DG AGRI Annual Activity Report by MikeJenny

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									                                March 2006




                      DG AGRI

 Annual Activity Report 2005




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DG AGRI Annual Activity Report 2005


                                                       Table of contents

1.     Policy results ...................................................................................................................... 4
     1.1.    Political achievements and key messages of the Director General............................ 4
     1.2.    The year 2005 in a few figures and significant developments................................... 6
     1.3.    Main policy and core business results at ABB activity level.................................... 7
       1.3.1.      Overall impact on the policy .............................................................................. 7
          1.3.1.1.      Developing the Common Agricultural Policy............................................ 7
          1.3.1.2.      Further consolidating rural development policy ...................................... 11
          1.3.1.3.      Promoting agriculture in a changing trade environment.......................... 13
          1.3.1.4.      Workload indicators ................................................................................. 16
          1.3.1.5.      Evaluation and studies.............................................................................. 19
       1.3.2.      ABB 02 – Plant products.................................................................................. 19
       1.3.3.      ABB 03 - Animal products............................................................................... 19
          1.3.3.1.      Objectives................................................................................................. 20
          1.3.3.2.      Direct aid .................................................................................................. 21
          1.3.3.3.      Common Market Organisations ............................................................... 21
          1.3.3.4.      Outermost regions .................................................................................... 24
          1.3.3.5.      Promotion of agricultural products .......................................................... 24
          1.3.3.6.      Other remarks........................................................................................... 24
       1.3.4.     ABB 04 – Rural development .......................................................................... 26
          1.3.4.1.      Objectives................................................................................................. 26
          1.3.4.2.      Programme implementation ..................................................................... 26
          1.3.4.3.      Coordination and reporting activities....................................................... 28
          1.3.4.4.      Policy development .................................................................................. 28
          1.3.4.5.      Integration of environmental concerns into agriculture ........................... 29
          1.3.4.6.      Implementation of the EU Forestry Strategy ........................................... 29
          1.3.4.7.      EU Strategy on Life Sciences and Biotechnology in agriculture............. 30
          1.3.4.8.      Closure of the tobacco research projects.................................................. 30
          1.3.4.9.      Implementation of the national aid scheme for Finland and Sweden ...... 30
          1.3.4.10. PDOs, PGIs and STGs ............................................................................. 30
          1.3.4.11.     Organic farming: ...................................................................................... 31
       1.3.5.      ABB 05 – SAPARD......................................................................................... 31
          1.3.5.1.      Objectives and impact .............................................................................. 31
          1.3.5.2.      Output in 2005.......................................................................................... 32
       1.3.6.      ABB 06 – External relations ............................................................................ 35
          1.3.6.1.      Objectives................................................................................................. 35
          1.3.6.2.      WTO and the Doha agricultural negotiations .......................................... 35
          1.3.6.3.      Bilateral aspects........................................................................................ 36
          1.3.6.4.      International organisations ....................................................................... 39
       1.3.7.      ABB 07 – Audit................................................................................................ 40
          1.3.7.1.      Objectives................................................................................................. 40
          1.3.7.2.      EAGGF Guarantee clearance of accounts decisions................................ 41
          1.3.7.3.      EAGGF Guidance .................................................................................... 41
          1.3.7.4.      New Member States & Accession Countries ........................................... 42
          1.3.7.5.      SAPARD & Candidate Countries ............................................................ 44


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        1.3.7.6.      Direct expenditure .................................................................................... 45
        1.3.7.7.      Legislative initiatives ............................................................................... 45
        1.3.7.8.      Task Force on recoveries.......................................................................... 46
     1.3.8.      ABB 08 – Policy strategy and co-ordination ................................................... 46
        1.3.8.1.      Objectives................................................................................................. 46
        1.3.8.2.      CAP reform and policy development and analysis .................................. 47
        1.3.8.3.      Legal affairs, simplification and legislative procedures........................... 48
        1.3.8.4.      Functioning of the internal market ........................................................... 49
        1.3.8.5.      Information and communication policy ................................................... 49
        1.3.8.6.      Inter-institutional relations, NGOs and programming ............................. 50
        1.3.8.7.      Other remarks........................................................................................... 50
     1.3.9.      ABB 80 – Administrative support for DG AGRI ............................................ 51
        1.3.9.1.      Objectives................................................................................................. 51
        1.3.9.2.      Legislative framework.............................................................................. 51
        1.3.9.3.      Budgetary and financial management ...................................................... 52
        1.3.9.4.      Information and Communication Technology (ICT) ............................... 56
        1.3.9.5.      Human resource management .................................................................. 57
        1.3.9.6.      Document management/e-Domec ............................................................ 59
        1.3.9.7.      Internal Audit Capability.......................................................................... 59
        1.3.9.8.      Other remarks........................................................................................... 59
2. Management of Internal Control Systems........................................................................ 61
  2.1.     Inherent nature and characteristics of the activities ................................................. 61
  2.2.     Management and internal control systems ............................................................... 62
     2.2.1.      Internal management systems .......................................................................... 62
        2.2.1.1.      24 Internal Control Standards .................................................................. 63
        2.2.1.2.      Internal Risk Self-Assessment ................................................................. 64
     2.2.2.      Shared management and decentralised management ....................................... 66
        2.2.2.1.      Expenditure under the Guarantee section................................................. 66
        2.2.2.2.      EAGGF, Guidance ................................................................................... 78
        2.2.2.3.      SAPARD .................................................................................................. 86
     2.2.3.      Direct management .......................................................................................... 88
        2.2.3.1.      Cross Delegations..................................................................................... 89
     2.2.4.      Audit, evaluation and follow-up of action plans .............................................. 90
        2.2.4.1.      Follow up of reservations 2004................................................................ 91
        2.2.4.2.      Audit reports from 2005........................................................................... 93
     2.2.5.      Tables – Results of Member States’ controls................................................... 96
3. Reservations and their combined impact on the declaration.......................................... 103
  3.1.     Materiality criteria used ......................................................................................... 103
  3.2.     2005 Reservations .................................................................................................. 103
  3.3.     Overall assessment on providing reasonable assurance......................................... 109
     3.3.1.      Impact of the reservations .............................................................................. 109
     3.3.2.      Overall background on which the assurance is provided............................... 109
4. Declaration of the Authorising officer by delegation..................................................... 112




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      1. Policy results
          1.1. Political achievements and key messages of the
              Director General

The year 2005 witnessed major developments in both pillars of the CAP and the agriculture
dossier continued to be a basic element in the ongoing Doha Round of world trade talks. DG
AGRI thereby contributed significantly to the Commission’s 5-year strategic objectives.

In terms of the Second Pillar of the CAP, the major political achievement in 2005 was the
adoption of the Rural Development Regulation for 2007-2013. Following discussions in the
Council and the European Parliament, the Agricultural Council reached a political agreement
in June 2005 and the text was published in October. In parallel, the Commission issued its
proposal for Community Strategic Guidelines for Rural Development 2007-2013 in July,
which was adopted by the Council in February 2006.

The new Rural Development regulation, which comprises three main axes (improving
competitiveness of farming and forestry; environment and land management; improving
quality of life and diversification) will give Member States much greater scope to use Rural
Development funds for the creation of new growth and jobs and carry through ecological
protection programmes in rural areas in line with the Göteborg agenda, and thereby making a
significant contribution of the CAP to the Lisbon Strategy.

In relation to the CAP Reform agenda, the Commission achieved a key success with the
agreement in November by EU agriculture ministers on a wide-ranging reform of the sugar
sector, which largely reflected the Commission’s original proposal adopted in June 2005. In
bringing a system, which has remained largely unchanged for almost 40 years, into line with
the CAP reforms of 2003/04, the sugar reform will boost the sector’s competitiveness,
improve its market orientation and attain a sustainable market balance, with respect to the
EU’s international commitments. This will be achieved by introducing a 36% cut in the
guaranteed price for white sugar, compensation for farmers in the form of a decoupled
payment, added to the Single Farm Payment, and a voluntary restructuring scheme, providing
incentives for less competitive EU sugar factories to leave the sector.

Advances were also made in 2005 regarding implementation of the 2003/04 CAP reforms.
2005 was the first year of implementation of the decoupled single farm payment. With the last
of the EU-15 Member States now having decided to implement the reform as from 2006, the
end of the transition period provided for EU-15 Member States, and the gradual integration of
the new Member States into the CAP, some 90% of direct payments to farmers will become
decoupled from production. The benefits of the reform, in terms of supporting farmers while
encouraging them to react better to market signals, are thus being extended across the entire
EU-25.

Ever since 1992, the CAP has been immersed in a fundamental reform process, aimed at
moving away from a policy of price and production support to a more comprehensive policy
of farmer income aid. However, the CAP reforms also oblige the agricultural sector to take
responsibility for managing those business risks that were formerly absorbed by market and


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price support policies. In this context, and in response to a request made by the Council at the
time of the adoption of the 2003 CAP Reform, in March 2005, the Commission adopted a
Communication on risk and crisis management in agriculture. The policy options identified
were discussed by the Council, which is awaiting additional analysis by the Commission
before proceeding to further in the debate.

In 2005 two important advances were made regarding the financial management of the CAP.

In June, the Council adopted a single legal framework for financing the CAP, establishing the
conditions and specific rules for financing expenditure under the CAP and creating two new
funds: the European Agricultural Guarantee Fund (EAGF) and the European Agricultural
Fund for Rural Development (EAFRD). These new arrangements will considerably simplify
CAP financing, reinforce and modernise management and control of CAP finances, and will
strengthen budgetary discipline.

Secondly, in its 2004 annual report, the Court of Auditors recognised that where properly
applied, the Integrated Administration and Control System, IACS, which controls some 60%
of EAGGF spending, is an effective system to limit the risk of irregular expenditure. This is a
major step in fulfilling the Commission’s strategic objective of arriving at a positive statement
of assurance (“DAS”) before the end of its mandate.

With regard to the agreement on the Financial Perspectives for period 2007-2013, reached by
the EU Heads of Government in December 2005, which still awaits approval by the European
Parliament, the CAP was identified as a key element in a wide ranging review, covering all
aspects of EU spending and of resources, which will take place in 2008/09.

Compared to originally proposal by the Commission, the agreement slightly reduced the
budget assigned to Pillar I measures of the CAP (i.e. direct aids and market measures) by € 8
bill and for Rural Development under Pillar II, the budget allocated was some € 19 bill lower.

With regard to the ongoing talks in the WTO Doha Round, DG AGRI has made a
considerable and sustained contribution throughout the year. Thanks mainly to the latest
additional offer to phase out export subsidies by 2013, from the EU’s point of view, the
Round continued to make progress at December’s Hong Kong Ministerial. And DG AGRI is
currently working to achieve an agreement on modalities by the end of April 2006.

Finally, in the latter half of 2005, with the call for a renewed political signal on EU energy
policy in view of rising oil prices, high energy dependence of our economy and international
climate change commitments, the possibility of increasing the production of bio-fuels became
a major issue for the EU and DG AGRI has been actively involved in the discussion of this
complex, cross-cutting and dynamic issue.

An EU Biomass Action Plan was adopted by the Commission in December 2005 with the
main objective of more than doubling biomass use in the EU by 2010 and paving the way for
bigger increases by 2020. This preliminary EU initiative also served as a basis for the
Communication on the EU Strategy for Biofuels, led by DG AGRI. The communication was
adopted in February 2006 (COM(2006)34).




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          1.2. The year 2005 in a few figures and significant
              developments

Following on from section 1.1 the significant developments for DG AGRI and the CAP in
2005 were:

    •   The core objectives of the CAP, to ensure a fair standard of living for the farming
        community, while ensuring supplies to the consumers at reasonable prices, were also
        in 2005 achieved, although the first estimates of farm incomes show a drop of 6.6% in
        EU-15. But this came after a good progress of 12% over the previous 2 years. Food
        prices increased marginally less than the general price index. The access to food
        supplies was in 2005, as in any year in modern times, not an issue;

    •   2005 was the first full year with the new Member States as part of the CAP. The
        significance of the membership can easily be illustrated by the increase in income that
        the farming community has experienced. In the EU-10 incomes have increased by
        some 74% after accession. All in all, the integration of the new MS has, generally
        speaking, been without major difficulties and shortcomings. The new MS have largely
        managed to get the administrative structures in place, including the control systems
        (not least the IACS). This bears witness to the success of the pre-accession effort
        made through the SAPARD programme;

    •   2005 was also the first year of the application of the new decoupled Single Farm
        Payment. The decoupling of the aid is the last phase in the CAP reforms which have
        been ongoing since 1992. It is being phased in during the period 2005-2007. Already
        in 2006 (claim year 2005) will the decoupled aid represent almost 50% of all direct
        aid;

    •   As the Doha WTO negotiation round is heading towards its final conclusion, it is
        worth mentioning that the EU continued in 2005 to be the a major importer of
        agricultural products from the developing countries – with imports being more than
        twice the value of exports to these countries. The EU thereby contributes substantially
        to the economy of the agricultural sector in many developing countries;

    •   In terms of legislative initiatives, the main achievements were, as indicated in section
        1.1, the reform of the sugar sector, the adoption of the new CAP financing regulation
        and the adoption of the Rural Development strategic guidelines;

    •   In terms of budget execution, 2005 saw an increase in CAP expenditure mainly due to
        the accession of the 10 new Member States. The expenditure devoted to EAGGF
        Guarantee and Guidance was € 46.7 bill in both 2003 and in 2004, followed by an
        increase to € 51.8 bill in 2005. The share of expenditure devoted to rural development
        has gone up steadily. With € 7.3 bill in 2003, rural development represented 15.6% of
        total expenditure. In 2004 the share increased to 18.8% with € 8.8 bill to reach 19.1%
        in 2005 with an expenditure of € 9.9 bill. In addition to these figures comes the
        expenditure of the SAPARD programme which has increased substantially. In 2005
        the SAPARD expenditure was € 811.9 mio, up from € 573.5 mio in 2004 and € 263.4
        mio in 2003.




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    •   Finally, 2005 marked an important step in achieving the Commission’s objective of
        arriving at a positive statement of assurance (DAS) by the Court of Auditors within
        the period of this Commission’s mandate. The Integrated Administration and Control
        System, IACS, under which some 60% of all CAP expenditure is controlled, was,
        where properly applied, deemed by the Court of Auditors as an effective system to
        limit the risk of irregular expenditure.

In section 1.3.1 more details are provided on the development in a number of key indicators.



          1.3.        Main policy and core business results at ABB activity
                      level


              1.3.1. Overall impact on the policy

                  1.3.1.1. Developing the Common Agricultural Policy

Developing the Common Agricultural Policy, in order to meet the requirements of the
agricultural sector and the expectations of society

One of the key objectives of the CAP is to provide the farming community with a fair
standard of living. The estimates of agricultural income for 2005 show a year-on-year drop of
5.6% in the European Union as a whole. This marked fall would however take place after two
years of sustained growth when farm income showed a healthy 12 % increase. Agricultural
income would drop by -6.4 % in the old Member States whereas it would show a small
increase of 0.6 % in the new Member States (the new Member States produced 8 % of the
sector income of agriculture in the EU-25).

With this income decline, agricultural income in the old Member States would return to its
level of the late 1990s and early 2000s, i.e. still some 40 % above its 1980 level in real terms.
The slight rise in agricultural income in the new Member States would secure the gains from
enlargement of the preceding year when farm income increased by 72 % (revised upwards
from the estimate of 54 % from December 2004). Consequently, agricultural income would
remain some 74 % higher than before accession and 69 % above its 2000 level.




AAR 2005-agri-final                            7
Development in farm income
                 1992          1997       1998       1999          2000          2001          2002         2003           2004            2005
  BE                98.9         100.6      94.2        87.8         100.0         102.3          92.4         90.1           88.3            87.8
  CZ       :               :                63.1        52.7         100.0          97.8          64.6         62.7          100.4           113.1
  DK                84.9         107.6      83.3        83.0         100.0         112.5          81.5         77.9           94.2            94.7
  DE                67.1          90.2      81.0        80.1         100.0         125.5          92.7         87.0          125.5           121.7
  EE       :                     111.7     120.6        66.9         100.0         121.2         121.0        172.6          268.2           272.8
  EL       :                     101.3     100.5       100.5         100.0         102.1          98.7         91.8           83.6            82.1
  ES                70.9         105.2     100.8        94.6         100.0         108.0         104.7        118.4          118.5           106.3
  FR                79.8         100.6     105.2       102.1         100.0         100.2          98.4         97.9           96.2            86.6
  IE                88.2          94.6      91.4        86.3         100.0          98.5          93.3         93.1           92.4           107.7
  IT                73.7          96.2      96.1       103.7         100.0         100.4          96.2         97.1           96.3            86.3
  CY       :               :                           102.5         100.0         112.1         112.3        105.1           79.7            75.2
  LV       :               :               119.5        88.1         100.0         119.2         123.2        124.0          214.8           243.1
  LT       :                     126.0     131.3       106.9         100.0          92.7          81.9         96.5          163.1           203.3
  LU                98.6         101.4     111.3       105.0         100.0          99.0         101.7         96.3           91.6            90.2
  HU       :               :               131.8       113.1         100.0         106.9          90.9         91.7          142.1           129.9
  MT       :               :               116.9       110.5         100.0         107.5          99.2         88.8           94.1            88.4
  NL               120.0         118.6     106.5        98.9         100.0          97.9          84.1         89.8           81.2            86.2
  AT               100.5          94.8      93.7        94.5         100.0         115.5         109.3        109.0          107.3           103.6
  PL       :               :               113.3        98.1         100.0         114.9         104.8        103.5          201.9           205.7
  PT                56.0        104.7       96.2       116.8         100.0         120.0         112.7        119.0          121.0           106.5
  SI       :                    101.2       99.1        92.6         100.0          86.3         117.3         89.4          134.7           129.1
  SK       :                    108.8       96.5       102.9         100.0         114.6         108.2         93.4          133.5           119.3
  FI                87.3         79.3       65.2        82.3         100.0          98.8          97.8         96.6           94.5            94.3
  SE                78.1        102.2      104.6        92.0         100.0         108.2         108.3        109.1          106.0           103.1
  UK               124.8        123.0      105.6       103.4         100.0         106.3         116.2        138.5          127.0           122.5
 EU15      :                    101.5       97.9        97.5         100.0         105.7          99.1        102.1          103.7            97.2
exCC10                                                  95.7         100.0         108.7          98.2         96.8          166.4           168.7
 EU25                                                   97.0         100.0         105.7         100.3        104.6          111.2           105.2
Source: EUROSTAT
The basis index 100 taken into account is of 2000. These indexes show the evolution of the deflated (real) net value added at factor
cost of agriculture, per annual work unit. Indicator A measures the change of real agricultural factor income (corresponding to the net value
added at factor cost) related to the change in total agricultural labour input. All figures are expressed in real terms (i.e. they are deflated by
means of the implicit price index of GDP).



Graph 1: Development of agricultural income in the EU-25 in annual change (%)
        and cumulative growth (1999 = 100)
               Annual growth                                                                          Cumulative growth
   10.0%                                                                                                                              120


    8.0%                                                                                               6.6%                           116

                                                    5.7%
    6.0%                                                                                                                              112

                                   3.3%                                               4.0%
    4.0%                                                                                                                              108


    2.0%                                                                                                                              104


    0.0%                                                                                                                              100


   -2.0%                                                                                                                              96


   -4.0%                                                                                                                              92


   -6.0%                                                             -5.4%                                              -5.6%         88


   -8.0%                                                                                                                              84


  -10.0%                                                                                                                              80
                   1999            2000             2001             2002             2003             2004              2005

                                                    Annual growth              Cumulative growth




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Graph 2: Development in agricultural income in the EU-15 in annual change (%)
        and cumulative growth (1980=100)
   Annual growth
                                                                                                            Cumulative growth
 18%                                                                                                                         160


 15%                                                                                                                         150
                                              11.8%
 12%          10.9%                                                10.1%                                                     140

  9%                                                                   8.0%
                                                                                                                             130
                                                                                                    5.7%
  6%
                                         3.2%                                3.5%                                            120
                        3.0%                                                                   2.5%           2.7%
  3%                                                                                                              2.3%
                                                       1.4%
                                1.2%                            0.5%                                                         110
  0%
         -0.3%                                                                            -0.4%
                                                  -0.8%                          -0.8%
                                      -1.7%                                                                                  100
 -3%
                                                          -2.2%
                    -3.4%   -3.6%                                                      -3.5%
 -6%                                                                                                                         90
                                                                                                          -6.2%      -6.4%
 -9%                                                                                                                         80
     80

     81

     82

     83

     84

     85

     86

     87

     88

     89

     90

     91

     92

     93

     94

     95

     96

     97

     98

     99

     00

     01

     02

     03

     04

     05
   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   19

   20

   20

   20

   20

   20

   20
                                              Annual growth                Cumulative growth

Graph 4: Development of agricultural income in the New Member States in annual

          change (%) and cumulative growth (2000=100)
          Annual growth                                                                        Cumulative growth
  80%                                                                                                                         180
                                                                                                  72.0%

  70%                                                                                                                         170


  60%                                                                                                                         160


  50%                                                                                                                         150


  40%                                                                                                                         140


  30%                                                                                                                         130


  20%                                                                                                                         120


  10%                                                                                                                         110
                               5.1%
                                                8.9%                                                              0.6%
   0%                                                                                                                         100
                                                                               -1.5%
 -10%                                                                                                                         90
                                                              -10.2%
 -20%                                                                                                                         80
             1999              2000             2001            2002            2003              2004            2005

                                                Annual growth              Cumulative growth




Price index for food products compared to the general price index

Another objective of the CAP is to supply consumers with food at reasonable prices. In the
table below the price index for food is compared with the development in the general price
index for all commodities in the period 1996 to 2005. There is no obvious deviation in the
development of the two indices, as could have been expected in view of the policy pursued of
lower price support for agricultural products. One reason is that in fact the agricultural raw
material accounts for an increasingly lower share of the value of the final product. Secondly,
although support prices have been reduced since the first CAP reform in 1992, market prices
have in some periods remained strong, which was the case for cereals prices in the mid



AAR 2005-agri-final                                                9
nineties and the early 2000s as well as for beef, which in recent years is experiencing very
firm prices.

                             1996      1997     1998      1999     2000      2001     2002      2003      2004     2005
EU-      All-items HICP        100    102.6     104.7     106.4    109.0    111.7      114.1    116.3     118.8    121.4
25       Food                  100    101.6     103.4     103.9    105.9    111.3      114.0    116.0     117.8    118.8
EU-      All-items HICP        100    101.7     103.0     104.3    106.2    108.6      110.8    113.0     115.2    117.7
15       Food                  100    100.7     102.0     102.5    103.7    108.9      111.9    114.2     115.4    116.3
Source: Eurostat. 01/2006
HICP is the Harmonised Indices of Consumer Prices. It has been designed for international comparisons of consumer price
inflation. The food prices index, do not include alcohol and non alcohol beverages.
EU-25 includes all 25 countries also in years prior to accession.


   Volume and value of public stocks in intervention for main products

One of the objectives of the successive reforms of the CAP is to reduce the recourse to public
intervention of agricultural products. Seen over a longer time frame this objective has been
achieved. Firstly, the need for intervention has been reduced as a result of the pursued price
polity. Secondly, the possibility of selling products into intervention has been limited or even
done away with. For example for beef, public intervention does effectively not exist any more
(can in extreme market situations still be opened) and for milk products, butter and SMP, the
possibility of selling into intervention has been restricted.
However, in 2005 an increase in intervention of cereals was seen and intervention of sugar
took place for the first time in many years. The intervention stocks for cereals went up from
3.5 mio tonnes on 30/9/2004 to 14.9 mio tonnes on 30/9/2005. This increase was due to 1)
very low stocks in 2004 as the 2003 harvest was of a record low entailing substantial sales out
of intervention in 2003/04 and practically no intake; and 2) 2004/05 was the first year with the
new Member States. Hungary and the Czech Republic have had big surpluses and difficulties
in selling cereals due to the transport cost. These regional market balance problems are
expected to ease when the new MS are better integrated into the EU-market, but some more
structural imbalances may persist and could necessitate legislative initiatives.
For sugar, the sales into intervention was mainly linked to the accession of new Member
States and the introduction of the sugar reform.
The substantial reduction in the butter and SMP stocks was due to a strong market for both
products in 2005 – on internal market and on export markets.




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                                     30/09/2000             30/09/2001            30/09/2002             30/09/2003             30/09/2004               30/09/2005
EU TOTAL                                                                                                                       QUANTITY                QUANTITY
                                   QUANTITY     VALUE     QUANTITY     VALUE     QUANTITY     VALUE     QUANTITY     VALUE      (1000t or    VALUE      (1000t or    VALUE
                                    (1000 t)   (Mio Euro)  (1000 t)   (Mio Euro)  (1000 t)   (Mio Euro)  (1000 t)   (Mio Euro) 1000 hl)     (Mio Euro)   1000 hl)   (Mio Euro)
      Common wheat                  2 769.6      281.6      665.9       67.8      430.8        44.6     1 179.1      124.2       173.4        18.5     8 674.7       902.0
      Barley                        1 798.1      143.5     2 210.3     223.1     2 382.1      246.8      800.2       84.4        109.2       11.5      1 242.5       102.2
      Rye                           3 217.7      205.3     3 791.7     266.9     5 054.5      360.9     4 715.7      338.8      3 226.3      232.9     2 306.6       151.2
      Maize                          23.2         2.1        11.7        1.1       2.7          0.3       16.7         1.7        0.0          0.0     2 667.9       233.6
      Sorghum                         5.5         0.5         5.5        0.5        3.9         0.3       10.7         1.1        0.0          0.0        1.8          0.2
TOTAL CEREALS (excl. rice)          7 814.1      632.8     6 685.1     559.3     7 874.1      653.0     6 722.4      550.2      3 509.0      263.0     14 893.5     1 389.1
TOTAL RICE                           703.1       120.2      619.8      103.8      582.0        92.5      700.5       118.7       610.5        87.8      298.2         31.1
OLIVE OIL                             25.3        33.4        6.1        7.8        0.0         0.0        0.0         0.0        0.0          0.0        0.0          0.0
TOTAL ALCOHOL (HL 100%)             1 602.3       7.7      2 248.9      27.0     3 538.6       40.4     3 599.8       71.1      3 310.7       60.9     3 554.0        83.4
      SMP                             1.0         0.8         0.0        0.0      146.5       214.3      200.0       298.6       159.5       239.6       15.9         23.9
      Butter                         71.6         89.6       34.1       43.3      171.8       211.7      226.9       301.7       199.8       243.5      135.5        178.3
TOTAL MILK AND BUTTER                72.6         90.4       34.1       43.3      318.3       426.0      427.0       600.4       359.3       483.1      151.4        202.2
      Beef carcassed                  0.5         0.2       165.1      165.4      137.9       124.1       22.2        20.0        0.0          0.0        0.0          0.0
      Boned beed                      0.3         0.2        67.4       77.5       84.3         0.0        9.0         0.0        0.0          0.0        0.0          0.0
TOTAL EQ. CARCASSES                   0.8         0.4       232.5      242.9      222.2       208.0       31.2        29.3        0.2          0.2        0.0          0.0
Sucre blanc                                                                                                                       0.0          0.0      578.1        166.9
Sucre brut                                                                                                                        0.0          0.0       59.1         13.5
 TOTAL SUCRE                                                                                                                      0.0          0.0      637.3        180.5
            GRAND TOTAL                             885.0              984.1                 1 419.9                1 369.6                  895.0                  1 886.3
SOURCE : The declarations of the Member States before controls.
VALUES : The quantities are valued in national currencies as at the date indicated.
The conversion into EURO (where applicable) has been effected at the
budgetary rate of expenditure of the following month.
Source: DG AGRI (FEOGA)



                              1.3.1.2.               Further consolidating rural development policy

Rural development expenditure (including modulation) as share of total EAGGF expenditure


The objective to increase the share of the CAP budget devoted to rural development (the
second pillar of the CAP) is still valid. This is achieved when the long-term trend is
considered.
As it can be seen in the table below, the share of the CAP budget going to rural development
continues to increase, but most significantly in the last year as the implementation of the rural
development programmes for the 2000-2006 programming period advances. Payment
appropriations have increased from 13.6% in 2000, to 15.6% in 2003 and to 19.1% in 2005. It
should be noted that the increase in the amounts allocated to rural development indicated in
the table only concerns the EU-financing. As rural development is ‘only’ co-financed by the
Community, the increase vis-à-vis the final beneficiaries is much higher insofar as the
matching national co-financing is added.
The modulation mechanism is part of the reform process, adopted in September 2003, which
will further shift considerable amounts from the first to the second pillar of CAP during the
coming years, starting in budget year 2006.




AAR 2005-agri-final                                                                   11
Rural development expenditure (including modulation) as share of total EAGGF expenditure

                                      2003 (³)                          2004 (³)                        2005 (³)
EXÉCUTION in
Mio. EUR
                                 CE              CP                CE               CP             CE              CP

A) TOTAL EAGGF              47,248.64       46,746.45         48,075.89        46,715.41      52,686.89       51,754.82
(Guarantee +
Guidance)
Of which total EAGGF-       44,136.56       44,133.60         44,399.85        43,289.02      48,687.16       48,168.32
Guar.(1)
Of which total EAGGF-            3,112.09    2,612.85             3,676.05      3,426.39        3,999.73          3,586.50
Guid. (Obj.1 + Leader)
(²)
B) TOTAL RURAL                   7,791.69    7,292.46         10,138.05         8,784.32      10,827.08           9,897.42
DEVELOPMENT
Of which subtotal                4,679.61    4,679.61             6,462.01      5,357.93        6,827.35          6,310.92
EAGGF-Guar. (RDPs)
(1)
Of which total EAGGF-            3,112.09    2,612.85             3,676.05      3,426.39        3,999.73          3,586.50
Guid. (Obj. 1 + Leader)
(²)
C) % Total Rural                  16.5%        15.6%           21.1%           18.8%          20.6%            19.1%
Development in total
EAGGF
Notes:
(1) In the execution carryovers are included.
(2) Execution CE/CP of obj.1 programmes and Leader of the 2000-2006 period; in CP the RAL of 1994-1999 programmes is
included.
(3) Figures concern EU 15 for year 2003 and EU 25 for years 2004 and 2005. SAPARD expenditure is not included.
CP: Payment appropriations; CE: Commitment appropriations

Area under agri-environmental commitments

The success of the agri-environment policy can be demonstrated by the area of Utilised
Agricultural Area (UAA) being contracted under Regulation nº 1257/1999 or Regulation nº
2078/1992. As can be seen from the table below, in EU-15 this concerned almost one third of
UAA in 2002 and 2003. In EU-25 more than a quarter of all UAA is under an agri-
environment contract.


      Area under agri-environmental commitments
      col1                col2                   col3              col4             col5                   col6
                                                   area under        area under
                                                 contract under    contract under
                            UTILIZED                   reg.              reg.
                          AGRICULTURAL             1257/1999         2078/1992        total CONTRACT           as a
                           AREA* (‘000                (‘000             (‘000                area           percentage
                            hectares)               hectares)         hectares)         (‘000 hectares)       of UAA
             EU-15
             2001                                    19310             12278               31588
             2002                129866              27965              9914               37879              29,17
             2003                129421              35515              5345               40860              31,57
             EU-25
             2004                163479              41694              1075               42769              26,16
      In 2004, data concerns EU25.




AAR 2005-agri-final                                           12
      Source: col. 2 Eurostat, col. 3 CAP-IDIM
      Data can not be added over the years (the same hectares are covered by agri-environment payments over several
      years)
      Figure of total contract area is higher than for physical area as more than one contract can be concluded for the
      same land parcel for different measures.


Number of products under Protected Designation of Origin

The number of products under geographic and traditional indications (appellations d'origine
protégées (AOP), indications géographiques protégées (IGP), spécialités traditionnelles
garanties (STG)) is 720 demonstrating the interest that specialised product producers have in
using these instruments. There are no specific targets fixed as objectives for the
denominations, but the number of products registered and the fact that new applications are
received regularly is a sign of the importance attached to these schemes by the Member
States.
                                     Nouveaux          Nouveaux          Nouveaux         Nouveaux         Nombre de
                                     enregistré        enregistré        enregistré       enregistré        produits
                                      en 2002           en 2003           en 2004          en 2005          Fin 2005
Appellations d'origine
                                           8                16                12               16               409
protégées (AOP)
Indications géographiques
                                          15                17                32                8               296
protégées (IGP)
Spécialités Traditionnelles
                                           3                 1                 1                0                15
Garanties (STG)

At the end of 2005, 345 applications were waiting for final decisions – up from 306 open
cases at the end of 2004. As 85 new applications were received in 2005, the number of open
cases from 2004 or before was reduced to 260. It should be noted that 102 of these cases were
pending as additional information was awaited from the Member States concerned.



                    1.3.1.3.         Promoting agriculture in a changing trade environment


     Support for all agricultural sectors;

Producer Support Estimate (PSE)

In the DG AGRI 2004 AAR the indicator used was AMS (Aggregated Measurement of
Support) which is used to express the part of the agricultural support that in a WTO context is
considered as trade distorting. In the AAR 2004 it was shown that in AMS terms the EU
support level decreased steadily from the mid nineties to 2001, whereas the US AMS in the
same period more than doubled. Unfortunately, the latest available data is still only for 2001.
That is the reason why another indicator was used in the present report.

The Producer Support Estimate has been developed by the OECD to monitor and evaluate
agricultural policies.




AAR 2005-agri-final                                        13
In the table below is shown the amount of Producer Support Estimate (PSE) for the EU, and
compared with the amounts for a number of other countries. The percentage of PSE in
relation to the total production value is also indicated.

The figures show that the relative reductions in PSE (in terms of % of production value) since
the second half of the 1980s has been higher in the EU than in the US. Canada and Australia
have seen the PSE reduced by almost half, whereas the traditionally more protectionist
countries, Japan, Norway and Switzerland, have only seen modest PSE reductions with
support levels remaining high.

However, the overall PSE figures do only partially reflect the effort made by the EU in
reducing farm support and in particular potentially trade distorting support. First PSE and
AMS are different indicators. While the AMS only measures market price support, the PSE
also covers other forms of support like direct payments. Second, there are differences in the
measurement of market price support as such. The AMS takes into account the gap between
support prices and a historical border price. Therefore, its decrease directly reflects the cut in
EU intervention prices implemented under the successive reforms of the CAP. By contrast,
the market price support in the PSE is calculated as the difference between producer prices
and border prices in a given year. Variations in these prices are not only attributable to policy
changes, but also to market developments. Moreover, the border prices are derived from
selected world prices, hence issues like their representativeness and exchange rates also play a
role. (For instance, in the late nineties, the drop in world prices translated into an increase in
the PSE for wheat, while EU support remained unchanged).

Nevertheless, considering developments in the different components of the EU PSE since the
mid eighties clearly shows the significant decline in market price support and the shifts
towards direct payments.

