Special Report No 7/2004 on the common organisation of the market in raw tobacco, together with the Commission’s replies
Date: 2005-02-17
Institutions: European Court of Auditors
Subjects: European Commission, agricultural guidance, common organisation of markets, interinstitutional relations (EU), management audit, operation of the Institutions, report, tobacco

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 7/2004

on the common organisation of the market in raw tobacco, together with
the Commission’s replies

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

(2005/C 41/01)

TABLE OF CONTENTS

Paragraph

Page

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Tobacco cultivation and the EU market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Objectives of the CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Measures adopted under the 1998 scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PREPARATION FOR THE 1998 REFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Information and analysis underlying the 1998 reform proposal

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

Insufficient alignment of agriculture and other policies . . . . . . . . . . . . . . . . . . . . . . . . . .

THE CMO HAS NOT ACHIEVED THE DESIRED IMPACT . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The various measures have not achieved their objectives . . . . . . . . . . . . . . . . . . . . . . . . .

Simplification of administration not achieved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-X

1-19

1-4

5-6

7-15

16-19

20-37

21-33

34-37

38-74

38-65

66

Inappropriate price agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67-71

Procedures to improve control were not effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-compliance with regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MONITORING AND EVALUATION OF THE REFORMED CMO . . . . . . . . . . . . . . . . . . . . . . .

Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The external evaluation concluded that the CMO was not achieving the intended impact

FURTHER REFORM OF THE CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assessment of options for reform of the CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How the reform will address the weaknesses identified by the audit

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

72

73-74

75-87

75-84

85-87

88-95

88-91

92-95

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

96–107

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

96–102

Recommendations

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

103–107

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

2

3

3

4

5

5

6

6

8

8

8

11

12

12

12

13

13

14

15

15

15

15

15

16

25

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EXECUTIVE SUMMARY

I.
The EU produces about 5 % of the world’s raw tobacco making it the fifth largest producer. It exports
more than half its own production however, because the aroma and taste of most of the tobacco cultivated is
not in demand within the EU. This production is predominantly of Virginia and Burley varieties of neutral
aroma and taste used as the main cigarette filler. Smaller quantities of oriental varieties are also grown which
have the required aroma and taste in demand. Consequently, it imports from outside the EU the tobacco which
meets the aroma/taste requirements and takes 9 % of the world’s production making it the biggest importer.
The major EU producers are Italy, Greece and Spain who together account for 87 % of total production. Prod-
uction is characterised by a large number of growers dedicating small individual areas to its cultivation. Mecha-
nisation is limited and production cost high. EU growers cannot make a reasonable living without the EU aid
as the premium represents around 75 % of producers’ income from tobacco production. Were EU tobacco pro-
duction to cease, this would not affect manufacturers of tobacco products who would obtain supplies through
increased imports.

II.
The EU has been supporting its tobacco cultivation through a common market organisation (CMO)
since 1970 and the annual budget is some 1 000 million euro. The market has been reformed substantially
first in 1992, 1998 and again in 2004, in efforts to provide appropriate income support within budgetary
limits, improve the response to market requirements and thus the value of production. It was hoped that grow-
ers would become less dependent on aid. Other measures are targeted towards facilitating voluntary departure
from the sector and alternative cultivation.

III.
The Court has reported on the operation of the CMO on three previous occasions. It concluded, in its
last report in 1997, that the measures adopted in 1992 had achieved no measurable effect on the high level of
subvention in relation to the value of production, the areas planted, the level of employment or the EU’s mar-
ket situation.

IV.
The objective of this audit was to assess whether the reforms introduced in 1998 were soundly based
and well managed by Member States. It also examined how the Commission had monitored and evaluated
implementation and whether the objectives of the reformed CMO had been achieved.

V.
As a result of its examination the Court concluded that the process by which the Commission elab-
orated its proposals for the 1998 reform was based on unreliable data and its analysis of the market was inad-
equate. Because of these failings the measures adopted were largely inappropriate from the outset and proved
to be ineffective in many areas. There is no evidence that the CMO has influenced EU production so as to
reduce the mismatch of supply and demand. The Court also found that the measures introduced did not
achieve significant improvements in the income from tobacco cultivation or the market balance anticipated.
The value of production was also put at risk by anti-competitive behaviour, in the form of price agreements,
in the three largest producer States.

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There were numerous failings in Member States to apply the checks required by the regulations and
VI.
the verification of key controls and the pursuit of corrections through the clearance of accounts process should
have been extended. No clearance of accounts decision has been taken as at June 2004.

VII.
The Commission’s monitoring was unsatisfactory and the evaluation of the CMO was delayed. The
findings of the evaluation carried out by external consultants were made public in a report in October 2003
and are, on common issues, very similar to those of the Court.

In July 2002 the Commission published its mid-term review of the common agricultural policy and
VIII.
proposed a new strategy for sustainable development across the agriculture sector which would be based on
decoupling aid from production and providing support to farmers through a single farm payment scheme. The
audit also examined how this might affect the tobacco CMO.

IX.
The reform adopted by the Council in April 2004 (1) envisages phased decoupling of the aid from pro-
duction. Future support for tobacco producers will be included in the single farm payment scheme. There will
also be a specific financial envelope for the restructuring of tobacco-producing areas.

X.
The Court welcomes the present reform, which should go some way to addressing many of the weak-
nesses identified by the audit, although this will take some time. The Court recommends that the Commission
pursue their investigations of the anti-competitive behaviour in Member States and, if it is confirmed, take
appropriate action. The Member States’ failures to apply the checks required by the regulations should also be
pursued and corrections applied where possible.

INTRODUCTION

Tobacco cultivation and the EU market

2.
The EU produces around 5 % of the world’s production of
raw tobacco making it the fifth largest producer, but less than half
its own production is used within the EU because it does not have
the aroma and taste which is in demand by manufacturers. In
order to obtain tobaccos with the required characteristics, the EU
imports about 9 % of world production making it the biggest
importer.

1.
Raw tobacco is tobacco in leaves which has been grown
and subjected to initial drying by growers (the producers) but not
yet processed. The next stage involves more specific preparation
of the raw tobacco by companies called first processors who then
supply the processed tobacco to the manufacturers of tobacco
products such as cigarettes, cigars and pipe tobacco. Annex 1
shows the tobacco-growing, processing, manufacturing and dis-
tribution chain.

(1) Council Regulation (EC) No 864/2004 (OJ L 161, 30.4.2004, p. 48).

3.
In the EU, Italy, Greece and Spain are the most significant
growers and account for around 38, 36 and 13 % of total pro-
duction respectively. The table shows the EU raw tobacco supply
situation for the period 1996 to 2000.

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Table

EU raw tobacco supply balance

(tonnes)

1996
01/1996

1997
01/1997

1998
01/1998

1999
01/1999

2000
01/2000

383 263

286 291

244 942

226 565

299 274

300 563

306 794

304 148

543 022

536 110

533 411

528 782

212 319

302 289

528 000

1 225 559

1 122 964

1 085 147

1 059 495

1 042 608

– 219 268

– 168 022

– 178 582

– 172 176

– 170 000

Opening stock

Dry weight production

Total imports

Available

Export

Consumption of EU production

– 135 000

– 125 000

– 120 000

– 115 000

– 120 000

Consumption of imports

– 585 000

– 585 000

– 560 000

– 560 000

– 560 000

Total consumption

Ending stock

– 939 268

– 878 022

– 858 582

– 847 176

– 850 000

286 291

244 942

226 565

212 319

192 608

EU production in % of world production

EU import in % of world import

EU export in % of world export

EU export in % of EU production

Domestic consumption in % of EU production

4,5

28

11

73

45

4,1

27

8

56

42

5,1

28

9

58

39

4,9

26

9

57

38

5,1

26

9

56

40

Source: Agriculture DG and United States Department of Agriculture.
This table shows that domestic consumption of EU production did not change significantly between 1996 and 2000 and that imports have remained stable
throughout the same period.

4.
Growing of raw tobacco in the EU is characterised by
approximately 80 000 producers, mostly dedicating small indi-
vidual areas to production. Mechanisation of production is lim-
ited and production costs high. The EU has been supporting the
growing of raw tobacco for more than 30 years and the budget
in recent years has been around 1 000 million euro.

Since then the CMO was reformed in 1992 (3), in 1998 (4)
6.
and again in 2004 (5). In addition to achieving the general objec-
tives of stabilising raw tobacco markets and ensuring a fair stan-
dard of living for producers, as set out in Article 33 of the Treaty,
the CMO set out specifically to:

(a)

limit production and discourage cultivation of tobacco vari-
eties which cannot readily be sold on the EU market;

Objectives of the CMO

(b) encourage improvements in the quality and value of EU

production;

5.
Before the establishment of the single market in the EU,
tobacco growers benefited from national market arrangements.
These provided them with a guaranteed price in order to ensure a
‘fair income’ (2). This support was considered necessary because
levels of return did not always cover the costs of production. In
those regions where tobacco was produced it represented a major
part of farmers’ income. The CMO for tobacco introduced in
1970 replaced the national systems while continuing to provide
similar levels of support.

(c) protect public health and meet environmental protection

requirements;

(d)

facilitate voluntary departure from the sector;

(e)

reinforce control procedures and simplify the management
task for Member States.

(2) Council Regulation (EEC) No 727/70 (OJ L 94, 28.4.1970, p. 1).

(3) Council Regulation (EEC) No 2075/92 (OJ L 215, 30.7.1992, p. 70).
(4) Council Regulation (EC) No 1636/98 (OJ L 210, 28.7.1998, p. 23).
(5) Council Regulation (EC) No 864/2004.

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Measures adopted under the 1998 scheme

The measures adopted to achieve these objectives are set

7.
out below.

A quota buy-back scheme also exists whereby individual
12.
producers, who wish to cease tobacco cultivation definitively,
may sell their quota back to the EU if they cannot be sold to other
producers. Buy-back by the EU results in a permanent reduction
in the national and EU production threshold.

Premium payments

8.
Producers are required to enter into cultivation contracts
with first processors. The EU subsidy is paid as a premium per
kilo of tobacco supplied and accepted under these arrangements.
The premium supplements the price the producers receive for
their tobacco on the market and should provide them with a ‘fair
income’ and encourage to produce good quality tobacco. A rate
of premium was set by the Council in 1992 for each of the eight
variety groups recognised by the CMO. The rates have remained
virtually unchanged since then (6).

9.
The premium comprises both a fixed and a variable
amount the latter presently accounting for between 30 and 45 %
according to the variety (7). The fixed part of the premium is paid
in full to all producers. The variable part of the premium is dis-
tributed by the producer groups to their members in proportion
to the price which each of them has been paid by the first pro-
cessors for their deliveries.

Cultivation contract auction scheme

10.
For tobacco production to be eligible for aid, regulations
require cultivation contracts to be concluded, by variety group of
tobacco, between first processors and producer groups or indi-
vidual producers who are not members of a group. To help con-
tract prices truly reflect market conditions, Member States were
given the option, for each harvest year, to operate a cultivation
contract auction scheme. The scheme permits individual produc-
ers who are not member of a producer group or producer groups
to offer their existing cultivation contracts to the wider first pro-
cessing market. Bids have to be at least 10 % higher than the
original contract price and the original first processor has to be
given the opportunity to match the new price.

Thresholds, quotas and national reserves

11.
In order to orient and limit production while maintain-
ing budgetary control, the Council sets an overall guaranteed
quantity for which aid will be paid. This is set per harvest by
tobacco variety group and Member State. It is allocated to pro-
ducers through quotas established on the basis of their produc-
tion in a reference period. The regime permits Member States to
transfer guaranteed quantities between variety groups, with the
approval of the Commission, provided the effect is at least neut-
ral for the budget.

13.
Finally, there is a system of national quota reserves cre-
ated by Member States from deductions from the quotas allocated
to producers. These reserves are intended to encourage existing
producers to switch to other crops and/or restructure their hold-
ings and to allow producers who wish to become tobacco pro-
ducers to enter the market.

Specific aid for producer groups

14.
Producer groups are required to play an important role
in achieving the market’s objectives. Provided they satisfy regula-
tory requirements and are officially recognised by Member States,
they are granted 2 % from the total premium paid to producers.
At least half of the funds made available are intended to compen-
sate them for costs on employment of technical staff and pur-
chase of certified seeds or seedlings with the objective to improve
product quality and environmental protection measures. Any
remainder may be used on infrastructure measures for enhancing
the value of the tobacco such as grading, storage and handling
facilities and on employment of administrative staff.

The Tobacco Fund

15.
The Fund was used to finance research into tobacco vari-
eties, production methods and for combating smoking through
information campaigns to increase public awareness of its harm-
ful effects. The research element has now been transferred to the
EU’s research programme from 2003. From the 2002 harvest
onwards, the Fund finances actions primarily to improve public
awareness of the harmful effects of all forms of tobacco con-
sumption and other actions to assist producers to convert from
tobacco cultivation to other crops or activities. It is currently
financed by withholding 3 % from the premium.

Audit objectives

16.
The Court has reported on the CMO on three previous
occasions (8), the last being in its Annual Report for 1996. The
purpose of the present audit was to examine the reformed mar-
ket regime introduced in 1998.

(6) Except for group V for which the premium was decreased by 10 %

from the harvest year 2002 onwards.

(7) The variable part has been increased progressively from 1999

onwards.

(8) Special Report No 3/87 on the common organisation of the market
in raw tobacco (OJ C 297, 6.11.1987, p. 1). Special Report No 8/93
on the common organisation of the market in raw tobacco (OJ C 65,
2.3.1994, p. 1). Annual Report for 1996 (OJ C 348, 18.11.1997,
p. 83).

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17.

The main objectives were to assess whether:

(a)

the Commission’s proposals for changes to the CMO, as sub-
sequently adopted in the 1998 reform, were soundly based;

(b)

the measures introduced were well implemented and man-
aged by the Commission and Member States;

(c)

the Commission’s management, monitoring and evaluation
processes enabled it to identify the extent to which the objec-
tives of the reformed CMO were being achieved as foreseen.

