Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


ANNEX A

1. Is it true that the United Kingdom fleet requires investment of $2,222 million over the next 5 years ($1,759 million newbuild, and $463 million for second-hand ships)?

  We understand this estimate to be a projection of the average net investment by the British industry in recent years. The gross investment trend (i.e., not subtracting the revenue from ship sales) would imply a figure nearer $4 billion. Although the figures look large, when the value of new large and sophisticated ships (e.g., a cruise ship—$300 million, or a containership—$100-200 million) is taken into account, it is clearly not a generous assessment. Leaving aside smaller ships, this could be equivalent to say 4 cruise or cruise-ferry ships and 4 large containerships.

  We believe that—if the objective is to renew the fleet rather than perpetuate the current decline (in numbers and age-profile)—this estimate is a considerable understatement. Since the average age of the UK fleet has been constantly deteriorating since 1980 (it now lies at about 18 years compared to the world average of around 14 and the normal life expectancy of a ship of about 25 years), if the UK fleet is to continue sensibly into the medium and long term future, significantly greater investment will be required in practice. If the objective is to expand the size of the fleet, clearly the investment requirement would be even greater. Indeed, the true requirement could then be in the order of $5 billion net.

2. Is it true shipping companies find that it is difficult to gain access to capital? Would a Government "guarantee of loans" assist? Should the Enterprise Investment Scheme be extended?

  There are several questions here:

    —  Access to capital. In our judgement, responsible and established shipping companies do not find it difficult to gain access to capital from banks. The difficulty lies in achieving a sufficient rate of return to enable the companies to service the cost of that capital and to renew/expand their fleet. Shipping operates in a highly competitive international market and, as such, provokes caution in investors. The degree of risk is, however, highly dependent on the particular sector in which the shipping company is operating and on an assessment of the position/ability/opportunities of the particular shipping company or venture. By and large, British shipping companies have moved out of those sectors where the risk is highest and the returns lowest, no doubt in response to competitive pressures in the trade and, in some cases, to investor pressures. We have, for example, now little or no significant representation in deep-sea dry bulk operations.

    —  Government "guarantee of loans". A guarantee scheme already exists for newbuildings in the Home Credit Guarantee scheme, which is driven essentially by national shipbuilding considerations. The UK scheme parallels similar arrangements in other shipbuilding countries and takes its nature and levels from an OECD agreement. The UK scheme is available to foreign carriers placing newbuilding business in UK shipyards and, similarly, British shipping companies can benefit from such credit schemes abroad.

    However, in recent years, the conditions have by and large not been favourable compared to current market interest rates. This is, we understand, currently under review. Moreover, the scheme is not available for second-hand investments, unless a major conversion is involved.

    Finally, there has been no great call in the UK shipping industry for a system of loan guarantees. Nor would one appear to offer any great value for the future.

    —  Enterprise Investment Scheme. Neither the EIS nor its predecessor (the BES) have had the potential in themselves to stimulate a substantial increase in investment or renewal in the British shipping industry. They were pitched at a completely different level than the "limited partnership" schemes in other European countries (including Denmark, Germany, Netherlands and Norway). As such, from an overall view, the EIS has not proved, and is unlikely to prove a very useful mechanism in shipping generally. On the other hand, for those companies which have expressed an interest in it (and a number of shipping ventures were launched under BES), there is a good case for making the current scheme more shipping-friendly, by increasing the level of relief and by allowing ship-chartering companies to take in ships on bareboat-charter within the scheme.

3. Will the changes you suggest to the SmarT scheme, and to the tax and National Insurance regimes, really be enough to raise the number of cadets to the target of 1,200? What else can be done to attract young people into the industry?

  The industry's training and employment proposals cannot be seen in isolation from the fiscal proposals. The ability of the industry to participate positively in training will in practice be heavily influenced by the Government's overall response on the key issues relating to the investment and employment climate in the UK. Unless a sufficient core package is adopted to improve the investment and employment climate, the industry's response to the promotion of training and other important proposals will be low-key.

  The White Paper's recommendations fall short of the industry's joint proposals in a number of areas:

    —  there is no increase in the proportion of training assistance compared to overall cost to the shipowner;

    —  the White Paper rejects, at least for the time being, the proposal to extend the existing seafarers' income tax alleviation to all seafarers including those in near-coastal trades; and

    —  it is negative also on the National Insurance proposal, even—at least for the time being—on the proposal for voluntary payments of Class 1 contributions, which would actually increase Treasury revenues.

  On the other hand, we welcome:

    —  the proposed increase in the overall budget available for training assistance;

    —  the potential that lies in the proposal for a maritime training trust;

    —  the greater flexibility shown in regard to the nationality of ships and of officers supervising ships for training; and

    —  the willingness to provide support for graduate training programmes and enhanced rating training arrangements.

  However, the key factor in determining numbers of British seafarers in training and in employment over the years has been the size of the fleet and that will only be underpinned by the fiscal proposals, particularly the tonnage-based tax regime. In order to strengthen its impact on employment, the industry has proposed a direct link to training, in the form of the "minimum training commitment" which we described in our oral evidence.

  We believe that a combination of the benefit arising from the tonnage-based tax regime and the present training and employment proposals (with only minor adjustment, as indicated in our written evidence) would be sufficient to generate confidence in the industry, as a direct result of the manifestation of the Government's commitment to this industry. That would have an immediate impact in terms of ships operated from this country and seafarers employed on those ships and would set the industry well on the way to rebuilding its recruitment numbers towards the target of 1,200-1,300 new cadets each year, which has been identified by two Government-sponsored studies. It would also improve prospects for rating recruitment.

  Certainly, the industry is committed to playing its full part in achieving that target, if a full package of measures is introduced, through increased promotional activity within the Merchant Navy Training Board and through pushing a seafaring career more strongly. In addition, the industry has given an undertaking to make every effort to increase recruitment by 25 per cent per year until the deficit is restored. This would mean that the target could be reached within four years.

  However, there are issues relating to employment costs which we believe the Government should consider further in the continuing development of the White Paper proposals. These include the points mentioned above concerning: the Crew Relief Costs scheme, National Insurance contributions, and the Foreign Earnings Deductions for Seafarers.

11 February 1999


 
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