It should however be noted, that the latest CAP reforms with decoupling of aid are not yet
reflected in the results of these different methods for calculating the agricultural support (or in
the PSE figure for 2004).



       € Mio / percentages        1986-88            2002          2003           2004 p

       European Union *              92,308           96,989       104,474         107,686
         - Percentage PSE                41               34            36              33
       United States                 33,295           41,493        31,527          37,544
         - Percentage PSE                22               18            15              18
       Canada                         5,548            5,091         5,357           4,613
          - Percentage PSE               36               21            25              21
         Australia                    1,219            1,123           941             876
          - Percentage PSE                8                5             4               4
        Japan                        44,408           46,859        42,377          39,346
          - Percentage PSE               61               58            59              56
        Norway                        2,545            2,923         2,651           2,385
          - Percentage PSE               71               74            72              68
         Switzerland                  4,925            5,184         4,723           4,688
          - Percentage PSE               78               73            71              68



AAR 2005-agri-final                             14
         Source: OECD-PSE/CSE database 2005
         p: provisional;
         *: EU 12 for 1986-1994 including ex-GDR from 1990; EU 15 for 1995-2003; EU 25 from 2004. The value of
         producer support (PSE) in the EU 15 for 2004 is estimated to be € 100,236 mio (USD 124,192 mio)


Agricultural export performance:

- proportion of unsubsidised exports in relation to total exports for main commodities;


The increased competitiveness of EU products is clearly demonstrated by the figures for EU
unsubsidised exports. Unsubsidised exports have in general increased, mainly as a result of
the successive CAP reforms. In the following table the development is shown for the main
commodities in the period 1995/96 to 2002/03 – data for later years is still not available.
However, this development cannot be attributed solely to the CAP reform process, but
also results from world market and US $ exchange rate developments. In particular, annual
variations are more the result of market and $ rate fluctuations, whereas the more long term
trends reflect the policy change.


 Unsubsidised exports in relation           1995-   1996-      1997-     1998-     1999-      2000-     2001-    2002-
to total exports                            1996    1997       1998      1999      2000       2001      2002     2003
                                             %        %         %          %         %          %         %       %
Wheat and wheat flour (wheat eq.)             74        4          0         0          0        25        83      17
Coarse grains                                  8        4          0         0          0        49        57      42
Rice                                          36        6         52        48         36        39        46      46
Rapeseed                                     100      100        100       100        100       100       100     100
Olive oil                                      0        0         51       100        100       100       100     100
Sugar                                         81       74         70        70         83        85        74      88
Butter and butter oil                          0        0          0         0          0         0         0       0
Skim milk powder                               3        1         23         0          0        45        26       2
Cheese                                        18       18         23        30         19        33        34      30
Other milk products                            0       16         13        18         13        23        32      21
Beef meat                                      8        0          0         5          8         8        10      20
Pig meat                                      54       64         76        38         42        92        93      94
Poultry meat                                  49       54         61        65         69        73        79      76
Eggs                                          12       25         14        17         20        21        26      29
Wine                                          74       72         77        76         78        80        81      82
Fruit and vegetables, fresh                   53       60         62        59         62        69        69      67
Fruit and vegetables, processed               65       56         68        73         70        78        80      81
Raw tobacco                                   96       99        100       100        100       100       100     100
Alcohol                                       87       31         29        42          0        29        51      12
Source: Based on notifications to the WTO



The EU share of world trade in agricultural products

In the tables below are illustrating the development in the EU share of world trade in total, of
world export and import and of import from developing countries.
         - the EU share of total world trade in agricultural products




AAR 2005-agri-final                                       15
in mio €
EXPORT                           1995        1996       1997       1998       1999      2000      2001      2002      2003      2004
Extra Trade EU                    44 759      46 495     52 828     51 136     50 456    57 552    59 879    60 016    59 542    58 008
World minus EU-Intra             211 759     234 200    269 596    256 515    252 756   297 243   317 106   299 629   295 279   276 739
Share of trade                     23.5%       21.8%      20.8%      21.0%      20.7%     18.6%     18.7%     19.0%     19.5%     21.4%
Source: COMTRADE


        – the share of the EU exports of agricultural exports going to developing countries

in mio €                          1995        1996       1997      1998       1999      2000      2001      2002      2003      2004
EXPORT
Extra Trade EU                      44 759     46 495     52 828    51 136     50 456    57 552    59 879    60 016    59 542    58 008
of which Developing countries       18 104     17 013     19 463    18 511     18 749    22 111    21 300    20 238    19 281    19 927
Share of Export Dev. Countries      40.4%      36.6%      36.8%     36.2%      37.2%     38.4%     35.6%     33.7%     32.4%     34.4%
Source: COMTRADE


        - the EU share of total world import of agricultural products

in mio €                         1995        1996       1997       1998       1999      2000      2001      2002      2003      2004
IMPORT
Extra Trade EU                    51 069      53 981     57 922     57 511     56 733    61 098    65 088    62 032    61 642    63 327
World minus EU-Intra             216 935     247 448    278 266    273 429    273 750   328 086   348 408   325 830   315 430   296 468
Share of trade                    23.5%       21.8%      20.8%      21.0%      20.7%     18.6%     18.7%     19.0%     19.5%     21.4%
Source: COMTRADE


        – the share of EU imports of agricultural products coming from developing countries
in mio €                          1995        1996       1997      1998       1999      2000      2001      2002      2003      2004
IMPORT
Extra Trade EU                      51 069     53 981     57 922     57 511    56 733    61 098    65 088    62 032    61 642    63 327
of which Developing countries       30 169     31 581     34 657     34 485    34 790    36 616    38 713    36 789    37 615    41 870
Share of Import Dev. Countries      59.1%      58.5%      59.8%      60.0%     61.3%     59.9%     59.5%     59.3%     61.0%     66.1%
Source: COMTRADE



The figures show that the EU share of world trade in agricultural products has remained fairly
stable over the period in the range between 19% and 21%. However, the EU share of exports
to developing countries shows a downward trend – with some annual variations -, which is an
encouraging development provided it is considered that some exports to developing countries
are blamed to have an adverse impact on these countries own production for their domestic
markets.
The EU share of world import of agricultural products is fairly stable around 19% to 23%.
The EU share of imports from developing countries’ remains high at around 60% with a peak
in 2004 of 66%. By being the by far most important importer of agricultural products from the
developing countries, the EU substantially supports their agricultural production. In fact, the
EU imports from the developing countries as much as the US, Japan, Australia, New Zealand
and Canada added together.


                         1.3.1.4.            Workload indicators

The General Secretariat has developed a set of 10 workload indicators common for all
Commission services. For the result of these reference is made to the table provided by the
SecGen.
In addition to the common indicators, DG AGRI has identified a few other ones of relevance
to the service.


AAR 2005-agri-final                                                 16
 Number of state aid cases
        STATE AIDS                                                                       Open files
                                   New dossiers             Decisions taken
         DG AGRI                                                                       at end of year*
             2005                       254                       260                        366
             2004                       275                       254                        410
             2003                       275                       294                        421
             2002                       350                       291                        460
             2001                        400                         236                         390
    *The figures do not add up from year to year as during a year there are more files closed than decisions
    taken. Ex: Cases withdrawn by Member States, administrative mistakes and cases closed by Commission as
    the Member State did not apply to requests for information.


 The number of new state aid files fell by almost 10%. For the third consecutive year the
 number of open files went down, this year by a substantial amount. The figures still confirms
 the big workload linked to state aid cases shown also by an increase in the number of
 decisions taken.

 Number of rural development programmes (RDP) and programme modifications

The number of programme modification is 2005 still remains high (compared to 121 in 2003)
translating the progressively higher uptake of the programmes at this point of the programming
period and the subsequent need to adapt them more frequently.
     Programming period:
                                                                     Programme modifications
     EU 15 2000-06; EU 10 2004-06
                                    No of programmes                    2004*               2005
  RDP EU 15                                    67                        30                   27
  RDP EU 10                                    10                         0                    4
  Obj. 2 programmes EU 15                      20                        29                   14
  Obj. 1 programmes EU 15                      69                        64                   41
  Obj. 1 programmes EU 10                       9                         0                    3
  Leader+ programmes                           73                        47                   40
  TOTAL                                       248                        170                 129
 * The high number of modifications of Objective 1, Objective 2 and Leader+ programmes in 2004 is due to the
 midterm review of the structural funds programming. In 2004 programme modifications did not occur for the
 new MS since that was the year where programmes where adopted. Programme modifications for these MS only
 started in 2005.


 Number of audit enquiries dealt with:
 The clearance of accounts directorate (Dir. J) dealt with the following number of audit
 enquiries:




 AAR 2005-agri-final                                 17
                                                                         2004               2005
Audits planned in the Annual Work Plan                                    257                229
Audits initiated - with mission                                           177                163
                  - without mission                                      104                119
Number of clearance decisions                                              4                  7
 - including financial clearance decisions                                 1                  4
 - including conformity clearance decisions                                3                  3


Number of written and oral EP questions

Responses or contributions to responses were provided by DG AGRI to 893 questions from
MEP’s. This is a substantial increase compared to the election year of 2004, but also a
significant increase compared to previous years.

                  Oral Questions                   Written Questions                        TOTAL
                       AGRI-                             AGRI-
 YEAR          Leader        Associated          Leader        Associated          Leader           Associated
 2005            62             47                239             545               301                592
 2004            25             25                176             385               201                410
 2003            44             76                207             468               251                544
 2002            46             51                197             448               243                499
 2001            42             63                231             415               273                478


First and second publications, opposition procedures and withdrawals of applications for
designations of origin, geographical indications and traditional specialities guaranteed

Number of second publications was low due to translation delays in 2004 after the accession
of 10 new Member States. Concerning first publications, the situation started improving. The
number of withdrawn applications was high compared to registrations.

      REGISTRATION AND AMENDMENT OF
       DENOMINATIONS OF ORIGIN AND                               2002           2003         2004          2005
         TRADITIONAL SPECIALITIES

 First publications                                                46           57            17            32
 Second publications                                               29           55            50            28
 Opposition procedures                                                           8            10            9
 Withdrawals                                                       n.a          n.a           n.a           15


Explanations of terms: The application to register a product must be sent to the relevant national authority, which
studies it and then transmits it to the Commission for examination and possible acceptance. If it meets the
requirements, a first publication in the Official Journal of the application will inform those in the Union who
are interested. If no interested parties object to this product registration, the Commission publishes (second
publication) the protected product name in the Official Journal. Objections after first publication, to this product
registration by a Member State undergo further consultation referred to as opposition procedures.




AAR 2005-agri-final                                     18
                  1.3.1.5. Evaluation and studies

DG AGRI has a well established function for carrying out policy evaluations and studies.

The evaluation plan of DG AGRI for 2005 included 25 evaluation projects. 9 projects were
completed during 2005: 5 concerned market-related measures (CMOs for the sectors of
bananas, flax and hemp, cereals, pig, poultry and eggs, environmental impacts of permanent
crops CMOs) and 4 concerned rural developments measures (agri-environment measures,
synthesis of mid-term evaluations of rural development programmes in objective 1 areas and
non-objective 1 areas).

For 8 evaluation projects, contracts were signed at the end of 2005: 4 concern market-related
measures (energy crops, citrus, processed tomatoes, peaches, nectarines and pears) and 2
concern rural development measures (measures in Less Favoured Areas, Leader+).
2 evaluation projects are of a horizontal nature (impact of export measures on food security,
CAP information policy)

The preparatory work for launching procurement procedures is well advanced for 2 projects
(beef extensification premium and environmental impacts of arable crops CMOs). Finally 6
projects were taken up in the new working plan for 2006-2008 (raisins, cross compliance,
dried fodder, genetic resources, beef market measures, producer organisations in the field of
fruit and vegetables).

In line with established procedures, follow-up notes were submitted to the Director General
for evaluation projects finalised two years before the reporting period. These follow-up notes
concerned 4 evaluation projects of rural development measures (measures under Regulation
950/97 concerning the efficiency of agricultural structures, measures under Regulation 951/97
concerning processing and marketing, Objective 5b programmes, and LEADER II).

As regards DG AGRI’s studies plan, 4 contracts were completed in 2005 (monitoring
indicators, evaluation baselines, contribution of CAP measures to cohesion, and co-existence
of GMO and conventional crops). For 5 studies to be carried out in the course of 2006,
contracts were signed by the end of 2005 (farm sectors in candidates countries; contribution
of rural development programs to environmental commitments, impacts of the cocoa
directive, environmental impacts of sheep and goat farming, and scenario 2020). The
procurement procedure concerning a study on liability in the context of co-existence between
GMO and non-GMO crops was almost finalised by the end of 2005.



              1.3.2. ABB 02 – Plant products

The two ABB-activities – Plant Products and Animal Products - are presented together as the
objectives are the same and the latest CAP reform (decoupling) makes the differentiation
between the two activities artificial. The reporting is provided below under ABB 03; Animal
Products.
As a consequence of the introduction of the decoupled Single Farm Payment, the definitions
of these two ABB-activities have been amended for 2006 onwards.


              1.3.3. ABB 03 - Animal products

AAR 2005-agri-final                           19
                  1.3.3.1. Objectives

The two ABB activities ‘Plant Products’ and ‘Animal Products’ represent the first pillar of the
CAP. These activities provide the main instruments for achieving the objectives of the CAP
as laid down in article 33 of the Treaty, notably to ensure a fair standard of living for the
farming community, while ensuring market stability and the supplies to consumers at
reasonable prices.

The way in which these objectives are approached has changed very substantially through a
number of successive reforms of the CAP since 1992. The initial reforms, the 1992 reform
and Agenda 2000, moved the main part of the CAP support from market and price support to
direct aid to the farmer, but with the aid still conditioned on the actual type of production. In
the 2003 and 2004 reforms the link between production and the direct aid was removed – the
direct aid to farmers is now in principle decoupled from production (for some sectors the
decoupling is introduced gradually over a few years, and Member States can choose to start
implementation between 2005 and 2007). The objectives of shifting support to direct aid are
to make the farmer’s production decision depend on the return from the market and not on
subsidies, to increase the competitiveness both on the internal market and on export markets
of EU produced agricultural products and to enhance the EU position vis-à-vis its trade
partners in multilateral trade negotiations.

The importance of the shift from the classical market and price support to direct aid can be
illustrated by a couple of budget figures. In 2005, total expenditure under the ABB activities
‘Plant Products’ and ‘Animal Products’ was € 42,390 mio, of which only € 8,693 mio
(20.5%) was for market support, whereas € 33,697 mio (79.5%) was direct aid to farmers.
The share of direct aid in 2006 is estimated at 80.5%, and which will continue to increase to
reach 89% by the time the latest reforms are fully implemented.

Before the reform process started in 1992, more than 90% of the CAP budget was spent on
market support. For example, export refunds have gone from just above € 10,000 mio in
1992/1993 down to € 2,996 mio in 2005 and estimated to fall further to € 2,624 mio in 2006.

2005 was important in the context of direct aid as it was the first year of implementation of
the new decoupled Single Farm Payment under Council Regulation nº 1782/2003. 10 of the
‘old’ Member States applied the decoupled aid from 2005 (financial year 2006). The
remaining MS will follow in 2006 and 2007. In 2006, total direct aid is estimated at € 34,817
mio with € 16,375 mio as decoupled (or 47%). The rate of decoupling will continue to
increase over the coming years.

These profound changes to the first pillar of the CAP have also had an impact on the work
and organisation of the services of DG AGRI. With effect from 1 January 2005 Directorates C
and D of DG AGRI were completely reorganised. A new unit (D.1) was created to manage
direct aid schemes. For the management of the remaining more classical market support
measures, a structure separating analytical work (Directorate C) and implementation tasks
(Unit D.2) was put in place.

With the reorganisation many colleagues moved to new, demanding tasks. To ensure
continuity, a system of mentoring (‘parrainage’) was put in place by which colleagues would
for a certain time continue providing assistance in the field of their former tasks. The system


AAR 2005-agri-final                            20
of “parrainage” worked well. By the end of 2005 the new organisation could be considered as
fully operational.

                  1.3.3.2. Direct aid

The new regime of direct payments was successfully introduced in 2005 without, at this stage,
any major problems having been identified. As mentioned above, from the year 2005, 10
Member States are applying the new decoupled Single Payment Scheme; the others will
follow in 2006 and 2007 (with the exception of the 8 new Member States using the decoupled
Single Area Payment Scheme).

Despite a tight timeframe, all the required detailed rules (and amendments to detailed rules)
for the implementation of Council Regulation nº 1782/2003 were adopted by the Commission
in due time. On the basis of the information available at this stage, farmers in the entire EU
have been granted (partially or totally) direct payments from December 2005, with the
exception of farmers in England, and by June 2006 (end the period of payments in respect of
the year 2005), all payments to all farmers will have been granted.

Cotton, hops, olive groves and tobacco

The Council adopted in 2004 reforms of the cotton, hops, olive groves and tobacco sectors
shifting also for these sectors the community support towards decoupled direct aid. The
implementing rules for the integration in 2006 of these sectors into the new regime of direct
payments were adopted by the Commission in 2005.

Cross-compliance

As provided for by Regl. nº 1782/2003, cross-compliance obligations apply to all EU farmers
benefiting from direct payments from 1 January 2005.

During this first year of implementation, the Member States faced a number of difficulties in
relation to the management of cross-compliance. This was in particular the case with the
preparation of the inclusion into cross-compliance of Regulation n° 178/2002 (the General
Food law) as from 01/01/2006. There were also problems in setting-up the management and
control systems. These difficulties were dealt with through bilateral exchanges and
discussions in the framework of the Management Committee for direct payments. As a
follow-up of a Commission commitment to the Council, a general discussion was launched
with Member States in the Committee, set to identify and address the problems. This
discussion will be followed-up in 2006.

It should be noted that the concept of cross-compliance represents a big commitment on
behalf of the farming community in delivering good farming practices, animal welfare,
environmental protection etc. in return for the direct aid paid to the farmers. The full
application of cross-compliance during the coming years will undoubtedly not be without
difficulties.

                  1.3.3.3. Common Market Organisations

The classical instruments of the CAP are measures to support and stabilise the markets of the
different product sectors. This is organised into a number of Common Market Organisations
(CMOs) and horizontal trade mechanism rules.


AAR 2005-agri-final                           21
The CMOs include measures for price stabilisation through supply management,
private/public storage arrangements, common border instruments (e.g. import tariffs, export
subsidies), aid for disposal of products on the internal market and production aid for some
agricultural products.

Ongoing market management is the major task in relation to CMOs and consists of market
monitoring/reporting, fixing import duties (e.g. cereals), export refunds, aid levels under
disposal schemes, buying into and sales out of intervention, private storage, monitoring of
preferential import schemes, management of direct aid schemes, etc. These are all under
Commission responsibility, but necessitate consultation of Member States through the
management committees. In total, 308 management and regulatory committee meetings were
held in 2005. 1481 acts were voted by the committees. Of these, the committees gave
favourable opinions on 1321 acts and no opinions on the remaining 160 acts. No negative
opinions were expressed. In addition, the various interested parties (farm representatives,
industry, trade, consumers etc.) are heard in the advisory committees. A large number of
parliamentary questions also concern agricultural markets.

In terms of new initiatives in 2005 to address problems identified and/or to pursue the CAP
reform process, the main actions in 2005 were:

    •   The most important result by far in 2005 was the Commission adoption in June 2005
        of the proposal for a reform of the EU sugar support scheme (COM(2005)263) and on
        which the Council reached an agreement in November 2005;

    •   In the bananas sector a factual report on the situation was transmitted to the Council
        and Parliament in February 2005 (COM(2005)50). This was in September followed by
        a proposal (COM(2005)433) for applying the tariff only scheme from 2006 onwards.
        Work also started for the presentation in 2006 of a proposal for reform of the internal
        banana support scheme;

    •   Proposal for amending Council Regulation 2075/92 on the CMO in raw tobacco
        following the reforms and its implementation starting in January 2006. La proposition
        visait à la suppression pour l’année 2005 du système de rachat de quotas qui n’avait
        plus de raison d’être;

    •   Proposals for technical changes to Council legislation concerning Wine
        (COM(2005)395). Work also started in 2005 for the preparation of a more profound
        reform of the wine sector to be presented in 2006;

    •   Proposal for a complete revision of Council legislation concerning Spirituous
        beverages was adopted and presented in December 2005 (COM(2005)125);

    •   Proposal for amending Regulation (EEC) No 1907/90 on certain marketing standards
        for eggs (extension of derogation for the marking of eggs sold directly on local
        markets) was adopted in May 2005 (COM(2005)215);

    •   Following the reforms of the hops sector and of the seeds sector, both adopted by the
        Council in 2004, technical updates of the basic regulations were required. Proposals in



AAR 2005-agri-final                           22
        this respect were presented in August 2005 (COM(2005)386 (hops) and
        COM(2005)384) (seeds));

    •   Report and Council Regulation on the Common Market Organisation for flax and
        hemp grown for fibre was prepared in 2005 and has been presented in early 2006;

    •   Report to the Council on the application of Council Decision 82/530/EEC (Isle of
        Man; concerning a special import regime for beef and veal and sheep meat);

    •   Some residual implementation rules of the 2003 CAP-reforms were prepared and
        adopted through management committee procedure;

    •   Following the adoption of Council Regulation 2336/2003, for the very first time a
        balance sheet for ethyl alcohol was created and published;

    •   After more than 20 years negotiations, the EC/US wine agreement could finally be
        concluded in 2005 and it was signed in March 2006.

In the internal risk self-assessment conducted in the autumn of 2004, it was noted that the
sales of alcohol out of intervention were maybe not optimised and that DG AGRI did not have
sufficient information to judge the correct level of the sale prices. To address the problem a
tender system for selling alcohol to the fuel sector was introduced. For this and market
reasons in the fuel sector, the selling price improved form 20 to 40 €/hl.

In the risk assessment a weakness in relation to consistency in figures used in the context of
wine production potential was identified. However, following a number of meetings with
Member State representatives on the verification of data sources, it has been decided to
maintain the use of the inventory data as the basis for the allocation of restructuring aid funds
for 2006. Ongoing audits by the DG AGRI audit directorate may lead to further
improvements.

Trade mechanism issues

A reservation was made to the Director-General’s annual declaration 2001 concerning the risk
of ‘carousel’ business (products exported with export refunds and re-imported under
preferential import schemes). Part of the action plan consisted of having an updated catalogue
of customs documents and stamps made for the 50 most important third countries. Following
a call for tender, a contract was signed in December 2004 with an external supplier (a
previous contract had to be cancelled as the contractor could not deliver the product).

L’étude sur les documents d’importation s’est déroulée conformément aux 3 étapes prévues
par le contrat. Les 20 premiers dossiers ont été acceptés et payés en 2005, sur les 30 dossiers
suivants, 14 sont en cours de révision au début 2006, les dossiers électroniques seront révisés
compte tenu des révisions apportées aux dossiers papier. L’étude devrait être mise à la
disposition des organismes payeurs des Etats Membres au 1er semestre 2006.
Un autre projet est l'application ‘AMIS Quota’ en développement, destinée à faciliter la
gestion des contingents tarifaires d'importation des produits agricoles gérés par le moyen de
certificats d’importation, a passé en 2005 la phase de pré-production ou Parallel Run, qui s’est
déroulée sans problème. Un premier ensemble de représentants AMIS Quota des États
Membres a été formé.



AAR 2005-agri-final                            23
Pour donner suite à des recommandations de la Cour des Comptes concernant des contingents
tarifaires (environ 130 contingents tarifaires) gères par la DG AGRI au moyen des certificats,
un avant-projet d’un règlement horizontal a été présenté au comité de gestion Mécanismes des
Échanges. Le vote du projet devrait intervenir au 2ème trimestre 2006.

Finalement, comme prévue dan le programme de travail de la DG AGRI des études visant à la
conception de règlements horizontaux en matière de stockage privé et de fixation des
restitutions par voie d’adjudication ont été effectuées. L’élaboration de règlements
horizontaux dans ces domaines et en matière de stockage public est désormais liée au projet,
lancé en 2005, d’une organisation commune de marché unique (cadre juridique de ces futurs
règlements horizontaux d’application), prévue pour fin 2006.

                  1.3.3.4. Outermost regions

The POSEI and Smaller Aegean Islands regimes with the objective of meeting the specific
needs of the Outermost Peripheral Regions did not present any particular difficulties in 2005.

At the end of the year, the Council reached a political agreement on the Commission proposal
for new POSEI arrangements to be implemented in 2006. The Council Regulation has been
published (R 247/2006) and the implementing rules have been approved in the management
committee.

The Commission implementation rules were prepared and will be formally adopted by the
Commission in early 2006

                  1.3.3.5. Promotion of agricultural products

In line with the programme for promotion of agricultural products, as stated in the AMP 2005,
the following was achieved:

• Four Commission decisions were adopted to admit proposals for new co-financed
  programmes (in February, May, September and December).

• Commission Regulations No 94/2002 and No 2879/2000 were replaced, respectively, by
  Regulations No 1071/2005 and No 1346/2005, adopted to align the application rules with
  the modifications of Council Regulations No 2826/2000 and No 2702/1999 adopted at the
  end of 2004.


                  1.3.3.6. Other remarks

International Olive Oil Council (COI)

The COI was the subject of a reservation to the Director-General’s annual declarations 2001,
2002 and 2003 due to considerable weaknesses in the management of the organisation,
revealed by a DG AGRI audit in 2001. Together with the other members of COI an action
plan was defined in order to make a complete overhaul of the organisation with new statutes,
new internal rules and not least a new management team.

As this reorganisation was basically achieved by the beginning of 2005, the reservation was
lifted for the 2004 annual declaration.


AAR 2005-agri-final                            24
During 2005 some further issues were still to be resolved. In particular, the role of the
financial controller and the definition of the financial circuit was still not yet satisfactory
ensured. This has lately been solved and should be finally confirmed at an extraordinary
meeting on 12 April 2006 in the COI Financial Committee.

The COI has as members all the main olive oil producer countries. The Community is the
biggest olive oil producer and therefore also contributes with the biggest part of the budget of
the organisation. The EU contribution would normally consist of two parts, a compulsory and
a voluntary contribution. However, due to the unsatisfactory internal situation of COI, no
voluntary contribution has been paid since 2002. The EU contribution in 2005 amounted to €
4.3 mio.

Finally, it should be noted that DG AGRI in 2005 successfully recovered an amount of €
706,000 from the COI.

‘Hilton’ beef

The Director-General has had a reservation concerning the import of high quality beef
(‘Hilton’ beef) to the 2003 and 2004 declarations. The reservation is carried over to the 2005
declarations as the solution found with the main exporting countries is not yet implemented.
The changes to the WTO schedules are not finalised. For more detail see the text of the
reservation in section 3.

Import of maize into Spain and Portugal

At the beginning of 2006 it has been found that in 2005 there was an overshoot of the quotas
for the import of maize into Spain and Portugal by around 334,000 tonnes and 45,000 tonnes
respectively.

The imports benefit from an abatement of the import duty. The abatement is fixed by tender
and was on average about € 26.5 /t for the quantities overshooting the quotas. The overshoot
of the quotas has therefore, theoretically, entailed a loss to the Community’s own resources of
€ 10.0 mio. However, it must be emphasised that this is a theoretical calculation as the
imports most likely would not have taken place had the full import duty been applied.

In any case, the materiality of this weakness is well below the 2% materiality threshold for
stating reservations to the annual declaration.

Measures will be taken during 2006 to ensure that the problem will not reoccur.

Small milk package postponed

DG AGRI has for some time had in its work programme the presentation of a small milk
package consisting of:

          – Proposal on Protein standardisation in milk sector (Unit C.4) postponed to 2006;




AAR 2005-agri-final                           25
          – Adaptation of the basic regulation for milk products in the context of
            standardisation as well as a review of private storage schemes (Unit C.4) –
            postponed to 2006;

          – Possible proposal to review the fat content of drinking milk (Unit C.4) –
            postponed to 2006;

In was during 2005 decided in collaboration with the Commissioner that it would be more
opportune to present these proposals to the Council and the Parliament in 2006.



              1.3.4. ABB 04 – Rural development


                  1.3.4.1.   Objectives

2005 was characterised by the preparations of the new legal framework post-2006. This
includes the Council Regulation, the Council decision on the Community Strategic Guidelines
for rural development, the Commission implementing, transitional control and financial
management rules and the setting up of the Common Monitoring and Evaluation Framework.
The implementation of the current programmes in the old and new Member States and the
closure of 1994/99 programmes also took up a large part of the year’s workload. The study on
employment in rural areas launched in 2004 reached its final stage and will be finalised early
2006. Its results will be transmitted to the Council shortly after the acceptance of the final
report. The operational objectives stipulated in AMP 2005 were thus largely fulfilled (see
record below).

                  1.3.4.2.   Programme implementation

Closure of 1994-1999 programmes:
84 programmes remained open at the end 2005 (compared to 164 still open at the end 2004
and 300 open at the end 2003). 14 of these programmes are partially closed with the closure
work finalised. For the outstanding 70 programmes, the financial correction procedures under
Article 24 have been initiated for 32, and the closure of the other 38 is being treated by the
geographical units. The RAL still open for these programmes at the end 2005 was € 426.2
mio, roughly 40% of the RAL existing at the end 2004.

The situation evolves month by month; the following table shows the situation by Member
State at the end of February 2006:

                                      Restant à
                                                      Dossiers en cours aux UG
                                      clôturer (*)
            Etat        Nombre de
           membre      programmes.                                    Solde final
                                                     Solde final
                                                                       encore à
                                                       établi
                                                                        établir
           BEL                16               0
           DAN                  4              0
           DEU                44              14               2               12
           ELL                19               1               1                0


AAR 2005-agri-final                           26
           ESP                47              8               0                  8
           FRA                65              7               2                  5
           IRE                 7              3               0                  3
           ITA                99              8               3                  5
           LUX                 4              1               1                  0
           NED                13              4               1                  3
           ÖST                24              0
           POR                10              7               0                  7
           SUO                11              0
           SVE                15              0
           UNK                24             16               1                 15
           Total             402             69              11                 58

            *Not including 13 programmes partially open (5 IT, 5 E, 2 FR and 1 DE)
            due to ongoing legal procedures

For 11 of the 69 programmes still open, the Commission closure proposal (including, when
relevant, financial corrections under the Art. 24 procedure) had already been communicated to
the Member States at the end of February 2006.

2000-2006 programmes:
Operational level: 249 annual reports for RDPs, Objective 1 and 2, OPs/SPDs and Leader+
programmes (including for national Leader+ network programmes) were received and
analysed. The STAR C/tee met 8 times in 2005 and gave favourable opinions on 32
programme modifications under Article 44(2) of Regulation 1257/99 and 13 on Sapard
programmes under Regulation 1268/99. In 2005, 85 notifications of amendments of RDPs
(not requiring a Commission decision) were received and examined. In total, 129 programme
modifications were approved through Commission decisions (45 RDPs for old and new MS,
84 Objective 1 POs/SPDs for old and new MS, including Leader+ programmes).

Financial level: The table below shows the financial execution 2005 in million € by type of
programme, compared to the financial execution 2004 and the initial budget 2005. Financial
execution of the two RD instruments EAGGF Guidance and the RD Financial instrument for
EU-10 amounted to € 5 bill, almost one billion over the financial execution 2004.

                         Budget exec       Initial    Budget exec
 Programme / Budget         2004        budget 2005      2005         (3)/(1)        (3)/(2)
 Line (€ mio)                (1)             (2)          (3)           %              %
 Obj.1
 2000/6        EU-15         2,492.20      2,396.40       2,462.80  98.82%           102.77%
               EU-10           216.76        175.00         290.27 133.91%           165.87%
 Peace II                       14.81          9.67          11.55  77.95%           119.39%
 Leader +                      238.23        196.45         334.48 140.40%           170.26%
 RDFI-Eur 10                   628.92      1,369.40       1,414.58 224.92%           103.30%
 Closure 94-99                 463.84        118.83         487.40 105.08%           410.16%
 Total                       4,055.00      4,266.00       5,001.00 123.34%           117.24%




AAR 2005-agri-final                          27
The EAGGF-Guarantee payments for RDPs and Objective 2 programmes in EU 15 amounted
to around € 4.9 bill. Guarantee spending for these programmes up to 2005 represents more
than 83% of the total financial allocations for the 2006-2006 programming period.

The initial budget 2005 was reinforced at the end of the exercise with € 396 mio (€ 206 mio
for Sapard and € 190 mio for Objective 1 programmes) coming from other budget headings
through the global transfer procedure, and € 598,8 mio coming from a supplementary budget.

                  1.3.4.3.   Coordination and reporting activities

The Leader+ Observatory entered in 2005 to its second year; a one-year extension of the
contract was signed on May 2005. With support of the Contact Point of the Observatory the
following main activities have been carried out in 2005: Reports and Guides: Synthesis of the
73 Leader+ Programmes, Guide on administrative rules and procedures applying to
transnational cooperation. Compendium of the existing tools developed for transnational
cooperation by national network units; Seminars: 2nd Thematic Seminar on ‘New know-how
and new technologies in rural areas’, April 6-10, 2005 in Finland; Leader+ Cooperation Fair
27-28 June 2005 held in Brussels. Information tools: Development of a new Leader + website
including a Leader+ Lag database; Leader+ Magazine (3 issues in 2005); an electronic
newsletter available twice a month. The Leader+ Steering Committee met twice in 2005.


                  1.3.4.4.   Policy development

In 2005 the major political achievement was the adoption of the Rural Development
regulation for 2007-2013. Following discussions with the MS and the other Institutions, the
Agricultural Council reached a political agreement in June 2005 and the text was published in
October in the Official Journal (Regulation (EC) No 1698/2005). The published regulation
does not include the EAFRD amount to allocate to rural development for 2007/13, as this
would be in function of the new Financial Perspectives still to be confirmed.

In parallel, the Commission issued its proposal for Community Strategic Guidelines for Rural
Development 2007-2013 (COM(2005)304 final) in July. After discussions the Council
reached a unanimous political agreement in November 2005 on the guidelines and adopted
them formally in February 2006 following the opinion of the European Parliament provided
on 16 February. This allows MS to prepare their national strategies in the first semester 2006
and their programmes in the second half of the year. In order to ease and speed-up the
preparation of the national strategies the Commission issued and sent to the Member States a
guidance document (National Strategy Plan Template) in November 2005.

The preparation of the implementing package has also started in 2005 and a draft transition
regulation was submitted to the MS in the 1st meeting of the new RD C/tee (December). The
preparation of the implementing draft regulation, the control regulation and the CAP-
financing implementing regulation (including EAFRD financial management) is also
advanced and these drafts will be presented to the MS in the relevant C/tees early in 2006.
The same holds for the preparation of the Common Monitoring and Evaluation Framework
(CMEF). In this context, DG AGRI finalised two studies by the end of 2005 on indicators for
rural development programmes for the next programming period. A first meeting on the
future CMEF was held with the MS on 30.11.2005.



AAR 2005-agri-final                          28
The Rural Development Advisory Group met twice in 2005 to examine progress in relation to
the setting up of the next period’s policy framework.


