Select Committee on European Communities Report


17.  PROPOSAL FOR A COUNCIL REGULATION ESTABLISHING NEW RULES ON AID TO SHIPBUILDING (11165/97)

Letter from Lord Tordoff, Chairman of the Committee, to John Battle MP, Minister for Science, Energy and Industry, Department of Trade and Industry

  As you may be aware, Sub-Committee B is currently conducting an enquiry into the above proposal. At an informal briefing meeting with officials from the Department of Trade and Industry on 19 March, the Committee became aware that the Government now hope to reach political agreement on the proposal at the Industry Council in May.

  As I am sure you will appreciate this puts the Committee in a very difficult position. On the one hand, the Committee does not wish to obstruct the UK Government by maintaining the scrutiny reserve on a matter which they wish to see resolved while they hold the Presidency of the European Union. On the other hand, we believe that the subject matter is a serious one which qualifies for a significant enquiry which it would be impossible to complete before the 7 May Industry Council meeting.

  The chronology in this context may help to explain the origin of our problem. Your Explanatory Memorandum (EM) of 4 November states that the proposals were "expected to be presented to the next meeting of the Industry Council on 13 November" (1997). The Committee has received no other official communication from you on the timetable for agreeing this proposal although your EM of 14 November 1997 on "Commission Communication—Towards a new shipbuilding policy" spoke of decisions being "deferred to a later Council".

  The Select Committee took the decision to conduct the enquiry in December 1997 and your Department was so advised in January 1998. The enquiry actually started in February 1998. I accept that a theoretical period December 1997 to May 1998 would normally have provided sufficient time for an enquiry. However, when the decision was taken in December 1997 to conduct an enquiry, we had received no indication that the UK Government was pressing for a decision at Council in May 1998. Rather, we had every indication that the timetable was for a decision in November 1998 and other apparently more urgent matters were given priority.

  In February 1998, just as our enquiry was starting, we elicited an indication from your Department that the Government were intending to take the proposal to the May 1998 Council, but that indication was coupled with doubt as to whether Member States would then reach political agreement.

  Had the Committee received an indication in January or even February 1998 (ie, early on in the Presidency), that the Government took the position that it now does, we might well have reconsidered conducting the enquiry. In fact, it was not until around 12 March 1998 that indication was received that the Government were pushing for political agreement on 7 May 1998 and that there was a good chance of achieving this. This was confirmed by Mrs Ann Wilks during the informal briefing of 19 March.

  As I have said, this puts the Committee in a dilemma.

  I should much appreciate first, your comments regarding the total lack of official and the late unofficial notification of revised timetable; secondly, your advice on what is the present timetable; and thirdly, what is the likelihood of reaching political agreement on 7 May 1998? My Committee can then decide on whether to drop the whole enquiry now or take very limited evidence with the aim of lifting the scrutiny reserve by way of a letter before 7 May 1998 or continue with a full enquiry, thereby maintaining the scrutiny reserve beyond 7 May 1998.

27 March 1998

Letter from John Battle MP, Minister of State for Science, Energy and Industry, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 27 March, concerning Sub-Committee B's enquiry into the Commission's proposal for a new EU shipbuilding regime.

  I am sorry about the misunderstanding that arose over the Government's timetable for reaching a Common Position on the proposal. However, as you will know, the pace of any EU negotiation is not in the gift of any single member state, even when that country holds the Presidency and the negotiations on the new EU shipbuilding regime are no exception. It emerged last December that a majority of member states wanted to reach a political agreement on the Commission proposals at the Industry Council in May. My Department fully supported this approach, as the House of Common's Select Committee on European Legislation made clear in their Ninth Report (paragraph 2.12) of 3 December 1997. I appreciate it would have been more helpful if we notified you direct of our revised timetable. I am sorry we did not do this.

