Special Report No 7/2002 on the sound financial management of the common organisation of markets in the banana sector, together with the Commission's replies
Date: 2002-09-12
Institutions: European Court of Auditors
Subjects: common organisation of markets, financial aid, financial management, import policy, market stabilisation, report, trade policy, tropical fruit

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 7/2002

on the sound financial management of the common organisation of markets in the banana sector,
together with the Commission’s replies

(pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2002/ 294/01)

CONTENTS

Paragraph

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The issues at stake in the banana market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The aims and implementation of the CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit objectives, scope of the audit and audit approach . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE MEASURES FINANCED BY THE EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weaknesses in the management of compensatory aid . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lack of precision in the legal texts and difficulties in their implementation . . . . . . . .

Impact of aid on producers’ incomes and cash flows . . . . . . . . . . . . . . . . . . . . . . . . .

Inadequate documentation in support of aid payments . . . . . . . . . . . . . . . . . . . . . . .

Minimal impact of the premium for final cessation of cultivation . . . . . . . . . . . . . . . . . . .

Non-compliance with the rules applicable to producers’ organisations . . . . . . . . . . . . . . .

Limited effectiveness of the structural programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Objectives defined in terms which are too general . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cost-effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Protecting producers in the ACP States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MARKET REGULATION MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conflicting interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sales price and consumer choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

European prices and quota rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A complex and controversial situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Complexity of the import arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disagreements with the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-XIII

1-17

1-3

4-9

10-15

16-17

18-55

18-38

21-26

27-34

35-38

39-41

42-44

45-53

45-46

47-53

54-55

56-85

56-59

56-57

58-59

60-72

60-66

67-72

3

4

4

4

5

6

6

6

7

7

8

9

9

9

9

10

10

10

10

10

11

11

11

12

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Paragraph

Page

Weaknesses in the management of quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The emergence of a secondary market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management shortcomings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Inadequate checks on imports

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DEVELOPMENTS AND EVALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The search for an interim arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Evaluation and monitoring by the Commission; future orientation of the CMO . . . . . . . .

A singularly protected market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The major evaluation in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Towards a system based solely on tariffs after 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .

73-85

73-74

75-78

79-85

86-99

86-92

93-99

94-95

96-97

98-99

CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100-107

The aims of the CMO — complexity and contradictions . . . . . . . . . . . . . . . . . . . . . . . . . .

100

A definition of objectives and measures either too general or unrealistic . . . . . . . . . . . . . .

101-102

Cost-effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103-104

Management shortcomings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

105-106

Inadequate controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107

ANNEXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

12

12

13

13

13

14

14

15

15

15

15

15

15

16

16

17

26

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Introduction

SUMMARY

I.
The banana market is the world’s second largest fruit market after citrus fruits. A common market
organisation (CMO) for bananas was introduced in that sector in 1993. Its main objective was to harmonise
and stabilise the market by means of various aid measures and to limit imports by introducing a tariff quota
system.

II.
The main objective of the audit was to examine how the Council defined the objectives of the CMO,
the way in which the Commission gave effect to them and the manner in which the implementing measures
were managed by the Member States and monitored by the Commission.

The measures financed by the EU

III.
A lack of precision in some of the basic implementing texts led to difficulties with the implementation
of the CMO, e.g. deficiencies in the information required to calculate aid, non-compliance with the rules appli-
cable to producer organisations, applications for compensatory aid in respect of quantities presented for mar-
keting by producers but subsequently not accepted by purchasers.

IV.
Some producers received additional national financial support which was not notified to the Com-
mission in advance. In addition, shortcomings were revealed in the documents provided in support of aid pay-
ments.

V.

The premium for final cessation of banana production had only limited impact.

Measures to regulate the market

VI.

The difference between world prices and Community prices results in what are known as ‘quota rents’.

VII.
a situation of persistent non-compliance with the World Trade Organisation (WTO) rules.

The system of tariff quotas initially introduced by the CMO resulted in a complex import system and

VIII.
practice and fraudulent imports.

At Member State level efficient quota management has been jeopardised by unsatisfactory customs

Developments and evaluation

After putting in place an interim arrangement, the Commission is moving towards an exclusively tariff-
IX.
based system for introduction by 2006. In doing this, its intention was to maintain adequate protection for
producers in the EU and ACP (African, Caribbean and Pacific) States without affecting the volume of imports
and with minimal impact on prices.

The Commission is expected to produce a general evaluation of the CMO at the end of 2004. This
X.
should allow an overall assessment to be made of the consequences of the introduction of the CMO and the
degree to which its initial objectives have been achieved.

Conclusions and recommendations

XI.
Some of the CMO’s objectives have not been achieved, and there have been shortcomings in the mea-
sures taken to achieve them; in addition some of the measures have had unforeseen and undesired results. Little
or no use has been made of grubbing-up premiums and alternative crops. Shortcomings in the methods used
to calculate reference prices and production prices have led to undue payment of compensatory aid and to
financial corrections. The quota rent advantage derived from the tariff quota system by the multinationals
operating in the market is approximately two to three times as great as the support given to EU and ACP grow-
ers (1).

(1) The figures quoted by the Commission in their reply relate to the rate of quota rent of 200 euro per tonne estimated by
them compared to the rate of income compensation aid of 383 euro per tonne for the year 2000 (see Annex 6). The
Court’s calculations are based on the total value of the quota rent in relation to the quota of 2 553 000 tonnes which
is some 511 million euro. This is around two to three times the expenditure for income compensation aid in 1999 and
2000.

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The vulnerability of producers within their producer organisations should be given more attention.
XII.
Furthermore, the import arrangements provided for under the CMO have proved susceptible to irregularities
and significant weaknesses were found in import controls.

XIII.
As the Commission has committed itself to conducting its first major evaluation around 2004, it
should ensure that it keeps to this timetable and that its analysis includes an evaluation of the synergy of the
various types of support for the banana sector.

INTRODUCTION

The issues at stake in the banana market

1.
The banana market is the world’s second largest fruit mar-
ket after citrus fruits. The Community consumes approximately
four million tonnes of bananas every year but only produces 20 %
of its requirements. Approximately 60 % of the Community’s
supplies comes from Latin America (see Annex 1). These bananas,
known as ‘dollar bananas’, are sold at prices below the price of
those produced in the Community. The remaining 20 % comes
from the ACP States. There are two large producer countries in
the EU: Spain, where the autonomous region of the Canary Islands
produces 400 000 tonnes per year, and France, where the over-
seas departments of Guadeloupe and Martinique produce
300 000 tonnes per year. Over the period 1989 to 2000 Com-
munity production and imports of dollar bananas increased by
approximately 6 %.

2.
Prior to 1993 various import regimes existed in the Com-
munity, hampering the free circulation of bananas within the
Community and constituting an obstacle to the establishment of
a common system for trade with third countries. Among the
Member States that are producers of bananas, national market
organisations applied quantitative import restrictions which cre-
ated an obstacle to the single market. Among the Member States
that are not producers, some gave priority to the marketing of
bananas from ACP States while others had liberal importation
rules.

(b)

free movement of bananas within the Community and implemen-
tation of a common regime for trade with third countries;

(c) ensuring adequate incomes for EU producers and for traditional
suppliers in the ACP (African, Caribbean and Pacific) States
and fair prices for consumers;

(d)

through the creation of producer organisations, improving the
efficiency of production and maximisation of earnings from
bananas produced in the Community.

The legislator thus sought to establish a balance between the sep-
arate, and contradictory, interests that existed prior to 1993.

To achieve these objectives, the Regulation introduced a

5.
number of measures:

(a)

compensatory aid (i.e. a premium per tonne of bananas mar-
keted) to balance out any subsequent loss of income; this aid
is granted to EU producers with the aim of placing them in
an equivalent position to that which existed prior to the
introduction of the CMO;

(b) a single premium (per hectare) granted to Community produc-
ers who cease to produce bananas where other crops prove
more appropriate;

3.
To achieve a single market, it was necessary to put in place
a common market organisation (CMO) to replace the various
national systems. In 1993 the common organisation of the mar-
ket in bananas was therefore introduced by Council Regulation
(EEC) No 404/1993 (1).

(c)

(d)

the introduction of a Community tariff quota system for the
marketing of bananas produced in third countries and ACP
States;

temporary aid to encourage the setting up of producer organi-
sations and to facilitate the administration of them during the
start-up phase;

The aims and implementation of the CMO

4.

The main objectives of the CMO are:

(e) aid granted in the context of operational programmes for regions
eligible for assistance from the Structural Funds, with the aim
of increasing competitiveness and improving the use of
resources in the banana sector.

(a) harmonisation and stabilisation of the market for bananas within

the Community;

(1) Council Regulation (EEC) No 404/93 of 13 February 1993 on the
common organisation of the market in bananas (OJ L 47, 25.2.1993,
p.1).

The first two measures are wholly financed through the
6.
European Agricultural Guarantee and Guidance Fund (EAGGF),
Guarantee Section, and comprise interventions designed to regu-
late the market. Since 1 January 2002 the start-up aid for pro-
ducer groups has been co-financed by the EAGGF Guarantee Sec-
tion. The latter two measures are co-financed (Member States and

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Commission) through one of the four Structural Funds, i.e. the
EAGGF Guidance Section. The aid for producer organisations is
similar to that provided in the CMO for fruit and vegetables (1);
the co-financing of operational programmes under the Structural
Funds is designed to align them with the rules (2) governing man-
agement of the Structural Funds for the benefit of regions whose
development is lagging behind.

In addition to the basic Council Regulation creating a com-
7.
mon organisation of the market in the banana sector (see para-
graph 3), the Commission adopted implementing rules including
those for (3):

(a)

the arrangements for importing bananas into the Commu-
nity (4);

(b)

the compensatory aid scheme in the banana sector (5);

(c)

the tariff quota system for agricultural products (6).

8.
The advent of the single market finally put an end to the
special arrangements operated previously by the Member States.
As a result, for bananas produced within the EU there ceased to
be an upper limit on quantities of bananas marketed in the Com-
munity, while those from the ACP States benefited from more
favourable tariffs, with compensatory aid to Community produc-
ers subject to maximum quantity limits. As for imports of bananas
into the Community, they were subject to a tariff quota system,
i.e. the duty to be charged was calculated at a preferential rate up
to a given quantity.

9.
To prevent traditional suppliers of bananas in the ACP
States being penalised by the introduction of the CMO in 1993,
the Community adopted a special system of aid for the benefit of
these producer countries, in parallel with the CMO.

Audit objectives, scope of the audit and audit approach

(b) how these measures were managed by the Member States and

monitored and evaluated by the Commission;

(c)

to what extent the objectives of the CMO were attained.

11.
A secondary objective was to analyse the reasons why the
banana import arrangements, from the viewpoint of the tariff
quota system, had led to appeals to the World Trade Organisation
(WTO) and tariff retaliation by the United States of America. The
audit therefore examined:

(a)

the effectiveness of the import arrangements as a means of
regulating the market and their compliance with international
trade rules;

(b)

the use made of import licences in connection with these
arrangements and their impact on the market;

(c)

the effectiveness of physical checks on imports and the real-
ity of the corresponding collection of related own resources.

12.
The audit focused on the management, in 1999, of the
system of compensatory aid in Spain and France. Their produc-
tion accounts for 99 % of total banana production in the Com-
munity. As a result, they receive 96 % of the aid. Audit visits were
made to the Commission’s offices, selected administrative bodies
and producers (including producer organisations) in France and
in Spain with the aim of obtaining a true picture of the operation
of the arrangements at all levels. The audit also included an
examination of projects submitted for support under the opera-
tional programmes financed through the EAGGF Guidance Sec-
tion and a general examination of the system of support for the
ACP banana-producing States. The scope of the audit did not
extend to the financing of measures in support of crops grown as
a substitute for bananas, which are covered by the REGIS Com-
munity initiative (integration of the outermost regions of the
Community) and totalled 3,5 million euro for the period 1994 to
1999.

10.

