Select Committee on European Communities Twenty-Third Report


Letter from Lord Tordoff 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.

  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[2]. 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 ten 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 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 per cent[3], 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[4] countries, currently claims about 25 per cent of the world shipbuilding market[5]. Shipbuilding in the European Union is concentrated mostly in high technology, high value vessels involving specialised design and fitting out work[6]. 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 Wolff)[7]. 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)[8]. 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 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[9]. 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.


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[10]. 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[11].

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 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-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 pricing. Back

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

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

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

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

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

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

9   British Maritime Technology Ltd. Back

10   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

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

previous page contents

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1998