italy) in deficit, or are only in  deficit if no account is taken of the structural  satisfaction of a part of demand (United Kingdom) by  preferential imports (see Table 6). Ultimately therefore,  this price supplement has had the effect, by distorting the  cost-benefit ratio, of promoting production in areas where  it is economically less viable.National aid2.45. While the first basic regulation considered that the  attainment of a single market based on a common price  system would be jeopardized by the granting of certain  forms of aid and that it was therefore necessary to  prohibit all forms of aid that were incompatible with the common market, it provided for an authorization,  exceptionally and on a temporary basis, of national aid in  Italy. It was expressly stipulated in the regulation itself  that these subsidies would be abolished on 30 June 1975,  and therefore at the end of the first scheme. Nevertheless,  the second regulation merely repeated the recital set out   in this connection in the first regulation, in particular  as regards the temporary granting by Italy of national aid,  which from that time on was known as 'adaptation  subsidies`. Pursuant to this regulation, the authorization  applied to the marketing years 1975/1976 to 1979/1980.2.46. The 1981 Regulation, which defines the third scheme,  lays down that national aid should be permitted, adding the  case of the French ODTs to that of Italy, and interest-cost  subsidies related to storage to the existing Italian  adaptation subsidies. When the scheme was renewed in 1986,  which mainly involved an extension of the existing  arrangements, this provision was maintained, and even  extended to include national aid awarded to the United  Kingdom for the refining of sugar cane, together with a  Community contribution of 25 %. Moreover, in the Treaty of  Accession, provision was made for Spain to grant national  adaptation subsidies to beet-growers during the period from  1 January 1986 to 31 December 1995. The national subsidies  granted in respect of the French ODTs are currently  considered to be part of a wider programme of aid for  regional restructuring and it is planned to transfer them  from the sugar legislation to the Poseidom set of  regulations.2.47. It is impossible not to conclude from all the above  that, on the one hand, the practice of national subsidies,  which was originally a temporary exception, has been  perpetuated, and that, on the other hand, such practices have tended to multiply as new Member States have joined  the Community. What started out as nothing more than a  temporary exemption, designed to allow the areas concerned  to catch up, has, with time, become a structural element of  the scheme. In this way the sugar industry is being kept artificially viable in certain areas, which will be  illustrated in more detail in the following paragraphs. The  prevailing situation is therefore no longer one of  progressive adaptation to the operations of the market,  which was the initial objective of the authors of the  Community legislation, but is rather an obstacle to a more  rational operation of the sugar market at Community level.Call for sugar-beet quotas2.48. Following the recent trends towards concentration  and internationalization in the sugar industry, certain  beet-growers are afraid that sugar production will  disappear from their regions. In view of the geographical  link between the production of the raw material and the  processing plant, this involves a risk for them of losing   their livelihoods as beet-growers. In order to avoid such a  development, they recommend replacing the sugar quotas with   beet quotas, at the level of the market regulation. Since  these are, more especially, cases of production in areas  less suited to this crop, such a way of thwarting any  relocation of production factors would obviously tend to  keep the less efficient producers in business.Specific problems in some Member StatesRestructuring in Italy2.49. The Italian sugar sector benefits from three special  measures which have been mentioned already, namely: a 3,5 %  increase in the intervention price under the regional  pricing system; national aid to make up the difference  between the true rate of interest and the flat rate  included in the statutory storage compensation in cases  where the difference is more than 3 %; and national  conversion aid. In the case of the latter, the basic  regulation that is currently in force provides that the  maximum amount of aid shall be 23,64 % of the intervention  price for white sugar. The level of aid is being reduced,  however, by one tenth per annum with effect from the  1988/89 season. The aid is granted in the form of a  production subsidy. Under the current system, 73 % of this  amount is passed on to the beet growers and the remaining  27 % is paid to the industry.2.50. The conversion aid was authorized by a series of  regulations because climatic conditions in Italy were not  suitable for beet and sugar production and there were   problems with applying modern production methods to a form  of beet production which has not kept pace with  technological developments. In fact, the amount of aid  which was authorized initially was intended to make up the  difference between the institutional prices applied before  and after the establishment of the common market in sugar  (this is why, in 1968, the guaranteed price in Italy was  50 % higher than the guaranteed price for France).2.51. In 1983 there was a general recession in the Italian  sugar sector. In view of the relative advantages of alternative crops, the Italian government implemented a  restructuring plan which was to be financed from the  national budget with the aim of reorganizing the sector and  making it more competitive. One of its main objectives was  to reduce the number of factories whilst increasing the  capacity of the remaining plants and thus improving their  economic efficiency. This plan was implemented in the  period 1984-1988. The main objective of the operation,  namely to reach an average processing capacity of 60 000  tonnes per factory per season (on average, the season lasts  for 64 days), was not achieved. Furthermore, as the  industrial aspect is an important feature of the sugar  industry, the plan was also affected by the national  industrial policy guidelines, which specified a particular  geographical distribution for the plants. In this way the  treatment accorded to the Italian sugar industry, which was  already in a special position compared with other areas of  the Community, was also differentiated within the country.  More particularly, the price thus increased by the various  components was differentiated by region: North, Central or  South. The guaranteed price is in fact highest in the  South, the region least suited to this type of crop, and  lowest in the North, the area which is most suitable, with  the Central area lying between the two. Whereas the average  yield for the whole of Italy is 5,7 tonnes of white sugar  per hectare (compared with 7,0 Community-wide), it is 6,1  t/ha in the North, 5,1 t/ha in the Central region and 4,5  t/ha in the South. The breakdown for total production is  70 % in the North, 15 % in the Central area and 15 % in the  South.2.52. The regulatory maximum for the conversion aid to  Italy (23,64 % of the intervention price for white sugar)  was finally reduced to 90 % of the initial limit for the  1989-1990 season and 80 % for the 1990-1991 season. In its proposals for the revision of the system for the 1991-1992  and 1992-1993 seasons, the Commission suggested that the  aid should continue to be reduced gradually and that the  ceilings should be set at 70 % and 60 % respectively of the  initial amount of the exemption granted for the 1988-1989  season. Council Regulation No EEC/305/91 of 4 February 1991  has finally opted for a ceiling of 70 % for the two years in  question.2.53. Despite the limited success of the national plan for  restructuring the beet and sugar sector, the Italian  authorities are at present launching a second five-year  programme, more or less on the same lines as the first. In  view of the fact that, despite all its efforts, Italy is  still one of the least efficient sugar-producing countries  in terms of production costs, the question arises as to  whether such guidelines should be perpetuated, given that  they are seemingly contrary to the principle of rational  expansion of production and also, to a certain extent,  affect the Community's finances. In particular, it must be  asked whether the consolidation and reorganizational  aspects of the restructuring ought, perhaps, to be targeted  on the percentage of production, which is fairly small in  terms of present levels, that could be economically viable  in the Community context.The transitional arrangements for Spain2.54. The situation in the Spanish sugar market at the  time of Spain's accession to the Community in 1986 was, in  some ways, similar to that which existed in Italy when the  common market in sugar was established in 1968. Spain is a  south European country and therefore unsuited to sugar-beet  production. Structures on the farms where beet is grown are  old-fashioned and the level of modernity in the processing industry is variable. The global average yield is 5,3  tonnes of white sugar per hectare, significantly lower than  the European average (7,0). In most of the country  multigerm seed is used, requiring very intensive use of  manpower to thin out the seedlings in the beet fields. (In  other countries this factor is markedly less important, due  to the use of monogerm seed).2.55. Before Spain joined the Community, the official  Spanish price was almost 16 % higher than the official  Community price. The Treaty of Accession granted Spain an  intervention price plus the above difference. The  difference was to be phased out over a transitional period  of seven years by means of a total price freeze, on the  assumption that the Community intervention price would  increase, as was normal at that time. There is, however,  provision for the transitional period to be extended by a  further three years should any difference still remain at  the end of the initial period. This possibility cannot be  ruled out, as the Community intervention price is no longer  increasing year by year at the same rate as it did prior to  1986.2.56. In addition, the Treaty of Accession authorized  substantial grants of aid for the conversion of  agricultural holdings, subject to a ceiling of 23,64 % of  the beet base price. This exemption applies until 31  December 1995. Finally, Spain was given a quota for A and B  sugar which was slightly in excess of domestic consumption.  In view of the Italian example, the Community authorities  could take care to prevent a similar tendency occurring in  Spain, as it could pose something of an obstacle to the  optimum development of the sugar market.>TABLE>>TABLE>Supplies to the Portuguese market2.57. Portugal has traditionally imported raw cane sugar  from its former colonies and, more recently, from the world  free market, for home refining. The autonomous region of  the Azores were self-sufficient in sugar due to a small  local beet-growing industry. On accession Portugal invoked  the precedent of the United Kingdom in order to claim the  right to continue to import raw sugar to supply its  refineries. Under the terms of the Treaty of Accession,   Portugal is authorized to import the quantities of raw  sugar needed to meet its requirements at a reduced import  levy rate to the extent that the necessary raw sugar is not  available in the Community (around 300 000 tonnes per  year).2.58. The Treaty provisions, which cover a period of seven  years from 1 January 1986, provide authorization for the  importation of 75 000 tonnes per annum from four specified  ACP countries in the first instance. Since supplies of raw  sugar of Community origin (mainly from the French overseas  departments and a small amount from metropolitan France)  are somewhat limited in terms of the demand that has to be  met, a substantial amount still has to be bought on the  free world market, again at a price that is reduced by the  import levy. In so far as this arrangement merely  perpetuates the main aspects of the supply situation which  existed in the Portuguese market prior to that country's  accession, it does not improve the organization of the  Community sugar economy in any way.2.59. Portugal's accession was accompanied by another  concession: the allocation of a quota of 60 000 tonnes for  beet sugar. This amount was intended to cover the expected  increase in national consumption, which in fact is far from having been achieved. Sugar beet has never been grown in  continental Portugal, however, and the industry will  therefore have to start from scratch with the construction  of a processing plant. The only sugar-beet produced in  Portugal is in the autonomous region of the Azores, where  production has declined in recent years because dairy-farming holds out better prospects for local farmers.  Attempts to start beet production in continental Portugal  are proving particularly difficult. Current production  amounts to only a few thousand tonnes, which are sent to  Spain by rail for refining and then freighted back to  Portugal. The project for the construction of a plant is  temporarily in abeyance while the national authorities  study the possibility of using Community structural funds  to alleviate the financial burden. All things considered,  it is clearly lacking in realism to grant a sugar beet  quota to continental Portugal.Sugar-beet production in Greece2.60. Greece's accession to the Community took effect in  1981, coinciding, more or less, with the change of  government which took place that year. It was allocated a  quota of 319 000 tonnes, which corresponded approximately  to the level of national consumption. Although Greece is a  Mediterranean country, its performance figures are more  akin to those of a typical northern area than to those of  the other Mediterranean countries. As can be seen from  Table 7, Greece is top of the table in terms of tonnes of  beet production per hectare and is slightly above the  average in terms of sugar yield per hectare, with levels  very comparable to those of the FRG and ahead of Denmark  and the United Kingdom.