The main objectives of the audit were to examine:

(a) how the Commission gave effect to the CMO objectives
defined by the Council in the banana sector and what mea-
sures were taken to achieve them;

An evaluation of the quality and the operation of the
13.
internal control system was obtained by examining whether aid
payments (to individual producers) complied with national and
Community rules. The audit included analysis of the work of the
Commission’s offices (clearance of accounts) and of national bod-
ies involved in the management and control of the aid schemes.

(1) Council Regulation (EEC) No 1035/72 of 18 May 1972 (OJ L 118,

20.5.1972).

(2) Council Regulation (EEC) No 2052/88 of 24 June 1988 (OJ L 185,

15.7.1988).

(3) Other procedures adopted by the Commission under the CMO include
quality standards (Regulation (EC) No 2257/94), rules on producer
groups (Regulation (EC) No 919/94) and grubbing-up arrangements
(Regulation (EEC) No 1639/93).

(4) Commission Regulation (EEC) No 1442/93 of 10 June 1993 (OJ L

142, 12.6.1993).

(5) Commission Regulation (EEC) No 1858/93 of 9 July 1993 (OJ L 170,

13.7.1993).

(6) Commission Regulation (EEC) No 3719/88 of 16 November 1988

(OJ L 331, 2.12.1988).

The management of the tariff quota system by Agricul-
14.
ture DG at the Commission was also examined, including the
management of the physical checks on imports, which has been
delegated to national customs authorities. In the course of this
work auditors from the Court observed the way in which these
procedures were applied at a major EU port handling significant
quantities of bananas (Antwerp). Discussions were also held with
representatives of three multinational companies involved in large-
scale importation and marketing of bananas in the Community
and with the Commission services responsible for own resources
and customs procedures.

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Evidence was obtained by checking documents and
15.
records, and by requesting and obtaining confirmation of infor-
mation. This was rounded off by discussions with the representa-
tives of Member States and selected bodies.

27 000 hectares of which France has around 16 750 and Spain
8 500, supporting a total of some 1 600 and 10 500 producers
respectively. The number of producers in Spain reflects the small
size of holdings, of which 80 % are less than 1 ha. The budget for
compensatory aid has been set at 303 million euro for 2002,
which represents some 11 200 euro per hectare.

Budgetary aspects

16.
Table 1 shows the expenditure on the income compensa-
tion and grubbing-up premium funded by the EAGGF Guarantee
Section between 1993, when the CMO was established, and 2000.
Total expenditure in the period amounted to some 1 287 million
euro of which some 662 million euro was paid to Spain and
572 million euro to France as the dominant banana producers in
the EU. The total land under banana cultivation in the EU is around

17.
The Community contribution to the measures in support
of the banana sector under the two operational programmes
audited by the Court, in France and Spain, were 28 million euro
and 8,5 million euro respectively (for the period 1994 to 1999).
The financing for measures in support of the banana sector in
ACP States amounts to some 45 million euro per year.

Table 1

EAGGF Guarantee income compensation and grubbing-up premium (1)

Actual expenditure of EU banana producer States 1993 to 2000

Year

1993

1994

1995

1996

1997

1998

1999

2000

Total

Spain

France

Portugal

Greece

TOTAL

4,11

73,1

58,1

7,0

0,0

60,6

48,3

6,8

120,3

96,2

105,1

73,8

8,8

102,2

94,7

8,1

8,1

0,0

97,2

73,7

6,8

0,0

109,7

117,2

7,3

0,2

662,2

572,1

52,9

0,2

4,11

138,2

115,7

202,9

206,5

207,9

177,7

234,4

1 287,4

(Mio EUR)

(1) Grubbing-up premium only for 1993 (41 000 euro) and 1994 (4 000 euro)
Source: Commission 2002.

THE MEASURES FINANCED BY THE EU

Weaknesses in the management of compensatory aid

18.
One of the aims of the new CMO system applied in 1993
was to ensure that producers had adequate income to continue
production at the costs entailed by the structural situation. In
order to make good the loss of marketing income (1) likely to
affect EU producers’ incomes following the implementation of the
new system the framework regulation (2) introduced a system of
income compensation for the producers in question. This prin-
ciple was to be applied as long as the situation had not been
improved by the implementation of structural measures. It should
be noted that the regulations do not define exactly what might
constitute ‘adequate income’, but they do define all the items
needed for the aid calculation.

19.
Calculation and payment of aid: compensatory aid is a
premium paid to Community producers, in principle through the
producer organisations of which they are members, for the quan-

tities of bananas marketed in the Community. This aid is calcu-
lated by the Commission on the basis of the difference between:

(a) a ‘flat-rate reference income’, on the one hand, determined by
means of the average price of the bananas produced and mar-
keted in the Community during a reference period before the
introduction of the CMO, less the costs of delivery fob (3) and
transport;

(b) and, on the other, the ‘average production income’ calculated
for each year on the basis of the average price of the bananas
produced and marketed in the Community during the year
under consideration (less the costs of delivery fob and trans-
port); this calculation must take into account the most recent
information available in the Member States.

20.
Limitation of the quantities eligible for compensatory aid:
the Council fixed the maximum quantities produced and mar-
keted in the EU for which compensation will be paid at 854 000
tonnes.

(1) Council Regulation (EEC) No 404/93, Article 12.
(2) Council Regulation (EEC) No 404/93 of 13 February 1993 (OJ L 47,

(3)

25.2.1993).

fob: ‘free on board’, means that the risks of damage to or loss of the
goods are transferred to the buyer at the point where the goods are
on board the ship.

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Lack of precision in the legal texts and difficulties in their
implementation

Varying interpretations of the information required for calculating aid

only pays for the quantities that are accepted. The Court estab-
lished that the quantities on which the entitlement to aid was cal-
culated were not adjusted to reflect the quantities ultimately pur-
chased. This resulted in undue payments amounting to some 2
million euro; the Commission will propose a correction.

21.
The rules governing the calculation of compensatory aid,
carried out by the Commission using data forwarded by the
Member States, stipulate that the premium for producers shall be
based on an average price for the bananas after deduction of the
costs of transport (see details in paragraph 19). These rules do not
specify in detail all the price and cost components used as the
basis for this calculation.

22.
This lack of precision led to weaknesses in the applica-
tion of the rules mentioned above. These weaknesses were identi-
fied by the Commission offices responsible for clearing the
accounts during inspections carried out in 1997. They led to sub-
stantial corrections:

(a)

the costs deducted were questionable, refunds and discounts
had not been declared, thereby increasing the deductible costs
and hence the amount of financial aid (0,8 million euro
recovered in France);

(b) sales were made at abnormally low prices (Spain and Portu-
gal) and claims made for types of banana which were not eli-
gible for compensatory aid (Portugal): the amounts recovered
totalled 2,6 million euro in Spain and 0,5 million euro in Por-
tugal.

Applications for compensatory aid in respect of quantities presented for
marketing by producers, but not subsequently accepted by the purchasers

23.
Compensatory aid is granted to producers who sell
bananas on the Community market and is paid on the quantities
marketed by each producer through the producer organisation.
The legal framework does not define ‘marketing’, nor does it specify at
what stage of the marketing process the aid entitlement arises.
The Court considers that this should equate to the point at which
the quantities in question are accepted by the importer/purchaser, whether
at the quay in the port of embarkation or on arrival in mainland
Europe.

25.
The national authorities confirmed that adjustments had
been made in respect of goods which were not accepted or which
had deteriorated before the cargoes were accepted for transport
to the EU mainland destination. But further adjustments were not
made in respect of amounts rejected subsequent to that. For the
purposes of the aid calculation it was, in their view, reasonable to
equate the time of acceptance of the quantities being marketed
with the end of the packing stage, on the principle used to estab-
lish reference and production prices. They also argued that the
method had been notified to, and tacitly accepted by, the Com-
mission since the latter had received a copy of the paying agency’s
written procedures explaining how the aid due is determined.

26.
The Court noted that there were differences in practice
between France and Spain. Bananas from the Canary Islands are
usually sold to primary/secondary importers before being sent to
the Iberian peninsula. The situation is thus not comparable to that
in Guadeloupe, because the quantities are accepted by the pur-
chaser before dispatch.

Impact of aid on producers’ incomes and cash flows

27.
The CMO aims to ensure for producers adequate incomes
and cash flows (but does not give a more precise definition of
what this means). As there may be a delay between the sale of the
bananas on the market and the payment of Community aid, the
regulations allow producers to apply for an advance, subject to
the provision of a security. The Commission has also, on a num-
ber of occasions, waived the provisions of Article 4 of Regulation
(EEC) No 1858/93, which state that the amount of each advance
is 70 % of the aid in respect of the preceding year. The Commis-
sion justified its action on the grounds of the level of aid in the
previous year or the adverse trend of market prices during the
year in question.

24.
In Guadeloupe, it was found that aid had been claimed
for quantities of bananas presented for marketing which were not
subsequently accepted by the purchaser on their arrival at the Euro-
pean mainland. In Guadeloupe entitlement to aid was established
in relation to the quantities of bananas leaving warehouses/
packing sheds for despatch to the port and transport to mainland
Europe. The goods may be damaged in transit; some may be
rejected on quality grounds on arrival. However, the purchaser

Even with the artificial maintenance of EU prices above
28.
world-market
levels, world-market prices as a whole have
fallen. Income from EU production has therefore dropped and aid
has increased. The result is that aid now accounts for more than
50 % of EU growers’ incomes (see Table 2 and Annex 6).

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Changes in banana prices (EC) and compensatory aid to producers

Table 2

Source: Table prepared by the Court of Auditors on the basis of Commission data (see Annex 6).

29.
As Community aid represents a large part of producers’
income (more than 50 %) and the advance on this aid is limited, and
in view of the significant delays that occur as regards the final aid pay-
ment, some producer organisations (Martinique) grant supplemen-
tary advances. The aim is to ensure that producers have adequate
cash resources. The Court found that some producer organisa-
tions are thus carrying out prefinancing, not only by means of
advances on Community aid but also by advances on income
from sales.

The absence of a precise definition of the objectives and the non-
availability of any (economic and financial) evaluation of them
means that in-depth cost-effectiveness analysis of these measures
is not possible. The information contained in the preceding para-
graphs also leads to the conclusion that the CMO objective of
maintaining production at the costs entailed and guaranteeing an
adequate income has only been partially achieved. The Commis-
sion must carry out an in-depth evaluation with a view to assess-
ing the impact of the measures taken and whether they are eco-
nomic, effective and efficient.

Additional national financial support for producers

30.
Despite the efforts to improve producers’ cash flows, fall-
ing banana market prices and climatic disasters have had a sig-
nificant impact on producers’ incomes. The audit showed that in
1997, in order to alleviate the precarious financial situation of
producers in Martinique and Guadeloupe, France granted produc-
ers loans totalling 13 million euro. The loans were interest free
and unsecured.

31.
Article 88 of the EC Treaty provides that the Member
States must inform the Commission of any plans to grant State
aid, in sufficient time for it to be able to submit its comments. The
Court found that, although the support provided was compatible
with the criteria in force, the Commission had not been informed
beforehand, as is required.

32.
Despite the provision of national aid, the situation of
producers continued to deteriorate and, at the request of the
French government, the Commission agreed in November 1999
to increase the amount of aid which could be advanced.

33.
In 1999, France announced other measures in Martinique
and Guadeloupe to re-stabilise the producers’ economic circum-
stances.

Inadequate documentation in support of aid payments

35.
In Spain, the local working instructions on the manage-
ment of compensatory aid were not sufficiently explicit in respect
of the purpose of internal controls, their scope, their frequency
and their level.

36.
The Court identified weaknesses in connection with docu-
ments which served as proofs of payment. For instance, differ-
ences were discovered between the quantities for which aid had
been claimed and the quantities for which aid had actually been
paid. The local authorities, while acknowledging these differences,
were unable to produce proof that they had been the subject of
reconciliation. Although the Court was able to identify some fac-
tors that could explain the differences, it concluded that it was
essential for this reconciliation to be clearly documented in future.

The Court’s observations provide information on pro-
34.
ducers’ incomes, cash flows and precarious economic situation.