  The Government believes that, in the absence of the OECD Agreement, the Commission's contingency proposals will provide a good basis for developing a more viable UK shipbuilding industry as they will eliminate contract aid, a major source of market distortion and provide support measures for improving competitiveness similar to those enjoyed by other sectors of EU industry. We consider that there is a real prospect of success at the May Industry Council, but we assess the chances of success as much lower if the proposal were to be deferred to the November Council as the momentum of support for the Commission's proposals could easily have dissipated by then. It would, therefore, greatly help the UK Presidency's negotiating stance if your Committee could lift its scrutiny reserve before 7 May.

2 April 1998

Letter from Lord Tordoff, Chairman of the Committee, to John Battle MP, Minister for Science, Energy and Industry, Department of Trade and Industry

  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 (not printed).

  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 have received.

  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 Agreement.[7] As proposed the council Regulation would:

    (i)  abolish contract-related aid after 31 December 2000;

    (ii)  permit measures to improve the competitive position of the industry through capacity reductions or productivity increases, namely:

    —  closure aid for facilities ceasing to be engaged in shipbuilding for at least 10 years without review;

    —  restructuring aid;

    —  investment aid for innovation;

    —  research and development aid; and

    (iii)  permit measures that would not distort competition within the common market, namely:

    —  regional investment aid;

    —  environment protection aid.

  There were 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 (Q163). 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

  Contract-related aid, currently fixed at nine per cent[8], 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 (Q24). 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[9] countries, currently claims about 25 per cent of the world shipbuilding market[10]. Shipbuilding in the European Union is concentrated mostly in high technology, high value vessels involving specialised design and fitting out work[11]. 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 (Q153). 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 Wolff)[12]. 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 (Q90). BMT pointed out that the research situation varies across Member States with some national or local governments providing significant top-up funding for research (Q32)[13]. 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 (Q165).

  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 implemented.

  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[14]. 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.

Regional aid

  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.

Warshipbuilders

  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[15]. 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 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" (Q158). 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 (Q91). 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[16].

  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 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 market.

  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-a-vis their worldwide counterparts.

1 May 1998

Letter from John Battle MP, Minister of State for Science, Energy and Industry, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 1 May, notifying me of the support of Sub-Committee B for the Commission's proposal for a Council Regulation establishing new rules on aid to shipbuilding.

  Firstly, please be assured that we do take our scrutiny obligations seriously and we are not complacent about our performance. Since 1 May, we have taken a number of steps to tighten up our procedures but some oversights do still unfortunately occur from time to time. We therefore continue to keep procedures under review and we are preparing comprehensive internal guidance on handling of scrutiny business which should help us to handle the process in the most effective way.

  I am most grateful to the Committee for lifting its Scrutiny Reserve in advance of 7 May Industry Council. The Committee's action cleared the way for the considerable success which the UK Presidency achieved at that Council where the Regulation was adopted (by qualified majority). As envisaged, EU ministers agreed to end operating aid from the end of 2000 and to re-focus remaining forms of support to aid competitiveness and innovation in the European shipbuilding and ship repair industry. The new regime also opens regional aid to the Industry, places a strict limit on restructuring aid and introduces strengthened monitoring provisions. It includes measures to address potential unfair pricing by external competitors, although these inevitably fall short of the injurious pricing conditions contained in the stalled 1994 OECD Agreement. The Regulation comes into force on 1 January 1999.

  We are aware of the concerns that you raised in your letter. We sought to address many of these in the written evidence we provided to the Committee. Nevertheless I thought it would be helpful if I summarised the Government's position.

The removal of contract-related aid

  The Government's firm view is that the replacement of operating aid by forms of support directed at competitiveness and innovation provides the best basis for securing a viable future for the industry. Operating aid may initially have helped ease the problems faced by the EU Industry over 30 years ago as it confronted the rapid expansion in shipbuilding in Japan and Korea. However it has not delivered a competitive Industry. From a UK perspective, operating aid can be damaging to our shipyards because of the opportunities it provides for some of our main EU competitors to pay higher subsidies, with harmful distortion of competition. Furthermore, we believe that contract-related subsidies too often simply compete against themselves because much of the competition faced by EU yards is within the EU. Nevertheless the continuation of contract-aid for a further two years after the new Regulation comes into force will allow those EU shipyards that are in competition with Asian and other non-EU yards the opportunity to adjust to the implications for their business of a more open market.

