Proposal for a Council Regulation (EC) establishing new rules on aid to shipbuilding
Date: 1997-10-01
Institutions: European Commission
Subjects: OECD, State aid, competition policy, control of State aid, shipbuilding

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  01.10.1997 
COM(97) 469fmal 

9 7/  0248(CNS) 

9 7/  0249(CNS) 

Proposal for a 

COUNCIL REGULATION (EC) 

amending Council  Regulation  3094/95 

thereby further prolonging the relevant provisions of the Seventh Council Directive  on 

aid to Shipbuilding 

Proposal for a 

COUNCIL REGULATION (EC) 

establishing new rules  on aid to shipbuilding 

(presented by the Commission) 

Commission  proposal  for a Council Regulation  amending Council Regulation  3094/95 
thereby further prolonging the relevant provisions of the Seventh Council Directive on 
aid to Shipbuilding 

, 

, 
Explanatory Memorandum 

. 

' 

97/ 0248CCNS) 

l. 

Introduction 

1.1 

1.2 

1.3 

1.4 

In  1994 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. 

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.Article  10 of  the 
regulation provided 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.  However 
because of continuing  delays  in the entry into force  of the OECD  agreement  due to 
the  failure  of  the  US  to  ratify,  Council  Regulation  1904/96  further  prolonged  the 
directive until 31 December 1997. 

Having reviewed the situation at its meeting on 24 April  1997, the Industry  Council 
agreed that if the OECD agreement was not going to enter into force a specific  new 
aid  regime  for  shipbuilding  should  be  established.  In  the  meantime  the  seventh 
directive  should  be extended  until 31 December  1998 on the understanding  that  the 
prolonged  directive  would  lapse  automatically  as  soon  as  the  OECD  agreement  is 
ratified  by  the  US  or  as  soon  as  a  new  regime  on  shipbuilding  is  adopted.  The 
Commission was invited to submit proposals accordingly. 

Since there remain uncertainties over the entry into force of the agreement, this paper 
reviews  the  situation  and  puts  forward  proposals  for  an  extension  of  the  directive 
until 31 December  1998. Proposals for a new aid regime to replace the directive  are 
the subject of a separate communication  being submitted in parallel with the present 
proposal. 

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. 

1 

C O M ( 9 7 ) X XX 

2.2  Although  the  European  Union,  Korea,  Norway  and  Japan  have  ratified  the 
agreement, the  ratification of the USA is still awaited. The prospects of when the US 
will ratify are uncertain at this stage. 

2.3 

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  would  be  inappropriate  for  the 
European Union unilaterally to dismantle its aid arrangements. 

3. 

Proposal  ' 

3.1 

In  the  light  of  the  above  it  is  proposed  that  if  necessary  the  Community  should 
maintain  the  rules  of  the  directive  until  31  December  1998  should  there  bè  a 
continuing delay in the entry into force of the OECD agreement.  In that event, since 
new measures of support are prohibited by the "standstill" provisions of the Final Act 
of the negotiations concluding the OECD agreement, provisions which the Council 
has confirmed  it considers binding, the rules of the directive would be maintained 
unchanged.  This would include the level of the production aid ceiling. 

4. 

Conclusion 

4.1 

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. 

4.2 

In order to  avoid  any  legal vacuum  the  Council  should  take  a decision  before  31 
December 1997. 

Proposai  for  a  Council  Regulation  amending  Council  Regulation  3094/95  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)(e), 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  industry  concluded  between  the  European  Community  and  certain 
third  countries  within  the  framework  of  the  Organisation  for  Economic  Co-operation  and 
Development (OECD)  , has still 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  3094/95,  as  amended  by  Council 
Regulation  1904/964  the  relevant  rules  of  Council  Directive  90/684/EEC  on  aid  to 
shipbuilding  continue  to  apply  ad  interim,  pending  the  entry  into  force  of  the  OECD 
agreement and until 31 December  1997 at the latest; 

Whereas  given the  continuing  uncertainties  over entry  into  force  of  the  OECD  agreement, 
which  may  be  further  delayed  beyond  31  December  1997,  the  Council  needs  to  take 
appropriate steps pending decisions on a possible new aid arrangements; 

Whereas Regulation 3094/95 should therefore be modified, 

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. 