                  1.3.4.5.   Integration of environmental concerns into agriculture

The Agriculture & Environment Indicator Report (IRENA) which assesses how well
environmental concerns have been integrated into the CAP was completed in 2005. Fact
sheets and their corresponding data sets for 40 (sub-)indicators, an Indicator Report
(“Agriculture and environment in EU-15”), an Indicator-based Assessment Report, and an
Evaluation Report were produced in 2005. A Commission Communication (planned for the
2nd quarter 2006) will report to the Council and to the European Parliament on the progress
made in the development of agri-environmental indicators and on the challenges and actions
needed to improve and update the indicators.

In March 2005 the CIFAS study (“Study on environmental Cross-compliance Indicators in the
context of the Farm Advisory System”) was launched. The study is meant to support the
establishment of the farm advisory systems that Member States have to set up by 1 January
2007, by contributing to the development of suitable farm advisory tools in relation to cross-
compliance requirements in the domain of environment. The CIFAS Steering Group met 4
times, and 2 stakeholder meetings were organised.

Two of the "old" projects on conservation of genetic resources in agriculture were closed; two
are still open. The first call for proposals for the new Community programme was published
in July 2005. The 30 proposals received in response to this call were evaluated by the
Commission against the eligibility criteria, and by independent experts on the basis of
published award criteria.

The implementation of the Biodiversity Action Plan for agriculture continued. The
Commission launched a public internet consultation, the results of which will be taken into
account in finalising a Communication (in the 1st quarter of 2006) on the measures the EU
could adopt to halt the loss of and restore biodiversity.

The 6th Environment Action Programme (6th EAP) remains the main driver of EU
environment policy until 2012. In this context, the Commission set out to develop 7 thematic
strategies, most of which have strong links with agriculture. In 2005, the Commission adopted
four of these strategies: The thematic strategies on: air pollution; the protection and
conservation of the marine environment; on the sustainable use of natural resources; and the
prevention and recycling of waste. Preparations for the thematic strategies on the sustainable
use of pesticides and soil protection continued on the basis of Communications adopted in
2003. These 2 strategies are foreseen to be adopted in 2006.

                  1.3.4.6.   Implementation of the EU Forestry Strategy

The Commission Communication on the implementation of the EU Forestry Strategy,
COM(2005) 84 final, was adopted in March 2005. Council Conclusions on the proposals put
forward in the Communication were adopted by the Agriculture Council in May 2005.
Co-operation and co-ordination with the Member States continued through the Standing
Forestry Committee. In the course of 2005, the Committee met 6 times. In addition, three
Working Groups within the Standing Forestry Committee were established for the preparation


AAR 2005-agri-final                          29
of the EU Forest Action Plan, which is due to be presented by the Commission in 2006.
Similarly, 2 meetings of the advisory group on forestry and cork were held during the year.
Following a call for tender, the Commission awarded a service contract for the
implementation of a preparatory action aimed at developing an internet-based European
Forest Information and Communication Platform (EFICP).

Concerning the implementation of projects and programmes for the protection of forests
against atmospheric pollution and fires under Council Regulations (EEC) N° 3528/86 and
(EEC) N° 2158/92, a total of 20 projects and programmes were closed, reducing the number
of open contracts to 9 by the end of the year.

                  1.3.4.7.    EU Strategy on Life Sciences and Biotechnology in agriculture

DG AGRI continued to ensure the Commission's coordination role regarding the co-existence
of genetically modified crops with conventional and organic agriculture. A number of
Member States notified national or regional measures to the Commission. The Commission
evaluated these notifications according to the principles stated in the Commission
Recommendation adopted in 2003. In July 2005 the Commission established a network group
for the exchange and coordination of information concerning co-existence. The first meeting
of the group, which is composed of national experts appointed by the Member States, was
held in September 2005. Preparations began for a report to the Council and the European
Parliament on the experience gained in the Member States concerning the implementation of
measures to address co-existence. Preparations also began for a conference on co-existence, to
be held in Vienna in April 2006.

                  1.3.4.8.    Closure of the tobacco research projects

The claims and contestations received in response to the liquidations letters sent to the project
co-ordinators in December 2004 were processed and additional fact finding missions were
carried out. Subsequently, the final payments were made. In three cases, recovery orders were
issued, of which one was settled before the due date in December 2005. The others are due in
early 2006. Apart from that, all technical and financial operations for the closure of the
tobacco research projects were completed in 2005.

                  1.3.4.9.   Implementation of the national aid scheme for Finland and
                         Sweden

The reform of the CAP had implications for the implementation of the long term national aid
scheme for the northern regions of Finland. Consequently, Decision 2002/404/EC had to be
amended twice. The objectives of the schemes for the two countries are still valid. However,
after being in force for ten years, the schemes will be subject to an in-depth analysis in 2006.
This analysis should clarify whether the conditions and mechanisms of the systems still
ensure an efficient implementation of these aid schemes

                  1.3.4.10.   PDOs, PGIs and STGs

The treatment of submissions for product registrations (PDO/PGI/STG) has caused
difficulties for DG AGRI in recent years. A considerable backlog of applications has built up
– for the statistics see section 1.3.1.



AAR 2005-agri-final                            30
In 2005 measures were taken in order to address the backlog. A reorganisation of the service
dealing with the applications was made to have one unit with this as its primary task.
Moreover, proposals were adopted by the Commission to streamline and simplify the
PDO/PGI and STG regulations.

Concerning treatment of the backlog of submissions for product registration (PDO/PGI/STG),
the Commission added 24 names to the list of protected designations of origin and protected
geographical indications; the list currently comprises a total of 705 denominations. 4
modifications of the specifications of registered PDO/PGI were approved. The relatively low
number of final registrations this year results from a halt in translation services for the first
publications in the Official Journal (which take place at least 6 months prior to final
registration) in 2004 following enlargement. In 2005 the backlog of outstanding applications
was analysed and measures taken to simplify and streamline procedures, including proposals
to Council. The total number of applications outstanding stood at 345 at the end of 2005, of
which 256 were being treated or for which further information had been requested from the
applicants, leaving 89 applications subject to continuing delays in treatment. 85 applications,
including one from a non-EC country, were submitted in 2005. A major new IT application
project (named DOOR) to manage the entire registration process was launched in 2005.

Internationally, discussions continued with many countries on protection of geographical
indications and memoranda of understanding were signed with China and India. In Codex
Alimentarius Commission (in May 2005) the Commission successfully opposed a proposal to
commence work on an international “Parmesan” standard which could have the effect of
undermining the protected status of the denomination of origin.

                   1.3.4.11.     Organic farming:

In terms of the legal framework a new Council Regulation on organic production was
presented by the Commission.
The Council adopted our proposal extending the deadline for the transitional import regime
until 31 December 2006.

The Commission adopted implementing rules on organic feedstuffs (Reg.1294/2005
amending Annex I of Reg.2092/91), fertilisers and pesticides (Reg.1318/2005 amending
Annex II of Reg. 2092/91), risk based controls (Reg.1336/2005 amending Annex III of
Reg.2092/91), use of synthetic vitamins (Reg.1916/2005 amending Annex II of Reg.2092/91)
and adoption by the Joint Committee of an amendment to the technical annex of the Bilateral
EU-CH Agreement1.



              1.3.5.      ABB 05 – SAPARD


                   1.3.5.1.      Objectives and impact


1
  Decision No 4/2005 of the Joint Committee on Agriculture on amending Appendix 1 to Annex 9 to the
Agreement between the European Community and the Swiss Confederation on trade in agricultural products
(2005/956/EC)



AAR 2005-agri-final                                31
        – SAPARD is part of the pre-accession strategy. The objective is to assist the
          agricultural sectors in the candidate countries to develop and adapt their structures
          prior to EU-membership and to support the administrations to prepare to apply the
          CAP from the very beginning of membership;
        – SAPARD provides support for rural development to 11 Countries in Central and
          Eastern Europe on a decentralised basis. On 1 May 2004 eight SAPARD countries
          joined the EU. During the course of 2004 they stopped contracting new projects under
          their respective SAPARD programmes and switched to contracting under the post-
          accession programmes. Their SAPARD programmes are gradually being phased-out.
          Romania and Bulgaria are still in full implementation of their SAPARD programmes.
          In 2005 the focus of attention was on the preparation of Croatia for receiving
          assistance under SAPARD;
        – From 2000 to 2005, a total of € 2,663.9 mio was allocated to the SAPARD countries,
          of which € 1,334.2 mio was allocated to the new Member States and € 1,329.7 mio to
          Bulgaria and Romania. During this period € 1,803.02 mio was actually paid,
          representing 94.4 % of all available appropriations for the new Member States and
          40.9 % for Romania and Bulgaria;
        – As a result of SAPARD implementation, the new Member States were able to build
          up more quickly the necessary structures for the implementation of the post-accession
          programmes;
        – In all new Member States the commitments finally made under SAPARD to the final
          beneficiaries went well beyond the 100 % available under SAPARD. The projects
          committed amount to over 34,000 and account for € 1,492.0 mio of Community
          contribution;
        – By 31.12.2005, Romania had contracted over 1,900 projects accounting for over
          €534.7 mio of Community contribution. During about the same period (up to
          31.12.2005) Bulgaria had contracted over 1,700 projects, involving € 244.1 mio of
          EU funds;
        – Community contribution amounts as a general rule to 75% of the total public funds
          allocated to beneficiaries under the SAPARD Programme. In the Czech Republic and
          in 2005 in Romania, a provision was included in the programmes allowing for
          specific measures in context with floods a Community contribution of 85%. On
          31.12.2005 the total amount of EC Sapard contribution spent to final beneficiaries
          was € 1,747.7 million. The total amount of public funds spent under the programme at
          the end of the year 2005, is therefore € 2,334.9 million. Furthermore, a large share of
          the investment undertaken under the SAPARD Programme is revenue generating
          investments which are supported by up to 50% from public sources. The overall direct
          impact of Community support under the SAPARD instrument therefore amounts to a
          total of € 4,287.1 million in investments and services provided. Consequently, each
          Euro given by the Community under SAPARD results in an investment of € 2.40.


                    1.3.5.2.      Output in 2005

Elaboration of a new legislation on external aid


2
    payments on account and reimbursement payments


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During 2005 DG AGRI became increasingly involved in the preparation of the legal
framework to implement the reform of the external aid policies proposed by the Commission
in the Financial Perspective 2007-2013. It resulted in the elaboration of the new single
Instrument for Pre-accession Assistance (IPA). The work involved the preparation of the legal
basis for the IPA, including the Rural Development Component of the instrument (IPARD),
and the initiation of the preparatory work for the implementation of IPARD in the candidate
countries concerned (Turkey, Croatia and (from December 2005) FYROM).

SAPARD annual report for 2004

The annual report to the Council, the Parliament, the Economic and Social Committee and the
Committee on Regions on progress in the implementation of SAPARD was finalised, adopted
and published by the Commission on 28.10.2005 as COM(2005) 537 final.

Finalise the Annual Financing Agreements

The financing decisions and the model AFAs 2005 for Bulgaria and Romania were approved
by the Commission on 26.10.2005 (SEC(2005)1385/3). Romania signed this agreement on
29.12.2005 and Bulgaria on 17.1.2006. The EC signature for Romania is still pending.

Modification to the legal framework for SAPARD

Commission Regulation 1419/2004, setting out the rules on the continuation of the
application of the Annual and Multi-annual Financing Agreeemnts in the new Member States,
was amended by Commission Regulation 1155/2005 of 18 July 2005 to clarify the conditions
for the closure of the relevant SAPARD programmes.

     – Eleven Commission Decisions amending programmes of nine beneficiary countries
       (all except Poland) were adopted in 2005, eight of which for the new Member States
       and three for Bulgaria and Romania.
     – For the new Member States, these amendments mainly consisted in adapting the
       programmes’ financial tables to the real commitments concluded with final
       beneficiaries. These amendments were necessary to allow for the last payments of the
       Community contribution.
     – The main objective of the amendments adopted for Bulgaria and Romania were
       mainly to better focus their programmes to their needs for accession and to improve
       their absorption capacity. One additional amendment to the Romanian SAPARD
       programme was presented to the STAR Committee in December 2005. The aim of
       this amendment is mainly to allow the Romanian authorities to apply the special
       provisions for exceptional natural disasters contributing to relief Romanian rural areas
       affected by floods. The official adoption of these amendments is expected for the
       starting of 2006.


Completion of procedures for 10 Annual Implementing Reports to be submitted by
beneficiary countries




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According to the Multi Annual Financing Agreement (MAFA) the beneficiary countries have
to submit to the Commission an annual implementation report within six months of the end of
each full calendar year. All the reports were received in time and considered by the
Commission as satisfactory, but nevertheless subject to some remarks which are
communicated by letter to the Beneficiary Countries. Only Slovenia and Slovakia had at the
beginning of 2006 replied to the Commission’s remarks.

SAPARD programme for Croatia adopted and Multi-annual Financing Agreement
signed

The SAPARD programme for Croatia passed the STAR Committee in December and the
procedure for the adoption of the programme is launched as soon as the necessary translations
are available. The Multi-Annual Financing Agreement for Croatia was adopted on 6.12.2005
and signed respectively by Croatia and the EC on 29.12.2005.

Financial execution/payments

In December 2005 the Czech Republic submitted the final payment claim to the Commission.
Provided for that all necessary conditions are met this programme could be closed in 2006.
EU payments to Estonia, Lithuania, Poland, Slovenia and Slovakia have also reached 95 % of
the available funds. According to the provisions of the Multi Annual Financing Agreement
(MAFA) the Commission has now stopped intermediate payments. The final balance (5%) for
the reimbursement of costs incurred by the final beneficiaries must be pre-financed by these
countries until the Commission can pay the balance for the programmes. As none of these
countries have submitted the final claim in 2005 the remaining 5 % can be paid at the earliest
in October 2007, pending the conditions set out in MAFA being met.
In 2005 the Commission paid a total of € 811.9 million to the Beneficiary countries of which
€ 557.5 million to the new Member States and € 254.4 million to Romania and Bulgaria. The
payments made in 2005 correspond to 82 % of the payments made between 2000 – 2004. This
indicates the sharp increase in absorbing the EU money and is mainly due to the fact that
nearly all new Member States succeeded in arriving at the 95 % threshold (Latvia and
Hungary are close to it).
In Romania and Bulgaria substantial progress in performance was registered during the first
and second quarter of 2005. Consequently, both countries paid an average Annual Financial
Agreement (AFA) amount to the final beneficiaries. Yet speed diminished towards the end of
2005 leaving a total of € 72.7 million payment appropriations unused in the budget, reinforced
by € 307.1 million based on the beneficiary countries estimates in the “payment request
forecast” of April 2005 (updated in August by Romania).
        Budget execution 2005:                                            (in € mio)

                        Commitments                                  payments
            Original              final               Original                   final
                     transfers            execution              transfers             execution
            budget               budget               budget                    budget
new MS                                                 290.0       271.0         561.0   557.5
RO/BG        248.0      1.5      250.3      250.3      287.5       36.1          323.6   254.4
Total        248.0      1.5      250.3      250.3      577.5       307.1         884.6   811.9




AAR 2005-agri-final                           34
Due to the need to reinforce the budget appropriations financial execution was extremely
delayed, specifically to Hungary.


              1.3.6. ABB 06 – External relations


                  1.3.6.1.Objectives

The main operational objectives covered in 2005 were:
   • To prepare, promote and defend the EU interests and positions within agriculture in
      the multilateral framework of WTO and in bilateral trade relations as far as agriculture
      is concerned;
    •   To pursue an active EU policy in relations with third countries to preserve the
        European model of agriculture and to optimize the opportunities of improved trade
        relations.
    •   To monitor the proper implementation of the agricultural part of the agreements for
        the accession of the ten new Member States;
    •   To prepare EU positions for the agricultural enlargement negotiations with Bulgaria
        and Romania and to monitor the proper implementation of the agricultural part of the
        accession agreements;

    The main actions carried out in 2005 in order to fulfil the objectives are outlined below.


                  1.3.6.2.    WTO and the Doha agricultural negotiations

The preparatory work of the services of DG Agri was carried out respecting the timetables set
out in this area. The effort to reach a final agreement within the Doha WTO round continues
and DG Agri will continue to play a central role in this respect.
Main WTO activities in 2005 were:
    •   The on-going DDA (Doha Development Agenda) negotiations on agriculture leading
        up to the Hong Kong Ministerial Conference in December 2005. There was an
        intensive schedule of negotiations both at the technical and political levels. The
        conclusion of the round is now expected in 2006;
    •   Negotiations under GATT Article XXIV.6 related to enlargement were finalized with
        New Zealand, Australia, China, Thailand, the US and Malaysia. Negotiation with the
        remaining partners was closed (Canada, Brazil) or is expected to close (Uruguay,
        Argentina) in 2006.
    •   Negotiations under GATT Article XXVIII for the modification of our concessions on
        rice
    •   Handled a number of defensive dispute settlement cases, notably EC-GIs, EC-sugar,
        EC-poultry;
    •   The bananas arbitration took place and a Council regulation on tariff rates on bananas
        was adopted while GATT Article XXVIII negotiations are on-going;


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    •   Regular work on notifications, accessions and monitoring of the implementation of the
        Agreement on Agriculture;
    •   US: Concluded a comprehensive EU/US wine agreement; followed the Hormones and
        the GMOs dispute settlement cases;
    •   Canada: Dealt with various issues on the implementation of the wine agreement.


                  1.3.6.3.    Bilateral aspects

In the area of bilateral aspects a large number of files were dealt with in 2005:

South East Europe

2005 saw the entry into force of the Additional Protocols to the Europe Agreements with
Bulgaria and Romania respectively to take account of enlargement of the Community and
enhanced trading arrangements. On the basis of negotiating directives issued by the Council
in 2003, a new wine and spirits agreement was concluded at negotiator level with Romania
and in a similar vein discussion continue with Bulgaria.

Negotiations were concluded with Turkey adapting the agricultural trade aspects of Decision
No 1/98 of the EC-Turkey Association Council to take account of EU 2004 enlargement and
implementation is underway. Consultations continued with the Turkish authorities on the BSE
related ban on imports of various meat and live animal products underlining the
Commission’s view that it is not in line with international (OIE) guidelines. Turkey has
offered to negotiate alternative concessions to temporarily compensate EU exporters for the
economic loss incurred due the beef ban. Discussions between the Commission and Turkey
on this issue are ongoing.

Following adoption by the Council in February 2005 of a mandate to introduce tariff rate
quotas for the Community's imports of sugar from the Western Balkans, from July 2005
annual duty-free tariff quotas were set for those Western Balkan countries benefiting from the
unilateral autonomous trade measures (Regulation 2007/2000) - Serbia and Montenegro,
Bosnia and Herzegovina and Albania . A duty-free tariff quota was negotiated with the former
Yugoslav Republic of Macedonia introducing an annual quantity from January 2006 and
negotiations with Croatia will continue in 2006.

Stabilisation and Association Agreements:

    •   Based on directives adopted by the Council in 2002, negotiations with Albania
        continued, including agricultural trade aspects and a wine and spirits agreement
        (almost concluded);

    •   Negotiations with Serbia and Montenegro were opened in November 2005 on the
        basis of directives adopted by the Council. The first technical meeting on the chapter
        “movements of goods”, including agriculture, took place in December;

    •   Negotiations with Bosnia and Herzegovina began in December in line with directives
        from the Council.




AAR 2005-agri-final                            36
EFTA/EEA countries
Wine experts of EEA countries prepared in 2005 the update of Protocol 47 of the EEA
agreement. Bilateral trade negotiations with Iceland took place in 2005, with a view to deepen
existing concessions in the framework of the EEA agreement.
The EC-Switzerland Joint Committee on Agriculture adopted four decisions in 2005 aiming at
updating the provisions of the bilateral agreement on agriculture, including in particular the
adaptation of bilateral preferences following last EU enlargement.


Mediterranean Neighbourhood Countries and Middle-East
All Adaptation Protocols following the enlargement entered into force in 2005. The Euro-
Mediterranean Association Agreement with Algeria was implemented from 1 September 2005
on.
Following a first set of Action Plans under the umbrella of the European Neighbourhood
Policy agreed on with Israel, Jordan, Morocco, the Palestinian Authority and Tunisia,
discussions on a Action Plan with Egypt are well advanced and have started with Lebanon.
Negotiations on the revision of the agricultural protocols of the Euro-Mediterranean
Association Agreement with Jordan were carried out and concluded in time to allow the new
concessions to apply as of 1 January 2006.
A roadmap for trade liberalisation in agriculture, agricultural products and fishery products
was elaborated and adopted in May 2005 in Rabat with the Mediterranean Partner Countries.
At their meeting in Luxembourg the Euro-Mediterranean Ministers of Foreign Affairs
recommended the adoption of the roadmap, which was included in the five year work
programme adopted at the Barcelona 10th Anniversary Summit held in Barcelona in
November 2005. The Council adopted during the same month a negotiating mandate based on
the roadmap allowing the Commission to start a new round of negotiation with the
Mediterranean Partners ready to do so during 2006.
Furthermore the first meeting of the roadmap follow-up group of senior officials in
Agriculture and Trade was held in Brussels in November 2005.


Russia, Eastern Neighbourhood Countries and Central Asia
Preparation and discussion with Russia, Ukraine and Moldova of priority activities that stem
from the Action Plans drawn up under the aegis of the EU-Russia Common Economic Space
and under the European Neighbourhood Policy, as regards Ukraine and Moldova.
Preparation of European Neighbourhood Policy Action Plans for Georgia, Armenia and
Azerbaijan; therein cooperation activities in agriculture are being streamlined.


Latin America
During 2005 there was limited activity in the negotiations for a bi-regional Association
agreement with Mercosur and negotiations will continue in 2006. This Agreement would
include a liberalisation of trade in all sectors in agriculture together with agreements on trade
in wines and spirit drinks and possibly on protection of geographical indications for other
agricultural products.




AAR 2005-agri-final                            37
Informal agreements were concluded with Argentina, Brazil and Uruguay on the updated
definition including minimum traceability standards for High Quality Beef. This concerns
reservation n° 1 to the Director General’s annual declaration 2004, and which is repeated in
the 2005 declaration – see parts 2 and 3 for more detail.

Outstanding matters with Chile on the protection of Community geographical indications
were concluded. Parties concluded negotiations on five agreements that will modify the
current Wine and Spirit drinks Agreements.

Talks on the review clause on agriculture and the standstill clause of the Free Trade
Agreement with Mexico continued in 2005. Parties agreed to start the revision of the Spirit
Drinks Agreement in 2006.

In the case of both Central America and the Andean Community a joint assessment exercise
with the EU was convened on the evaluation of the economic integration process in both
regions, in line with the conclusions of Guadalajara Summit of May 2004. The conclusions
will be reported at the May 2006 EU-LAC Summit in Vienna.

Other third countries

    •   The Commission obtained a Mandate from the Council to negotiate with South Africa
        the adaptation of certain TDCA (Trade Development and Cooperation Agreement)
        concessions following the EU enlargement. Another Mandate is expected from the
        Council, allowing the Commission to negotiate with South Africa possible new trade
        concessions under the revision clause of the TDCA. The outcome of technical
        discussions on pending agricultural issues is to be adopted by the EC/South Africa
        Cooperation Council in 2006.
    •   Technical discussions continued with Japan on pork exports to Japan, including the
        effects of Japan's safeguard mechanism. Discussion on market access to Japan in
        numerous product sectors (including fruit and vegetables) continued in the EU-Japan
        Regulatory Reform Dialogue.
    •   Discussions on market access to S. Korea were held in the 4th EU-S. Korea Joint
        Committee meeting.
    •   Commissioner Fischer Boel and China’s Minister of Agriculture signed in July 2005 a
        Joint Declaration establishing a Dialogue on Agriculture.
    •   DG AGRI has continued to follow developments in the negotiations with the six
        different Economic Partnership Agreements (EPA) regions: Central Africa, West
        Africa, Eastern and southern Africa and Indian Ocean, Southern Africa development
        Community (SADC), Pacific region and Caribbean region.
    •   DG AGRI contributed to the elaboration of the new GSP scheme, in particular as
        regards the trade regime for agricultural products.

Bilateral activities specifically related to wine and spirits

In 2005 DG AGRI also made a considerable effort in advancing bilateral agreements on wine
and spirits with different trading partners:



AAR 2005-agri-final                           38
    •   In relation to the agreement on trade in wine and spirit drinks with Canada (entered
        into force on 1 June 2004), several implementation issues were addressed in 2005; a
        monitoring group was constituted and it has regular meetings to survey
        implementation of the Agreement.
    •   Technical discussions continued with South Africa on the outstanding issues of the
        wine agreement concluded in 2002;
    •   Intensive talks on wine issues continued with the USA and concluded by a first
        agreement on matters related to trade in wine which has not yet been signed; an
        exchange of letters between the USA and the EC, covering transitional aspects until
        the entry into force of the Agreement took place in November 2005 (OJ L 301 of
        18.11.2005, p.16). Under this Agreement, each party recognises oenological practices
        from the other party, lifting restrictions to trade on this basis. For the first time, certain
        EU geographical indications are recognised as distinctive designations under US
        Regulations and certification of EU exports to the USA will be facilitated; in addition,
        this Agreement lays down the foundation to further dialogue within a commitment
        undertaken by the parties to continue talks in order to achieve improved cooperation,
        enhanced transparency of Regulations affecting trade in wine and leading to a future
        broader agreement on trade in wine.
    •   Intensive negotiations continued in 2005 with Australia for a new wine agreement
        replacing the existing 1994 agreement. The negotiators settled most of the outstanding
        issues. The new wine agreement, once approved by the respective constituencies, will
        guarantee comprehensive protection by Australia of EU names, including traditional
        expressions. It is hoped that the new wine Agreement will be approved during the first
        semester of 2006.

                  1.3.6.4.     International organisations

DG AGRI continued in 2005 its work related to international organisations:
    •   On the basis of the mandate given by the Council to the Commission for the revision
        of the Food Aid Convention and taking account of ongoing negotiations on food aid
        issues within the framework of the DDA, the Commission proposed to freeze these
        negotiations until substantive progress can be achieved on this topic at WTO level.
    •   On the basis of the mandate granted by the Council, the Commission services
        concluded negotiations on a new International Agreement on Olive Oil and Table
        Olives (COI Agreement), which was submitted to a World Conference at the
        UNCTAD in March 2005 for approval and ratified by the EC later in the year. This
        new Agreement is significantly improved as compared to the former one and includes
        provisions of specific interest to the EC. A number of management weaknesses within
        the COI have been intensively addressed in the last few years in collaboration with the
        other COI members – for more details see section 1.3.3.6 Other remarks - (COI).


    •   DG AGRI has actively participated in the following FAO events, in Rome:
            o FAO 65th Session of the Committee on Commodity problems (CCP) April
              2005
            o 19th Session of the Committee on Agriculture (April 2005)



AAR 2005-agri-final                              39
            o High-Level Round Table on Agricultural Trade Reform and Food Security
            o 33rd FAO Conference (November 20005): Attended by Commissioner Fischer
              Boel. The Commissioner underlined the enhanced EC-FAO Partnership and
              the significant EU contribution to Development Aid. The Conference was
              marked by the re-election of the Director General, Mr Diouf, for a third
              mandate.
            o 129th Session of FAO Council.
    •   Reflection and action within DG AGRI continued for the reinforcement of the role of
        Commission and DG AGRI in relation to FAO, in particular as regards the partnership
        agreement, and other general questions as well as sectoral ones (bananas).



              1.3.7. ABB 07 – Audit

The audit activities are managed by Directorate J of DG AGRI.
The Directorate audits mainly by means of system controls in the Member States. The audit
work is separated into two parts: 1) accounting clearance and 2) conformity clearance – the
system is described in more detail in chapter 2. Both types of audits may lead to financial
corrections whereby expenditure which does not comply with the Community rules is
disallowed and recovered from the Member States. Audits of direct expenditure and of
SAPARD (decentralised management) are also part of this activity.
The activity includes the co-ordination of the relations between DG AGRI and OLAF.


                  1.3.7.1.    Objectives

The objective is to provide the Commission with reasonable assurance that the expenditure
declared by the Member States is in compliance with Community rules and that the accounts
are materially true, as well as ensuring complete and accurate records of the operations
charged to the Fund under shared management. The objective is also to assist in identifying
possible areas of improvement of the legal framework of the CAP.
En vue d’atteindre l’objectif de l’activité, le programme d’audit a été conduit globalement
comme prévu dans le plan de travail 2005 de la Direction : il prévoyait 169 audits avec
missions et 60 d’audits sans mission (ce dernier était une estimation basé sur l’expérience des
années passées) 71 audits ont été ajoutés en cours d’année (12 avec mission, 59 sans mission).
Les ajouts d’audits sans mission sont inhérents à l’activité normale de la Direction : il s’agit
essentiellement des cas DAS et des dénonciations entraînant l’ouverture d’un audit. S’y
ajoutent des missions (qui ne sont pas des audits) pour assister le service juridique devant la
Cour de Justice.
18 audits prévus n’ont pas été effectués en 2005, dont 4 annulés et 14 reportés sur 2006. Les 4
audits annulés concernent le volet audit informatique initialement prévu dans le cadre des
enquêtes de conformité qui n’a plus été jugé nécessaire par les auditors compétentes des
unités de conformité lors de la préparation détaillé de la mission. Pour les audits reportés, la
cause est en général exogène: il s’agit d’indisponibilité d’interprètes ou de problèmes
d’organisation au niveau de l’Etat membre, des changements dans le personnel de la direction
ou du manque de disponibilité d’autres services de la DG.


AAR 2005-agri-final                           40
En conclusion, la Direction a effectué 282 audits dont 163 avec mission et 119 sans mission.


                  1.3.7.2.   EAGGF Guarantee clearance of accounts decisions

a. Financial clearance

The second decision (concerning the 4 remaining paying agencies) in respect of the 2001
financial year was adopted by the Commission on 11 February 2005.
The second decision (concerning the 17 remaining paying agencies) in respect of the 2002
financial year was adopted by the Commission on 21 April 2005.
The second decision (concerning 26 out of the 29 paying agencies) in respect of the 2003
financial year was adopted by the Commission on 14 September 2005. The accounts of 3
Paying Agencies, corresponding to about € 550 million (slightly more than 1 % of total
expenditure) are expected to be cleared in 2006.
The decision in respect of the 2004 financial year was adopted on 13 May 2005. The accounts
of 5 Paying Agencies, corresponding to € 3,956 million (9 % of total expenditure) could not
be cleared.
The postponement of the clearance of the accounts of the said paying agencies will allow the
Member States concerned to provide additional information and in some cases to perform
certain tasks (requested by the guidelines) which were not finalised by the regulatory
deadline. Once these weaknesses have been addressed by the Member States, the Commission
should be in a position to clear the accounts.
b. Conformity clearance

Trois décisions d’apurement de conformité ont été prises, écartant du financement
communautaire un montant total de € 635,36 mio couvrant les années financières 1996 à
2004 (inclus):
    •   La décision n° 18 (2005/354/CE) du 29 avril 2005, portant sur 277,25 mio d’euros ;
    •   La décision n° 19 (2005/555/CE) du 15 juillet 2005, portant sur 244,41 mio d’euros ;
    •   La décision n° 20 (2005/579/CE) du 20 juillet 2005, portant sur 113,7 mio d’euros.

Ces décisions concernaient principalement les secteurs suivants:

    • L’huile d’olive et le textile (32% du total des € 635,36 mio) pour des carences
       majeures dans le système de contrôle et dépassement du plafond ;
    • Les fruits & légumes (19% du total des € 635,36 mio) suite à des défaillances dans le
       système de contrôle et le non-respect des délais de paiement ;
    • Non-respect des délais de paiement (17% du total des € 635,36 mio);
    • Les primes animales (16% du total des € 635,36 mio) suite à des faiblesses
       persistantes et récurrentes dans le régime de contrôle.


                  1.3.7.3.   EAGGF Guidance

a. Closure of EAGGF Guidance programmes for the programming period 1994-1999




AAR 2005-agri-final                           41
The deadline for payments by Member States was 31/12/2001 for the programming period
1994-1999. In 2002, the Member States began to send in their final payment claims together
with the necessary closure documents, which will lead to final payments (or recoveries) by
the Commission. However, for the vast majority of programmes (around 300 out of 381 that
still had to be examined under the clearance of accounts out of the total of 402 programmes),
documents arrived in the week before the ultimate deadline (31 March 2003), which caused
considerable practical difficulties in their treatment. For all 381 programmes, the examination
had been concluded by mid 2005.
For 32 programmes, financial correction procedures under Article 24 of Regulation 4253/88
were launched in 2005 based on the examination of the closure documents. For 28 of these
programmes the bilateral meetings were held in 2005, for two others the Member State did
not demand a bilateral meeting. The bilateral meetings for the remaining programmes and the
decisions should be made during 2006.
In addition 15 programmes were subject to ex post audits in 2004 and 2005. Where necessary,
financial correction procedures are underway.

b. Verification of EAGGF Guidance programmes for the period 2000-2006

Under the Regulations for this period (Article 38(1) of Regulation 1260/99 and Articles 5 and
6 of Regulation 438/2001) there is a requirement for the Member States to present a
description of their management and control systems and for the Commission to examine and
obtain an assurance as to these systems.
The Commission verification has been the subject of one of the reservations to the Director-
General’s declarations for the years 2001and 2002 as DG AGRI had not yet been able to
ensure these verifications of the 142 programmes concerned. With the help of an external
audit firm this work was finalised by the end of February 2004. The reservation as such was
not repeated in the 2003 declaration of assurance.
However, a new reservation was introduced for 2003 as the contradictory procedure was still
ongoing for many programmes and/or Member States needed some time to put into effect the
recommendations made by DG AGRI. There was thus not yet a sufficient basis for giving
assurance on the expenditure made in 2003. Despite considerable progress achieved during
2004, a number of issues with some Member Sates remained outstanding. The reservation
was therefore carried-over for the 2004 declaration.
During 2005 further improvements have been made on those issues for which reasonable
assurance was not available in 2004. As a result, based on the additional work performed and
the limited materiality of the remaining issues, the reservation is not repeated for the 2005
declaration. For more detail see chapters 2 and 3.
During 2006 the next stages will be undertaken for a number of financial correction
procedures. It is hoped that the first Commission decisions will be taken in 2006.


                  1.3.7.4.   New Member States & Accession Countries

a. Paying Agencies

For the EU-15 Member States, as well as for new MS, only expenditure paid by accredited
Paying Agencies can be financed under EAGGF-Guarantee.