37.
In order to ensure that a right to aid really exists, the regu-
lations stipulate that applications for aid must include certain
information (e.g. the name of the producer, the name of the
organisation submitting the application, sales invoices, etc.).

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In the context of its examination of aid applications and
38.
payments in Spain the Court found that, for about 50 % of the
local cash sales between one producer organisation and one local
trader, the invoices did not provide reliable evidence of the client’s
identity. Thus at the point where the authorities were processing
the applications they did not have sufficient evidence to accept
the sales as qualifying for compensatory aid.

(ii) guarantee the producers’ control of the organisation and

its decision-making procedures;

(iii) stipulate that every producer must undertake to remain
a member for a minimum period of three years and give
at least 12 months’ notice of his intention to leave the
organisation;

Minimal impact of the premium for final cessation of
cultivation

39.
Where conditions were unsuited to the production of
bananas and more suited to alternative crops, cessation of banana
growing was to be encouraged through the payment of a one-off
premium.

The main condition for qualifying for this type of aid was
40.
the grubbing-up of all banana plants on holdings where the area
planted to bananas was less than five hectares, and of half the
banana plants on holdings where the area planted to bananas was
larger than this. The aid was fixed at 1 000 euro per hectare, with
a prohibition on replanting bananas on the land in question for a
period of 20 years. The Court noted that the expenditure aid was
minimal, amounting to only 45 000 euro — the equivalent of 45
hectares — for the eligible period 1993 to 1994. In the EU the
area under bananas has actually increased by two per cent since
1994. The areas cultivated by ACP and dollar banana producers,
however, have increased by a much larger percentage (16 % and
20 % respectively), despite the world oversupply situation.

41.
European producers and their organisations gave the fol-
lowing explanations: on the one hand, they had no real possibili-
ties in terms of substitution crops; on the other hand, the pre-
mium was not sufficiently attractive to producers. From this the
Court concluded that, either the objective of encouraging substi-
tute production was unrealistic or that it is more profitable for
producers to continue growing bananas as long as they receive
financial assistance.

Non-compliance with the rules applicable to producers’
organisations

42.
The responsible authorities in the Member States grant
‘recognition’ to these organisations if they fulfil the conditions
laid down in the Community regulations. These include the fol-
lowing points:

(a)

the statutes of these organisations must:

(i)

require producers to market the whole of their produc-
tion through the organisation;

(b)

the competent authorities in the Member States must, on the
one hand, ensure that the producer organisations are set up
and operate in accordance with the regulations, by means of
on-the-spot checks at least once every three years, and, on
the other, must withdraw their ‘recognition’ when they find
that the obligations imposed by the regulations are not being
fulfilled.

The Commission’s clearance of accounts units found
43.
cases of non-compliance with these requirements (France). They
were:

(a) non-compliance by some producers with the requirement
that the whole of their production was to be marketed through
the organisation;

(b)

the competent authority in the Member State had not exam-
ined the activities of each producer organisation at least once
every three years.

Although progress was found to have been made, espe-
44.
cially following intervention by the Commission, there are still
problems such as non-compliance with the requirement that all
production is to be marketed. These problems are treated as part
of the procedure for clearing the accounts.

Limited effectiveness of the structural programmes

Objectives defined in terms which are too general

45.
As pointed out above in the ‘Introduction’ section, the
CMO in the banana sector covers objectives not only in connec-
tion with agricultural policy but with structural policy objectives
as well. Thus co-financing under the Structural Funds (EAGGF-
Guidance) is possible for projects which pursue at least two of the
three following objectives: (1) application of a quality and commer-
cial strategy; (2) improvement of the use of resources; (3) improving com-
petitiveness. These objectives are general (not quantified) and their
expected impact is not precisely defined. They must be included
in the programming documents drawn up at Member State level
and subsequently in the terms of reference of individual projects.

The Court found that the programming documents
46.
(period 1994 to 1999) of the Member States (France and Spain)
did not indicate how the measures which had been planned ful-
filled at least two of the three objectives specified in the CMO
Regulation. The link is even more tenuous in the projects carried
out under these programmes.

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Cost-effectiveness

47.
The absence of a clear definition of quantified objectives
and measures for achieving them allows neither monitoring nor
evaluation of the structural strand of the CMO. The mid-term
evaluations gave rise to observations of a general nature as the
findings of the ex post facto evaluation of the programmes could
not be available before 2003.

48.
The measures in the structural strand of the CMO (e.g.
improving competitiveness) are closely linked to those of the agri-
cultural market strand (e.g. compensatory aid to producers). It is
therefore necessary to monitor the implementation and consis-
tency of these two strands continuously, as well as evaluating
them individually and the synergy of the CMO as a whole. In view
of the fact that several of the Commission’s directorates-general
are involved in the management of the various strands of the
CMO, close coordination is vital.

49.
The implications of important changes in the way in
which the CMO is managed are discussed by the main services
responsible. However, the required level of coordination and
exchange of information on the impact of Structural Fund and
agricultural market (EAGGF-Guarantee) measures, necessary to
ensure their cost-effectiveness and synergy, is not being achieved.
This will not happen until the evaluation of the CMO is com-
pleted by the end of 2004.

One example

50.
In the programming document for the French overseas
departments there is provision for a measure for ‘the modernisa-
tion of the banana distribution network’. In addition to the con-
struction and improvement of packing facilities the projects
adopted on the basis of this programme involve cable transport
systems; vehicles and trailers. There is no information to indicate
to what extent these projects are supposed to contribute to the
objectives laid down (quality strategy, improvement of competi-
tiveness and improved use of resources).

The audit also revealed that the producers’ cash-flow
51.
problems had not made the implementation of the projects any
easier. In actual fact producers have to prefinance projects before
they receive national and Community aid. Moreover, the interval
between initial approval of a project and the final payment can be
very long, sometimes up to two years.

The Court has reached the conclusion that no quantified
53.
objectives were specified and that information was available nei-
ther on the effectiveness of the measures taken to improve com-
petitiveness nor on their impact on the utilisation of resources or
the quality of the products. The actions supported concentrated
on increasing production capacity rather than on competitiveness
or the efficient use of the banana sector’s resources, and this was
done in spite of the oversupply situation on the world market.

Protecting producers in the ACP States

54.
To ensure that the introduction of the CMO would not
penalise traditional ACP suppliers of bananas, Community Regu-
lation (EC) No 2686/94 introduced technical and financial assist-
ance measures and income support for banana producers in ACP
countries. These measures aimed to increase their productivity,
improve product quality and marketing and encourage crop diver-
sification. Income support was abolished following a subsequent
reform of the CMO.

55.
External consultants were employed by the Commission
to evaluate the efficiency, effectiveness, impact and viability of the
implementation of the arrangements prior to the reform (in five
countries). They also analysed in how far it was appropriate and
met the needs of the beneficiaries. The study (January 2000) con-
cluded that the assistance had covered a broad range of initiatives,
that its impact on competitiveness had been greatest where it
involved improving productivity in the field (for example, irriga-
tion, drainage, etc.), that its impact was least in the areas where it
was potentially greatest (e.g. management reform), and that the
sector’s limited competitiveness (two countries) argued against
any expansion of exports. The study recommended that, in future,
the priority objectives of aid should be clearly defined and that
the creation of alternative sources of income should be one of the
main priorities. The Court considers that this evaluation should
serve as a model for the evaluation of the CMO before any new
programmes are drawn up in support of traditional producers
(see paragraph 99).

MARKET REGULATION MEASURES

Conflicting interests

Sales price and consumer choice

The framework programme for the new period 2000 to
52.
2006 included a short general evaluation of the old programme
pointing out that the slowness of its implementation was due to
difficulties in the banana sector and problems with project financ-
ing. It also said that it was not possible to replace bananas with
substitution crops.

56.
The EU imports around 80 % of its needs. The system of
preferential tariff quotas was designed to achieve a stable balance
between the sources of market supply and to provide a steady
market for the output of the various producer regions. The tariff
quota system also generates Community own resources.

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The CMO placed the emphasis on harmonisation of mar-
57.
keting channels, and on the free movement of goods within the
Community, while keeping consumer prices at a reasonable level.
It was important to pursue these objectives while also maintain-
ing consumer choice, i.e. not undermining imports from outside
the EU.

(b)

(c)

European prices and quota rents

58.
The GATT Uruguay Round negotiations between 1986
and 1993 focused on removing export subsidies and import
quotas with the aim of liberalising the market. The measures
introduced by the EU combined the payment of income compen-
sation to EU producers with improved market access for non-EU
bananas, through the quota system. The initial system neverthe-
less actually reduced access to the market for traditional dollar
banana importers, by attributing 30 % of the quota to importers
who had previously only imported EU or ACP bananas. They
were awarded 30 % of the dollar banana quota (see paragraph 61).
They therefore had to choose between seeking an increase in prof-
its by marketing dollar bananas, or selling their rights to other
operators who would be seeking to increase their import oppor-
tunities. This created the secondary market for import licences.

59.
The differential between world prices and EU prices is
known as a ‘quota rent’. It is not a charge on the EU budget, since
it is passed on to the consumer. In 1999, the Commission esti-
mated the quota rent to be around 200 euro (1) per tonne. Taking
the current quota of 2 653 000 tonnes (see paragraph 91) the
quota rent amounts to a total of 531 million euro. Accurate esti-
mates are difficult because various fluctuating parameters and
hypotheses such as exchange rates have to be taken into account.
Other estimates of the quota rent go as high as 388 euro/tonne
which gives a total of more than 1 000 million euro (see also
paragraphs 73 to 74).

A complex and controversial situation

Complexity of the import arrangements

‘non-traditional ACP’ quantities (i.e. quantities in excess of
quota (a)) and quantities from third countries (essentially dol-
lar bananas) were awarded a combined quota of 2 000 000
tonnes subject to customs duties of 100 euro per tonne;

‘non-traditional ACP’ quantities and quantities from third
countries in excess of quota (b) were to be subject to customs
duties of 750 euro and 850 euro per tonne. These higher
duties were intended to discourage imports outside the
quotas.

The import arrangements originally established by the
61.
CMO (Annex 2) allocated quotas for third countries and non-
traditional ACP bananas as follows: category A — 66,5 % for
operators established in the EU and marketing non-traditional
ACP and third country bananas; category B — 30 % for opera-
tors established in the EU and marketing EU and traditional ACP
bananas; category C — 3,5 % for new operators marketing non-
traditional ACP and third country bananas.

62.
The allocations for categories A and B were also weighted
in relation to the type of commercial activity in which the opera-
tors were engaged: category (a) — 57 % to primary importers; cat-
egory (b) — 15 % to secondary importers; category (c) — 28 %
to ripeners.

63.
In order to justify the amounts to be allocated under the
CMO, operators were required to disclose, via national adminis-
trations, the level of their marketing activity for a reference period
which, at the time of the launch of the market, was the three years
leading up to 1992. In anticipation of the introduction of the sys-
tem, some operators saturated the market with very cheap bananas
in the period before the introduction of the CMO in the hope of
driving up their initial share of the quota.

Quotas are managed on a quarterly basis. Indicative quan-
64.
tities are set which represent the proportion of the quota allowed
to enter the EU. These are published in the Official Journal of the
European Communities.

The quota system introduced by the CMO was as follows

60.
(see Annex 2):

(a) quantities imported from ACP States (‘traditional ACP
bananas’) benefited from a tariff quota of 857 700 tonnes
free of customs duties;

(1) SEC(1999) 1397 final of 8 September 1999, ‘Report from the Com-
mission to the Council on consultations with a view to settlement of
the banana dispute’.

65.
The audit showed that the Commission’s Agriculture
Directorate-General had carried out credibility tests on the quanti-
ties declared by Member States as the basis for their initial alloca-
tions of quota. The total quantities declared for primary import-
ers did not correspond to those which were later handled by
secondary importers and ripeners. The Member States drew atten-
tion to these discrepancies and, after investigation, appropriate
adjustments were made. The reference quantities were reduced by
amounts which ranged from less than one per cent to nearly
20 %. Member States claimed that the discrepancies had arisen
from a misinterpretation of Commission implementing regula-
tions on the attribution of reference quantities to the various
operator categories.