O JC 

3 7 5 , 3 0 . 1 2 . 1 9 9 4 , p3 
3  OJ  L 3 3 2 , 3 1 . 1 2 . 1 9 9 5 , pl 
4  OJ  L 2 5 1 , 3 . 1 0 . 1 9 9 6 , p5 
5  OJ  L 3 8 0 , 3 1 . 1 2 ; 1 9 9 0 , p 27 

fi 

, 

Artick 2 

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

Commission proposal for a Council Regulation establishing new rules 
on aid to shipbuilding 

9 7/  02A9(CMS) 

Explanatory Memorandum 

Introduction 
In  1994 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, but has not yet done so due to delays in US ratification of the agreement. 

» 

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.  Under  these 
provisions  generally all measures of support  for  shipbuilding  would  be prohibited 
except for aid for research and development; social aid linked to closures and ship 
financing  credits complying with the revised  1994 Understanding on Export Credits 
for Ships. Article 10 of the regulation provided 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) continuing to apply ad interim 
and until  1  October  1996 at the latest. However because of the continuing delays in 
the entry  into  force  of the  OECD agreement,  Council  Regulation  1904/96  further 
prolonged the directive until 31 December 1997. 

Having reviewed the situation at its meeting on 24 April  1997, the Industry Council 
agreed that if the OECD agreement was not going to enter into force a specific new 
aid  regime  for  shipbuilding  should  be  established.  In  the  meantime  the  seventh 
directive should be extended until 31 December  1998 on the understanding that the 
prolonged  directive would  lapse automatically  as soon as the OECD agreement  is 
ratified  by  the  US  or  as  soon  as  a  new  regime  on  shipbuilding  is  adopted.  The 
Commission was invited to submit proposals accordingly. 

Since there remain uncertainties over the entry into force  of the OECD agreement, 
this  paper  puts  forward  proposals  for  a  new  aid  regime  should  the  need  arise. 
Proposals  for  an  extension  of  the  directive  up  until  31  December  1998  in  the 
meantime are the subject of a separate communication  being submitted at the same 
time as the present proposal. 

The  proposals  for  a  new  aid  regime  should  be  seen  within  the  context  of  wider 
shipbuilding  policy  and  in particular  the Commission's  parallel  communication  to 
the Council outlining new orientations airned at improving the competitiveness of the 
sector . 

1. 
1.1 

1.2 

1.3 

1.4 

1.5 

6 COM(97)XXXX 
7 

'Towards a New Shipbuilding  Policy' COM(97)XXXX 

2. 

Existing State Aid Rules 

2.1 

The  seventh  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, leading to a significant  imbalance  between 
supply and demand and depressed prices.  The main aim of the directive has been: 

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

2.2  Under the  Directive  operating  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. In 
accordance with the principle of degressivity established by the Directive, the ceiling, 
which was 28% in 1987, has  been progressively reduced to 9%  currently (4.5% for 
smaller vessels and conversions). The only operating aids exempted from the ceiling 
are credit facilities complying with the 1981 OECD Understanding on Export Credits 
for Ships and aid granted as development assistance to developing countries. 

2.3 

The  Directive  also  lays  down  rules  for  investment  aids  within  the  framework  of 
restructuring 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 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 a 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 In addition the directive imposes notification and reporting 
obligations on Member States in order that the Commission can monitor compliance 
with the rules. 

2.4 

In  the  Commission's  view  the  Directive  has  been  generally  effective  and  largely 
achieved  its  aims, enabling  the  Community  broadly  to  maintain  its  world  market 
share in recent years at around 20%. However the industry is still in difficulty,  with 
depressed prices for newbuildings and repairs world-wide. Despite the improvements 
made in recent years, many EU yards still lack competitiveness, in particular lagging 
behind  their  major  Far  East  competitors  in  terms  of  productivity.  The  world 

2.5 

2.6 

2.7 

shipbuilding market is likely to become even more competitive in the medium term 
with overall demand starting to soften  in the next decade, and Japanese and Korean 
yards continuing to make further major improvements in their productivity. 