>TABLE>2.61. This situation can be explained by a combination of  structural factors on the one hand and the specific  organization of this agro-industry on the other. The sugar  beet is grown in a number of deltas in the north of the  country, which typically have very fertile soils, suitable  irrigation infrastructure and a continental-type micro-climate. The sugar sector in Greece is a fairly recent  innovation and has been organized rationally as part of an  agro-industry development programme which was launched in  1960. Both the industrial technology and the farming  methods were researched systematically abroad before they  were introduced into the country. The sector is  characterized by the very close relationship between  farmers and the industry in respect of advisory services,  seed, fertilizers and pesticides, disease prevention and  mechanization. This highly coordinated approach has made it  possible to achieve the performance figures referred to  above.2.62. On the economic side, the real level of performance  is more difficult to identify, because the Greek sugar  industry is in fact owned by the State through the agency  of the national agricultural bank, so that the economic and  financial conditions under which the industry operates do  not make it possible to establish conclusively whether it  is operating profitably. As regards the terms offered to  Greek beet farmers, it was found that, in addition to the  agronomic and logistical support mentioned above, the price  they receive for their beet is 15 % to 20 % higher than the  minimum regulation price (fixed as specified in 1.16(f)  above). Consequently it is difficult to form any clear  opinion as to the true level of economic efficiency of  Greek sugar production.The situation with regard to isoglucose2.63. The technology of isoglucose manufacture is now so  advanced that this substitution product can be obtained  from cereals of European origin. When the process was  introduced in the 1970s, the basic raw material was still  quality maize, which had to be imported from the United  States. The process is based on a Japanese invention and  was perfected in the United States which at that time was  importing 5 million tonnes of sugar, mainly from the  countries of Central and South America. The manufacture of  isoglucose from maize, which was (and still is) in surplus  in the United States, made it possible for the latter to  reduce its imports of sugar, where there was a shortfall,  from four million tonnes to one million tonnes.2.64. Isoglucose is used in the manufacture of food  products which require a liquid sweetener, such as soft  drinks, yoghourt, jam, ice cream, etc. In the United States  these products represent between 30 % and 40 % of sweetener  consumption. In Europe they represent between 20 % and 30 %  of the market, the equivalent of approximately 2,5 million  tonnes of sugar. In the United States this market share is  effectively held by isoglucose, which makes it possible to  avoid imports and to use the maize surpluses profitably. In  Europe in the 1970s the situation was exactly the reverse:  the Community had a sugar surplus and had to import  American quality maize in order to be able to produce  isoglucose. Nevertheless, the ratio between the prices of  these two commodities made the manufacture of isoglucose  profitable even at that time. The technology was later  developed to the point where it was possible to base  production on other, lower-grade cereals. Nowadays, for  example, one of the largest producers, Belgium, uses only  Belgian wheat, with costs considerably lower than those for sugar. The choice is therefore reduced to a choice between  two commodities of European agricultural origin.2.65. In 1979, after a number of restrictive measures had  been taken, the advocates of protection for the sugar  industry succeeded in getting isoglucose incorporated into  the common market organization for sugar. A production  quota was fixed on the basis of a reference level of  production achieved in the preceding years, without taking  into account the production capacity represented by the  plants which were then under construction. Isoglucose  production was thus limited to around 2 % of the global  maximum quota (A + B, sugar and isoglucose), which is well  below its potential. Isoglucose was also made part of the  system of production levies, even though there are  practically no exports of this product. When Greece, and  then Spain and Portugal, joined the Community, the  isoglucose quotas allocated to them were proportionately  slightly higher, because the reference production level had  been achieved under the pre-Community system. The present  distribution of isoglucose quotas, compared with sugar  quotas, is shown in Table 8.2.66. It is easy to understand the advantage, for the  sugar industry, of keeping the level of isoglucose  production as low as possible: the 'sweetening  power:production costs` ratio for this product is far more  favourable than that of sugar, for which it represents a  dangerous competitor. If this is true in the case of  Belgium, a country which is eminently suitable for sugar-beet growing and less so for the production of high-grade  cereals, how much greater is it in the case of the  countries of southern Europe, which are generally less  suitable for beet growing, but far more able to produce  quality cereals (maize for example). From a macroeconomic standpoint, it might therefore be expected that in the  south of Europe cereal-based isoglucose production should  be encouraged and that the aim should be to substitute that  product for beet sugar, which is economically less  profitable.2.67. In fact, however, the quotas not only did not evolve  in this direction but on occasions when the system has been  revised, the national authorities have not even made use of  their reserve quantities of 10 % of the sugar quotas which  they are allowed to convert into isoglucose quotas (see  paragraphs 1.15, 2.16 and 2.19) as a way of promoting this  type of production. It is an observable fact that the  responsible authorities in the countries most suited for  developing such a product in fact do nothing to make it  possible. In some cases, even, their attitude is the  reverse. The Greek government, for example, has effectively  blocked for a period of more than two years part of the  Greek isoglucose quota which became available following the  failure of the undertaking which held it, by refusing  initially to allocate it to the other Greek isoglucose  producer, which has surplus production capacity, and  awarding it instead to the Greek sugar producer, which does  not have the necessary plant, so that this isoglucose quota  has since remained unused. Isoglucose thus typifies the way  in which obstacles are wilfully put in the way of rational  development of the market.Conclusion2.68. The various factors detailed in this chapter  illustrate how far we are from the principles of market  stabilization and rational development of production set  out in Article 39 of the EEC Treaty. Furthermore, the  common market principles which are laid down in Article 40 of the same Treaty have in fact been defeated. In this way  the system of national quotas has become an end in itself:  it creates production rights when there is no real need for  the product, resulting in the development of an  economically barely viable form of production. This  involves clear consequences for consumer prices and the  financial equilibrium of the system, that is, ultimately  for its proper financial management. Before drawing the  consequences, we must examine the external aspects of the  system.3. INTERNATIONAL MACRO-ECONOMIC ASPECTS AND THE WORLD SUGAR MARKETThe world marketCharacteristics of the world market3.1. In recent years world sugar production has amounted  to approximately 105 million tonnes of raw sugar. Roughly  speaking, three quarters of the sugar produced is consumed  in the country of production, leaving some 27 million  tonnes to be traded on world markets. Part of this takes  place under bilateral preferential trade agreements,  between the USSR and Cuba, the United States and South and  Central America and between the EEC and the ACP countries,  for example. After deduction of this trade, the world free  market accounts for approximately 18 million tonnes of raw  sugar per year. The world market is split more or less  equally between raw sugar and white sugar. The commodity is  traded on three exchanges, New York, Paris and London.  These are futures markets, which means that the total  volume of trades is substantially larger than the actual  volume of the commodity that is ultimately delivered.3.2. As on all free markets, the price is determined by  the relationship between supply and demand. A large part of  the supply consists of surplus production from the producer  countries which operate a protectionist system whereby they  supply their own needs and subsidize exports of quantities  produced in excess of their own requirements. Of course,  some of these exports do not have the benefit of official  pricing; but exporters usually consider them profitable  because they base their calculations exclusively on the  marginal cost.The market price is thus not the prime  factor which determines the volume of such exports. Due to the residual nature of the market, the price may even drop  below the level of the production costs of an efficient  producer who is supplying the world market. The market is  also residual in terms of demand: the producer countries  use it to make up any shortfall, which may occasionally  create temporary price surges. In consequence, the free  world market is very volatile and bears very little  relationship to production costs.>TABLE>3.3. Only a very few exporter countries, such as the ones  with the lowest production costs (e.g. Australia), deliberately produce for this market because they can  obtain a profit from it. The most efficient producers'  costs are between 10 and 12 US cents per pound of raw  sugar, which at current dollar prices is between 185 and  215 ECU per tonne of white sugar. At the moment the  Community intervention price is 530 ECU per tonne. Table 9  shows the movement in the world price against the EEC  intervention price. On average, over the last ten years,  the European price has been almost double the world price.  This comparison is an important one because export refunds  are calculated on the basis of the difference between these  two prices.The Community's place in the world market3.4. The two more or less equal halves into which the  world sugar market breaks down, namely, raw sugar and white  sugar, are relatively independent of each other.  Nevertheless, there is a link insofar as if there is a  substantial increase in the price of white sugar, for  example, it becomes worthwhile to process more raw sugar  into white. Conversely, it may be preferable not to process  the raw sugar into white. The Community, for its part, is  concerned primarily with the white sugar market. The Community of Six was already a net exporter of white sugar.  It went into a slight deficit, very briefly, at the time of  the United Kingdom's accession and since then has expanded  to become the world's leading exporter of white sugar,  holding more than half the world market and thus accounting  for some 25 % of the total free market. Table 10 shows the  composition of this market on both the import and the  export side. Table 9 - Comparative figures for the world price and the intervention price >REFERENCE TO A FILM>>START OF GRAPHIC>>END OF GRAPHIC>3.5. By virtue of their volume (an average of 4,8 million  tonnes per year), the Community's white sugar exports  necessarily affect the balance of world supply and demand  on the free market. It is of course very difficult to  estimate the level at which the price would be situated if  the Community surpluses had no effect on the market. It is  not even possible to determine the extent to which this  source of supply would be replaced by increased production  in other countries if it were to diminish to any great  extent. It is only possible to make theoretical  calculations dealing with hypothetical trends. In the  studies that have been carried out on this subject,  there are some analyses, which are already out of date  (they refer to the situation before 1982), but they lead to  the conclusion that the world price would be approximately  12 % higher if Community exports were to be unsubsidized.3.6. As regards the economic effects of Community sugar  exports on third countries, a distinction must be made  between sugar importer and sugar exporter countries. In the  case of the importer countries there is an advantage  inasmuch as they are able to buy their sugar at a lower  price due to the presence of 4,8 million tonnes of European  sugar. These include the countries which import their sugar  on non-preferential terms, i.e. from the free world market,  namely African and Asian countries. On the other hand, for the exporter countries, insofar as they sell on non-preferential terms, there is a loss of revenue. To these  must be added the importer countries with a level of self-sufficiency just below 100 %, which could step up production  and become exporters if the price were higher.Food aid>TABLE>3.7. Intervention on the Community market in order to  absorb surpluses is not the aim of food aid. In any event,  in the case of sugar, the amounts are very small: of the  order of 6 000 tonnes per year on average.The economic impact of C sugarThe relative importance of C sugar production3.8. The basic idea of the system of production quotas in  the sugar market is to allow any amount of sugar produced  within the limits of quotas A and B to receive the  guaranteed intervention price and to put any amount  produced in excess of a maximum quota up for sale on world  market conditions. A manufacturer may, however, decide to  carry an amount of C (or B) sugar equivalent to a current  maximum of 20 % of his A quota over to the following year as  future A sugar by storing that amount for one year. In this  way he does, of course, reduce his authorized capacity for  A sugar production in the new year by an equivalent  quantity, and that amount is, in fact, shifted to B or C.  Apart from this reserve quantity, any manufacturer left  with C sugar is obliged to export it at his own expense at  the external market price before 31 December of the year in  which the production season ends.3.9. Over the last ten years, the world price for white  sugar has corresponded, on average, to 53 % of the Community  intervention price. If this difference were, in fact,  prohibitive in economic terms, C sugar production would be  the natural consequence of harvests which exceeded the  seed-time forecasts as a result of exceptionally favourable  climatic conditions. As Table 11 shows, however, over the  last ten years there has been an average of 1 348 000  tonnes of C sugar produced each year - the equivalent of  14,1 % of the basic quota (quota A). If this is compared  with the current supply level of 142 % (see Table 3), i.e. a  surplus of 42 %, this means that Community exports of white  sugar - the commodity for which the Community is the  premier international exporter - break down into one third  C sugar and two thirds quota sugar.3.10. It must be concluded, therefore, that the phenomenon  of C sugar production is both too significant and too  constant for it to be attributable to mere random  meteorological events. It is in fact possible to  demonstrate statistically on the basis of the trend of  yields and the areas actually sown that it is inevitable  that the maximum quota will be exceeded.Economic conditions for non-quota production3.11. One reason that is frequently put forward as an  explanation for systematic production in excess of the  maximum quota is producers' fears of losing their shares of  quota when the next reallocation takes place, on the  assumption that the next quota will be based on the amount  produced in a previous reference period. According to this  theory, manufacturers would conclude contracts for a  manufacturing volume and the growers would provide the  sowings to ensure that they would at least meet their respective individual quotas under any circumstances and  climatic conditions would merely determine the extent to  which the quota was exceeded. This line of reasoning is  incomplete, however, as will now be demonstrated.3.12. In the case of France, a country which alone  produces almost half the Community's C sugar, there is a  statistical correlation between, on the one hand, the  sowing of an area which corresponds statistically to C  production and the movement in the world price, and,  therefore, the expected sales revenue, on the other. In the  case of the other countries, however, there is a  statistical relationship only between the movement of the  world price and decisions to carry C sugar forward to the  following season (see paragraph 3.14).