Letter from Lord Tordoff to John Battle
MP, Minister for Science, Energy and Industry, Department of Trade
Thank you for your letter, dated 2 April, on
the above proposal. As you are aware, this proposal has been the
subject of an enquiry by Sub-Committee B which has received both
written and oral evidence. Copies of that evidence are attached.
In your letter you apologise for the "misunderstanding"
that arose over the Government's timetable for reaching a Common
Position on the proposal. The Committee finds your statement that
you "appreciate it would have been more helpful if we notified
you direct of our revised timetable" deeply unsatisfactory.
We do not accept that the lack of notification of the change of
timetable was a "misunderstanding". We find that, in
spite of assurance to the contrary, there appears to be a continuing
attitude towards Parliamentary scrutiny, which at best can be
described as careless, and at worst as cavalier.
This lack of information from you has led Sub-Committee
B to cut short an enquiry that we believe is of importance. We
therefore seek your assurance that, in the future, if the timetable
of any proposal under scrutiny changes significantly from that
stated in the Explanatory Memorandum, we will receive immediate
notification to that effect. We sincerely hope that this will
prevent any similar occurrence in the future.
Because of the reduced timescale, the Committee
has been unable to take evidence in the depth it intended. We
have, therefore, formed our opinion on the limited evidence we
The proposal is intended to restore normal competitive
conditions within the European Union shipbuilding industry in
line with the provisions contained in the 1994 OECD Shipbuilding
As proposed, the Council Regulation would:
(i) abolish contract-related aid after 31
(ii) permit measures to improve the competitive
position of the industry through capacity reductions or productivity
closure aid for facilities
ceasing to be engaged in shipbuilding for at least ten years without
investment aid for innovation
research and development
(iii) permit measures that would not distort
competition within the common market, namely:
regional investment aid;
There was general support among most of the
witnesses for the main thrust of the proposal although several
witnesses qualified this support. Three Quays Marine Services
Limited, however, thought the proposal would not reverse the "continuous
decline" in the shipbuilding industry in the European Union
(Q 163). The Korean Shipbuilders' Association feared that
it would "initiate a new round of escalation in shipyard
aid in the world's shipbuilding market". The Committee
supports the main aim of the proposal to improve the competitive
conditions of the European Union shipbuilding industry. We agree
that the measure will, in general terms, be of long-term benefit
to the shipbuilding industry. We do, however, have a number of
comments on several aspects of the proposal which we outline below.
The removal of contract-related aid
1. Contract-related aid, currently fixed at nine
has been the main form of direct state aid to European Union merchant
shipbuilders for many years. Again, most of the witnesses generally
welcomed the abolition of contract-related aid. Many of the witnesses
were of the opinion that subsidies in the long term are bad for
the shipbuilding industry. P&O suggested that the cyclical
nature of shipping has been exacerbated by aid in the past. British
Maritime Technology (BMT) suggested that the European Union shipbuilding
industry was capable of being competitive in the world market
without subsidies (Q 24). While the Committee welcomes
the removal of contract-related aid we share the concerns raised
by several witnesses (see paragraphs 17-20).
Future prospects for the industry
2. The European Union, together with other AWES
countries, currently claims about 25 per cent of the world shipbuilding
Shipbuilding in the European Union is concentrated mostly in high
technology, high value vessels involving specialised design and
fitting out work.
The Chamber of Shipping characterised the strengths of European
yards as having "virtually total domination" in passenger
ships, and advantages in off-shore oil-related vessels; specialised
vessels, where the European Union is a design and technology leader;
and fast ferries. Such vessels are not generally suitable for
series production, unlike the tankers and bulk carriers that are
the main products of many Asian yards.
3. The European Union ship repair and conversion
industry also concentrates successfully on work involving specialised
design and innovative technology (A&P Group). Shipbuilding
and repair has therefore survived in the European Union by identifying
and exploiting sectors of the market in which technical skills
and flexibility can be employed to greatest advantage.
4. Nevertheless, the European Union industry
is fragmented compared with its Asian competitors (H Clarkson)
and it suffers lower productivity (Shipbuilders and Shiprepairers
Associates). BMT took the view that the European Union shipbuilding
industry is in need of further rationalisation and its supply
chains need to be more effectively organised on a European Union-wide
basis. The Confederation of Shipbuilding and Engineering Unions
(CSEU) and others were doubtful whether the skill base, upon which
its present competitive position depends, can be maintained as
the remaining labour force ages, and recruitment and training
continue to be neglected.
5. Several witnesses doubted whether the European
Union industry could maintain its present market share in the
future. Fincantieri, H Clarkson and P&O shared the view that
Asian competition is and will be increasingly aimed at niche markets
with a high technology content. Three Quays argued that the transfer
of technology was so quick that this situation could materialise
in a matter of years (Q 153). Several witnesses disagreed
over the extent to which the cruise ship market would continue
to thrive - International Maritime Industries Forum (IMIF) considered
that the boom would not continue for much longer but P&O saw
brighter prospects. Several witnesses noted that shipbuilding
capacity in China is currently undergoing rapid expansion. Chinese
yards have already demonstrated the ability to acquire the skills
necessary to construct the more technically complex types of vessels,
although IMIF raised doubts as to the true skill level in China.