The main pillar of the current aid policy has been operating aid. Initially, through the 
progressive  reduction in the aid ceiling,  operating aid encouraged changes towards 
greater competitiveness.  However the necessary  impetus has not  been  sustained  in 
more  recent  years  as  the  level  of  the  ceiling  became  static,  coupled  with  the 
uncertainty over the OECD agreement. Overall  the aid has served to cushion yards 
from  the full rigours of the market. Operating aid also results in significant costs for 
most Member States, many of which face growing budgetary constraints 

Shipbuilding  is  the  only  sector  of  manufacturing  industry  which  systematically 
benefits  from  such  aids  and  it  is  questionable  whether  the  expenditure  involved 
represents  a  cost-effective  use  of  limited  public  resources.  Furthermore  given  the 
extent  to  which  competition  is  between  EU  yards  the  aid  has  tended  to  distort 
competition  within  the  common  market, particularly  since  there  has  been  a  wide 
variations in the actual levels of aid granted by the Member States, undermining the 
aim of establishing a level playing  field. 

Against  this  background,  state  aid  policy  needs  to  be  refocussed  to  promote  and 
underpin efforts to improve the competitiveness of the industry. This implies shifting 
away  from  operating  aid  to  other  forms  of  support,  such  as  investment  aid  for 
innovation, better geared towards helping industry achieve the necessary changes and 
overcome its weaknesses. 

3. 

Proposals for Future Aid Policy 

3.1 

3.2 

The attached proposed Council Regulation sets out the Commission's proposals for a 
new aid regime to replace the seventh directive, by the latest upon its proposed expiry 
at the end of  1998 but preferably sooner. The following  briefly  summarises the key 
elements and the main changes from previous policy. 

So  far  as  operating  aid  is  concerned,  there  are  some  arguments  for  proposing  its 
immediate  abolition upon entry  into force  of  the proposed regulation.  Industry has 
already had plenty of time to adjust to the possibility of operating "without such aids 
since it had been expected that the OECD agreement(which prohibits these aids) had 
been expected to enter into force on  1 January  1996. However since then there has 
been some uncertainty over the direction of future policy in the light of the delays in 
the US ratification of the agreement and it therefore  seems appropriate to provide a 
short,  and final, transitional  period  during  which  contract-related  operating  aid, at 
current aid ceilings, should continue. It is proposed that this transitional period expire 
on 31 December 2000 (Article 3.1 refers). Since the Community still believes that the 
OECD  agreement  represents  the  best  option,  this  will  also  allow  time  to  facilitate 
further efforts to bring that agreement into force. 

3.3 

One  year  before  the  abolition  of  operating  aid  the  Community  will  monitor  the 
market  situation  and  appraise  whether  European  yards  are  affected  by  anti 
competitive  practices.  If  it  is"  established  at  that  or  a  later  stage  that  industry  is 

3.4 

3.5 

3.6 

3.7 

/ 

3.8 

being  caused  injury  by  anti-competitive  practices  including  injurious  pricing,  the 
Community  will consider introducing appropriate measures 
the  only  contract-related  aid  allowed  will  be  home  and 
As  from  1 January  2001 
export  credits  in  conformity  with  OECD  rules  on  Export  Credits  for  Ships,  which 
until  31  December  2000  will,  as  at  present,  not  be  counted  under  the  aid 
ceiling(Article  3.4  refers).  Since the  1981  OECD  Understanding  on  Export  Credits 
remains  in force  at present,  the Commission  considers  itself obliged  at this stage  to 
propose that the provisions of that Understanding should continue to apply. However 
the Commission recognises that certain provisions of the  1994 OECD  Understanding 
on Export Credits for Ships, which has not yet entered into force, more closely  reflect 
market realities and that therefore  it might be more appropriate to  introduce them  in 
the new regime. The technical and legal issues involved require further  examination. 