Future prospects for the industry

  The new regime will provide a much better EU framework for pursuing the EU and UK aims of promoting the competitiveness of the Industry. EU yards will have much more incentive to improve their performance, productivity and costs as they will be able to compete on a more market-orientated basis without the distortions caused by operating aid. However, while the Government can help get the best economic framework for industry and ensure that policies do not distort markets, the future prospects of the industry depend above all on its ability to win orders.

Aid for R&D

  We recognise the importance of R&D for the future of the Industry. The inclusion of aid for R&D in the Regulation places the shipbuilding industry on the same footing as other EU industries and the new aid for innovation, while it is specific to the Industry, will help shipyards bring innovative products and processes to the market. I hope that the Industry will build on this improved framework by bringing forward suitable innovative projects.

Regional aid for shipbuilding

  The new aid ceilings are 22.5 per cent in "A" regions (ie where GDP per head is less than 75 per cent of the average) and 12.5 per cent in "C" regions (ie industrial regions in decline), compared with general ceilings of 75 per cent and 30 per cent, respectively. We believe that the significant reduction in the level of regional aid we have negotiated, not without difficulty, will greatly reduce any distortion in competition. These low aid levels will help to ensure that investment decisions are based on strictly commercial considerations. In addition, prior notification and Commission approval is required for each project where the level of aid is over 100,000 ECU.

Monitoring

  We entirely share your view on the need for rigorous and strong monitoring and this was one of the key issues for us in the new regime. The new regime contains significantly more stringent monitoring provisions, such as on-site inspections by the Commission for restructuring aid.

Contract aid for warshipyards

  No discussions have yet been taken on this subject which is being considered in the context of the Comprehensive Spending Review.

The OECD Agreement

  The OECD Agreement remains the UK's and the EU's preferred approach for eliminating shipbuilding subsidies. The new EU subsidy regime is a contingency measure pending the implementation of the OECD Agreement. It goes a good way to meeting the key objectives of the OECD Agreement but we still need a mechanism for removing other countries' subsidies and combating injurious pricing and only the OECD Agreement can do that. The Commission and the UK will therefore continue to lobby the US vigorously to ratify the OECD Agreement.

3 June 1998

Letter from Lord Tordoff, Chairman of the Committee, to John Battle MP, Minister of State for Science, Energy and Industry, Department of Trade and Industry

  Thank you for your letter dated 3 June on Aid to Shipbuilding which was considered by Sub-Committee B this morning.

  Your letter reports on the outcome of the 7 May Industry Council and responds to the specific issues the Committee raised on the proposal. The Committee is, however, concerned that your response to the issue of the European Union unilaterally removing subsidies before the implementation of the OECD Agreement does not address the Committee's very real concerns.

  You will be aware that the Select Committee's Report on Aid to Shipbuilding was published on 29 May. We look forward to receiving your official response to that Report[17] in due course and hope that you can give a more detailed response to the concerns outlined above in that response.

25 June 1998



7   OECD Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry, 21 December 1994. This excludes those conditions concerned with injurious pricing. Back

8   Nine per cent of the contract value before aid at the time of signing the contract. Back

9   The Association of West European Shipbuilders. This includes all Member States of the European Union and Poland and Norway. Back

10   By compensated gross tonnage of ships completed per annum. Lloyds Maritime Information Service. Back

11   The Spanish shipbuilding industry is directed towards building less sophisticated series production competing more directly with the Far East (P&O). Back

12   This however was not the view of Lloyds Register who expected that the economic crisis might adversely affect yards in that country. Back

13   There is currently no standard method by which contract aid is awarded by Member States. Back

14   British Maritime Technology Ltd. Back

15   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 USA. Back

16   These include Government subsidies for R&D and home-build requirements. Back

17   The response is printed on p120. Back


 
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