AAR 2005-agri-final                           42
All eight SAPARD countries of the 10 new Member States (except for Cyprus and Malta)
built their EAGGF-Guarantee Paying Agencies on the foundation of the SAPARD agency.
At the end of 2005, all of the new paying agencies were “finally” accredited (with the
exception of EE, which was accredited as of 01/02/2006). This means that each of the paying
agencies was considered by the respective Competent authority (based on a detailed review
by an external audit body) to dispose of an administrative organisation and system of internal
control complying with the accreditation criteria.
Moreover, an IACS system was in place in all new Member States and it was considered to be
operational (see below).
The financial audit programme for 2005 included visits to all the Paying Agencies of the 10
new Member States. The main objective of these missions was to review the respect of the
accreditation criteria. The review at this stage was concentrated whether criteria had been put
in place. The operations of systems and procedures were not tested in the course of the
missions. Thus, these missions alone could not provide evidence to assess fully the operation
of the accreditation criteria, but provided valuable information on the paying agencies control
systems and procedures.
The overall opinion from these 63 clearance of account missions carried out in the course of
2004 and 2005 to the new Member States is that the infrastructure established to manage
EAGGF expenditure is generally satisfactory and that written procedures in respect of the
authorisation, payment and accounting functions were put into place and that the different
control and sanctioning systems were in place. Obviously, there are still certain points
(mainly ancillary elements) that give rise to some concern and/or need to be improved. To this
end recommendations have and will continue to be communicated to the Member States.


b. IACS

With regard to the Single Area Payment Scheme opted for by the Czech Republic, Cyprus,
Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia, the IACS comprises a
computerised database of holdings and aid applications, systems for identifying parcels of
agricultural land, and a set of administrative checks and on-farm inspections.
In addition for Malta and Slovenia which opted for the “full system”, IACS comprises a
system for identifying and registering of animals.
Based on the enquiries made prior to accession, it was expected that certain ancillary
weaknesses would appear in the operation of IACS in the first year of function.
Throughout late 2004 and 2005, a series of formal audit missions on IACS were performed to
cover all new Member States at least once, with some requiring second missions.
Observations letters and recommendations were sent in the course of 2005 and bilateral
meetings are being organised as from March 2006.
IACS systems are in place in all new Member States and are considered to be operational,
giving a generally satisfactory overall situation. Therefore, the first year of IACS
implementation was successful, albeit with some operational and payment delays. In
particular the claim processing and risk analysis stages of the administrative operations were
well executed.

c. Setting up of paying agencies and IACS in Romania and Bulgaria



AAR 2005-agri-final                           43
DG AGRI continued its monitoring of developments in the establishment of new paying
agencies in the acceding countries.
Monitoring missions were carried out by unit J.3 in Bulgaria on 4-6 April 2005 and in
Romania on 6-8 April 2005. The overall objective of the missions was to check whether the
paying agencies (present Sapard agencies, future paying agencies) of Bulgaria and Romania
will be in a position to carry out the administration and control of the surface based aid
schemes in accordance with Community legislation by the time of accession.

Overall the preparation for implementing IACS requirements is still mostly in the planning
phase in both countries. Considering the volume of work still to be accomplished in both
countries, the timescale becomes critical to have all IACS components in place and
functioning properly by 2007.

                  1.3.7.5.   SAPARD & Candidate Countries

a. Conferral of management
One conferral audit mission to Romania within their ‘third wave’ of accreditation, covering
four measures has been carried out. The Commission Decision was not issued in 2005, as
Romanian authorities were due to amend and complete some of the SAPARD procedures in
order to comply with the Multi Annual Financing Agreement (MAFA) requirements.

b. Financial clearance of accounts
La Commission a pris une décision en date du 30 septembre 2005 sur l’apurement des
comptes pour l’année 2004 des 10 pays SAPARD. Par ailleurs, les comptes des 3 pays qui
avaient été disjoints en 2004 pour l’exercice financier 2003 (Bulgarie, Pologne et Roumanie)
ont fait l’objet de vérifications complémentaires au cours de l’année 2005 et la décision
d’apurement de ces trois comptes a été adoptée par la Commission en date du 17 février 2006
(n° C(428)). Ces décisions ne préjugent pas de l’adoption ultérieure de décisions visant à
exclure du financement communautaires des dépenses n’ayant pas été effectuées
conformément à la réglementation communautaire.


c. Conformity clearance of accounts
L’audit de conformité des dépenses SAPARD, qui a démarré en 2003, s’est poursuivi en
2005. Une décision d’apurement de conformité a été prise, pour la Bulgarie. The financial
correction was € 9,000 and concerned the failure to obtain three offers for consultancy work
and conflicts of interest in the award of such work. A proposal for a financial correction of €
531,000 for ineligible VAT declared by Poland is in the process of being adopted by the
Commission.

d. New candidate countries

    •   Croatia: In 2005, there were three fact-finding missions to Croatia. The objective of
        such missions was to follow-up the progress made by the National Fund and the
        SAPARD Agency towards accreditation.
        In December 2005, it was noticed that the Croatian authorities made significant
        progress; however, some important aspects remained to be addressed and followed



AAR 2005-agri-final                           44
          up, like controllability of the Rural Development Programme requirements and on-
          the-spot controls.

    •     Turkey: A ‘kick-off IPA’ mission to Turkey was conducted by the Commission
          services (DG AGRI, DG ELARG, EG EMPL and DG REGIO) in July 2005. The
          objective of the mission was to present the Instrument of Pre-Accession for Rural
          Development (IPARD) to the Turkish authorities and to conduct meetings on rural
          development with IPA Rural Development Implementation and Programming
          Working Groups.

                  1.3.7.6.     Direct expenditure

Pour les dépenses directes 10 audits ont été réalisés en 2005 couvrant les dépenses relatives
en particulier aux agences huiles d’olive, au règlement n° 723/97, aux projets relatifs à la
conservation, la caractérisation, la collection et l’utilisation des ressources génétiques en
agriculture (RESGEN), au Réseau d'Information Comptable Agricole (RICA) et aux actions
d’information dans les pays tiers (Mission à haut niveau et Campagne d’information sur les
AOP, IGP, STG et produits biologiques).
Les constatations faites au cours de l’audit du RICA permettront à l’unité gestionnaire en
charge de ce secteur d’en améliorer la gestion dans le futur. Par ailleurs, les audits réalisés
dans tous les autres secteurs ont ou vont générer des redressements financiers (R. 723/97 :
récupération de € 1,283,900 - RESGEN et actions d’information : en cours de concertation).


                  1.3.7.7.     Legislative initiatives

On 21 June 2005, the Council adopted Regulation (EC) No 1290/2005 on the financing of the
Common Agricultural Policy, which will be applicable as of financial year 2007.

Three major changes will affect the agricultural audit:

     1.      the creation of a new fund for the Rural Development expenditure (EAFRD),
            which will largely follow the rules presently applicable to the EAGGF Guarantee
            expenditure;
     2.      directors of Paying Agencies will be required to sign a declaration of assurance
            (DAS) mirroring in shared management the declaration of assurance issued by the
            Directors-General of the Commission;
     3.      the rules on recoveries following irregularities will be changed to clear cases after
            a certain lapse of time.

The necessary implementing rules as regards the accreditation of paying agencies and
coordinating bodies as well as the clearance of the accounts of the EAGGF and the EAFRD
expenditure are under preparation and should be adopted by the Commission before summer
2006. In this context, it is intended to clarify and strengthen also the rules governing the
accreditation and supervision of the paying agencies. The implementation rules concerning
the controls of rural development measures are also under preparation in view of final
adoption in 2006.




AAR 2005-agri-final                             45
                  1.3.7.8.    Task Force on recoveries

A special OLAF – AGRI Task Force Recovery (TFR) was created in the framework of the
Commission Communication of 3 December 2002. The objective of this task force is to clear
the accounts for all non recovered amounts of irregularities communicated by Member States
until 31 December 1998. For practical reasons the non recovered irregularities have been
divided into two groups: cases involving more than € 500,000 /case and cases involving less
than € 500,000 / case.
The TFR has concluded the investigative phase concerning the cases > € 500,000 per case in
2004 after which the Clearance of Accounts procedure was started via the sending of formal
“Article 8 letters” to the Member States concerned. In accordance with the Clearance of
Accounts procedure bilateral meetings were held in 2005 to discuss the recovery procedures
for each individual case with the respective Member States.
The cases discussed concern 463 irregularities each exceeding € 500,000 (involving
approximately € 840 mill). The Clearance of Accounts procedure will now continue (formal
DG Agriculture position, possibility of an appeal to the conciliation body, presentation to the
EAGGF Committee) before a final Commission decision will be made whether or not
financial liability for the non recovery will be attributed to a Member State. Provided no
appeal is made to the Conciliation Body the procedure should lead to a Commission Decision,
covering most of the cases, before 15 October 2006.


The TFR also started the audit of all cases involving less then € 500,000 per case (ca. 3500
cases) by sending out a detailed questionnaire to the Member State for each case. Considering
the impossibility to finalise the clearance of accounts procedure before Regulation 1290/2005
will become applicable, these cases will fall under the automatic clearing mechanism in place
after 15 October 2006. Under this procedure, for all cases older than 4 years (8 years if legal
proceedings are ongoing) even if they are still ongoing, the financial loss for non-recovered
amounts will be split 50/50 between the Community budget and the Member State. In
addition, if it is shown that any non-recovery is due to negligence on the part of the Member
State, the full loss may be charged to the Member State under the clearance of accounts
procedure. This procedure will apply to all cases, also open ones, whereas under the present
legal framework the TFR has been limited to examine closed cases or cases that should have
been closed if the Member State had not been negligent.




              1.3.8. ABB 08 – Policy strategy and co-ordination

Policy Strategy and Co-ordination involves a substantial part of DG AGRI's work.
Directorates B, G and H and unit I.6 contributed to the activity in 2005. From 1.1.2006
Directorate B has become Directorate K.
The areas covered are: 1) overall policy evaluation, analysis, including trade aspect analysis,
conception and formulation, 2) legal affairs, simplification and legislative procedures, 3) state
aid/competition and infringements, 3) information and communication policy, 4) relations
with the other institutions and stakeholders (NGOs), and 5) planning and programming.

                  1.3.8.1.    Objectives


AAR 2005-agri-final                            46
The operational objectives are manifold and mostly of a horizontal nature in order to support
the policy co-ordination, development and implementation. In short the objectives can be
summarised as to facilitate the decisions making process on, and the development of the CAP
through policy and economic analysis, policy evaluations and legal support, through ensuring
dialogue with the other institutions and stakeholders/civil society, and through the compliance
with internal and inter-institutional procedures and by ensuring the planning and
programming of activities.

                  1.3.8.2.   CAP reform and policy development and analysis

The conceptual work, the economic analysis and the legal support related the CAP reforms
over the years 2003 to 2005 were ensured under this activity.
Related to CAP reform and policy analysis the main products in 2005 were:
• 2005 Sugar Reform:
     – Contribution to the drafting of Commission Proposal (COM (2005) 263 final), on the
       common organisation of the markets in the sugar sector, amending Regulation (EC)
       No 1782/2003 and establishing a temporary scheme for restructuring of the sugar
       industry in the European Community. Drafting of Commission Staff Working
       Document (SEC (2005) 808), an update to Impact Assessment (SEC (2003) 1022) on
       Reforming the European Union’s sugar policy. During the negotiation in the Council
       contribution were also made to facilitate the final Presidency Compromise;
• Risk and Crisis Management in Agriculture:
     – Drafting of the Communication from the Commission to the Council on risk and crisis
       management in agriculture (COM (2005) 74) and Commission Staff Working
       Document on risk and crisis management in agriculture (SEC (2005) 320);
• Biofuels:
     – Contribution to the preparation of the Communication from the Commission on the
       EU Biomass Action Plan (COM (2005) 628 final);
     – Leading participation in and the provision of fact sheets to the Cabinet / Inter-service
       steering group on biofuels and drafting of the Communication from the Commission
       on an EU Strategy for Biofuels and its accompanying impact assessment
       (COM(2006)34; SEC(2006)142);
• Support in policy formulation for the CAP Reform Process:
     – Contribution to the preparation of the European Council agreement on the Financial
       Perspectives (2007-2013) through the drafting of key orientation notes dealing with
       the CAP and the Financial Perspectives;
     – Drafting of the first draft of the economic report on the wine sector and elaboration of
       a database;
• Analysis related to multilateral relations

     – Concerning multilateral trade relations, analytical work were undertaken in four areas.
       Firstly, in the development and defence of the EU position in DDA negotiations by
       analysing the impact of alternative proposals on market access and the full impact of


AAR 2005-agri-final                           47
        the EU offer on EU agriculture. Secondly, in the analysis of developments in world
        agricultural markets. Thirdly, in the communication strategy of the DG by producing
        a new series of Newsletters and Briefs (Monitoring Agri-trade Policy – MAP), which
        is available on the AGRI website. Fourthly, by finalising the terms of reference of a
        grant with OECD that estimates the PSE indicator for non-OECD members, including
        new EU member states;

• Short-term forecasts and other economic analysis:

     – Short term forecasts for the arable crops, meat and dairy sectors were presented over
       the year. Two reports on the 2005-2012 medium-term outlook for the main
       agricultural sectors (including the cereal, meat and dairy sectors) and the income of
       the whole agricultural sector were prepared and presented;

     – Substantial analytical contribution to the preparation of the future rural development
       policy in the form of statistical and economic analysis was also carried out (notably
       for the designation of LFA areas and for the indicators of the Common Monitoring
       and Evaluation Framework);

• The Farm Accountancy Data Network (FADN)

     – For the FADN for recording farm income in the EU a working group discussed the
       consequences of the 2003 CAP reform on the typology of agricultural holdings and
       provided broad orientations on how to adapt it to the decoupling of aids and to the
       diversification of activities within the agricultural sector. New software for processing
       the FADN data has been developed in order to enhance the functionalities of the IT
       systems. This new software should be completely operational in the first months of
       2006

Moreover, the evaluation of the policy continued in 2005. For more details see section 1.3.1.

                  1.3.8.3. Legal affairs, simplification and legislative procedures

An important part of the activity ‘policy strategy and coordination’ is to provide other DG
AGRI services with legal advice. Hence, the team of lawyers in DG AGRI was in 2005
deeply involved in the decision making process, in particular at Council level, leading to the
adoption of the new regulations on support for rural development and on the financing of the
CAP and to the political agreement on the sugar reform. Similarly, it had a leading role in the
conception and the drafting of the corresponding Commission implementing rules. Other
legislative tasks included the preparation on the introduction of the tariff-only import scheme
for bananas as from 1.1.2006 and the drafting of the legislative proposals in the quality sector
recasting the existing legislation: organic production, protection of geographical indications
and designations of origin, certificates of specific character for agricultural products and
foodstuffs.

Simplification of agricultural policy continued to be a priority. The Communication on
Simplification and Better Regulation for the Common Agricultural Policy was adopted by the
Commission on 19 October 2005 (COM(2005) 509). The aim is to reduce red tape for both
farmers and administrations by making rules more transparent, easier to understand and less
burdensome to comply with. The Commission’s Communication calls for the production of
an Action Plan during 2006, which will set out the concrete measures envisaged.


AAR 2005-agri-final                             48
The consolidation of agricultural legislation (the “Ange bleu”) in French language and also in
English as regard the rapidly evolving sector of direct payments continued. The preparatory
work for extending the number of volumes in English was intensified.

DG AGRI is one of the most ‘procedure’ heavy services of the Commission, each year
producing a high number of Commission regulations:

                                                       2005         2004        2003

Nombre de procédures :                                   2517         2406        2567
- of which :
        procédures orales                                     6            13          18
        procédures écrites                                377          462         392
        procédures d’habilitation                         531          480         483
        procédures de subdélégation                      1039          804         976
        procédures de délégation                          564          647         698

Nombre de documents COM                                       42           38          46
Nombre de documents SEC                                       19           19          28

Nombre de réunions des comités de gestion et de
                                                          309          346         322
réglementation



                  1.3.8.4.     Functioning of the internal market

The functioning of the internal market is not an issue at the main focus of the public interest
in the CAP. However, in terms of workload for DG AGRI it is a substantial activity. In 2005
it covered:

   • In 2005, 260 state aid decisions concluding a file have been taken. 11 Decisions have
     been taken to open a formal investigation procedure.

   • 190 infringements cases (included 7 Ombudsman’s cases) were dealt with. Regarding
     the application of Directive 98/34 on technical norms, 154 draft legal measures have
     been examined on their compatibility with article 28 ECT.

   • Intensive work on a revision of state aid rules for the agriculture sector has been
     undertaken in light of the 2003 CAP reform, the Lisbon agenda, simplification and
     experience of application since 2000, including a series of seminars with the
     Commissioner. Main principles have been agreed. Interservice consultation on a new
     exemption regulation for the agriculture sector was launched in December 2005.


                  1.3.8.5.     Information and communication policy



AAR 2005-agri-final                               49
Information and communication work related to the CAP continued in 2005, notably:

    • Grants for information actions under Regulation (EC) n° 814/2000. Under the 2005
      exercise, grants were awarded to 20 beneficiaries for 31 measures (17 of which were
      part of 6 annual programmes) between July 2005 and June 2006, for an overall amount
      of € 1,275,572;

    •   Other information activities undertaken by DG Agriculture under Reg. 814/2000
        included writing and publications for an amount of € 1,129,098, participation in
        agricultural fairs for an amount of € 732,211, conferences and seminars for an amount
        of € 294,541 and surveys for an amount of € 134,589.


It should also be mentioned that from January 2005, internal communications was specifically
mentioned for the first time in DG AGRI’s organisation chart. A new section in
information/communication unit was therefore created, responsible for coordinating the DG’s
internal communications and managing the internal website and newsletter as well as the
DG’s documentation centre which is also open to visitors from outside the DG/Commission.

                  1.3.8.6.    Inter-institutional relations, NGOs and programming

    •   The DG AGRI Services continued to participate actively in Committee discussions on
        agricultural issues in Council, European Parliament, the European Economic and
        Social Committee and the Committee of the Regions. The main political discussions
        take place in the EP Committee on Agriculture and Rural Development, the
        Committee on Budgetary Control and the Plenary. Important subjects were the
        reforms of the CMO for sugar and the CMO for fruits and vegetables, rural
        development, WTO, risk and crisis management in agriculture, the EU-USA wine
        agreement, exceptional market support measures in the beef sector and the forest
        strategy. As in previous years, DG AGRI was involved in replying to a large number
        of written and oral questions-the statistics are provided in section 1.1.
    •   The structure and certain operational aspects of DG AGRI’s stakeholder/civil society
        consultation process were reformed in 2004 to take account of CAP reform and
        enlargement. The year 2005 was the first full year of NMS participation in this
        consultation procedure. Comprehensive stakeholder consultation was ensured through
        77 different meetings involving the participation of about 2,200 representatives of
        socio-economic organisations.

    •   Work linked to the Court of Auditors and the annual discharge procedure also
        continued in 2005. For more details see section 2.2.4.

                  1.3.8.7.    Other remarks

    •   ‘Risque de surfacturation des événements cofinancés (subventions)’. When NGOs are
        allocated grants under Regl. 814/2000 for carrying out CAP information actions in
        Member States, there is an inherent risk that the beneficiary will include expenses
        which cannot, at least in full, be attributed to the project to which the grant has been
        given. This had already been addressed by excluding from the beginning of 2005
        overheads and contingencies from the eligible costs. Starting with the 2006 exercise,
        the provisions of the Call for proposals concerning eligible costs have been further


AAR 2005-agri-final                           50
        modified by introducing fixed maximum amounts for applicants' staff costs so as to
        further limit these costs.



              1.3.9.     ABB 80 – Administrative support for DG AGRI

The activity covers budgetary and financial management, the whole IT area, staff
management, archives and the internal audit of DG AGRI. The activity is managed by the
whole of Directorate I (except Unit I.6), Unit B.2 (K.2 from 1.1.2006) and the Unit 01,
Internal Audit.
                  1.3.9.1.    Objectives

The main objectives stated in the AMP 2005 can be summarised as follows:
    •   Ensure budget and financial management and reporting in respect of the rules laid
        down in or stemming from the Financial Regulation;
    •   Make available a high-level IT environment in DG AGRI and provide tailor made
        applications;
    •   Ensure personnel management in the DG, including timely recruitment of highly
        qualified specialised staff and to ensure the implementation of the internal
        administrative Commission reform;
    •   With regard to Internal Audit, its main objective is to help the Directorate-General to
        accomplish his objectives, by bringing a systematic, disciplined approach to evaluate
        and improve the effectiveness of risk management, control and governance processes.

                  1.3.9.2.    Legislative framework

DG AGRI prepared in 2004 a proposal for a new Council regulation on the financing of the
CAP (COM(2004)489 of 14 July 2004). The Council adopted the new Regulation in June
2005 (Regl nº 1290/2005). It applies from the 2007 financial year and will replace Regulation
No1258/1999.
This new, innovative Council Regulation creates two new funds: a European Agricultural
Guarantee Fund, ‘EAGF’, and a European Agricultural Fund for Rural Development,
‘EAFRD’. These two funds replace the existing EAGGF Guarantee and Guidance funds.
For the financing of rural development the new EAFRD fund represents a major
simplification as rural development will be financed under one single instrument. Under the
present system rural development is financed under both EAGGF Guarantee and EAGGF
Guidance. At the same time the system for rural development will be aligned with the system
for Guarantee; the system proven to be the most effective to control EU expenditure. Hence,
the management of rural development payments must be done by an accredited paying
agency, there must be annual accounts which are certified by an external certification body
and rural development expenditure will be subject to Commission financial and conformity
clearance of accounts procedures.
For both the EAGF and the EAFRD the directors of the paying agencies must provide an
annual declaration of assurance.



AAR 2005-agri-final                           51
Finally, the new regulation for CAP financing will make the procedures for recovery of
irregular expenditure more effective. The procedure becomes much simpler and recovery
cases under the new system cannot remain open for years.
Work on the corresponding implementation regulations started during 2005 in view of
Commission adoption in 2006.

                  1.3.9.3.   Budgetary and financial management

Budgetary and financial management consists of budgetary estimation and execution for
expenditure under shared management, financial management within direct expenditure and
the corresponding internal and external reporting.

Budget estimations

L’Avant Projet de Budget (APB) et la Lettre Rectificative pour 2006 ont été établies durant
2005 en respectant les délais prévus. Concernant le reporting et le suivi budgétaire, vu la
situation particulière de 2005, un effort particulier a été assuré. Ainsi, des mises à jour des
prévisions plus fréquemment a été effectues, avec une implication des Etats membres via les
réunions du Comité du FEOGA. Ceci a permis de conclure à l’établissement d’un budget
rectificatif à la baisse au titre du « 1a », situation qui a ainsi facilité la décision sur le
renforcement des Crédits Payments du FEOGA-Orientatation. En termes des textes soumis à
l’autorité budgétaire les rapports prévus dans le cadre du système d’alerte ont été préparés.
An action plan for improving the quality of budget estimation was launched in 2005 – see
point 1.3.9.8.

DG AGRI also contributed very substantially during 2005 to the setting up of the financial
perspective 2007-2013 and with estimations on the budget cost of future enlargements.

Budget execution, shared management

Financial management of EAGGF Guarantee Section consists of assuring that the monthly
advances for the EAGGF Guarantee in shared management are correctly paid and accounted
for within the legal deadlines and that appropriate corrections are made.

In 2005 the monthly payments of a total of € 46,739 mio were all paid within the prescribed
deadlines. The monthly accounting has also been affected in time as foreseen in the Financial
Regulation throughout 2005. The most important corrections made during the 2005 exercise
were reductions due to late payments by Member States (- € 29 mill). It should be noted that it
was the first budgetary exercise with full participation of the New Member States.

In terms of budgetary management, 2005 was also marked by 1) Implementation of the
accounting reform for the EAGGF Guarantee from 2005, 2) preparation for the introduction
of assigned revenue in agriculture from the financial exercise 2007 onwards, and 3) new
analyses of the business processes for the EAGGF Guarantee in collaboration with IBM (the
supplier) with a view to upgrading the local accounting system AGREX.

Financial management within direct expenditure

Mise en place de la comptabilité d'exercice


AAR 2005-agri-final                           52
A partir du 1er janvier 2005 l'utilisation de la comptabilité d'exercice est devenue obligatoire
pour toutes les transactions financières de la Commission. S'assurer de la réussite d'une telle
opération pour les lignes/unités concernées par la dépense directe, a constitué une des
priorités principales en 2005. Un effort a été fait sur le suivi des dispositions et des outils de
gestion liés à la nouvelle comptabilité et sur les activités de support et contrôle visant à
assurer que les principes et les règles sont bien compris et appliqués par la DG AGRI. A cet
égard des formations interne ont également été organisées.

Contrôle ex ante des opérations en gestion directe

Toutes transactions financières gérées en mode centralisé direct par la DG AGRI sont l’objet
d’une vérification ex-ante supplémentaire. Seuls les transactions ayant reçu un visa positif de
l’unité financière peuvent être validées par les OSD.

Pendant l'année 2005, 1226 transactions financières au total ont été traitées (soit une
augmentation d'environ 20% par rapport à 2004) dont 769 ordres de paiement, 418
propositions d'engagement/dégagement et 12 ordres de recouvrement. L'exécution s'est
encore concentrée sur le dernier trimestre de l'année (même si les statistiques montrent une
légère amélioration par rapport au passé). Ainsi presque 41% des transactions ont eu lieu
dans le dernier trimestre (contre 43% de 2004) et 22% dans le mois de décembre (contre 26%
de 2004). Cette concentration est particulièrement évidente pour les engagements : environ
32% des engagements correspondant à 26% des crédits disponibles, ont été exécuté en
décembre.

L'intervention ex-ante a permis de déceler un certain nombre de dossiers devant faire l’objet
d’observations et/ou de corrections, donnant ainsi lieu à des renvois aux services concernés.
Sur les 172 renvois concernant les transactions financières enregistrées dans ABAC, 109
touchaient les ordres de paiements et 58 les propositions d’engagements ou dégagements
budgétaires. Ces renvois représentent respectivement un taux de 13,7% et 13,9% par rapport
aux dossiers concernés, le taux de renvoi enregistré sur la totalité des transactions traitées
étant de 14%. Tous ces taux sont en baisse par rapport aux statistiques sur l’ensemble de
l’année 2004.

En 2005, un critère concernant la « nature » du renvoi a été ajouté, selon qu’il s’agisse d’une
erreur substantielle3 ou d’une observation/correction formelle4. Ce nouveau critère a permis
de constater que sur l’ensemble des 1.226 transactions SI2, le taux d’erreurs substantielles est
de 1,5%.

Sur les 172 renvois de transactions Sincom constatés, les raisons principales se trouvent dans
une insuffisance d'encodage (48,3%) ou de pièces justificatives (22,7%).

Dérogations aux procédures financières

Une supervision des demandes qui sont présentées au Directeur Général pour déroger aux
procédures financières en vigueur a aussi été effectuée. En 2005, 13 demandes au total ont été
enregistrées, dont 7 concernant les dépenses directes. Une suite favorable a été donnée
s'agissant en général de cas où les règles internes de la DG AGRI sont plus strictes que le RF

3
  erreur substantielle = erreur pouvant avoir un impact financier (>200€), réputationnel ou résultant d’une non observance
significative de l’encadrement juridique et procédural
4
    erreur formelle = erreur ne présentant pas ce type de risque.



AAR 2005-agri-final                                                 53
et ses modalités d'exécution (par exemple, usage de la procédure négociée et garanties
bancaires sur préfinancement).

Surveillance des procédures de Marchés

A l’intérieur de la DG AGRI il y a un Comité Marché qui traite toutes les proposition pour
signer des contrats avec des fournisseurs des services externes. Au cours de l'année 2005, 6
réunions du Groupe préparatoire et du Comité Marché ont été organisées, au cours desquelles
15 dossiers (hors renouvellement) ont été examinés et approuvés, donnant lieu à la signature
de 15 contrats. De plus, sept autres procédures de marché (négociées, restreintes) supérieures
à 13.800 € mais en dessous du seuil pour la présentation au Comité marché ont été examinées.

Pour contrats supérieurs à 13.800 € la situation était:

           Appel au Marché                      N° contrats      Montant

           Procédures négociées                       5             184.965
           Procédures restreintes                     2              83.356
           Procédures ouvertes                       15          13.035.421


              Comité Marché Agri          (si sup € 50.000)

              Réunion du Comité Marché Agri                              6
              Dossiers soumis                                           18
              Avis favorables donnés                                    18
              Contrats finalisés après avis                             15



Le Vade-mecum des Marchés a été complété au cours de 2005 par l'ajout de la description
détaillée de toutes les principales procédures de marchés publics, y compris celles pour les
marchés de faible valeur et les procédures négociées relevant des articles 126 et 127 des
Modalités d’Exécution. Il convient ici de signaler que les marchés passés par ces procédures
n'atteignent pas en valeur les 5% du total des marchés passés annuellement par la DG AGRI
et que le vade-mecum pour la procédure ouverte avait été déjà finalisé au cours de 2004.

Une mise à jour du vade-mecum de la dépense gérée de façon centralisée directe a été
également effectuée fin 2005 et sera officialisée début 2006.

Décision de financement et suivi de la réglementation financière (RF, ME, RI, CIS)

Conformément au règlement financier, toutes les opérations d'exécution financière sont
subordonnées à l'adoption préalable d'une décision de financement détaillant la base légale, la
nature et le montant alloué à chaque action. La Commission a adopté la décision de
financement global en début d'année et deux autres décisions complémentaires en cours
d'année. A partir de l'automne, les travaux de préparation de la décision 2006 ont aussi
débuté.

Dans ce contexte il convient de rappeler l'action mise sur pied au cours de 2005 afin de
remédier à une exécution budgétaire trop concentrée en fin d'année et atteignant des taux trop


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bas. Elle s'est concrétisée d'abord par une sensibilisation des unités principalement
concernées. Ensuite, pour stimuler les OSD à programmer plus en détail leurs activités et se
donner des moyens de suivi, lors de la préparation de la décision de financement 2006, il a été
demandé aux OSD d'accompagner leurs propositions avec une planification, la plus détaillée
possible, de toutes les étapes préparatoires menant à l'engagement de la dépense.

Un tableau de bord élaboré sur ces informations devra permettre au cours de 2006 un suivi
central plus rigoureux de toutes les activités liées à l'exécution budgétaire. Cette action devra
se poursuivre, dans le cadre de l'APB 2007 par la demande aux OSD d'élaborer une
programmation détaillée de toutes les actions nécessaire à l'exécution des crédits demandés.
Cette programmation sera de nouveau confirmée dans le cadre de la préparation de la décision
de financement 2007.

Gestion des circuits financiers et sécurité

Les circuits financiers de la DG sont restés inchangés au cours de l'année. Les subdélégations
ont été produites régulièrement même à l'occasion de l'importante modification de
l'organigramme début 2005. Une procédure pour la préparation et la diffusion régulière des
listes des acteurs financiers a été définie avec l'unité du personnel (OSD, GT, DO, GF et CI)
dans le but de mieux surveiller le respect des objectifs en matière de formation.

Dans le domaine de la sécurité budgétaire, il est à signaler que le "Manuel de gestion de la
Sécurité Sincom pour la DG AGRI" a été complété par un document décrivant les opérations
d'aménagements et de virement locaux de crédits.

Ententes directes

Les procédures négociées de la DG AGRI est très faible et est resté stable au cours des trois
dernières années : 6 PN en 2003, 3 PN en 2004 et 5 PN en 2005.

Quant à la valeur de ces procédures négociées par rapport au volume des marchés, cette
proportion pour 2005 reste elle aussi très limitée, à savoir 1,64 %, alors que la moyenne de la
Commission s’élève à 29,9 %.

    Année      Nombre      Valeur de     Nombre          Valeur de      % par        % par
                de PN       ces PN       total de       ces marchés   rapport au    rapport à
                                         marchés                       nombre       la valeur

     2003             6     361.922           31        14.223.641     19.35 %       2,54 %

     2004             3     74.866            27        11.540.419     11,11 %       0,65 %

     2005             5     184.965           25        11.290.388     20,00 %       1,64 %



Il faut souligner une discontinuité dans la statistique fournie. En effet, pour 2003, premier
exercice de recensement, c’est la valeur des contrats spécifiques signés qui a été prise en
compte, et non la valeur des contrats cadre. Suite aux précisions apportées par la DG BUDG
pour la réalisation du recensement des procédures négociées en 2004 (à savoir, prise en
compte des contrats cadre et exclusion des contrats spécifiques), la DG AGRI a rectifié sa


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méthode de recensement pour les exercices ultérieurs. La statistique présentée ci-dessus tient
compte de cette rectification.

En conclusion:

        -   le nombre de procédures négociées est en ligne avec le passé ;
        -   leur valeur reste très limitée par rapport au volume total des marchés (1,64 %) et
            est bien en deçà de la moyenne communautaire (29,9 %).

                  1.3.9.4.    Information and Communication Technology (ICT)

The ICT work plan of DG AGRI is laid down in a 3-yearly rolling plan (ICT Investment Plan
“Schéma Directeur” for 2005-2007).

Most important IT events/actions in 2005 were AMIS Quota (to monitor preferential import
quotas) entering production with as a first step 40 quotas set up in the system and opened for
notification by the MS (sugar, mushrooms, rice, olive oil and beef sectors), the start-up of
renewal of the AGREX information system for the guarantee fund and the Market
mechanisms management system ISAMM, and the new rural development information
system (RDIS). Progress was also made in the areas of security (Disaster Recovery Plan) and
governance.

Support DG AGRI users in fulfilling their operational tasks and targets

Maintaining the ICT level of service available to DG AGRI is the overall ICT priority. A user
satisfaction survey, about Information Systems and support services available in the DG,
showed a very positive result. The participation, at some 40% of the personnel of DG AGRI,
was significant. 92% of the participants rate the overall IT services at DG AGRI to be ‘good’
(58%) or ‘very good’ (34%).

Development and maintenance of financial information systems for DG AGRI
The financial management information systems have continued to be adapted to the
requirements of the "accrual accounting model" on the basis of the specifications of DG
BUDG. Adaptations and new functionality have been made/developed according to user
requirements and regulation changes. The systems have successfully passed the local system
validation process of DG BUDG.

For AGREX in particular, the 3rd phase of the modernisation of the AGREX system has
started in 2005 with a business process analysis aiming to reduce the complexity and to
harmonise the management procedures before beginning the definition and development of a
new system.

For RDIS the set up of the contractual framework for the development of the Information
system for the management of the rural development programs in 2007-2013 is complete and
the project was launched with a business process analysis at the end of the year. The aim of
the project is the development of a workflow system to support the operational management
of Member State Rural Development plans and of a financial management system to support
the financial aspects.

Security and continuity of the ICT data and Applications


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The new systems are UNIX based SUN machines and they are chosen in view to align the DG
AGRI infrastructure to the Data Centre one. This new configuration will provide a better
resilience and availability of the information systems. The Disaster Recovery Plan (DRP)
has also been partially tested and extended to include the rural development information
systems. The DRP is an ongoing project developed in stages at DG AGRI with the support of
DIGIT in view to assure that in case of a disaster the critical applications will be able to run
into the Data Centre premises, in Luxembourg, within 48 hours. A full test of the DRP is
planned for the first semester of 2006.

Coherent governance of the IT in DG AGRI.