>TABLE>3.13. On the theoretical level, the decision as to whether  or not to produce C sugar tends, generally, to be  influenced by an assessment of the risk of producing at a  loss. This decision concerns the planters of sugar beet  rather less than the sugar manufacturers, who are able to  use the instrument of mixed prices (see also paragraphs  2.40 - 2.44) to obtain additional raw materials at an  undifferentiated price. This makes the production of  additional C beet advantageous for the growers and neutral  for the manufacturers. For the latter, production of C  sugar can be analysed in terms of variable costs on the  basis of the principle that their fixed costs can be  recovered in full on the strength of A and B sugar. Faced  with the question of whether or not it is advisable to plan  for production in excess of the maximum quota, there are  two possibilities that can be envisaged: the marginal cost  of producing C sugar is higher than the world price, or it  is lower. Whereas there is a clear advantage in producing  more in the latter case, in the former, where there is a risk of producing C sugar at a loss, it may nevertheless be  reasonable to plan for production in excess of the maximum  quota. In economic terms the explanation is as follows: to  the extent that the difference between the B sugar price  and the marginal cost of producing B sugar is greater than  the difference between the price of C sugar (= world price)  and the marginal cost of producing C sugar, the risk of  losing revenue as a result of a deficit of B sugar is  greater than the risk of making a loss on the sugar  produced in excess of the maximum quota (A+B).The influence of the carry-over mechanism3.14. On average, over the period 1978-1988 approximately  30 % of the C sugar produced was stored and 70 % was  exported. Nevertheless, these percentages may vary from one  season to another according to the economic optimization  decisions taken. Sugar producers are required to decide  finally by 1 February of the current year the extent to  which they want to use the possibility of carrying C sugar  over to the following year. If they decide not to put sugar  into storage, they are required to export it by 31 December  of that year. It is logical, therefore, for them to take  their decision in terms of the level of the world price  over the same period. Statistical analysis confirms this  line of reasoning: there is a very significant negative  correlation between the level of the world price and the  portion of C production carried forward.3.15. The practice of carrying C sugar forward to the  following season is encouraged by the fact that, within the  limit of 20 % of the A quota, these amounts receive a  storage premium. Although this option was understandable at  a time when the level of supply was around 100 %, in that it  ensured that reserve stocks were available, this is no longer the case when the level of supply is close to 150 %.  Under present conditions this refund should therefore be  questioned, as it is tantamount to a premium for  speculating on a rise in the world price. The cost of such  finance is ultimately passed on to the European consumer  via the system of compensation for storage costs, which in  turn is reflected in the price. Furthermore, there are  grounds, under present market conditions, for questioning  the economic justification of the system of carrying over C  sugar, in that it encourages speculative C sugar production  (see paragraph 3.12).The effect of C sugar exports on the cost of quota sugar exports3.16. Community exports of white sugar amount on average  to 4,8 Mio t and thus represent one quarter of the volume  of trade on the free world market: this means that  Community exports play a very significant role in the world  balance of supply and demand. The portion represented by C  sugar (approximately one third of European exports) is  sufficiently large in itself for it to affect this balance.  This means that exports of C sugar affect the world price  and, through the pressure they exert on it, logically tend  to increase the cost of export refunds for quota sugar.3.17. It is possible to attempt to make a quantitative  estimate of the extent to which the cost of quota sugar  exports is increased as a result of exports of C sugar.  Taking the economic projections most frequently used as a  basis in this area, it is possible to show that a   1 Mio t reduction in C sugar (the portion of C production  which can be regarded as an avoidable minimum) produces an  increase of between 1,5 % and 3,1 % in the world price.  By applying this increase to an amount of 3,5 Mio t for quota sugar exports and taking as base a long-term balanced  world price of 250 ECU/t, the cost of the export refunds  would be reduced by between 15 and 30 Mio ECU per year (2).  At a rough estimate, this reduction would break down into   5 to 10 Mio ECU on the net budgetary cost and 10 to  20 Mio ECU as the cost of the co-responsibility levy.The effect of the predominance of C exports in a favourable world price situation3.18. The commercial advantage of quota sugar exports is  different from that of C sugar exports. In the case of the  former, the aim is to maximize the rate of refund. In the  case of C sugar, the objective is quite simply to take  advantage of the most favourable world price possible,  hence the tendency for traders to give priority to exports  of C sugar at times of rising world prices.3.19. The substitution effect between quota exports and C  sugar exports is confirmed by statistical analysis of the  monthly data for both categories of transaction for the  period between October 1982 and May 1989. It reveals that  there is a direct relationship between the world price and  exports of C sugar and an inverse relationship between the  world price and exports of quota sugar. Referring to the  world price when a quota sugar refund was awarded and the  world price at the time of the application for the C sugar  certificate, it appears that, on average, on the basis of  the series of transactions specified above, the world price  for exports of quota sugar was 20 ECU/t lower than the  world price for C sugar exports, at 218,6 ECU/t and 238,4  ECU/t respectively. The global average price actually  obtained during this period was around 226,4 ECU/t. Had  exports of quota sugar been effected at the average price  in the same way as exports of C sugar, the Community would have saved around 7 ECU on each tonne of quota sugar  exported, some 20 Mio ECU a year. This loss could have been  avoided, partly, at least, if the Commission had adopted a  more flexible and more finely-tuned strategy, so as to  prevent speculative action by C sugar exporters.3.20. The above arguments indicate that it is illusory to  claim that C sugar costs the Community nothing. The two  phenomena analysed in the preceding paragraphs in fact show  that there is a financial charge which is a direct result  of exporting C sugar, and that it can be estimated to be of  the order of 30 to 60 Mio ECU per year. Of this, 10 to   20 Mio ECU are a direct charge on the budget and 20 to  40 Mio ECU are covered by production levies.The effect of the ACP and Indian sugar protocol3.21. The importation of raw cane sugar from a number of  ACP countries and India is in fact a throw-back to the  arrangements for supplying the British market which existed  prior to 1973. In 1986 a further 75 000 tonnes were added  for Portugal. In today's common market situation these are  quantities which have to be added to a European production  surplus which is already considerable. At the moment two  types of argument are used to justify this situation:a)as regards protecting investment and employment in the  British and Portuguese refining industries, the  arguments were entirely understandable in a short, or  even medium-term, perspective. The act of halting  production overnight where such substantial investment  is involved would amount to an act of destruction of  capital, with very serious consequences. But, on the  other hand, the fact that, after almost two decades, the  choice between imports and domestic production for the purpose of supplying the Community market has still not  been made is equally difficult to justify in a situation  of over-production;b)as regards the justification that the present system  offers a guarantee for the developing countries,  comprising the award of a quota to each of the countries  concerned and a price which is aligned with the European  intervention price. In view of the standard relationship  between the world free price and the European guaranteed  price, the advantages are considerable. In economic  terms, however, the fact that they are able to count on  a preferential price at the level at which the European  quota is set does have some perverse effects on the  sugar economies of the producer countries, which are  still dependent on the world market price. Some ACP  countries, in fact, export their quotas to the Community  and import sugar from the world market to cover their  own requirements.3.22. In fact, the price advantage offered by this  preferential trade constitutes a transfer of income related  to a particular product. This became apparent in 1989-1990  when the Community intervention price fell by 2 %. The ACP  countries complained and the Commission decided to offer  them financial compensation for the resultant loss of  revenue. The Community authorities should learn from this  state of affairs, by reviewing the procedures for what is  now, clearly, becoming a kind of income support for third-world sugar producers and thus has no place in the common  agricultural policy and the budgetary expenditure it  represents. Although the Court does not dispute the  objective, it is of the opinion that this aspect of  Community policy falls within the Community expenditure on  development aid, not the EAGGF section of the general budget. Furthermore, it is significant that the Decision of  24 June 1988 on budgetary discipline specifically  excludes amounts for the disposal of ACP sugar.The international negotiationsThe international sugar agreements3.23. For a very long time, the sugar-consuming and  producing countries have looked for ways to control the  market for this vital commodity, or at least reduce its  instability. In January 1968 an international sugar  agreement was signed by a number of countries providing for  a stabilizing mechanism based on the creation of national  stocks, commitments to buying minimum quantities and  preferential supplies for the signatory States. Neither the  EEC nor the United States was party to this agreement.  Their absence as signatories, combined with the narrowness  of the free market, resulted in the collapse of the  agreement, which was not equal to the crisis of 1973-1974.3.24. A new agreement was signed in 1978 by 31 exporter  and 15 importer countries. It provided for export quotas to  be allocated to the various exporter countries, a price  stabilization mechanism (within a range of 11-21 US cents  per pound) and buffer stocks, which were to be built up and  liquidated according to price movements. The EEC decided  that it would not be a party to the agreement because,  amongst other things, although the export quota proposed  for it (2,9 Mio t) was sufficient to cover quota sugar  exports, it was not large enough to cover the C sugar  exports as well. In the end, the agreement failed. This  should not, however, be allowed to prejudice any position  which the Community authorities might adopt in the future and which ought to take account of the observations made by  the Court in this chapter and in the preceding one.GATT3.25. In view of the importance of European sugar exports  on the world market, it is not surprising if other producer  and exporter countries are now trying to counter this  trend, as they have done in the past. In the context of the  Uruguay round of the General Agreement on Tariffs and Trade  (GATT), the question of agricultural subsidies and their  effects on international markets was raised again. An  agricultural product like sugar is mentioned specifically  on the list of products for which an agreement is to be  negotiated. The position of other countries, both exporters  and importers (for example the Cairns group), is such that  it may lead to restrictions. It is now evident that sugar  will inevitably form part of the package of agricultural  products for which a reduction in the level of subsidy may  be envisaged.4. The consequences for the public finances  of the CommunityDevelopment of the budgetary situation4.1. The sugar and isoglucose market is the only one which  entails the explicit entering of revenue, as well as  expenditure, in the budget of the Communities, under the  corresponding budgetary headings. Table 12 shows the  changing situation of revenue and expenditure, and of the  net expenditure charged to the budget, resulting from these  entries over the period since 1981. The table shows that  average annual expenditure for the period 1981-1989 was  1 620 Mio ECU and average revenue was 1 080 Mio ECU,  leaving an average charge to the budget of 540 Mio ECU. It  will then be observed that, over this same period, the  level of both expenditure and revenue almost doubled, but  that the situation was relatively stable during the last  three years, with expenditure at a level of around  2 000 Mio ECU and revenue at around 1 400 Mio ECU. The  greater part of the expenditure, around 70 %, involved  export refunds. The average amounts of expenditure and  revenue involved in storage costs are reasonably balanced  (even in budgetary ECUs), as befits a system based on the  principle of equalization. In the later years, storage  costs amounted to around 450 Mio ECU, or 22 % of  expenditure. Table 13 shows, for the average of the last  three financial years, the distribution by Member State of  expenditure and revenue and of the consequent net  expenditure. This table demonstrates that, in accounting  terms, around 75 % of the expenditure occurs in three Member  States, which, in descending order of importance, are  France (28 %), the Netherlands (27 %) and the Federal  Republic of Germany (21 %), and which between them also  account for around 65 % of the revenue recovered. It should be noted that these data are influenced by the free  circulation of products when sugar is exported from a  country other than the country of production, which is  where the production levy was charged.The costs of the surplusCost-sharing4.2. The financing of the common organization of the sugar  and isoglucose market is unique, inasmuch as the costs  occasioned by the disposal of surplus Community production  are fully covered by levies paid by the producers  but are, at the same time, reflected in the prices and thus  indirectly charged to the consumer. More precisely, the  cost of exporting the difference between Community  production and Community consumption and the cost of using  up in the chemical industry any quantities in excess of the   60 000 tonnes traditionally used in that industry are  financed by the levies system. The same principle applies  to storage costs, which are covered by a specific  contribution provided to that end and calculated so as to  balance out the expenditure and revenue in question  (expressed in green ECU) in the medium term. Other  expenditure items are usually charged to the budget. This  is the case for the cost of exporting a quantity equivalent  to the quantity of preferential imports, the use of the  first 60 000 tonnes in the chemical industry and some items  of aid (for refining in particular). In order to arrive at  the net cost to the budget, the revenue from import levies,  particularly on molasses, must also be deducted, and the  net effect of the double rate applied in the agricultural  area (the production contributions are calculated in green  ECU, which are different from budgetary ECU) must be added.  Finally, since the market is managed by marketing year, all these items of revenue and expenditure should be set out by  each sugar marketing year. The results are presented in  Table 14.>TABLE>>TABLE>>TABLE>4.3. Table 14 shows that, on average, for the period  1982/1983 - 1988/1989, the sum financed from the producers'  levies ('self-financing`) was 1039 Mio ECU per annum, or  52 % of the total charged to the budget. This figure allows  for the reimbursement to the Member States of 10 % of the  sums collected in order to cover their collection costs.  Over the same period, the net amount chargeable to the  Community budget was 824 Mio ECU per annum, or 42 % of the  total. These percentages have been established by including  in the sums those corresponding to the storage system; but  this is a separate system, with a 100 % self-financing rate.  