Financial aid for the processing of agricultural products: the state mainly subsidised large enterprises with profits of up to hundreds of millions Czech crowns
Press release on audit No 21/33 – 9 January 2023
The SAO reviewed how the Ministry of Agriculture (MoA) and the State Agricultural Intervention Fund (SAIF) treated state and European Union (EU) funds spent on the processing of agricultural products, between the years 2018 and 2021. The auditors found that although the financial aid was to be targeted primarily at micro, small and medium-sized enterprises according to both the MoA’s strategy and the EU subsidy programme, the Ministry failed to prepare a national subsidy programme for these enterprises in the audited years. Conversely, it has launched a programme aimed at increasing competitiveness of large processing companies. Between 2018 and 2021, the MoA paid out EUR 1.7 billion to these large companies. In the case of EU subsidies, the MoA set such conditions that small and medium-sized enterprises were interested in only one of the four available investment operations. Mainly large enterprises, with a profit ranging from CZK 10 million to CZK 100 million, received annual financial aid from the Czech Republic and the EU.
The MoA did not monitor nor evaluate the economy, effectiveness or benefits of spent national subsidies. As for the provision of EU funds, the MoA did not verify whether the supported projects resulted in the envisaged innovations or whether machines, equipment and technologies were simply replaced.
National subsidies
The SAO auditors revealed that the MoA and the SAIF did not require the beneficiaries to define specific and measurable objectives of their projects. Their objectives were therefore general, vague and unmeasurable. It is not clear whether the quality of product processing has been improved and whether the competitiveness of Czech enterprises on the European market has increased.
The MoA did not set binding conditions for the selection of suppliers nor maximum limits on expenditure on the acquisition of assets and services. Therefore, the beneficiaries were not forced to behave economically.
The MoA and the SAIF only formally assessed the necessity of financial aid granted to large enterprises. In accordance with the Regulation of the European Commission, national aid must have an incentive effect. However, the MoA and the SAIF did not have sufficient evidence for its evaluation. They granted subsidies without requiring applicants to substantiate their claim on the possible benefits of the proposed investments. For selected beneficiaries of subsidies, the SAO found that hundreds of millions of Czech crowns were spent annually on the renovation and modernisation of technical equipment of their premises. According to the SAO, the repeated use of national subsidies from the budget of the MoA creates a risk of a “deadweight effect”, i.e. a situation where the beneficiaries would invest even without public financial aid.
In response to the COVID-19 pandemic, in 2020 and 2021, the MoA launched a programme to support agricultural processors called AGRICOVID FOODS. These were exceptional subsidies aimed at mitigating the impact of the closure of schools and catering services or increased demands for emergency supplies, etc. The MoA earmarked funds amounting to CZK 3 billion for this type of financial aid. Of these, however, CZK 206 million, i.e. about 7%, were spent.
European subsidies
Micro, small and medium-sized enterprises were interested in one of four operations, namely in the support of investments which was originally intended for them. However, in 2020, the MoA allowed large enterprises to benefit from this subsidy as well, thus they received an additional source of financial aid for investments. At the same time, the MoA increased the amount of the maximum subsidy from the original CZK 12 million to CZK 37.5 million. This is where the SAO sees the risk that the funds earmarked for this subsidy will be used up by large enterprises.
Also, in the case of another investment operation, designed to support the development of new products and technologies, the MoA mainly favoured large projects. The conditions were set in such a manner, that they enabled expenditures on cooperation with a research institution — a key element of the operation — to account for only a minimum percentage of the expenditure for large and financially significant projects. This way, the MoA created, above all, an additional subsidy option to support investments for large processing companies with financially significant projects. By mid-May 2022, the SAIF had paid more than CZK 2 billion to applicants under this operation. Of these, 97.5% were used for investments and about 2.5% for cooperation with research institutions. Most of the funding from the grants was used by the beneficiaries for the acquisition of machinery, the purchase of technology and the related construction works. Out of 51 projects, 37 projects were associated with large enterprises with subsidies amounting to almost CZK 1.6 billion. Micro, small and medium-sized enterprises carried out 14 projects and received aid amounting to almost CZK 485 million.
Communication Department
Supreme Audit Office