9 Effectiveness of reforms of the EU
sugar market
| (32204)
16315/10
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| Special Report No 6/2010 of the European Court of Auditors: Has the reform of the sugar market achieved its main objectives?
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| Legal base | —
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| Deposited in Parliament | 18 November 2010
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| Department | Environment, Food & Rural Affairs
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| Basis of consideration | EM of 1 December 2010
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| Previous Committee Report | None, but see footnote
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| To be discussed in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
9.1 The EU sugar market is extremely complex, as is the associated
common market organisation, which was set up in 1967 to ensure
a fair income to EU producers, and to stabilise the market. The
sugar regime has in subsequent years undergone a number of reforms,
the most recent of these having been in 2006, and it was the subject
of a Special Report (No 20/2000)[52]
by the European Court of Auditors in 2000. In this latest such
Report, the Court has sought to assess the extent to which the
objectives of the 2006 reforms have been achieved as regards the
future competitiveness of the EU sugar industry, whether they
have stabilised markets and guaranteed the availability of supplies,
and whether the specific instruments adopted have succeeded in
alleviating the adaptation problems related to reform.
The current document
9.2 The Court notes that sugar is produced either from beet cultivated
within the EU or from imported cane, and that the common market
organisation enabled producers to sell it at guaranteed (intervention)
prices which from 1996 to 2006 were significantly higher than
the world market price. It points out that the regime also set
(and distributed among Member States) production quotas; that
import levies were imposed on external production; and that surplus
sugar was exported, with export refunds (subsidies) being available
for production within quota (but not for that outside it).
9.3 The Court goes to recall that, prior to the reform,
the EU came under increasing pressure to avoid exporting surplus
sugar at subsidised rates on the world market, which resulted
in a ruling by the World Trade Organisation (WTO) in 2005 obliging
it to include out-of-quota exports (and re-exports of sugar imported
from the African Caribbean and Pacific (ACP) countries) within
its overall sugar export limit laid down by an earlier protocol
to the General Agreement of Tariffs and Trade (GATT). The effect
of this was to reduce average EU exports of subsidised sugar from
6.5 million tonnes a year to 1.37 million tonnes. It also notes
that the EU adopted in 2001 the Everything But Arms (EBA) initiative,
under which import tariffs for products from 49 developing countries
— including six signatories of the ACP Sugar Protocol —
were suspended, and that the sugar in question has had free unrestricted
access since 1 October 2009, all of which increased the pressure
for reform.
9.4 The Court says that the main features of the
reform were:
- the maintenance of production
quotas, but with a reduction of some 6 million tonnes (about 30%
of total quota production) by 2010, which the Commission estimated
would preserve market balance;
- the provision of additional
quota of some 1.5 million tonnes, mostly for those producers which
considered themselves to be competitive in the new market environment;
- gradual reductions in the price for white sugar,
from an intervention price of €631.9 per tonne prior to the
2006-07 marketing year to a reference price of €404.4 as
from 2009-10;
- gradual reductions from €44.01 to €26.29
in the minimum price of quota sugar beet paid to producers;
- the maintenance of a refund mechanism for quota
sugar exports, but with the expectation[53]
that, as from 2007-08, it would not be used;
- partial compensation to sugar beet growers for
the reduction in price, through the introduction of payment entitlements
into the decoupled Single Payment Scheme;
- the setting up of a temporary restructuring fund,
financed by a contribution from producers on quota totalling €6.2
billion, the expectation being that any funds remaining after
September 2012 will be assigned to the European Agricultural Guarantee
Fund (EAGF), with the fund being used in the meantime for restructuring
aid (€4.75 billion), for diversification (€675 million),
or transitional aid to full time refiners (€150 million).