It concluded that the only justification for the Community’s con-
tinued aid for tobacco production was if producers could improve
tobacco quality, obtain higher prices and reduce their dependence
on aid. The measures introduced reflected this. Accordingly, the
Commission expected that the combined effect of all the elements
of the reform would improve the quality of tobacco produced in
the Community and reduce the exports of subsidised poor qual-
ity tobacco.

Information and analysis underlying the 1998 reform proposal

18.
The criteria against which the Court examined the Com-
mission’s management derive from the Financial Regulation and
focused on whether:

The significance of tobacco production for employment was
based on incomplete information

(a) mobilisation of resources was preceded by an evaluation of

the costs and benefits likely to be involved;

(b) market objectives were quantified and progress monitored;

(c)

the budget was used in such a way as to ensure sound finan-
and cost
cial management
effectiveness;

in particular

economy

(d) operations were subject to regular review during the annual
budgetary process so that their continued justification could
be verified.

19.

The main sources of audit evidence were:

(a)

interviews with staff in tobacco-related Commission services,
the competent national authorities, producers and processors
and other relevant parties acting in the tobacco market;

(b) documentation obtained from the Commission, Member

States, and other informed sources;

(c) on-the-spot examinations in Germany, Greece, Spain, France
and Italy who, between them, receive 97,7 % of the premi-
ums; the transactions examined covered 20 producer groups
representing some 40 % of EU tobacco producers.

PREPARATION FOR THE 1998 REFORM

20.
The Court examined the process through which the
Commission prepared its reform proposal and noted that it had
been prepared on certain key assumptions. These were that
tobacco was of material importance for employment and the
entire population’s livelihood in some areas; alternative cultiva-
tion was not viable; the existing market imbalance and the need
for significant support was attributable to the poor quality of
tobacco produced which resulted in low prices being obtained.

21.
One of the key parameters necessary to measure the
impact of the CMO’s measures is reliable data on employment.
The Commission’s assessment of the significance of tobacco pro-
duction in relation to employment in the producing regions and
the proposal to continue with the production aid scheme should
have been based on up-to-date information from Member States.

22.
The Court found that the Commission’s 1996 estimate
(used in the context of its reform proposals) of 170 000 full-time
workers being dependent on tobacco production was based on
data relating to 1986 (for man hours per hectare) and to 1993
(for areas under cultivation). More up-to-date information was
not requested from Member States.

23.
Since this estimate was not reliable, the Court compared
it with the most recent data available for the year 1999 in the
Commission’s 2003 evaluation report. This report suggested that
around 64 000 full-time workers were involved in producing
90 % of the EU’s production. The Court estimates this meant
about 72 000 were involved overall. This is less than half of the
Commission’s estimate made three years earlier. In the opinion of
the Court, this is likely to be closer to the situation actually pre-
vailing in 1996 when the Commission made its proposals.

Applying the total budget of about 1 000 million euro
24.
per year to the estimated 72 000 full-time workers, aid represents
13 653 euro per person. The difference with the number of
7 600 euro mentioned by the Commission is due to the fact that
it uses a number of working units from a different source whereas
the Court uses a number based on figures verified by the external
evaluator contracted by the Commission.

25.
Finally, the Commission considered that tobacco produc-
tion was important for the entire population’s livelihood in some
producing areas. This conclusion was based on statements from
Member States. When questioned during the audit, Member States
were unable to produce any evidence for their statements.

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The justification for continuing to support
production was not soundly based

tobacco

(c)

When preparing the new policy, the Commission con-
26.
cluded that,
if quality did not improve, EU production was
doomed in the medium term. It considered that the EU still had
the potential to produce better quality tobacco, and therefore
decided to provide an incentive by linking premium to the qual-
ity produced. The Commission assumed that the market price
would reflect the quality of tobacco. However this did not reflect
the reality of the market and other errors were made in interpret-
ing the data used.

27.
Firstly, the Commission based its policy on the assump-
tion that EU production of certain variety groups could meet EU
demand if a larger proportion of better quality tobacco was pro-
duced, thus reducing the mismatch between production and
demand. The Commission did not take sufficiently into account
however, that EU consumer demand had switched from dark
cigarettes, produced from dark air-cured tobaccos, to American
and English blends which require tobacco which cannot be pro-
duced in the EU. Only imported tobacco varieties offered the
qualities of aroma and taste which are required. These qualities
derived from agronomic and climatic conditions prevailing in the
countries of origin. Because the EU cannot produce certain vari-
eties of tobacco required, the possibility to match production to
EU demand was limited.

28.
Secondly, the Commission’s conclusion that modulation
of the premium in relation to price would improve quality was
based on its assessment that the higher prices obtained for
tobacco originating outside the EU were uniquely a reflection of
its superior quality. Accordingly the Commission considered that,
if tobacco produced in the EU was of better quality producers
would receive better prices. However the price comparison it
made between the high non-EU prices and the lower internal
prices was not reliable for the following reasons:

(a)

(b)

the comparison of EU and non-EU market prices in those
tobacco producing countries selected for comparison,
Malawi, Zimbabwe and the USA, did not take account of the
fact that EU prices were subsidised through aid and that
non-EU prices were maintained at relatively higher levels
because of price support through production restrictions;

the Commission had no assurance that the export prices it
used to value raw tobacco sold represented the value of the
sales. Tobacco is often sold initially to multinational compa-
nies and traded within them (e.g. for tax reasons), before
being sold to manufacturers at a higher price. It is the lower
price generated by the initial sale and export which is trans-
mitted by the Member States and used by the Commission.
This lower price does not reflect the market value of raw
tobacco and therefore it can not be used to reflect the tobacco
quality;

the prices used by the Commission in the comparison did
not always reflect the total payments made by first proces-
sors to producers for their tobacco. For example they did not
include the additional amounts sometimes paid by first pro-
cessors to growers or benefits in kind (which can account for
up to 28 % of the price);

(d)

the Commission made errors in comparing import and
export prices because the prices used for imports are on a CIF
(cost insurance freight) basis whereas the export prices of EU
tobacco are on a FOB (free on board) basis.

The Commission’s advisory Committee (9) indicated that
29.
price was affected by factors other than quality such as move-
ments in exchange rates, stock levels and major releases of stock
onto the world market by non-EU producers. Moreover, it had
advised the Commission that the absence of an objective quality
grading system was an obstacle to implementing a policy which
relied on measuring quality.

30.
Because of these failings the Commission’s market analy-
sis did not provide policy-makers with a sufficiently comprehen-
sive and balanced understanding of the market to guide their
selection of the market measures.

The possibility of alternative cultivation

31.
The Commission argued that, in some cases, alternative
cultivation was not possible. For example in Greece, sun-cured
varieties were grown under conditions that made the growing of
alternative crops impossible. However, a pilot project (10) for the
Commission concluded in 1995 that various alternative crops
could be grown with good results (11).

The Commission’s analysis did not take into account changes
in the character of the market

32.
The post 1998 CMO continued to be based on the
assumption that first processors were independent in setting the
terms of the cultivation contract prices negotiated with produc-
ers. This assumption was unrealistic since the situation had
changed. There had been a concentration of purchasing in the
hands of a small number of multinational first processors, mer-
chants and manufacturers and the latter had become increasingly
dominant in price setting.

(9) The Standing Group on tobacco set up under the Advisory Commit-
tee on Specialist Products pursuant
to Commission Decision
98/235/EC. This Group comprises experts representing producers,
traders, first processors, manufacturers and consumers.

(10) Commission Decision C(92) 3126 3.12.1992 for a pilot and dem-
onstration project according to Article 8 of Council Regulation (EEC)
No 4256/88 (OJ
(Project
No 92.EL.06002).

L 374, 31.12.1988, p. 25).

(11) Helmico SA (1995) Final Report on Project No 92 EL.06002.

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Insufficient competition on the market suppresses prices
33.
and puts the CMO’s premium strategy at risk. The Directorates-
General for Agriculture and Fisheries received, in February 1997,
a joint letter from producers and cooperative unions indicating
that the problem of low prices was attributable to the oligopolis-
tic structure of the processing market but this matter was not
investigated at the time. The Court’s audit subsequently found out
that anti-competitive practices existed (see paragraphs 61 to 71).
In its Special Report No 8/1993, the Court had already noted that
the increasing involvement of producer groups in first process-
ing had permitted them to limit manufacturers’ influence over
prices. The Commission’s 1996 analysis did not recognise the
negative implications for competition arising from the prohibi-
tion,
first
processing (12).

from carrying out

in 1993, of

such groups

Insufficient alignment of agriculture and other policies

34.
The tobacco CMO contains policy objectives and mea-
sures which affect other policy areas. It is important to ensure
coherence between them and this is usually achieved through
inter-service consultation. Not all relevant services however, were
consulted during the preparation of the Commission’s proposals
(Directorate-General for Development, Directorate-General for
Competition).

The export of a substantial part of EU subsidised tobacco
35.
at very low prices was not discussed with the Directorate-General
for Development and Humanitarian Aid in terms of its potentially
adverse effect on the exports of developing countries. Such
exports are crucial to EU efforts to improve the economic situa-
tion of these countries. For example, the Commission grants
development aid to small-scale tobacco producers in Malawi
where raw tobacco accounts for 70 % of all export income. On
the other hand, the CMO supports EU production, most of which
is not in demand in the EU and therefore exported. This reduces
the export possibilities of developing countries.

36.
A report produced in 1994 for the Directorate-General
for Environment on eco-responsibility and the common agricul-
tural policy pointed out that tobacco types had varying irrigation
and nitrogen application needs and thus impacted differently on
the environment. The CMO’s premium system encourages shifts
in production from sun-cured and dark air-cured towards flue-
cured and light air-cured. This leads to undesirable environmen-
tal impacts as they require higher levels of irrigation and/or fer-
tiliser. Flue-curing also involved higher energy consumption.
Such changes are incompatible with both the Commission’s over-
all environmental objectives and those specific to the tobacco

CMO. The Court noted that, for the 1998 reform, the Commis-
sion did not fully take account of the Directorate-General for the
Environment’s reservations. However, it was the main argument
for its proposal for phasing out raw tobacco production subsi-
dies presented to the Göteborg European Council in 2001.

37.
The Commission failed to draw Council’s attention to the
advice given by the Directorate-General for Customs and Indirect
Taxation (Taxation and Customs Union DG) that, subsidies
impact on retail prices (reduce them). The effect on retail prices is
amplified by the excise duty policy adopted by most tobacco pro-
ducing Member States, who apply a lower rate of duty to their
own tobacco. For example, France applied the minimum rate of
excise duty to dark-tobacco cigarettes manufactured locally. This
is 20 % lower than the rate applied to imported light-tobacco
cigarettes. In this way, Member States favour their national ciga-
rette brands, containing a large proportion of subsidised
tobacco (13). In consequence, retail prices were lowered. Authori-
tative sources, such as the World Health Organisation and the
World Bank (14), consider that lower prices increase consumption
levels and by association, the level of tobacco-related disease.

THE CMO HAS NOT ACHIEVED THE DESIRED IMPACT

The various measures have not achieved their objectives

38.
The Court examined whether, overall, the measures
introduced since the 1998 reform had achieved the objectives set
and found that they had either not been as successful as intended
in many respects or impact could not be measured to determine
whether they had been successful or not.

The impact of aid on growers’ income cannot be assessed

39.
By compensating for the greater costs involved, the pre-
mium system was intended to help make EU tobacco more mar-
ketable and thus achieve a fair income. The Commission did not
define what constitutes a ‘fair income’ from growing tobacco, set
quantifiable targets for improvement or ensure that appropriate
information on production costs, prices and income from reliable
sources was received in order to measure impact. It was therefore
unable to evaluate the impact of premium on growers’ income
overall and their standard of living (15).

(13) This situation is confirmed by the Court of Justice’s ruling of 27 Feb-
ruary 2002, Case C-302/00 Commission v French Republic, concerning
differential taxation of dark and Virginia type tobacco.

(14) The WHO Framework Convention on tobacco control, World Bank
tobacco

‘Economic analysis of

tobacco toolkit:

economics of
demand’.

(12) Regulation (EEC) No 84/93 (OJ L 12, 20.1.1993, p. 5).

(15) The evaluation report referred to by the Commission does not take
into account income from secondary activities which is necessary to
evaluate growers income overall and their standard of living.

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The producers’ dependence on aid has not changed

40.
The premium represents around 75 % of producers’
income from tobacco production but has reached nearly 95 % for
production of one variety in Italy. The variable element of pre-
mium was intended to provide an incentive to producers to
improve quality in order to increase the value of their product
thus reducing their dependence on aid. The Commission assumed
that the costs to the producer of improving quality would be cov-
ered by the variable premium and higher sales prices and thus
reduce dependence on subsidies. The evidence available to the
Commission however showed the contrary.

41.
The information available at the Commission in 1998
indicated that, even for the better quality tobacco, the sales prices
communicated by Member States, along with the EU premium
did not cover the costs of production (see also paragraph 48). Fur-
thermore, there is no information available showing to what
extent the different measures of the CMO would have reduced the
dependence on subsidies. The most recent market information
shows that EU average sales prices in 2003 were lower than in
2002 making producers more dependent on subsidies in 2003
than in 2002.

The impact of aid on the improvement of tobacco quality

42.
The Directorate-General for Agriculture considered that
improvements in quality within each variety group could be mea-
sured by increases in the quantity of tobacco produced of the
higher grades. This however, required a clear definition of quality
standards and performance to be measurable on a constant basis.