It can therefore be ignored and attention concentrated  solely on the cost of financing the disposal of surplus  production ('self-financing`): in this respect, the charge  to be financed by production levies averaged 649 Mio ECU,  naturally including ACP sugar, or 42 %, while 58 % was  charged against the budget. The problem of self-financing  is dealt with in paragraphs 4.6-4.14 of this report.The relative importance of the costs4.4. If the charges broken down in Table 14 are compared  with Community consumption, evaluated at the intervention  price, which corresponds to the ex works price, it may be  concluded that the cost finally passed on to the consumer  corresponds to 0,097 ECU per kg of sugar, or 18 % of the  consumer price. Furthermore, as a taxpayer, he also pays  0,088 ECU per kg, or 17 % of the price. The total subsidy is  0,185 ECU per kg of sugar bought by consumers in Europe, or  35 % of the consumer price. The lower part of Table 14 gives the details by marketing year, as an average in ECU per  tonne (lines 5 to 7) and as a percentage (lines 10 to 12).The induced costs4.5. The principal budgetary data which we have just  examined reflect the extent of the costs that are induced  directly or indirectly by the characteristics of the  internal or external macroeconomic management of the  scheme. With regard to the principles of economy and sound  financial management, the Court wishes to stress the  following points:a)the structural surplus, which must be disposed of on the  world market at heavily subsidized prices, is very  costly: it represents average gross expenditure of  1 987 Mio ECU per annum (see Table 14), which  corresponds to 35 % of the value of domestic consumption;b)the existence of so considerable a financial burden is  partly concealed by the artifice of the co-responsibility mechanism, also known as self-financing,  which involves covering the cost of disposing of the  production surplus by levies on producers; these levies,  however, are simultaneously passed on in the  institutional price, which in turn determines the price  charged to the consumer. The consumer, who has no  alternative source of supply for this basic foodstuff,  is thus obliged to contribute to financing this system;  the question might therefore be asked whether the prices  really are reasonable for the consumers, in the sense  intended by Article 39 of the EEC Treaty;c)another part of the financial burden has nothing to do  with Community production and is generated essentially by the fact that the Community authorities have not  decided between guaranteed own production, which is  already in surplus, and preferential imports. The result  is that both enjoy the Community guarantee. The  preferential imports alone from the ACP countries and  India represent an average charge to the Community  budget of 535 Mio ECU a year (calculated by the Court in  agricultural ECU). The Court considers that this sum is  being wrongly charged to appropriations that have been  earmarked for the common agricultural policy, whereas it  really comes under development aid;d)in addition to all this, there is the matter of non-quota production (C sugar), which is officially excluded  from the Community guarantee but which nevertheless has  financial consequences. The two phenomena analysed in  paragraphs 3.16-3.20 of this report, namely the effect  of exports of C sugar on the cost of exports of quota  sugar and the effect of the predominance of C exports  when the world price is favourable, entail a financial  charge which can be evaluated at approximately 30 to  60 Mio ECU per annum. Of this charge, 10 to 20 Mio ECU  comes directly from the budget and 20 to 40 Mio ECU is  covered by production levies.Control of self-financingThe mechanism4.6. The eleventh recital of the basic regulation of  30 June 1981 provides for the producers themselves to   meet the costs of disposing of the surpluses arising from  the excess of Community production over consumption. This  concept is also known as 'self-financing`, and the  expression 'budgetary neutrality` is even used in connection with the common organization of the sugar  market. These latter expressions can cause confusion,  however: the common market organization in question is  neither self-financed nor neutral in its effects on the  budget. This is so because, in the first place, it is the  consumers who pay the contributions, as a fraction of the  price. Secondly, only part of the expenditure is covered by  these contributions. The recital in the regulation cited  above makes this clear: the aim is to finance the cost of  disposing of the surplus of Community production over  Community consumption.4.7. Articles 28 and 28(a) of the same basic regulation  provide a very precise definition of how this financial  contribution is to be approached. For each marketing year,  estimates are first made and then the actual figures  recorded for the following:a)the quantity of A and B sugar and of A and B isoglucose  produced for the marketing year in question;b)the quantity of sugar and isoglucose sold for  consumption within the Community during the same  marketing year;c)the so-called 'exportable surplus`, obtained by  subtracting the quantity referred to at b) from the  quantity referred to at a);d)the average loss (or, if appropriate, the average  revenue) per tonne of sugar earmarked for export  or for use in the chemical industry (more than  60 000 tonnes per annum where the latter is concerned)  in respect of the marketing year in question;e)the amount to be covered by the levies, multiplying the  quantity discussed at c) by the amount referred to at  d).4.8. From the 1986/87 marketing year on, this calculation  is made cumulatively, so as automatically to absorb any  adjustments which might follow on from any subsequent  corrections of the figures for the previous marketing  years. Once the global amount to be covered has been  determined in this way, the levies are set by a system of  percentages applicable to the intervention price, which  vary according to whether the sugar is A or B sugar and are  stepped, in the case of the latter, in accordance with a  scale supplemented by an additional levy which is applied  on a linear basis to the amount of the A and B levies in  order to make up for the remaining shortfall. The data in  Table 14 show that, if the other items of expenditure and  revenue are taken into account, with the exception of the  storage allowances, which are 100 % covered by the storage  levies, a little less than one-half of the expenditure,  42 %, has been 'self-financed` (see paragraph 4.3). If  expenditure and revenue relating to the system of  equalization of storage costs are included - although they  do not come under the concept of self-financing as  understood in the regulation - this percentage comes to  around 52 %.The problem of accounting control4.9. If an objective such as 100 % financing by the  producers themselves of the costs of disposing of surplus  Community production has been explicitly proclaimed, it is  worth checking whether it has in fact been achieved. This  was one of the Court's intentions when it undertook a  financial audit of the sugar and isoglucose sector at the Commission in 1989. The audit work carried out in this  context revealed considerable technical difficulties  standing in the way of establishing beyond any doubt the  degree to which the objective of self-financing was being  achieved. The ensuing discussions between the Court and  Commission officials, and the arguments advanced by both  sides in the part of the 1988 annual report devoted to this  subject, showed that certain methodological problems needed  to be clarified first.4.10. It was for this reason that the Council, in its  opinion on the discharge for the 1988 financial year,  considered it 'urgent for the two institutions to reach an  agreement on an identical method of analysis`. The Council  also agreed with the Court 'on the need for the means to be  available to evaluate, in accounting terms too, whether the  principle of self-financing is being respected`. The  European Parliament, in its discharge decision for the 1988  financial year, announced its intention to 'review the  question of the financial neutrality of the sugar sector in  the light of the communications from the Commission and the  Court of Auditors`. In view of this request by the  budgetary authority, it was decided to carry out an in-depth study of the problem and to include the results of  this study in this report. Thus, the Court's auditors  carried out a detailed analysis on the basis of the raw  data made available by the departments of the Commission.Accounting analysis4.11. The implementation of the principle of self-  financing in the sugar sector goes back to the application  of the approach contained in Articles 28 and 29 of the  basic regulation for the determination of production  levies, including the additional levy (see paragraphs 4.6-4.8). The accounting control on the implementation of this  principle must therefore concern the subsequent entering in  the accounts of the elements concerned in this calculation,   which at that stage are statistical or estimated. Comparing  the accounting data on expenditure effected and revenue  received, on the one hand, with the data used in  calculating the levies, on the other, presents a whole  series of technical difficulties, which are listed  hereafter:a)Article 28 defines the amount to be financed as the  difference between Community production of quota sugar  and isoglucose, on the one hand, and the quantity of  sugar and isoglucose disposed of for consumption in the  Community, on the other, multiplied by the average  amount of refunds granted; these are therefore global  concepts and statistical averages, and do not correspond  to any accounting entry;b)still on the definitions from Article 28, the amount of  the average refund, which is multiplied by the  exportable surplus to arrive at the sum to be financed  by the levies, is determined on the basis of export  commitments (and commitments for the chemical industry  in excess of 60 000 tonnes per annum). This concept of a  commitment corresponds to the quantities allocated to  successful tenderers and not to the quantities involved  in the actual operations. In particular, it takes no  account of any variations in the quantities within the  margin of use (+ or - 5 %), or of non-use of  certificates; questions might be asked on the  compatibility of this provision with the objective,  which, in the recital of the regulation, is stated in  terms of 'full financing (......) of the disposal  costs`;c)given that these regulations were adopted in the context  of the common agricultural policy, the financial aspects  are expressed in agricultural ECU; for the purposes of  comparison with the budgetary accounting, which is in  budgetary ECU, the figures have to be reduced to a  common denominator; the exchange rate difference between  the agricultural ECU and the budgetary ECU must  therefore be eliminated; but, far from being marginal,  this difference represents a sizeable magnitude, as will  be seen below;d)the calculations concerning self-financing and,  therefore, all the data used in this calculation, refer  to the marketing year for sugar and isoglucose, i.e. the  period from 1 July to 30 June; the budgetary accounting  covers the period of the financial year, 1 January to  31 December or, more recently, for the EAGGF Guarantee  Section, 16 October to 15 October; the two sets of  totals cannot therefore be compared in any way;e)the rate at which expenditure, in particular, is entered  in the accounts reveals a time lag, compared with the  events that give rise to the expenditure, which varies  over time and from one Member State to another; these  are amounts paid to operators on presentation of a  certificate of entitlement which may bear an issue date  going back several months; these payments are effected  and entered in the accounts by paying agencies in the  Member States, who declare this expenditure to the  Commission, which in turn reimburses them, whereupon  these sums are entered in the Community's accounts; the  time which has elapsed between the issue of the  certificate and the recording of its financial  consequences in the accounts is too dependent on all  sorts of operational and administrative delays for there to be any stable link between an act of management in a  given month and the accounting entries made during a  specific later month.4.12. In an attempt to resolve all these problems, the  Court's auditors were obliged to analyse all the  expenditure and revenue operations down to the smallest  detail - in terms of the budgetary item, the reference  marketing year, the month in which the certificate of  entitlement was issued, the month of the accounting entry,  the amount in national currency, agricultural ECU and  budgetary ECU - in order to establish sets of data for  those used in the system for calculating self-financing, on  the one hand, and for those which appear in the budgetary  accounting, on the other. Processing of these data provided  the following results.4.13. The results of the analysisa)In the first place, it should be noted that the analysis  carried out proved to be extremely laborious, not only  because of the technical complications listed in the  preceding paragraph but also in view of the difficulties  encountered in obtaining, from the departments of the  Commission, the exact data needed by this analysis and  in an appropriate form. These practical difficulties  clearly demonstrated that the Commission is not  accustomed to carrying out this type of control. In  fact, an almost total lack of internal control on this  specific point was noted within the departments of the  Commission. It is clear to the Court that the existence  of this situation cannot be attributed solely to the  sole market division concerned within the Directorate-General for Agriculture; the Court's criticism is  directed at all the departments of the Commission which are concerned (the EAGGF Directorate at the Directorate-General for Agriculture, the Directorate-General for  Budgets and Financial Control);b)the differences arising from the conversion of sums  denominated in budgetary ECU into agricultural ECU are  shown in Table 15. The net effect is substantial and it  increases the share of the expenditure in respect of  this market which is financed from the Community budget,  since this, by definition, remains outside the self-financing mechanism;c)a regression analysis of the series of monthly sums on  which self-financing calculations, on the one hand, and  the corresponding monthly budgetary expenditure,  converted into agricultural ECU, on the other hand, are  based, demonstrated that there is no significant  correlation between the two series, for any set delay  factor; for each category of expenditure involved in the  calculation, however, the delay which gave the best  correlation was taken for the rest of the analysis;d)since the statistical correlation is insufficient, there  is only one method left for comparing the two groups of  data: to add up the figures for the two series that are  to be compared over a sufficiently long period for the  results of the variations due to the factor cited above  (see paragraph 4.11.e)) to become relatively  insignificant, and then to evaluate the trend of the  remaining balance. The results of these analyses are  given in Tables 16, 17 and 18. The analyses were carried  out in two series; a first series started from  1 January 1983, the date with effect from which the  necessary data are available at the Commission; and from 1 July 1986, when the five-year arrangements currently  in force began. While the percentages concerning the  revenue and the production refunds in the chemical  industry seem acceptable, a question mark hangs over the  export refunds. The variation is too constant and too  great for it to be explained by the user margin of 5 %  maximum. This result of 7 to 8 % first raises once again  the problem of reference to hypothetical or real charges  mentioned in paragraph 4.11.b) above, but then proves  that there is a need for verification. The most  plausible explanation for the difference is non-use of  certificates issued, but apparently the departments of  the Commission do not have the monitoring resources to  observe this phenomenon;e)this statistical correlation analysis is the only means  of assessing the extent to which the calculation data  which determine self-financing, on the one hand, and the  realisation of this, in the accounts, on the other,  actually correspond. Varying time-lags between  commitment operations, on the one hand, and accounting  entries, on the other, an expenditure and revenue  situation which ought to balance cannot be established  with the current accounting system.Assessment of sound financial management in the area of self-financing>TABLE>4.14. The analysis carried out by the auditors allowed most  of the