Impact of reform on EU competitiveness
9.5 The Court notes that the Commission expected
the economic incentives offered to result in the undertakings
with the lowest productivity renouncing their quota by accepting
restructuring aid, thereby increasing average productivity and
the future competitiveness of the industry. However, the Court
found that neither the Commission nor Member States required the
industry to provide the data needed to assess the reform in terms
of individual producers or factories, and that categorisation
was based on whether the combined profitability of growers and
producers in regions was low, medium, or high, and on 2001 data
(so that it did not show the incidence of high profitability undertakings
in low profitability areas, or vice versa).
9.6 The Court also notes that, in the first two years
of the reform, only about 2.2 million tonnes out of the targeted
6 million tonnes was voluntarily renounced, which it suggests
was due to the aid available being too low and uncertainty as
to its rate. However, it says that, after a number of modifications
had been made to the restructuring fund, the 6 million target
was largely achieved in the third year, though it adds that, since
it had become evident that this could not be done solely by the
cessation of production by the least competitive factories in
the regions least suited to beet production, a strong incentive
was created for all producers to renounce at least a part of their
quota. In addition, the Court suggests that some of the chosen
mechanisms conflicted with each other, in that the reform aimed
on the one hand to persuade undertakings to give up their quota,
whilst at the same time offering up to 1.5 million additional
tonnes for the more competitive producers.
Stable markets and the availability of sugar supplies
9.7 The Court examined whether the reforms had stabilised
markets and guaranteed the availability of sugar supplies, and
has concluded that, in the first three years, markets have been
stable around the reference price. However, it notes that, since
there are no longer any quantitative restrictions on imports from
the least developed countries, the level of internal production
needed has become the key market stabilising factor, and that
the latter is now only about 85% of consumption, making the EU
a net importer.
9.8 The Court suggests that an increase in imports
would adversely affect the balance of the EU sugar market, and
that the Commission may therefore have to again reduce producers'
quotas, resulting in further factory closures (with the lost capacity
unlikely to be recovered, at least in the short term). It goes
on to conclude that the EU has become more dependent on imports
for what is a strategic product for the agri-food and chemical
industries, whilst new uses also place increased demand on supplies
at a time when these are dominated by a limited number of exporting
countries: and it also suggests that increased rights of access
for suppliers from third countries provides an incentive for producers
to invest in those countries, thus increasing the EU's dependency
on imports and having a potentially negative effect on the social
fabric in its affected areas.
9.9 The Court notes that the recent reforms were
designed to reduce sugar prices by up to 36%, and that the EU
price has followed the reductions in the reference price. However,
it says that it is very difficult to determine to what extent
this reduction has been reflected in the price paid by the final
consumer, which is also influenced by other factors, such as energy
and labour costs. Nevertheless, it observes that studies indicate
that the bulk of the reduction is unlikely to be passed on, in
that most of the saving will accrue to the producers of processed
products (which account for over two-thirds of consumption).
Addressing and alleviating adaptation problems
9.10 The Court notes that it was anticipated the
closing of factories would have an important direct and indirect
social impact on the agricultural community and the regions concerned,
and that the legislation therefore provided for a fund to finance
restructuring, diversification and transitional aid. In the case
of restructuring aid, it notes that producers were granted roughly
90%, with the rest being reserved for sugar beet growers and machinery
contractors; that, since sugar production in the EU is rather
concentrated, the geographical distribution of this aid is limited;
that, although the aid scheme was intended to include a plan for
the re-training, redeployment and early retirement of the work
force concerned, there are no comprehensive data on how this has
worked in practice; and that there had also been delays in restoring
the environmental conditions of former factory sites. As regards
diversification aid, the Court says that some 80 sugar beet factories
have been closed, and that the wider local community has been
affected rather than just those key stakeholders in the sugar
sector which were earmarked to receive the aid; that the criteria
used for the allocation of aid varied widely between Member States;
that there had in some cases been delays in its implementation;
and that the Commission had no overview of the impact of the aid
on the regions affected. The Court also found that there was no
evidence that the transitional aid paid to full time refiners
was based on a technical assessment of their needs, or that the
amounts were based on objective criteria. It added that the vagueness
of the objectives to be achieved made it impossible to evaluate
the efficiency or effectiveness of the aid, and that it appears
in the main to have been seen as compensation for the future loss
on the monopoly those refiners enjoyed in imports of raw cane
sugar.