43.
Several factors militated against this. Firstly, there is no
standard grading system and there are variations between Mem-
ber States in the way in which grades are established for the same
in order to measure quality
varieties of tobacco. Secondly,
improvements over time, it is necessary to take into account the
composition of producer groups and the characteristics of their
production. The effect of a low-quality producer leaving a group,
would be to increase the quality of the group concerned even
though there would be no improvements of production by pro-
ducers as a whole. It was not possible to measure the quality
improvements because of the changes which occurred in pro-
ducer groups. For example, the 1998 reform introduced mini-
mum size requirements for producer groups which resulted in
significant reorganisation. Also, membership of most producer
groups changes from year to year.

44.
The way in which producer groups are organised can
work against modulation of the variable premium. Whereas the
objective of the variable premium is to provide an incentive to
grow better quality tobacco, reality can be different: if all the pro-
ducers in a group are producing the same quality (grade) of a

particular variety the total variable premium available to the
group for that variety will be apportioned equally between them
(see also paragraph 9). The same applies if producers of a poorer
grade of the same variety group together. The members of both
groups will get the same amount of variable premium even
though the quality they are producing is different. These obser-
vations show that, contrary to its objective, the premium system
is not necessarily an incentive to improve quality: it allows pro-
ducers to maximise aid without improvement in quality and as
shown in certain cases, identified by the Court and the Commis-
sion services, there is no difference in premium payments between
good and bad producers.

The rates of premium are inconsistent with the quality of
tobacco

45.
Differentiation of premium between variety groups was
intended to encourage the cultivation of the higher quality vari-
eties: higher premiums would be paid for higher quality as it
involved higher production costs. This would have required
annual modifications of premium levels when justified by changes
in costs and income. Since 1993 however, premium levels set by
the Council have remained largely unchanged.

46.
In the absence of sufficiently detailed costs and income
information from the Commission, the Court made its own analy-
sis to verify the correlation between the level of premium paid,
the quality of tobacco production and production costs. For the
year 1998, it used data obtained specifically from Greece in rela-
tion to production costs and such data as was available from the
Commission on sales prices. This analysis was based uniquely on
Greece as it provided the most complete data set for EU tobacco
varieties.

47.
In view of the intention to reward quality and the higher
costs involved in achieving it via the premium system, the Court
sought to compare the quality of tobacco (which the Commission
considered to be reflected in sales prices) with production costs
and the level of premium paid. The comparison in Annex 2shows
that the premium applied to a high quality tobacco such as Bas-
mas represented 47 % of production costs whereas that applied
to a lower quality such as Katerini was 87 %. This was contrary
to the objective of seeking to reimburse a higher proportion of
the greater costs associated with the production of the higher
quality varieties and provide a margin which producers would
find an incentive.

The reimbursement of a higher proportion of production
48.
costs was intended to have a positive effect on income. The results
show that, for most varieties in Greece, income was negative. The
Court also looked at the reliability of the sale prices communi-
cated to the Commission by the Member States. As a result of its
audit in several Member States, including Greece, the Court found
that the average sales prices communicated to the Commission,
indeed did not always include the additional amounts paid by first
processors to producers or the services in kind provided to them
(see also paragraph 28). These can represent a substantial source
of additional ‘income’ for producers and in one Member State

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such additional payments were as much as 28 %. Thissuggested
that the sales prices supplied to the Commission by Member
States might not provide complete information about returns to
growers. The Commission was thus unable to obtain satisfactory
information on which to base its management of the tobacco
regime.

49.
The Court again analysed the correlation between the
level of premium and the quality of tobacco for the year 2000.
Since similar data to those for 1998 were not available, the Court
compared the average premium per hectare, per variety and
Member State, with the Commission’s ranking of varieties by
quality. This showed that in four out of five Member States, pre-
mium did not correspond to the quality ranking and that the
highest premium was paid to lower quality varieties. The results
are set out in more detail in Annex 3.

Efforts to align production and demand have not been
successful

In order to stabilise markets and ensure supplies the
50.
CMO is, inter alia, intended to align production to the EU mar-
ket’s requirements.

Analysis of the EU supply balance table shows that over-
51.
all domestic consumption of EU production did not change sig-
nificantly between 1996 and 2000 at which time it was 40 %.
Detailed data by variety group is not available. Imports have
remained stable throughout the same period at 65 %. There is no
evidence that the CMO has influenced EU production so as to
reduce the mismatch of supply and demand. While certain types
of tobacco have to be imported, a successful policy would have
led to some substitution of domestic products for imports. But
this did not happen. The Court notes that the Commission con-
siders that the CMO policy was successful even though it recog-
nises that sufficient data was not available and that the scheme
before the 1998 reform was not adapted to solve the most evi-
dent problems of the sector, i.e. growing the tobacco in demand
(see paragraph 96 of its replies).

Expenditure from the Tobacco Fund has been limited and
there were weaknesses in project management

52.
The Fund was established in 1993. It was initially funded
by 0,5 % withheld from premium which was progressively
increased to 3 % and was intended to finance programmes of
research and information relating to the harmful effects of
tobacco consumption and preventive and curative measures. It
was also intended to help orient production towards the least
harmful varieties and qualities. Depending on the type of activity
funded, such projects fell to be managed by either the Directorate-
General for Agriculture or the Directorate General for Health and
Consumer Protection. As part of the 1998 reforms, the financing
of the fund was doubled even though there had not been much
activity.

53.
The Court analysed the utilisation of the Fund. Annex 4
shows that payments during the first five years (1996 to 2000)
amounted, on average, to 18 % of the available funding and the

rate of utilisation has continuously increased over the last three
years to reach 65 % in 2003. The unused balance of the Fund
stood at some 68 million euro.

54.
Although modest in extent, the Court identified weak-
nesses in project management such as ineligible expenditure,
expenditure before the date of the contract or in periods other
than those stipulated in the contracts, advances paid not covered
by guarantees, the existence of a posteriori allocation of appro-
priations, and contracts not signed by either of the two parties.

The Court noted that, in his Annual Activity Report for
55.
2002, the Director-General, Agriculture made a reservation to his
declaration to the effect, that he did not have sufficient assurance
that the resources transferred to the Fund since 1993 had been
used in accordance with the principles of regularity and sound
financial management.

56.
In contrast, the Director-General of the Directorate-
General for Health and Consumer Protection concluded in his
2001 Activity Report that, having assessed the weaknesses con-
cerning the administration of projects under his control, the
problems were not sufficiently material to merit formal reserva-
tion. The Court noted however, that the weaknesses identified
(paragraph 55) mainly related to the Directorate-General for
Health and Consumer Protection.

Expenditure on environmental measures financed from the
specific aid to producer groups has been very limited

57.
As indicated in paragraph 14, specific aid for producer
groups was introduced in part to finance environmental activi-
ties. But the proportion they were expected to spend on them was
not specified and the aid was not made conditional on it being
spent on such activities. Actual expenditure on environmental
protection activity has been very limited. For the harvest year for
which complete information was available at the time of the audit
(1999), only one out of the 20 producer groups examined had
applied aid to environmental protection measures involving only
1 % (2 648 euro) of the total amount of specific aid it received.

The quota buy-back scheme has had only limited success

58.
In order to facilitate voluntary departure from the
tobacco sector a quota buy-back scheme was introduced whereby
individual producers who wished to cease production could sell
their quota. This mechanism was intended to permit the reallo-
cation of resources within the sector and to increase the propor-
tion devoted to measures designed to achieve structural adjust-
ment. The potential success of such a scheme is dependent on the
attractiveness of the financial compensation to participants. The
Commission considered it would be prudent to set the price at a
percentage of the premium for a fixed period. This was eventu-
ally set at around 23 % of the premium per tonne during a period
of three years.

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The Commission chose as its performance indicator the
59.
quantity offered up, but did not specify the overall levels it wished
to achieve. It concluded in 2001 however, that the level of quota
bought back in respect of the 1999 and 2000 harvests, at just
729 tonnes or 0,20 % of the guarantee quantity, was too small. It
therefore increased the compensation offered to some 25 %. For
sun-cured tobacco (group V) which faced marketing problems,
the buy back price was increased to 75 % in the first two years
and 50 % of the premium in the third year. In 2002 the Commis-
sion concluded that, although the take up was much greater than
in previous years, the scheme had again not produced the impact
foreseen as it was still only around 1 % (3 626 tonnes out of
348 844) of guarantee quantity. It has now further increased
compensation, which can be up to 100 % in some cases, extended
the compensation period from three to five years and established
a possibility for further financing via the Tobacco Fund. In 2003,
the quantity bought back was 7 228 tonnes or 2 % of the guar-
anteed quantity. By not setting an appropriate level of compen-
sation from the outset, the Commission has delayed achievement
of the scheme’s objectives.

quota directly from other growers. Because national quota
reserves were created compulsorily without any financial com-
pensation they were reluctant to continue the restructuring of
their holdings by purchasing further quota. This was because they
would start to lose it through the annual deductions without
compensation.

63.
The Commission found that, despite the various mea-
sures, the majority of producers still had insufficient quota to
ensure the viability of their holdings. Enforced reductions of these
quotas to create the national reserves exacerbated the situation.
Equally, the level of allocations from the national reserve was also
insufficient to ensure the viability of new producers. In 2001 the
Commission recognised that application at the national level had
proved inadequate for achieving their objectives and proposed
abolition of the measure. Despite the demonstrated failure of the
measure the Council however, rejected the idea of abolition and
decided to make it optional for Member States. Only Austria, Bel-
gium and Portugal are presently operating the system.

The initiative to encourage alternative activities via the
Structural Funds has been misdirected

The cultivation contract auction scheme has not been used
by Member States

In order to encourage tobacco producers to consider
60.
alternative activities, the 1998 reform of the tobacco CMO speci-
fied for the first time an option for rural development pro-
grammes to include measures for the conversion of tobacco-
growing regions to other activities (16). The audit showed that the
tobacco measures adopted in Extramadura in Spain and Umbria
in Italy, provided for improving productivity and marketing
instead of conversion activities. In those regions of Greece
(Aetoloakamania, Thrace and East Macedonia) and Italy (Cam-
pania), which had the greatest need for help to convert to other
activities, no measures at all were directed towards tobacco. This
demonstrated that the initiative was failing to meet its objective.

The national quota reserve measure has not been successful

61.
The 1998 reform sought to introduce greater flexibility
into the quota system. Transfers of guaranteed quantities between
variety groups at national level and the transfer of production
quotas between individual producers were made easier. As
another initiative it also introduced a system of national quota
reserves to be created by annual compulsory deductions, of up to
2 %, from the quotas allocated to producers. It was intended to
encourage producers to switch to other crops and/or other vari-
ety groups and restructure their holdings. The reserves were
required to be distributed to existing or new producers on the
basis of objective national criteria.

62.
Before the introduction of the new measure, producers
increased their effectiveness by restructuring through purchasing

(16) Council Regulation (EC) No 1257/1999 (OJ L 160, 26.6.1999 p. 80).

In order to improve competition, which was recognised
64.
to be insufficient and to ensure that contract prices reflected mar-
ket conditions, the Commission introduced an optional cultiva-
tion contract auction scheme for Member States. It permitted pro-
ducers to offer their existing cultivation contracts to the first
processing market in order to obtain the best possible price,
which has to be at least 10 % higher to qualify. Under the mea-
sure cultivation contracts must include the prices to be paid to
producers and be concluded before the tobacco is produced. This
can be nearly a year before delivery. First processors usually adopt
a cautious approach to price-setting and contracts frequently con-
tain provisions for additional, sometimes unquantified, payments
after delivery. However, an auction scheme with complete and
final payment conditions which need to be fixed a long time in
advance prohibits such cautious approach.

65.
The measure proved unpopular with the sector and no
Member State has yet made use of it. The objective of the mea-
sure has therefore not been achieved.

Simplification of administration not achieved

In order to help simplify administration, the 1998 reform
66.
replaced the annual allocation of production quotas to individual
producers with the allocation of production quotas every three
years to producer groups and to individual producers. However,
the introduction of a national quota reserve through annual
deductions from the producers’ quotas required annual modifica-
tions of the quotas and the issuing of up-to-date quota state-
ments. As a result of its enquiries in Member States the Court
found that in practice, national authorities had experienced an
increase in their workload compared with the situation before the
reform.

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Inappropriate price agreements

67.
Article 81 of the EC Treaty sets out the principles for
maintaining competition. In general it prohibits all agreements
between undertakings and concerted practices which have as their
object or effect, the prevention, restriction or distortion of com-
petition within the common market. In September 2003 the
Court of Justice confirmed that ‘the maintenance of effective com-
petition on the market for agricultural products is one of the
objectives of the CAP’ (17). Accordingly the market should ensure
that the prices obtained by producers reflect normal competition.

68.
In the principal producing Member States, the Court
found documents which it considered to be inappropriateprice
agreements between first processors and/or producer organisa-
tions. The agreements examined contained a price ceiling which
is incompatible with the Treaty as it restricts competition.

For example, in Spain, in addition to price agreements,
69.
national authorities confirmed to the Court that, after the
break-up of the State monopoly, first processors now operate
contracts with producers which correspond to their production
capacity. The Court concludes that contractual relations between
producer groups and first processors are established according to
processors’ production capacity rather than on the basis of price
competition.

70.
In Italy, growers and first processors have traditionally
been closely linked. The Court found that there was a global
three-year price agreement between producer organisations and
associations of first processors representing about 85 % of the
raw tobacco production. These agreements fix prices without free
competition between the parties involved. In Greece, the national
authorities, producers’ organisations and first processor’s associa-
tions informed both the Court and the Commission of the exist-
ence of collective agreements in relation to cultivation contract
price conditions covering the entire industry.

The above practices restrict or at worst eliminate price
71.
competition. The Court communicated its findings on such agree-
ments to the Commission. The Directorate General for Competi-
tion is investigating all the cases involved.