Other forms of operating aid, ie non-contract-related  aid (such as loss compensation, 
rescue  aid  etc)  shall  be  subject  to  specific  new  rules  on  restructuring  aid  (see 
paragraph  3.8 below). 

It is proposed that contract-related aid granted in the form of  development  assistance 
to  developing  countries  should • continue  to  be  permitted  (Article  3.5  refers), 
notwithstanding  Commission  concerns  that  such  aid,  used  by  only  a  very  few 
Member  States, may be used as an operating  aid to keep yards  in business  and  thus 
have undesirable  effects  on competition  within  the  EU.  However  since this  type  of 
aid is permitted under OECD rules it would unfairly  disadvantage EU yards  vis à vis 
their  international  competitors  if  their  possibilities  of  such  aid  were  closed  off. 
Nevertheless  the Commission proposes  stricter  rules  requiring  aid  offers  to  be  open 
to bids from different  yards and closer monitoring to ensure that there are no abuses. 

Closure  aid  (Article  4)  continues  to  be  needed  to  facilitate  the  further  structural 
adjustment  of the sector that will inevitably  be necessary, in particular  social  aids to 
mitigate  the  social  repercussions  of  adjustment  and  aids  to  cover  other  normal 
expenditure  occasioned  by total  or partial  closures, both  of which  can also  increase 
competitiveness  of  the  undertakings  concerned  when  partial  closures  are  involved. 
However  in  order  to  ensure  that  possible  distortions  to  intra-EU  competition  are 
minimised  it  is  essential  that  the  resulting  capacity  reductions  are  genuine  and 
irreversible.  In  that  context  under  the  current  rules  closed  facilities  must  remain 
closed  for  a period  of 5 years and may not reopen  for  a further  period  of  another 5 
years  without  the  Commission's  prior  approval.  Given  the  continuing  imbalance 
between supply  and demand on the world shipbuilding  market  and the  perspectives 
for  the  future  it  is  very  difficult  to  foresee  circumstances  where  it  would  be 
appropriate  for  the  Commission  to approve  the reopening  of  closed  facilities  in  the 
second  5  year  period.  Accordingly  it  is  proposed  that  closed  facilities  should  not 
return to shipbuilding for a period of  10 years, with no possibility of review after  the 
first 5 years has elapsed. 

form  of  aid  necessary 

for  structural  adjustment  and 

improved 
Another 
competitiveness is restructuring aid. The seventh directive has a lacuna in this respect 
in  that  its  relevant  provisions  focus  on  investment  aids  rather  than  other  forms  of 
restructuring  aid  like capital  injections,  debt  write-offs,  subsidised  loans, rescue  aid 
etc.  It  is  proposed  that  there  should  be  specific  rules  in  the  proposed  new  regime 
(Article  5  refers)  based  on  the  general  Community  guidelines  for  such  aids. 

Furthermore, drawing on experience from past restructuring cases in the shipbuilding 
sector,  the  Commission  proposes  that  there  should  in  particular  be  very  strict  rules 
applying the 'one time/last time' principle, with rigorous assessment  and  monitoring 
of viability programmes. 

3.9 

A key element in the Commission's assessment of restructuring aid cases will be the 
nature and extent of the capacity reductions required as the necessary counterpart  for 
the aid to  minimise, its distortive  effects  on the common  market.  In order to  ensure 
that  the  capacity  reductions  are  real  and  genuinely  will  have  an  effect  on  the 
beneficiary's  position on the market, the Commission proposes that  the  determining 
factor will be the level of production in the preceding 5 years rather than the notional 
capacity of the yard. 

3.10  So far as investment aid is concerned, the Commission  fully  recognises the role that 
investment  has to play  in helping  EU yards make significant  improvements  in their 
productivity and thus increase their competitiveness. At the same time it is important 
that  measures  of  support  do  not  unduly  distort  competition  within  the  common 
market.  Under  the  approach  proposed  there  would  be  a  differentiation  between 
investment aids for innovation (Article 6) and regional investment aids for  upgrading 
and modernising yards (Article 7). 

