EU incentives encourage firm to leave country

The Eastern Sugar company used to produce more than 100,000 metric tons of beet sugar per year in the Czech Republic. In 2006, the company announced it was pulling out of Central Europe altogether, and closing its three Czech facilities.  

The story would end rather unremarkably there, if the company hadn't received 25 million euros in farm subsidies for its operations in the Czech Republic in 2008 - more than three times the amount of any other company in the country - and an additional 35 million euros so far this year.

Add to this more than 20 million euros in subsidies received for closing operations in Slovakia and nearly 64 million euros for ending production in Hungary, and the firm has received nearly 150 million euros in taxpayer money for shutting down its five Central European production plants.

"It's a bit like an Alice in Wonderland scenario," said Jack Thurston, a fellow at the German Marshall Fund and an agricultural subsidies expert. "They pay money to reduce inefficiency and then pay to reduce efficiency."

This windfall for Eastern Sugar - a company registered in the Netherlands but co-owned by the United Kingdom's Tate & Lyle and German firm Süd Zucker, is in fact exactly what the European Union intended. In 2006, the EU began implementing a plan to cut sugar production, and, that same year, Eastern Sugar announced it would close its Central European operations.

The EU program sought to cut Continent-wide sugar production from 20 million metric tons to 14 million metric tons through 2009 by paying companies to stop production and sell annual sugar quotas back to the European Commission, said Johan Reyniers, a commission spokesman. The goal was to make European sugar better suited for the world market and to fall in step with World Trade Organization (WTO) rules.

"European producers were asked to hand in some of their quota," said Dominik Risser, a Süd Zucker spokesman. "Your factories need to be operating at full capacity to be efficient, so it was all or nothing. It was better than losing it and receiving nothing."

A spokesman for Tate & Lyle declined to comment.

Still, Eastern Sugar was the only firm in the Czech Republic to sell back their production quota.

"They got the quotas for free from the Czech government. They are the only company that tried to sell its quota back to the EU," said Zdeněk Joudal, chairman of the Sugar Beet Growers Association of Bohemia. "It's wrong, but there is nothing I can do about it."

By all accounts, Eastern Sugar was making a profit before shutting down. In essence, the EU subsidies created a scenario where it was more profitable for the company to cease production. Eastern Sugar's annual quota of 102,000 metric tons in 2006 made them eligible for significant EU compensation. The move cut the Czech Republic's national output by one-fourth.

System failure

The European Common Agricultural Policy represents more than half of the EU's overall annual budget, at last count more than 53 billion euros. Experts see the Eastern Sugar case as emblematic of systemic problems.

"It's a lot like the Wall Street bailout; money from subsidies is going to large companies and wealthy individuals rather than small farmers," said Thurston, who also runs the Web site Farmsubsidy.org, which collects and publishes subsidy figures. "The bigger you are, the more money you get, and it all seems to happen without public oversight."

Local government officials are more tight-lipped, but allude to similar views.

"I have my own opinion, and that's all I will say," said Zdeněk Procházka, a government agricultural economist who distributes regional farm subsidies from Prague.

In mid-August, world sugar prices reached a 28-year high. Futures on white sugar were trading at about 344 euros per metric ton. The price is up 86 percent since the beginning of the year. At that price, the Czech sales from Eastern Sugar's most recent year of production would be worth more than 35 million euros.   

While the reform of the EU sugar markets was meant to better position the trading bloc in international markets, the changes have been costly, financially and otherwise.

"It closed two or three years ago; the land is for sale," said Kojetín Mayor Mojmír Haupt, of the former plant in his town.

Miroslav Besperát, the mayor of Hrochův Týnec, said his town lost 160 jobs when Eastern Sugar shut down.

The town of Němčice nad Hanou lost 400 jobs, said the mayor, Ivana Dvořáková. The town has only 2,100 inhabitants.

In Slovakia, the city of Dunajská Streda lost about 600 jobs.

"The biggest problem was suppliers who bought special machines and technology to cooperate with Eastern Sugar," said Zoltán Papay, the city's finance director. "The parcels of land Eastern Sugar used are now just sitting, waiting to be sold."

Under the subsidy system, some of the EU money is meant to go back to the sugar beet farmers, workers and the towns where operations were closed. Asked how much local producers received from the subsidies, Risser of Süd Zucker said, "That is hard to say."

More money

Eastern Sugar's public money boon doesn't end with the EU. In 2007, the firm won 27.2 million euros from the Czech government in an arbitration case, after successfully arguing that the Czechs unfairly limited their production quotas. That money has already been paid, said Petr Vorlíček, spokesman for the Agriculture Ministry.

Eastern Sugar is in court again suing for an additional 38 million euros, citing unfair compensation when it gave up some of its production quota to meet EU requirements during the Czech Republic's accession process.

All these numbers lead to the question of how Eastern Sugar has to this point avoided public scrutiny.

Thurston says the nearly impenetrable lists of subsidy recipients published by governments make public oversight almost impossible. The Czech government Web site listing subsidy recipients, for example, is 1,580 pages.

But there are additional explanations as well. In touting its services on its Web site, public relations firm JWA Prague s.r.o gives one.

"Over the years, a good part of JWA's work has been the absolute reverse to promoting its clients or sending out press releases; in fact, in many cases its brief has been to ensure that its client is NOT in the news and to act as a barrier between the client and the media to ensure that the client is not available to talk. Such was the case with Eastern Sugar," reads the firm's Web site.

Jo Weaver, the founder of JWA, said she had no knowledge of the scale of Eastern Sugar's subsidies in the past two years.

"It's news to me," she said. "Our work finished with them in 2007."

- Petr Cibulka contributed to this report.

Benjamin Cunningham can be reached at
bcunningham@praguepost.com