Select Committee on European Scrutiny Eighth Report


SUPPLY OF AGRICULTURAL PRODUCTS TO THE RUSSIAN FEDERATION


(22010)
14922/00

Special Report No. 18/2000 from the Court of Auditors concerning the programme to supply agricultural products to the Russian Federation.


Legal base:
Document originated: 10 November 2000
Forwarded to the Council: 18 December 2000
Deposited in Parliament: 17 January 2001
Department: Agriculture, Fisheries and Food
Basis of consideration: EM of 19 February 2001
Previous Committee Report: None
To be discussed in Council: No date set
Committee's assessment: Politically important
Committee's decision: Cleared

Background

  22.1  In 1998, the Russian Federation was simultaneously affected by a poor cereal harvest and a serious financial crisis. This resulted in the United States granting food aid, and, since the Community was anxious to secure its presence in what is its second most important meat export market, the Council decided in December 1998 to supply free agricultural products to the neediest areas in Russia. The intention was to sell these products in local markets, and to use the proceeds to create a counterpart fund to finance social measures. However, it was also made clear that the programme should not be allowed to impede the Community's normal agricultural exports to Russia (some of them subsidised), nor to disturb the local market. The selling price was thus not to be less than that of similar products obtained locally or imported from the Community (though this did, of course, conflict with the Russian aim to maximise the funds available).

  22.2  In more detailed terms, the programme, described by the Court as complex and ambitious, provided for the supply of 1.85 million tonnes of food products, with a value of 377.7 million euros, to about 50 of the 89 Russian regions. Meat products accounted for about 50% of the total value and cereals and rice for approximately 40%, with skimmed milk powder making up the balance. With the exception of pigmeat, which was bought on the Community market, all the supplies were taken from intervention stocks. The costs of monitoring and transporting the products to the Russian border were charged to the Community budget, and, after taking into account savings on storage costs and export refunds, the net total cost of the programme financed by European Agricultural Guidance and Guarantee Fund (EAGGF) appropriations was put at 411.1 million euros.

The current document

  22.3  The Court says that, given the significant inherent risks of such a programme, its audit — which was carried out in the second half of 1999 — centred mainly on its implementation in Russia, and aimed to verify the effectiveness and impact of the programme, and to examine the Commission's performance as regards the transport of the products and the collection of counterpart funds, as well as ensuring that they were used for the intended purposes.

— Preparation of the programme

  22.4  The Court notes that, at the Agriculture Council in September 1998, the Commission had stated that there were no food shortages in Russia, that on a macro-economic level there was enough money to buy foodstuffs, and that most analysts considered that Russian food imports would resume as soon as exchange rates had stabilised. It also notes that the need for a programme was the subject of extensive debate in Russia itself, and that, despite warnings from the World Bank, the Commission did not analyse the negative impact which it might have on the emerging private sector there. Nor did it assess how far internal trade barriers were affecting the supply of cereals, even though the FAO had said that any shortages in Russia would be local and attributable to such barriers.

  22.5  The Court makes a number of other criticisms, notably:

    —  that official statistics under-estimated cereal stocks in Russia by 10 to 20%;

    —  that, although no actual violation of the arrangements occurred, the Community adopted a programme of food aid to Russia "at the very moment when Russian cereals exports were reaching record levels";

    —  that the Commission over-estimated the extent of the Russian financial crisis, and its consequential effect on Community meat exports;

    —  that the Commission made no detailed examination of the supply situation in the various beneficiary regions, and the choice of regions receiving aid was not based on any objective factor;

    —  that the legal framework for the programme was prepared very quickly because of the supposed urgency, but that, although negotiations took place with the Russian agriculture ministry, the finance ministry, which had an essential role in the collection of counterpart funds, was not consulted; and

    —  that, since this was the priority of both the Russian Government and the International Monetary Fund, the Commission agreed to allocate 80% of the counterpart funds to paying off the Federal Pension Fund arrears: however, despite concerns over the lack of transparency in Russian public finance and numerous irregularities in the management of the Fund, the Commission made no analysis of the Fund's function and utilisation before taking this decision of principle.

— Implementation of the programme

  22.6  On the resources deployed by the Commission, the Court says that decisions were taken centrally in Brussels, with neither the relevant Directorates General (Agriculture and External Relations), nor the Delegation in Moscow, being given any additional resources. As a result the programme lacked flexibility, particularly when compared with that of the United States.