obstacles cited in paragraph 4.11, above, to be  overcome. Nevertheless, it is important to note that one of  these obstacles is still there, since it is impossible to  carry out an accurate control within the present system of  accounting for revenue and expenditure. Moreover, where the  statistical analysis carried out in its stead by the Court is concerned, its laborious nature and the difficulties  encountered in carrying it out prove that the management  and accounting organization of the departments of the  Commission is not really suited to carrying out the control  as intended. The principles of sound financial management  nevertheless require the achievement of so fundamental an  aim as self-financing in the sugar sector to be checked  against independent data which reflect the real financial  position. The result of the analysis shows that the real  situation should be examined by comparison with the  forecasts, because a significant discrepancy is to be found  in the largest item of expenditure. Since the type of  analysis carried out on that occasion is too unwieldy to be  repeated regularly, the accounting organization should be  adapted to the needs of a system of quasi-automatic  control. Such a control could be carried out simply by  providing for a declaration of expenditure and revenue by  the Member States which distinguished between the marketing  years for which they were effected. Such a degree of  specification would not make excessive demands on the  corresponding authorities in the Member States, since they  already have the necessary information for their own  management purposes. It would thus be possible to measure  the extent to which 'self-financing` is achieved within the  narrow limits recalled in paragraphs 4.6-4.8 on a regular  basis, from one year to another.Other specific observations on sound financial managementExport refunds>TABLE>>TABLE>4.15. The payment of export refunds is conditional upon  the issue of certificates which allow the correct and  timely execution of the operations to be monitored, and  also upon a system of sureties which penalizes cases of infringement. The implementation of these safeguard  measures, like those in respect of other operations, is  assigned to the corresponding authorities in the Member  States. Such decentralization, however, can by no means  reduce the Community's overall responsibility for the  correct execution of the operations; on the contrary, it  imposes an obligation to provide coordination and central  control. In its annual report concerning the financial year  1988, on the basis of a survey carried out among the  responsible paying agencies in several Member States, the  Court concluded that the national procedures should be  harmonized in order to obtain the same level of  effectiveness and guaranteed regularity. Likewise,  at the time of the investigation on which this report is  based, it was found that operations effected by way of  market regulation were not being adequately monitored from  the centre. More especially, the Commission has no  mechanism for systematically checking on the satisfaction  of export commitments established when the contracts are  awarded. This absence of a suitable mechanism also  constitutes an obstacle to the task of checking the correct  functioning of the self-financing system in terms of its  objectives.Production refunds4.16. When the production refunds system for the use of  sugar in the chemical industry was instituted, the aim was  to create an additional outlet for surpluses. This also had  the effect, however, of creating competition for starch.  This derived product (mainly obtained from cereals and  potatoes) is also subject to common market regulation. It  provides the basis for the production of a whole range of  products, both foodstuffs and others, including isoglucose  and glucose. This latter is in competition with sugar as a raw material for the production by the chemical industry of  certain products, such as citric acid, which is used in the  food-manufacturing industry. The regulation on production  aid in the chemical industry was designed to ensure  balanced conditions between the two alternative raw  materials. Thus, the production refund granted for sugar  was accompanied by a deduction of 70 ECU per tonne in  relation to the difference between the Community price and  the world price, even though the chemical industry is  attempting to put itself on equal terms with its  international competitors outside the Community. The wish  to ensure equality between sugar and isoglucose has also  affected the administrative procedures for the measure:  thus, the rate of refund is established four times a year,  which is not at all suited to the working rhythms of the  chemical industry; furthermore, particularly cumbersome  administrative and control procedures were set up. Amongst  the latter, the lodging of a security for correct use which  serves no real purpose deserves mention, since the payment  of the aid is subject to random controls to determine that  it is used correctly.4.17. Meanwhile, with effect from 1 July 1990, the system  of aid for sugar has been completely separated from the  same system laid down by the common market organization  rules for cereals and starch. This is one more reason for  re-examining the administrative procedures applicable to  sugar so that the system becomes more attractive for the  chemical industry. The unwieldiness of the Community system  has hitherto resulted, according to the information  obtained from the representatives of this sector, in the  industry's opting for molasses, in which the Community has  a deficit and which therefore has to be imported, rather  than sugar or isoglucose. And yet those concerned estimate  that there is potentially capacity to absorb several hundred thousand tonnes of sugar. The group of measures  should therefore be managed in such a way as to make full  use of this internal outlet in order to absorb the  surpluses rather than tackle it using imports.The administrative management by the Commission and the  Member States4.18. The sugar and isoglucose market is a highly  organized sector. In the first place, the products  concerned are of agricultural origin and must necessarily  be obtained by industrial processing. Second, the product  which is principally concerned, white sugar, is a  homogeneous product for which the regulation provides only  one quality. Lastly, the industrial plants, which provide  the inevitable link between agricultural production and the  consumer product, are not very numerous, as seen above  (200 sugar refineries belonging to fewer than  100 undertakings). There are even fewer isoglucose plants  than sugar mills, and ownership is especially concentrated,  for the greater part within the sugar industry.4.19. As the organization of this market is concentrated  on a relatively limited number of clearly identified key  points, its management and control are therefore relatively  uncomplicated by comparison with other markets. A system of  production quotas is easy to manage for so few direct  beneficiaries. Likewise, the collection of levies, to cover  part of the financing requirements, from so few economic  agents is easily effected and monitored.4.20. It is therefore not surprising that the  administrative organization, at the level of both the  European Commission and the national authorities, is  generally well ordered. The management procedures are generally competently implemented, i.e. with good knowledge  of this relatively transparent market and on the basis of  relatively reliable data. The administrative control is  further reinforced by very regular contacts between  Community and national departments, particularly at the  weekly meetings of the management committee. Any  observations made in the preceding paragraphs on the  effectiveness of the administrative organization are to be  understood in this general context.5. ConclusionA seemingly coherent system5.1. By comparison with other agricultural markets, the  sugar market is, in principle, relatively easy to manage  and to monitor. Sugar consumption is homogeneous. The  product does not come in different qualities, any  variations being a question of different presentations. The  raw material obtained from agriculture is processed  industrially. For technical and economic reasons, this  processing is carried on in a very limited number of plants  (of the order of 200) through which the product has to  pass.5.2. This is a heavy industry, requiring substantial  investment and in which policy needs to be developed  according to clear long-term guidelines. But the limited  number of companies concerned (less than 100 at present,  and the numbers are declining) makes it easier for the  operators to unite in defence of their interests, to the  point where they could establish dominant market positions,  thereby jeopardizing the conditions required for genuine  competition.5.3. The management mechanism implemented on this market  presents manifest peculiarities by comparison with other  common market organizations while nevertheless sharing  certain customary features, such as the prices system and  the institution of a levy or import and export refunds. The  peculiarities are the following:a)a simple general system of production quotas; b)the costs of disposing of the excess of production over   consumption are usually fully financed from production  levies;c)a system of equalizing storage costs between the  producers and the main sugar stockholders.These peculiarities can be attributed partly to historical  reasons, such as the existence, when the Sugar CMO was set  up in 1968, of a problem of surpluses and disparities  between the constituent sugar-producing economies, and  partly to the specific structure of the market, as  mentioned above (paragraph 5.1). Taken together, these  measures, both traditional and special, constituted one of  the potentially strongest and most effective mechanisms for  ensuring the regulation and control of a common market  organization.A system adrift5.4. After 22 years of common organization of the markets  in the sugar sector, it must be concluded that the  experiment of organizing these markets on a Community basis  has failed. The way the system has developed has run  counter to the very concept of the common market, as  contained in Article 40 of the Treaty, and several of the  essential objectives assigned to the Common Agricultural  Policy by Article 39 of the EEC Treaty have not been  attained. The fact is that while certain principles  proclaimed by this Article (increased productivity,  security of supply) were achieved long ago, the same cannot  be said of others (rational development of agricultural  production, stabilization of the market and reasonable  prices for the consumer). Furthermore, an additional  objective which came to the fore in the 1980s, namely the control of production and thus of the expenditure linked to  surpluses, is especially far from being achieved in the  sugar market, where oversupply is of the order of 150 % and  total spending is of the order of 2 000 Mio ECU.5.5. As things stand currently, the European market in  sugar is anything but a common market: it is no more than  the sum of the individual national markets. Production is  tied to the territories of the Member States by production  quotas which are set per Member State. More effective  production cannot be developed because less efficient  production is protected. The initial disparities which  existed when the CMO was set up, or when new members  joined, are still there. So-called transitional measures  have played a large part in this process because they have  been kept in place beyond their original deadline. The then  Member of the Commission with responsibility for  Agriculture, who was a Vice-President of the Commission,  made the following comments in a speech to the Economic and  Social Committee on 28 September 1967, and therefore right  in the middle of the preparatory stages of the sugar CMO:  'There are grounds for fearing that at some time in the  future the Council will agree upon a system whereby after a  certain period it will no longer be possible to achieve a  common market in sugar (...). All the measures that we must  take should be such as to make it possible to open  frontiers after the transitional period, resulting in  specialization in the production of sugar. This question  deserves particular attention, since it is the first time  that we have encountered such difficulties and that  national interests have been defended so rigorously.`5.6. In fact the system of production quotas, which has  been a major idiosyncrasy of this market since it was set  up and is, in theory, an effective means of controlling and guiding production, is the factor in the equation that has  led to the ossification and under-optimization which  currently characterizes this market. Instead of allowing  backward regions to adapt and making it easier for overall  production to develop towards a macroeconomic optimum, with  a common market as the ultimate aim, the way in which the  system has actually been implemented by the political  authorities has tended rather to move the sugar market in  the opposite direction, away from its objectives. The quota  instrument has been systematically extended with every  change in the system, in order to safeguard producers who  were less efficient from the start, especially in Italy,  and subsequently to satisfy new Member States, whether  their natural conditions were suited to growing sugar beet  or not, so as to make them self-sufficient at least - with  the characteristic examples of the Norwegian quota for  Denmark and the new sugar beet production quota in mainland  Portugal. The instrument has also been used both to offer  guarantees to the former Commonwealth countries that their  exports of raw sugar to the United Kingdom will be  maintained and to ensure this supply of raw material for  the British industry. The quota mechanism has even  prevented isoglucose, which costs less to produce, from  competing with sugar.5.7. The quota system has thus produced the opposite  result to what was initially planned. If we consider that  it is principally the nationalization of the quotas which  has made this instrument ineffective, and even counter-productive, we must conclude that a production management  policy based on a system of production quotas, especially  when price conditions are generous (see paragraph 5.11), is  bound to fail if it takes the form of quotas defined for  and managed by each Member State and then perpetuated indefinitely, de facto if not de iure, as can be seen in  the case of sugar.5.8. The system thus implemented has allowed the common  sugar market to reach a rate of oversupply of as much as  173 %, and around 150 % on average for the last ten years.  This market thus boasts the greatest surplus of all the  common agricultural markets. Given that this surplus has to  be disposed of on the world market, where the level of  prices averages roughly half of the guaranteed Community  price - a particularly unfavourable ratio - and that around  two-thirds of these exports receive refunds to make up for  this difference, the result is an extremely expensive  mechanism, particularly in relation to other markets. The  truth is that sugar beet sowing in the Community could be  reduced by a minimum of 20 % at no risk to the internal  market supply. This situation is far from the principle of  economy which - the Court is bound to point out - is an  integral part of sound financial management.5.9. One of the objectives that the creation of a common  market is supposed to achieve is regional specialization.  