The procedures to improve control were not effective

72.
The checks required of Member States are designed to
ensure that the objectives of the CMO are attained and that
expenditure is incurred in accordance with regulations. In order
to address irregularities found previously by the Commission
through the clearance of accounts procedures, in particular in
Greece and Italy, the reform introduced new procedures in order

(17) Case C-137/00.

to tighten controls. Prior approval of first processing undertak-
ings was introduced with the objective of ensuring that they were
financially sound and were really engaged in first processing, thus
excluding speculative transactions by intermediaries to the detri-
ment of producers income. Specific verification of areas declared
by producers as being planted with tobacco by variety and crop
was also introduced to ensure that claimants themselves had
grown the tobacco for which aid was claimed. Examination of the
implementation of these procedures and the other controls
required by the CMO revealed weaknesses as shown below.

Non-compliance with regulations

73.
Annex 5 provides a summary of the cases of non-
compliance with the checks and controls required by regulations
found by the Court during the audits carried out in the five Mem-
ber States visited. The main findings are set out below and cross-
referenced to the columns in the annex:

(a) The bodies responsible for controls were not always suffi-
ciently independent to ensure reliable results. In Greece, until
2001, the national body responsible for advising tobacco
producers had also been responsible for the control func-
tions relating to producers and first processors required by
the CMO. This led to a conflict of interest and insufficient
independence for its role as the control body. Although the
problem had been identified by the Commission in 1994 it
was only in 2002 that the risk was addressed and the con-
trol responsibility transferred to another body. In Italy those
responsible for operating controls and checks continue to
alternate this work with acting as advisors to producers (col-
umn 1).

(b) Administrative cross-checks of parcels to prevent aid being
paid twice for the same harvest were either not carried out
or did not produce a reliable result (column 2). In addition
compulsory checks of areas planted by individual growers
were found not to have been carried in Greece (column 3.2)
exposing the Community to the risk that production aid for
tobacco could be claimed as well as area-based aid for other
crops (false claims). Other cases were found in Greece and
Italy (column 4) where, contrary to a Court of Justice ruling
in 1997, on-the-spot controls oftobacco parcels were carried
out after the tobacco had been harvested (18) thereby render-
ing them ineffective.

(18) The Court of Justice, in its ruling in Case C-46/97, Hellenic Republic
v Commission of the European Communities, concluded that, in order to
be considered as effective, on-the-spot checks of tobacco fields must
be carried out at the time when the tobacco is still in the field. Since
the Greek authorities had executed the controls after the harvest,
Greece had to accept a 2 % flat-rate reduction of the annual premium
granted.

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(c) Checks at first processors to ensure that tobacco is not
released from supervision without being processed were
either not executed at all, not executed in compliance with
regulations or were not sufficiently documented (columns 7
and 8). Therefore, there was inadequate assurance that aid
was not paid on raw tobacco submitted more than once or
on tobacco imported from third countries which does not
qualify for aid.

The Court considers however that on the basis of the
76.
Commission’s guidelines regarding the calculation of financial
consequences, when preparing the decisions regarding the clear-
ance of accounts of the EAGGF Guarantee Fund, a number of
other controls should have been considered and classified as ‘key
controls’ (see Annex 7). These key controls should be examined
during the clearance of accounts audit, in order to obtain reason-
able assurance concerning the correctness of the accounts.

(d) Some producer organisations had not complied with recog-
nition conditions which must precede qualification for spe-
cific aid, had used the aid for ineligible purposes or had failed
to achieve additionality because the specific aid was used to
finance existing administrative measures instead of new
activities (columns 9, 10, 12 and 13).

(e) There had been failures to comply with the prohibition of
producer groups from carrying out first processing. This is a
specific requirement of the Regulations introduced in 1993
to prevent distortion of competition and monitoring difficul-
ties (column 11).

(f)

Premium and specific aid were granted in respect of cultiva-
tion contracts concluded after the regulatory deadline or
which did not contain the information required for the
tobacco to be eligible for aid (columns 14 and 15).

74.
The Court notes that until June 2004, the Commission
had not finalised its work and imposed financial corrections
where deemed necessary (Spain, Greece, Italy).

MONITORING AND EVALUATION OF THE REFORMED CMO

Monitoring

Verification of controls by the Commission

77.
The detailed rules to be applied by Member States require
them to verify the moisture content of the tobacco for which aid
premium is claimed. This is needed in order to verify the permit-
ted levels for tobacco varieties and to calculate the weight of
tobacco for which aid can be claimed. The Court’s audit of the
records in Greece showed that the moisture tests carried out in
relation to the 1999 to 2001 harvests were not carried out in
compliance with the provisions of the legislation and no weight
adjustments were made. Further enquiries made by the Court
established that correct checks had not been carried out since
1993. This may explain why the Commission’s checks did not
identify the problem. The Audit Directorate of the Directorate-
General for Agriculture was informed through different sources
of the failure but had decided not to apply financial corrections
even though there was a systematic lack of compliance. The level
of correction would have been between 2 and 10 % (20), appli-
cable to all aid claims in the period, had it been imposed.

78.
As part of the1998 reform proposals, the Commission
suggested dropping the requirement for the control on the
grounds that it was imprecise and difficult. The reforms finally
adopted by the Council however, maintained and reinforced the
requirement for this test. In 2000, the Commission expressed its
intention to pursue corrections for non-compliance but only in
respect of future failures. The Court notes that, as EAGGF years
from 1997 onwards remain open, corrective action for these
years is still possible.

Inadequate review during the budgetary procedure

79.
The Financial Regulation requires that the annual bud-
getary procedure should ensure that the ‘mobilisation of Commu-
nity resources must be preceded by an evaluation to ensure that
the resultant benefits are in proportion to the resources applied’.
It further requires that all on-going operations ‘must be subject to
regular review’ in order to confirm their continued justification.

75.
The Court examined the work undertaken on tobacco aid
in the framework of the clearance of accounts procedure which
requires the Commission to perform checks to verify whether
Member States have correctly interpreted and applied the regula-
tions relating to aid schemes (19). The Audit Directorate of the
for Agriculture made control visits for
Directorate-General
tobacco to four Member States following the 1998 reform which
covered the key controls indicated in Annex 6.

(19) Council Regulation (EC) No 1258/1999 (OJ L 160, 26.6.1999,

p. 103).

80.
Examination of the budget submissions by the Commis-
sion for tobacco from 1999 to 2002 (21) revealed them to be
repetitive and lacking in evaluative comment in relation to the
above criteria.

(20) Commission Document: Guidelines for flat-rate corrections DOC.
VI/5330/97 of 23 December 1997 and clearance of accounts enquiry
No 99/902-ES.

(21) Preliminary draft general budget of the European Commission.

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Insufficient information was provided by Member States
and by the Commission

The external evaluation concluded that the CMO was not
achieving the intended impact

81.
In order to ensure efficient and effective monitoring of
the market the Commission needs relevant, accurate, complete,
timely, and unbiased information. This is important, not only
from their own point of view as managers, to ascertain whether
modification of measures is required, but also where they are
required to publish information to be used by interested parties.
This was not achieved as explained below.

85.
The Commission engaged external consultants to pro-
vide an analysis/evaluation of the market for the period 1993 to
2001. Their report was made public in October 2003 (25) and
their findings are similar to those of the Court. The evaluation
report was an in-depth evaluation including a detailed apprecia-
tion of the impact of the CMO.

82.
The CMO regulations (22) require Member States to sub-
mit data on cultivated areas, numbers of contracts, quantities,
growers and first processors and estimated and actual production
to enable the Commission to monitor the tobacco market. Com-
pliance was in general satisfactory. Member States are also
required to submit information on cultivation contracts concern-
ing prices, first processors, producers, quotas and the surfaces
involved. After harvest, additional data on tobacco deliveries,
sales and stocks must also be provided. For the 1999 harvest only
Germany, a small-scale producer, submitted the information on
time. In respect of the 2000 harvest, the information was sup-
plied by all the Member States, except for Italy. For the 2001 and
2002 harvests the situation deteriorated and only three and four
Member States respectively submitted the information on time.

83.
The Commission is required to publish timely and up-to-
date lists of first processing undertakings approved to sign culti-
vation contracts (23). Examination showed that the Commission
only published such lists after the deadline for signing contracts.
This exposed growers and producer organisations to the risk of
contracting with non-approved first processors and losing the
right to aid.

84.
The 1998 reform required the Commission to submit to
the European Parliament and the Council, before 1 April 2002, a
report on the functioning of the CMO in raw tobacco. The Com-
mission, considering that the information it had asked for would
be insufficient for the purpose of producing the required report,
requested additional information from the Member States. It car-
ried out additional work to provide the necessary factual infor-
mation which was processed and made available to Parliament
and the Council in a report in November 2002 (24).

86.

The report concluded that:

(a)

the lack of reliable information had not permitted a quanti-
tative evaluation of the impact of the CMO on the balance of
supply and demand;

(b)

the system of guaranteed quantity had controlled production
and achieved improved flexibility;

(c)

the approach chosen by the Commission to measure the
improvement in tobacco quality could be challenged: the
Commission had selected price as the sole indicator of qual-
ity; in the evaluator’s view, other factors also played an
important role and the data on quality/price was not homo-
geneous and was highly subjective; there were major differ-
ences in how variable premiums were applied in Member
States and the effect varied widely; as a substitute for direct
measurement the consultants had interviewed tobacco pro-
fessionals and asked whether they were satisfied that quality
had improved; their replies indicated that there had been
some improvements in the grades of tobacco produced;

(d)

the objective of ensuring a fair income to farmers could not
be evaluated with precision as the evaluator had used data
which suffered from limitations; it was stated that, except in
one region, holdings with diversified activities obtain a bet-
ter income than those who are specialised in the production
of tobacco only;

(e) as far as the impact of tobacco support on the economic
activity and employment in rural areas was concerned the
results varied according to the situation of individual regions;
it could not be stated whether or not the CMO had markedly
improved the quality of life although it was evident that,
without support the situation would be worse;

(22) Commission Regulation (EC) No 2848/98 (OJ L 358, 27.12.1988,
p. 17) and Commission Regulation (EC) No 2636/1999 (OJ L 323,
15.12.1999, p. 4).

(23) Article 54(c) of Regulation (EC) No 2848/98.
(24) Commission Staff Working Paper: ‘Report to the European Parlia-
ment and the Council on the operation of the common organisation
of the market in raw tobacco’. SEC(2002) 1183 of 6 November 2002.

(f)

the CMO had not had any significant impact on public health
and cigarette consumption had not been influenced;

(25) Evaluation de l’organisation commune de marché dans le secteur du tabac
brut, Consulenti per la Gestione Aziendale srl (COGEA), 2003.

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(g) although management was generally more effective, espe-
cially in terms of reducing costs and time and of increasing
transparency in the management of premium, system weak-
nesses remained; for example, an excessively bureaucratic
approach to activities and financial stress for producer
groups caused by the time lag between calculation and pay-
ment of the variable premium.

It envisaged a phased decoupling of the existing aid from
90.
production over a period of three years accompanied by a phas-
ing out of the Tobacco Fund (which, in the meantime would con-
tinue to fund anti-smoking information campaigns). A specific
financial envelope would be established for the restructuring of
tobacco-producing areas.

87.
The Court considers that the overall message which
emerges is that the CMO has not achieved any material beneficial
change in most areas (or cannot conclude in the absence of rel-
evant data) although the continuity of support through aid has
permitted growers to survive. Even today (26), tobacco production
without aid is not viable for the tobacco growing community.

91.
The approved reform will begin from 2006 with the
transfer of all or part of current tobacco premium into entitle-
ments to a single farm payment. With full implementation, the
reform will redistribute 50 % of the current tobacco production
premium to the single farm payment and 50 % to the restructur-
ing envelope. It is expected that, in the short term, cultivation of
less-profitable tobacco varieties will cease and farmers will be
encouraged to convert to other forms of land use.

FURTHER REFORM OF THE CMO

How the reform will address the weaknesses identified by the
audit

Assessment of options for reform of the CMO

88.
In July 2002, the Commission published its mid-term
review of the CAP as a whole. It proposed a new strategy for sus-
tainable development which would decouple support from pro-
duction and provide support to farmers through a payment
scheme based on the support payments previously received by
the farmer in a reference period. The Council asked the Commis-
sion for a specific proposal on tobacco by September 2003 which
would respond to the new strategy. To support this proposal, the
Commission carried out an extended impact assessment of the
options for market reform. The Commission considered the fol-
lowing three options:

(a) prolongation of the current CMO;

(b) decoupling along CAP reform lines;

(c) gradual phasing out of support over a 10-year period.

It concluded that neither (a) nor (c) would permit the
89.
CAP’s new objectives to be met or solve the inherent problems of
the current CMO. It decided that option (b) however, should offer
a simpler, more efficient means of support for farm incomes while
avoiding the undesirable effects of the current coupled regime
such as maintenance of production which had no outlet in the EU
and potential complications for negotiations with the World
Trade Organisation (WTO).

(26) October 2003 when the report was published.

92.
The reform has the potential to reduce the mismatch
between internal supply and demand. There would no longer be
an incentive for the producer to grow tobacco with the main
objective of obtaining the premium. Producers would be encour-
aged to respond to the demands of the market. There will no
longer be a need for a production threshold system with the
objective of guiding production. The reform will also do away
with the production quota system and thereby the need for quota
transfers, quota buy back and reserves.

93.
Reinforcement of structural measures also has the poten-
tial to improve the viability of tobacco holdings which have, up
to now, been inhibited by the rigid production quota system. It
should also improve professional training of producers allowing
them to improve production techniques and quality.

94.
The switch to the single farm payment scheme and the
cross-compliance system will make payments dependent on the
respect of environmental requirements thus replacing the present
ineffective system linked to the specific aid to producer groups.

Finally, it will remove one of the agriculture support sys-

95.
tem’s most complex and expensive control systems.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

96.
The Court regrets the Commission’s contradictions
within its replies which makes the reading of this report more
difficult.

