Select Committee on European Communities Report


Letter from John Battle MP, Minister of State for Science, Energy and Industry, Department of Trade and Industry

  Thank you for your letter of 25 June[28] in which you highlighted the Select Committee's concerns about the new EU shipbuilding aids framework and sought the Department's response to the Committee's Report on Aid to Shipbuilding.

  My letter of 3 June[29] did give a detailed response to your concerns and the Committee's conclusions. However, I do recognise your concerns about removing operating aid before the implementation of the OECD Shipbuilding Agreement and I am therefore pleased to explain again our approach to this and other issues covered in the Select Committee's recommendations and conclusions.


  I can well understand that you highlight the real concerns about the effectiveness of operating aid and external unfair competition. This was at the heart of the debate on the new EU approach to shipbuilding and shipbuilding subsidies for us and the rest of the EU. It was the key area of concern for Member States and was rightly the subject of lengthy and exhaustive discussion in the EU negotiation. We believe that the final agreement, which was supported by a clear majority of Member States and, more importantly, by all those with major shipbuilding industries, struck the right balance. On the one hand it will end operating aid after two years while refocusing other support towards more effective ways of improving the efficiency and competitiveness of the industry and, on the other hand, it will provide for a review of unfair trade and allow further time to pursue the implementation of the OECD Agreement. We are firmly of the view that the new arrangement does indeed offer a very positive and comprehensive response to the concerns on ending operating aid and external unfair trade and provides a much enhanced basis for the shipbuilding industry to meet the competitive challenges of the future.

  At the core of the debate was the continued effectiveness of operating aid as the best means of helping the industry to improve its competitiveness and to compete against external unfair competition. We and a majority in the EU took the view that it no longer was and that a new approach to improving the competitiveness of the shipbuilding industry was needed. Let me run over once more our reasons for believing that operating aid has run its course. First, even after over 25 years of operating aid it has not and is not improving the competitiveness of EU yards as we continue to see a significant cost/price gap between EU and third country yards. It may even be acting as a constraint on improving the efficiency of EU yards as it may cushion them from taking necessary steps to enhance their performance. More particularly the main competition now faced by UK yards is from within the EU and not from third countries, so operating aid is less and less relevant to today's market. At the same time it is the operating aid that creates the most damaging trade distortions and allegations of abuse within the EU for UK yards. We continue to believe that this represents an overwhelming case for the removal of operating aid and that the new aid regime offers the best framework in which to do this. I would remind you that the SSA support this approach.

  At the same time the new approach does provide additional safeguards against external unfair competition such as from South Korea. The new Regulation contains a review clause which provides for a regular review of the market situation by the Commission and allows the Commission to propose measures to the Council in cases where it is established that European shipyards are being caused injury by anti-competitive practices. We also have more time to pursue our preferred approach for tackling external unfair competition, ie the OECD Shipbuilding Agreement. I am very disappointed that we have still not yet been able to implement that Agreement but we are working strenuously to persuade the US to ratify this in Congress, though there are clear difficulties in achieving this. We and the European Commission are therefore exploring alternative ways of implementing the Agreement. Our objective is to secure the implementation of the main terms of the Agreement as soon as possible.

  I would add that I believe that the financial crisis in South Korea opens up a real opportunity to induce the Korean shipbuilding industry to operate on a more market-orientated basis. The IMF support package contains tough measures to reform South Korea's financial and corporate sectors and it is these which have underpinned the Korean shipyards' capacity expansion on a non-market basis.

  Our comments on the Committee's remaining conclusions are as follows:


  The industry has faced challenging times in recent years and will no doubt continue to do so in the years ahead. Against that background, I strongly believe that the new Regulation offers UK yards a much better platform for the industry to meet those challenges and compete worldwide in future. As well as offering a sound framework for improving the long-term competitiveness of the UK shipyards, the new Regulation will also help ensure fairer competition within the EU—where the main competition to our yards lies—by removing trade distortions which have hitherto damaged UK yards' interests. Furthermore I have recently set up a Shipbuilding Forum, in partnership with the industry, which aims to help UK shipbuilders gain a larger slice of the EU market. The Forum will help the industry to build on its existing strengths and take it into the 21st century.


  The onus is on the management to carry out actions necessary to improve the competitiveness of yards, such as restructuring. As I have said, the aim of the new Regulation is to improve the competitiveness of the industry and I am sure that the new regime provides a much better basis for industrial co-operation across the EU, whether between yards or between yards, suppliers and owners. The removal of operating aid will also encourage this process by removing uneconomic yards. I would add that the Commission is already supporting industrial co-operation in the industry through the Maritime Industries Forum, which the Commission estalished in 1991.


  I am frankly puzzled by the Committee's statement (Appendix 5, paragraph 11) that "many of the research benefits are not disseminated to the industry itself". The mechanism for this certainly exists: once the knowledge has been created the members of the consortium that carried out the R&D have a duty to disseminate the results to the industry if they have not taken steps to exploit it themselves within three years. Concerning the Committee's comments, in the same paragraph, about the mechanisms of the Fourth and Fifth framework being too slow, we accept that this is a fair criticism. Indeed, at the instigation of the DTI the Commission is considering ways of simplifying the process and I hope this will pay dividends.


  We share your view that regional investment aid must not distort intra-Community competition and that is why we supported the lower aid ceilings that were agreed.


  As I said in my previous letter, 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.


  No decisions have yet been taken. Although the Comprehensive Spending Review is now complete decisions on how to allocate funds within the DTI have still to be taken.

  Framework to bring together all the parties involved in the industry to exchange views and co-ordinate policy.

  We are in fact already working across a number of departments with the industry. The Department was the catalyst for the Tri-Partite Agreement established three years ago between the Chamber of Shipping, the Shipbuilders and Shiprepairers Association (SSA) and the British Marine Equipment Council. In this connection we staged, in co-operation with these partners, a successful European competitiveness conference during the EU Presidency to examine ways of improving the competitiveness of the industry.

  Furthermore, and as I mentioned earlier, I have recently set up a Shipbuilding Forum which will build upon the Tri-Partite Agreement by drawing in other social partners, namely the Confederation of Shipbuilding and Engineering Unions, the Engineering and Marine Training Authority and the non-SSA yards. The Forum's objective is to increase UK yards' competitiveness so as to boost the UK's share of EU ship purchases. The Forum will consider and make recommendations on the following four key areas: the current market situation, including regulatory issues; the relationship between purchasers, shipyards and suppliers; employment and training; and competitiveness. These areas will be considered in workshops, which other interested government departments (including the Ministry of Defence) will also attend, over the coming months and I aim to have recommendations ready by the end of the year.

27 July 1998

28   Printed on page 30-31. Back

29   Printed on page 29-30. Back

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