It has to be observed that this has not been achieved, for  the following reasons:a)in the first place, national quotas have been allocated,  with each successive enlargement, to countries which  were not all equally suitable for beet cultivation, so  that they have each become more or less self-sufficient  in sugar. From the very beginning, certain measures  included in the basic regulation and perpetuated  thereafter, such as derived prices, mixed prices and  national aids, have made up for a lack of economic  efficiency on the part of the national producers  concerned;b)originally, the B quotas, as specialization quotas, were  by nature essentially mobile (the term 'migratory  quotas` was used). On the one hand, they have been  gradually nationalized, and, on the other, the levy  intended to finance their exports has stopped being  selective. The fact is that the institutional price is  so generous that B sugar is produced even in the regions  which are least suited to beet sugar production and the  collection of differentiated A and B levies, in varying   proportions from one Member State to another, amounts to  a mechanism for the distribution among the Member States  of the costs that arise from exports of quota sugar.  B sugar can be produced with almost the same confidence  as A sugar.5.10. In actual fact, C sugar is the one that has become  the real focus for specialization. This non-quota sugar,  which receives no Community guarantees and must be sold on  the world market at world market prices, is produced in  quantities far in excess of the level of variations which  can be attributed to weather conditions. This production  cannot fail to have budgetary consequences. In fact, the  volume of C exports helps to depress the world price and,  thus, tends to increase the rate of the export refund:  these exports therefore increase the cost of exports of  quota sugar. Furthermore, when the world rate is  favourable, producers give preference to exports of  C sugar, to the detriment of quota sugar. The combined  financial effect of these phenomena amounts to several tens  of millions of ECU a year, which have to come from the  Community budget.5.11. The extent of C sugar production and exports can  only be explained by the level of return obtained from  quota sugar production, thanks to generous institutional price conditions. Further advantages are obtained from  specific measures, such as the right to carry over part of  the C sugar to the following marketing year as A sugar and  receive a storage allowance on the stocks concerned. In the  current market situation, these facilities are no longer  economically justifiable.5.12. It is clear from the preceding paragraphs that the  current guarantee level (quantities and prices) is too  high. The B quotas are seen as self-financing export quotas  when, in fact, they amount to a surplus which ought to be  competitive on the world market without the need for aid.  In this way the Court considers that the overall amount of  guaranteed quantities could be reduced. A large part, and  even the totality, of the B quota could be treated on the  same basis as C sugar is at present, although there would  still be a distinction in terms of the level at which the  levy would be set, and therefore one of pricing between A  and B within this reduced amount. This would allow  production to be guided geographically towards an economic  optimum, while the disposal costs, similarly reduced, could  still be financed.5.13. In sharp contrast to the remarkable oversupply of  sugar, the supply of the alternative, cereal-based  sweetener, in the form of isoglucose, has been frozen at a  mere 2 % of the maximum quota. Technically speaking, about  25 % of sugar consumed could be replaced by isoglucose. The  Court also notes that, while the countries of the South are  more suited to the production of high-quality cereals than  to sugar beet growing, they are slow to explore this  interesting possibility.5.14. Around one third of the Community's raw sugar  exports, or 1,5 Mio t., is intended to balance out preferential imports of raw cane sugar, the bulk of which  comes from the ACP countries. While this practice could  originally be explained by the existence of a refining  industry in the United Kingdom and Portugal when they  joined the Community, it is harder to justify in the long  term, particularly since the Community A quota, on a par  with which this ACP sugar is put for guarantee purposes, is  still sufficient to meet the Community's domestic  consumption needs. To the extent that this aid for the  production of ACP sugar is in the nature of development  aid, it ought to be treated as such in the budget.  Furthermore, if this aid must be for sugar specifically,  the Court wonders whether a simple price guarantee system  could not be set up for producers in the ACP countries  concerned, thus obviating the costly physical to-ing and  fro-ing of the product itself.5.15. In view of the relative importance of Community  sugar exports on the world market, accounting for around  one quarter of the market as a whole and around one half of  white sugar, the impact is undeniable. The depressive  effect constitutes an advantage for the often poor importer  countries which obtain their supplies on this market, but  it is also an economic obstacle for the producer countries,  particularly the developing countries, which are sometimes  greatly dependent on this kind of production in their  attempts to find profitable export outlets. A re-examination of the system would seem to be indicated, in  the context of the current discussions with its trading  partners in the Uruguay Round.Substantial costs5.16. The characteristics of internal or external macro-economic management generate substantial costs for the   Community finances and for the consumer:a)the very high cost of the structural surplus supply (corresponding to more than one third of the value of internal consumption), is a burden both on the budget  and on the final consumer;b)the budgetary cost of the preferential imports is, in  the Court's opinion, an unnecessary burden on the  appropriations for the Common Agricultural Policy;c)the specific effects of the production and export of  C sugar entail invisible additional expenditure against  the Community budget.To all this must be added the illusion of the so-called  self-financing principle, as will be reiterated below.5.17. Bearing in mind all its constituent parts, the sugar  market is relatively simple to control and the  administrative organization in place at Community and  national level presents a relatively well ordered picture.  The management procedures are generally competently  implemented, on the strength of relatively reliable data  and very regular contacts between Community and national  departments. There is nevertheless one major shortcoming.  In accounting terms, more specifically where the so-called  self-financing mechanism is concerned, the real operation  of this, as defined in the basic regulation, and the  achievement of its aim, as set out in the recitals to this regulation, are not subject to any ex post auditing, as the  principles of sound financial management would require.5.18. This concept of self-financing, or of 'budgetary  neutrality`, comes down to the principle affirmed since  1968, but much vaunted since 1981, of the financing of the  costs of disposing of the excess of Community production  over consumption by production levies. In spite of its  apparent simplicity, this concept warrants some  qualification:a)in the first place, this does not mean that the entire  Community surplus is covered by this mechanism: part of  it is still a structural burden on the budget. This is  mainly the cost of exporting the equivalent of the  imports, a sum of around 761 Mio ECU per annum. Finally,  not including the equalization of storage costs, which  is a whole system in itself, 'self-financing` covers  just less than one half of the market cost;b)secondly, the net burden on the budget induced, as with  the other CMOs, by the application of the double ECU  conversion rate (the agricultural rate for the  conversion of the unit amounts and the budgetary rate  for entering the financial consequences in the accounts)  should be highlighted: it has amounted to around  44 Mio ECU on average over the last six years but has  been of the order of 100 Mio ECU over the last two  years;c)lastly, even though part of the costs covered by the  production levies is paid by the sugar producers, this  cost is passed on to the consumer in the level of the  institutional price; the nub of the self-financing  system is thus the fact that the consumer, rather than the taxpayer, bears a considerable proportion of the  cost of the system: it is perhaps this expedient which  sustains the mistaken idea that this market is self-financing, is no burden on the budget, or even costs the  Community nothing.5.19. Beyond these initial observations, the Court's  analyses, while revealing that no conclusive reconciliation  is feasible within the current system of accounting,  nevertheless raise doubts, especially as to the accuracy of  the amounts used, and included in the calculation of the  levies, as regards the costs of export refunds. Considering  the laborious nature of these analyses, on the one hand,  and in view of the importance of transparent, verifiable  management, on the other, it would be desirable to provide  for specific reference to each marketing year in the system  for the declaration of revenue and expenditure by the  Member States. This can be readily achieved, since the  Member States already have this information available for  their own management purposes.5.20. The sugar market, which accounts for 2 000 Mio ECU  in the Community budget by way of expenditure in respect of  this CMO and about 1 200 Mio ECU in terms of revenue, costs  the Community and the consumer much more than it should.  This is particularly as a result of non-specialization and  over-supply on artificial conditions and is, more  generally, the result of the tendency to short-term  thinking, national protectionism and optimistic evaluation  which has always marked the process of policymaking when  the system has come under review and the market has been  enlarged. Indisputably, there are lessons to be learned  from the past for the next review of the CMO, which is due  in 1993, following the two-year extension of the current  system on which the Council of Ministers has just decided. The coincidence of the dates is too significant for the  Court not to stress its importance - sugar cannot be  excluded from the radical changes which the single market  calls for.This report was adopted by the Court of Auditors in  Luxembourg at its meeting of 12 September 1991.   For the Court of Auditors   Aldo ANGIOI   President>TABLE>THE COMMISSION'S REPLIESGENERAL CONSIDERATIONSThe Commission is pleased to note that the conclusions set out in Part 5 of the Court's report make no mention of any violation of the rules governing the sugar sector or any negligence in their application.Readers pressed for time may also refer to the Commission's conclusions.1. Presentation of the common organization of the marketThe mechanisms by which the system is managedProduction quotas1.15. The Commission would point out that the Member States, when redistributing quotas amongst companies, must take account of the interests of all the parties concerned, and in particular those of sugar-beet and sugar-cane growers, within the strict framework of Community rules. The Commission keeps a watch on how these rules are applied.The other aspectsRules on importation1.17. The Commission would refer to the final figures for Community sugar supply over the production years 1986/87 to 1989/90.The quantities of sugar imported are shown in the following table.The COM's financial and budgetary systemBudgetary nomenclature1.22. Some revenue and expenditure relating to the sugar sector may be found under budgetary headings other than those mentioned in Table 2 of the Court's report, although such revenue or expenditure is on a smaller scale.The items concerned are the import levies (Chapter 10 of Title I: Own resources) and the export refunds on sugar used in processed products (Chapter B1-30 of Title B1-3: Ancillary expenditure). The revenue from import levies is estimated at ECU 190 million (B) and the expenditure on export refunds at ECU 180 million (B) (average for the four marketing years from 1986/87 to 1989/90).>TABLE>The Commission would point out that the costs incurred by the Member States on the collection of sugar levies are charged to the Community budget in the same way as the cost of collecting the Community's other own resources. These costs therefore appear in Chapter 19 of the revenue part of the Community budget.The 'remarks` relating to budget heading 1119 were not incorrect but incomplete. The Commission has amended the said remarks in its preliminary draft budget for 1992.The audit's objectives and detailed arrangementsThe Court's earlier observations1.27. In 1987 and 1988 the Council, acting on a proposal from the Commission and having consulted Parliament, adopted measures for the introduction of an additional levy (known as the 'special elimination levy` for the 1986/87 and 1987/88 marketing years). These measures were in line with the recommendations made by the Court in its 1985 and 1986 Reports.From 1986/87 onwards the Commission also carried out additional analyses and checks whenever prices or levies were being fixed, to demonstrate clearly that a financial balance was being maintained between the expenditure borne by Community producers and the revenue from the corresponding levies.In 1989, moreover, following the observations made in the Court's 1988 Report, the Commission began to publish a shortened version of the results in the Annexes to the Financial Report of the EAGGF Guarantee Section.2. The internal macro-economic consequences of the Community scheme Background to the quota systemThe second sugar regulation and the first enlargement of the Community (1975-1981)2.12. Although it is true that the world market is prone to brief crises, security of supply must be guaranteed at all times, particularly on such a speculative market.2.15. One of the factors taken into consideration when setting the quotas for the new Member States was the traditional level of production over a reference period. The fact that Norway did not join the Community is not, in the Commission's opinion, a good reason for reducing the quota allocated to Denmark for its traditional production of the 50 000 tonnes in question, since the exports concerned are obviously covered by the levies.General assessment of the evolution of the quota system2.29. The Commission would point out that the maintenance of the quota system as a means of keeping production under control has in fact limited the quantities which qualify for Community price guarantees. The fact that the Community has allocated the quotas on a geographical basis reflects its  determination to maintain a certain level of production throughout the Community and shows its concern for rural society and for the maintenance of optimum farming conditions in all regions. Excessive specialization would have had disastrous consequences for the farming population's standard of living and for rural development in certain regions.The Commission is relieved to note that, at the time, the 'fathers` of Community agriculture showed concern for rural society and for maintaining optimum levels of agriculture in all regions. In this context, moreover, one must not forget the other aims of Article 39 of the Treaty, i.e. raising the living standards of the farming population in the regions in question, and the consequences which any change of policy would have on rural development. These objectives are as praiseworthy as extreme specialization (which is artificially contrived in some cases).Evolution of market supply conditionsThe supply surplus2.30. It should be noted that Community white sugar is sold on the world market where there is a real demand that cannot be satisfied, in the short term at least, by other countries.Security of supply2.31   2.33. The Commission notes, but does not necessarily endorse, the Court's calculations indicating that the areas sown to sugar beet could be reduced by 20 % without endangering the Community's security of supply. The Commission wonders, however, what other type of farming would replace beet growing if it were to follow up this suggestion and what extra costs this would place on the Community budget if cereals or some other product had to be exported. The Court's statement has to be analysed in the overall  context to assess the effects this approach would have on other sectors and on the Community budget.The rational development of production, the