9.11 Finally, the Court notes that around €640
million will be available in the restructuring fund to be assigned
to the EAGF in 2012, but that there are significant additional
related costs, not directly charged to the agricultural section
of the budget, for compensating traditional ACP country exporters
for their loss of income, which it says means that the overall
cost of the reform is €1.2 billion higher than the average
budgetary support before the reform.
Recommendations
9.12 The Court concludes with the following recommendations:
- that, for any further adjustment
of internal production deemed necessary, measures should be designed
so as to ensure overall consistency and be based on a thorough
technical assessment of needs and on objective criteria;
- that the Commission should propose measures to
remove the rigidities and constraints in the current quota system
which affect adversely the competitiveness of growers and producers;
- that any future decisions which impact EU sugar
production should take into account the level of internal sugar
production which is considered necessary given the Treaty objective
of assuring availability of supply;
- that price formation should be subject to regular
monitoring by the Commission, and that the Commission and Member
States should ensure that competition law is correctly enforced
in this sector, thus ensuring the Treaty objective that supplies
reach consumers at reasonable prices;
- that the Commission and Member States should
take urgent measures to ensure that diversification measures become
rapidly operational and produce the intended impact;
- that the Commission and Member States should
become more actively involved in ensuring that the environmental
obligations entered into by the closed factories are fully complied
with.
COMMISSION RESPONSE
9.13 In its response, the Commission suggests that
the 2006 reform has successfully managed the restructuring of
the sector, providing it with a long-term policy framework, and
it says that it has been budget neutral in terms of agricultural
expenditure, with the adjustment needs in ACP countries having
been explicitly addressed in a specific aid programme agreed as
part of the reform package. It also points out that the reform
has to be considered against the background of the Everything
But Arms Initiative, and in particular the WTO ruling in 2005
obliging the EU to reduce its subsidised exports, which required
it to cut its sugar production quotas to maintain an appropriate
market balance, and it says that the reform has led to an evident
increase in the overall competitiveness of the EU sugar sector,
with the simultaneous abandonment of existing quotas and the provision
of new quotas for more competitive producers having contributed
to this.
The Government's view
9.14 In his Explanatory Memorandum of 1 December
2010, the Minister of State for Agriculture and Food at the Department
for Environment, Food & Rural Affairs (Mr Jim Paice) says
that the
Government welcomes the Court's report, and that, although the
UK was not one of the Member States specifically examined, the
overall conclusions about competitiveness and the functioning
of the EU sugar market are of relevance to it. He also says that
the Court has recommended further action from the Commission to
remove rigidities and constraints in the sugar quota system which
adversely affect competitiveness, and that this will be examined
during the forthcoming round of CAP reforms, in which increasing
efficiency and competitiveness will be important objectives for
the UK. He adds that this Report of the Court will prove an important
contribution to the forthcoming debate.
Conclusion
9.15 As we have noted, the EU sugar regime has
been subject to various changes over the years, and this Report
by the European Court of Auditors provides an interesting analysis
of the impact of the most recent such reform in 2006, which we
are drawing to the attention of the House. Having said that, the
Government has pointed out that the Court's conclusions and recommendations
will be examined in the context of a recent Communication[54]
on the further reform of the CAP, and we note its view that the
document will make an important contribution to that debate. For
that reason, we do not think any further consideration by the
House is called for at this stage, and we are therefore clearing
the document.
52 (21932) 14925/00: see HC 28-iv (2000-01), chapter
12 (24 January 2001). Back
53
However, the Court points out that, because of market balance,
subsidised exports did in fact take place in 2007-08. Back
54
(32233) 16348/10: see HC 428-ix (2010-11), chapter 7 (15 December
2010). Back
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