Proposal for a COUNCIL DIRECTIVE amending Council Directive 90/684/EEC on aid to shipbuilding
Date: 1993-04-20
Institutions: European Commission
Subjects: OECD, State aid, application of EU law, competition, competitiveness, shipbuilding

COMMISSION OF THE EUROPEAN  COMMUNITIES 

COM(93)160  final 

Brussels,  20 ApriI  1993 

Proposal  for a 

COUNCIL DIRECTIVE 

ï§^ 

'^ 

amend i ng Counc iI D i rect i ve 90/684/EEC 

on aid to shipbuilding 

(presented by  the Commission) 

iftfr  ' 

~T,ïm 

Explanatory Memorandum 

introduction 

The  current  rules  for  state  aids  to  shipbuilding  are  laid  down  in  the 
Seventh  Directive  on  Aid  to  Shipbuilding  (90/684/EEC)  (as  amended  by 
Directive  92/68/EEC, providing  a special  derogation  for  the shipyards  in 
the  former  GDR), based  on  Article 92(3)(d)  and  113  of  the  EEC  Treaty, 
which  was  adopted  on  21 December  1990.  In accordance  with  Article 13 of 
the Directive  its period of validity expires on  31 December  1993. 

This  paper  briefly  reviews  the  existing  policy;  assesses  the  current 
market  situation;  and  sets out  the  Commission's  proposals  for  Community 
shipbuilding  aid  policy beyond  the end of  this year.  It  is proposed  that 
the Council  should  decide  that  the Directive  be  prolonged  for  a  further 
12 months,  le up until  31 December  1994. 

This  decision  is a  matter  falling  within  the  competence  of  the  Council 
although  responsibility  for  implementation will  lie both  with  the Member 
States and the Commission  (see section 2 below). 

2.  Existing Policy 

Although  the  size of  the  EC shipbuilding  industry  has  declined  over  the 
years, a competitive  industry  remains of  vital  interest  to  the  Community 
and  contributes  to  its economic  and  social  development.  The  Community's 
existing  shipbuilding  aid  policy,  as  presently  enshrined  in  the 
Directive,  was  Introduced  against  a  background  of  difficult  market 
conditions,  caused  by  a declining  demand  for  ships  and  a  rapid  increase 
in  shipbuilding  capacities,  particularly  In  the  Far East  (with 
competitors  benefiting  from  home  credit  schemes  and  domestic-build 
practices  to  offer  ships  at  below  cost-recovery  prices),  leading  to  a 
significant  imbalance between supply  and demand  and depressed  prices. The 
main aims of  the Directive have therefore been to: 

-  provide  a  defensive  instrument  against  unfair  competition  through 
Injurious  pricing,  since  no  effective  anti-dumping  instrument  is 
available given  that ships cannot  be regarded as  imported  in the normal 
sense ; 

-  thereby  maintain  a sufficient  level  of  Community  shipbuilding activity 
in  those  segments  whose  Community  yards  will  remain  competitive  under 
normal  market  conditions and encourage  the structural  adjustment  of the 
EC  shipbuilding  industry  towards  higher  value-added, specialised  ships 
In order  to ensure  the  Industry's  longer-term competitIveness; and 

-  provide,  in  accordance  with  the  aims  of  the  internal  market  a  level 
playing  field  so  that  intra-Community  competition  in  shipbuilding  is 
conducted on a fair and equitable basis. 

- ensure full  aid  transparency. 

-  2 -

The Directive provides  a Community  regulatory  framework  for  the granting 
of  aids by Member  States, on whom  notification and  reporting obligations 
are  imposed  In  order  that  the  Commission  can  effectively  monitor 
compliance with  the rules. 

