Proposal for a COUNCIL REGULATION (EC) on aid to shipbuilding
Date: 1996-04-30
Institutions: European Commission
Subjects: OECD, State aid, competition law, international agreement, shipbuilding

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.04.1996 
COM(96)  309  final 

96/ 0165  (CNS) 

Proposal  for a 

COUNCIL REGULATION  (EH 

on aid to shipbuilding 

(presented by the Commission) 

Commission proposal further to prolong the 
Seventh Council Directive on aid to Shipbuilding 

1. 

Introduction 

1.1 

In 1994, after several years of negotiation an international agreement was concluded 
within  the  framework  of  OECD respecting  normal  competitive  conditions  in the 
commercial shipbuilding and shiprepair industry.  The agreement  had been due to 
enter into force  on  1 January  1996. 

1.2  Council regulation 3094/95 of 22 December  1995 on aid to shipbuilding is intended 

to give effect  to the State aid provisions of the OECD agreement. 

1.3  Article  10 of the regulation provides that the regulation shall apply as from the date 
of  entry  into  force  of  the  OECD  agreement  with  the  relevant  provisions  of  the 
shipbuilding  aid  directive  (Directive  90/684/EEC,  as  most  recently  amended  by 
Directive 94/73/EC) continuing to apply ad interim and until  1  October  1996 at the 
latest. 

1.4 

In  a  declaration  to  the  Minutes, the  Council  and  Commission  agreed  that  if  the 
OECD agreement had not entered into force by 1  June 1996 the Commission should 
put forward appropriate proposals so that the Council could decide before  1  October 
1996 on the position that should be adopted by the European Union. 

1.5  At  its  meeting  on  20  May  1996,  the  Industry  Council  reviewed  the  situation 
regarding  ratification  of  the  OECD  agreement.  It  called  upon  the  Commission 
closely to monitor developments, and to submit in due course further  evaluations on 
the matter, accompanied if necessary by appropriate proposals, in accordance with 
the Council's previous conclusions. 

1.6  Since there  are some uncertainties over the entry  into force  of the agreement, this 
paper reviews the situation and puts forward proposals regarding future shipbuilding 
aid policy beyond  1  October 1996 against the possibility that by that date the OECD 
agreement has still not entered  into force. 

2. 

OECD agreement 

2.1  Under the OECD agreement, generally all measures of support for shipbuilding are 
prohibited  except  for  aid  for  research  and  development,  social  aid  related  to 
closures; export credits complying with the revised  1994 OECD understanding on 
export credits for ships;  and domestic credits for ships under equivalent terms and 
conditions. 

2.2  Although the European Union, Korea, Norway  and also, within the last few days, 
Japan have ratified the agreement, the  ratification  of the USA is still awaited.  At 
an OECD meeting in December  1995 it was agreed that the revised target date for 
ratification  would  be  15  June  1996  at  the  latest,  with  entry  into  force  30  days 
According  to  the 
following  the  last  ratification,  i.e.  before  15  July  1996. 
information  available  to  the  Commission,  it  seems  that  although  the  US 
administration was committed to press for timely ratification, the US failed to ratify 
by the deadline as expected because of delays in passing the necessary  legislation. 
The prospects of when the US will ratify  are uncertain at this stage.  Against this 

background,  the  European  Union  is  obliged  to  prepare  possible  contingency 
measures. 

3. 

Existing State aid Rules 

3.1  As noted in paragraph  1.3  above, with the continuing delays in entry into force of 
the  OECD  agreement,  the  rules  of  the  Seventh  Council  Directive  on  aid  to 
shipbuilding continue to apply at present. 

3.2  The  directive  maintains  the  policy  established  by  the  Sixth  Directive,  adopted  in 
1986 against a background  of abnormally  difficult  market  conditions, caused by a 
declining  demand  for  ships  and  a  rapid  increase  in  shipbuilding  capacities, 
particularly in the Far East (with competitors benefitting  from home credit schemes 
and domestic-build practices), leading to a significant imbalance between supply and 
demand  and depressed prices.  The main aim of the directive has therefore  been: 

to  safeguard  the  Community  shipbuilding  industry  by  providing  a  defensive 
instrument against unfair competition through injurious pricing below costs, thereby 
maintaining  a sufficient  level of Community  shipbuilding  activity  in those market 
segments  where  the  Community  will  remain  competitive  under  normal  market 
conditions, such as less labour-intensive, technologically complex specialised ships; 

to  encourage  the necessary  structural  adjustment  of EC shipbuilding  toward these 
directions; 

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

3.3  Under the Directive (Article 4) production aid for shipbuilding and ship conversions, 
(but not ship repair) may be granted, up to a common maximum aid ceiling which 
reflects the difference  between the costs of the most competitive Community yards 
and market prices of their main international competitors, with particular regard to 
those  market  segments  in  which  Community  shipbuilders  remain  relatively  most 
competitive. 