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These errors did not affect the EU budget, but did, exclu-
66.
sively, affect the allocation of quotas to the three marketing cat-
egories (see paragraph 61).

Weaknesses in the management of quotas

The emergence of a secondary market

Disagreements with the WTO

A controversial system

67.
The automatic allocation of a substantial part of the quota
(see paragraph 61) provoked considerable criticism. In the case of
dollar banana the big operators protested at having to buy import
rights and against the protection given to EU and traditional ACP
producers. The arrangements were formally challenged by the
interested parties under the GATT disputes procedure.

73.
Registered operators may apply for import licences, up to
the level of their allocation for the quarter in question, within the
indicative quantities decided by the Commission. The category
must be specified in the application. The quantities attributed
with the licence may be transferred during the period of its valid-
ity at the rate of a single transfer per licence. The Commission has
acknowledged that applications for category C licences (new
importers) were being made by operators who had no intention
of importing but who simply wanted to sell on the licences at a
profit.

68.
Some multinationals adapted to the new rules laid down
by the CMO and anticipated them by diversifying their crops and
their marketing to the EU and ACP countries. Others made no
attempt to do so.

74.
One of the biggest multinational operators, when inter-
viewed by the auditors, valued the licences at about USD 5 per
standard case (18,5 kg), which equates to USD 270 per tonne.
This confirms the extent to which the quota rent is attractive to
those wishing to market dollar bananas in the EU (see also para-
graph 59).

Non-compliance with WTO rules persisted till 2001

Management shortcomings

69.
The quota system was modified in 1995, primarily to
accommodate the new EU Member States. Following a ruling by
the Dispute Settlement Body of the WTO in 1997, the Council
approved further modifications in order to bring the CMO into
line with WTO rules. These modifications entered into force on
1 January 1999. The various provisions introduced by the reforms
are set out in diagrammatic form in Annexes 3 and 4.

The Court examined the import licensing system in
75.
France, where the paying agency issues stocks of blank licence
forms to operators. Although the licences are serially numbered
and bear the title of the issuing authority, the serial number is not
used as a means of controlling either their origin or their eventual
use by the importers.

70.
The main changes introduced were the abolition of the
categories and subcategories of operators and a reclassification of
importers into two main operator categories — traditional and
new arrivals. Traditional operators were those established in the
EU and importing on their own account.

71.
Despite these reforms, the WTO ruled that this system
remained non-compliant, since it perpetuated distortions, and
that the separate quota for ACP States was still unacceptable.

76.
The agency acknowledged, however, that when the quan-
tities authorised are entered on the licence, an official number is
attributed to it. The agency confirmed that it is the responsibility
of the importer or licence holder to record the quantities imported
on the back of the form. It also confirmed that it is the customs
authorities at the port of entry that are required to certify the
quantities deemed to have been released for free circulation in the
Community. The certification is usually in the form of the official
stamp of the responsible authority, attesting that all the required
checks have been performed.

72.
Even before the WTO decision, the United States of
America had tried to impose unilateral sanctions on a range of EU
goods, valued at USD 500 million a year. The WTO ruled that
they were both precipitate and excessive and asked for the sanc-
tions to be reduced to USD 191 million, which is the level they
were imposed at until the conclusion of bilateral negotiations
with the United States of America in April 2001 and the adop-
tion of an amended system of quota tariffs (1) in December 2001
(see paragraphs 86 to 92).

(1) Council Regulation (EC) No 2587/2001 of 19 December 2001

(OJ L 345, 29.12.2001).

77.
The paying agency also confirmed that it is the responsi-
bility of the operator to whom the licence is issued to return it to
the issuing authority within 30 days of its expiry date, as a secu-
rity measure.

However, the audit established that national customs
78.
authorities were under no obligation to notify the issuing author-
ity separately of the quantities they had authorised for importa-
tion by means of the licences presented. As a result, the issuing
authority relied exclusively on the licence holder, who was sup-
the absence of
posed to return the used licence, but

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an independent cross-check between the customs authority and
the issuing authority rendered the system vulnerable.

bananas imported for it to be able to ensure that management of
the quotas is sound.

Inadequate checks on imports

Shortcomings in the physical checks

Under the framework regulations the national customs
79.
authorities are required to establish the weight (net mass) of the
bananas imported for release for free circulation in the Commu-
nity. The check is based on a sample of packing units for each
type of package and each origin. The sample of packing units to
be weighed by the customs authorities must be representative and
must comprise a minimum number of units.

80.
In order to obtain first-hand knowledge of how this is
done, the Court examined how the system operated in a major EU
port (Antwerp, Belgium). The auditors observed the unloading of
a large vessel containing some 373 000 boxes weighing nearly
7 500 tonnes and also observed the weighing tests carried out by
the customs authorities. They found that the way in which the
checks were carried out did not provide reasonable assurance as
to the quantities being imported. The sample size was too small
and the selection not representative. Accurate checks are essential,
particularly in view of the fact that the difference between the
weight checked by the customs authorities and the declared weight
varied by between – 2 % and + 6 %. In addition, the results of the
tests were applied not to the ship that was being checked, but to
the cargo of the following ship.

81.
The controls prescribed by the regulations are not always
applied or documented adequately, particularly in the case of large
cargoes. The minimum sample sizes were well below the level
needed to give statistical confidence and precision in the case of
large quantities. Extrapolating sample results to a population other
than the target population does not give a reliable result and is
not in accordance with the Regulation. These weaknesses mean
that the weight of the imported bananas is not reliably verified
and there is no assurance as to the quality of the management and
monitoring of the quotas.

82.
As a result of the audits carried out by the Court, the
Commission conducted an inquiry with the aim of obtaining an
overview of the systems put in place by the Member States for
clearing fresh bananas through customs. The Commission con-
cluded that the national systems do not ensure that the Commu-
nity rules are properly applied, nor do they give any guarantee
that the financial interests of the EU are being protected.

83.
In the light of the checks carried out by the Court and by
the Commission, the Court concludes that the Commission has
never hitherto had sufficient information about the quantity of

Case of fraud involving import licences

84.
The audit by the Court followed shortly after the discov-
ery in Italy of a major import fraud, in which forged licences were
used to import bananas. OLAF (the European Anti-fraud Office)
announced the discovery of the fraud in the summer of 2000.
Large quantities of dollar bananas had entered the EU via Italian
ports under cover of false ‘French’ import licences. This made it
possible for the importer to bring bananas into the Community
throughout this period without their being subject to quota, and
to pay duty at the rate of 75 euro per tonne instead of 680 to
822 euro per tonne for above-quota imports. It was estimated
that some 160 000 tonnes entered in this way, and thus evaded
customs duties of 126 million euro. Italy could thus have suffered
VAT losses of 5,5 million euro.

85.
OLAF considered that the market had been significantly
disturbed, because of the scale of the fraud. When such disturb-
ances affect prices there is a corresponding effect on the level of
aid. The Commission has not calculated the impact that the fraud
may have had on compensatory aid.

DEVELOPMENTS AND EVALUATION

The search for an interim arrangement

86.
In May 1999, the Council asked the Commission to sub-
mit proposals for reform of the CMO in order to bring it into line
with WTO rules. In the face of the difficulties encountered, the
Commission announced its intention of moving towards a tariff-
only system of control from 2006 and introducing an interim
system for 2001 to 2005.

87.
Throughout 2000 the Commission discussed various
options with all parties. In December 2000 the European Parlia-
ment (1) finally adopted the proposal set out in COM(2000)
621 (2), which provided for transitional tariff quota arrangements.
The scheme was to operate on a ‘first come, first served’ (FCFS)
basis, which seemed to be acceptable to most parties.

(1) Second report on the proposal for a Council regulation amending
Regulation (EEC) No 404/93 on the common organisation of the
market in bananas — Committee on Agriculture and Rural Develop-
ment. European Parliament (A5-0374/2000 final).

(2) Communication from the Commission to the Council on the ‘first
come, first served’ method for the banana regime and the implica-
tions of a tariff only scheme.

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The system envisaged three quotas one of which was a
88.
new autonomous C quota of 850 000 tonnes. The quotas would
be open to all bananas irrespective of their origin. The entry duties
for quotas A and B would be 75 euro/tonne and for the new
C quota 300 euro/tonne. There would be a preferential tariff for
ACP bananas.

89.
Doubts were expressed concerning the potential admin-
istrative difficulties and the system caused some disquiet, as it
seemed likely to favour the larger operators, who were better
equipped to orchestrate their operations. After intense, high-level,
bilateral negotiations with the United States of America, the pro-
posal was abandoned by the Commission in April 2001 in favour
of continuing the tariff quota system, but in a modified form.

Detailed rules for applying the new system were issued in
90.
Commission Regulation (EC) No 896/2001 of 7 May 2001 on the
basis of historical references, but with 83 % allocated to tradi-
tional operators and 17 % to non-traditional operators. The refer-
ence period for the definition of operator categories and autho-
rised quantities was 1994 to 1996.

91.
The tariff quotas were adopted under Council Regulation
(EC) No 2587/2001 of 19 December 2001 amending Regulation
(EEC) No 404/93, with effect from 1 January 2002, as follows:

quota A — 2 200 000 tonnes,

quota B — additional quota 453 000 tonnes,

quota C — an autonomous quota of 750 000 tonnes.

Quotas A and B are open to imports originating in any third
country and quota C is reserved for imports of produce originat-
ing in ACP States. Imports under A and B quotas are also subject
to duty of 75 euro per tonne, while imports of produce originat-
ing in ACP States are subject to a zero rate of duty. Imports under
the C quota are subject to a zero rate of duty.

92.
The Commission also recognised the need to tighten the
criteria for non-traditional operators in order to avoid the regis-
tration of fictitious operators. As a result of this agreement the
United States of America lifted the sanctions on products from
the EU. So ended the long trade dispute over bananas.

Evaluation and monitoring by the Commission; future
orientation of the CMO

Under Article 32 of Regulation (EEC) No 404/93, which
93.
introduced the CMO, the Commission is required to produce two
reports on the implementation of the Regulation:

(a)

(b)

the first was to be presented not later than the end of the
third year after the entry into force of the Regulation and was
to include an analysis of the marketing trends for EU, ACP and
third countries since the introduction of the CMO;

the second was supposed to report on the implementation of
the Regulation as of 31 December 2001 and to contain appro-
priate proposals for agreement after 31 December 2002.
When the second reform of the import arrangements was
introduced under Council Regulation (EC) No 1637/98 (1),
this deadline was moved to 2004.

A singularly protected market

The first report, produced in October 1995 (SEC(95)

94.
1565), found that:

(a) world production had increased so much that there was world
overproduction. Despite increases in consumption the real
world price had continued to fall;

(b) EU producers were singularly protected from market forces,
through the measures introduced by the CMO. Leaving aside
the existence of incentives to improve production via the
Structural Funds, this meant that EU producers would be
likely to increase their production, at least to the level at
which aid ceased to be payable;

(c) ACP States had not increased their production to the quota
level set for traditional imports; the resulting margin had not
been spread evenly between the various countries;

(d) despite the information which flowed into the Commission
from Member States, it was difficult to establish an overall
picture, particularly with regard to retail prices;

(e)

there was some indication that EU/ACP bananas were begin-
ning to penetrate EU markets other than those which had
previously given them preferential treatment.

95.
The report provided no price breakdown to indicate the
extent to which costs were being influenced by the market mea-
sures. As subsequent events have shown, the desired equilibrium
between EU, ACP and Latin American producers has not been
achieved.

(1) Council Regulation (EC) No 1637/98 of 20 July 1998 amending
Regulation (EEC) No 404/93 on the common organisation of the
market in bananas (OJ L 210, 28.7.1998, p.28).

28.11.2002

EN

Official Journal of the European Communities

C 294/15

The major evaluation in 2004

96.
Regulation (EC) No. 1637/98 provided a framework for
the evaluation expected from the Commission in 2004, which is
to include an analysis of the market trends for EU/ACP and dollar
bananas, and an assessment of the effectiveness of import control
measures. Special attention is also to be given to ACP suppliers
and their ability to maintain their position in the EU market.