In  the  Commission's  view,  the  policy  has  in general  been  effective  and 
largely  achieved  Its aims, safeguarding  Community  yards and enabling  the 
EC broadly  to maintain market  share while restructuring. A key element of 
the  policy  has  been  the  common  maximum  production  aid  celling  for 
shipbuilding  and  ship  conversion  set  annually  by  the  Commission  in 
accordance  with  the  Directive.  This  is  intended  to  allow  the  most 
competitive  Community  yards  to  maintain  their  activities  despite  the 
abnormal  world  market  conditions,  and  at  the  same  time  serves  to 
encourage  the  less  competitive  yards  to  undertake  the  necessary 
restructuring.  This  is  reinforced  by  the  Directive's  principle  of 
degressivlty  in  the  level  of  the  ceiling.  The ceiling,  which  was  28% in 
1987 has been progressively reduced  to 9% for 1993. 

Future Policy 

Decisions  on  future  policy  very  much  depend  on  an  assessment  of  the 
prevailing  state  of  the  market  and  future  prospects;  and  the  expected 
resumption  of  efforts  Inside  OECD  to  reach  a  multilateral  agreement  to 
phase out  all  obstacles  to normal  competition  in shipbuilding. These  two 
aspects are discussed  below. 

4.  Market  Situation 

After  some  signs  In  1991  that  the  shipbuilding  market  was  beginning  to 
recover  following  the  end  of  the  Gulf  crisis,  this  was  not  sustained 
during  1992  and  there  was  a marked  downward  trend  with  a  dip  in orders 
and  prices,  although  the  Community's  market  share  continued  to  hold  up 
pretty well  in the circumstances. 

According  to  data  available  to  the  Commission,  new  orders  worldwide 
totalled  8.904 mi 11 Ion  cgt,  down  25%  on  1991.  The  order  intake  by 
Community  yards  (including  the former GDR yards) was 1.821  million cgt, a 
decrease  of  16%.  This  however  represented  an  improvement  in  the  EC's 
market  share, up  to 20.5% of world orders compared  with  18.2% in 1991. 

An analysis of  the types of vessels ordered shows that  demand  in 1992 was 
due mostly  to the buoyancy of  the market  in oil  tankers and bulk  carriers 
' 
(which accounted  for 60% of orders worldwide). 

As  regards  the  state  of  the  order  books,  the  continuing  gap  between 
freight  rates  and  newbullding  prices  widened,  dampening  demand  for  the 
expected  necessary  renewal  of  the fleet. 

According  to  Commission  data,  the  worldwide  order  book  as  at  31.12.92 
stood  at  22.961  million  cgt,  down  11.5% on  1991  but  higher  than  during 
the  second  half  of  the  1980s.  The  order  book  for  Community  yards 
(including  the former GDR  yards) showed a decrease of nearly  16% compared 
with  the  previous  year  standing  at  5.177  million  cgt,  which  represented 
22.5% of  the world order  book  (down  1.2%  in 1991). 

3 -

1992  completions  worldwide  were  estimated  at  11.838  million  cgt,  an 
Increase of  2.7% on  the  1991  level  and  the  highest  level  since  1986. EC 
production  (including  the former GDR  yards) was 2.771  million cgt, a 4.5% 
increase  on  the  previous  year  and  the  highest  level  since  1985, 
representing 23.4% of world production, up slightly on 1991. 

As  regards  prices, according  to OECD  In  1991  there was  a positive  trend 
with  prices continuing  to  rise,  albeit  more  slowly  than  In  recent  years 
and remaining at  levels below those prevailing  In 1982 (after  taking  into 
account  Inflation).  That  trend  was  not  however  sustained  in  1992, with 
performance  patchy,  varying  from  ship  to  ship.  However  exchange  rate 
fluctuations,  in  particular  relating  to  the  US  dollar,  have  been  a 
factor,  as  confirmed  by  the  1992  market  study  conducted  for  the 
Commission  in  connection  with  the  annual  review  of  the  common  maximum 
production aid ceiling under  the Directive. 