3.4  The production aid ceiling must be reviewed at least once every  12 months, which 
serves to ensure that the most competitive parts of the EC shipbuilding industry can 
maintain their activities despite the abnormal world market conditions;  and which 
at  the  same  time  encourages  less  efficient  yards  to  undertake  the  necessary 
restructuring  measures.  This  is  reinforced  by  the  principle  of  degressivity 
established  by  the  Directive.  The  ceiling,  which  was  28%  in  1987,  has  been 
progressively reduced to 9%  currently. 

3.5 

In  order  to  ensure  transparency  as  far  as  possible  all  types  of  production  aid, 
whether direct or indirect, are subject to the ceiling.  Article 3 provides that aid to 
shipowners or to third parties  linked to the construction  of ships is counted  under 
the  ceiling.  Similarly  operating  aid  granted  to yards, not  linked  to  an  individual 
contract, but  in the form  of e.g. loss compensation or rescue aid  is also subject  to 
the ceiling. 

3.6 

3.7 

3.8 

3.9 

The only  operating  aids exempted from the ceiling  are credit  facilities  complying 
with the  1981  OECD Understanding on Export Credits for Ships (Article 4.6) and 
aid  granted  as development  assistance to developing  countries  (Article  4.7) 

In order to ensure the maximum intra - Community competition, Article 4.5  of the 
directive provides that where only  Community  yards are competing  for the  same 
that 
the  Commission  will, 
contract 
competition  is not distorted by aid. 

if  requested, 

to  ensure 

intervene 

The Directive  also lays down specific  rules for investment aids (Article  6), which 
must be  linked to a restructuring plan which does not  involve  any  increase in the 
yard's  shipbuilding  capacity  or which  must  be  directly  linked  to  a  corresponding 
irreversible  reduction  in  capacity  of  other  yards  in the  Member  State  concerned; 
aid for closures (Article  7), on condition that the resulting capacity reduction is of 
a genuine and irreversible nature (with the facilities having to remain closed for not 
less than 5 years; and not being reopened within â further 5 years after the 5 years, 
i.e.  for a total of  10 years, without the Commission's prior approval);  and aid for 
research and development (Article 8).  In addition the directive (Articles 11 and 12) 
imposes notification  and reporting obligations  on Member States in order that the 
Commission can monitor  compliance  with the rules. 

In the  Commission's view  the  Directive  has  been  generally  effective  and  largely 
achieved its aims.  It has provided a transparent and stable framework  safeguarding 
Community  yards  and  enabling  the  Community  broadly  to  maintain  its  world 
market share in recent years at around 20%.  At the same time it has been possible 
to  undertake  the  necessary  restructuring.  Over  the  last  20  years  the  size  of  the 
Community's  shipbuilding  industry  has  shrunk  significantly.  (For  example  in 
Western Europe  (EU  15 plus Norway)  capacity  has fallen from  8.5  million  cgt in 
1975  to 4.2  million cgt  in  1994.  During the  same period  the workforce  has also 
been  reduced  substantially,  in the  EU  12  (  minus the  three  new  Member  States) 
from  nearly  209,000  in  1975  to  under  68,000  in  1994).  This  approach  has 
demonstrated  to  our  trading  partners  that  the  Community  will  protect  its 
shipbuilding industry against unfair competition but at the same time will not prop 
up uncompetitive  capacity. 

4. 