97.
The synergy of all the components of the aid to the banana
sector will need to be assessed during the forthcoming evaluation,
in order to obtain an overall picture of the consequences of intro-
ducing the CMO and the extent to which the initial objectives
have been achieved. It might also be appropriate to make a very
objective assessment of the potential future of banana cultivation
by EU producers, in the same way as has been done for ACP pro-
ducers. The Commission must ensure that the necessary exper-
tise, both internal and external, is made available for these assess-
ments.

Towards a system based solely on tariffs after 2006

The level of single tariff to be applied from 2006 has yet
98.
to be decided. The Commission’s objective is to maintain appro-
priate protection for EU and ACP producers, to avoid any change
in import volumes and to minimise the impact on prices and to
limit the costs of this.

99.
The Court considers that the evaluation of the CMO
mentioned in the preceding section will enable the impact, effi-
ciency and effectiveness of the arrangements to be measured and
should provide a basis for the formulation of new options and
proposals for reform of the regime. It will therefore be essential
to carry out an in-depth analysis of models underlying various
hypotheses, their advantages and drawbacks, including the risks
of trade conflicts.

CONCLUSIONS AND RECOMMENDATIONS

The aims of the CMO — complexity and contradictions

The CMO in the banana sector covers a body of com-
100.
plex and contradictory objectives relating to several areas of Com-
munity policy: regulation of the market, restructuring of the sec-
tor, development of the sector in the ACP States. Each of these
policy areas is considered, as part of the remits of different Com-
mission DGs using different management and control systems.
The objectives of these Community policies are closely inter-
twined, which makes evaluation of their respective impact, effec-
tiveness, consistency and synergies difficult. A clear definition of
the CMO’s objectives, including their expected impact, is therefore
essential.

Differentiation of the various goals and a clearer definition of the
CMO’s objectives, with a description of the expected impact, would,
firstly, make it possible to measure the costs and benefits and, sec-
ondly, facilitate management and control.

Definition of objectives and measures either too general or
unrealistic

101.
The objective of encouraging development towards the
growing of substitution crops by awarding a grubbing-up pre-
mium was, firstly, unrealistic (especially in the absence of any real
alternatives) and, secondly, not attractive to producers.

The absence of clear, quantified objectives for the projects
102.
financed under the Structural Funds and the lack of monitoring
and evaluation make it impossible to evaluate the extent of their
contribution to the success of the CMO in the banana sector.

The Court recommends that the planned evaluation of the CMO
verify that there are clear definitions of precise, realistic, quantified
objectives, and of the measures for achieving them. It is also essen-
tial to ensure that, firstly, implementation is subject to continuous
monitoring and, secondly, the objectives of individual projects are
consistent with those of the CMO.

Cost-effectiveness

Community support for producers, which currently
103.
accounts for more than 50 % of their income, does not resolve
the problem of an adequate income for the cultivation of bananas
and being able to continue production at the costs entailed. In the
absence of, firstly, a clear definition of the objectives and, sec-
ondly, economic and financial evaluations of them, it is impos-
sible to form an opinion of the justification for the compensatory
aid system (see paragraphs 28 to 36).

The Commission must carry out an in-depth evaluation with the
aim of measuring the impact of the measures taken on producers’
incomes, and the economy, efficiency and effectiveness of them.

104.
The tariff quota system introduced to regulate imports
created more favourable market conditions for importers by limit-
ing supply. The corresponding cost has been two to three times
greater than the total aid paid to EU producers (see also foot-
note 1).

Although it is expected that this situation will be rectified in 2006
when the single tariff scheme is introduced, the Commission must
ensure that the scheme does not have any kind of new impact that
may not have been quantified. In this respect it will be necessary to
carry out a full analysis of the risks, costs and benefits associated
with various possible options for introducing a single tariff.

C 294/16

EN

Official Journal of the European Communities

28.11.2002

Management shortcomings

105.
The coordination and exchange of information on the
impact of the Structural Funds and market measures set out in the
CMO does not ensure the achievement of the required synergy
and cost effectiveness.

The various objectives of the CMO should be more clearly defined
and, in parallel with that, the responsibilities of the managing
departments at the Commission should be clearly differentiated.
The latter should not only manage the various strands of the CMO
and ensure they are consistent, they should also adopt a more
forward-looking management approach vis-à-vis the Member
States. The Commission should therefore take all necessary steps to
ensure that the regulatory framework is consistently applied and
interpreted.

The Commission may wish to take into account the evaluations of
the ACP programmes, which have shown that development of the
banana sector is not always viable.

Control weaknesses

107.
The Court found significant weaknesses in the controls
on the tariff quota system applicable to the arrangements for
imports. The import arrangements have proved to be vulnerable
to fraud and costly for the EU. Weaknesses were noted in the
documentation which serves as proof for the payment of com-
pensatory aid to producers (paragraphs 37 to 40).

106.
The ex post evaluations of the operational programmes
which are foreseen should be used as part of the CMO evaluation
process due to be completed by the end of 2004. This should also
be taken as an opportunity to examine the synergy of the various
measures taken to date.

The Court recommends that the Commission, in cooperation with
the Member States, improve the instructions on the control pro-
cedures to be applied by the latter. Their implementation should be
the subject of control and monitoring by the Commission.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 12 September 2002.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

28.11.2002

EN

Official Journal of the European Communities

C 294/17

QUANTITIES OF BANANAS MARKETED IN THE EU BETWEEN 1993 AND 2000, BY REGION AND COUNTRY OF ORIGIN

Country of origin

1993

1994

1995

1996

1997

1998

1999

2000

(Tonnes)

ANNEX 1

EU

Greece

Spain

France

Martinique

Guadeloupe

Portugal

ACP

Total

3 951 480

3 761 588

3 827 301

3 954 961

3 965 691

3 867 407

3 926 980

4 065 623

643 691

584 622

658 206

684 605

810 537

786 232

729 304

% of total

16,3 %

15,5 %

17,2 %

17,3 %

20,4 %

20,3 %

18,6 %

782 175

19,2 %

7 233

3 071

3 138

3 807

3 901

3 589

3 336

3 275

330 875

321 555

369 387

345 943

403 999

437 414

362 188

397 578

279 837

180 861

98 976

234 130

151 965

82 165

251 280

188 073

63 207

310 652

249 733

60 919

374 747

277 013

97 734

314 793

342 009

240 499

258 501

74 294

83 508

358 861

271 269

87 592

25 746

25 866

34 401

24 203

27 890

30 436

21 771

22 461

748 126

726 987

763 965

800 075

693 054

654 853

675 987

756 808

% of total

18,9 %

19,3 %

20,0 %

20,2 %

17,5 %

16,9 %

17,2 %

18,6 %

Dollar banana producers

2 559 664

2 449 978

2 405 129

2 470 281

2 462 100

2 426 322

2 521 689

2 526 640

% of total

64,8 %

65,1 %

62,8 %

62,5 %

62,1 %

62,7 %

64,2 %

62,1 %

Notes:
The table shows that for the period 1993 to 2000 the EU supplied between 15,5 % and 20,3 % of its banana demand and ACP States about 18 %. It also shows that in 2000
imports of dollar bananas were nearly twice the amount obtained from EU and ACP sources.

Source: Commission, 2000.

C 294/18

EN

Official Journal of the European Communities

28.11.2002

2
X
E
N
N
A

Note 1: General

This description only covers the quota regime and compensation system. The other mechanisms for which provision is made under Regulation (EEC) No 404/93 (grubbing-up premium, producers’ organisations and quality standards) are not
described here.

Note 2: Quantities for which compensation may be paid to EU producers (in 1 000 tonnes — total quantity of 854 000 tonnes) — Article 12 of Council Regulation (EEC) No 404/93

Canary Islands (420) — Guadeloupe (150) — Martinique (219) — Madeira, the Azores and the Algarve (50) — Crete and Lakonia (15)

Note 3: Traditional ACP bananas (in 1 000 tonnes — total quantity of 857 700 tonnes) — Annex to Council Regulation (EEC) No 404/93

Côte d’Ivoire (155) — Cameroon (155) — Suriname (38) — Somalia (60) — Jamaica (105) — St Lucia (127) — St Vincent and the Grenadines (82) — Dominica (71) — Belize (40) — Cape Verde (4,8) — Grenada (14) — Madagascar (5,9)

Note 4: Allocation of annual quantities for categories A and B, Articles 4 and 5 of Regulation (EEC) No 1442/93

Advance registration of operators with the competent authorities in each Member State according to category of economic activity. Annual allocations are made on the basis of individual applications. The annual allocations are awarded on the basis
of a reference quantity corresponding to the average quantities marketed by the operators during the three years prior to the year for which the tariff quota is awarded (this average is referred to as the ‘reference quantity’). The quantities marketed
are multiplied by weighting coefficients depending on the operator’s category of economic activity (57 %, 15 % or 28 %, see Note 5). Thus, every operator is given a weighted reference quantity.

Note 5: Distribution of import entitlements according to operators’ economic activity (Regulation (EEC) No 1442/93)

Group (a) 57 %:

primary importers. Purchase/produce green bananas in the country of origin (third country or ACP State), consign them and sell them in the EU (American multinationals).

Group (b) 15 %:

secondary importers. Supply, release for free circulation and sell green bananas on the European market, bearing the commercial risk as owner of the product (European transport enterprises).

Group (c) 28 %:

ripeners and vendors of bananas on the market, as owners of the products.

Note 6: Fixing indicative quantities for each quarter, applications for and issue of quarterly import licences to operators (Article 9 of Regulation (EEC) No 1442/93)

Indicative quantities are fixed for each quarter by the Commission for the purposes of issuing import licences. Operators submit their applications for licences on a quarterly basis to the competent national authorities. Applications may be adjusted
by applying a weighting coefficient, depending on the indicative quantities fixed for each quarter and taking the annual weighted reference quantities into account.

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C 294/20

EN

Official Journal of the European Communities

28.11.2002

3
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E
N
N
A

Note 1: General

This description only covers the quota regime and the compensation system. The other mechanisms for which provision is made under Regulation (EEC) No 404/93 (grubbing-up premium, producers’ organisations and quality standards) are not
described here.

Note 2: Quantities for which compensation may be paid to EU producers — (Article 12 of Council Regulation (EEC) No 404/93)

Canary Islands (420) — Guadeloupe (150) — Martinique (219) — Madeira, the Azores and the Algarve (50) — Crete and Lakonia (15)
(in 1 000 tonnes — a total of 854 000 tonnes)

Note 3: Traditional ACP bananas (Annex to Council Regulation (EEC) No 404/93)

Côte d’Ivoire (155) — Cameroon (155) — Suriname (38) — Somalia (60) — Jamaica (105) — St Lucia (127) — St Vincent and the Grenadines (82) — Dominica (71) — Belize (40) — Cape Verde (4,8) — Grenada (14) — Madagascar (5,9)
(in 1 000 tonnes — a total of 857 700 tonnes)

Note 4: Allocation of annual A and B quantities, Articles 4 and 5 of Regulation (EEC) No 1442/93

Advance registration of operators with the competent authorities in each Member State according to category of economic activity. Annual allocations are made on the basis of individual applications. The annual allocations are awarded on the basis
of a reference quantity corresponding to the average of the quantities marketed by the operators during the three years prior to the year for which the tariff quota is awarded (this average is referred to as the ‘reference quantity’). The quantities
marketed are multiplied by weighting coefficients depending on the operator’s category of economic activity (57 %, 15 % or 28 %, see Note 5). Thus, every operator is given a weighted reference quantity.

Note 5: Distribution of import licences according to operators’ economic activity (Commission Regulation (EEC) No 1442/93)

Group (a) 57 %:

primary importers. Purchase/produce green bananas in the country of origin (third country or ACP State), consign them and sell them in the EU (American multinationals)

Group (b) 15 %:

secondary importers. Supply, release for free circulation or sell green bananas on the European market, bearing the commercial risk as owner of the product (European transport enterprises).