3.11  The Commission's  general policy towards investment  aids has been to adopt a strict 
attitude  towards  such  aids  for  modernisation  and  upgrading  facilities  since  such 
activities  are normally  undertaken by companies  themselves,  financed  by  their  own 
resources  or  by  commercial  loans,  as  part  of  normal  company  operations  in  a 
competitive market  environment. However the Commission acknowledges that  such 
aids  can  make  a  valuable  contribution  towards  overcoming  structural  handicaps  in 
disadvantaged  regions. It is therefore  proposed  that such aids granted  under regional 
aid  schemes  may  be  allowed  provided  that  the  aided  project  is  to  improve  the 
productivity of existing installations. 

3.12 

Innovation  is  a  key  element  in  improving  competitiveness.  To  promote  greater 
innovation,  which  carries  a  higher  degree  of  industrial  and  technological  risk,  the 
Commission is proposing to allow for incentives to be given provided that the project 
relates to innovative products and processes that are not currently used commercially 
by other EU operators in the shipbuilding sector. 

3.13  Research  and  development(R&D)  is another valuable way  of promoting  medium  to 
longer term  competitiveness  of the industry.  Accordingly  it is proposed  that  aid  for 
R&D  should  continue to be allowed in accordance with the Community  framework 
on  aid  for  research  and  developmentArticle  8 refers).  In addition,  in  order  that  the 
shipbuilding industry should have the same treatment as all other industrial sectors it 
is  proposed  that  aid  for  environmental  protection  in  accordance  with  Community 
guidelines should also be allowed(Article 9 refers). 

3.14  Finally,  in  order  to  ensure  the  fullest  transparency  and  to  enable  the  Commission 
closely  to  control  aid,  it  is proposed  that  the current  strict  rules  on  notification  and 
certain 
monitoring 
improvements(Articles  10 and  11). 

be  maintained 

arrangements 

subject 

should 

to 

10 

3.15  As the proposal concerns significant changes to the existing rules, it is proposed that 
the Regulation should apply for a five year period until the end of 2003  in order to 
allow sufficient time for the new strategy to produce a structural effect in the sector. 

4. 

Conclusion 

4.1 

Accordingly,  it  is  proposed  that  the  Council  adopts,  after  consultation  of  the 
European  Parliament  and  the  Economic  and  Social  Committee,  the  attached 
regulation for a new shipbuilding aid regime to replace, by 31 December  1998 at the 
latest,  the  proposed  prolongation  until  that date  of  the  seventh  directive  on  aid  to 
shipbuilding, in the event that the OECD agreement has still not entered into force. 

11 

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)(e), 
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 industry concluded between the European Community and certain third countries within the 
framework  of the Organisation for Economic Co-operation and development (OECD), has still not 
entered into force because of the failure of the US to ratify the agreement; 

Whereas, therefore Council Regulation 3094/95 of 22 December 19959 on aid to shipbuilding has not 
yet entered into force; 

Whereas, in accordance with Article 10 of Regulation 3094/95, as most recently amended by Council 
/9710, the relevant rules of Council Directive 90/684/EEC11 will continue to apply, in 
Regulation 
the absence of entry into force of the OECD agreement, until 31 December 1998 at the latest; 

Whereas, a satisfactory  balance between supply and demand on the world shipbuilding has still not 
been fully established so that prices remain depressed; and whereas the competitive pressures on 
European Union shipbuilders are expected to grow further as overall ship demand after the year 2000 is 
predicted to fall and available world shipbuilding capacity is expected to continue to rise; 

Whereas, although European Union yards have made progress in improving competitiveness, the rate at 
which they are  improving productivity needs to be increased in order to close the gap with their 
international competitors, particularly in Japan and Korea; 

Whereas, a competitive shipbuilding industry is important to the Community and contributes to its 
economic and social development by providing a substantial market for a range of industries and by 
maintaining employment in a number of regions, many of which are already suffering  a high rate of 
unemployment; 