  22.7  As regards the mobilisation of the foodstuffs in question, the Court says that the Commission's financial provision for pigmeat under-estimated by over 30% the actual costs involved, and that, although it was a cardinal concern that produce should reach its destination as soon as possible, only two thirds of the beef and half of the pigmeat and skimmed milk powder had been delivered by the target date. The Court further notes that the Commission was obliged to suspend mobilisation of the products for nearly four weeks until the Russian authorities had accepted the Community's safety, hygiene and health certification procedures, and that there was subsequently a similar delay over the pricing mechanism. Because of these delays, the Court says that almost half of the grain arrived during or after the harvest, large amounts of meat arrived during the summer at the time of weakest demand, and it became necessary to extend the control work commissioned from outside companies, thus increasing costs. The Court also notes that the transport costs were higher than forecast, and that monitoring was again hampered by inadequate resources.

  22.8  In its examination of the distribution arrangements within Russia, the Court comments that the tender procedures "could barely be described as open", and it criticises the Russian ministry of agriculture and food for entrusting distribution to operators retaining close links with the former central planning system. It also points out that, whereas the Russian Government was supposed to bear the costs of domestic transport, these were in practice met by the buyers, and it criticises the arrangements for monitoring the delivery of products to the regions. Although most of the produce was safely delivered, the Report notes that selling prices, particularly for meat, were sometimes much higher than those for commercial imports, and that most of the meat was thus held in cold stores for several months. In addition, there were problems over the quality of the wheat supplied, and the dioxin crisis in Belgium affected some of the pigmeat supplied.

  22.9  This section of the Report also considers the operation of the counterpart funds. Although the intention was that these should be used to implement social measures, the Russian Government specified that they should be allocated to the Federal Pension Fund budget for the payment of pensions and discharge of the pension indebtedness accrued in 1998, meaning that only 20% of the funds would be available for other specific social purposes. In the event, most of the sums earmarked for the Pension Fund were used to pay off the arrears, but, by the beginning of 2000, the Russian Government had still not presented any plan for using the remaining funds, and it was eventually agreed in April 2000 that they should be used to finance items proposed by the health and employment ministries. However, since the outstanding sums had been kept in a non-interest bearing bank account at a time when inflation in Russia was 36%, the real benefit had been rapidly eroded. The Court also notes that, in order to ensure payment to the counterpart funds, the Russian Government tried to establish a system whereby central budgetary transfers would be reduced for regions which did not pay for the products. However, in many cases, this proved difficult to enforce, and it also meant that some of the poorer regions preferred to reduce their uptake, with the produce going instead to other more prosperous regions.

— Impact of the programme

  22.10  Although the programme was intended to help stabilise agricultural markets in Russia, the Court notes that, during much of the relevant period, prices of wheat and prices in the meat sector rose sharply, and that commercial exports attracting exports refunds were more likely to limit such increases in the latter area. It also says that the programme was criticised by private Russian operators, who considered that it strengthened those from the old regime to their detriment. As noted in paragraph 22.9 above, the financial arrangements imposed by the Russian Government on regional authorities, together with the high price, particularly for meat, meant that supplies were often diverted from the poorer to the more favoured regions. Consequently, the Court concludes that, unlike the American programme, which involved free distribution by non-governmental organisations to the most vulnerable groups, the Community aid benefited the neediest groups only to a limited extent. It also comments that the counterpart funds nevertheless helped to improve the lot of pensioners, and enabled the health and employment ministries to finance projects of a social nature.

The Commission's response

  22.11  In its response, the Commission emphasises that this was the largest ever food delivery programme undertaken by the Community, and had achieved some very positive results. Consequently, despite the numerous implementation difficulties, and lack of human resources, it considered that the primary task of delivering food supplies to agreed destinations was achieved with relative speed. It also pointed to the fact that 97% of the quantities foreseen were delivered within the space of nine months. More generally, the Commission defends the need for the programme, and says that a targeted humanitarian programme would not have been possible as the non-governmental organisations charged with its execution would not have had sufficient resources to handle a programme of such magnitude. It also points out that the Court's observations relate to a programme which was still under way, and that it has contracted independent consultants to carry out an evaluation, which is to be published soon. In addition, a "full and final" audit is planned. In recognising that more could have been done had more resources been available, the Community says that is continuing to press the Russian Government to resolve all outstanding problems satisfactorily.

The Government's view

  22.12  In her Explanatory Memorandum of 19 February 2001, the Minister of State (Commons) at the Ministry of Agriculture, Fisheries and Food (the Rt. Hon. Joyce Quin) says simply that, from a UK viewpoint, the Commission's forthcoming evaluation of the programme and the final audit reports will require detailed consideration.

Conclusion

  22.13  Although we find the Minister's observations somewhat cursory, we are clearing this Report, which relates to a programme undertaken for a finite period which is now largely completed. As usual, the Court has made some telling criticisms, though, in this case, it should be recognised that the Commission was responding at some speed to what was seen as a political imperative, and was moreover seeking, with inadequate resources, to manage an inherently complex operation in very difficult circumstances. Consequently, whilst this might not justify some of the mistakes identified by the Court, it does, in this instance at least, go some way towards explaining them.




 
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