October 20, 2004

EC demands shipyard subsidies be repaid

The European Commission is demanding that shipyards in Spain, Germany and Greece repay what the EC deems were illegal subsidies by their national governments. The yards are Izar, Kvaerner Warnow Werft and Hellenic Shipyards. In the case of Hellenic Shipyards, not only must subsidies be repaid but "certain illegal provisions must be repealed. "

IZAR

The Izar decision concerns capital injections of Euros 1,477 million provided in 2000 to 2002 from the State holding company Sociedad Estatal de Participaciones Industriales (SEPI) to IZAR, the owner of the public Spanish shipyards.

The Commission has established that out of this amount Euros 556 million has been used to cover losses and to provide other forms of support to IZAR's commercial shipbuildingactivities. The rest of the capital was used to cover social costs and other costs linked to past and recent military activities of IZAR and its predecessor Bazan. Funds for military activities are not covered by the European Union's state aid rules. But the Euros 556 million aid provided for IZAR's non-military activities is not in line with the rules and the Commission, therefore, concludes that this amount has to be recovered from IZAR.

A statement from the Commission notes that in 1997 the Commission and the European Council approved restructuring aid to the public Spanish shipyards amounting to Euros 1,380 million on the condition that no further such aid could be provided. Including aid approved in 1995 the total restructuring aid package amounted to Euros 1,900 million.

The restructuring period lasted from 1994 to 1998, after which the shipyards should have become profitable. This did not happen, and the shipyards have continued to generate losses.

In 1999 the Commission decided that Euros 111 million provided in 1998 to the public Spanish shipyards could not be approved and had to be recovered. The European Court of Justice upheld the decision. In May 2004, the Commission also decided that further aid of Euros 308 million provided to IZAR's civil shipyards in 2000 could not be authorised and had to be recovered.

Hellenic Shipyards

In a separate decision, the European Commission concluded that the Greek authorities must repeal certain legal provisions, that allow the State to cover future retirement costs at Hellenic shipyards and to relieve Hellenic Shipyards from any tax or other duties with respect to reserves and amounts for the increase of share capital, which are used to offset losses of previous years.

These measures are incompatible with EU state aid rules as they constitute operating aid. The Greek authorities have been requested to repeal both measures and to recover any aid that may have been granted.

Kvaerner Warnow Werft

In another decision, the Commission has also decided that the German government must recover Euros 13.3 million from Kvaerner Warnow Werft.

After the reunification of Germany, the East German shipyards received large amounts of state aid for their restructuring (between 1993 and 1995).

The Commission has examined allegations that the company would have received new subsidies and after a careful examination concluded that it had indeed received Euros 13.3 million in illegal aid.

Background on Shipbuilding policy

As a final comment the Commission emphasizes that the European Community has a coherent policy in support of EU shipyards, which face unfair competition from Korean shipyards. This policy consists of four main elements.

WTO procedure. The Commission has launched a dispute settlement procedure in the WTO against Korea challenging restructuring aid and export aid and the price depression these measures have caused. This procedure is currently ongoing in Geneva.

Temporary defensive mechanism. The Commission in 2001 proposed a temporary defensive aid to help EU shipyards face the unfair Korean competition in market segments such as product-, chemical- and LNG-tankers and containerships. This aid, of up to 6 percent of the contract value per ship, has been available since October 2002 and the provision was recently extended until March 31, 2005. *

InterSHIP is a Euro 38 million research project, financed jointly by Euroyards and the European Commission and designed to improve the competitiveness of European cruise, ferry and ro-pax shipbuilders, to develop safer and more environmentally friendly ships considering their entire life cycle, and to achieve a drastic reduction of building and development costs as well as time-to-market of innovative solutions.

"LeaderSHIP 2015" is a Commission initiative aiming at strengthening the competitiveness of EC shipyards. The Leadership 2015 Group has identified a number of priorities in the field of maritime industries: strengthening R&D and innovation, establishing a level playing field at world level, developing financial and guarantee schemes, ensuring the protection of intellectual property rights, and providing access to a skilled workforce. Implementation of these priorities will be subject to particularly close scrutiny. In both cases, this will mean implementing the guidelines proposed by the Commission and adopted by the Council on the basis of the recommendation of the High-Level groups.

One if the first results of LeaderSHIP is support for innovation, and was included in a new Framework on state aid to shipbuilding, which has been applicable since January 1, 2004 and which allows up to 20 percent innovation aid for shipbuilding for the innovative parts of the project. Shipbuilding is the only industrial sector in the EU that has access to such aid. and naval shipbuilding, and ship repair.

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