Whereas, a complete abolition of aid to the sector is not yet possible in view of the difficult  market 
situation  and the need to encourage yards to make the necessary changes to improve competitiveness; 
whereas, a tight and selective aid policy should be continued in order to support these efforts  and in 
order to ensure fair and uniform conditions for intra-Community competition; whereas, such a policy 
constitutes the most appropriate approach in terms of ensuring the maintenance of a sufficient  level of 
activity in European shipyards and, thereby, the survival of an efficient  and competitive European 
shipbuilding industry; 

8  OJ No C375, 30 December  1994, p3 
9  OJ No L332,  30 December  1995, pi 
10 

"  OJ  No L380, 31 December  1990; p27 

12 

Whereas, the European Community's aid policy for the shipbuilding sector has remained  essentially 
unchanged since  1987; whereas, that policy has generally achieved  its objectives but requires 
adaptations so that it is better able to address the future challenges facing the industry; 

Whereas, in particular operating aid is not the most cost-effective  way of encouraging the  European 
shipbuilding industry to improve its competitiveness; whereas, accordingly  operating aid should be 
phased out and the focus  shifted  more towards other forms of support to promote the necessary 
improvements in competitiveness, such as investment aids for  innovation; 

Whereas, operating aid will therefore  end on 31 December 2000; 

Whereas, one year before that date the Community will monitor the market situation and appraise 
whether European yards are affected  by anti-competitive practices. If it is established at that or a later 
stage that industry is being caused injury  by anti-competitive practices including injurious  pricing, the 
Community will consider introducing appropriate measures; 

Whereas, operating aid in the form  of development assistance to developing countries should  continue 
subject to stricter conditions; 

Whereas, a clearer distinction is needed between investment aid and restructuring aid; whereas the 
latter should only be granted exceptionally and subject to strict rules, such as applying the principle of 
'one time/last time', requiring genuine capacity reductions as a counterpart  for the aid and  tighter 
monitoring procedures; and whereas the former  should be allowed only under regional aid  schemes 
provided that the project  is to improve the productivity of existing installations; 

Whereas, investment aid for  innovation should be allowed provided that it is for genuinely  innovative 
projects that will improve competitiveness; whereas aid for research and development and aid  for 
environmental protection should also be permitted so that the shipbuilding industry is not deprived  of 
these aid possibilities that are available to all other industrial sectors; and whereas, closure aid should 
continue to be allowed to facilitate  structural  adjustment; 

Whereas, although it is proposed to continue to treat ship conversion in the same way as shipbuilding to 
a certain extent, aid to the shiprepair sector should continue not to be permitted except for  restructuring, 
closure, investments under regional aid schemes, innovation, research and development, and 
environmental  protection; 

Whereas, close and transparent monitoring  is necessary if the aid policy is to be  effective; 

Whereas, the provisions of this Regulation are without prejudice to any amendments necessary  to 
comply with international commitments of the Community concerning state aid to the shipbuilding 
industry, 

HAS ADOPTED THIS REGULATION 

13 

Article I 

For the purposes of this Regulation, the following  definitions  shall apply: 

(a) 
• 
4 

• 
• 
• 
• 

"self-propelled  seagoing commercial vessels" are: 
vessels of not less than  100 gt used for the transportation of passengers and/or goods; 
vessels of not less than  100 gt for the performance  of a specialised service (for  example 
dredgers and ice breakers); 
tugs of not less than 365 kW; 
fishing  vessels of not less than  100 gt for export outside the Community; 
unfinished  shells of the abovementioned vessels that are afloat  and mobile; and 
floating  storage and offloading  vessels (FSOs), floating  production storage and  offloading 
vessels (FPSOs), floating production drilling  storage and offloading  vessels(FPDSOs), and 
derivatives thereof, if the completed vessel has a maximum designed speed when under its own 
power of more than 6 knots in any direction. 

For the purposes of the above "self-propelled  seagoing vessel" means a vessel that, by means of its 
permanent propulsion and. steering, has all the characteristics of self-navigability  on the high seas. 