Future Policy 

4.1 

The  early  entry  into  force  of  the  OECD  agreement  is  vitally  important  if  a 
normalisation  of  world  shipbuilding  market  is  to  be  achieved.  By  ratifying,  the 
Community has already  signalled its commitment to the agreement.  However,  so 
long  as other  parties to the  agreement  have  not ratified  and continue  to  maintain 
subsidies  and  other  market-distortive  measures,  it  is  necessary  to  maintain  a 
defensive  instrument  for  Community  yards  against  unfair  competition.  This  is 
particularly necessary given the prevailing market situation which, notwithstanding 
some  encouraging  signs,  remains  difficult. 
It  would  be  inappropriate  in  such 
circumstances  for  the  European  Union  unilaterally  to  dismantle  its  existing  aid 
arrangements. 

5- 

Proposal 

5.1 

In the  light of the above  it is proposed that if necessary the Community  should be 
prepared to maintain the rules of the directive beyond  1 October  1996 should there 
be  a  continuing  delay  in  the  entry  into  force  of  the  OECD  agreement.  In that 
event,  since  these  rules have  generally  operated  satisfactorily,  and new  measures 

of support are in any case prohibited by the "standstill" provisions of the Final Act 
of  the  negotiations  concluding  the  OECD  agreement,  the  rules  of  the  directive 
could be maintained  unchanged.  This would include the principle of degressivity 
in the  level of the production aid ceiling.  The aim of  a progressive reduction  in 
the aid ceiling would remain,  but the actual level set would be dependent on the 
market  situation and the size of the cost/price gap. 

5.2  As regards the duration of any prolongation of the rules of the directive, a lengthy 
prolongation  could  send  the  wrong  signals  to  the  other  parties  to  the  OECD 
agreement.  On the other hand, given the current uncertainties  over the timing of 
the entry into force of the OECD agreement, too short a prolongation could create 
further  uncertainty for Community yards over possible future policy direction.  To 
avoid  these  problems  it  is  proposed  that  the  directive  be  prolonged  until  31 
December  1998 unless  the  OECD  agreement  enters  into  force  in  the  meantime. 
This would also allow sufficient  time to undertake a more fundamental  review of 
future  policy  if appropriate. 

6. 

Conclusion 

6.1  Accordingly,  it  is  proposed  that  the  Council  adopts,  after  consultation  of  the 
European  Parliament  and  the  Economic  and  Social  Committee,  the  attached 
amendment  to Regulation  3094/95 providing  for  its entry  into  force  as from the 
date of entry into force of the OECD agreement, with the relevant provisions of the 
shipbuilding directive continuing to apply ad interim and until 31 December  1998 
at the latest. 

6.2 

In order to  avoid any  legal vacuum the  Council  should take  a decision  before  1 
October 1996. 

Proposal for a Council Regulation  on aid to shipbuilding 

THE COUNCIL  OF THE EUROPEAN UNION 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Articles 92(3)(c), 94 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,  an  agreement  respecting  normal  competitive  conditions  in  the  commercial 
shipbuilding and repair industry0} concluded between the European Community and certain 
third  countries  with the  framework  of the  Organisation  for  Economic  Co-operation  and 
Development  (OECD), has not yet entered into  force. 

Whereas,  therefore  Council  Regulation  3094/95  of  22  December  1995  on  aid  to 
shipbuilding^ has not yet entered  into force. 

Whereas,  in  accordance  with  Article  10  of  Regulation,  the  relevant  rules  of  Council 
Directive  90/654/EEC(3) on aid to shipbuilding continue to apply ad interim, pending the 
entry  into force  of the OECD agreement and until  1 October  1996 at the latest; 

Whereas as a contingency measures against the possibility that the entry into force  of the 
OECD agreement is delayed beyond 1  October  1996 the Council needs to take appropriate 
steps. 

HAS ADOPTED THIS REGULATION 

Article 1 

The  third  paragraph  of  Article  10  of  Regulation  3094/95  shall  be  replaced  by  the 
following: 

Pending the entry  into force  of the  said Agreement, the relevant provisions of Directive 
90/684/EEC shall apply until the Agreement enters into force and until 31 December 1998 
at the latest. 

Article 2 

This  Regulation  shall  be  binding  in  its  entirety  and  directly  applicable  in  all  Member 
States. 

(D 

(2) 

(3) 

O J N ° C 3 7 5,  30.12.1994, p. 3 
O J N °L  332,  31.12.1995, p. 1 
OJ  N°  L  380,  31.12.90,  p.  27,  Directive  last  amended  by  Directive  94/73/EC  (OJ  no  L  351, 
31.12.1994, p.  10) 

KSN0254-U75 

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