Group (c) 28 %:

ripeners and vendors of bananas on the market, as owners of the products.

Note 6: Fixing indicative quantities for each quarter, applications for and issue of quarterly licences to operators

Indicative quantities are fixed for each quarter by the Commission for the purposes of issuing import licences. Operators submit their applications for licences on a quarterly basis to the competent national authorities. Applications may be adjusted
by applying a weighting coefficient, depending on the indicative quantities fixed for each quarter and taking the annual weighted reference quantities into account (Article 9 of Regulation (EEC) No 1422/93).

The release of bananas for free circulation in the Community is subject to the submission of a certificate of origin (Article 6 of Regulation (EC) No 478/95).

Note 7: Export licences (Article 7 of Regulation (EC) No 478/95)

Applications for import licences of Categories A and C for goods originating in Colombia, Costa Rica, or Nicaragua must be accompanied by valid export licences.

Note 8: Application of correction coefficients (Article 4 of Regulation (EC) No 478/95)

Where operators’ applications are modified by the application of a correction coefficient, the operators concerned may either withdraw the applications or submit new applications for products of origins to which no correction coefficient is
applicable.

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C 294/22

EN

Official Journal of the European Communities

28.11.2002

4
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Note 1: General

This description only covers the quota regime and compensation system. The other mechanisms for which provision is made under Regulation (EEC) No 404/93 (grubbing-up premium, producers’ organisations and quality standards) are not
described here.

Note 2: Tonnage for which compensation may be offered to EU producers (in 1 000 tonnes — total 854 000 tonnes) — Article 12 of Council Regulation (EEC) No 404/93

Canary Islands (420) — Guadeloupe (150) — Martinique (219) — Madeira, the Azores and the Algarve (50) — Crete and Lakonia (15)

Note 3: Traditional ACP bananas (in 1 000 tonnes — total 857 700 tonnes) — Annex to Council Regulation (EC) No 1637/98

Côte d’Ivoire — Cameroon — Suriname — Somalia — Jamaica — St Lucia — St Vincent and the Grenadines — Dominica — Belize — Cape Verde — Grenada — Madagascar

Allocation of separate shares to various countries no longer exists (Annex I to Regulation (EEC) No 404/93).

Note 4: Traditional operators

Traditional operators must be established in the EU and must have imported a minimum quantity of third-country and/or ACP bananas on their own account during the reference period for subsequent marketing in the Community.

Note 5: ‘Newcomer’ operators

‘Newcomers’ are operators who must be established in the EU at the time of registration and who must have been engaged independently and on their own account ‘in the commercial activity of importing fresh fruit and vegetables falling within
Chapters 7 and 8 of the Tariff and Statistical Nomenclature and the Community Customs Tariff, or products under Chapter 9 thereof (coffee, tea, maté and spices) if they have also imported products falling within Chapters 7 and 8 in one of the
three years immediately preceding the year in respect of which registration is sought …’. The declared customs value of the imports undertaken during this three-year period must be at least 400 000 euro.

Note 6: Allocation of reference quantities (traditional operators) and quantities allocated annually (‘newcomers’)

For each traditional operator, the import entitlement (i.e. the annual ‘reference quantity’) is determined on the basis of the quantity of bananas ‘actually imported’ during the reference period. For 1999 the reference period covered the years 1994
to 1996.
For the newcomers there are no reference quantities. Their ‘requests for annual allocation’ may not cover a quantity greater than 10 % of the total quantity reserved for newcomers each year. A newcomer may obtain the status of a traditional
operator after three years of commercial activity. Obligation to lodge a security of 18 euro/tonne.

Note 7: Quarterly procedure for issuing licences

‘Indicative quantities’ for the first three quarters may be calculated by the Commission for the purpose of issuing licences. The licences are issued at the end of a quarterly procedure in two stages. First stage: applications are submitted for quantities
in respect of the origins fixed in the Regulation: traditional ACP, Annex 1 and others. These quantities may be adjusted by the application of a reduction coefficient where the ‘indicative quantities’ are exceeded or where quantities allocated annually
are still available. At the end of the first stage the applications are either cancelled by the operator or supplemented by submission of new applications for the origins which are not affected by the application of a corrective coefficient. Unused
quantities covered by licences may be reallocated under certain conditions. Licences may be transferred once only under certain conditions.

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C 294/24

EN

Official Journal of the European Communities

28.11.2002

INSTRUCTIONS FOR VERIFYING THE MASS OF BANANAS ACCEPTED FOR IMPORT INTO THE EU

ANNEX 5

1.
Regulation (EC) No 89/97 of 20 January 1997 amended Regulation (EEC) No 2454/93 which laid down provisions
for implementing Council Regulation (EEC) No 2913/92 establishing the Community Customs Code. The first recital in the
preamble to Regulation (EC) No 89/97 stated that verification of the net mass specified in declarations of entry for free
circulation of bananas had, in the past, posed problems of methodology and uniform application. The Regulation in ques-
tion therefore introduced specific methods to be universally applied to determine the net mass of bananas for admission.
Bananas are the only import where the verification methodology is specified in this way.

2.

Regulation (EC) No 89/97 specifies the checks to be carried out. It requires:

— a sample to be taken from each type of package and for each place of origin,

— that the control must be carried out in a way which ensures that the packaging units weighed constitute a representative

sample and that at least the minimum quantities shown below are checked:

— up to 400 units: 5 units to be checked,

— 401 to 700: 7 units to be checked,

— 701 to 1 000: 10 units to be checked,

— 1 001 to 2 000: 13 units to be checked,

— more than 2 000: 15 units to be checked,

— where the whole cargo is covered by a single declaration the customs office may, if fraud is not suspected, base their

calculation of net mass on a minimum sample of 15 units per type of package and place of origin,

— the net mass is determined thus:

— open at least one packaging unit in order to establish its weight,

— deduct this weight from the total mass of all the units (boxes) in the sample, in order to determine the net mass of

each,

— calculate the average net mass for the sample,

— multiply this average net mass by the total number of boxes shown on the declaration, in order to determine the

total mass admitted for importation.

28.11.2002

EN

Official Journal of the European Communities

C 294/25

CHANGES IN COMPENSATORY AID TO BANANA PRODUCERS

ANNEX 6

Portugal

France

Martinique

Guadeloupe

Spain

Greece

EC weighted
average

Change relative
to previous year

(Quantities in tonnes; values in euro/tonne)

1998 year

Quantity
Price ex-packing shed (1)

Aid

Supplementary aid

Total

1999 year

Quantity
Price ex-packing shed (1)

Aid

Supplementary aid

Total

2000 year

Quantity
Price ex-packing shed (1)

Aid

Supplementary aid

Total

30 436

240 499

74 294

437 414

3 589

786 232

336

244

32

612

396

244

640

368

244

612

370

244

738

244

614

982

378

244

1

623

21 770

258 501

83 508

362 188

3 336

729 303

277

297

50

624

284

297

30

611

231

297

85

613

415

297

712

22 461

271 269

87 592

397 578

213

383

33

629

234

383

617

215

383

19

617

283

383

666

856

516

297

813

3 275

473

383

343

297

22

662

782 175

257

383

3

643

– 7,2 %

– 9,3 %

21,7 %

7,2 %

– 25,1 %

29,0 %

(1) Supplementary aid is granted to producer regions when average income from production is significantly lower than the average income in the Community.

Note:
The table shows that in 1999/2000 the prices paid to EU banana producers fell and that income compensation increased as a consequence.

Source: Commission.

C 294/26

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Official Journal of the European Communities

28.11.2002

THE COMMISSION’S REPLIES

SUMMARY

III.
The level of detail in the definition and quantification of objectives is similar to the other market
organisations and will be reviewed in depth when the market organisation is evaluated under Article 32 of
Regulation (EEC) No 404/93 (evaluation planned for 2004).

The Commission finds that the method for calculating the compensatory aid is clearly defined in Article 12 of
Regulation (EEC) No 404/93.

The Commission considers that it solved the management problems that arose in the Member States effectively,
by taking immediate corrective action.

IV.
The Commission will be drawing the attention of the relevant national authorities to the State aid
scheme cited by the Court with a view to ruling on whether it is compatible with the common market under
Article 87 of the Treaty.

The Commission had already identified the shortcomings in the documents supplied in support of compensa-
tory aid payments as mentioned by the Court. These are being followed up under the clearance of accounts
procedure.

V.
The grubbing-up aid was a limited measure (1993 and 1994) connected with the transition to the com-
mon organisation of the market. The main purpose of the measure was to enable a very specific and limited
category of producers to leave the sector.

VI.
The difference vis-à-vis other representative markets (such as the United States of America) is not due
to the quota rent alone, but also to other factors such as the distance from the production areas, distribution
costs, product quality and customs duties.

Moreover, a tariff-only system will be introduced on 1 January 2006 at the latest (Article 16(1) of Regulation
(EEC) No 404/93, as amended by Regulation (EC) No 216/2001), and quota rents are part of all tariff-quota
regimes.

VII.
The import arrangements introduced in 1993 replaced a situation which was extremely diverse, given
the existence of 12 different national import regimes. The new arrangements were designed to ensure fair
access to the Community market for many different types of operators and bananas from many different ori-
gins, taking account of the situations of the various players in the import system (e.g. ACP producer States
with close ties to particular Member States of the Community).

The current system has achieved a remarkable stability. It is widely appreciated for its simplicity by producer
third countries and the Community’s other trading partners.

VIII.
The Commission is aware of the Member States’ shortcomings in applying the Community legisla-
tion on physical checks on the net quantity of imported bananas. At the meeting of the Customs Code Com-
mittee of 17 May 2002, the Commission departments reminded the Member States of their obligations under
the Community rules and stressed the importance of those obligations. The Commission will monitor this
matter within the Customs Committee in order to achieve full and correct application of the Community rules.

28.11.2002

EN

Official Journal of the European Communities

C 294/27

Fraudulent imports were detected by the Commission. It should be noted that this discovery was possible
because imports are subject to a licensing scheme. The Commission immediately adopted Regulation (EC)
No 1632/2000 to introduce a procedure for cross-checks on the issuing and use of licences so that such fraud
can no longer occur.

IX.
The transitional arrangements currently in force are indeed designed to maintain fair market access
for EU and ACP producers before a tariff-only system is introduced, no later than 1 January 2006. However,
with regard to import volumes, 100 000 tonnes were transferred from the C quota (ACP bananas) to the B
quota (open to all origins) as of 1 January 2002 following the entry into force of Regulation (EC) No 2587/
2001.

The Commission attaches the same importance as the Court to the evaluation of the different aspects

X.
of the market organisation and its objectives planned for 2004.

XI.

The Commission takes the view that:

(a)

the fundamental objectives of the market organisation have in the main been achieved, in particular the
fusion of several national markets into a single market, the quantitative balance in market supply, fair
prices for consumers and for Community and ACP producers. In the context of a world market dominated
by multinationals, the Community market has remained diversified and pluralist, in terms of both the
origins of bananas and types of traders;

(b)

the grubbing-up premium was a limited measure (1993 and 1994) connected with the transition to the
common organisation of the market. The main purpose of the measure was to enable a very specific and
limited category of producers to leave the sector;

(c)

the method for calculating the compensatory aid is clearly defined by the Community legislation in force
(Article 12 of Regulation (EEC) No 404/93 and Regulation (EEC) No 1858/93). The Commission has iden-
tified the shortcomings in the application of the Community rules and these are being followed up under
the clearance of accounts procedure;

(d)

lastly, concerning the comparison between the quota rent and the support given to Community and ACP
growers, the Commission notes that:

— there are 3,5 times more ‘dollar bananas’ than bananas produced in the Community (the same applies

for ACP bananas),

— the compensatory aid received by Community producers in 2000 was 1,9 times the theoretical quota

rent estimated for dollar bananas,

— the producers of bananas in the ACP countries enjoy not only technical assistance but also particularly
advantageous preferential treatment (an exclusively reserved tariff quota, zero import duty inside all
the quotas and a duty reduced by EUR 300 outside the quotas),

— the existence of tariff quotas, and therefore, inevitably, a quota rent, also makes it easier to sell Com-

munity and ACP bananas and indirectly benefits Community and ACP producers.