The Commission communications on IT Governance and Interoperability requires that a plan
be drawn up by DG for the implementation of a methodology compliant with the
Methodology Framework, as chosen by DIGIT. DG AGRI has defined its plan in 2005. The
DG AGRI methodology, to which all AGRI information systems should conform by 2008,
will integrate elements appropriate to the DG AGRI business activities, building on the
current project management and procedures in place.


                  1.3.9.5.    Human resource management

In the area of human resource management, the most important actions in 2005 were:

•   Following the reforms of the CAP and the accession of new Member States, DG AGRI’s
    organigramme went through a thorough reorganisation at the beginning of 2005. This also
    triggered a considerable reorganisation of the physical office allocations, involving the
    moving of approximately 500 persons. Further changes to the organigramme with effect
    from the beginning of 2006 was prepared during 2005;

•   Implementation of DG AGRI’s mobility plan for sensitive and non sensitive posts
    continued in 2005. In addition, a redefinition of sensitive posts was carried out to take into
    account the new organisation chart due to the CAP reform;

•   Implementation of DG AGRI Strategic Training framework for 2005 and the development
    of a new IT application to follow up compulsory training and mobility in DG AGRI. In
    terms of statistics DG AGRI’s staff devoted in 2005 in average 10,25 working days to
    training, well beyond the target of 7.4 working days. An effort was made not least in the
    area of financial training where there is a close collaboration between the financial unit
    and the staff management unit. 2.5 days should be added to these figures of on-the-job
    training which is considered by DG ADMIN as a standard figure for all Commission
    services. By adding these 2.5 days, the average training in DG AGRI in 2005 was 12.75
    days against the Commission target of 9.9 days.

    The number of training actions in 2005 organised locally in DG AGRI was 85 general
    trainings, against 70 in 2004 (+21.5%).




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    Statistics on training:

               DG AGRI                                                                                        2005
               Central general                                                                           2,541.10
               AGRI general                                                                              1,888.77
               Central language                                                                          4,282.76
               Central informatics                                                                           667.37
               AGRI informatics                                                                              244.00
               Total per year                                                                            9,623.99
               Average No training days per staff member (939*)                                               10.25
       * This figure (939) refers to the average n° of occupied A,B,C & D posts during 2005, including external staff


Statistics on mobility in 2005:

mobilité en 2005                                                     2004                          2005
Grades                                                      A          B          C        A        B           C
- nombre total for 2004(888); 2005(943)                     397        199         292     430      212          301
a) mutations à l’intérieur de la DG                           21            8         29    35           4          37
b) entrées d’autres DG                                        14           13         20       9        13            8
c) nouveaux fonctionnaires                                    47           22         17    40          13        27
d) départs vers d’autres DG                                   15           11         19    11          12          10
e) départs de la commission                                   32           10         16       9         1            8
nouveaux jobholders = a + b + c                               82         43         66      84       30           72
% de nouveaux jobholders                                   20,7        21,6       22,6     19,5     14,2        23,9
The total number of officials (943 posts) here refers to A, B & C posts and not D posts.

Other human resource actions included 1) the coordination and follow up of the 2004 CDR
exercise and of the 2005 promotions exercise, 2) coordination of new attestation and
certification procedures, 3) drafting of DG AGRI Action Plan on Equal opportunities, 4)
launch of a quality review exercise as regards DG AGRI job descriptions and 5) Full
deployment of DG AGRI local career guidance service.

As regards the human resource related output indicators proposed for the AMP 2005, the DG
AGRI overall performance has been very positive:

         Implementation of DG AGRI’s mobility plan to decrease seniority within the same
         unit of DG AGRI staff. A total of 30 jobholders were concerned, of which 14
         individuals moved in 2005, 8 derogations were granted to guarantee continuity of the
         service. 4 individuals working in the IT domain benefited from derogation. The
         remaining jobholders (4 persons) are subject to move in the first semester 2006;

         The exercise 2005 for sensitive posts concerned 16 posts of which 6 Head of Units.
         Mobility has been effective for all non management posts at the end of 2005.


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         Regarding management posts, and following Commission decision of 28.04.2004 on
         middle management staff, 5 Head of Units were transferred internally to other units on
         1.3.2006. One derogation was granted to a Head of Unit (with no financial tasks) to
         ensure continuity of the service;

         Average rate of vacant posts was ± 9.0 % in 2005 compared to 8.3 % in 2004.


                  1.3.9.6.     Document management/e-Domec

The Commission initiative for introducing a new filing plan for the whole institution has been
followed-up in DG AGRI. In 2005 the new filing plan and filing lists were deployed in all
DG’s units. Also the electronic filing started to be used in Adonis 5.3.3.


                  1.3.9.7.     Internal Audit Capability

In 2005 the Internal Audit of DG AGRI continued to enhance its work by providing assurance
and advice to the Director-General.

a) For assurance activities, the following table lists the assignments performed in 2005.

     –   Assignments                                 –   Date of final report
     –   Gestion budgétaire                          –   12 April 2005
     –   Promotion                                   –   26 April 2005
     –   Agricultural Product Quality Policy         –   10 June 2005
     –   Information Technology                      –   15 July 2005
     –   Personnel & Administration                  –   27 October 2005
     –   Evaluation                                  –   16 December 2005


The DG AGRI IAC planned, in the AMP 2005, to perform 6 audits during the year; in fact
these 6 audits were finalised.

In addition, the Unit started as scheduled a “Performance audit on the CMO for units C1-C2-D2-D3”.
This assignment is expected to be finalised in the first quarter of 2006.

During the year 2005, the IAC reviewed also the status of the implementation of the
recommendations issued in prior years audit reports (follow-up), and performed a risk
analysis of the DG which was used to develop the Internal Audit Work Plan for 2006.

The main performance indicator used is the number of recommendations accepted versus
issued. For the period under review, the 6 audit reports issued generating 60 recommendations
out of which a vast majority (57 or 95 %) were accepted by the auditees.

                  1.3.9.8.     Other remarks

1) At the internal risk self-assessment made in DG AGRI in the autumn of 2004 the “Risk of
budget forecast for the CAP expenditure deviating from the actual funding need” was
identified. The implementation of the action plan to address this risk started in 2005 and will



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continue in 2006. With the new budget discipline procedure applicable form 2007 onwards,
precise budget estimations will become still more important.

2) In the ICT area, three contracts suffered from the performance of the contractors: in the
areas of CAP_IDIM (indicators system), CATS (clearance of accounts) and Ange Bleu
(consolidated legislation). Finally the contracts have terminated on the request of DG AGRI
because the contractors were not able to provide the required result. DG AGRI did not pay the
undelivered deliverables and in addition applied penalties. An underlying problem with the
contractors of the Commission wide information system development and maintenance
framework contracts is that (i) they promise very low prices which later turn out not to be
realistic in terms of the profiles required and (ii) they sign specific contracts for a workload
that goes beyond the capacity they can handle. It is hoped that this situation will improve in
the future.




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      2.    Management of Internal Control Systems

        2.1.          Inherent nature and characteristics of the activities

DG AGRI is responsible for the management of the CAP, including Rural Development, and
is thereby also responsible for the implementation of almost half of the Community Budget.
In 2005 the total expenditure (payments made) under DG AGRI was of some € 52,6 bill.

Practically the totality of the expenditure is under shared management with the Member
States. 98.3% of the expenditure (payments) in 2005 was in fact under shared management.
1.5% was in decentralised management by the candidate/acceding countries under SAPARD
with many similar characteristics as shared management. DG AGRI’s direct managed
expenditure for actions carried out by the DG itself only represented 0.2% of the expenditure.

The direct and primary beneficiaries of the CAP are the farmers in line with the objective of
the Treaty of ensuring a reasonable standard of living for the farming community. Other
direct beneficiaries are the operators in the food industry receiving support for the disposal of
products on either the internal market or for export. The benefit of this support is expected to
be returned to the farmers through the price paid for their products. But the benefit of the
policy extends to the rural areas as a whole. Farming is in many rural areas the backbone of
the economy and an active farming business ensures employment in other parts of the
economy. New non-food farming activities, like agri-tourism, also contribute to the rural
economy.

From the above mentioned follows that the main stakeholders for DG AGRI are the
representatives of the farmers, of the processing industry and as well organisations involved
in generally promoting the living conditions in rural areas.

Given the substantial amounts involved in the CAP, the related financial risks in absolute
terms are also substantial. The CAP and the environment in which DG AGRI works are
therefore very risk and control oriented.

The implementation of the CAP in the Member States under shared management is based on a
well defined chain of controls – this is explained in detail in section 2.2. No payments to final
beneficiaries are made before administrative eligibility checks are made, and a defined
minimum number of claims are subject to on the spot controls. Furthermore, there is also an
obligation for minimum ex-post controls and most CAP legislation provides for dissuasive
sanctions systems (not the case for EAGGF Guidance, but is foreseen for the unique rural
development fund, EAFRD) which, together with risk analysis systems should give the
necessary assurances looked for. The Commission supervises and controls the Member State
systems for ensuring these verifications.

This is necessary in order to meet the legitimate expectations of the EU citizens that EU-funds
are well managed and spent in accordance with the financial regulation. It must be noted that
in practice no support measure can be controlled 100% on-the-spot. One will always have to
strike a balance between the cost of controls and the risks one is prepared to accept. To claim



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100% physical control and refusal to accept any risk would be unrealistic and economically
disproportionate.

When drafting legislation an important and integral part of the process is to ensure
controllability of measures and to make legislation as ‘fraud proof’ as reasonably possible.

DG AGRI’s directly managed expenditure is relatively small. It mainly concerns the Farm
Accountancy Data Network (FADN), evaluations and studies contracted to third parties,
subventions for information actions carried out by NGOs and promotion actions. It is an
explicit policy of DG AGRI to avoid managing centrally any programmes based on direct aid
to final beneficiaries.

The financial circuits in DG AGRI

DG AGRI manages the financial resources available for the implementation of its policies via
three circuits which were set up in conformity with the principles established by the Financial
Regulation, its implementing rules (in particular the principle of separation of responsibilities
between initiation and verification) and the general guidelines issued by DG BUDG. Each
circuit corresponds to one of the three domains of activity of DG AGRI.

      Circuit n° 1: EAGGF-Guarantee
      This is managed using a local information system, AGREX. The operations of initiation,
      verification and approval (as envisaged by the Financial Regulation) take place within
      Unit I.4. The final transaction is then transferred by an interface into ABAC, where
      validation by the AOSD (Authorising Officer by Sub-Delegation) takes place.

      Circuit n° 2: EAGGF-Guidance, Rural Development, Sapard
      This is managed by two local systems, Feorient (for the Operational Programmes from
      1994 to 1999) and GFO (for the Operational Programmes from 2000 to 2006). The
      AOSD is the head of the geographical unit. The workflow begins with a financial and
      operational initiation carried out by a financial officer, followed by an operational and
      financial verification carried out respectively by a geographical desk officer and by the
      head of the financial cell of the unit; an additional ex-ante control carried out by an
      independent financial unit (AGRI F.2), prior to the AOSD giving his visa in ABAC.

      Circuit n° 3: Direct Centralised Management
      This circuit is used for all actions directly managed by DG AGRI’s services. The AOSD
      is the head of unit competent for the specific budget post to be implemented. The
      workflow begins with an operational and financial initiation, followed by a financial and
      operational verification both carried out by staff of the competent unit (in case of units
      with a very small number of transactions, financial initiation may take place in another
      unit); an additional ex-ante control is carried out by an independent financial unit (AGRI
      I.2), prior to the AOSD giving his visa in ABAC.


          2.2.        Management and internal control systems

                  2.2.1.            Internal management systems



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DG AGRI’s internal management systems are organised in accordance with the legal
framework, notably the Financial Regulation, and the rules and guidelines for the services as
decided by the Commission.
The requirements to be fulfilled by Commission services are specified in the 24 Internal
Control Standards.

                      2.2.1.1. 24 Internal Control Standards
Compliance with baseline requirements

In DG AGRI the progress in compliance with the 24 Internal Control Standards (ICS) has
been monitored rigorously since the introduction of the standards in 2001. DG AGRI’s
monitoring has focused on the defined baseline requirements for the 24 ICS provided by
central financial services for the year in question (71 in 2004, increased to 75 in 2005).

DG AGRI made very good progress in complying with the baseline requirements, thus it
could claim in the internal assessment of the compliance with the standards by the end of
2004 that full compliance was assured for the then 71 baselines. Nevertheless, DG AGRI
indicated that there was still room for improvements in some areas (e.g. documentation of
procedures, document management).

The assessment of the compliance with the standards by the end of 2005 concerns 75 baseline
requirements. In the second semester of 2005 an update was done to identify necessary
actions to assure continued compliance with the standards in DG AGRI.

The result was that for a few baseline requirements some additional actions had to be
undertaken before the end of the year to remain in compliance with the baselines.

The assessment of the compliance with the standards by end of 2005 shows that the
compliance is continuously assured for all 75 baselines. The result was reported to DG BUDG
on 16 February 2006, (note ref. D(2006) 5337).

Formal compliance with baselines are ensured, however, further improvements are foreseen in
some specific areas, where action plans has been drawn up in order to improve the effective
compliance.

Overall, the implementation of the 24 ICS has reached a good level of maturity. The DG
AGRI Internal Audit Capability will in the second quarter of 2006 audit the implementation
of the standard.
Internal Control Self-Assessment

In addition to the centrally ensured assessments of the compliance with the 24 ICS, DG AGRI
carried out an Internal Control Self-Assessment from May to July 2005. Five working groups
(consisting of 7 members from different units, in total with the participation of 35 units) were
established to assess the effective implementation of each of the five components of the 24
ICS. The purpose was to ensure the effective implementation of the control standards in
addition to the formal compliance with the baseline requirements. The five groups confirmed
the official assessment and made some recommendations for internal improvements.




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At the finalisation of the exercise a common discussion was held with all heads of unit and all
those who participated in the exercise. The conclusions were then agreed between Directors,
Deputy-Directors General and the Director General. The result was the identification of 6
action plans and a number of recommendations. The action plans were: 1) Heads of unit
should follow the training “Entretiens de selection”; 2) Start Annual Management Plan
process in September (instead of October/November) with more active involvement of staff
and also to include a certain “multi-annual approach”; 3) Provide information to staff on the
new Commission filing system (e-Domec) and DG Agri’s application of it and organise a
meeting with all directors and heads of unit; 4) Guidelines on good practices should be
prepared for the use of e-mail – registration, use of functional boxes, etc; 5) Raise awareness
of the obligation and clarify the definition of “exception”, and remind staff of the obligation
to report financial and non-financial internal control weaknesses (in the framework of ICS
20); 6) Make assessable on Dimitra the information contained in an internal database
(FORAgri) on the follow-up of Court of Auditors recommendations.

In October 2005 a follow-up was made on the implementation of these actions. It confirmed
that they were already implemented or were under implementation in line with the proposed
timetable.

                      2.2.1.2. Internal Risk Self-Assessment
According to Internal Control Standard 11 each Commission service shall conduct an annual
risk diagnosis. DG AGRI has since 2002 conducted risk assessments following the
methodology and guidelines provided by Central Financial Service (CFS) for the year in
question.

Follow-up of risk assessment for 2005

For the risk assessment 2005 CFS changed considerably the methodology, for which DG
AGRI participated as a pilot DG. This overall risk assessment was launched in autumn 2004
together with the preparation for the annual management plan (AMP) 2005 and was finalized
in February 2005. The exercise covered all directorates at DG AGRI. 13 significant risks were
identified of which 3 were the reservations to the Director General’s annual declaration for
2004 and corresponding action plans were defined for each risk.

An update of the implementation of the action plans was done together with the preparation of
the 2nd semester report to the Commissioner sent on 9 November 2005. Among the 13 risks 7
were considered as “closed”, as the risk was reduced to an acceptable level. The remaining 6
risks are maintained for the next year with the conclusion that good progress had been made
in all areas, nevertheless the implementation of action plans continued an/or the risks was
maintained in order to keep it under surveillance.

Risk Assessment for 2006

The risk assessment exercise 2006 was launched in September 2005 together with the AMP
2006 exercise. DG AGRI followed – similarly to previous year – a full scope approach,
reviewing all ABB-activities of the DG, both from a strategic and from an operational
perspective. The result of the follow-up exercise from last year and the risk assessment for
2006 were discussed at the directors’ meeting in December 2005.



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Together with risks rolled over from last year the exercise resulted in a risk register,
containing 22 significant risks in DG AGRI:

    1)  Risk of not identifying material risks (Internal Audit Capability (IAC));
    2)  Lack of independence/objectivity (IAC);
    3)  Inadequate staffing levels (IAC);
    4)  Risk of incorrect execution or fraudulent auto evaluation of grant financed activity;
    5)  Risk of incorrect implementation by the MS of the legislation governing direct
        support;
    6) Risk of inconsistency between the MS as regards the implementation of the legislation
        governing direct support; and risk of inconsistency between NMS as regards the
        application of the legislation on complementing direct payments (top-ups);
    7) Risk related to fixing of export refunds;
    8) Risk related to communications of tenders;
    9) Risk related to reassurance good functioning of IT tools on databases used for
        managing market intervention measures;
    10) Insufficient follow up of the programmes by MS competent authorities;
    11) Incorrect declarations by the MS on the expenditure incurred for co-financed
        promotion programmes;
    12) Delays in registration of geographical and traditional denominations for agricultural
        products and foodstuffs (PDOs, PGIs and TSGs);
    13) Risk of not being able to respect the deadline for dealing with state aid notifications or
        the 18-months deadline for closing formal investigations are not respected;
    14) Complaints and illegal aid cases cannot be dealt with quickly;
    15) Risk related to unexpected workload regarding examination of national technical
        standards;
    16) Risk of budget forecast for the CAP expenditure deviating from the actual funding
        need;
    17) Risk of errors (ex-ante) in the area of direct expenditure;
    18) Non respect des obligations liées à la participation du personnel aux actions de
        formation obligatoires ;
    19) Risk for the closure of the accounting year, calculation and booking errors;
    20) Outsourcing of evaluations;
    21) Insufficient implementation of IACS in Greece;
    22) Risk related to post-payment checks (Reg.4045/89).

Among these – in the view of their evaluation – one critical risk was identified; the Risk of
insufficient implementation of IACS Greece (one of the reservations to the annual declarations
2004 and 2005).

The two other reservations to the annual declaration 2004 (“Hilton” beef and EAGGF
Guidance) are among the 7 risks, which are considered reduced to an acceptable level.
Nevertheless, the “Hilton” beef issue is maintained as a reservation to the 2005 declaration,
since the risk was still present in 2005 and also at the beginning of 2006.

The document was finalized and communicated to all directorates on 26 January 2006 with
clear indications of responsibilities for the follow-up of action plans during the course of
2005. Those concerned, will in the second half of the year be requested to report on progress.




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It should be noted that at Commission level the risk assessment methodology is still in a test
phase and is likely still to be developed further before a final methodology has been found.
DG AGRI has since 2004 been serving as one of the pilot DGs for the project.


        2.2.2. Shared management and decentralised management

Le règlement financier (CE, Euratom) n° 1605/2002 du Conseil dispose en son article 53,
paragraphe 3 que « lorsque la Commission exécute le budget en gestion partagée, des tâches
d’exécution du budget sont déléguées à des Etats membres […] ». Dans le cadre de la gestion
partagée la Commission n’effectue donc pas de paiements en faveur de bénéficiaires. Aux
termes de l’article 4 du règlement (CE) n° 1258/1999 du Conseil, les paiements sont de la
responsabilité des États membres. Dans le domaine agricole, la gestion partagée concerne les
dépenses du FEOGA section garantie et du FEOGA section orientation. Les procédures sont
significativement différentes dans les deux cas.

Par ailleurs, le règlement financier stipule également en son article 53, paragraphe 4 que «
lorsque la Commission exécute le budget en gestion décentralisée, des tâches d’exécution du
budget sont déléguées à des pays tiers… ». Dans le domaine de l’aide de pré adhésion en
matière de développement rural, la gestion décentralisée concerne les dépenses SAPARD.

                      2.2.2.1. Expenditure under the Guarantee section
The Community legislation provides for a comprehensive system of management and controls
which relies on four levels:

a.      Compulsory administrative structure at the level of MS, centred around the
        establishment of paying agencies and an authority at high level which is competent for
        issuing and withdrawing the agency’s accreditation. The decision for issuing the
        accreditation is based on a detailed review by an external audit body;

b.      Detailed systems for controls and dissuasive sanctions to be applied by those paying
        agencies, with common basis features and special rules tailored to the specificities of
        each aid regime;

c.      Ex-post controls through Certified audit bodies and special departments (4045/89
        checks);

d.      Clearance of accounts through the Commission (both annual financial clearance and
        multi-annual conformity clearance).

These four levels, to be described in more detail below, establish a comprehensive system for
the management and control of agricultural expenditure. It includes, on the one hand, all the
necessary building blocks to guarantee a sound administration of the expenditure at Member
States’ level and, on the other hand, allows the Commission to counter the risk of financial
losses as a result of any deficiencies in the set-up and operation of those building blocks
through the clearance of accounts procedure. In this context, it should be emphasized that the
latter procedure does not only enable the Commission to check the paying agencies’
documentation on management, control and sanctions, but also to evaluate how those
elements are implemented in practice, including the quality of the on-the-spot controls
through visiting a sample of final beneficiaries, thus closing the circle to the on-the-spot


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controls carried out by the paying agencies themselves. Taken together, the four levels
therefore provide the DG for agriculture and rural development with reasonable assurance as
to the effective management of the risk of error in the legality and regularity of the underlying
transactions in agriculture.

a.        Compulsory administrative structure at the level of Member States

The Member State, via a “competent authority” shall accredit each paying agency, after an
examination of particular arrangements regarding the execution of payments, the safeguarding
of the treasury, the security of computer systems, the maintenance of accounting records, the
division of duties and the adequacy of internal and external controls. It may grant provisional
accreditation if not all criteria are satisfied, together with instructions as to the improvements
to be made. (Article 4 of Regulation 1258/1999 and Article 1 of Regulation 1663/95).

Les organismes payeurs sont les organes des États membres dont le rôle est de fournir des
garanties suffisantes que:

      •    la recevabilité des demandes et la conformité aux règles communautaires sont
           contrôlées avant que le paiement soit autorisé;

      •    les paiements effectués sont correctement et intégralement inscrits dans les comptes;

      •    la documentation pertinente est présentée dans les délais et de la manière prévue dans
           la réglementation communautaire.

Paying agencies must respect accreditation criteria and have the primary responsibility for
controlling/checking expenditure under the Guarantee section to the final beneficiary. Paying
agencies accounts and their administrative structures are examined by the Certifying Body
both during and after each financial year and the latter draws up a certification report and an
audit certificate of its findings (see point c below).

b.        Detailed systems for controls and dissuasive sanctions

(1)        Common features

Article 8(1) of Regulation 1258/1999 provides for the general obligation of Member States to
ensure that transactions financed by the EAGGF Guarantee section are carried out and
executed correctly, to prevent and deal with irregularities and to recover amounts unduly paid.

In complement to this general obligation, for each aid regime (see below specific aid
regimes), generally there is a system of controls and dissuasive sanctions of final
beneficiaries which reflects the specific features of the regime and the risk involved in its
administration. The controls are carried out by the paying agencies or by delegated bodies
operating under their supervision, and effective, dissuasive and proportionate sanctions are
imposed if the controls reveal non-compliance with Community rules.

The systems generally provide for exhaustive administrative controls of 100% of the aid
applications, cross-checks with other databases where this is considered appropriate as well as
pre-payment on-the-spot controls of a sample of transactions ranging between 1% and
100%, depending on the risk associated with the regime in question. For example, the control
rate in the framework of the IACS is normally 5%, while it is 100% for sugar storage. If the



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on-the-spot controls reveal a high number of irregularities, additional controls must be carried
out. The sample of transactions is determined on a risk and/or random basis.

In addition, for most regimes which are not subject to the IACS, in addition to the primary
and secondary control levels, ex-post controls must be carried out in accordance with
Regulation (EEC) No 4045/89 (see point c below).

(2)    Specific aid regimes

Il faut distinguer les trois régimes d’aide:

(i)    Les régimes d’aide qui sont couverts directement par le SIGC (French abbreviation
       for IACS), aux termes du règlement 1782/2003 du Conseil. Pour ces régimes d’aide, les
       règles en matière de contrôles et de réductions/sanctions dissuasives sont décrites dans
       le règlement n° 796/2004 de la Commission.

(ii)   Les régimes d’aide dont les procédures de gestion et de contrôle doivent être
       compatibles avec le SIGC pour certains aspects, aux termes du règlement 1782/2003.
       Ces aspects couvrent essentiellement les bases de données et les contrôles
       administratifs.

(iii) Les autres régimes d’aide non cités en (1) et (2) correspondent notamment aux aides à
      l’exportation ou de stockage et auxquels sont associés des règles spécifiques en matière
      de contrôles et de réductions/sanctions dissuasives, décrites dans les réglementations
      sectorielles.

All these schemes are covered by the compulsory administrative structure at the level of the
MS (accreditation), some detailed systems for controls and dissuasive sanctions, some ex-post
controls (Certification bodies and 4045 controls) and the Clearance of Accounts procedure.

Ad (i): Integrated Administration and Control System (IACS)

A fully operational IACS consists of an electronic database, a Land Parcel Identification
System, a system for Identifying and Registering animals, a claim processing system, and an
on-the-spot checking system with appropriate risk analysis and sanctioning procedures. The
IACS is fully automated and provides highly efficient controls by maximising the use of
computerised and remote controls.

This system foresees a 100% administrative control covering the eligibility of the claim,
complemented by administrative cross-controls with standing databases ensuring that only
areas / bovines that fulfil all eligible requirements are paid premium and by a minimum 5% of
on the spot checks to check the existence and eligibility of the area/ animals claimed.

The use of standing databases, which are appropriately updated, is well adapted to the
schemes whereby aids are directly paid to the farmers and based on the surfaces or on the
number of animals, in that the risk can be reduced to the lowest levels. Moreover, the result of
the ECA' work shows that, where properly applied, IACS is an effective control system to
limit the risk of irregular expenditure.

IACS presently covers some 68 % of expenditure on market support and direct aids (EAGGF
Guarantee “budget 1(a)” expenditure). The 2003 CAP reform followed by the second wave of
the Reform in 2004 on Mediterranean products (entering into force as from 2006) will further


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enhance this positive evolution and will contribute to reducing the overall risk even further by
extending this coverage to 88% by 2010. The final phasing in of payments in the new
Member States to 100 % by 2013 will then raise the percentage to 90%.

DG AGRI verifies the effectiveness of Member States' IACS and homogenous
implementation by means of both on-the-spot auditing and general supervision based on
annually supplied financial and statistical data. It has been established already for some years
now that the IACS provides an excellent and cost effective means of ensuring the proper use
of Community funds – IACS is up and running for several years, IACS compatibility went
smoothly and the new MS were well monitored, largely thanks to the enforcement and
preventive efforts involved in the monitoring exercise. This has generally been accepted by
the ECA in its 2004 annual report.

Member States have to submit each year reports on the implementation of the IACS,
including results of controls carried out and the reductions/dissuasive sanctions applied. A
summary of these data is shown in Annex for the claim year 2004 - financial year 2005 (last
data available). This data is passed to the Court of Auditors at the earliest opportunity for use
in its own enquiries.

Ces données expriment les résultats des contrôles effectués par les Etats membres dans le
cadre du SIGC. Les services de la Commission examinent chaque année ces chiffres afin
d'identifier de possibles erreurs, et ils utilisent ces données pour leurs audits. Il faut signaler
que l'appréciation que porte la Commission sur les systèmes des Etats membres repose sur
l'ensemble de ses audits et que ces données ne sont qu'un élément d'information. Ces données
émanent des Etats membres, qui sont responsables de leur exactitude. Néanmoins ces chiffres
donnent une indication concrète, actualisée annuellement, sur le fait que le SIGC fonctionne,
et sur ses résultats.

Les résultats des contrôles SIGC, effectués par les Etats membres et repris en annexe, font
apparaître, en ce qui concerne les cultures arables, des réductions de surface après contrôle sur
place de 2,1% de surfaces ainsi contrôlées, Au total, on observe des réductions de surfaces
après contrôle administratifs et sur place (0,54%), auxquelles s’ajoutent les sanctions
dissuasives (0,74%), soit 1,3% des surfaces faisant l’objet de demandes. Ces deux
pourcentages de 2,1% et 1,3% sont naturellement différents et difficilement comparables,
l’échantillon soumis à contrôles sur place n’étant pas déterminé de manière représentative,
mais au contraire très majoritairement de manière orientée. En ce qui concerne les primes
bovines, pour lesquelles la combinaison des bases de données ‘identification’ et ‘SIGC’
constitue un outil de contrôle très fiable, les contrôles administratifs garantissent la gestion
des plafonds individuels et détectent efficacement les doubles demandes ou animaux
autrement inéligibles, et les taux de contrôle sur place largement supérieurs au taux minimum
donnent lieu à des refus de financement communautaire entre 1,8% et 2,8% des animaux
contrôlés, selon la prime concernée. Il faut enfin noter que ces données ne sont pas exprimées
sur la même base que celles communiquées dans le rapport annuel d’activité 2004. Elles
intègrent en effet, depuis cette année, les résultats des contrôles effectués dans les nouveaux
Etats Membres. Par souci de comparabilité, les tableaux distinguent les pays EUR-15 et EUR-
10.

Les chiffres par Etat membre comportent certaines anomalies apparentes, en particulier des
taux anormalement élevés de sanctions chez certains nouveaux Etats membres, ou des
incohérences. En outre, certains Etats membres (EUR 15) ont déclaré des pourcentages de
demandes d’aide avec erreur plus élevés que l’année précédente. Les services de la


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Commission poursuivront en 2006 l’examen de ces données, par des contacts avec les Etats
membres concernés, en vue de l’amélioration de l’efficacité des systèmes de contrôle
administratif. Ad (ii): Régimes « IACS compatibles »

 Il est à noter que l’importance des régimes « IACS compatibles », en nombre et en montants
financiers, est destinée à diminuer notablement en faveur des régimes S.I.G.C., puisque la
seconde vague de la réforme de la PAC va transformer en 2006 certains régimes en aides à
l’hectare, notamment le coton, le tabac et l’huile d’olive. Ces aides seront alors pleinement
contrôlées par le S.I.G.C.

Ad (iii): Other schemes – export refunds, intervention, rural development (Guarantee)

Custom controls for export refunds

Export refund applications are subject to 100 % administrative checks by customs as well as
physical or substitution checks, the frequency of which is determined by Regulations 386/90
and 2090/2002. Customs are also responsible for the supervision of exports and the
certification of their exit from Community customs territory. A system of dissuasive sanctions
is foreseen under Regulation 800/1999. These controls are complemented by post payment
checks carried out under Regulation 4045/89.

Article 11 of Regulation 2090/2002 obliges Member States to present by the 1 May of each
year an annual report to the Commission on the implementation of physical and substitution
checks. The last report available relates to the year 2004. According to this report the
following checks have been carried out:

Physical checks:

•          For the EU-15, a total of 34,704 physical checks or 5.9 % of the total number of
583,463 export declarations (compared to the required minimum varying between 0.5 % and
5 %);

•           For the NMS (data from 1 May 2004 to 31 December 2004), a total of 2,982
physical checks or 14% of the total number of 21,036 export declarations;

•          Overall the total number of checks for 2004 for EU-25 is 37,686 or 6.2% of the
total number of 604,499 export declarations.

Irregularities:

Regarding irregularities detected, 49 irregularities with a financial incidence greater than
€ 4,000 were communicated as a result of physical checks and had a total financial incidence
of € 2,006,556. See table 4 at the end of section 2.

As regards irregularities with a financial incidence of less than € 4000, Member States are
obliged to report them to the Commission only from calendar year 2005 onwards. However,
sixteen Member States already provided some information for calendar year 2004 and
reported a further 745 irregularities. Thirteen of these Member States also reported the
financial incidence of these irregularities. The financial impact of the 541 irregularities
concerned came to € 1,575,855. See table 5 at the end of section 2.




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For the thirteen Member States who provided complete data, the total number of irregularities
above and below € 4,000 was 541, with a total impact of € 1,769,079. Expenditure by these
Member States on export refunds in 2004 came to € 1,678 million. The number of export
declarations to which physical checks were applicable was 347,391, of which 21,855 were
subjected to a physical check. Thus the ratio between irregularities detected by physical
checks and checks carried out was slightly over 2.5%, while the ratio between the financial
incidence of these irregularities and expenditure was 0.11%. See table 5 at the end of section
2.

Substitution checks:

– A total of 31,715 substitution checks took place. Substitution checks are carried out on
  goods leaving the custom territory which were not sealed by the custom office of export.
  They must be carried out at an average rate of at least one for each day on which exits of
  such goods take place. The total number of qualifying days was 22,744 and the average
  number of checks was 1.45 per qualifying day. The total number of exports potentially
  subject to substitution checks was 257,940. Thus the proportion of eligible exports
  receiving a substitution check was 12.2%.

– A total of 1,157 specific substitution checks were carried out. Specific substitution checks
  take place on all exports where the seal has been damaged or is missing (art. 10 (2a) of
  Regulation 2090/2002).

– According to the annual reports, 304 substitution checks (0.96% of checks carried out) and
  96 specific substitution checks (8.3% of specific substitution checks carried out) revealed
  irregularities, which were mainly of a documentary nature with limited financial incidence.

Intervention Storage

Products entering intervention storage are controlled by the Member State to ensure that they
meet the qualitative standards prescribed as well as to establish the quantity of products being
taken over. Regulation 2148/96 lays down, by product, what control has been carried out and
obliges equally Member states to submit annually a report of the controls carried out.

Annual inventory controls are performed in every storage facility on 5% of all products to
ensure their continued physical presence in store. A further guarantee is offered by the fact
that the storekeeper is responsible for quantities which are found to be missing either during
the controls carried out or on removal of the quantities from store.

Every year, the Member States communicate to the Commission a summary of the controls
carried out and the anomalies found. This report is to be submitted by the 10 February with
the annual accounts of the previous financial year. The examination of this report is still
ongoing at the time of drafting this annual activity report. In previous years the MS reports
generally confirmed that the 5% inventory of stocks had been carried out.Rural
Development; Guarantee

All declarations are subject to a 100% administrative control and a sample of on-the-spot
checks.

The control systems can be divided into two parts:



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(1)      Measures based on aid per hectare such as the agri-environmental measures are
IACS compatible. The areas or animals declared are subject to the same control and sanction
regime as IACS measures. In addition there are controls on the respect of Good Farming
Practises and of other specific eligibility criteria – 100% administrative control on the
relevant 2005 expenditure plus checks on-the-spot of a minimum of 5% of expenditure;

(2)      Other measures such as investments, rural infrastructure, etc are subject to 100%
administrative control (often including a visual inspection) on the relevant 2005 expenditure
plus on-the-spot checks of at least 5% of this expenditure. In addition, this expenditure is
subject to the third level of control under Regulation 4045/89.

