European Court of Auditors: Reform Has Not Ensured the Future Competitiveness of the EU Sugar Industry

The sugar reform involved a price decrease as well as a 30 % reduction in production quotas, resulting in the closure of 80 factories. A restructuring fund and aid for diversification were intended to mitigate the social and economic impact of these measures.

11 Nov 2010 --- The EU launched a major reform of its sugar sector in 2006 in order to increase market orientation and to stabilise the market while complying with international commitments. The European Court of Auditors has conducted an audit of the reform and concludes that, whereas the aim was to create an incentive for the least competitive sugar producers to give up their quotas, quotas were also abandoned by competitive factories. There is an increased dependence on imports while there are doubts as to whether the fall in prices will be passed on to final consumers and delays persist in implementing diversification and environmental measures. The Court also notes the increasing risk of displacement of production facilities.

The sugar reform involved a price decrease as well as a 30 % reduction in production quotas, resulting in the closure of 80 factories. A restructuring fund and aid for diversification were intended to mitigate the social and economic impact of these measures. The Court’s audit assessed the extent to which the objectives of the reform have been achieved to date.

With regard to the competitiveness of the EU sugar industry, the Court concludes that overall the reform process has not fully ensured the future competitiveness of the EU sugar industry via a selective reduction of unprofitable production capacity.

In the first two years of the reform, the expected level of voluntary quota renunciations was not achieved. From the third year of the reform, key modifications were made and the overall 6 million tonnes target was largely achieved, although a significant portion of quotas was also abandoned by producers that were not in the least competitive regions. The reform simultaneously provided incentives to reduce the level of quotas but also allocated additional quotas. The Court found cases of undertakings giving up the additional quotas they had obtained or purchased. It concludes that there is no rationale in first making available additional quotas and later striving to reduce them.

As for the objective of stabilising the market and guaranteeing the availability of sugar supplies, the Court concludes that while market stability has been assured thus far, it has been achieved through the use of production quotas, which currently set the maximum allowed internal production at a level of approximately 85 % of EU consumption for what is a strategic product for the agri-food and chemical industries, thus increasing the EU dependence on imports. Furthermore, the Court draws attention to the risk that downward movements in the sugar price are not passed on to consumers.

As to whether the specific instruments/ mechanisms have been successful in addressing and alleviating the adaptation problems arising from reform, the Court notes that, overall, it is not yet possible to conclude as to the extent to which the instruments put in place have mitigated the significant direct and indirect social and economic impacts on the agricultural community in the regions affected. The Court noted delays in the implementation of the diversification measures intended to develop alternatives to sugar production as well as in the compliance with environmental obligations.

Taking these factors into consideration, the Court recommends that:

- the European Commission proposes measures to remove the rigidities and constraints in the current quota system which adversely affect the competitiveness of growers and producers. For any further adjustment of internal production deemed necessary, instruments and measures should be designed so as to ensure overall consistency and they should be based on a thorough technical assessment of needs and on objective criteria;
- price formation be subject to regular monitoring by the Commission and that the Commission and the Member States ensure that competition law is correctly enforced in the sector, thus ensuring the Treaty objective that supplies reach consumers at reasonable prices;
- the Commission and the Member States take urgent measures to ensure that the diversification measures become rapidly operational and produce the intended impact.