The Commission has identified the shortcomings in the way the Member States apply the rules appli-
XII.
cable to producer organisations and the matter is being followed up under the accounts clearance procedure.

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The Commission has also adopted a number of measures to improve the cash-flow situation of producers (see
points 27 et seq.).

The Member States’ customs procedures on import have yet to be improved and the Commission stressed this
point to the Member States at the meeting of the Customs Code Committee on 17 May 2002. The Commis-
sion will continue to insist that the Member States find a permanent solution to the problem.

XIII.
of the market organisation planned for 2004. It will ensure that it keeps to this timetable.

The Commission attaches the same importance as the Court to the evaluation of the different aspects

INTRODUCTION

1.
The general statement that dollar bananas are sold at lower
prices than Community bananas does not fully reflect market
reality. The prices of bananas from different origins depend on a
number of market factors, in particular distribution, consumer
preference, quality and trade mark.

4.
The aims of the market organisation reflect the goals of
the common agricultural policy as set out in Article 33 of the
Treaty. The Commission thinks that, on the whole, the balance
sought by the legislator between the different market organisa-
tions has been achieved, despite the complexity of those aims.

In the context of a world market dominated by multinationals,
the Community market has remained diversified and pluralist, in
terms of both the origins of bananas and types of traders.

The legal basis for structural assistance resides in the
5(e).
Community’s rural development and regional policies. The mar-
ket organisation text merely refers to structural instruments which
can provide support that is consistent with the aims of the market
organisation.

17.
The amount budgeted for the special framework of assis-
tance in favour of traditional ACP banana suppliers is to be spread
among 12 ACP beneficiary countries. The annual budget so far
has been approximately EUR 44 million to EUR 45 million. This
scheme was introduced by Council Regulation (EC) No 856/1999
for a period not exceeding 10 years.

lation (EEC) No 404/93 indicates, the aim being ‘to permit the
continuation of Community production at the costs entailed by
the specific structural situation for as long as this remains unad-
justed by the structural measures implemented’.

21.
The Commission did not consider it necessary to draw up
a list of eligible price and cost components in addition to the defi-
nition in Regulation (EEC) No 1858/93 because the details of the
components to be taken into account for each marketing stage
were already listed in an internationally recognised nomenclature
(Incoterms). Incoterms is used, inter alia, by the Member States of
the WTO. In the EU, this nomenclature is normally administered
by the chambers of commerce in the Member States.

22.
The Commission has adopted Regulation (EC) No 1467/
1999 (amending Regulation (EEC) No 1858/93) which, firstly, lays
down a flat-rate amount for the costs to be deducted for deter-
mining the producer prices at the ex-packing shed stage and, sec-
ondly, requires the information on quantities and prices to be bro-
ken down by bananas marketed inside and outside their producer
region, so that the origin of abnormally low prices can more eas-
ily be detected.

The ‘abnormally low’ prices relate to products marketed locally
and not in the rest of the Community, and the percentages con-
cerned are very small.

THE MEASURES FINANCED BY THE EU

Strictly speaking, the compensatory aid scheme is
18 to 20.
not income aid. Its objective is more limited, as recital 7 of Regu-

23.
The Commission shares the Court’s view that the term
‘marketing’ should mean the actual sale of the product. It consid-
ers that this problem arises from an incorrect application of the
Community rules at national level, which will be rectified under
the current accounts clearance exercise.

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The Commission shares the Court’s view that the
24 to 25.
method applied in France since 1 January 1998 to determine the
quantity on which compensatory aid is paid does not comply
with the Community rules. The Commission is acting on these
findings under the accounts clearance procedure, but has not yet
decided on a financial correction.

The grubbing-up premium was a limited measure
39 to 41.
for 1993 and 1994 designed to enable producers in areas with
poor production potential to leave the sector if they so wished.
The measure therefore targeted a limited number of specific cases.

The Commission confirms that the interministerial circular set-
ting out, inter alia, the procedures concerned was transmitted to
the Commission at the time. However, the Commission would
point out that the Member State is responsible for issuing instruc-
tions at national level that comply with Community legislation
and it cannot free itself from this requirement simply by notify-
ing the Commission of a national rule.

27.
The Commission has adopted Regulation (EC) No 471/
2001, which aims expressly at improving the cash-flow situation
of producers by introducing the possibility of a sixth advance pay-
ment for bananas marketed during November and December. The
current system of advances is therefore an important advantage
to Community producers, who are entitled to the payment of six
advances throughout the year, at regular two-monthly intervals.

Any aid granted by a Member State without the
30 to 33.
prior authorisation of the Commission is illegal and the Commis-
sion may have to establish whether it is compatible with the com-
petition rules. The Commission departments will draw the atten-
tion of the French authorities to this aid scheme in order to obtain
the information needed to allow it to rule on its compatibility
with the common market under Article 87 of the Treaty.

34.
The Commission wishes to stress that the trend in Com-
munity output since 1993 shows that traditional banana produc-
tion in the Community has increased slightly (+ 6,3 %). The Com-
mission sees this as a convincing indicator that the financial
injection generated by both the market prices obtained when the
bananas are sold and the various Community support schemes,
in particular compensatory aid, have proven to be effective instru-
ments at a level that is largely adequate, in particular for the Com-
munity growers in certain regions.

In the general context of banana production, given the absence of
other sources of income, the grubbing-up premium would not in
itself be a sustainable strategic alternative for the vast majority of
producers.

43 to 44.
The Commission confirms that it has identified
shortcomings in the compliance with the statutory criteria for the
recognition of producer organisations in France and that prob-
lems persist despite apparent improvements. These are being fol-
lowed up under the accounts clearance procedure.

45.
The structural measures provided for under the market
organisation are implemented under the development programmes
of the regions concerned (Martinique, Guadeloupe and the Canary
Islands). Such measures to strengthen the agricultural economy of
these regions existed before the organisation of the market in
bananas was created. The same is true of the sugar sector and all
the other sectors of agricultural activity in these regions (livestock
farming, fruit and vegetables, etc.).

46.
In the context of regional programming under the Struc-
tural Funds, the aim of the measures for bananas is to improve
quality, use of resources and competitiveness (moreover, agrien-
vironment measures financed by the EAGGF Guarantee Section
have also been launched, particularly in Martinique). For example,
the 1994 to 1999 rural development operational programme for
the Canary Islands states the following objectives and measures:
‘to improve production and competition conditions, this assis-
tance will take the form, in particular, of measures relating to
research, harvesting, presentation and packaging, transport, stor-
age, marketing and sales promotion.’ The Commission therefore
considers that the programme supplies the link between the three
objectives sought by the market organisation and the measures
proposed in the context of structural assistance.

The Commission notes the Court’s suggestion that it carry out a
detailed evaluation of the cost- effectiveness of the measures taken
under the internal regime; it will do this during the review exer-
cise in 2004.

35 to 38.
no financial impact in the case identified by the Court.

The Commission wishes to point out that there is

47.
The single programming document covering the alloca-
tion from all four Structural Funds (ERDF, ESF, EAGGF and FIFG)
cannot set out the aims for each measure in too much detail, par-
ticularly in agriculture, because of the uncertainty of the weather
in these regions, especially in the Antilles. Besides, the relatively
slow start up of the programmes and the need to close the previ-
ous programme (1989 to1993, and the two annual programmes
for 1992 and 1993 for the Antilles) meant that the mid-term
evaluation could do no more than evaluate the implementation
of the programme.

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The Commission entirely shares the Court’s insistence on
48.
coordination. This coordination is ensured by the instruments
mentioned in point 49.

The ex ante evaluation provided for by the rules for the
52.
new programming period must indeed include an overall evalu-
ation of the previous programme. This evaluation is sometimes
brief because it was drawn up at the end of 1999 while the size
of the final financial instalments makes it difficult to measure tan-
gible results.

It should also be noted that the results of structural measures are
sometimes difficult to measure because of local economic fluctua-
tions and local weather.

All decisions on the internal aid scheme for Community
49.
producers and the programmes financed by the Structural Funds
in the production regions are taken after an interdepartmental
consultation procedure which amply involves all the departments
concerned from the earliest stages in preparing the measure to be
adopted.

Concerning the impact of the measures, the ex post evaluation of
the programmes financed by the Structural Funds will be com-
pleted in 2003. This procedure, which will cover both the cost-
effectiveness and the synergy of the measures, will thus assess the
impact of the projects implemented under these programmes.
The findings of this evaluation will also be taken into account in
the evaluation of the market organisation planned for 2004, also
in view of the transition to the tariff-only regime. Thus the inter-
actions and synergies between the measures financed by the
Structural Funds and the market measures in the banana sector
are closely monitored.

50.
The Commission considers that types of assistance and
the aims of these projects are fully consistent with the aims of the
market organisation and clearly pursue the three goals laid down
in Article 10 of Regulation (EEC) No 404/93.

53.
Assistance was granted to improve production capacity.
This is because the implicit aim of making banana production
more competitive requires the production of bananas of constant
quality, which was far from being the case in the past. Varietal
improvement (improving resistance to hurricanes by reducing the
size of the banana trees, drip irrigation, control of inputs, etc.) has
allowed this constant quality to be achieved. But at the same time
quality has also been improved by transporting the fruit without
shocks or jolts (cable way, trailers with suspension) and main-
tained by improving the cold chain (agri-food investment was
used to finance cold walls in Guadeloupe and Martinique).

MARKET REGULATION MEASURES

57.
In terms of results, maintaining diversity of supply sources
has made it possible to offer Community consumers a broad
product range in terms of both quality and price. The market
organisation has led to interpenetration and diversification on the
existing national markets (for example, the British market has
opened up to dollar bananas where before it had been dominated
by Caribbean and Community bananas, and ACP bananas now
have access to the German market).

In this connection it should be stressed that any quality strategy
aimed at increasing the competitiveness of the product requires
continual modernisation of production and marketing structures.
This approach is systematically included in the priorities of the
Community Support Frameworks and operational programmes.
These programmes and their strategies are regularly examined
and assessed by all the Commission departments concerned before
a decision is taken to grant aid.

58.
The Commission believes that the approach of gradually
opening up the Community market was continuously upheld.
The banana import regime, based on a gradually reduced consoli-
dated tariff, has been accompanied by tariff quotas with a strong
tariff preference and progressive quantity adjustments.

51.
The cash-flow problems facing producers are not unique
to the banana sector. They affect almost all those sponsoring
projects to develop these island regions. Moreover, the already
heavily burdened banking sector is not always willing to assist
projects that will not be immediately profitable. The new pro-
gramming for 2000 to 2006 aims to reduce the lead time between
approval of a project and payment of the Community aid.

The import regime introduced in 1993 aimed to ensure fair access
to the Community market for bananas from many origins and
different types of operators, taking account of the high degree of
integration of the participants in the import trade (e.g. some ACP
producer States have close ties with certain Community coun-
tries). The new regime took the place of a situation which was
extremely diverse, given the existence of 12 different national
import regimes which in some cases granted substantial prefer-
ences to certain origins.

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Under the current arrangements, the Community market has
achieved a stability and profitability which is widely appreciated
by the exporting countries.

Average imports of dollar bananas in 1989/90 were much lower
than in any year after 1993.

high would allow producers to benefit from the quota rent,
and it is also worth making the general point that the fact
that the traditional ACP suppliers are part of a closely inte-
grated import chain enables the growers in those countries
to sell their bananas at a higher price than the other coun-
tries in the dollar area, thereby drawing some benefit from
the quota rent.

In a quota management system based on historical reference
quantities, it goes without saying that there must be some adjust-
ment towards the more recent operational context. Consequently,
the transfer of licences between operators (it has never been pos-
sible to determine the scale of this practice) has helped to bring
the system into line with practical market requirements and
brought flexibility into a system based on traditional flows. The
current arrangements have restricted the drift of this market, in
particular for non-traditional operators. It is already planned that
as from 2004 the system will be adjusted so that operators’ refer-
ence quantities are fixed in the light of their actual use of licences.
This change should solve the problem once and for all.