The majority of expenditure (around 66%) is based on aid per hectare, and so is IACS
compatible. Other measures are usually based on physical investments, and so the reality of
the investment can be verified by visual inspection or through invoices, architect’s
certificates, building permits, etc.

c.    Ex-post controls

(1) Certification

Les comptes des organismes payeurs du FEOGA Garantie font l’objet d’une certification
annuelle de la part d’un « …service ou un organe fonctionnellement indépendant des
organismes payeurs et de coordination et qui dispose des compétences techniques
(l’organisme de certification) » (article 3, paragraphe 1 du règlement n° 1663/95).
L’assurance obtenue par cette certification annuelle des comptes contribue de manière
significative à l’assurance globale du DG. Cette assurance est repose sur les éléments
suivants :

(i) L’intégralité, l’exactitude et la véracité des comptes

La certification annuelle des comptes du FEOGA Garantie porte sur « …l’intégralité,
l’exactitude et la véracité des comptes transmis. » (article 6 paragraphe 1, alinéa b) du
règlement n° 1258/1999). Cette certification apporte une assurance raisonnable dans le cadre
du seuil de signification fixé à 1 % des dépenses.

Sur la base de ce certificat et de la revue réalisée par la Commission, une décision annuelle
d’apurement des comptes est prise qui porte sur « …l’intégralité, l’exactitude et la véracité
des comptes transmis. » (article 7 paragraphe 3, deuxième alinéa du règlement n° 1258/1999).

(ii) La conception et le fonctionnement des procédures de contrôle interne dans les Etats
membres

Conception des systèmes : le rapport de certification « … précise si les procédures appliquées
par les organismes payeurs, tenant compte notamment des critères d’agrément, sont de
nature à garantir de manière raisonnable que les opérations imputées au Fonds sont
conformes aux règles communautaires, et quelles recommandations ont été faites pour
améliorer le système. » (article 3, paragraphe 3, premier alinéa du règlement n°1663/95).

Fonctionnement des systèmes : ledit rapport précise en outre si « … les procédures de
contrôle interne ont été appliquée de manière satisfaisante » (article 3, paragraphe 1 du R
1663/95). Ainsi, la certification annuelle contribue aussi à donner une assurance sur le



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fonctionnement des procédures de contrôle interne des organismes payeurs, tels qu’analysés
dans leur globalité dans le cadre des audits de certification.

(iii) Capacité des structures administratives en matière de conformité des dépenses

In order to further improve the overall system the new Council Regulation 1290/2005 on the
financing of the common agricultural policy, applicable as from 16/10/2006, provides that the
heads of paying agencies shall henceforth sign an ex-post declaration of assurance on the
legality and regularity of their expenditure.

Les rapports de certification apportent sur cet aspect une certaine forme d’assurance quant à la
capacité des structures administratives des organismes payeurs d’assurer que la conformité
des paiements avec les règles communautaires a été vérifiée avant que le paiement ne soit
réalisé (article 3, paragraphe 1 du règlement n° 1663/95). Dans cette perspective, l’organe de
certification doit concevoir et mettre en œuvre des procédures d’audit dont la nature, le
calendrier et l’étendue apportent une réponse adéquate aux risques d’erreur significative et ce
afin d’obtenir un niveau global d’assurance d’audit requis de 95 % (des montants). Ces
procédures d’audit relèvent de l’évaluation du système de contrôle interne et comprennent des
sondages de conformité, ainsi que des tests de corroboration dont l’étendue est fonction des
résultats de l’analyse préalable du système.

(2) Controls pursuant to Regulation 4045/89

Regulation 4045/89 provides for a control system which is a complement to the sectoral
control systems described above under point b. They are ex-post controls to be carried out by
the Member States and cover a wide range of CAP subsidies including export refunds,
processing and production subsidies, investment aids etc. In fact, those additional scrutinizes
cover all CAP subsidies to companies (except direct payments to farmers) and constitute an
extra layer of controls in order to get assurance that transaction have been carried out in
conformity with the rules or otherwise to recover unduly paid amounts.

Following the requirements laid down in Regulation 4045/89 special departments responsible
for application of the Regulation have been set up in every Member State. Those special
departments coordinate the controls executed in the framework of the Regulation by other
control bodies or perform the controls themselves. In total some 1,000 scrutineers across all
25 Member States are involved in execution of the 4045 controls. Each year some 3,000
controls are undertaken and consequently a number of irregularities are discovered. Given the
ex-post nature of the 4045 controls, results of scrutinies have an impact only after the year of
expenditure.

The controls executed in the framework of Regulation 4045/89 are very important tools used
to detect irregularities. Moreover, those controls serve also as an important deterrent factor.
Each year various communications are received from the Member States and analysed by the
services of the Commission (e.g. risk analysis proposals, annual programmes, annual reports
as well as mutual assistance requests and replies).

According to the information received from those Member States who have provided full data
in respect of scrutinies completed for the 2003/2004 scrutiny period, irregularities were
detected and the value of irregular amounts involved was about € 6.1 mio out of € 2,400 mio
controlled. For these Member States, the level of irregular amounts is low (0.3%). The




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modification of the rules regarding the reporting of statistics (see below) should in future
permit a better analysis and comparison of the control results.

Based on the deficiencies identified by the Court of auditors in its Annual Report 2004 in the
application of Regulation No 4045/89, the Commission took the following measures to
improve the application of this regulation:

      •    The number of control missions carried out has been considerably increased in order
           to assess the application of the Regulation on the spot and to review the quality of the
           controls carried out by the Member States’ authorities. Thus audit missions to
           Belgium, Greece and Portugal took place in 2004, to Finland, Latvia, Poland, Slovak
           Republic, the Netherlands, Spain and Sweden in 2005. In 2006 8 further audit
           missions on the application of Regulation 4045/89 to cover general aspects are
           envisaged. In addition, the compliance units will continue in 2006 to evaluate the
           application of the Regulation as part of their missions covering specific sector related
           issues;

      •    The Commission has modified Regulation 4/2004 laying down detailed rules for the
           application of Regulation 4045/89 (Commission Regulation No. 40/2006 – OJ L8,
           2006). In practice, a number of tables used for reporting have been modified but also a
           set of new tables has been added. Those tables cover all major aspects of the execution
           of ex-post inspections including reporting on irregularities on a budget post basis, so
           that the rate of error can be calculated for all categories of expenditure. The common
           format will permit a better analysis of the statistics;

      •    As regards delays in the execution of ex-post controls, DG AGRI has identified, based
           on the 2003/04 annual reports, four Member States with such delays (Germany, Spain,
           France and Italy). Letters were sent to those Member States in order to establish the
           exact number of outstanding scrutinies. In addition, missions to all four Member
           States were also included in the mission programme for 2005-06 in order to assess the
           situation on the spot (two of those missions have already been carried out). The
           Member States concerned have been requested to establish an action plan in order to
           catch up with the outstanding controls. The implementation of this action plans will be
           closely followed by DG Agri.


d.        Clearance of accounts (both financial and conformity clearances)

(1)        General description

As described above, the range of physical, pre- and post-payment checks available to Member
State authorities is comprehensive and weaknesses in any one form of check must be
evaluated in this context. Moreover, controls in the framework of the clearance of accounts
procedure permit the Commission to get assurance that the control and management systems
are in place, work properly and enhance financial corrections under the clearance of accounts
procedure in case they detect any control deficiency.

La procédure d’apurement des comptes est divisée en deux étapes, l’apurement comptable et
l’apurement de conformité, qui sont distinctes mais complémentaires.

(i) Financial clearance - principles


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L’apurement comptable a pour objet les comptes et les systèmes de contrôle mis en place
par les organismes payeurs. Dans ce cadre, les services de la DG AGRI examinent plus
particulièrement les conclusions et les recommandations (en cas de constat de faiblesse) des
organismes de certification, suite à leurs revues des systèmes de gestion et de contrôle des
organismes payeurs. Lors de cette revue, les services de la DG AGRI couvrent aussi les
aspects liés aux critères d’accréditation desdits organismes payeurs et à la protection des
intérêts financiers de la Communauté en ce qui concerne les avances payées, les garanties
obtenues, les stocks d'intervention et les quantités à rassembler.

Il incombe ensuite à la Commission d’adopter une décision annuelle d’apurement des
comptes, par laquelle elle déclare accepter les comptes annuels des États membres sur la base
des certificats et rapports des organismes de certification, mais sans préjudice de décisions
ultérieures de recouvrement de toute dépense qui s’avérerait n’ayant pas été conforme aux
règles communautaires. La Commission doit apurer les comptes et adopter sa décision
d’apurement avant le 30 avril de l’année suivant l’année financière concernée.



(ii) Financial clearance – outcome of 2005 exercise

As regards the accounts:

Based on the information available at mid March 2006 (one and a half months prior to the
regulatory deadline of 30 April for the formal clearance decision by the Commission) the
accounts of 6 Paying Agencies, corresponding to € 4,579 mio (about 10 % of total
expenditure) are deemed not to be cleared in time due to insufficient audit assurance as to
whether the accounts are materially correct:

*   Italy:                   AGEA                          (€ 3.850 mio)
*   Germany:                 Bayern Umwelt                 (€ 27 mio)
*   Hungary:                 ARDA                          (€ 560 mio)
*   Malta                    MRAE                          (€ 6 mio)
*   Luxembourg:              Ministry of Agriculture        (€ 45 mio)
*   Portugal:                IFADAP                         (€ 91 mio)

A cet égard, il convient de rappeler que la disjonction des comptes par la Commission n’est
pas en règle général à assimiler à un problème important. Elle a jusqu’à présent, eu pour
origine des informations manquantes ou des travaux supplémentaires à effectuer par
l’organisme chargé par l’Etat membre de certifier les comptes, et pour conséquence un
apurement des comptes différé.

As regards the operation of internal control procedures:

A ce stade d’analyse des rapports de certification portant sur les comptes 2005, il ressort que
les organismes de certification sont d’avis que, de manière générale, les systèmes mis en place
par les organismes payeurs fonctionnent, globalement, de manière satisfaisante. Les
recommandations formulées concernent principalement les aspects liés à la supervision des
organismes délégués, la gestion des avances et des garanties, la gestion des débiteurs, la
sécurité des systèmes d’information, l’audit interne, ainsi que la mise en oeuvre des contrôles
administratifs et physiques].




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En ce qui concerne le fonctionnement des systèmes de gestion et de contrôle interne des
organismes payeurs en général, et sans préjudice de ce qui est exposé par ailleurs au présent
rapport, certaines faiblesses ont été identifiées par les organismes de certification, et
mentionnées au certificat qu’ils ont émis, pour les organismes payeurs suivants : Italie -
AGEA (gestion du livre des débiteurs), Portugal - IFADAP (intégralité du livre des débiteurs)
et Luxembourg (procédures administratives et système de contrôle du régime d’aide aux
investissements dans les exploitations agricoles).


(iii) Conformity clearance

La responsabilité de s’assurer de la réalité et de la régularité des opérations via un système de
contrôle et de sanctions dissuasives incombe donc au premier chef aux Etats membres. Les
services de la Commission, au cas où un Etat membre ne s’acquitte pas correctement de cette
obligation, disposent de la procédure d’apurement des comptes qui permet de protéger les
intérêts financiers de la Communauté par le biais de conformité, comportant des
recommandations et de corrections financières.

L’apurement de conformité a trait à la légalité et à la régularité des transactions. La
Commission prend des décisions visant à exclure du financement communautaire les
dépenses non conformes avec la réglementation. Dans ce cas, des corrections financières sont
imposées en fonction du degré de manquement, de la nature et de la gravité de la violation et
du préjudice financier subi par le budget communautaire. Le calcul de la correction financière
est fait soit sur une base forfaitaire prenant en compte le système de contrôle mis en place,
soit sur une base ponctuelle lorsque le risque financier est connu ou peut être calculé.

A ce propos, il faut noter que les corrections financières nettes appliquées aux Etats membres
dans le cadre de l’apurement des comptes sont en moyennes légèrement en dessous 1% des
dépenses total de l’année en question. S’il l’on globalise ces montants avec l’ensemble des
recouvrements et des sanctions appliqués dans les différents autres régimes d’aides de la
PAC, on peut affirmer qu’ils couvrent le risque financier global.

Alors que l’apurement comptable est un exercice annuel, l’apurement de conformité n’est pas
rattaché à ce cycle annuel. Il peut couvrir des dépenses effectuées durant plus d’une année
budgétaire FEOGA, couvrant un période maximale de 24 mois précédant la première date de
réception officielle de la notification à l’Etat membre des constatations de la Commission
(lettre de l’article 8).

Pour les dépenses de l’année en cours, les conclusions des audits de conformité qui s’y
rapportent ne sont pas encore connues : les missions et examens sur pièces ont déjà été
effectués mais la procédure contradictoire, longue de 645 jours pour garantir un droit de
réponse à l’Etat membre audité, n’a pas encore été menée à son terme.

Toutefois, ce caractère multi-annuel n’est pas de nature à mettre en cause l’assurance sur les
dépenses de l’année en cours, car les audits effectués par les services de la Commission
portent sur les systèmes de gestion, contrôle et sanctions et sont récurrents/continus dans le
temps. Chaque audit informe sur les dépenses qui font l’objet de l’audit mais aussi
indirectement sur les dépenses à venir. Il est ainsi de nature à conforter le Directeur général
sur la maîtrise des faiblesses de système constatées dans les Etats membres, et donc sur le
fonctionnement satisfaisant de la gestion en mode partagé dans le domaine du FEOGA
Garantie. De plus, ces audits sont effectués sur la base d’une analyse annuelle de risques


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approfondie (on which the Court previously has commented positively), et constituent dès
lors une couverture large et adéquate des dépenses sous revue. Ils amènent à formuler un
certain nombre de remarques - cfr constatations ci-dessous – relatives à des secteurs où les
systèmes de contrôle sont néanmoins en place.

For the financial years 1999-2005, the net amount that may still be recovered by future
conformity decisions is estimated at 1,151 mio EUR (total of 1,481 mio EUR minus 330 mio
EUR already inscribed in the 2006 budget). For the years 1999-2000, an assessment of the
individual conformity procedures still pending leads to an estimated correction of 167 mio
EUR. For the years 2001-2005, the estimated correction amounts to 1,314 mio EUR and is
based on a historical net correction rate of 0.95% of total expenditure, which is the average
experienced for the years 1996-2000.

The audit priorities are defined each year and ensure that the audit work will address the risks
identified. The audit enquiries undertaken to implement the audit strategy have a scope,
objective and methodology which provide a sound basis for drawing conclusions on the
functioning of the systems in the Member States and beneficiary countries. The selection of
the systems, programmes or projects audited is based on a risk analysis. When an audit
identifies serious deficiencies which have a control impact, in the framework of the
contradictory procedure with the Member State or beneficiary country, and remedial measures
requested by the Commission are to be implemented and correction of ineligible expenditure
declared if necessary.

(2)  Constatations pouvant entraîner un risque financier significatif pour le FEOGA-
Garantie en 2005

Comme déjà largement évoqué ci-avant, le risque financier est couvert surtout par l’activité
d’audit de la Direction J. Les audits sont planifiés selon une analyse des risques et le préjudice
financier fait l’objet de corrections financières à la charge de l’Etat membre, en application de
la procédure d’apurement des comptes.

En ce qui concerne particulièrement l’exercice financier 2005, la quantification exacte des
corrections n’est connue qu’au moment de la finalisation des audits concernés (voir la section
ci-dessus).

L’examen des risques financiers potentiels mis en évidence par les audits de conformité en
cours et par l’analyse des rapports de certification dans le cadre des audits financiers
permettent d’ores et déjà d’identifier des secteurs à risques, susceptibles de donner lieu,
au terme de la procédure de conformité, à des corrections financières significatives des
dépenses de l’exercice 2005.

Vu que dans les secteurs concernés ci-dessous, les systèmes de contrôle sont en place (soit
l’IACS, soit les systèmes de contrôles spécifiques aux différents régimes d’aides comme
évoqué ci-avant, selon le cas), ces secteurs font l’objet de remarques et non pas de réserves à
la déclaration annuelle du Directeur général à l’exception de l’IACS Grèce où les services de
la DG AGRI constatent toujours des défaillances importances, malgré certains progrès (see
part 3 on Reservations and their combined impact on the declaration).

 Conformity clearance




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Directorate J has put in place an early warning system in order to identify cases representing a
significant risk for the Fund either because of an absence or serious weaknesses of
management and control systems. In the framework of this system, the following findings
have been established:

•       An audit to France in June 2005 confirmed that one of the important deficiency
signalled in the Annual Report 2004 of the DG continues to exist. It concerns producer
organisations in the fruit and vegetable sector where organisations continue to be recognised
without fulfilling all criteria imposed by the regulation. A correction of 25% of expenditure
declared by France has already been subject of a Commission clearance decision and the
problem continues to exist both in 2004 and 2005.
•       Equally, in the AAR 2004, a significant problem has been signalled regarding dried
grapes in Greece. Two audits carried out in 2005 have confirmed that problems continue to
exist. Significant deficiencies have been established in the control system including eligibility
issues. Financial correction proposals are being finalised.
•        The audits carried out in 2005 have also shown weaknesses in the olive oil regime in
Spain and Greece, i.e. quality of the control of the information in the OLI-GIS is not at
sufficient standard. This point will require further attention in the coming period as the action
needed to counter these weaknesses requires persistent and thorough attention by the relevant
authorities. Significant deficiencies have been established in the control system including
eligibility issues. Financial correction proposals are being finalised.


(Annexes of results of Member States’ controls are to be found at the end of this chapter 2)


                      2.2.2.2. EAGGF, Guidance
Le FEOGA-orientation est aussi géré et contrôlé selon les principes de la gestion partagée.
Néanmoins les règles qui régissent le FEOGA-orientation ne sont pas les mêmes que celles
pour le FEOGA-garantie mais sont les règles communes aux 4 Fonds structurels. De la même
manière que pour le FEOGA-garantie, les Etats membres sont responsables des paiements aux
bénéficiaires finaux. Ils sont effectués par l’intermédiaire d’autorités de paiement désignées
par ceux-ci. Les Etats membres désignent aussi des autorités de gestion pour chacun des
programmes co-financés par le FEOGA-orientation.
A la différence du FEOGA-garantie pour lequel l’apurement financier des comptes est annuel,
les comptes du FEOGA-orientation sont apurés lors de la clôture des programmes
pluriannuels.
Il convient ici de distinguer deux périodes de programmation : la période 1994-1999 et la
période 2000-2006.
a.    Programming period 1994-1999

Total expenditure for the period 1994-1999 amounted to around €17bn. Of this €290m was
spent in 2005.
This programming period is based on the provisions of Council Regulations 2081/93,
2082/93, 2085/93, Commission Regulation 2064/97 and on a number of other Regulations
(eg. 950/97, 951/97, etc) providing for specific actions to be co-financed. In general, the
deadline for payments by Member States to beneficiaries was on 31/12/2001. Before the


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ultimate deadline of 31 March 2003, the Member States had to send in their final payment
claims together with the necessary closure documents (expenditure declarations, final
implementation reports, closure statements according to Article 8 of Commission Regulation
2064/97), which will lead to final payments (or recoveries) by the Commission.
The closure documents for every programme are examined by the audit service (audit
certificates and reports) and by the geographical units (final reports and demand for final
payments). As far as the audit reports are concerned, every report was examined, and the
results documented in a checklist. The opinion of OLAF was also sought, to ensure that
irregularities had been satisfactorily treated.
The checklists also summarised any points arising from the 202 “open cases” registered in the
audit service. These open cases included:
      •    audits carried out during the period by Financial Control, the clearance directorate and
           the ECA;
      •    OLAF enquiries;
      •    Denunciations received.
This checklist was then discussed in a Committee (CCEC) bringing together all the interested
parties within DG AGRI (horizontal and geographical units, legal department and clearance of
accounts) which validated (with amendments if necessary) the proposal of the audit service.
This often led to a demand for additional information from the Member State, which would
lead to a modification of the checklist and a re-examination by the CCEC.
Where necessary, the proposals were also subjected to interservice consultation with the other
SF services, to ensure a common approach.
Where the information provided by the Member States was unsatisfactory or where the results
of the analyses showed risks to the Fund that had not been solved by the Member States,
financial correction procedures (“Article 24 procedures”) were started. This was the case for
32 programmes. The procedures are ongoing.
In addition ex post audits of 15 programmes were undertaken, covering 32% of programmed
expenditure. Where necessary these audits will be followed up in Article 24 procedures. The
audits concentrated on identified risk areas, such as reconciliation of expenditure, audit trails,
quality of on-the-spot controls.
The different procedures set out above are considered to provide a reasonable assurance for
this expenditure. The closure documentation, produced by independent audit services, was
examined in detail for all programmes, and this has been backed up by audits throughout and
after the period in question. Financial correction procedures are underway where necessary.
b.        Programming period 2000-2006
(1)        Description
For the programming period 2000-2006, the Community legislation provides for a system of
management and controls that relies on the following four levels of controls:
      •    An administrative structure based around a Managing Authority, responsibly for the
           implementation of the support measures, and a Paying Authority, responsible for
           declaring the expenditure to the Commission;
      •    Rules for controls to be applied by managing services;
      •    Ex post controls by independent services, including a formal audit declaration at the


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        winding up of the assistance;
    •   Clearance of accounts by the Commission.
Taken together, the four levels therefore provide the Director General for agriculture and rural
development with reasonable assurance as to the effective management of the risk of error in
the legality and regularity of the underlying transactions in agriculture;


(i) Administrative structure

The Member States must nominate a Managing Authority and a Paying Authority, as well as
specifying any other bodies that will play a part in the management or control of Structural
Fund support. These bodies must meet certain minimum standards set out in the Regulations
regarding separation of functions and definition of responsibilities.
Under the Regulations for this period (Article 38(1) of Regulation 1260/99 and Articles 5 and
6 of Regulation 438/2001) there is a requirement for the Member States to present a
description of their management and control systems and for the Commission to examine and
obtain an assurance as to these systems. Article 6 of Regulation 438/2001 states that:
“The Commission shall, in cooperation with the Member State, satisfy itself that the
management and control systems presented under Article 5 meet the standards required by
Regulation (EC) No 1260/1999 and by this Regulation, and shall make known any obstacles
which they present to the transparency of checks on the operation of the Funds and to the
Commission's discharge of its responsibilities under Article 274 of the Treaty.”
(ii) Controls to be applied by managing services

Management checks should be undertaken on every demand for aid or for payment. They
should verify the delivery of products or services, compliance with the terms of the contract,
and respect of eligibility criteria. Generally, such management checks should include a visit to
the project at least once before the final payment is made.
The projects supported generally have a physical object. This allows visual verification of the
physical object of the project as well as the verification of documentation, such as invoices,
proof of payments, architects certificates, construction permits, etc.
The eligibility criteria are often complex, and different rules and guidelines have been
produced by the Commission services to assist in their interpretation.
(iii) Ex post controls by independent services

The Regulations set out a number of ex post control activities.
Systems audits

Member States are required to carry out systems’ audits. Firstly, while carrying out sample
checks, they should also verify the effectiveness of the management and control systems in
place. Secondly, the final declaration shall be based on an examination of the management
and control systems.
Sample checks on operations

These should be carried out by the Member State during the course of the programming
period, and should cover at least 5% of total expenditure by the end of this period. There



AAR 2005-agri-final                           80
should be an appropriate separation between the controllers carrying out these sample checks
and those responsible for management.

The sample should be representative and take into account certain risk factors.

Annual reports

Under Article 13 of Regulation 438/2001, the Member States are required to provide a report
on the outcome of sample checks and system audits. These are evaluated by the Commission
services, and discussed during annual coordination meetings. The Commission services are
especially interested where it is found that:

      •   The sample checks are well behind the required 5% level;
      •   The sample checks show a high level of error;
      •   There are outstanding issues arising from national or Commission audit reports.

Final declarations

These final declarations, produced by independent audit services in the Member States, will
not be produced until 2009. However, the bodies that will produce the final declarations have
already been nominated, and have generally begun their work. Most of the audit services also
carried out this work for the 1994-1999 period and so have considerable experience.

These services are generally represented in the annual coordination meetings, and there are
other informal and formal meetings during the year.

A guideline has been written to ensure that these services undertake the necessary work and
provide the necessary information to the Commission at the closure.

(iv) Role of the Commission

The Commission has to:

      •   evaluate the systems’ descriptions provided by the Member States, providing
          comments if necessary;
      •   review the systems audits and annual reports provided by the different audit services;
      •   ask the necessary clarification and questions during the annual coordination meeting;
      •   carry out audits in the Member States, and make financial corrections wherever
          necessary.

(2)       Findings


DG AGRI has obtained evidence for its work from a number of different sources and
processes:
(i) Examination under Articles 5 and 6 of Regulation 438/2001

There are 152 programmes accepted for the programming period 2000-2006. 78 of these
cover operational programmes for Objective 1 regions of the EU. Note that the same


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measures outside Objective 1 regions are funded by the EAGGF Guarantee section and are
subject to different rules for control and management.

Total programmed expenditure for the period 2000-2006 is € 22.7 bill, of which € 20.7 bill is
for operational programmes in Objective 1 regions, € 2.1 bill for the Community Initiative
LEADER+ and € 45 mio for the PEACE programme.

Under Articles 5 and 6 of Regulation 438/2001, the systems descriptions supplied by the
Member States were examined and a number of requests for information were sent to gather
further evidence. This was documented in checklists and working documents and resulted in
letters to the Member States stating that there were no further questions to raise and including
any recommendations.

In this process, some assurance could be taken from work already carried out by other DGs,
where there were common systems for different Structural Funds, or from other DG AGRI
missions, where different regions had a similar structure.

In addition, in certain cases a certain level of assurance could be taken from the fact that one
or more of the organisations involved were also accredited EAGGF Guarantee Paying
Agencies or SAPARD Agencies. This source of evidence was especially important for the
new Member States, where the structures for EAGGF Guidance are basically the same as for
SAPARD and EAGGF Guarantee, and where the EAGGF Guidance measures were basically
the same as for SAPARD. Unit J.4 had already audited all the SAPARD agencies before
accession.

Although this work was carried out late for the EU-15, (see follow-up of the earlier reserves
of the Director General – section 2.2.4.1.) it does provide a general assurance about the
structures and systems in operation in the Member States.

(ii) Ongoing audits and reporting by audit services in the Member States

The Commission has signed bilateral administrative agreements with audit services in all of
the Member States. It meets with these partners every year in formal meetings, coordinates
plans and shares results.

These audit services send their audit reports to the Commission. They then provide, under
Article 13 of Regulation 438/2001, an annual report summarising the findings of their reports,
and the results of the “5% checks” carried out under Article 10 of the Regulation.

During the annual coordination meeting the results of audits by the national authorities and
the Commission services are discussed. The Commission services are particularly interested
in the action plans to follow up weaknesses identified.

The results of the “5% checks” are also discussed during these meetings. The Commission
services examine whether the Member State is achieving this rate, or whether it has plans to
achieve this rate by the end of the programming period, and the error rate arising from the
checks.

Some of the audit services in the Member States are well known to DG AGRI, from their
work as Certifying Bodies for EAGGF Guarantee or from their work for the 1994-1999


AAR 2005-agri-final                           82
programming period. Others are less well known, although part of the audit strategy is to
minimise this problem.

The work of these national audit services, and the reports that they produce, give some
assurance every year covering every programme. It is therefore a useful complement to the
work on systems descriptions and the audits of the DG AGRI services.

(iii) Final declarations

These will only be delivered in 2009. However, the organisations who will prepare these
declarations generally have already begun their work. The experience from 1994-1999 shows
that the work of these bodies will lead to improvements during the life of the programme and
the deduction of identified ineligible expenditure, and provide important assurance at the time
of the final payment.

(iv) Audits by the Commission services

A number of audits have been carried out in 2003, 2004 and 2005, sometimes with the
assistance of private auditors. These audits have covered general systems aspects (respect of
Regulation 438/2001) and certain conformity aspects (respect of Regulation 1257/1999,
eligibility criteria and the OP). Earlier audits tended to concentrate on general systems
aspects, later audits on conformity.

In total, at the end of 2005, 59 programmes out of the 152 have been subject to audit (38.8%),
covering € 17,271 bill (76%) of total programmed expenditure. In 2006, 13 additional
programmes will be visited, with total programmed expenditure of € 2,161 bill (9.5%). In
addition, by the end of 2006, 7 of the largest programmes will have been subject to a follow
up visit.

The selection of programmes to be audited has been the result of a risk analysis within
EAGGF Guidance and in the context of the Central Risk Analysis carried out for the whole
Directorate.

These audits give a very high level of assurance over the audit field. However, the audit field
cannot generally be the whole expenditure of the programme. It will generally be a certain
number of measures or regions, and will be based on systems examination. Nevertheless,
there is a knock-on effect of these audits in terms of other unaudited measures, to the extent
that good systems will generally work for any measure, and that Article 10/15 auditors in the
Member State will generally be common to all measures.

In summary, the risks observed during different audits are:

    •   Inadequate management controls (Article 4 of Regulation 438/2001), especially on the
        respect of minimum standards;
    •   Inadequate certification of expenditure by Paying Authorities, particularly a lack of
        independent work;
    •   Backlog of sample checks (Article 10 of Regulation 438/2001).




AAR 2005-agri-final                           83
In addition, for LEADER+ programmes, there are risks relating to the operations of Local
Action Groups, in particular, inadequate management controls and conflicts of interest,
although this depends on the powers delegated to these LAGs.

Problems of different degrees of seriousness are identified in most Commission audits and in
most reports received from the Member States. They are followed up as necessary in the
clearance of accounts process and do not indicate widespread or systematic weaknesses.

As such it is not considered that they impact on the reasonable assurance available from the
systems in place. Nevertheless, some of the systematic deficiencies detected in Portugal, Italy
and Greece are subject to remarks detailed in the section 2.2.4.1. below on the “Follow up of
reservations 2004” (Reservation n° 3). Apart from these remarks, two others are new and
concern VAT in Spain and Hungary.

Spain – VAT

Several audits have been carried out in Spain and these have given rise to a range of problems
that will be followed up in clearance of accounts procedures. They relate mainly to inadequate
controls over minimum standards for protection of the environment or animal welfare,
controls over irrigation projects and ineligible expenditure in public works contracts.
During 2005 the ECJ ruled that Spain was not properly respecting the VAT directives. Of
particular relevance to the Structural Funds was that, for rural infrastructure projects
undertaken via State owned companies, certain amounts of VAT declared for co-financing, as
it was irrecoverable under the Spanish law, would now seem to be ineligible.
The Spanish authorities are aware of this issue, but are awaiting a final analysis of the
judgement by DG MARKT. In any case, no VAT has been charged to the EAGGF Guidance
Fund for the national programme, which is by far the biggest programme and includes mainly
public works. Some VAT has certainly been charged to the Fund for the regional
programmes.
While this VAT would seem to be ineligible it cannot be considered as a systems weakness
but as an eligibility issue. Until the ECJ decision the Spanish authorities declared VAT based
on their national law. Based on the ECJ ruling this situation has changed, and the damage will
have to be corrected by the Spanish authorities or by the Commission. It is not considered that
this problem requires a reservation to the declaration.
Hungary – VAT

A possibly systematic problem has been identified concerning VAT in Hungary, which may
prove to be ineligible. Clearance of accounts procedures are underway, and the relevant law
has been changed from 1/1/2006.
Weaknesses observed in Spain and England: With reference to the common methodology
agreed between the structural funds DGs for issuing reservations and the peer review (March
2006) of proposed reservations, DG AGRI has examined the additional elements noted by DG
REGIO in the preparation of its AAR, relating to programmes in England and Spain, in order
to verify to what extent the same problems apply to EAGGF guidance expenditure. Its
conclusions are as follows:
England – there are significant differences in the organisational structure for EAGGF
guidance and ERDF in England, in particular the use of certain EAGGF guarantee structures.



AAR 2005-agri-final                           84
Overall, it is not considered that the problems identified by ERDF are relevant to EAGGF
guidance.
Spain –
    •   the problems identified by DG REGIO in relation to the non-respect of public
        tendering Directives could also apply to EAGGF Guidance expenditure, though to a
        much smaller degree. No concrete problems have been identified up to now, but the
        situation will continue to be monitored.
    •   Regarding the quality of Article 4 (management checks), the managing bodies for
        EAGGF guidance are different from those for ERDF. DG AGRI has also identified
        problems in many of its audits. However, the problems identified have been diverse,
        and have been generally linked to the respect of specific eligibility criteria introduced
        by agricultural legislation (respect of minimum standards for respect of the
        environment, control of economic viability, etc). During each audit it has been
        concluded that the management and control system exists, and is functioning, but with
        weaknesses. These weaknesses will be the subject of financial corrections. However,
        systematic and wide-ranging problems in the management and control systems have
        not been identified.
    •   Regarding the Article 10 (sample) checks, the same auditors are involved for EAGGF
        Guidance and ERDF. DG AGRI has examined the level of control to date in the
        different programmes. For many LEADER+ programmes the rate of control is low or
        even zero, but this is considered to be justified, given the generally low level of
        implementation so far. For the Objective 1 programmes, some Regions are above the
        5% level, some are below. Those that are below clearly need to catch up with their
        backlog, but there is still time to do this.
    •   DG AGRI has not proposed or agreed a specific action plan for Spain.
It is certainly true that the general risks set out above have been identified in Spain. Financial
corrections will be proposed, and efforts are needed by the Spanish authorities to achieve the
targets for controls set out in the Regulation. Nevertheless, given the significant differences in
organisation between EAGGF guidance and ERDF, and the limited impact of public
procurement problems for EAGGF guidance, it is not considered that the problems identified
by DG REGIO have the same level of impact for DG AGRI.



(v) Conclusions

Overall, on the basis of the work performed for 140 programmes, involving 84.6% of
programmed expenditure and 87% of 2005 Guidance expenditure, there is no evidence of
major problems that could affect the assurance of the Director General.
For 12 programmes in 2 Member States, Portugal and Italy, involving 15.4% of programmed
expenditure and 13% (€ 390 mio.) of 2005 Guidance expenditure, there are problems
remaining in the operation of the systems in 2005 that are considered to be important (for
details see section 2.2.4.1. below on the “Follow up of reservations 2004” - Reservation n° 3).
All important findings will be closely followed and financial corrections will be proposed
where necessary. The risk to the Fund will be minimised by the programme of audits to be
carried out and by financial corrections that will be proposed to cover any loss to the Fund.