So  far  as  overall  future  prospects  are  concerned,  the  prospects  for  a 
market  upturn  In  the  Immediate  short  term  appear  uncertain  at  present. 
However  It  Is generally agreed  that  the situation should  improve markedly 
in the medium  to  long term given  the need  to renew  the aging world  fleet. 

In that context, recent  Initiatives dealing with environmental  and safety 
concerns  caused  by  substandard  ships  should  encourage  scrapping  activity 
and  lead  to  increased  demand  for  new  ships  being  generated.  It  is 
estimated  that  over  50% of  the  world  fleet  Is more  than  15 years  old, 
broken  down  as  follows:  19% of  the world  fleet  is  15-19  years old,  15% 
20-24 years old and 20% over  25 years old. With such an age profile  it Is 
evident  that  there  will  be  an  increasing  necessity  for  new,  replacement 
ships. 

Forecasts as to the extent  and  timing of  the recovery  in the shipbuilding 
market  vary.  OECD  report  that  the  Association  of  West  European 
Shipbuilders  (AWES)  forecast  that  the  annual  world  demand  for  new  ships 
(In  terms  of  deliveries) will  remain  static  at  an  average  of  around  12 
million  cgt  per  annum  until  1995  before  increasing  rapidly  to around  18 
million  cgt  by  the  year  2000 and  then  falling  back  to  17 million  cgt  in 
2005.  The  Japanese  Ministry  of  Transport  similarly  predicts  a  gradual 
increase  in shipbuilding  demand  but  expects  this to peak  In 1998 at  some 
13 mill ion cgt. 

OECD Negotiations 

It  seems  likely  that  negotiations  will  resume  by  mid  1993  on  an 
international  agreement  to  phase  out  all  existing  obstacles  to  normal 
competitive  conditions  in  the  shipbuilding  market.  When  the  previous 
talks  broke  down  in April  1992,  the  Community  had  already  made  it clear 
that  it  was  prepared  to  accept  a  deadline  of  1 January  1995  for  the 
elimination of all shipbuilding subsidies provided  that  the other  parties 
would  eliminate  all  their  trade-distorting  measures  and  regulations, 
such as  Injurious  pricing,  home  credit  schemes  and  domestic  build 
requirements. 

In  the  Commission's  view,  such  an  international  agreement  is  vital  for 
the  normalisation  of  the  world  shipbuilding  market  and  remains  an 
important  Community  objective.  However  the  prospects  for  a  successful 
conclusion of  the negotiations are uncertain at present. 

6.  Proposai 

_ 4 -

Against  the background  described  above,  It  Is not  possible  at  this stage 
to determine  a  longer  term  shipbuilding  aid policy  framework. A  complete 
abolition of aid to the sector would appear  to be difficult  to justify at 
this  stage  given  the  present  market  situation.  On  the  other  hand, 
a market  upturn  is  expected  in  the  not  too  distant  future;  and  the 
planned  resumption of  the OECD negotiations  Is also encouraging, although 
there  are  uncertainties  whether,  and  within  what  timescale,  an 
acceptable  multilateral  agreement  can  be concluded. A policy  vacuum  when 
the  current  Directive  expires  clearly  needs  to  be  avoided.  It  is 
therefore  proposed  that  the  present  directive  should  be  prolonged  for a 
short  period  by  extending  it  for  a  further  12 months,  ie  up  until 
31 December  1994. 

This  would  enable  the  Community  to  maintain  its  existing  policy 
(including  inter alia  the principle of production  aid degressivity) until 
the situation becomes clearer. Furthermore,  If this course  is adopted, it 
would be entirely  consistent  with  the Community's negotiating  position  in 
the OECD  talks and would  send  a clear  signal  that  we  remained  willing  to 
work  positively  and  constructively  towards  an  agreement.  At  the  same 
time,  It would  leave  the  Community  with  sufficient  flexibility  to adapt 
its shipbuilding  aid policy  in the  light of developments. 

Since  the present  policy  has generally  operated  satisfactorily, no other 
modifications  to  the  Directive's  provisions  seem  appropriate  at  this 
11 me. 