59.
In 2000 the European Parliament endorsed the tariff
quota regime in so far as it allowed these producers continued
access to the market. In 2001 the Council decided, on a proposal
from the Commission, to introduce a tariff-only system from
1 January 2006 at the latest.

The quota rent is an inherent part of any tariff quota regime and
the Commission agrees with the Court that it is difficult to make
any precise estimation, particularly of its impact on the consumer
price. This price has generally fallen since the market organisation
was set up (– 22 % in 2000).

The Commission wishes to stress that the quota rent:

— is linked to the particularly high level of the tariff preference
for bananas (EUR 605 per tonne) and to movements in world
market prices,

— is spread over the different stages of importing and market-
ing according to the relative strength of the operators in the
trade, in particular the supermarkets. Indeed, the producer
third countries have not taken full advantage of the oppor-
tunity offered by the preferential tariff quotas. Cut-throat
competition between producers, particularly in Latin
America, has allowed traders importing into the Community
market to buy bananas at a very low price, thereby obtain-
ing a substantial quota rent because of the much higher sell-
ing price on the Community market. Keeping producer prices

60 to 63.
pler than they were at the outset.

The import arrangements are now appreciably sim-

65.
Regarding the checking of the operators’ quantities
declared by the Member States (double counting), the Commis-
sion wishes to point out that it made considerable efforts to pre-
vent the same quantities being taken into account to calculate the
rights of several different operators. In particular, the Commis-
sion was closely involved in checking the figures for individual
operators in collaboration with the competent national authori-
ties, in order to identify and eliminate the cases of double count-
ing before fixing the final adjustment coefficient to be applied to
each operator’s reference quantity. The Court of First Instance rec-
ognised that the Commission played ‘a very important role,
together with the competent national authorities, in checking and
correcting the operators’ individual reference quantities in order
to eliminate cases of double counting’.

The problem of double counting has arisen in each cat-

66.
egory of operators.

67.
The arrangements introduced when the market organisa-
tion first entered into force were designed to ensure fair access to
the Community market to bananas from different origins and dif-
ferent types of operators. As a result of the disputes with the EU’s
trading partners, the Community sought actively to identify solu-
tions compatible with the WTO. Since the conclusion of the dis-
pute settlement understandings with the United States and Ecua-
dor in April 2001, the international sanctions have been raised
and the system has attained a remarkable stability. Moreover, the
Commission would point out that on 14 November 2001 the
WTO granted two exemptions from Articles I and XIII of GATT
to allow the creation of a C quota entirely reserved for the ACP
States and the fixing of a zero customs duty for banana imports
originating in the ACP States inside the tariff quotas. The current
regime is widely appreciated by the producer third countries and
the Community’s other trading partners.

The volume of the quotas was adjusted in 1995 to take
69.
account of the demand from the new Member States. However,
the rules governing the importation arrangements were not
changed. The new Member States benefited from transitional
measures for a nine-month adjustment period before fully apply-
ing the import regulations in force in the Community.

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Under the arrangements in force since 1 July 2001, the
73.
Commission has introduced stricter eligibility criteria for the reg-
istration of non-traditional operators (see Article 6 of Regulation
(EC) No 896/2001).

take any measures needed to compensate for financial conse-
quences deriving from non-compliance,
including back-dated
interest on arrears.

74.
In the specific case quoted by the Court, the Commission
considers that the amount of USD 5 per case quoted by the
operator concerned should be taken not as a mean value but as a
maximum. It should be stressed that the price of licences and the
quota rent are two different things. Specifically, the price of a
licence reflects the economic climate and depends closely on the
trading relations between the operators and the specific commer-
cial operation for which the licence is being transferred.

The Commission adopted Regulation (EC) No 1632/
75 to 78.
2000 to strengthen the provisions on management and checks,
and the national authorities are now required to make cross-
checks on import licences.

79 to 83.
The Commission is aware of the Member States’
shortcomings in applying the Community legislation on physical
checks on the net quantity of imported bananas. At the meeting
of the Customs Code Committee of 17 May 2002, the Commis-
sion departments reminded the Member States of their obliga-
tions under Community legislation and stressed the importance
of those obligations. The Commission does not think that the rea-
sons why Member States fail to fulfil their obligations correctly
are connected with the content of the provisions for applying the
Customs Code. The Commission will continue its efforts with the
Member States in the Customs Committee to solve this problem
once and for all.

The Commission’s own inspections have already revealed, in all
the Member States visited, non-compliance with aspects of the
legislative requirements to properly weigh a specific proportion
of fully representative samples and to apply those findings to dec-
larations accepted. Action is already being taken in these Member
States to remedy the various shortcomings. All the Member States
have been notified of the findings in a thematic report, which will
be discussed at a forthcoming meeting of the Advisory Commit-
tee on Own Resources.

The Commission found the same situation during its inspections
in Zeebrugge and Antwerp. Following the Commission’s request,
the Belgian authorities have already changed their procedures.

In its thematic report on the control of fresh banana imports, the
Commission concluded that none of the Member States inspected
was fully complying with the border checks required for banana
imports. All the Member States involved have satisfactorily
responded to requests to take the necessary remedial action to
ensure that their procedures fully comply with the legislation. The
Commission is meanwhile following up any cases where the
shortcomings in controls have had direct measurable effects on
the own resources due, including demands for back-dated inter-
est where appropriate. It is also alerting the other Member States
to the deficiencies found.

The fraud concerned several Community ports and sev-
84.
eral Member States (Belgium, Italy, Spain, Portugal, Greece and
Germany). The false licences were also forged from French and
Spanish originals. The total quantities involved are around 220 000
tonnes and the total customs duty evaded amounts to some EUR
160 million.

These fraudulent imports were detected by the Commission. It
should be noted that this discovery was possible because imports
are subject to a licensing scheme. Independently of the action
taken against the discovered fraud, the Commission immediately
adopted Regulation (EC) No 1632/2000 to introduce a procedure
for cross-checks on the issuing and use of licences so that such
fraud can no longer occur.

It is extremely difficult to assess the impact of fraud and
85.
any influence that impact might have on banana prices and com-
pensatory aid. Factors other than fraud have had a more direct
and in some ways much more important influence on price lev-
els, namely an increase of around 10 % in the world stocks of
export bananas and a fall of more than 15 % in both the fob
prices for Ecuadorian bananas and the Community import price
between 1996 and 2000, the same period in which the fraudulent
imports took place.

86.
With regard to the current state and future prospects of
the import arrangements, the approach proposed by the Com-
mission and approved by the Council is indeed to introduce a
tariff-only system from 1 January 2006 at the latest (Regulation
(EC) No 216/2001).

DEVELOPMENTS AND EVALUATION

Although cases of non-conformity were found in the other Mem-
ber States inspected, the particular procedures used in Belgium
were not reproduced elsewhere. Other Member States have been
instructed no longer to accept standard weights and to ensure that
samples are taken sufficiently frequently and are of sufficient size
to comply with Regulation (EC) No 89/97. The Commission will

87.
It should be noted that the ‘first-come, first-served’
approach examined by the Commission before the dispute settle-
ment understandings were reached with the United States of
America and Ecuador was a method for managing tariff quotas,
and so the Commission was not yet contemplating abolishing the

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quota regime at the time when it was studying the possibilities for
adopting the system referred to above.

89.
The ‘first-come, first-served’ method is the one most
commonly used for managing other tariff quotas at Community
level.

In view of the difficulties of finding a solution with our other
trading partners, the Commission believed that this method could
have been a viable alternative to historical reference quantities.

The measure to convert the banana sector under the
102.
1994 to 1999 rural development programme for the Canary
Islands was monitored by the Commission departments with the
same regularity as the other operational programmes during that
period. The Commission has no direct knowledge of the projects
selected by the authorities. These must comply with the provi-
sions set out in the programmes. The ex post evaluation of the
1994 to 1999 operational programme, including the measure to
convert the banana sector, is currently under way.

103.
The Commission is aware of the large increase in the
level of the compensatory aid during recent years. It should also
be noted that this development is the result of the surplus supply
on the world market and the consequent drop in banana prices.
The rallying of world prices made it possible to reduce the com-
pensatory aid substantially in 2001.

95.
The successive amendments since 1995 have achieved a
quantitative market balance because on the whole the quantities
sold on the Community market are well balanced in relation to
demand and in terms of Community output and imports from
the ACP States and other producer third countries. The transfer
of 100 000 tonnes from the C quota to the B quota from 1 Janu-
ary 2002 should further improve this balance. The Community
market is one of the world’s most diversified markets in terms of
both the origin of the products and the types of importers.

However,
it should be stressed that Community output has
increased slightly since 1993. This fact is a convincing indicator
that the financial injection generated by both the market prices
obtained when the bananas are sold and the various Community
support schemes, in particular the aid to compensate the loss of
sales revenue, has proven adequate for Community growers as a
whole.

The Commission agrees on the importance of a
96 to 99.
thorough analysis of market trends, the impact of the transition
to a tariff-only system on all the parties involved, and the synergy
between the different components of the market organisation. It
takes due note of the Court’s recommendation that the review
exercise be based on appropriate internal and external expert
opinions.

CONCLUSIONS AND RECOMMENDATIONS

The Commission believes that the Court’s comments,
100.
the 2004 review and the prospect of moving to the tariff-only
system will provide an opportunity to evaluate (or even re-examine)
the market organisation’s objectives for both the internal arrange-
ments and trade with third countries. Close attention could be
paid to the interactions and synergies with the objectives set for
the banana sector in the context of other Community policies.

The Commission is also deeply convinced of the need to conduct
an in-depth review of the aid scheme for Community producers.
The review procedure will be launched in mid-2003.

104.

The Commission notes that:

— Community producers receive compensatory aid which, in
2000, was 1,9 times the theoretical quota rent estimated for
dollar bananas,

— the existence of tariff quotas, and thus, inevitably, a quota
rent, makes it easier to sell Community and ACP bananas
and indirectly benefits the producers in those areas.

The Commission takes due note of the Court’s recommendation
that a thorough analysis be made of the impact of the transition
to a tariff-only system on all the parties involved, at the time of
the review exercise in 2004.

105.

See the reply to point 49.

101.
The grubbing-up aid was a limited measure (1993 and
1994) connected with the transition to the common organisation
of the market. The main purpose of the measure was to enable a
very specific and limited category of producers to leave the sec-
tor.

The banana industry is not always sustainable in some
106.
traditional ACP banana-growing States. The Commission recog-
nised this and tackled it when establishing the special framework
of assistance for those countries. As stated in Article 3(2) of
Council Regulation (EC) No 856/1999 introducing the scheme,
which is designed to facilitate the adaptation to the new market

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conditions, technical and financial assistance is granted to those
countries either ‘to improve competitiveness in the banana sec-
tor’, or ‘to support diversification where improvement in the
competitiveness of the banana sector is not sustainable’.

Furthermore, the Commission is obliged by Article 9 of the same
Regulation ‘every two years… to submit a report, accompanied if
appropriate by proposals, on the operation of this Regulation to
the European Parliament and to the Council’. The first report was
presented in December 2000 as foreseen and the second one is
in preparation. Thus, the scheme is being continually monitored
and the possibility of translating these evaluations into factual
proposals is ensured.

107 to 108.
The Commission is aware of the shortcomings
in the physical checks by customs officials on the net quantities

of bananas imported. Action is already under way, via the usual
procedures, for following up areas of non-conformity highlighted
in inspection reports, to ensure that the Member States properly
implement the Community rules on checks on banana imports.
The Commission will insist that the Member States rigorously
apply the provisions in force.

The Commission had already identified the shortcomings in the
documents supplied in support of compensatory aid payments
mentioned by the Court and these are being followed up under
the clearance of accounts procedure.

The Commission’s discovery of import frauds was followed by
immediate corrective action. The Commission immediately
adopted Regulation (EC) No 1632/2000 to introduce cross-
checking procedures on the issuing and use of licences to prevent
any continuation of such fraud.