AAR 2005-agri-final                            85
                      2.2.2.3.       SAPARD
a.       General description
In compliance with the Council regulation requirements, a particular management system of
SAPARD programmes was set out in the Communication to the Commission of 26 January
2000 (SEC(2000) 97 of 19 January 2000). The system is in line with both the principles of
EAGGF-Guarantee and the relevant external aid provisions of the Financial Regulation, and
follows as well the appropriate rules reflecting the programming and payments system of the
Structural Funds. It is based on a decentralised approach with three main characteristics:
     •    An accredited SAPARD implementing/paying agency, to be established by each
          applicant country. The SAPARD agencies are organised in conformity with the
          EAGGF Guarantee provisions. The National Fund (entity within the Ministry of
          Finance, already installed for PHARE financial management) is the competent
          authority for the accreditation of the SAPARD agency. The Commission verifies the
          accreditation of the SAPARD agency and relevant part of the National Fund on the
          spot. Only expenditure carried out on the basis of decentralised management through
          SAPARD agencies may be eligible for Community financing;
     •    A system of payments from the Commission based on differentiated appropriations.
          The subsequent system of commitment, payments on account, interim payments or
          payments of the final balance, closely follows the system of Structural Funds;
     •    A clearance of accounts procedure to audit payments of the decentralised agencies
          and, if necessary, to recover irregular or undue payments from the applicant countries.
          Audits and controls are executed in accordance with the EAGGF Guarantee
          provisions. These foresee a clearance procedure in two steps:
           – the annual financial clearance of accounts decision determines the amount of
             expenditure effected by the SAPARD agency during the preceding financial year,
             which shall be recognised as being chargeable to SAPARD;
           – without prejudice to the financial clearance of accounts decision, the Commission
             may at a later stage exclude expenditure from financing when it considers that
             expenditure was not affected according to the SAPARD rules (conformity
             clearance decision).
The determination of financial corrections also follows EAGGF Guarantee guidelines. For
example flat-rate corrections are applied in cases where controls have not been correctly
established or executed by the SAPARD agency, and unlike Structural Funds, financial
corrections can not be compensated with expenditure made for other projects.
The Commission Regulation (EC) No 2222/2000, based on the above principles, set up the
financial implementing rules for SAPARD.
As Community legislation is not binding on applicant countries, bilateral agreements with
each of them constitute the legal framework binding the Community and each Candidate
country to the rules for implementing SAPARD.
A Multi-annual Financing Agreement (MAFA) lays down the Community management and
control rules for SAPARD for the duration of the programme, namely 2000-2006. It provides
rules for an advance and reimbursement system similar to the Structural Funds system, as
well as specific requirements for monitoring committees, management and evaluation of the
programme and reporting, also similar to the Structural Funds system.


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Annual Financing Agreements (AFA) are drawn up and negotiated with each Candidate
country for each year of the programme. It sets out the annual financial commitment of the
Community and, where necessary, amends provisions of the Multi-annual Financing
Agreement.
For the Countries that became Member States on 1st May 2004 specific provisions were
established in their Acts of Accession, allowing the Commission to adopt rules to facilitate
the transition from SAPARD to the new programming instruments available to them.
Commission Regulation (EC) No 447/2004 establishes the conditions to stop contracting
projects under SAPARD before starting implementing the new Rural Development
programming instruments. It also allows SAPARD projects to be co-financed under the new
RDPs, when SAPARD funds are exhausted.
The assurance for the Director General is built up in basically the same way as for EAGGF
Guarantee, although with some additional elements:
     •    Accreditation of SAPARD Agencies by the national authorities, but in addition a
          conferral of management by the Commission;
     •    Ex ante controls by staff of the SAPARD Agencies of delegated bodies ensure a high
          degree of supervision;
     •    Ex post checks by staff of the national authorities;
     •    Certification of the accounts of the SAPARD Agencies by independent auditors;
     •    Financial and conformity audits by the Commission services.
Taken together, the four levels therefore provide the Director General for agriculture and rural
development with reasonable assurance as to the effective management of the risk of error in
the legality and regularity of the underlying transactions in agriculture;
b.       Problems identified
The problems identified by the Commission services, and by the ECA, have generally
concerned formal issues, such as a failure to properly justify the choice of supplier,
inadequate documentation and business plan issues not fully checked.
One particular problem was the inclusion of ineligible VAT in the declarations of Poland,
although this has been followed up and will be the subject to a financial correction in 2006.
The problem was identified by the national authorities during the certification process.
There have also been a number of denunciations, alleging fraud and irregularity. These have
been followed up by DG AGRI and OLAF. The number and type of these irregularities does
not suggest systematic or wide-ranging problems except in Romania, where such allegations
have been persistent.
The Romanian authorities, on their own initiative, have carried out a wide-ranging enquiry
into the allegations, which centre mainly on conflicts of interest or corruption in the
adjudication or implementation stage of public works contracts, and on the quality of public
works. These authorities have withdrawn several cases from the SAPARD programme, or
commenced recovery procedures, where such allegations have been proven.
The audit directorate is following up the activities of the Romanian authorities. However, its
own work has not revealed any major systems weaknesses. It is therefore considered that the
situation concerning public tendering in Romania requires to be noted, but is not of a nature
necessitating a reservation to the annual declaration.



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c.    Conclusion
It is considered that the elements demonstrate that the system implemented for SAPARD is in
place, and provides an adequate assurance for the Director General.
Note that the ECA, in its annual report 2004, gave a positive opinion to enlargement
expenditure, which includes SAPARD.

        2.2.3.        Direct management

Dans le domaine de la gestion centralisée directe, la DG AGRI a adopté une organisation par
laquelle les fonctions d'initiation et vérification, tant technique que financière, sont assurées
par des agents distincts de chaque unité chargée de la gestion d'un ou plusieurs postes
budgétaires (séparation des tâches). Ils sont officiellement nommés par leurs chefs d'unité qui
ont reçu à leur tour une subdélégation pour l'ordonnancement des crédits à leur disposition
pour la mise en œuvre des politiques/activités dont ils sont responsables.

La suppléance de la fonction de OSD est normalement ascendante. Afin d'atteindre un degré
de sécurité plus élevé, chaque transaction fait l'objet d'un contrôle ex ante supplémentaire de
la part d'une unité spécialisée (AGRI.I.2) avant validation par l'OSD responsable.

Au cours de 2005, les crédits d'engagement gérés en mode centralisé direct se sont élevés à €
98,5 mio dont € 71,5 mio (72,5% du total) ont été géré directement par les services (20 unités
concernées au cours de l'année) de la DG AGRI, le restant ayant fait l'objet de trois
subdélégations croisées au DGT (€ 0,15 mio), CCR (€ 7 mio) et Eurostat (€ 19,9 mio).

La consommation globale des crédits d'engagement a été de € 77 mio, correspondant à 78,2%
du total, niveau en ligne à celui registré dans le passé.

Les autres principaux indicateurs de gestion montrent des progrès sensibles. Ainsi nonobstant
une augmentation du nombre total de transactions de 20% (de 1.017 à 1.226), le pourcentage
de transactions ayant fait l'objet d'observations de la part de l'unité de contrôle central a
diminué et seulement un pourcentage très bas de 1,5% a fait l'objet de la correction d'une
erreur qu'on pourrait qualifier de substantielle (c.à.d. avec un impact financier ou
reputationnel). La concentration des opérations dans le dernier trimestre de l'année reste
importante même si les chiffres montrent une légère amélioration (40,8 % des opérations
concentrées dans le 4e trimestre – 42,7 % en 2004 – et 22% au mois de décembre – 25,8 % en
2004). Le Ral anormal est substantiellement diminué de € 8,1 mio à € 0,38 mio et le délai
moyen de paiement est descendu à 35 jours, même si encore les 19% des factures sont payées
au-delà de 45 jours.

Tous le chefs d'unité OSD déclarent respecter la norme de contrôle interne n° 17 (supervision)
et effectuer les contrôles et les vérifications selon les normes et les spécifications du
Règlement Financier, du Vade Mecum et du circuit interne de la gestion directe. Les
exceptions aux règles (norme 18) sont peu nombreuses et concernent en général des cas où les
règles appliquées par la DG AGRI sont plus strictes que le RF (procédure négociée, garantie
bancaire sur préfinancement), et le relevé de la norme 20 ne signale pas de déficiences
éventuelles du contrôle interne.

L'activité de contrôle ex ante est accompagnée d'une intense activité d'assistance (comprenant
aussi de la formation) aux unités ordonnatrices visant à prévenir, suffisamment en amont dans


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la vie d'un dossier, des erreurs. Outre à des cas spécifiques, elle couvre en particulier la
surveillance des procédures de marchés, la gestion des subventions et la mise en œuvre de la
comptabilité d'exercice.
L'activité de contrôle ex ante est complétée par des contrôles ex post sur place (c.à.d. auprès
des bénéficiaires ou des contractants) d'un échantillon de subventions et contrats de service
non forfaitaire.

La décision de lancer des contrôles ex post relève- en règle générale – de la responsabilité des
ordonnateurs compétents. La Direction J, dans le cadre de son programme annuel d'audit peut
également prévoir des audits dans le domaine de la gestion centralisée directe. Ces contrôles
ex post sont exécutés soit par les ordonnateurs avec leurs moyens propres ou via un contrat
cadre ou par la Direction J.

                      2.2.3.1.      Cross Delegations
En 2005 la DG AGRI a accordé trois subdélégations croisées de gestion:

A) Au CCR: les crédits ont été subdélégués sur les lignes:

05.080300 « Modèle agro-meteorologique»
- Mise à disposition : € 1.211.000 en CE et € 1.246.000 en CP.
- Taux d’exécution : Les crédits d’engagement et de paiement ont été utilisé comme prévus
(€1.207.733 en CE et € 1.210.083 en CP respectivement).
Aucune exception n’a été détectée sur les transactions financières, toutes les activités prévues
par le programme de travail ont pu être réalisées.

05.070102 « Achat d'images satellitaires»
- Mise à disposition : € 5.780.000 en CE et en CP.
- Taux d’exécution : Les crédits d’engagement et de paiement ont été utilise comme prévus –
90,69% en CE (€ 5.241.933,5) et 86,25% en CP respectivement (€ 4.985.335,5).
6 engagement provisionnels on été effectués au courant l’année 2005. Les images de la
campagne Automne 2005 restent encore à facturer et à payer pour une somme globale
€171.000. La sous-consommation de CP est due principalement aux deux facteurs: à
l’influence des conditions météorologiques sur l’acquisition de l’image et à son aspect
technique (baisse de prix sur « Very High Resolution » VHR images).
Une exception au règlement a été enregistrée concernant l’achat des images pour le projet
Ikonos, les offres financières reçues dans le cadre d'un appel d'offre restreint ayant dépassé
largement le budget prévu par l'appel même.

05.040301 « European Forest Information and Communication platform EFICP»
- Mise à disposition : € 500.000 en CE (C5) et € 300.000 en CP (C1).
-Taux d’exécution : Les € 500.000 des crédits C5 a été engagé entièrement
(100%),€281.817,58 a été payé respectivement (94%). EFICP est une platforme électronique
destinée à fournir un accès aux données détenues dans les bases des données informatiques
décentralisées. En 2005, un appel d’offre a été lancé pour développer le système, le
contractant a été sélectionné et l’engagement budgétaire approprié a été effectué en décembre.
Le Directeur Général du CCR confirme que les procédures internes de contrôle ont été
appliquées à toutes les opérations financières concernant les crédits mis à disposition par la
DG AGRI. Une exception citée ci-dessus, a été enregistrée dans le registre des exceptions du



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CCR. Selon le Directeur Général du CCR cette exception n'atteint pas le seuil de matérialité,
et donc il ne propose ni réserves ni observations.

B) A EUROSTAT: les crédits ont été subdélégués sur les lignes:

05.080201 « Farm structure survey »
- Mise à disposition : € 14.400.000 en CE et € 15.500.000 en CP. Ces crédits ont été utilisés à
financer 16 conventions de subvention, signées avec les Etats Membres comme contribution
de l'Union aux coûts de l'enquête sur la structure des exploitations agricoles. Un contrat de
service informatique a été signé pour un montant de € 15.000.
- Taux d’exécution : 99% pour CE, 90% pour CP. La sous-consommation des CP est due,
entre autres, au fait que le nombre d’exploitations enquêtées était inférieur au nombre
initialement prévu.

05.080301: « LUCAS & TAPAS »
- Mise à disposition : € 6.734.971 en CE (€ 5.500.000 en C1 et € 1.234.971 en crédits reportés
2004) et € 4.555.000 en CP.
- Taux d’exécution : 97,92% pour CE, 46,77% pour CP.
A) LUCAS : 11 contrats ont été signés au courant de l’année 2005 : 2 contrats sur crédits
reportés 2004 pour la provision de services de photo-interprétation et assistance technique à
l’enquête de 2006, et 9 contrats pour l’exécution de l’enquête sur le terrain avec CZ, ES, IT,
HU, PL, FR, BE, SK, DE. (3,5 ME)
- Taux d’exécution : 99% pour CE, 23% pour CP. La faible consommation des CP est une
conséquence de l'indisponibilité de Sincom suite à la réorganisation d’Eurostat, ce qui n'a pas
permis de payer les soldes du contrat « Photo-interprétation » et des avances sur les contrats
« Enquête de terrain 2006 ».
B) TAPAS : Un engagement global prévu par le plan d’action 2005 a été effectué ainsi que
tous les engagements individuels correspondants (excepté pour la Slovénie- manque du
programme de travail).
- Taux d’exécution : 95% pour CE, 76.11% pour CP. La faible consommation des CP est due
en grande partie à la non disponibilité de Sincom suite à la réorganisation d’Eurostat.
Certaines avances pour certaines actions n’ont pas pu être payées.

Sauf la sous-exécution des crédits de paiement, aucun problème ni difficulté n’a été signalé.

C) A DGT:

05.040206 « Développement rural dans le FEOGA, section orientation – LEADER »
 - Mise à disposition : € 300.000 en CE et € 150.000 en CP. Sur la base d’état d’avancement
du programme, € 150.00 en CE et € 20.000 en CP ont été restitué comme excédentaires.
 - Taux d’exécution : 54,78% pour CE, 77,54% pour CP. La sous-consommation des crédits
est due au retard dans la transmission des documents et au report des projets au 2006.

Toutes les normes appliquées par la DGT et relevant du contrôle interne ont été utilisées dans
le cadre de la présente subdélégation. Aucun problème ni difficulté n’a pas été signalé.



                  2.2.4.      Audit, evaluation and follow-up of action plans



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As the CAP is the biggest expenditure area of the Community budget, the Court of Auditors
devotes a considerable part of its work to verify the implementation of the CAP and publishes
many reports hereon. Also the Commission’s own Internal Audit Service (IAS) has audited
DG AGRI, and DG AGRI has, like all Commission services, an Internal Audit Capability
(IAC).
In some previous years the findings of the Court of Auditors led to the formulation of
reservations to the Director-General’s annual declaration of assurance. This was in the area of
export refunds. These findings were followed up and the reservations were lifted.
Concerning the audit findings of 2005 and the subsequent recommendations made by the
auditors, none of them are deemed to have a material impact on the Director-General’s
declaration of assurance 2005 and thereby none leads to the formulation of reservations.
                      2.2.4.1. Follow up of reservations 2004
In total, three reservations were made to the Director-General’s annual declaration of
assurance 2004. All the reservations included action plans to address the weaknesses
identified.
The action plans have been followed-up very closely and significant progress has been
achieved. For one of the reservations (EAGGF Guidance programmes 2000-2006) the
progress in remedying the weakness advanced to an extent that the risk is considered to have
been reduced to an acceptable level in 2005 and the reservation is not carried-over to 2005.
For two other reservations, Import of ‘Hilton’ beef and IACS in Greece, the reservations are
maintained.
The follow-up of the action plans during 2005:

Reservation n° 1: Import of high quality beef (“Hilton” beef) – risk of none respect of
                  product definition (carry-over of the reservation from 2003 and
                  2004)

Imports of ‘Hilton’ beef with the risk of non-respect of the products definitions to qualify for
the reduced (preferential) import duty concern three third countries: Argentina, Brazil and
Uruguay. New product definitions have been negotiated and agreed with all three countries;
Argentina in 2004 and the two other countries in 2005.

The next step is the inclusion of these new product definitions in the EC WTO schedules
before the necessary changes to the EU regulations can be made and the new definitions
applied for the imports. Steps in this regard were taken in 2005, but the procedure has taken
longer than foreseen and in the case of Argentina, progress has been difficult.

The objective is now that the issue can be fully solved during 2006. For more details see the
full text of the reservation in section 3.

Reservation n° 2: Serious deficiencies in the application of IACS in Greece (carry-over
                  of the reservation from 2002, 2003 and 2004)

DG AGRI already made a reservation to the 2002, 2003 and 2004 declarations due to the lack
of full implementation of the Integrated Administration and Control System (IACS) in
Greece, years after this was a regulatory requirement.


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An action plan was put in place in the years 2003, 2004 and 2005 consisting of an enhanced
audit programme and other supervisory measures to support the new paying agency in Greece
as well as DG AGRI actively monitoring the implementation of IACS in Greece. Progress has
been achieved by the Greek authorities and the overall conclusion is that it appears that the
main elements of the IACS system are in place. However, in the light of audits performed by
the Commission and the Court of Auditors, it also appears that important deficiencies remain
in the functioning of all of these elements. The reservation is therefore maintained for the
2005 declaration. For more details see the full text of the reservation in section 3.


Reservation n° 3: EAGGF Guidance programmes 2000-2006 - assurance concerning
                  the Member States’ control systems (not repeated for the 2005
                  declaration)

Reservations existed for the EAGGF Guidance section expenditure for the declarations for
2001 to 2004. The background was that the Commission shall assure itself that the
management and control systems in the Member States satisfy the standards laid down for the
2000-2006 programming period. This regulatory verification of Member States’ control
systems was delayed due to other priorities. Progress in addressing these issues was made and
in 2004 the general reservation could be lifted. However, some systematic problems remained
for programmes for Portugal, Italy and Greece. As the estimated remaining lack of assurance
still exceeded the defined materiality threshold a reformulated reservation was made to the
2003 and 2004 declarations.
During 2005 the situation has been further followed-up and the remaining deficiencies in the
three Member States do no longer necessitate a reservation to the Director-General’s annual
declaration. In summary the situation is as follows:
a. Follow-up in 2005
(1) Portugal – audit trail

It was found that the Paying Authority for all 8 Objective 1 programmes, IFADAP, was not
able to reconcile its books of account and its declaration to the Commission for the 1994-1999
period, and this problem has persisted during the 2000-2006 period.
A new computer system has been developed, which entered into operation on 1 January 2005.
The Commission services have received 3 reports from the Portuguese authorities pointing at
encouraging progress. However, it is too soon to be sure that the system is working properly.
€ 890 mio has been reimbursed to Portugal over the period 2000-2004, of which € 230 mio in
2005. DG AGRI has planned an audit of the system in 2006. Financial correction procedures
will be undertaken as necessary and the risk to the EAGGF Guidance section will, in this way,
be covered in the medium term.
(2) Greece – public tendering procedures

DG REGIO identified serious weaknesses in the awarding and control of public works subject
to the European Directive. This problem also affects EAGGF Guidance, but to a much smaller
extent. The most important difference is the scale of public tendering – ERDF has many
hundreds of projects involving public tendering under the Directives, while EAGGF has just
28 projects.
A follow up audit by DG AGRI took place in January 2006. The evidence collected suggests
that some of the problems in tendering procedures identified by DG REGIO did not apply to


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EAGGF. Some additional evidence is still awaited, and the situation will need to be
monitored throughout the programming period and at the closure. However, the situation can
now be considered as under control, rather than showing systematic problems.
(3) Italy – separation of functions

At the end of 2004 questions remained about the separation of functions for 5 of the 29
programmes: Calabria, Basilicata, Puglia: Objective 1 and LEADER+, Sardinia. In all five
cases new information has been received indicating progress, but in most cases the
information does not allow to draw any definitive conclusion concerning the fulfilment of
separation of functions.
The risk must therefore be considered also to have been present during 2005.
b. Materiality
Total expenditure on rural development in the Guidance section for 2005 was € 2,967 mio,
while total rural development expenditure (Guarantee and Guidance) was € 9.8 bill. The
problems identified above concern:
•     Portugal: € 252 mio total expenditure in 2005. The amount of expenditure “at risk” is
      impossible to calculate precisely, but is clearly only a part of the total expenditure.
      Using the Commission’s guidelines for financial corrections the risk can be assessed as
      between 5% (“key control functions, but not with the frequency, consistency or depth
      required”) and 10% (“a key element of the system does not function or functions so
      poorly or so infrequently that they are completely effective in determining the eligibility
      of a claim”) This leads to an estimate of expenditure at risk in the range of € 12.6 mio to
      € 25.2 mio.
•     Italy: € 138 mio total expenditure in 2005 for the programmes in question. The amount
      of expenditure “at risk” is impossible to calculate precisely. As for Portugal, following
      the Commission’s guidelines the amount “at risk” will be between 5% (€ 6.9mio) and
      10% (€ 13.8 mio).
The total amount at risk can therefore be estimated as being between € 19.5 mio and € 39 mio.
This is between 0.65% and 1.3% of 2005 expenditure in the Guidance section and between
0.2% and 0.4% of total Rural Development expenditure and, thus, in any case well below the
2% the materiality threshold. It should be noted, however, that the financial corrections which
may be imposed on the two Member States would cover the amount at risk.
Based on the elements set out above it is considered that the risk arising from programmes
with significant problems do not result in a material risk to the Community Budget, nor do
they appear to give rise to a high reputational risk for the Commission.
                      2.2.4.2.   Audit reports from 2005
As mentioned in the introduction to this part, DG AGRI was in 2005 subject to a number of
audits and subsequent audit reports, and also subject to a number of the recommendations
made by the European Parliament and the Council within the annual discharge exercise. As
stated none of the findings leading to the recommendations were of a nature deemed to
potentially have an impact on the Director-General’s statement of assurance.
All recommendations are examined and those accepted are followed-up in order to remedy the
weakness pointed out. For recommendations not accepted appropriate reasons are given. For
audit recommendations the follow-up is monitored with the help of a DG AGRI developed IT



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tool ‘FORAgri’ which allows keeping track of the state of play of all recommendations.
Discharge recommendations are registered in the DG BUDG database ‘RAD’.


Court of Auditors’ reports and discharge recommendations

The Court of Auditors’ Annual Report 2004 (published in November 2005) covers many
areas concerning DG AGRI: DAS, budgetary management, clearance of accounts, IACS, ex-
post controls, physical controls, structural funds, sugar levies, follow-up of former special
reports (bananas, export refunds, potato and cereal starch) and summaries of the latest special
reports.
The Court made in 2005 one Special Reports in the area of agriculture: Report nº 3/2005;
Rural Development: The Verification of Agri-Environment expenditure.
The most important message stemming from the Annual Report 2004 is a far reaching
recognition of the IACS control system. The Court says that the IACS, where properly
applied, is an effective system to limit the risk of irregular expenditure. As around 60% of all
CAP expenditure is subject to controls under IACS, this is a significant step in achieving the
Commission’s strategic objective of obtaining a positive DAS within its mandate.
However, in the Annual Report the Court also points at weaknesses, in particular in the ex-
post controls performed under Regulation nº 4045/89. The Court criticised the number of
audits carried out by the Member States as well as the quality hereof. The Court questioned
the assurance the Commission can gain from Member States’ 4045/89 controls. In its
response to the Court, the Commission maintained that 4045/89 did contribute to the overall
assurance on the legality and regularity of the 2004 expenditure. However, in order to further
strengthen the assurance provided by 4045/89, DG Agri has responded to the criticism by
increasing the number of audits missions to Member States and by amending the
implementation regulation obliging Member States to improve the reporting to the
Commission on the results of the 4045/89 controls. See also section 2.2.2.1.c.(2).
The main issue of the special report on agri-environment measures is the question of
controllability of measures. The Court recommended that for the next programming period
2007-2013, the Commission, the Council and the Parliament should consider how to take into
account the principle that if a measure cannot be adequately checked, it should not be the
subject of public finding. The Commission is seeking to meet the recommendation by
specifying in the rural development implementation regulation Member States’ obligations in
ensuring the controllability of proposed agri-environment measures.
In April 2005, the European Parliament (EP) gave discharge to the Commission for the 2003
financial year. The discharge was, as in previous years, accompanied by a resolution
requesting the Commission to take action in a number of areas. For the CAP, the EP made
notable recommendations in the areas of recoveries of irregular payments and the tobacco
CMO. DG AGRI has responded to the recommendations.
The discharge procedure for 2004 started with Commissioner Mrs Fischer Boel meeting the
Budgetary Control Committee (COCOBU) of the Parliament on 29 November 2005. At the
time of writing, the COCOBU has voted to grant discharge for the 2004 financial year;
adoption of the decision in plenary session is anticipated in April 2006.



Internal Audit Capability (IAC)


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IAC Audit strategy and risk assessment

Each year as part of the Unit’s annual planning process, a risk analysis is performed of all
areas of activity of DG AGRI. In addition, the DG AGRI management is formally requested
by note to inform the IAC of any areas that they would like to be considered for audit during
the coming year. The IAC gives consideration to the document summarising management’s
own assessment of risks for annual planning as well as during the pre-audit phase of
individual assignments.

Follow-up of DG AGRI Internal Audit recommendations

DG AGRI IAC carries out two exercises, one in September and one in January, where
auditees are requested to comment on progress made in implementing IAC report
recommendations. Based on comments received from auditees in September 2005, and those
received so far during the January 2006 exercise, the implementation of recommendations is
consistent with the action plan agreed. In some cases implementation has not been completed
by the deadline originally envisaged, as longer term strategic or procedural considerations
have come into play (for example, adoption of revised legislation).

An on-the-spot follow-up audit started in February 2006 to assess the implementation of
recommendations contained in the report, “Audit of Agricultural Expenditure, Units J.1 and
J.3”.

The responses to five recommendations contained in the audit report, “Milk and Milk
Products” indicate that rather than implement the original recommendations, it is expected
that the subsidies concerned, private storage of cheese; and caseine, will cease, the first in the
framework of the proposed small milk package (see section 1.3.3.6), the second as a result of
the reduction of the intervention price for SMP on 1 July 2006.

With regards to the audit report, “Agricultural Product Quality Policy”, one recommendation
concerned monitoring the European Action Plan for organic food and farming (EAP). The
response to this recommendation indicates that, while some consideration has been given to
staffing needs, proposals have not yet formally been made to management.

Internal Audit Service (IAS)
In the period February to June 2005, IAS carried out an audit of the Guidance section of the
EAGGF as part of its Structural Funds audit. Its report, “DG AGRI – Structural Funds –
EAGGF Guidance” was finalised in December 2005. The conclusion stated “the IAS
concludes that the internal control system in place provides reasonable assurance regarding
the achievement of the business objectives for the areas examined, except for the very
important issues outlined below”. Those very important issues covered the AOSD charter,
disclosure in the AAR and the assurance process. While accepting all eleven
recommendations, DG AGRI had its own comments on various aspects included in the IAS
report. Concerning the follow-up to these recommendations, it is at this stage too early to
comment.

During February 2006, IAS carried out an analysis of auditee response to eight
recommendations that remained open following its report, “Follow-up of the in-depth audit
DG Agriculture”. The final IAS report on the follow-up shows that these eight
recommendations have now been classified as “closed” and so no follow-up action is
required.


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                  2.2.5.      Tables – Results of Member States’ controls


    1. TABLEAU 1: Aides surfaces: tableau général (les chiffres des sanctions au point
       2.2.2.1.b -IACS reflètent ce tableau, contrôles administratifs et contrôles sur place
       inclus)

    2. TABLEAU 2: Aides surfaces: tableau identique à celui du rapport de la Cour mais
       actualisé (il ne comprend que les résultats des contrôles sur place).

    3. TABLEAUX 3a et 3b: Primes animales : (tableau identique à celui du rapport de la
       Cour pour Suckler Cow Premium-SCP + un tableau supplémentaire pour Special Beef
       premium-SBP.).

    4. TABLEAU 4: Export refunds: EU-25 Declarations, physical checks, number and
       amounts of irregularities detected

    5. TABLEAU 5: Export refunds: Declarations, physical checks, number and amounts of
       irregularities detected and expenditure for those Member States providing complete
       data, 2004




AAR 2005-agri-final                           96
TABLEAU 1 : Aides surfaces: tableau général (les chiffres des sanctions au point 2.2.2.1.b -IACS reflètent ce tableau, contrôles administratifs et contrôles sur place inclus)


                                           Area not found      % of         Area not found     % of     Effect of Sanctions    % of        Effect of     % of                     % of
                          Total area            after          total             after         total     Art.32 and 33 of      total       Art. 21 of    total     Area not       total
                         (ha) declared      adm.controls      declared    on-the-spot checks declared      R.2419/2001        declared   R. 2316/1999 declared      paid.        declared

BE                           1.000.290                4.369      0,4%                  1.273     0,1%                 5.169      0,5%            4.270     0,4%        15.081       1,5%
DK                           2.329.078                2.246      0,1%                  1.186     0,1%                 4.732      0,2%              152     0,0%         8.316       0,4%
DE                          14.050.886               11.660      0,1%                  6.278     0,0%                16.573      0,1%            8.172     0,1%        42.682       0,3%
EL                           3.995.969                2.671      0,1%                 25.872     0,6%                16.707      0,4%            1.229     0,0%        46.479       1,2%
ES                          17.456.253              114.354      0,7%                 61.788     0,4%               305.845      1,8%            7.494     0,0%       489.480       2,8%
FR                          23.977.234                4.876      0,0%                 11.231     0,0%                24.802      0,1%              884     0,0%        41.793       0,2%
IR                           4.727.824                4.763      0,1%                  1.469     0,0%                11.919      0,3%            2.508     0,1%        20.659       0,4%
IT                           7.219.935               90.788      1,3%                 51.457     0,7%               120.838      1,7%           15.410     0,2%       278.493       3,9%
LU                             121.623                  257      0,2%                    252     0,2%                   457      0,4%              195     0,2%         1.160       1,0%
NL                             657.563                2.450      0,4%                  2.450     0,4%                10.122      1,5%            1.174     0,2%        16.196       2,5%
AT                           2.538.919                   56      0,0%                  4.169     0,2%                 9.243      0,4%               39     0,0%        13.507       0,5%
PT                           1.825.639               10.876      0,6%                 22.392     1,2%                31.224      1,7%            2.868     0,2%        67.360       3,7%
FI                           2.086.152                  291      0,0%                  1.105     0,1%                 1.639      0,1%              106     0,0%         3.140       0,2%
SW                           2.763.404                1.444      0,1%                  6.550     0,2%                12.021      0,4%            2.563     0,1%        22.579       0,8%
UK                          14.101.733               19.546      0,1%                  6.898     0,0%                32.350      0,2%            5.111     0,0%        63.905       0,5%
Total(1) 2004               98.852.502              270.646      0,3%                204.371     0,2%               603.640      0,6%           52.174     0,1%      1.130.831      1,1%

Total 2003                  98.843.984              278.190      0,3%                199.741     0,2%               720.343      0,7%             99.439    0,1%     1.297.713      1,3%
Total 2002                  97.967.033              363.801      0,4%                199.928     0,2%               907.057      0,9%    Info not requested          1.470.786      1,5%


CY                             113.971                7.556      6,6%                  3.042     2,7%                39.981     35,1%                0     0,0%        50.579      44,4%
CZ                           3.529.135                5.933      0,2%                  3.766     0,1%                68.656      1,9%                0     0,0%        78.355       2,2%
EE                             818.453                4.643      0,6%                  1.855     0,2%                 6.517      0,8%                0     0,0%        13.015       1,6%
HU                           5.002.587               86.106      1,7%                  9.442     0,2%                68.580      1,4%                0     0,0%       164.128       3,3%
LT                           2.550.555                7.625      0,3%                  6.603     0,3%                15.954      0,6%                0     0,0%        30.182       1,2%
LV                           1.338.352               11.656      0,9%                 11.540     0,9%                25.847      1,9%                0     0,0%        49.043       3,7%
MT                               5.152                   29      0,6%                    201     3,9%                   218      4,2%                0     0,0%           449       8,7%
PL                          13.689.069                3.087      0,0%                 21.208     0,2%                57.008      0,4%                0     0,0%        81.303       0,6%
SI                             166.113               13.886      8,4%                  8.945     5,4%                29.461     17,7%            1.442     0,9%        53.734      32,3%
SK                           1.831.840                5.722      0,3%                  8.133     0,4%                11.923      0,7%                0     0,0%        25.778       1,4%
Total(2) 2004               29.045.227              146.243      0,5%                 74.735     0,3%               324.146      1,1%            1.442     0,0%       546.566       1,9%
Total (1)+(2) 2004         127.897.729              416.889      0,3%                279.106     0,2%               927.786      0,7%           53.616     0,0%      1.677.397      1,3%
Some figures are unrealistic / inconsistent and are subject to further review.


AAR 2005-agri-final                                               97
                   TABLEAU 2 : Aides surfaces: tableau identique à celui du rapport de la Cour mais actualisé (il ne comprend que les résultats des contrôles sur place).
       Member                        Applications submitted                              Applications checked on the spot                             Applications with errors
        State                Number          Area (ha)        Avg/size       Number          %        Area (ha)      %       Avg/size       Number          %        Area (ha)       %
         BE                     39.821          1.000.290         25             3.815        9,6%       133.656    13,4%        35             1.584      41,5%             1.273   1,0%
         DK                     47.391          2.329.078         49             2.506        5,3%       136.454     5,9%        54               852      34,0%             1.186   0,9%
         DE                    298.771         14.050.886        47             17.798        6,0%     1.093.602     7,8%       61              7.873      44,2%             6.278   0,6%
         EL                    318.947          3.995.969        13             39.169       12,3%     1.018.459    25,5%        26             9.379      23,9%            25.872   2,5%
         ES                    420.001         17.456.253        42             44.212       10,5%     1.895.097    10,9%        43            18.793      42,5%            61.788   3,3%
         FR                    401.827         23.977.234        60             27.365        6,8%     1.975.055     8,2%        72            12.212      44,6%            11.231   0,6%
          IR                   130.508          4.727.824         36             8.892        6,8%       363.336     7,7%        41             1.441      16,2%             1.469   0,4%
          IT                   599.095          7.219.935        12             42.540        7,1%       819.002    11,3%        19            20.212      47,5%            51.457   6,3%
         LU                      1.935            121.623        63                113        5,8%         7.200     5,9%        64               118     104,4%               252   3,5%
         NL                     44.996            657.563        15              3.154        7,0%        50.283     7,6%       16              1.160      36,8%             2.450   4,9%
         AT                    137.677          2.538.919         18             8.649        6,3%       184.400     7,3%        21             5.115      59,1%             4.169   2,3%
         PT                    130.854          1.825.639        14              7.641        5,8%       431.407    23,6%        56             5.904      77,3%            22.392   5,2%
          FI                    67.090          2.086.152         31             4.290        6,4%       160.239     7,7%        37             2.088      48,7%             1.105   0,7%
         SW                     59.058          2.763.404         47             3.793        6,4%       206.888     7,5%        55             2.429      64,0%             6.550   3,2%
         UK                    131.410         14.101.733        107             7.091        5,4%       907.365     6,4%       128             4.335      61,1%             6.898   0,8%
    Total(1) 2004            2.829.381         98.852.502        35           221.028          7,8%    9.382.445      9,5%      42             93.495       42,3%      204.371       2,2%
      Total 2003             2.840.153         98.843.983        35           230.170         8,1%    11.309.077    11,4%       49             97.729      42,5%       199.740       1,8%
      Total 2002             2.894.917         97.955.796        34           248.572         8,6%    11.656.029    11,9%       47             94.717      38,1%       198.079       1,7%
      Total 2001             2.935.273         98.275.675        33           299.716        10,2%    11.638.423    11,8%       39             62.968      21,0%       156.928       1,3%

         CY                     17.533            113.971         7              1.160        6,6%        31.312    27,5%        27               457      39,4%             3.042    9,7%
         CZ                     18.759          3.529.135        188             1.344        7,2%       454.566    12,9%       338               831      61,8%             3.766    0,8%
         EE                     18.954            818.453        43              1.068        5,6%       259.394    31,7%       243               548      51,3%             1.855    0,7%
         HU                    208.809          5.002.587        24             11.205        5,4%       549.872    11,0%        49             1.763      15,7%             9.442    1,7%
         LT                    238.068          2.550.555        11             17.413        7,3%       352.572    13,8%        20             7.418      42,6%             6.603    1,9%
         LV                     69.847          1.338.352         19             5.220        7,5%       366.044    27,4%        70             2.667      51,1%            11.540    3,2%
         MT                      4.981              5.152         1              1.011       20,3%         1.941    37,7%        2                481      47,6%               201   10,4%
         PL                  1.400.401         13.689.069        10             78.618        5,6%     1.235.809     9,0%       16             23.061      29,3%            21.208    1,7%
         SI                     77.049            166.113         2              5.093        6,6%        16.725    10,1%        3              5.232     102,7%             8.945   53,5%
         SK                     12.399          1.831.840        148             1.704       13,7%       528.588    28,9%       310             1.042      61,2%             8.133    1,5%
    Total(2) 2004            2.066.800         29.045.227        14           123.836          6,0%    3.796.823    13,1%       31             43.500       35,1%           74.735   2,0%

  Total (1)+(2) 2004         4.896.181        127.897.729        26           344.864          7,0%   13.179.269    10,3%       38            136.995       39,7%      279.106       2,1%
Some figures are incorrect/inconsistent and are subject to further review.