6. In addition, several witnesses noted that
the recent currency fluctuations in South Korea may give advantages
to South Korean shipyards who have recently won orders for specialised
vessels originally destined for European Union yards (Fincantieri,
H Clarkson). There was also concern that South Korean yards are
quoting new-building prices that barely cover materials cost,
and concern that international economic support, in particular
the proposed IMF packages, to South Korea will inevitably lead
to further distortion of the shipbuilding market (Harland and
The Committee endorses the Commission's concerns in this regard.
7. The Committee accepts that the prospects
for the European shipbuilding lie in the niche markets that the
industry already exploits. Any aid regime must therefore be based
on this understanding of the market and should provide a platform
for the industry to compete world wide in the future. The Committee
recommends that the Government, in forthcoming discussions, discuss
ways to encourage restructuring of the industry on a European-wide
basis. Only by working together can the European Union shipbuilding
industry compete world wide.
Aid for research and development (R&D)
8. Several witnesses raised concerns over R&D
funding for the shipbuilding industry. CSEU were disappointed
that the Regulation did not address the need for structural changes
to utilise R&D on a European-wide basis: "There has to
be some mechanism where funds are fed into R&D and I believe
that it has to be on a European dimension". It was "crazy"
for the European Community to give R&D aid on competing projects
within the European Union (Q 90). BMT pointed out that the
research situation varies across Member States with some national
or local governments providing significant top-up funding for
research (Q 32).
Three Quays argued that while R&D funding was available it
was "a very long and drawn-out procedure" which made
it difficult, if not impossible, to tie the benefit of the research
grant to the orders coming in (Q 165).
9. The CSEU also called for a centralised R&D
innovative body to make structural changes. BMT considered that,
while there was a high level of technical expertise in the European
Union, there was no structured programme to make technological
knowledge generally available. Similarly, the Shipbuilders and
Shiprepairers Association (SSA) argued that the appropriate level
of technology exists in the European Union but it needs to be
10. The Committee welcomes the inclusion of
investment aid for innovation and aid for R&D as recognition
of its importance for the future of the shipbuilding industry.
However, we consider that the potential benefits to be gained
from these measures are likely to be diminished without the appropriate
co-ordination mechanisms. R&D aid is likely to be most effective
when it is directed towards specific strategic goals, when it
encourages strategic partnerships between yards, and when its
results are disseminated to the European shipbuilding industry
as a whole. We share the concerns of some witnesses that the structure
of R&D funding under the proposed Regulation will not necessarily
be sufficient to sustain the industry in the longer term.
11. We are concerned also that a proportion
of R&D money in the shipbuilding industry is wasted because
it is not properly directed.
The Committee believes that many of the research benefits are
not disseminated to the industry itself. For these reasons, we
believe that such grants should be geared towards R&D which
aims to benefit the European Community as a whole as well as the
individual research organisation. Furthermore, we concur with
the views expressed that the mechanisms of the current and proposed
frameworks for research funding, the Fourth and Fifth Framework
Programmes, are far too slow for research to be relevant. To be
useful, research must be available on a timely basis.
12. The potential distortions arising from the
regional aid provisions were raised by several witnesses. A&P
Group asserted that the availability of aid in one Member State
should not be allowed to distort commercial conditions and argued
that the United Kingdom Government should provide funds on a similar
level to other Member States. The CSEU echoed this call and gave
examples of the rig-building industry suffering competitively
because regional aid was denied. BMT however argued that all aid,
including regional aid, is damaging as it removes incentives for
the industry to exploit its competitiveness.
13. We are concerned that the continuing use
of regional aid in shipbuilding may continue to distort intra-Community
competition. We accept that the effect of regional aid on shipyards
can be substantial, particularly in terms of employment. We also
recognise that regional aid could be used to improve the competitive
position of the yard without giving it direct support and is therefore
one of the ways in which "cheating" can take place.
We therefore recommend that the Government act to ensure that
regional aid does not distort competition within the Community.
14. Articles 10 and 11 of the proposal propose
strict monitoring arrangements for aid. Several witnesses expressed
concern that these arrangements were adhered to. A&P Group
stated that the arrangements needed to be subject to close attention.
The Commission needs to be vigilant in preventing the mis-application
or abuse of the new regime. SSA was concerned that the Commission
should be given adequate powers to monitor and control the new
regime. Harland and Wolff argued that the new measures should
be applied consistently within the different Member States and
that it should not be left to individual countries to determine
the extent of their application. Furthermore, Fincantieri called
for monitoring to ensure that competition was not distorted before
the final removal of contract-related aid.