7.  Conclusion 

Accordingly  it  Is proposed  that  the Council  adopts, after  consultation of 
the  European  Parliament  and  the  Economic . and  Social  Committee,  the 
attached  amendment  to  the  Directive  extending  its  validity  until  31 
December  1994. 

In order  to avoid  unnecessary  uncertainty  for  the Community  shipbuilding 
Industry,  and  to enhance  the  credibility  of  our  negotiating  position  in 
the OECD  talks, the Commission  invites the Council  to take a decision as 
soon as possible. 

Proposal  for  a Council  Directive  amending  Council  Directive  90/684/EEC 
on  aid  to  shipbuilding 

THE  COUNCIL  OF  THE  EUROPEAN  COMMUNITIES, 

Having  regard  to  the  Treaty  establishing  the  European  Economic  Community, 
and  in particular  Articles  92(3)(d)  and  113  thereof, 

Having  regard  to  the  proposal  from  the  Commission, 

Having  regard  to  the opinion  of  the  European  Parliament, 

Having  regard  to  the opinion  of  the  Economic  and  Social  Committee, 

Whereas  Council  Directive  90/684/EEC  of  21  December  1990  on  aid  to  ship 
building,  as  amended  by  Council  Directive  92/68/EEC  of  20  July  1992,  will 
expire  on  31  December  1993; 

Whereas  the  aid  policy  established  in  that  Directive  has  generally  achieved 
i ts object Ives; 

Whereas  however  in  spite  of  the  forecasted  improvements  due  to  a  pending 
increase  in new  building  demand  the  world  shipbuilding  market  has  still  not 
yet  been  fully  normalised; 

Whereas  the  Community's  existing  policy  needs  to  be  maintained  in order  to 
promote  the  long  term  survival  of  an  efficient  and  competitive  European 
shipbuilding  industry; 

Whereas  the  Community  is still  pursuing  its efforts  within  the  Organisation 
for  Economic  Cooperation  and  Development  (OECD)  framework  to  reach  a 
multilateral  agreement  between  the  world's  most  important  shipbuilding 
nations  on  a  rapid  phasing-out  of  all  direct  and  indirect  public  support 
measures  to  shipbuilding,  ship  conversion  and  ship  repair  as  well  as  other 
obstacles  to  re-establishing  normal  competitive  conditions  in  the  sector; 

Whereas  this  agreement  must  ensure  fair  competition  at  an  international 
level  among  shipyards  through  a  balanced  and  equitable  elimination  of  all 
existing  impediments  or  obstacles  to normal  competitive  conditions  and  must 
provide  an  effective 
for  counteracting  injurious  pricing 
practices  inconsistent  with  the  agreement; 

Instrument 

Whereas  the  provisions  of  this  and  the  above-mentioned  directives  are 
without  prejudice  to  any  amendments  that  may  be  necessary  in  order  to 
comply  with  international  obligations  entered  into  by  the  Community, 

HAS  ADOPTED  THIS  DIRECTIVE: 

Article 1 

Article  13  of  Council  Directive  90/684/EEC  shall  be  amended  to  read  as 
fol lows : 

"This  Directive  shall  apply  from  1 January  1991  to  31  December  1994." 

- 6 -

Article 2 

1. Member  States  shall  put  into  force  the  legal.  regulatory  and 
administrative  measures  necessary  to  conform  with  this  Directive  by  31 
December  1993 at  the  latest. 

The measures adopted  shall  contain  a reference  to the current  Directive 
or  shall  be  accompanied  by  such  a  reference  when  they  are  officially 
published.  The  terms of  the reference  shall  be determined  by  the Member 
States. 

2. The  Member  States  shall  communicate  to  the  Commission  the  text  of  the 

measures  they adopt  in the field covered by  this Directive. 

This Directive  Is addressed  to the Member  States. 

Article 3 

ISSN 0254-1475 

COM(93) 160 final 

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