distribution of quotas and the attitude taken by the tradeApplication to sugar beet cultivation and the creation of specialization quotas2.36. The Community rules on quotas do not cover this new concept of 'migratory B quotas`. Since the outset the B quota has always been linked to the A quota, having been defined as a percentage of the A quota or by reference to B production. If there is to be any 'migration`, it would be by the total or partial transfer of A + B quotas between companies.The actual distribution of quotas2.37   2.38. The Commission would point out that official prices in the sugar sector, as expressed in ecu terms (A), were frozen for the marketing years 1985/86 to 1988/89 and were actually lowered by 2 % in 1989/90. This policy on prices has to be seen in the general context of support for other agricultural sectors.The prices applicable in the Community are quite in line with those in other comparable industrialized countries where a support system is in force.The Commission has of course no objections to a more dynamic policy, even in the southern regions of the Community where specialization is feasible. The Commission should also mention in this connection that it still favours the idea that quotas (established on the basis of reference production rather than consumption) should be allocated directly to undertakings without the allocation of national basic quotas. This was what it proposed to the Council in 1974. See also the reply to point 2.29.The other general provisions affecting economic effectivenessMixed prices2.39   2.43. The Commission has twice proposed that Member States should no longer be free to apply a system of mixed prices. As it is, such a system has never been followed throughout the Community.Regionalized prices2.44. Contrary to what the Court has claimed, the price supplement in question does not have the effect of encouraging production in the region concerned but that of ensuring a certain minimum level of production.In the Commission's opinion, Italy is still in structural deficit (as is the Ireland/United Kingdom area), if the quantities of white sugar wich it produces from beet are compared with total consumption in that country. As pointed out in the Commission's proposal for a production quota system as from 1 July 1991 (COM(90) 323 final/2 of 26 September 1990), annual imports amount to approximately 1 200 000 tonnes of ACP sugar, whereas in 1988/89 the quantities produced totalled 1 304 000 tonnes and consumption was running at 2 375 000 tonnes.National aid2.47. The third subparagraph of Article 93(2) of the EEC Treaty states that the Council may, acting unanimously and on application by a Member State, decide that the aid which that Member State intends to grant is to be considered compatible with the common market. This is the procedure which has been followed until now as far as national aid in the sugar sector is concerned.Specific problems in some Member StatesRestructuring in Italy2.49   2.53. Community policy on sugar production in Italy is a good example of the complexity of factors to be taken into consideration and demonstrates the Community's determination that the optimum level of economic efficiency should not be seen as the sole objective.The situation with regard to isoglucose2.63   2.67. The Commission takes the view that the inclusion of isoglucose in the market organization for sugar was completely justified, bearing in mind that the markets for isoglucose and liquid sugar are closely linked and that the products in question are fully interchangeable. It is out of the question that the Community should give a free rein to the manufacture of isoglucose from basic products which are usually imported from non-member countries without any financial constraint, whereas sugar production is subject to a quota system with the financial responsibility falling on Community producers. This basic consideration has, moreover, been explicitly acknowledged by the Court of Justice in those cases brought before it by isoglucose manufacturers questioning whether they should be subject to a system of production quotas.The Court has consistently dismissed the actions brought by these manufacturers, ruling that isoglucose quotas were perfectly justified as long as a production quota system applied to sugar (Judgments of 29 October 1980 in Case 138/79 (grounds 26 and 27) and in Case 139/79 (grounds 23, 24 and 26)).Conclusion2.68. The Commission emphatically disagrees with the Court. The objectives of Articles 39 and 40 go beyond those stated in this paragraph.3. International macro-economic aspects and the world sugar marketThe world marketThe Community's place in the world market3.5. The Commission would point out that the figure of 12% is based on theoretical assumptions which do not reflect any practical reality.The economic impact of C sugarThe relative importance of C sugar production3.8. The fact that the Community rules allow quantities to be produced over and above the quotas reflect the liberal spirit in which the rules in question were drawn up and which rejected the idea that the production of quantities in excess of those covered by Community guarantees should be prohibited.Economic conditions for non-quota production3.13. Even a manufacturer paying mixed prices would have to restrict his purchases of beet to a level enabling him to make a profit on his production overall.The influence of the carry-over mechanism3.14   3.15. The Commission shares the Court's view that the regular carry-over of quantities of C sugar does not reflect the original purpose of the carry-over system for such sugar. That is why the Commission recently proposed to the Council [COM(90) 323 final/2 of 26 September] that C sugar should no longer qualify for the reimbursement of storage costs. As mentioned in the reply to point 5.11, however, this proposal has not been adopted.The effect of C sugar on the cost of quota sugar exports3.16   3.20. In addition of the answers given to points 2.31 to 2.33, it should be pointed out that the Court's calculations are based on the assumption that the quantities of C sugar exported by the Community will not be replaced by sugar exports from other countries.If the quantities of white sugar available on the world market were to fall (as a result of C sugar exports coming to an end), the developing countries to which the Community mainly exports would tend to reduce their consumption. This would also be true if world market prices were high and placed a brake on consumption in these countries. Moreover, the Commission considers that when such white sugar is exported under Community guarantee on a regular basis and in limited quantities, it has in fact a regulatory influence on the supply of white sugar to these developing countries and, consequently, on the market for white sugar, which is quite distinct from that for raw sugar. Another point to remember is that refining capacity is mainly located in the industrialized countries and operates to supply the latter, generally speaking.The Commission would stress that the effects of C sugar production to which the Court refers derive indirectly from the main objectives pursued. On the one hand, the Community endeavours to implement a responsible export policy by issuing regular invitations to tender which do not give rise to any sudden shifts on the world market. On the other hand, it has to leave scope for production over and above the quotas. As things stand at present, the rules governing the sugar sector must leave scope for such production; otherwise the Court of Justice is bound to find against the rules concerned.The effects of the ACP and Indian sugar protocol3.21. Most of the observations made by the Court in this part of its report are covered by the replies given by the Commission to point 5.14.As regards Community expenditure arising from preferential imports, i.e. the export refunds on an equivalent quantity of sugar, the Commission considers that it is in accordance with the financial rules to treat such refunds as expenditure on the agricultural sector, explaining their special nature in the remarks concerning the chapters in question. When faced with the choice between imports and its own production, the Community chose imports in order to meet its commitments vis-à-vis the United Kingdom and ACP countries (cf. Protocols Nos 17 and 22 to the Act of Accession of the United Kingdom).4. The consequences for the public finances of the CommunityDevelopment of the budgetary situation4.1. The Court does not take into consideration the fact that much of the gross expenditure, such as refunds, is attributable to the exportation of a quantity equivalent to the Community's imports of preferential sugar.The Court's observations, particularly its remarks establishing a link between expenditure and revenue, are at odds with the principle of financial solidarity, which has been acknowledged by the Court of Justice itself (Judgment of 22 January 1986 in Case 250/34, cf. grounds 19, 20, 21, 22, 25, 30 and 32).The costs of the surplusCost-sharing4.2. The Court claims that the levies paid by the producers are 'passed on in the prices and thus charged to the consumer`.The Commission would point out that the levies are charged on production and not on consumption and that the ACP costs, which represent the bulk of budgetary expenditure, are totally unrelated to consumption.The method for calculating the production levies is based on the identification of that proportion of expenditure which is to be borne by Community producers.In the Commission's opinion, the approach taken by the Court calls for the exercise of great caution, particularly as regards the way in which imports and variations in stocks affect overall expenditure on export refunds in a given year, as compared with the revenue for the same year.4.3. The Commission would draw attention to the fact that the Court's calculations for each marketing year, as shown in Table 14, do not take account of the difference between the sugar year and the budgetarry year.The Commission feels that the Court's presentation of the 'self-financing` arrangements is ambiguous, to say the least. It lumps together the costs inherent in preferential imports (which are the exclusive financial responsibility of the Community) and those inherent in the disposal of Community production surpluses (which, by virtue of Articles 28 and 28a of the basic regulation are charged solely to the producers via the production levies). Thus, the comparison of the percentages quoted (42% and 58%) is meaningless in the context of the self-financing arrangements for the sugar sector.The induced costs4.5   4.6. The Commission would point out that this analysis and the assumptions on which it is based are purely theoretical:a)The figure quoted by the Court (ECU 1 987 million) reflects gross expenditure, that is, it does not take revenue into account. There is no reason in any case to compare the expenditure on exports with the value of consumption. The two figures are completely independent of each other.b)The Commission would stress that the collection  of production levies from companies necessarily entails costs for the companies concerned. The levies are paid into the Community budget as the Community's own resources, thus ensuring that no financial costs are passed on to the sugar consumer in his capacity as a Community tax-payer.c)The budgetary cost which the Court identifies as arising from the Community's obligations under the ACP-EEC Protocol on Sugar and under the Agreement with India consists of expenditure on export refunds which must, under the accounting and budgetary rules, be classified as agricultural expenditure. In the remarks accompanying the budget headings concerned, however, the Commission takes care to explain the special nature of such expenditure.d)The Commission would draw attention to the hypothetical nature of the Court's estimates. In particular, they assume that the Community's exports of C sugar will not simply be replaced by white sugar from another exporting country.Control of self-financingThe mechanism4.8. Bearing in mind the considerable quantities of sugar imported into the Community, particularly under the preferential arrangements, the Commission sees nothing remarkable in the fact that the quantities which have to be exported as a result exceed surplus production under the A and B quotas.>TABLE>The following table shows the final supply balances for Community sugar over the last four marketing years and clearly indicates what percentage of Community sugar exports is attributable to surplus production under the A and B quotas, as compared with those attributable to imports or the run-down of stocks:The problem of accounting control and Accounting analysis and The results of the analysis and Assessment of sound financial management in the area of self-financing4.9   4.14. In 1981 when the present rules were being drawn up, the Commission considered the possibility of fixing the production levies on the basis of accounting data but decided that this was not feasible, largely because of the same technical difficulties as the Court encountered in the course of its attempt at accounting control.With reference to point 4.13(a), the Commission's statistical approach is based on the legislation as it stands. The Commission regrets, therefore, that the Court should have concentrated all its attention on the question of accounting control/assessment. At the same time, it is pleased to note that the Court's audit failed to reveal any irregularity or illegality.Other specific observations on sound financial managementExport refunds4.15. The Court finds that the Commission does not always check on the fulfilment of export commitments established when contracts are awarded.The Commission has no system for this purpose but together with the Member States it operates a system to monitor the issue of licences, thus enabling it to keep track of any operations thought to be abnormal. This is done not only with a view to sound management but also to ensure that the self-financing arrangements function as they should. The surety mechanism and the level at which the surety is set (which depends on the licences issued under individual tendering procedures) have so far been successful in preventing irregular operations.Since 1968 the tender system, which was the first to be used for market organization purposes, has made it possible to maintain control over the quantities exported.Production refunds4.16   4.17. The Commission notes the Court's observations.5. ConclusionA seemingly coherent system5.1. Now that the market organization for sugar has been in force for more than 23 years and has undergone many changes (despite appearances), the Commission feels sure that the management and control arrangements for this sector are working very effectively, not only in the Member States and the companies concerned but also within the Commission itself. The rules may be complex but the sugar sector is more complicated than it seems, necessitating rigorous management and strict controls.Sugar production from Community-grown beet or cane is thus only one of the factors affecting the management of the sugar marketing year, since the volume of sales, whether for internal consumption or for export, is also dependent on the quantities imported, the level of intra-Community trade and variations in stocks. In addition, sugar is not only an agricultural product but also an industrial product, with a market behaviour which reflects this status and which is unlike that of other products covered by a market organization.5.2. The Community rules on competition also apply to the sugar sector. The Commission remains vigilant in this area so that it can, if necessary, take the measures needed to deal with any infringement, as was the case in 1973 (Commission Decision of 2 January 1973, OJ N° L 140, 26.5.1973, p. 17).A system adrift5.4. The common organization of the market in sugar is in line with the principles laid down in the Treaty. Both the Commission and the Council ensure that each individual measure is in line with these principles.The best proof of the market organization's success has been the introduction of Community financial solidarity with, on one hand, the establishment of the self-financing system (provided