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Inadequate preparation of the 1998 reform proposals

97.
The Commission’s proposals for the 1998 reforms were
based on unreliable data and its analysis of the market was inad-
equate. The importance of tobacco production on employment
was based on out-dated and incompatible data, and the impact of
the premium system on the production of better quality and a
reduction of the mismatch between supply and demand although
limited in terms of possibilities was not proven. The Commission
could not produce evidence in support of its assertion that better
‘quality’ would increase market prices and make producers less
dependant on subsidy. The contention that cultivation of alterna-
tive crops was not possible was contradicted by a study in one
major producer State. Lastly there had been insufficient inter-
service cooperation within the Commission to the extent that the
tobacco CMO is insufficiently aligned with the EU’s development,
environmental and taxation policy. Because of these failings,
largely inappropriate policy measures were adopted for the
tobacco market and the continuation of the existing aid system
(measures) was not justified (see paragraphs 20 to 37).

The CMO has not achieved the desired impact

The measures of the CMO were largely inappropriate,
98.
from the outset because of the aforementioned failings, these
measures proved to be ineffective in most areas. While climatic
conditions do not allow production for all EU needs, the pre-
mium system was not successful in increasing the production of
the quality EU tobacco currently in demand. Therefore it did not
change growers’ dependence on aid (aid represents about 75 % of
their income). In addition and contrary to its objectives, the
scheme has been an incentive for the production of low quality
tobacco which in certain cases is over-compensated even though
it has no outlet in the EU.

99.
Voluntary departure from the tobacco sector through the
buy-back scheme was unsuccessful (about 1 % in 2002 and 2 %
in 2003 of the guaranteed quantity) because of lack in incentive.
Competition in the market was not increased through the culti-
vation contract auction scheme as it was not used. Moreover, free
competition was put at risk by inappropriate price agreements in
the three largest producer Member States. Little progress was
made in achieving the objectives of orienting production towards
less-harmful tobacco varieties, of encouraging alternative eco-
nomic activities and protecting the environment. The Tobacco
Fund was under-utilised in the early years. Moreover, its limited
expenditure was characterised by weaknesses in project manage-
ment (see paragraphs 38 to 73).

The Commission carried out audits to ensure that the
100.
aid scheme is correctly applied and interpreted by the Member
States. The Court considers that this work should have been
extended to cover the key controls outlined in Annex 7. No clear-
ance of accounts decision was taken before June 2004 and there-
take corrective action when
fore the Commission did not
required.

Monitoring and evaluation

101.
Monitoring of progress made in the implementation of
the CMO was deficient because of insufficient information and
the reviews made during the annual budgetary procedure,
required to justify continuing with the market’s measure, were
inadequate (see paragraph 74 to 83).

The reports from the Commission required by the Par-
102.
liament and Council to assess the effectiveness of the 1998
reforms were delayed. The results were communicated in Novem-
ber 2002 and September 2003. A further reform has now been
decided. On 22 April 2004 the Council of Agricultural Ministers
took a decision to fundamentally reform the support for the
tobacco sector. It provides that, from 2010 onwards, tobacco aid
will be completely de-linked from production (see paragraphs 84
to 99).

Recommendations

103.
As the situation of tobacco production has not signifi-
cantly changed over the years (market imbalance, unviable pro-
duction holdings, …), the Commission should pursue its strategy
to give public health and sustainable development priority over
(in this case) tobacco production of questionable viability. The
Court considers that its observations show that the Commission
missed the opportunity in 1998 to propose a reform of the mar-
ket in the way it is now envisaged.

104.
The Commission should address the failings identified
in relation to preparation for the 1998 reform and seek to ensure
that any reform proposals are supported by sufficient, relevant
and reliable data and that the impact of the proposals on the sec-
tor is analysed.

With its approved reform in 2004 however, the Coun-
105.
cil has chosen to continue partial support of the tobacco sector
between 2006 and 2009, though the total package of aid will be
distributed differently. Notwithstanding the improvements which
the reform should bring, the Commission should ensure that it
monitors and addresses the fact that EU produced tobacco

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cannot meet all demands; that the EU production is not viable
without aid; that it is one of the most expensive market schemes,
that it is not in line with the EU’s public health and sustainable
development policy objectives and, finally, that the market prices
are suppressed through uncompetitive practices.

106.
It is under these conditions that the Court welcomes the
Commission’s reform proposals as adopted by the Council. The
Court however points out that, because the production based aid
will phase out over time, the weaknesses identified in this report

should be addressed. Also, the co-existence of producers receiv-
ing aid coupled to production and others receiving a decoupled
lump sum could create the risk that producers will collaborate to
maximise and share the aid available under both systems.

The Court recommends that the Commission pursue
107.
the outcome of the investigation into anti-competitive behaviour
and, if it is confirmed, take appropriate action. The failures by
Member States to operate the required checks and controls should
also be followed up and corrective action taken where justified.

This report was adopted by the European Court of Auditors in Luxembourg on 21 July 2004.

For the Court of Auditors
Juan Manuel FABRA VALLÉS
President

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ANNEX 1

The tobacco supply chain

Tobacco 
growers; 
cultivation and 
curing raw 
tobacco

First 
processors' 
preparation of 
raw tobacco to 
meet 
manufacturers 
requirements

Manufacturing 
of tobacco 
products such 
as cigarettes, 
cigars and pipe 
tobacco

Distribution and 
trade network

Consumption

Production costs, income and profit/loss by kilo by 0,1 ha (stremma) in Greece, harvest 1998

ANNEX 2

A

B

C

D

E

F

Costs DRA/kg

Sales price/kg average

Net aid DRA/kg

Total income DRA/kg (B + C)

Net income/loss (D – A)

Net aid in % of costs

Group of varieties

(1 ECU = 327,086 DRA)

I Virginia

II Burley

V Sun-cured

VI Basmas

VII Katerini

VIII
Kaba K. Classic

1 209

195

966

1 161

– 48

80

936

141

773

914

– 22

83

1 172

158

773

931

– 241

66

2 872

939

1 338

2 277

– 595

47

1 332

541

1 136

1 677

345

85

1 265

357

812

1 169

– 96

64

Sources: Production costs: National Tobacco Board Greece (EOK).
Sales prices: Member States’ returns to the Commission in respect of Regulation (EEC) No 1771/93. These prices do not always include all payments and services received by

the producers in return for their tobacco.

 
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ANNEX 3

Average premium by variety group per hectare in 2000

Member State

Variety group

Premium in euro per ha

Rank overall

Germany

Greece

Spain

France

Italy

Group I

Group II

Group III

Group I

Group II

Group V

Group VI

Group VII

Group VIII

Group I

Group II

Group III

Group IV

Group I

Group II

Group III

Group I

Group II

Group III

Group IV

Group V

Group VII

7 282,65

9 113,34

8 012,90

9 806,24

9 203,13

5 643,48

5 285,85

7 218,14

5 533,33

9 836,05

6 747,37

7 033,48

7 185,33

9 338,51

8 917,35

8 570,58

8 792,83

11 015,14

6 723,53

6 869,49

5 171,40

3 258,67

11

6

10

3

5

18

20

12

19

2

16

14

13

4

7

9

8

1

17

15

21

22

Source: Member States’ return to the Commission
It is the Commission’s objective to support the following quality ranking in descending order:
Quality 1 Group VI
Quality 2 Group VII
Quality 3 Group I
Quality 4 Group IV
Quality 5 Group VIII
Quality 6 Group II
Quality 7 Group III

Basmas
Katerini and similar varieties
Virginia, Virginia D and hybrids thereof, Bright
Kentucky, Moro di Cori, Salento
Kaba Koulak (classic), Elassona, Myrodata Agrinion, Zichnomyrodata
Burley, Badischer Burley, Maryland
Badischer Geudertheimer, Pereg, Korso, Paraguay, Dragon Vert, Philippin, Semois, Appelterre, Nijkerk,
Misionero, Rio Grande, Forchheimer Havanna IIc, Resistente 142, Goyano, Hybrids of Geudertheimer,
Beneventano, Fermented Burley, Havanna, Brasile Selvaggio and similar varieties Petit Grammont,
Nostrano del Brenta
Xanthi-Yaka, Perustitza, Samsun, Erzegovina and similar varieties, Myrodata Smyrmis, Trapezous and
Phi I, Kaba Koulak (non classic), Tsebelia, Mavra

Quality 8 Group V

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Amounts withheld from tobacco production aid for the financing of the Community Tobacco Fund and
payments by type of action

ANNEX 4

Year

Withheld
(deduction in year
[t – 1])

Appropriation uti-
lised for the infor-
mation
component

Appropriation uti-
lised for the
research component

Reconversion

‘Unused amounts’

TOTAL

A

B

C

D

E(A – B – C)

E in % of A

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

289 744,00

4 839 200,00

8 390 773,00

9 454 679,00

9 371 382,00

1 393 467,15

7 951 889,00

128 308,78

1 017 647,00

1 570 658,00

915 468,00

143 857,00

8 498 972,00

1 108 067,10

1 301 843,00

19 167 708,00

6 321 097,00

544 461,00

18 867 346,00

6 933 341,00

3 759 836,00

289 744,00

4 839 200,00

7 373 126,00

7 884 021,00

7 062 446,85

7 679 723,22

6 089 061,90

12 302 150,00

8 174 169,00

18 744 984,00

2 519 660,00 (1)

225 108,00

9 500 000,00 (2)

6 500 216,00

Total

105 576 677,00

18 403 941,03

9 478 878,00

9 500 000,00

68 193 857,97

100,0

100,0

87,9

83,4

75,4

96,6

71,6

64,2

43,3

34,7

64,6

(1) State: 23 May 2004.
(2) OJ L 164, 2.7.2003.
N.B.: The amounts withheld are not allocated to a ‘Fund’. In the preparation of the budget, the amount withheld for the financing of the ‘Fund’ is deducted from the calculated
premium appropriations, whereby the final appropriation in the budget is only the net amount. Consequently, future expenditure from the ‘unused amounts’ must be cov-
ered by future revenue.

i.e. it represents ‘a burden of the past’.

Sources: Commission DG-AGRI and DG SANCO.

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ANNEX 5

Cases of non-compliance with legislative requirements in either one or all of the harvest years 1999 to 2001

Germany (central level)

At beneficiary level

Greece (central level)

At first processor level

At beneficiary level

Spain

At regional level

At beneficiary level

France (central level)

At first processor level

1

X

2

X

X

X

Italy (central level)

X

At beneficiary level

Type of failure (1)

3.1

3.2

3.3

4

5

6

X

X

X

X

X

X

7

X

X

8

9

10

11

12

13

14

16

17

15

X

X

X

X

X

X

X

X

X (2)

X

X

X

X

X

X

X

X

X

X

X

X

X (2)

X

X

X

X

X

X

X

(1) The numbers refer to the type of failure listed in the attached notes.
(2) These failures were also being committed in respect of the harvest years prior to 1999.

Notes to Annex 5 (1):

Legal requirements

1.

According to the provisions of Article 44 of Regulation (EC) No 2848/98, Member States shall set up inspection arrangements to ensure effec-
tive verification of the compliance with that Regulation and with Regulation (EEC) No 2075/92 and shall adopt all the additional measures nec-
essary for the application of those Regulations.

2.

According to Article 45 of Regulation (EC) No 2848/98 Member States administrative checks shall include cross-checks:

— on declared tobacco parcels against the database provided for in Article 2 of Regulation (EEC) No 3508/92 to prevent aid being wrongly

paid twice for the same harvest.

Cross-checks for 1999 harvest may be carried out on a sample.

3.

According to the provisions of Article 46 of Regulation (EC) No 2848/98 on the spot checks of parcels:

3.1. must be carried out unannounced;

3.2. shall cover at least 5 % of the individual producers for each processing undertaking;

4.

5.

6.

3.3. must be made on a sample selected on the basis of a risk analysis taking account of at least the quantities covered by contracts in relation

to the areas declared as under tobacco (the production yield) and the results of the checks carried out in previous years.

In a ruling of 13 July 2000 in Case C-46/97, the Court of Justice states that in order to be considered as effective, the on-the-spot checks of
tobacco fields must be carried out at the time when the tobacco is still in the field.

According to Article 47 of Regulation (EC) No 2848/98, in case deliveries are made to distinct purchasing centres, transport of the raw tobacco
from these centres to the processing plant must be authorised in advance. This advance notice shall allow the competent control body to accu-
rately identify the means of transport used, the route, and the time of departure and arrival together with the quantity of tobacco transported in
each separate instance.

When determining the quantity eligible for premium payments, predetermined reference moisture values must be respected. Both at the pur-
chasing centres and at the processing plant, the moisture content of the tobacco must be determined, and eventual adjustments to the weight
must be applied. Annex VI to Regulation (EC) No 2848/98 sets out the methods to be used, the sampling level and frequency and the calcula-
tion methods to be applied.

(1) When the Commission finds that expenditure has not been effected in compliance with Community rules, it shall evaluate the amounts to be excluded
from Community financing. The Commission must have regard, in particular, to the degree of non-compliance found, the nature and gravity of the
infringement and the financial loss suffered by the Community. Such corrections are generally between 2 and 10 % of the expenditure. Higher rates of
correction, up to 100 %, may be decided in exceptional cases.

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7.

According to the provisions of Article 48 of Regulation (EC) No 2848/98, checks during first processing and market preparation of tobacco
shall be carried out after risk analysis.

Legal requirements

Checks shall at least include:

(i)

(ii)

an unannounced check of the processing undertaking’s stocks,

a check when the tobacco leaves the place in which it was under supervision, having undergone first processing and market preparation
(see note 8).

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

Article 1(3) of Regulation (EC) No 1636/98 defines ‘first processing’ as the processing of raw tobacco delivered by a producer into a stable,
storable product put up in uniform bales of a quality meeting final user (manufacturer) requirements.

Since the 1993 harvest, producer groups can obtain the status of ‘recognised producer groups’ by complying with a number of requirements
specified in the provisions of Article 2(1) of Regulation (EEC) No 84/93. From the 1999 harvest the requirements are specified in Article 3(1) of
Regulation (EC) No 2848/98.