15. The Committee concurs with the views of
these witnesses that it is essential that measures for monitoring
and policing the proposed Regulation are strong and rigorously
enforced. We urge the Government to take action to ensure that
the measures in the proposal are sufficiently stringent to prevent
the mis-application of aid. We also urge the Commission to be
tough, and to be seen to be tough, in implementing these provisions
with appropriate penalties.
16. Vosper Thornycroft argued that warshipbuilders
turning to commercial shipbuilding should have the same access
to support as commercial yards. Contract-related aid has not been
available to warship builders under present and past Regulations
and they have been prevented, in consequence, from diversifying
into the construction of technically advanced merchant ships in
the face of competition from designated merchant ship yards. Fincantieri
considered it prudent to enhance cross-fertilisation and dual
technologies between naval and merchant shipbuilding. We consider
that appropriate technology available in warshipyards should be
available to commercial shipbuilders and, as relevant, vice versa.
We also consider that aid should be available on even terms to
warshipyards diversifying into commercial shipbuilding.
The OECD Agreement
17. The proposed Regulation is a response to
the continued failure of the United States to ratify the 1994
OECD Shipbuilding Agreement.
There was some difference of opinion as to what action the European
Community should take in the face of the continued non-ratification
of the 1994 Agreement. SSA argued that the while the OECD Agreement
was not ratified, Europe needs a framework for its own industry.
Others' support for the proposal was tempered. The Chamber of
Shipping argued that there is a distinct possibility that the
measures will only be successful if OECD ratification occurs.
Fincantieri stated that without the OECD Agreement, the abolition
of state aid in the European Union would "be the equivalent
to unilateral disarmament". Three Quays argued that "unless
you are prepared to subsidise your industry directly or indirectly
in the manner the Far East has done, you will not survive"
(Q 158). We agree with most witnesses that the new regime
in the European Union should not divert attention away from pressing
for ratification of the OECD Agreement.
18. There was also a degree of scepticism about
the likelihood of achieving competitive conditions even if the
OECD Agreement does come into force. This scepticism arose from
two concerns. First, as previously mentioned, several witnesses
predicted the continuing rise of China as a shipbuilding nation
in the next decade and China is not a signatory to the OECD Agreement.
Secondly, although some nations may sign up to the OECD Agreement,
some witnesses feared that, despite this, the continuing use of
indirect subsidies would hamper the creation of a truly competitive
industry. The CSEU argued that Europe cannot compete because of
market distortions, especially credit facilities (Q 91).
H Clarkson argued that the Agreement would be of limited importance
because of the prevalence of indirect subsidies. The Japan Ship
Centre however argued that the Japanese shipbuilding industry
does not receive any aid inconsistent with the terms of the OECD
Agreement and positively supported principles of the OECD Agreement.
The Korean Shipbuilders' Association stated that they would have
to remove several types of aid when the OECD agreement is ratified.
19. We share the concern expressed by several
witnesses that by removing contract-related aid in the European
Union we are putting its shipbuilding industry at a disadvantage
worldwide. While the nine per cent contract-related aid is not
justifiable, we consider it may be better to take a more pragmatic
approach while the OECD agreement is awaiting ratification in
the United States. For this reason, and until the Agreement is
ratified by the United States, we would not support the United
Kingdom Government's position of pushing for the date for removal
of contract related aid to be brought forward. We believe that
the present aid arrangements should remain in place until the
new aid regime is operational and seen to be effective. Further,
we believe that following ratification of the proposed Directive,
all Member States should implement the new regime simultaneously
thereby preventing instability in the European Union shipbuilding
20. We recognise that in the absence of ratification
of the Agreement, the European Union should act to improve the
competitive conditions within its shipbuilding industry. However,
we consider the OECD agreement preferable to the proposed Council
Regulation which commits the European Community to unilateral
action which may, in the interim, disadvantage its shipbuilders.
We are very concerned that the proposed Regulation would do nothing
to assist the competitiveness of European Union shipbuilders vis-à-vis
their worldwide counterparts.
1 May 1998
2 OECD Agreement Respecting Normal Competitive Conditions
in the Commercial Shipbuilding and Repair Industry, 21 December
1994. This excludes those conditions concerned with injurious
Nine per cent of the contract value before aid at the time of
signing the contract. Back
The Association of West European Shipbuilders. This includes all
Member States of the European Union and Poland and Norway. Back
By compensated gross tonnage of ships completed per annum. Lloyds
Maritime Information Service. Back
The Spanish shipbuilding industry is directed towards building
less sophisticated series production competing more directly with
the Far East (P&O). Back
This however was not the view of Lloyds Register who expected
that the economic crisis might adversely affect yards in that
There is currently no standard method by which contract aid is
awarded by Member States. Back
British Maritime Technology Ltd. Back
The Final Act of the 1994 OECD Agreement has been signed by the
Governments of South Korea, Japan, Norway, USA and the Commission
of the European Communities. It will apply once ratified by the
These include Government subsidies for R&D and home-build