AAR 2005-agri-final                                         98
TABLEAUX 3a et 3b: Primes animales : (tableau identique à celui du rapport de la Cour pour Suckler Cow Premium-SCP + un tableau supplémentaire pour Special
Beef premium-SBP.)
TABLE 3A              IACS Animal Premiums - application year 2004 (financial year 2005)               SUCKLER COW PREMIUM
Data on applications and results of on-the-spot checks as communicated by Member States.
                       Applications                      On-the-spot checks - on farm                  Applications          On-the-spot checks - on farm
                              A              B.                                                             C.           D.
                       Total number Total no. of              Farmers              Farmers                Total       Number                Number of
   Member state          of farmers       farmers     in %       with     in %        with    in %      number of        of        in %       animals       in %
                        who lodged       involved       of      claims      of       claims     of       claimed      animals        of     involved in       of
                           a claim                      A.     partially   B.         fully    B.        animals      involved      C.     reductions &      D.
                                                              reduced               reduced                                                 exclusions
Austria                      60.200        6.563      10,9        408       6,2          79      1,2        403.022      69.724      17,3            876       1,3
Belgium                      14.886          707       4,7          6       0,8           3      0,4        395.197      30.885       7,8             58       0,2
Denmark                       8.650        1.047      12,1          5       0,5           3      0,3        109.355      25.066      22,9             18       0,1
Finland                       1.666          225      13,5         29      12,9           4      1,8         41.499       6.714      16,2            126       1,9
France                      117.249       13.958      11,9      1.024       7,3         217      1,6      4.214.721     548.148      13,0          2.181       0,4
Germany                      32.899        3.508      10,7        227       6,5          81      2,3        641.781      87.995      13,7          1.126       1,3
Greece                       10.849        3.728      34,4        201       5,4          22      0,6        209.825     125.424      59,8          1.179       0,9
Ireland                      61.840        4.698       7,6        421       9,0          19      0,4      1.104.521     132.916      12,0            603       0,5
Italy                        55.783        8.443      15,1        212       2,5         288      3,4        763.119     122.665      16,1         13.954      11,4
Luxembourg                      491           62      12,6          4       6,5           0      0,0         23.288       4.959      21,3             12       0,2
Malta                             0            0                    0                     0                       0           0                        0
The Netherlands               4.549          648      14,2         16       2,5          30      4,6         73.105      10.015      13,7            141       1,4
Portugal                     24.849        2.792      11,2         91       3,3          41      1,5        364.386      59.322      16,3            345       0,6
Slovenia                     27.813        2.832      10,2        825      29,1          45      1,6         98.537      13.556      13,8          6.534      48,2
Spain                        59.800        5.195       8,7        293       5,6          44      0,8      1.758.585     311.213      17,7          4.188       1,3
Sweden                        9.809          590       6,0          2       0,3           1      0,2        152.363      10.661       7,0              8       0,1
United Kingdom               43.778        5.457      12,5        410       7,5          33      0,6      1.709.788     235.665      13,8          1.499       0,6

EU17                        535.111       60.453      11,3      4.174       6,9         910      1,5     12.063.092   1.794.928      14,9         32.848       1,8

EU15                        507.298       57.621      11,4      3.349       5,8         865      1,5     11.964.555   1.781.372      14,9         26.314       1,5
Application year 2003
EU15                        522.146       66.352      12,7      4.596       6,9       1.683      2,5     11.998.677   2.060.855      17,2         25.082       1,2
Application year 2002
EU15                        539.093       78.087      14,5      6.056       7,8       2.933      3,8     11.934.249   2.230.816      18,7         45.408       2,0




AAR 2005-agri-final                                 99
TABLEAUX 3a et 3b: Primes animales : (tableau identique à celui du rapport de la Cour pour Suckler Cow Premium-SCP + un tableau supplémentaire pour
Special Beef premium-SBP.)
TABLE 3B                  IACS Animal Premia - application year 2004 (financial year 2005)                        SPECIAL BEEF PREMIUM
Data on applications and results of on-the-spot checks as communicated by Member States.
                           Applications                           On-the-spot checks - on farm                    Applications         On-the-spot checks - on farm
                                 A          B.                                                                         C.           D.
                           Total number Total no. of                    Farmers              Farmers                 Total       Number               Number of
   Member state             of farmers   farmers                in %      with      in %       with      in %      number of        of        in %      animals     in %
                           who lodged    involved                 of     claims       of      claims       of       claimed      animals        of    involved in     of
                              a claim                             A.    partially    B.        fully      B.        animals      involved      C.    reductions &    D.
                                                                        reduced              excluded                                                 exclusions
Austria                            39.909           4.826        12,1          66      1,4         24       0,5        359.464      51.130     14,2           214      0,4
Belgium                            16.278           1.387         8,5           2      0,1          2       0,1        241.120      16.127      6,7            43      0,3
Denmark                            15.380           2.507        16,3          30      1,2          4       0,2        266.204      84.990     31,9            69      0,1
Finland                             9.458           1.489        15,7          39      2,6          1       0,1        167.518      21.088     12,6            55      0,3
France                            101.237          13.836        13,7       1.144      8,3         77       0,6      2.120.889     225.000     10,6        14.410      6,4
Germany                           104.444           8.899         8,5         176      2,0         58       0,7      2.231.764     240.670     10,8         1.013      0,4
Greece                             15.178           7.616        50,2         257      3,4         25       0,3        167.223     103.961     62,2         1.473      1,4
Ireland                            81.721           5.454         6,7         126      2,3         11       0,2      2.298.593     197.916      8,6         1.477      0,7
Italy                              61.008           6.785        11,1         302      4,5        261       3,8        634.461      83.660     13,2        18.205     21,8
Luxembourg                            984             142        14,4           9      6,3          0       0,0         22.060       4.294     19,5             8      0,2
      1)
Malta                                 245              79        32,2          10     12,7         11      13,9          2.108       3.357    159,3           396     11,8
The Netherlands                     5.340             869        16,3          27      3,1          8       0,9        145.821      22.877     15,7           144      0,6
Portugal                           38.704           5.894        15,2         143      2,4         35       0,6        257.160      40.498     15,7           382      0,9
Slovenia                           20.818           1.733         8,3         172      9,9         16       0,9         66.696       6.122      9,2         3.440     56,2
Spain                              52.043           5.749        11,0         365      6,3         42       0,7      1.198.774     146.343     12,2         2.469      1,7
Sweden                             18.249           1.079         5,9           8      0,7          2       0,2        284.152      22.863      8,0            61      0,3
United Kingdom                     85.718           9.116        10,6         597      6,5         50       0,5      3.204.790     420.898     13,1         2.189      0,5

EU17                              666.714          77.460        11,6       3.473      4,5        627       0,8     13.668.797   1.691.794     12,4        46.048      2,7
1) Some inconsistencies appear in the information from Malta.

EU15                              645.651          75.648        11,7       3.291      4,4        600       0,8     13.599.993   1.682.315     12,4        42.212      2,5
Application year 2003
EU15                              618.243          92.039        14,9       4.581      5,0       1.523      1,7     11.997.478   1.783.018     14,9        58.018      3,3
Application year 2002
EU15                              641.928          98.405        15,3       7.319      7,4       2.452      2,5     12.059.172   1.681.803     13,9        62.964      3,7



AAR 2005-agri-final                                             100
TABLEAU 4:                           EXPORT REFUNDS: EU-25 DECLARATIONS, PHYSICAL
                                     CHECKS1, NUMBER AND AMOUNTS OF IRREGULARITIES
                                     DETECTED

                                        2004                         Irregularities <€4,000                Irregularities >€4,000
                                                                   Nr. Total            €. Total
                       Declarations            Checks

    AT                         20,129                 653                     27           22,153                  0                0
    BE                         36,825               2,951                      8                 -                 0                0
    DE                         98,256               6,396                       -                -                15          165,283
    DK                         38,386               1,544                      -                 -                17        1,649,480
    EL                         12,605               1,080                       -                -                 -                -
    ES                         54,594               5,242                     19            5,043                  -                -
    FI                          6,604                 566                     84                 -                 0                0
    FR                         83,181               3,321                    156           23,666                  6           61,200
    IE                         18,010                 613                      2               45                  4           48,382
    IT                         49,276               4,309                     30            3,634                  0                0
    LU                             69                   2                      0                0                  0                0
    NL                        105,933               6,268                    261        1,456,139                  0                0
    PT                          6,012                 581                     18           47,295                  2           33,976
    SE                         13,447                 297                       -               -                  0                0
    UK                         40,136                 881                       -                -                 3           34,853
    EU-15                     583,463              34,704                    605        1,557,975                 47        1,993,174
    CY                                192              25                      -                  -                0                 0
    CZ2                             1,660             675                      -                  -                0                 0
    EE                                166              26                      -                  -                0                 0
    HU                              6,185             500                      5              7,455                1             4,711
    LV                                282              40                      3                  0                0                 0
    LT                              1,650             123                      1              2,295                0                 0
    MT                                  0               0                      0                  0                0                 0
    PL                              8,613           1,365                    125                   -               1             8,671
    SI                              2,070             203                      6              8,130
    SK²                               218              25                      -                   -
    NMS3                       21,036               2,982                    140            17,880                 2            13,382

    EU-25                     604,499              37,686                    745        1,575,855                 49        2,006,556
    - = Not reported
    0= No irregularities detected
    S:    Member State reporting to apply risk analysis pursuant to Regulation (EC) No 3122/94




1
  The minimum check rate may vary from 5% to 0.5% per sector per customs office of export. It depends on the application of risk analysis
   pursuant to Regulation (EC) No 3122/94, on the product sector, and on the supplementary application of the provisions on small offices
   and/or repetitive declarations pursuant to Article 6 of Regulation (EC) No 2090/2002. Therefore the calculation of an average check rate
   per Member State would not render useful information.
2
  Translation not completed.
3
  Data from 1 May 2004 to 31 December 2004



AAR 2005-agri-final                                               101
Table 5:      EXPORT REFUNDS: DECLARATIONS, PHYSICAL CHECKS,
              NUMBER AND AMOUNTS OF IRREGULARITIES DETECTED AND
              EXPENDITURE FOR THOSE MEMBER STATES PROVIDING
              COMPLETE DATA, 2004


                                2004                          Irregularities
                                                                                                             Ratio
                                                            Financial         Ratio        Expenditure     financial
                                                     Nr.                                     € (mio)     incidence to
                      Declarations     Checks               incidence     irregularities
                                                    Total                                                expenditure
                                                                €           to checks


        AT                20,129          653         27      22,153             4.1%            41.6        0.05%

        ES                54,594         5,242        19        5,043            0.4%           125.5        0.00%

        FR                83,181         3,321      162       84,866             4.9%           567.1        0.01%

        IE                18,010          613          6      93,382             1.0%           223.6        0.04%

        IT                49,276         4,309        30        3,634            0.7%           175.0        0.00%

        LU                     69               2      0             0           0.0%             0.0        0.00%

        NL              105,933          6,268      261     1,456,139            4.2%           518.7        0.28%

        PT                 6,012          581         20      81,271             3.4%            26.5        0.31%

        HU                 6,185          500          6      12,166             1.2%             0.2        6.08%

        LV                   282            40         3             0           7.5%             0.0        0.00%

        LT                 1,650          123          1        2,295            0.8%             0.1        2.30%

        MT                      0               0      0             0           0.0%             0.0        0.00%

        SI                 2,070          203          6        8,130            3.0%             0.1        8.13%

        TOTAL           347,391        21,855       541     1.769.079            2.5%         1,678.4       0.11%




AAR 2005-agri-final                                         102
3.     Reservations and their combined impact on the
     declaration
          3.1.          Materiality criteria used

The materiality criteria used in DG AGRI are based on those recommended by the
Commission in the Communication COM(2003)28 of 21 January 2003 and the “Guidelines
for assessment of materiality of deficiencies in Member States’ management and control
systems under shared management for the purposes of Annual Activity Reports” agreed in
2005 between the structural funds Directorate Generals.

In qualitative terms the materiality of a deficiency is judged on whether it concerns a
combination of the following elements:

     •   Is it a key control system at stake;
     •   What is the importance of the area/measure concerned;
     •   Is there an accumulation of weaknesses;
     •   Has/have the weakness(es) persisted for a long time;
     •   Have remedial measures been implemented to address the weakness(es);
     •   What is DG AGRI’s responsibility in managing the issue at stake;
     •   Is the reputation of DG AGRI/the Commission compromised;

In quantitative terms the materiality threshold used is the 2% level recommended at
Commission level. However, consideration is also given to the absolute budget amount(s)
involved due to the considerable size of the budget allocations to the CAP. More than one
third of the Community Budget is concentrated in two of DG AGRI’s ABB activities (Plant
Products and Animal Products). In such a case to apply the 2% threshold at the ABB activity
level does not appear justified. In that case the budget amount could be considered on another
basis, e.g. the expenditure in the MS concerned or the amount devoted to the sub-measure
concerned.

The reputational risk is a major factor for DG AGRI in determining whether to make
reservations to the Director-General’s annual declaration. In practice, most of the issues
considered relate to the implementation under shared management of measures/systems in the
Member States. When deficiencies are identified, the risk to the Community Budget is
covered by imposing financial corrections on the Member States under the clearance of
accounts procedure. However, although the financial risk is thereby covered, the reputation of
the Commission as the guardian of the Treaty could be at stake, despite such types of
deficiencies may lay entirely with the Member State.



          3.2.          2005 Reservations

For preparing the present report an analysis of identified weaknesses has been made in DG
AGRI at the level of directors and above in view of assessing whether the weaknesses could
potentially impact on the Director-General’s declaration of assurance for 2005.



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The weaknesses considered were those mentioned under the ABB activities of part 1, and
notably the weaknesses identified during the risk self-assessment conducted during the second
half of 2005 at the level of units and directorates – see section 2.2.1.2.

It was concluded that two of the three reservations to the declaration for 2004 have to be
carried-over to the 2005 declaration – the specifications are provided below. The other
reservation can be lifted – see section 2.1.4.1.

Concerning other weaknesses identified, it is the assessment that none are of a character
having a material impact on the declaration of assurance.

The two reservations to the Director-General’s annual declaration 2005 are:



Reservation nº 1:        Preferential import of high quality beef (“Hilton” beef)
                        – risk of non-respect of product definition.

DG                Agriculture and Rural Development

Title of the      Preferential import of high quality beef (“Hilton” beef) – risk of non-
Reservation       respect of product definition
                  - carried over from the 2003 and 2004 declarations

Expenditure       Import duties – agricultural products
area

Cause of the      The Community every year imports about 40,000 tonnes of high quality beef
reservation       (“Hilton beef”) benefiting from a reduced import duty under preferential
                  imports agreements. The meat imported shall comply with definitions laid
                  down in the Community legislation.
                  However, OLAF findings in 2003 with regard to import from Argentina
                  revealed a lack of control in Argentina and risk of non-compliance with the
                  product definition. This led to a reservation to the declaration for 2003 and
                  which was repeated for the 2004 declaration.
                  The compliance with country-specific definitions of high-quality beef being
                  entitled to lower customs duties for import into the Community is the
                  responsibility of the third countries concerned. It was not possible to carry out
                  Community supervision in third countries guaranteeing that compliance.
                  As evidenced by the OLAF findings in Argentina, the risk of non-compliance
                  is the biggest in countries where criteria are difficult to verify, e.g. age and
                  live weight of each animal. Those countries are Argentina, Uruguay, Brazil
                  and USA/Canada.
                  The reservation was followed by an action plan aimed at agreeing new
                  product definitions and appropriate traceability system guaranteeing origin
                  and traceability of the beef. Negotiations have been finalised with Argentina,


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                  Brazil and Uruguay and agreed in an exchange of letters between our Director
                  General and the Competent Authority in each of these countries. However,
                  the agreement would normally only enter into force once the EC WTO
                  schedule is modified, which at the end of 2005 was still outstanding.

Material          1)    Potential   budgetary    impact    (Community        import levies);
criteria          2)    Reputational risk for the Commission – lack of easily controllable
                  instruments which the Commission has responsibility to define.

Quantification The countries of origin, from which it is assumed that there is a risk of non-
               respect of the product definition, are Argentina, Uruguay, Brazil and
               USA/Canada. The annual preferential tariff import quotas are of 50,800 t. The
               actual use of the quotas is around 40,000 t per year (the quotas for
               USA/Canada are only partially used).
                  The average full import duty for this product quality is estimated at
                  € 3,500 /t. The average preferential import duty is estimated at € 1,100 /t
                  With an effective use of the quotas of 40,000 t the potential theoretical
                  maximum loss of import duty is € 96.0 mio. The total loss is theoretical as it
                  is unknown which quantity would be imported if full duty was applied, and
                  secondly, this maximum calculation is based on the assumption that none of
                  the actually imported beef would fulfil the definition.
                  The budget part concerned: Agricultural duties in respect of trade with non-
                  member countries (own resources – chapter 10): Budget 2005: € 819.5 mio

Assurance         Theoretical impact: € 96 mio of € 820 mio = 11.7%
impact

Responsible       The compliance with the country-specific definitions is the responsibility of
for weakness      the third countries concerned.
& remedy
                  Implementation of the action plan: Directorates A and B are responsible for
                  the negotiations with third countries. Directorate C is responsible for the
                  technical aspects of the identification and traceability of high quality beef.

Corrective        Talks have been concluded and confirmed in exchange of letters with all the
action plan       third countries concerned (Argentina, Brazil and Uruguay) in order to arrive
                  at more appropriate definitions of products being granted preferential access
                  to the Community, including appropriate traceability systems.
                  The action plan has been for DG AGRI to seek to incorporate the updated
                  definitions on high quality beef into our WTO schedule. In order to facilitate
                  the updating of the EC WTO schedule regarding the High Quality Beef
                  definition and avoid opening a separate WTO procedure, it was the strategy to
                  take advantage of the ongoing Article XXIV.6 negotiations to take account of
                  the EU 2004 enlargement for this purpose. Formally, however, there exists no
                  link between the two negotiations.
                  For Brazil and Uruguay the WTO Article XXIV.6 negotiations have in
                  principle advanced well, but a result has, nevertheless, still not been formally
                  confirmed.


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                  Concerning Argentina the EC offer has not yet been accepted due to
                  diverging views on the Article XXIV.6 compensation relating to enlargement.
                  The situation is therefore somehow blocked, although Argentina has indicated
                  an interest in finding a separate “Hilton” beef solution.
                  As USA and Canada only export marginal quantities of high quality beef to
                  the EU under preferential treatment no actions were foreseen for these
                  countries in 2005.
                  Given this state of play and that a final solution must be found and
                  implemented in 2006, the way ahead is that the EC acts unilaterally by
                  making a proposal to the Council to add the high-quality beef definition
                  change into the Council beef regulation and the corresponding Commission
                  implementation regulation. This would allow the Commission to apply the
                  new definitions for all three countries concerned. It would leave the door
                  open to finalise and/or formalise the Article XXIV.6 negotiations for each of
                  the three countries, when possible. The aim is to present a proposal, adopted
                  by the Commission, to the Council by 15 May 2006.

Conclusion        Considerable progress has been made with the 3 countries concerned in 2004
                  and 2005. However, as the WTO Article XXIV.6 negotiations are not
                  concluded and it appears difficult to get final, formally approved agreements,
                  DG AGRI/the Commission will go ahead proposing to the Council the
                  necessary amendments to the EU regulations in order to apply the agreed new
                  product definitions as soon as possible and well before the end of 2006.
                  As the initially identified risk was in principle still present in 2005 and also
                  remains in 2006, the reservation is maintained for the 2005 declaration.

Responsible in Units A.1, B.1 and C.4
DG Agri




Reservation nº 2: Insufficient implementation of IACS in Greece

DG                    Agriculture

Title of              Insufficient implementation of IACS in Greece
Reservation           - carry-over of the reservation from 2002, 2003 and 2004 declarations

Expenditure           EAGGF, Guarantee, expenditure – shared management
area

Cause of the          DG AGRI already made a reservation to the 2002, 2003 and 2004
reserve               declarations due to the lack of full implementation of the Integrated
                      Administration and Control System (IACS) in Greece, years after this was a
                      regulatory requirement.
                      An action plan was put in place in the years 2003 to 2005 consisting of an



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                      enhanced audit programme for Greece and other supervisory measures to
                      support the new paying agency in Greece as well as DG AGRI actively
                      monitoring the implementation of IACS in Greece. In 2005, 8 missions were
                      carried out on IACS or IACS related measures, among a total of 13 missions
                      in Greece.
                      Evaluation of the results of these actions indicates that Greece’s
                      implementation and control in the field of IACS and other measures shows
                      good progress, partly as concerns harvest years 2002 and 2003, but more so
                      for harvest year 2004 (financial year 2005). The different elements of the
                      IACS system are in place, but in the light of the audits performed by the
                      Commission and the Court of Auditors, it appears that important deficiencies
                      remain in the functioning of all of these elements. The persistent nature of
                      deficiencies year after year in every element of the IACS creates a unique
                      situation which gives rise to a high reputational risk for the Commission.
                      Therefore the reservation is maintained for the annual declaration for 2005.
                      DG AGRI will continue to closely monitor the situation also in 2006 as part
                      of the regular programme for Clearance of Accounts, and propose financial
                      corrections where appropriate. Furthermore, following a preliminary appraisal
                      (both documentary and on-the-spot) of negative findings concerning the claim
                      processing procedure reported in late 2004 by the European Court of
                      Auditors, an IT audit was being conducted by DG AGRI in early February
                      2006.
                      Il faut noter que le risque financier pour le FEOGA-Garantie a été et
                      continuera à être couvert par les corrections financières opérées dans le cadre
                      de l’apurement des comptes et les autres actions mentionnées plus haut. Mais,
                      selon les lignes directrices adoptées par la Commission du 28 janvier 2003 et
                      la conclusion entre les DG fonds structurel, ce type de faiblesse dans un Etat
                      membre doit conduire à une réserve.
                      In fact, in the period 1999-2004 the Commission has imposed on Greece
                      financial corrections of in total € 384 mio. Moreover, in 2002 the
                      Commission took Greece to the Court of Justice in Luxembourg for not
                      complying with Community law. The Court’s ruling of 2004 went against
                      Greece.

Material              The materiality criteria used are:
criteria
                      1) Firstly, it is a reputational risk to the Commission that a Member States for
                      almost 10 years still fails to ensure the effective functioning of the most
                      important system for controlling CAP expenditure;
                      2) In budgetary terms, the materiality threshold applied is 2% of expenditure
                      in Greece controlled under IACS.
                      This is a more narrow definition of the materiality than the Commission
                      guidelines recommend; i.e. 2% of the budget of the ABB-activity concerned.
                      In the actual case this threshold does not appear relevant due to the very big
                      budgetary amount of the ABB-activity (some € 30 bill).



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Quantification The total amount of expenditure controlled in Greece under IACS is in the
               order of € 850 mio year. Total expenditure controlled under IACS is some €
               30 bill (ABB activities Plant Products and Animal Products).
                      The amount of 2005 expenditure at risk cannot be calculated precisely before
                      the finalisation of the related clearance of account procedures, but this amount
                      is clearly only a part of the total expenditure. An estimate can however be
                      made.
                      In the different sectors covered by IACS in Greece, the most recent financial
                      corrections rates, concerning previous years, are 5% for the arable crops, 25%
                      for the basic bovine premiums, 100% for the bovine extensification premium,
                      and 10% for the ovine premium. As regards the 2005 financial year, although
                      a definitive assessment cannot be made before the conclusion of the audits, it
                      is already possible to roughly estimate the risk.
                      The total amount resulting from the application of this estimation to the 2005
                      expenditure is in the order of € 85 mio (10%). This amount can be considered
                      “at risk”.

Assurance             Systematic problems in the Member States bringing a risk of ineligible
impact                payments or incorrect declarations to the Commission.

                      The theoretical quantitative impact on the assurance is:

                      -based on ‘IACS’ expenditure in Greece: € 85 mio /€ 850 mio = 10%

                      -based on total ‘IACS’ expenditure: € 85 mio /€ 30,000 mio = 0.3%

Responsible           The expenditure concerned is under shared management for which the
for weakness          Member State is responsible for implementing the regulatory control systems.
& remedy              The Commission supervises the Greek authorities in this respect.

Corrective            Directorate J of DG AGRI will continue to closely monitor the situation also
action plan           in 2006 as part of the regular programme for Clearance of Accounts. The
                      work plan 2006 for Directorate J foresees 10 audit missions to Greece for
                      measures administered and controlled directly or indirectly by IACS.

                      In addition, 2006 sees the introduction of a new action plan, to be
                      implemented by Greece followed closely by the Commission, to target those
                      continuing deficiencies that now relate to the more ‘practical’ issue of
                      ensuring that the main IACS components are enhanced and used effectively.

Conclusion            The reservation is carried over to the 2005 declaration, despite the progress
                      achieved by the Greek authorities.

                      The different elements of the IACS system are in place, but in the light of the
                      audits performed by the Commission and the Court of Auditors, it appears
                      that important deficiencies remain in the functioning of all of these elements.

                      It is the accumulated effect of these weaknesses, together with the fact that
                      this is the most important control system for CAP expenditures and which


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                      should already have been functioning effectively for almost 10 years, which
                      necessitates maintaining the reservation for the fourth consecutive year.




          3.3. Overall assessment on providing reasonable
              assurance


              3.3.1.       Impact of the reservations

The first reservation, ‘Hilton’ beef, concerns own resources.

The second reservation, IACS in Greece, concerns the CAP expenditure and is estimated to
represent 0.2% of the CAP budget.

If the total of the two reservations is measured against the total of the CAP expenditure
budget plus the budget of agricultural levies (own resources), the overall materiality of the
reservations is 0.4%.

In conclusion, the overall impact of the reservations is well below the materiality criteria of
2% defined by the Commission. This means that from a quantitative point of view the
reservations do not compromise the assurance provided by the Director-General for the year
2005.

Nor from a qualitative point of view are the reservations of a character that conflicts with the
statement of assurance for the year 2005. The DG AGRI services have for both reservations
acted with diligence, within the means at their disposal, in addressing the weaknesses leading
to the reservations.


              3.3.2. Overall background on which the assurance is
                  provided

Part 2 of this report presents the environment in which DG AGRI works and in particular how
the internal control systems are organised and how the controls are ensured under shared,
centralised and decentralised management.

The existence and functioning on an ongoing basis of these systems constitute the overall
framework which allows the Director-General of DG AGRI to provide reasonable assurance
for the year 2005.

The three main elements permitting the providing of reasonable assurance are in summary:

    •   The internal management and control systems in place within DG AGRI, in particular
        the compliance with the 24 internal control standards;

    •   The systems in place for handling and controlling expenditure under shared
        management. For EAGGF Guarantee, the system is based upon (1) a compulsory


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        administrative structure at the level of MS, centred around the establishment of paying
        agencies and an authority at high level which is competent for issuing and
        withdrawing the agency’s accreditation, (2) detailed systems for controls and
        dissuasive sanctions to be applied by those paying agencies, with common basis
        features and special rules tailored to the specificities of each aid regime, (3) ex-post
        controls through certified audit bodies and special departments (4045/89 checks) and,
        (4) clearance of accounts through the Commission (both annual financial clearance
        and multi-annual conformity clearance).
        For the 2000-2006 programming period financed by EAGGF Guidance, the system is
        based upon (1) an administrative structure based around a Managing Authority,
        responsibly for the implementation of the support measures, and a Paying Authority,
        responsible for declaring the expenditure to the Commission, (2) rules for controls to
        be applied by managing services, (3) ex post controls by independent services,
        including a formal audit declaration at the winding up of the assistance and (4)
        clearance of accounts by the Commission.
        In both cases, the four levels of management and control establish a comprehensive
        system which includes, on the one hand, all the necessary building blocks to guarantee
        a sound administration of the expenditure at Member States’ level and, on the other
        hand, allows the Commission to counter the risk of financial losses as a result of any
        deficiencies in the set-up and operation of those building blocks through the clearance
        of accounts procedure. In this context, it should be emphasized that the latter
        procedure does not only enable the Commission to check the paying agencies’
        documentation on management, control and sanctions, but also to evaluate how those
        elements are implemented in practice, including the quality of the on-the-spot controls
        through visiting a sample of final beneficiaries, thus closing the circle to the on-the-
        spot controls carried out by the paying agencies themselves. Taken together, the four
        levels therefore provide the Director General for agriculture and rural development
        with reasonable assurance as to the effective management of the risk of error in the
        legality and regularity of the underlying transactions in agriculture;
    •   Similar systems are in place for expenditure under de-centralised management
        (SAPARD) and provide the equivalent level of assurance;
    •   For expenditure under direct management appropriate ex-ante and ex-post controls
        also provide similar assurances as for shared and de-centralised management;
    •   The information, conclusions and/or assurances provided by the different audit bodies
        following audits performed in the Member States and/or the Commission. These audit
        bodies are the Court of Auditors, the DG AGRI Internal Audit Capability and the
        Commission Internal Audit Service.

The control systems provide for the necessary assurances which the Commission is looking
for under shared management systems. As of financial year 2007, it will be further improved
and reinforced by the new Council Regulation 1290/2005 on the financing of the common
agricultural policy, notably by the introduction of the requirement of a statement of assurance
by the management of the paying agencies.

The main findings for which financial corrections are being prepared are mentioned in part 2
of this report. No reservation is made in relation to the specific problems identified in audits
carried out in this framework, any risk being addressed in a satisfactory way to ensure that the



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corrective (mainly financial corrections) and is of such a significant and continuous nature,
(and even though any financial risk is covered by clearance of accounts procedures
Only when the failure of a Member State that risks having an impact on the reputation of the
Commission is a reservation formulated to the declaration, e.g. IACS in Greece.




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4.       Declaration of the Authorising officer by delegation

Je soussigné, Jean-Luc DEMARTY
Directeur général de DG Agriculture
en ma qualité d'ordonnateur délégué
– Déclare par la présente que les informations contenues dans le présent rapport sont sincères
  et véritables1.

– Affirme avoir une assurance raisonnable que les ressources allouées aux activités décrites
     dans le présent rapport ont été utilisées aux fins prévues et conformément au principe de
     bonne gestion financière et que les procédures de contrôle mises en place donnent les
     garanties nécessaires quant à la légalité et la régularité des opérations sous-jacentes.

     Cette assurance raisonnable se fonde sur mon propre jugement et sur les éléments d’information à
     ma disposition, comme, par exemple, les résultats de l'auto-évaluation, des contrôles ex post, des
     travaux de "l'internal audit capability", des observations du Service d'audit interne ainsi que des
     enseignements retirés des rapports de la Cour des comptes relatifs aux exercices antérieurs à celui
     de cette déclaration

– Confirme en outre n’avoir connaissance d’aucun fait non signalé pouvant nuire aux intérêts de
  l’institution.

Toutefois les réserves suivantes doivent être relevées:



     1. Import of “Hilton” beef: Preferential import of high quality beef (“Hilton” beef) –
        risk of non-respect of product definition. This is a carry-over from the 2003 and 2004
        declarations. For preferential import of high quality beef OLAF found in 2003 lack of
        compliance with the product definition, specifically in the case of Argentina, but the
        risk may also apply to other countries. In accordance with the initial action plan,
        agreements on new product definitions have been reached with the three main
        countries concerned; Argentina, Brazil and Uruguay. These new definitions would
        normally be implemented through changes to the WTO schedules, followed by the
        corresponding amendments to the EC Council and Commission regulations. However,
        the changes to the WTO schedules through Art. XXIV.6 negotiations have proven
        more difficult to finalise and/or get formally approved. As the new definitions are not
        yet applied, I do still not have assurance that the products imported under these
        preferential imports agreements respect the definitions laid down in order to be
        eligible under the schemes.
         Given this situation, the action plan for 2006 is that DG AGRI/the Commission will
         go ahead and propose to the Council to implement unilaterally the new product
         definitions through the EC legislation.


     2. IACS in Greece: The implementation of the Integrated Administration and Control
1
 Sincère et véritable dans ce contexte signifie une vue fiable, complète et correcte de l’état des affaires dans le
service.


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        System, IACS, in Greece. This is a carry-over from the 2002, 2003 and 2004
        declarations. The action plan consisting of an enhanced clearance of accounts audit
        programme for Greece was implemented and good progress has been achieved by the
        Greek authorities. By the end of 2004 it seemed that the main elements of the IACS
        system were in place. However, following audits of the Court of Auditors and of the
        Commission it appears that important deficiencies still remain in the functioning of all
        of these elements. The accumulated effect of these weaknesses, together with the fact
        that this is the most important control system for CAP expenditure and which should
        already have been functioning effectively for almost 10 years, obliges me to maintain
        this reservation for 2005.




                                                              Fait à Bruxelles, le 31 mars 2006


                                                                                       [Signed]
                                                                         Jean-Luc DEMARTY
                                                                              Directeur général




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