According to Article 3(f) of Regulation (EC) No 2848/98 members of the producer group who wish to withdraw from membership, may do so
after they have been members of the group for a minimum of one year following its recognition.

The provisions of Article 2(2) of Regulation (EC) No 2848/98 prohibit producer groups from carrying out first processing of tobacco.

Article 4(a) of Regulation (EEC) No 2075/92 provides for the granting of specific aid to recognised producer groups, Article 7 of Regulation
(EEC) No 84/93 and Article 40(2) of Regulation (EC) No 2848/98 provide the details of the purposes for which specific aid may be used. In
1995 the Commission (DG VI/E3) issued an interpretative note (No VI/5711/95) to Member States on the use of the specific aid in particular to
ensure the effect of additionality of this subsidy.

According to Article 6(1a) of Regulation (EC) No 2848/98 recognition of producer groups shall be withdrawn by the Member State concerned
if specific aid is used for other than the purposes laid down in Article 40(2). Only recognised producer groups may be paid the specific aid and
the variable part of the premium.

According to Article 5 of Regulation (EEC) No 2075/92, it is a condition for granting of premiums to producers that leaf tobacco delivered is
covered by a cultivation contract with an approved first processor. The contract must be concluded at the latest by 30 May of the year of har-
vest.

According to Article 11 of Regulation (EC) No 2848/98, where a cultivation contract is concluded between a processor and a producer group,
it shall be accompanied by a list containing the names of the producers concerned.

The provisions of Article 18(2) of Regulation (EC) No 2848/98 require the competent body to pay the premiums to the producer groups
within 30 days of submitting the required documentation.

Article 6(2) of Regulation (EEC) No 2075/92 provides for an arrangement of prior granting of entitlement to first processors to sign cultivation
contracts if they comply with certain specific conditions. Cultivation contracts must be signed on 30 May at the latest.

According to Article 7 of Regulation (EC) No 2848/98 the Member States shall decide on approval of the first processors also taking into
account other conditions, which they have laid down themselves.

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C 41/24

EN

Official Journal of the European Union

17.2.2005

ANNEX 7

Key controls additional to those identified by the Commission

No

Regulation (EC) No 2848/98

The control measure

1

2

3

4

Article 46

Article 47(2)

Article 48(2)(a)

On-the-spot checks of parcels in respect of an
assessment of the reliability of the quantity of tobacco
(the production yield) actually delivered.

On-the-spot control of transport between remote
purchasing centres and the site of the first processing
establishment.

An unannounced on-the-spot control during first
processing and market preparation of the undertakings
stocks.

Article 40(2), (2a) and (3)

On-the-spot check of specific aid to producer groups.

Article 51(2)

17.2.2005

EN

Official Journal of the European Union

C 41/25

THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

I.
The Commission welcomes the report of the Court of
Auditors, but has difficulty in endorsing a number of the Court’s
conclusions.

V.
The Commission’s proposal for the 1998 reform was
based on a report presented in 1996. This report was based on
the most reliable data available at that time, which suffered from
some limitations. The Commission does not consider that its
market analysis was affected by this lack of data. The reform did
significantly reduce the production of the two lowest quality
groups of tobacco, thereby addressing the problem that the quali-
ties grown were not suited for the market demand. The alleged
anti-competitive behaviour within the tobacco sector is being fol-
lowed up by the Commission (see also point X).

VI.
The Commission’s clearance of accounts departments
were not inactive as regards tobacco. Based on their own risk
analysis, and taking into account certain preliminary remarks of
the Court of Auditors, they launched an investigation into tobacco
in 2001 (audits in Greece, Italy, France and Germany) plus
another three audits in 2003 (Greece, Italy and Spain). The pro-
cedures following the 2001 audits have been finalised for Ger-
many and France. For some of the other Member States, however,
the Commission is aware of some delays and will attempt to fina-
lise its investigations as soon as possible.

The Commission notes the extended list of key controls now pro-
posed by the Court. However, the Commission defined the key
controls to be carried out in the tobacco sector in 2001 and is of
the opinion that they cover the essential controls laid down in the
Regulation.

In the meantime, the Commission had employed an external
evaluator to examine the CMO. This evaluation (2), was available
in October 2003. Furthermore, in preparation for a reform of the
raw tobacco sector, the Commission carried out an Extended
Impact Assessment (3), which was completed on 23 September
2003.

IX.
On 22 April 2004 the Council of Agriculture Ministers
decided to fundamentally reform the support for the tobacco sec-
tor. The 2004 Reform provides that, from 2010 onwards, tobacco
aid will be completely decoupled from production. Half of the aid
will be transferred to the single farm payment and the remaining
half will be used for restructuring tobacco-producing regions
under the rural development policy. In a four-year transition
period, between 2006 and 2009, at least 40 % of the aid will be
decoupled and integrated in the single farm payment. Member
States may decide to retain up to 60 % as a coupled payment. The
coupled payment has to be granted in such a way as to ensure
equal treatment between farmers and/or according to objective
criteria such as for tobacco producers situated in Objective I
regions or for tobacco farmers producing varieties of a certain
quality. Further criteria may be considered in the future. The 2004
reform should in principle resolve all of the present difficulties.

X.
The Commission has issued Statements of Objections con-
cerning alleged cartels in the raw tobacco markets in Spain and
Italy (in December 2003 and February 2004 respectively). These
Statements of Objections contain the preliminary conclusions of
the Commission’s investigations on alleged anti-competitive
behaviour by producer groups and processors in the two Mem-
ber States which started in October 2001 and January 2002
respectively. Issuing a statement of objections is a preliminary
step in the procedure that may lead to the adoption of a prohi-
bition decision imposing fines on the companies concerned.

As regards possible financial corrections the Commission refers
to the ongoing clearance of accounts procedure following the
2001 and 2003 audits.

VII.
proved satisfactory.

The Commission is of the opinion that its monitoring

INTRODUCTION

Article 26 of Regulation (EEC) No 2075/92 required the Commis-
sion to submit a report on the functioning of the common
organisation of the market in raw tobacco to the European Par-
liament and to the Council before 1 April 2002. The Commis-
sion submitted the requested report (1) in November 2002, seven
months behind deadline.

(1) Report to the European Parliament and the Council on the operation
in raw tobacco,

the common organisation of

the market

of
SEC(2002) 1183, 6.11.2002.

13.
The instrument of the national reserve has favoured the
conversion to other variety groups in association with other
instruments such as the transfer of guarantee thresholds.

The national reserve has become an option for the Member State
since the 2002 harvest.

(2) Evaluation of the common organisation of the market in raw tobacco,

COGEA, 2003. Rome. 220 pp.

(3) Tobacco sector, Extended Impact Assessment, COM(2003) 554 final,

SEC(2003) 1023.

C 41/26

EN

Official Journal of the European Union

17.2.2005

PREPARATION FOR THE 1998 REFORM

21. to 23.
The main objective of the CMO is to support pro-
duction of leaf tobacco. The socio-economic impact of employ-
ment has also been an important consideration for the Council
during the history of the tobacco scheme.

In its 1996 report, the Commission used the best data available
at the time.

In a working document (1), the Commission points out that,
according to Eurostat, the tobacco sector employed a larger
labour force in 2000 than the 72 000 full-time workers estimated
by the Court using a theoretical calculation. The Eurostat figure
is
to
212 960 people as the share of seasonal and part-time employ-
ment is remarkably high.

annual working

corresponding

126 070

units,

24.
As regards the average aid per person, the Commission
would refer to its recent study (1), which indicates average assis-
tance of EUR 7 600 per person employed in the tobacco sector
in 2002 (2).

In some tobacco-producing regions tobacco is the main
25.
product grown. The majority of the agricultural population in
such specialised regions is occupied in production, first process-
ing, transport or supply of materials involved in the production
of this crop. Hence a large part of the agricultural population is
dependent on tobacco production.

Eastern Macedonia and Thrace, western Greece and continental
Greece, central Macedonia, western Macedonia (Greece) and Cam-
pania (Italy) can be regarded as the most specialised regions. In
these regions, consequently, tobacco cultivation plays an impor-
tant role both in structural and production specialisation and,
therefore, plays an important economic and social role. The
evaluation study used quantitative parameters (% tobacco farms
over total farms versus % tobacco area over total agricultural area)
to describe the degree of specialisation of tobacco-producing
regions (3), thus providing evidence for tobacco production’s
importance in relation to other crops.

26.
The Commission approach was justified and reflected
market reality. EU production of those variety groups in demand,
quality and market prices increased (also influenced by the cycli-
cal trends in world market prices).

(1) Tobacco

Sector,

Extended

Impact Assessment,

23.9.2003

(COM(2003) 554 final, SEC(2003) 1023).

(2) EUR 7 600 equivalent to EUR 963 million divided by 126 000 people

working in the tobacco sector.

(3) Evaluation of the common organisation of the market in raw tobacco.

COGEA, 2003. Rome. 220 pp.

When preparing the 1998 reform, one objective was to
27.
gear production more closely to market needs. The Commission
proposed transferring production rights between variety groups
depending on market demand. More flue-cured and light air-
cured tobacco of better quality was produced in order to cope
with an increased demand for these variety groups. There is evi-
dence that both exports and certain imports have decreased. EU
exports show a marked decrease in volume, especially of low
quality tobacco (semi-oriental varieties, dark air-cured varieties)
while value has increased.

28.
The key objectives of the reform, based on a modulation
of part of the premium, were to achieve both a better quality and
an improved price level within the EU, and these objectives have
largely been achieved. The most recent evidence available to the
Commission shows that for certain variety groups prices (also
influenced by cyclical trends in world market prices) have
improved.

The Commission took account of the fact that price is
29.
affected by supply (production, import, stocks) and demand (con-
sumption, export) as well as exchange rates. However, within a
given market situation in a given harvest year, it is obvious that
differences in quality lead to differences in price. It is often argued
that for a given quality the producer will not always receive the
same price. This is, however, the consequence of free competi-
tion between first processors when contracts are negotiated.

The lack of a single objective quality grading system was not an
obstacle to implementing a quality policy. The various national
and local quality grading systems can differentiate according to
variety groups and specific first processing needs.

The Commission considers that its market analysis was
30.
based on the best available information at the time and provided
policy-makers with an appropriate understanding of the market
to guide their selection of the market measures.

31.
The issue of the lack of alternative crops has to be seen
in relation to the whole production chain and not just primary
growing of tobacco on the farm. In some regions, local commu-
nities have become so dependent on tobacco that conversion to
other productions would only be possible over a considerable
period of time.

32.
The post-1998 CMO took into account the concentra-
tion of purchasing by a limited number of multinational first pro-
cessors, merchants and manufacturers and their more important
role in price setting. In order to counterbalance the increased inte-
gration and concentration at processor level, the Commission
provided strong incentives (access to the variable premium) for
producers to join producer groups and reinforced the role of pro-
ducer groups.

17.2.2005

EN

Official Journal of the European Union

C 41/27

DG AGRI

informed DG COMP of possible anti-
33.
competitive practices in June 2001. This information, amongst
others, led to an investigation by DG COMP in October 2001,
which subsequently confirmed that such alleged practices did
exist in Italy and Spain (see paragraphs 67 to 71).

the tobacco CMO should alleviate any potential distorting effect
of the present scheme as, when it is fully implemented, there will
be no link between the aid and production.

The Commission’s 1993 prohibition on producer groups from
carrying out first processing aimed to separate the functions of
producer (organisation) and first processor in order to avoid con-
flicts of interests between the two parties. Integration of producer
groups in processing was not favoured because of the high degree
of specialisation and capital input required. The separation of the
functions of producers and processors was maintained in order to
safeguard a fair price formation for raw tobacco.

The interdepartmental consultation on reform of the
34.
CMO carried out in 1998 followed normal practice within the
Commission at the time. In January 1998, DG AGRI consulted
five other directorates-general on the proposal: DG XIX (Budget),
DG V (Employment), DG XI (Environment), DG XX (Financial
Control) and LS (Legal Service).

All Commissioners and cabinets were consulted as part of the
normal procedure for adopting Commission proposals.

36.
The orientation of production toward flue-cured and
light air-cured tobacco is governed by market demand and not
the CMO premium system. Restructuring of production has
favoured concentration and intensification of production on
larger farms. As total EU production is limited by quantitative
thresholds, the total production area has considerably decreased
as a result of the higher yields.

From a solely environmental point of view it would have been
desirable to have a system with area references (limitations) rather
than quantitative thresholds. This possibility was disregarded as
the incentive to produce higher quality tobacco would largely
have been lost.

At the Gothenburg European Council in 2001, the Commission
proposed reorienting support from the CAP to reward ‘healthy,
high-quality products and practices rather than quantity’ (see
COM (2001) 264 final). The latest tobacco reform responds to
the Gothenburg declaration.

Prior to the 1998 proposal, the Commission published a report
to the Council on the common organisation of the market in raw
tobacco in 1996 (1) which was widely discussed with Member
States and included all possible options, some of which were
included in the 1998 proposal.

37.
The share of the primary material (raw tobacco) in the
price of cigarettes is estimated to be very low. Therefore the
impact of subsidies on the reduction of retail prices is negligible.

In 2001 the Commission introduced a broader and more system-
atic interdepartmental consultation. In addition, since 2003 an
extended impact assessment is carried out for all major proposals
made and presented to the other institutions along with the leg-
islative proposal. The tobacco reform adopted by the Council in
April 2004 was subject to this new procedure and 16 depart-
ments took part in the impact assessment, including DG DEV, DG
ENV, DG COMP and DG TAXUD.

35.
Community development policy recognises the key role
of agricultural and rural development in economic growth and
reducing poverty in many developing countries, which may
include tobacco production in certain regions. Tobacco from
developing countries may in some cases compete with EU tobacco
on different markets. Although no export refunds are granted, the
subsidies benefiting EU tobacco can affect competitive positions
and world market prices. However, as EU tobacco production
only accounts for 5 % of world production and 11 % of world
exports any impact would be limited. The recently adopted
of
reform

(1) Report from the Commission to the Council on the common organi-
sation of the market in raw tobacco (COM(96) 554 final, 18.12.1996).