for in Articles 28 and 28a of the basic regulation, Council Regulation (EEC) N° 1785/81) and, on the other, the compensation system for storage costs, also self-financed (as provided for in Article 8 of the said Regulation).The Commission takes the view that these aims are generally speaking in line with the objectives specified in Article 39 of the Treaty. It would point out that stabilization measures have always existed in the sugar sector, in the form of production quotas or the self-financing arrangements. The latter, which were first introduced in 1968 and further developed in 1981, 1986 and 1988, are currently applied to ensure, in particular, that over a given year Community producers meet the full cost of the disposal of Community production surpluses.The supply rate of 150% quoted by the Court takes account of imports, which are by definition not Community production.As far as production under the A and B quotas is concerned, the expenditure entailed by Community surpluses is fully covered by the producers.5.5. It is true that quotas are set on a regional basis (and are then allocated to individual companies) and that these quotas are primarily administered by the Member States (according to strict Community rules, however). This policy reflects the Community's determination to maintain a certain level of production (by both beet-growers and sugar manufacturers) in all regions of the Community, thus making a direct contribution towards the development of rural society. Such is the Commission's main concern.5.6   5.7. The Commission acknowledges that it would be theoretically preferable if a system of production quotas did not have to be applied but experience has shown the effectiveness of such a system as an instrument for managing the sector and keeping production under control.The fact that production is continuing in the regions described by the Court as 'less efficient` indicates that the profitability per hectare would still be satisfactory in such regions even if the aid came to an end. Moreover, consideration must be given to the farming aspects of the question and to the socio-economic and political factors. When fixing the quotas, the Community took into account the level of existing production in each region and in the case of Portugal the decisions taken reflect the Community's wish to encourage beet growing, particularly if no other agricultural product represents a suitable alternative, and to avoid a total dependence on imports.In the Commission's opinion, the quota system must also apply to isoglucose production. Given the similarities between this product and liquid sugar and the fact that for any quantity of isoglucose produced an equivalent quantity of sugar has to be exported, it is only right that isoglucose producers should pay for their share of the 'surpluses`.The Commission does not feel that prices in the sugar sector are 'generous`, especially if one compares the prices applicable in the Community with those in other industrialized countries (there is usually no economic reference point for gauging the prices obtained in the developing countries). This does not mean, however, that the guaranteed prices in the sugar sector should not be reduced.The management of the sugar necessitates a considerable volume of administrative work, which only the Member States have so far been able to perform. In terms of cost-effectiveness, therefore, the Commission can see no advantage in transferring this work to its own staff. The Commission would also point out that in 1974 it unsuccessfully proposed that quotas should be allocated directly to companies.5.8. One consistent feature of the sugar sector has been the contrast between total freedom of production, on the one hand, and the quota restrictions on the quantities qualifying for Community guarantees, on the other. Since the self-financing arrangements ensure that producers bear the full cost of the disposal of Community surpluses produced under the A and B quotas and since the producers bear the full cost of any exports of non-quota sugar (C sugar), the Commission fails to see how the present system represents a departure from the principle of economy. Nor can it see the financial need for a reduction in areas sown to sugar beet, a measure which would in any case have serious consequences for the rural economy in the regions referred to by the Court.5.9. The quotas for the new Member States were based on the customary level of production over a reference period. The Commission would point out that in principle all national aid has been granted for a limited time only, although the time limit may have been extended. Under the present rules there is to be a 30% reduction in authorized aid between 1988/89 and 1992/93.In the Commission's opinion, the economic efficiency of production represents only one important factor in a complex agricultural policy where the ideal should be the optimization of all the various factors. Mixed prices have never been applied throughout the Community but only in those regions which may be considered most suitable for beet growing (e.g. the Netherlands and Belgium). On two occasions the Commission has proposed that Member States should no longer have the option of a mixed price system, but no action has been taken on these proposals.5.10. The rule allowing the production of non-quota sugar (C sugar) safeguards the principle that sugar and isoglucose may be freely produced within the Community but places the entire financial responsibility on the producer, who is obliged to sell such sugar without guarantee on non-Community markets.Although largely dependent on the quantities of sugar carried over, exports of C sugar help to stabilize world market prices, since they can be adjusted to reflect price fluctuations.The Commission does not share the Court's view that sugar exports as such tend to depress the world price. In most cases the Community's exports supply countries which are unable to produce their own sugar. If the production of C sugar was to be scaled down or stopped, this would certainly tend to push the world price upwards in the short term, but in the medium and long term Community exports would of course be replaced by the white sugar supplied by other exporting countries and (who knows?) produced in circumstances every bit as artificial as those obtaining in the Community. During periods when world prices have been favourable, exports of C sugar do not appear to have depressed the world market to the detriment of Community sugar qualifying for an export refund. On the contrary, traders have continued to submit acceptable bids whenever invitations to tender are issued. For these reasons the Commission does not feel that C sugar is indirectly placing an extra burden on the Community budget. If the growing of C sugar beet was halted, other crops such as cereals would automatically be sown in their place, which would have the effect of increasing the expenditure chargeable to the Community budget in the sectors concerned.5.11. Since the production of C sugar depends on world market prices being high and since such high prices are recorded only once every seven to ten years, it can reasonably be claimed that the existence of C sugar has only a marginal influence on the said market.The Commission recently submitted a proposal whereby C sugar carried over to the following marketing year would no longer have been eligible for the reimbursement of storage costs, but no action has been taken on this proposal.5.13. It is wrong to say that the countries in the south of the Community such as Italy are slow to explore the possibilities of replacing sugar by isoglucose. In the south of Italy there are plans to manufacture isoglucose from a variety of sorghum. The rules governing the sugar sector place no restrictions on the quantities which Italy may transfer from the sugar quota to the isoglucose quota under its restructuring plans. The Commission would raise no objection to such transfers.5.14. The ACP-EEC Protocol on Sugar states that 'the Community undertakes for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or white, which originate in the ACP States and which these States undertake to deliver to it.` The Protocol also provides that it is to be implemented 'within the framework of the management of the common organization of the sugar market`. The physical importation of such sugar into the Community is a basic feature of the agreement reached with the ACP countries. If the Court's suggestion were followed and the raw sugar placed directly on the world market, world prices would probably be affected and the Community would be unable to fulfil its commitment, entered into at the time of the 1973 enlargement, to respect traditional patterns of trade.As regards the budget, the Commission must observe the nomenclature for the classification of budgetary expenditure but it explains the special situation with regard to the ACP Protocol and the specific agreement with India in the 'Remarks` on Chapter B1-11 and in the 'General observations` at the end of Subsection B1.It should be noted that the budgetary classification of expenditure arising from preferential imports does not prevent their special nature from being acknowledged, e.g. in the Community rules concerning budgetary discipline.5.15. If the Community's sugar exports work to the advantage of the developing countries which import sugar, as the Court claims, it is also true that the Community's commitment to import 1,3 million tonnes each year at guaranteed prices must work to the benefit of those developing countries which export sugar.Substantial costs5.16. The Commission is unable to agree with the Court's conclusions for the various reasons outlined above.5.18. The Commission does not agree with the Court's conclusions. The budgetary impact to which the Court refers is deduced from Table 15, which is in fact no more than a comparison between the effect of the 'double rate` on expenditure, on the one hand, and on revenue, on the other. Since the revenue from the sugar sector covers the proportion of expenditure charged to Community producers, it is clear that the differences found by the Court are nothing more than the effect of the 'double rate` on the proportion of expenditure which is charged to the Community budget.5.19. The Commission notes with interest the Court's suggestion for changes to the accounting system with a view to checking on the self-financing arrangements and can see no objection to this being done.Council Regulation N° 1009/67/EEC of 18 December 1967 on the common organisation of the market in sugar, OJ N° L 308, 18. 12. 1967, p. 1.Council Regulation N° 3330/74 of 19 December 1974 on the common organisation of the market in sugar, OJ N° L 359, 31. 12. 1974, p. 1.Council Regulation N° 1785/81 of 30 June 1981 on the common organisation of the market in sugar, OJ N° L 177, 1. 7. 1981, p. 4.Proposal for a Council (EEC) regulation amending Regulation (EEC) N° 1785/81 on the common organisation of the market in sugar, submitted by the Commission, doc. COM(90) 323 of 26.9.1990. This proposal led to Council Regulation (EEC) N° 305/91 of 4 February 1991 (OJ N° L 37, 9. 2. 1991).Council Regulation N° 1009/67/EEC of 18 December 1967 on the common organisation of the market in sugar, OJ N° L 308, 18. 12. 1967, p. 1.Article 26 of Regulation N° 1009/67/EEC. See Note 1.Latterly, Article 27 of Council Regulation (EEC) N° 1785/81. See Note 3.Article 22, first paragraph, of Regulation N° 1009/67/EEC. See Note 1.Article 25 of Council Regulation (EEC) N° 1785/81. See Note 3.Council Regulation N° 1009/67/EEC of 18 December 1967 on the common organisation of the market in sugar, OJ N° L 308, 18. 12. 1967, p. 1.Council Regulation N° 3330/74 of 19 December 1974 on the common organisation of the market in sugar, OJ N° L 359, 31. 12. 1974, p. 1.Annual report concerning the financial year 1985, OJ N° C 321, 15. 12. 1986, pp. 35-36. Annual report concerning the financial year 1986, OJ N° C 336, 15. 12. 1987, pp. 42-43. Annual report concerning the financial year 1987, OJ N° C 312, 15. 12. 1989, pp. 87-99.Proposal for a Council (EEC) regulation amending Regulation (EEC) N° 1785/81 on the common organisation of the market in sugar, submitted by the Commission, doc. COM(90) 323 of 26.9.1990. This proposal led to Council Regulation (EEC) N° 305/91 of 4 February 1991 (OJ N° L 37, 9. 2. 1991).Council Regulation N° 1009/67/EEC of 18 December 1967 on the common organisation of the market in sugar, OJ N° L 308, 18. 12. 1967, p. 1.Ninth recital of Council Regulation N° 1009/67/EEC of 18 December 1967. See Note 1.The question of regional specialization is looked at in detail in paragraphs 2.35-2.39 of this report.Article 23 of Regulation N° 1009/67/EEC. See Note 1.Article 24 of Regulation N° 1009/67/EEC. See Note 1.Article 27 of Regulation N° 1009/67/EEC. See Note 1.Articles 25 and 32 of Regulation N° 1009/67/EEC. See Note 1.Contribution by an FAO expert at the international sugar conference in London in 1975. This expert predicted an increase in sugar consumption in the countries with market-based economies of 25 million tonnes between 1975 and 1985 (starting from a level of about 60 Mio tonnes' consumption in 1973 in the same part of the world).Proposal for a Council (EEC) regulation amending Regulation (EEC) N° 1785/81 on the common organisation of the market in sugar, submitted by the Commission, doc. COM(90) 323 of 26.9.1990. This proposal led to Council Regulation (EEC) N° 305/91 of 4 February 1991 (OJ N° L 37, 9. 2. 1991).Council Regulation (EEC) N° 3577/90 of 4 December 1990 concerning the transitional measures and the adaptations necessary in the agriculture sector following German unification (Annex V - sugar, OJ N° L 353, 17. 12. 1990, p. 29).Proposal for a Council (EEC) regulation amending Regulation (EEC) N° 1785/81 on the common organisation of the market in sugar, submitted by the Commission, doc. COM(90) 323 of 26.9.1990. This proposal led to Council Regulation (EEC) N° 305/91 of 4 February 1991 (OJ N° L 37, 9. 2. 1991).-U. Koester and P.M. Schmitz, 'The EC sugar market policy and developing countries`, European Review of Agricultural Economics, Vol 9 (1982) , p. 190.  -I.M. Roberts, 'EC sugar support policies and world market prices, a comparative static analysis`, Melbourne, 1982, p. 217.  -J. Zietz and A. Valdez, 'The potential benefits to LDCs of trade liberalization in beef and sugar by Industrialized Countries`, Weltwirtschaftliches Archiv, Vol 122 (4), 1986.Sources as regards elasticity:  -G. Gemmill, 'The world sugar economy: an econometric analysis of production and policies`. Michigan 1976.  -J. Roberts, O. Tie and S. Murphy, 'EEC sugar policies and world market prices`, Quarterly Review of Rural Economy, Vol. 3, N° 4, 1981, pp. 309-319.  -L. Schmitz and L. Goreux, 'The sugar policies of the European Community and the United States and their impact on the world sugar market`, International Monetary Fund, DM/85/26, April 1985.  -U. Koester and P.M. Schmitz, 'The EC sugar policy and developing countries`, European Review of Agricultural Economics, Vol. 9 (1982), pp. 183-204.Calculations by the Institute of Agricultural Economics at the University of Kiel (Germany).Council Decision of 24 June 1988 concerning budgetary discipline, OJ N° L 185, 15. 7. 1988, p. 29.The so-called self-financing mechanism and the related problems of accounting verification are dealt with in paragraphs 4.6-4.14 of this report.Council Regulation N° 1785/81 of 30 June 1981 on the common organisation of the market in sugar, OJ N° L 177, 1. 7. 1981, p. 4.Council Regulation (EEC) N° 1785/81 of 30 June 1981, Article 28, paragraph 1, under d, second indent:' This average loss or average return shall be equal to the difference between the sum of the refunds and the sum of the levies as a proportion of the total tonnage of the export commitments concerned`, OJ N° L 171, 1. 7. 1981.Annual report concerning the financial year 1988, OJ N° C 312, 12. 12. 1989, pp. 87-92.If the degree of self-sufficiency is calculated in the usual way, that is, by expressing total Community production as a percentage of internal utilization, the average figure obtained for the Community is 127 % for the first four years of the current quota system (1989/1990: 129 %, 1988/1989: 128 %, 1987/1988: 122 % and 1986/1987: 129 %).