Under Article 8(2) of Council Directive 95/59/EC the rate of pro-
portional excise duty and the amount of specific excise duty must
be the same for all cigarettes. Consequently Member States can-
not apply a lower rate of duty on their own tobacco. The judg-
ment of the Court of Justice quoted by the Court (Case C-302/00)
confirmed that France, which maintained in force a system impos-
ing a different tax for dark-tobacco cigarettes, failed to fulfil its
obligations under Directive 95/59/EC and Article 90 of the
Treaty. Following this judgment France has brought its rates of
excise duty into line with Community legislation (Law No 2002-
1487 of 20 December 2002).

THE CMO HAS NOT ACHIEVED THE DESIRED IMPACT

38.
As indicated in paragraphs 28, 31 and 59, the reform sig-
nificantly reduced the production of the two lowest quality
groups of tobacco, thereby partly addressing the problem that the
qualities grown were not suited for the market demand.

C 41/28

EN

Official Journal of the European Union

17.2.2005

In order to measure the impact the Commission used the
39.
term ‘fair income’ as in the Treaty, set as a quantifiable target an
overall improvement in price (and quality), and used information
on production costs and income (1), available from the FADN
(Farm Accountancy Data Network). Information on prices, pro-
cessing and stocks was obtained through Regulation (EC)
No 2636/1999 (currently replaced by the consolidated version:
Regulation (EC) No 604/2004). The impact of premiums on
growers’ income was evaluated in the 2003 extended impact
assessment.

The information available to the Commission shows that,
40.
for certain varieties, quality and prices have improved (this has
also been influenced by cyclical trends in world market prices).

41.
Average selling prices in two consecutive years are not a
representative indication of a long-term trend. Observations over
several years (1993 to 2002) show a net long-term price increase.
Slight variations from year to year reflect the cyclical nature of
tobacco price trends.

42.
The Commission considers that improvements in qual-
ity can be measured in two ways: firstly by increases of the qual-
ity variety groups in demand. The net increase in production of
variety groups I (flue-cured) and group II (light air-cured) as a
result of market demand and the fall in production of variety
groups V (sun-cured) and III (dark air-cured) which faced market-
ing difficulties indicates an overall improvement in quality and
market orientation. Secondly, improved quality can be measured
by price increases taking account of the overall market price
evolution.

Most tobacco growers produce varying amounts of
44.
tobacco of different qualities leading to a proportional distribu-
tion of the premium. However information available to the Com-
mission shows that, in certain cases, there is an even distribution
of the variable premium. Such cases are relatively rare, but an
increase was observed in 2000 compared to 1999, the first year
of application of the variable premium.

Moreover, except for groups V and III, the variable premium
enhanced the price level, which was the main objective of the
reform.

(1) According to FADN, the most common farm income indicators are
net added value per annual working unit or the family farm income.
The calculation procedure is described under
http://europa.eu.int/comm/agriculture/rica/annex002_en.cfm.

Since 1993, premium levels have remained largely
45.
unchanged, except for group V. The policy adopted by the Coun-
cil was based on providing a steady income support, but to allow
guarantee thresholds to vary according to demand. In 2002, the
Council chose to decrease the guaranteed thresholds in order to
decrease supply versus demand, thus creating a relative shortage,
encouraging competition and improvement in prices.

The Commission proposed to differentiate between a fixed por-
tion of the premium (providing a minimum income) and a vari-
able portion (providing the economic function) which is paid
according to sales prices.

In its Extended Impact Assessment, the Commis-
46 to 48.
sion established average production costs and margins per ha of
tobacco on specialised farms (average 1999 to 2000), based on
the FADN (Farm Accountancy Data Network).

The main problem is putting a precise value on family work on
the farm. If work by family members is considered at the same
cost as that of paid labour force, then income is negative. On
valuing family work at a lower level, an equity or profit situation
occurs. Total margins (tobacco output + premium) over total
input (variable + fixed costs) are largely positive in all regions. It
was concluded that income (total receipts minus total costs) from
tobacco was only negative in Thessaly and Continental Greece,
representing 34 % of all Greek producers. Income in Italy, Spain
and other Greek regions was positive.

The Commission has complied with the provisions of

47.
Council Regulation (EEC) No 2075/92.

The 1998 reform specifically targeted the modulation of the vari-
able part of the premium in order to reward better quality. As
there were continuing problems in disposing of group V tobacco,
the Commission proposed a 10 % reduction of the premium. It
also proposed a reduction in the guarantee threshold.

48.
Price is a function of supply and demand, and of quality
of a commodity. In the context of the raw tobacco market, the
price is stated in the contract.

The aim of the Regulation is to provide a fair income.
49.
The premium level is fixed by the Council. At the time of the
1992 reform, the value of the premium was calculated, for each
variety group, as the average of premiums of the varieties in the
group. There was no longer any provision for a mechanism to
adjust the premium to price and/or cost variation.

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As pointed out in paragraph 28, for agricultural
51 and 52.
and climatic reasons, the EU is unable to produce all the tobacco
required for the manufacture of tobacco products. Between 1990
and 2000, raw tobacco imports remained stable. However, as
stripped tobacco constitutes the majority of imports, data on the
variety group are not available and substitution of imported
tobacco by domestic products cannot be confirmed or denied.
The CMO policy was successful as over the 1990 to 2000 period
EU exports decreased in volume but increased in value, indicat-
ing that production of low-quality tobacco decreased consider-
ably. Furthermore, the composition of EU production changed
according to demand as a result of the transfer of thresholds.

54.
The Commission agrees with the Court that the expen-
diture from the communication part of the Tobacco Fund for the
years before 2001 was limited.

With the adoption of the Commission implementing regulation
of the Tobacco Fund (Regulation (EC) No 1648/2000) on 25 July
2000, the launch of audits of former commitments and the modi-
fication of contracts, the Commission started seriously tackling
the problem. The number of opened contracts has now been sub-
stantially reduced (7). The Commission departments are still seek-
ing a solution in this respect.

55.
Following the Director-General for Agriculture’s declara-
tion for 2001, intensive efforts were launched to solve the prob-
lems stemming from discrepancies in the financial field between
multi-annual research contracts and annual budget allocations on
the one hand and certain internal organisational shortcomings on
the other. An internal task force was set up in 2002 to make up
the backlog for nine outstanding projects.

An action plan was successfully carried out in 2002 and the man-
agement of the projects could then be deemed as normalised, and
the reservations raised in the Director-General’s annual declara-
tion for 2002 were therefore not repeated.

The proportion of the specific aid the producer groups
57.
were expected to spend was outlined in Article 40 of Regulation
(EC) No 2848/98.

The evaluation of the sector showed that most producer groups
have developed orientation, assistance and training measures
which aim to reduce plant protection product residues and other
harmful elements (heavy metals, nitrosamines, plastic wires, etc.),
by improved farming and harvesting techniques (reduced use of
chemicals, rationalisation of water distribution, waste collection,
etc.). However, the evaluator was not able to find objective proof
of the effects of these activities.

Based on the FADN data, checks on the use of plant protection
products and fertiliser showed an intensification of farming prac-
tices and therefore some worsening of the environmental impact
of the crop, albeit on a much reduced total area (– 43 % in 10
years). This intensification favoured the improvement of produc-
tion quality in terms of colour and leaf integrity and increased
yield.

58 and 59.
In the framework of sound financial management
the Commission has chosen to set the buy-back price initially at
a low level and gradually increased this level in order to improve
the performance of the buy-back instrument.

Although the cumulated quantity bought back might be low in
terms of percentage of the total, both buy-back and transfer of
thresholds have led to a decrease in variety group III with
10 569 tonnes (– 33 %) and group V with 12 365 tonnes
(– 78 %). This achievement can be deemed a success.

56.
Although the Directorate-General for Health and Con-
sumer Protection did not raise any formal reservations in its 2001
Annual Activity Report, it did raise concerns about weaknesses
related to the management of past projects.

Finally, between 1999 and 2002, although other factors could
also be taken into account, the buy-back scheme favoured restruc-
turing of production: 10 671 producers left the sector and
12 549 tonnes of production quota were sold to other producers
who were then able to develop their production structure.

In fact, since 1999 it had started introducing corrective measures
to improve management of the fund. The effect of these measures
could be seen after 2001. From a budget point of view, the level
of budget consumption has reached an average over 80 % during
the last three years and this despite a huge increase in the budget
(from EUR 3 million to 14,4 million in 2004).

With its new communication strategy, the Commission is now
able to manage the Tobacco Fund adequately and even to handle
a new increase in the budget.

59.
It should also be noted that since 2003, Member States
have set up reconversion programmes under the Community
Tobacco Fund. Actions to convert producers to other crops or
economic activities as well as studies on the possibilities of such
conversion or actions of general interest are financed by the Com-
munity Tobacco Fund. 192 individual reconversion projects and
17 studies or actions of common interest were launched in
2003. There are 498 individual reconversion actions and 10 stud-
ies or actions of common interest which are being financed in
2004.

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to other activities,

Although Council Regulation (EC) No 1257/1999 pro-
60.
vides for the possibility of including measures in the Rural Devel-
opment Programmes (RDPs) for the conversion of tobacco-
growing regions
the programming is
decentralised and therefore drawn up by the Member States
according to their needs and priorities. Moreover, the Regulation
does not limit conversion only to other tobacco related activities.
The Rural Development Programme (RDP) for Umbria provides
two measures where aid is granted to companies who dry tobacco
if they invest in the renewal of drying installations on condition
that the new machines have at least a 10 % lower production
capacity.

Compared to the situation before the reform, the national authori-
ties had a lower workload because they only had to pay premium
amounts to producer groups. Producer groups were responsible
for distributing payments to individual producers. Furthermore,
computerised information systems considerably facilitated data
management. In practice, however, some Member States pre-
ferred to handle the premium payment themselves. It is true that
control measures had increased with the 1998 reform.

The matters referred to by the Court are currently being

68.
investigated by the Commission’s departments.

As regards investments in agricultural holdings, specific invest-
ments are allowed as long as they are consistent with the produc-
tion quota. Conversion measures can be included in the diversi-
fication measure. For the regions where there is the greatest need
to convert to other activities, like eastern Macedonia and Thrace,
these tobacco areas have limited potential for conversion and
other off-farm activities.

62.
The examination in the external evaluation report (see
ECA’s footnote 25) demonstrates that the national reserve did not
in any way hamper the continued restructuring of the tobacco
holdings. The area and number of holdings have constantly
decreased.

63.
Enforced reductions of all quotas to create the national
reserve did not exacerbate the situation as quota reductions were
limited to only 0,5 to 2 % and were proportional to the quota vol-
ume. However, the level of allocations from the national reserve
was sometimes insufficient to ensure the viability of new produc-
ers. The administrative burden also increased. The measure
became an option for the Member States from the 2002 harvest
year onwards.

64 to 65.
The auction system could possibly have had a role
in the producing Member States where the number of first pro-
cessors was sufficient to allow fair competition (e.g. in Italy,
Greece or Spain). In Greece and Italy however, small first proces-
sors, which feared too much competition from larger firms, con-
sidered the bidding system not in their interest. In the Member
States with a highly concentrated structure of the first processing
industry the auction system is more difficult to set up.

The calculation and distribution of the national reserve
66.
increased the workload of the national administrations. In 2001,
therefore, the Commission proposed abolishing the national
reserve. The Council decided that the reserve could remain an
option for the Member States. Since 2002, most Member States
have abandoned the national reserve.

69.
Given the overcapacity in the processing sector in Spain
and the concentration of most of it in one first processor, the
Commission considers that production capacity is not the lead-
ing factor in the contractual relation between parties.

70.
The Italian global three-year price agreement is one of the
elements on which the Commission has based its Statement of
Objections (see point X). With regard to the situation in Greece
the Commission is currently assessing whether the matters
referred to by the Court and those which the Commission iden-
tified in the course of its subsequent investigation represent an
infringement of Article 81 of the EC Treaty.

72.
The Member States are responsible for approval of first
processors (and, where necessary, withdrawal thereof). This has
been checked in audits by the audit services, in particular to verify
the existence of proper approval of first processors authorised to
sign cultivation contracts with producer groups.

Particular attention was paid to checks on areas to be planted
with tobacco, defined as a key control by the audit services, as the
audit reports show.

73.
The Commission carried out a series of audits in 2001
and 2003 which revealed some findings similar to those made by
the Court of Auditors and which have been taken into account in
the ongoing clearance of accounts procedures.

74.
Council Regulation (EC) No 1258/1999 provides that,
before a decision to refuse financing is taken, the results of the
Commission’s checks and the replies of the Member State con-
cerned shall be notified in writing, after which the two parties
shall endeavour to reach agreement on the action to be taken. For
all audits carried out in 2001, bilateral procedures took place. The
Commission, noting that the procedures for France and Germany
have been completed, is aware that there are some delays with
certain dossiers in other Member States and will endeavour to
complete them as soon as possible.

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MONITORING AND EVALUATION OF THE REFORMED CMO

76.
The Commission notes the Court of Auditors proposal
concerning the issue of ‘key controls’. However, the Commission
defined the key controls to be carried out in the tobacco sector in
2001 and is of the opinion that they cover the essential controls
foreseen by the Regulation.

77.
From the information gathered in the audits by its depart-
ments and the subsequent clearance of accounts procedures, the
Commission has been unable to conclude that the similarity in
moisture content results from a lack of compliance with the con-
trol procedures in Greece.

78.
The audit services have drawn up a programme to check
expenditure in the tobacco sector in all Member States with size-
able production (Italy, Greece, Spain, France) over the years 2001
and 2003; some points raised by the Court that were already
known to the Commission have been checked.

79.
The Financial Regulation and its implementing rules pro-
vide for regular evaluation, but not on an annual basis. It cannot
therefore be expected that an evaluation or related information
on each budget line or spending programme will be found in the
material provided for by the Commission in the annual budget-
ary procedure. The Commission applies the legislation in force in
order to quantify the annual budgetary requirements. Evaluation
results can be used to improve the budgetary procedures but only
after amendment of existing legislation.

In the meantime, the Commission had employed an external
evaluator to examine the CMO. This evaluation (2) was available
in October 2003. Furthermore, in preparation for a reform of the
raw tobacco sector, the Commission carried out an Extended
Impact Assessment (3), which was completed on 23 September
2003.

The Commission considers that other elements of the
86.
evaluation report’s conclusions should be considered as well (see
Chapter 9, pp. 212 to 220):

(a) with respect to the ‘lack of reliable information’, the evalua-
tor referred only to insufficient data on processed produc-
tion, stocks, and marketed quantities by first processors (see
paragraph 4.1.5. in the Evaluation report, p. 46).

The CMO instruments helped improve the balance between
supply and demand; however, the information available did
not show the precise extent to which the CMO had influ-
enced the balance of supply and demand (see Evaluation
report, p. 212, final three paragraphs);

(c) only the quality/price classification grids were not homoge-
neous and highly subjective (the statement did not relate to
all data) (see Evaluation report, p. 213, third paragraph).
Tobacco professionals however indicated that there had been
improvements in the quality grades of tobacco produced
(their degree of satisfaction had improved by 30 %) (see
Evaluation report, p. 213, seventh paragraph);

80.
The Commission, however, systematically informs the
budgetary authority each year about all evaluation activities car-
ried out in a specific document entitled ‘Annual Evaluation
Review’. In the case of tobacco, an evaluation of the CMO was
carried out by the Commission departments in 2002 and subse-
quently reported in the Annual Evaluation Review 2002. In addi-
tion, the full report was published on the Commission’s EUROPA
website.

(d)

the objective of ensuring a fair income was evaluated, but the
result must be considered with care due to limitations of
data; it was stated that the support system allowed tobacco
producers to obtain a better income compared to the income
of other farming types analysed. As income was largely
determined by farm size, restructuring helped improve
income (see Evaluation report, p. 215, fifth and second last
paragraph; p. 216, fourth paragraph);

83.
Article 54 of Regulation (EC) No 2848/98 does not
specify a deadline for the publication of a list of approved first
processors.

Article 26 of Regulation (EEC) No 2075/92
84 and 85.
required the Commission to submit a report on the functioning
of the common organisation of the market in raw tobacco to the
European Parliament and to the Council before 1 April 2002. The
Commission submitted the requested report (1) in November
2002, seven months behind deadline.

(1) Report to the European Parliament and the Council on the operation
in raw tobacco,

the common organisation of

the market

of
SEC(2002) 1183, 6.11.2002.

(e)

in areas where tobacco production was critical for rural activ-
ity, tobacco-related activities allowed by the Community sup-
port had a large impact on employment (see Evaluation
report, p. 217, eighth paragraph);

(f)

the research projects financed by the Fund have produced
valid results, but few of the conclusions have been passed on
to producers (see Evaluation report, p. 219, sixth paragraph).

(2) Evaluation of the common organisation of the market in raw tobacco,

COGEA, 2003. Rome. 220 pp.

(3) Tobacco sector, Extended Impact Assessment, COM(2003) 554 final,

SEC(2003) 1023.

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As regards the impact of the CMO, the Commission would also
like to point out that the measures launched in 2002 under the
Community Tobacco Fund have been shown to have an impact
on public awareness of
tobacco
consumption.

the negative impact of

87.
The Commission recognises that the evaluation report
pointed out weaknesses, but is nevertheless of the opinion that
the evaluation report demonstrates that the CMO instruments
have improved supply versus demand, improved quality and
enhanced continued restructuring of holdings. Sector manage-
ment efficiency improved, although some weaknesses remain.
The continuity of support through aid has permitted growers to
survive. Prices have increased, but not to a level allowing produc-
tion costs to be covered.

FURTHER REFORM OF THE CMO

The Commission proposed a new reform of the
88 to 90.
CMO in a comprehensive, in-depth procedure which produced
numerous analyses, all of which are available on the Commission
website:

— an economic report on the tobacco sector and the CMO,

— an extended impact assessment on three different reform
options involving six months of the collaboration with
experts from 16 directorates-general,

— in this context, a tobacco forum was organised in June 2003

to allow all stakeholders to comment,

— a seminar was also organised in November 2003 on the same
principles, for all products concerned by the reform proposal
(olive oil, cotton and tobacco).

On the basis of these analyses and organised debates the Com-
mission drew up the legislative proposal that it submitted to the
Council and which was agreed on 22 April 2004.

During a four-year transition period, starting in 2006, at least
40 % of the tobacco premiums have to be included in the
decoupled single payment for farmers. Member States may decide
to retain up to 60 % as a coupled payment. The coupled payment
has to be granted in such a way as to ensure equal treatment
between farmers and/or according to objective criteria such as for
tobacco producers situated in Objective I regions or for tobacco
farmers producing varieties of a certain quality. Further criteria
may be considered in the future. After the four year transition
period, from 2010, tobacco aid will be completely decoupled
from production. 50 % will be transferred to the single farm pay-
and
ment

the remaining 50 % will be used for restructuring programmes in
tobacco-producing regions under the rural development policy.

In 2006, the reform will start with the transfer of all or part of the
current
tobacco premium into entitlements for the single
payment.

In 2006 and 2007, information actions under the Community
Tobacco Fund will be financed with a deduction of 4 % and 5 %
respectively of the coupled payments.

92.
The introduction of decoupling will help improve pro-
ducers’ market orientation and considerably simplify the tobacco
regime.

94.
The reform adopted will allow application of condition-
ality and thus improved respect of environmental requirements.

CONCLUSIONS AND RECOMMENDATIONS

96 and 97.
conclusions of the Court.

The Commission cannot endorse a number of

The Commission’s proposals for the 1998 reform were based on
the most reliable data which could be obtained at the time and its
analysis of the market was adequate.

The CMO instruments have contributed to a better quantitative
balance between supply and demand. The 1998 reform has led to
a sharp decrease in the production of the two lowest quality
tobacco variety groups with limited outlets and favoured produc-
tion of variety groups in demand on the market. The variable pre-
mium encouraged farmers to produce a better quality and pro-
fessionals have indicated that quality has improved. Prices,
although equally influenced by supply and demand, show a ten-
dency to increase.

The issue of the lack of alternative crops has to be seen in rela-
tion to the whole production chain and not just primary growing
of tobacco on the farm. In some regions, local communities have
become so dependent on tobacco that conversion to other pro-
ductions would only be possible over a considerable period of
time.

The interdepartmental consultation on reform of the CMO car-
ried out in 1998 followed normal practice within the Commis-
sion at the time. Nevertheless, the Commission has since intro-
interdepartmental
duced a much more elaborate system of
collaboration.

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Clearly, the tobacco support regime in place prior to the 1998
reform was not geared to solving the key problem in the sector:
the growing of qualities which were not suited to the market. The
1998 reform helped significantly reduce the production of the
two tobacco groups facing the biggest marketing problems. The
problem should be fully addressed by the 2004 reform. The
decoupled premium means producers can decide to produce what
the market demands.

The Commission does not share the Court’s conclusion that the
continuation of the existing aid scheme was not justified, given
the findings presented in this report.

98.
Prevention of tobacco smoking became one of the main
political priorities after 1 October 1999 and started impacting on
the way the Fund was managed. The effects started to become vis-
ible only after 2001. For instance, the significant campaign ‘Feel
free to say no’, is strong evidence of the Commission goals in this
respect.

The Commission chose to set the buy-back price initially at a low
level and gradually increased this level in order to improve the
performance of the buy-back instrument and to practise sound
financial management. The cumulated quantity bought back
might be low in terms of percentage of the total, but both buy-
back and transfer of thresholds have led to a decrease of the low
quality variety groups. In addition, between 1999 and 2002, the
buy-back procedure favoured restructuring of production.

The Commission investigated the risk of limitation of free com-
petition by inappropriate price arrangements between first pro-
cessors and producer organisations. As regards Spain and Italy
these practices as well as others discovered during the investiga-
tion led the Commission to address a Statement of Objections to
representatives of producers and processors. For Greece, the
investigation is still ongoing.

Since 2003, Member States have set up reconversion programmes
under the Community Tobacco Fund. Actions to convert produc-
ers to other crops or economic activities as well as studies on the
possibilities of such conversion or actions of general interest are
financed by the Community Tobacco Fund. In 2003, 192 indi-
vidual reconversion projects and 17 studies or actions of com-
mon interest have started. In 2004, 498 individual reconversion
actions and 10 studies or actions of common interest are being
financed.

Concerning the under-utilisation of the Tobacco Fund, the pay-
ments during the first five years 1996 to 2000 amounted on aver-
age to 17 % of the available funding. Over the last three years the
rate of utilisation has increased constantly to reach 65 % in 2003.
The shortcomings in the management of the Fund identified in
the past have been corrected.

The Commission notes the extended list of key controls
99.
now proposed by the Court. However, the Commission defined
the key controls to be carried out in the tobacco sector in 2001
and is of the opinion that they cover the essential controls laid
down in the Regulation.

Regarding the criticism of the lack of action taken by the Com-
mission, Council Regulation (EC) No 1258/1999 provides that,
before a decision to refuse financing is taken, the results of the
Commission’s checks and the replies of the Member State con-
cerned are to be notified in writing, after which the two parties
must endeavour to reach agreement on the action to be taken. For
all audits carried out in 2001, bilateral procedures took place. The
Commission, while noting that the procedures for France and
Germany have been completed, is aware that there are some
delays with certain dossiers in other Member States and will strive
to complete them as soon as possible.

Hence, the Commission has taken appropriate steps as provided
for by the existing legal framework and the statement by the
Court that the Commission did not take corrective actions when
required is not accurate.

100.
The Commission’s monitoring proved to be satisfac-
tory. In 2002, the Commission proposed an adjustment of the
CMO instruments (premium, guarantee thresholds and Tobacco
Fund actions) in order to improve market orientation.

The tobacco regime was evaluated in 2002. This complies with
the Financial Regulation and its implementation rules, which
foresee regular evaluation, although not on an annual basis.

101.
Article 26 of Regulation (EEC) No 2075/92 required the
Commission to submit a report on the functioning of the com-
mon organisation of the market in raw tobacco to the European
Parliament and to the Council before 1 April 2002. The Commis-
sion submitted the requested report (1) in November 2002, seven
months behind deadline.

In the meantime, the Commission had employed an external
evaluator to examine the CMO. This evaluation (2) was available
in October 2003. Furthermore, in preparation for a reform of the
raw tobacco sector, the Commission carried out an Extended
Impact Assessment (3) which was completed on 23 September
2003.

(1) Report to the European Parliament and the Council on the operation
in raw tobacco,

the common organisation of

the market

of
SEC(2002) 1183, 6.11.2002.

(2) Evaluation of the common organisation of the market in raw tobacco,

COGEA, 2003. Rome. 220 pp.

(3) Tobacco sector, Extended Impact Assessment, COM(2003) 554 final,

SEC(2003) 1023.

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Endeavours to ensure improved consistency between
102.
Community policy in the tobacco sector and the public health
sector while also ensuring sustainable development prospects in
tobacco regions have been a key element of the reform of the
tobacco sector proposed by the Commission in 2003. The Coun-
cil’s approval of the reform on 22 April 2004, in particular of the
new mechanisms for decoupling direct aid and the restructuring
envelope proposed by the Commission represents a fundamental
change to the regime which should allow it to achieve these
objectives in their entirety.

In the hope of abolishing some of the existing mechanisms of
coupled payments which have proved lacking, as the Court points
out, the Commission has proposed a new regime which, in line
with the Court’s wishes, aims to:

— improve market orientation and quality, and increase the

prices paid to producers,

— improve the effectiveness of income support for farmers

without increasing overall support,

— improve support for research and development into alterna-

tive and diversified production,

— improve consistency with Community public health policy

and its policy in favour of developing countries,

— simplify the regime and its management.

103.
The 1998 reform was based on a preliminary report
from 1996. The reform of the tobacco sector proposed by the
Commission in 2003 was based on data from improved statistics
sources. This reform was also the subject of a prior extended
impact assessment to analyse all likely impacts of the three dif-
ferent reform options.

The Commission would like to emphasise that, for
104.
reform to be successful and effective,
it must be acceptable
socially, economically and environmentally. This assumes that the
production and processing structures will be allowed to adapt to
the new economic and regulatory environment.

Taking these constraints into account the Commission proposed
an in-depth reform of the common organisation of the market in
tobacco which the Council adopted in April 2004. As the Court
points out (and as the Commission explained in response to ques-
tion 102), rapid introduction of this reform will help eradicate the
weaknesses identified by the Court while avoiding a disruptive
impact on tobacco-producing regions.

105.
As pointed out by the Court, the Commission proposed
a reform in 2003 which aims to phase out the weaknesses of the
existing regime. The Council came to an agreement on this pro-
posal on 22 April 2004. From 2006 to 2009, the Council decided
on a transitional period with at least 40 % of direct aid payments
decoupled. The Commission will ensure that the gradual intro-
duction of decoupling, which will involve the coexistence of
coupled and decoupled payments over a four-year period, is car-
ried out in compliance with the provisions of the regulations
adopted.

106.
The Commission has issued Statements of Objections
concerning alleged cartels in the raw tobacco markets in Spain
and Italy (in December 2003 and February 2004 respectively).
These Statements of Objections contain the preliminary conclu-
sions of
the Commission’s investigations on alleged anti-
competitive behaviour by producer groups and processors in the
two Member States which started in October 2001 and January
2002 respectively. Issuing a statement of objections is a prelimi-
nary step in the procedure that may lead to the adoption of a pro-
hibition decision imposing fines on the companies concerned.