Military vessels(ie vessels which according to their basic structural characteristics and capability  are' 
specifically  intended to be used exclusively  for military purposes such as warships and other vessels  for 
offensive  or defensive  action) and modifications  made or features added to other vessels exclusively  for 
military purposes shall be excluded, provided that any measures or practices applied in respect of such 
vessels, modifications  or features  are not disguised actions taken in favour  of commercial  shipbuilding 
inconsistent with this Regulation; 

(b) 

(c) 

(d) 

(e) 

"shipbuilding" shall mean the building, in the Community, of self-propelled  seagoing 
commercial vessels, as defined  in (a); 

"ship repair" shall mean the repair or reconditioning in the Community of  self-propelled 
seagoing commercial vessels, as defined  in (a); 

"ship conversion" shall mean the conversion, in the Community, of self-propelled  seagoing 
commercial vessels, as defined  in (a), of not less than  1000 gt, on condition that conversion 
operations entail radical alterations to the cargo plan, the shell, the propulsion system or the 
passenger  accommodation; 

"aid" shall mean State aid within the meaning of Articles 92 and 93 of the Treaty. This shall 
include not only aid granted by the State itself but also that granted by regional or local 
authorities or other public bodies and any aid elements contained in financing  measures taken 
directly or indirectly by Member States in respect of shipbuilding, conversion or repair 
undertakings which cannot be regarded as a genuine provision of risk capital according to 
standard investment practice in a market economy; 

(f) 

"contract value before aid" shall mean the price laid down in the contract plus any aid granted 
directly to the yard; 

(g) 

"related  entity" shall  mean  any  natural  or  legal  person  who: 

14 

(i) owns or controls an undertaking engaged in shipbuilding, ship conversion or ship repair; or 
(ii) is owned or controlled, directly or indirectly, whether through stock ownership or otherwise, 
by an undertaking engaged  in shipbuilding, ship conversion or ship repair. 
Control shall be presumed to arise once a person or undertaking engaged in shipbuilding, ship 
conversion or ship repair owns or controls an interest of more than 25% in the other or vice 
versa. 

Article 2 

Aid granted, whether directly or indirectly, for shipbuilding, conversion and repair, as  defined 
under this Regulation, financed oy Member States or their regional or local authorities or 
through State resources in any form whatsoever may be considered compatible with the 
common market only if it complies with the provisions of this Regulation. This provision 
applies not only to aid granted to undertakings engaged in such activities but also to related 
entities. 

For the purposes of this Regulation aids granted indirectly include all forms  of aid to, 
shipowners or to third parties which are available as aid for the building or conversion of ships 
such as credit facilities, guarantees and tax concessions. Concerning tax concessions, these 
provisions shall be without prejudice to the Community guidelines on state aid to maritime 
transport and in particular point 3.1 thereof, as currently set out in Official  Journal of the 
European Communities No C 205 of  5 July  1997, and any amendments thereto. 

No aid granted pursuant to this Regulation may be conditional upon discriminatory  practices 
against products originating in other Member States. In particular aid granted by a Member 
State to its shipowners or to third parties in that State for the building or conversion of ships 
may not distort or threaten to distort competition between shipyards in the Member State and 
shipyards in other Member States in the placing of orders. 

CHAPTER IX 

CONTRACT - RELATED OPERATING  AID 

Article 3 

1. 

Until 31 December 2000, production aid in support of contracts for shipbuilding and 
shipconversion, but not shiprepair, may be considered compatible with the common  market 
provided that the total amount of  all forms of aid granted in support of any  individual 
contract(including the grant equivalent of any aid granted to. the shipowner or third parties) does 
not exceed, in grant equivalent, a common maximum aid ceiling expressed as a percentage of 
the contract value before aid. For shipbuilding contracts with a contract value before aid of more 
than ECU  10 million the ceiling shall be  9%; in all other cases the ceiling shall be 4.5%. 

2. 

The aid ceiling applicable to a contract shall be that in force at the date of signature of the final 
contract. However, this rule shall not apply in respect of any ship delivered more than three 
years from  the date of signing of the final contract. In such cases, the ceiling applicable to that 

15 

contract shall be that in force three years before the date of delivery of the ship. The 
Commission may however grant an extension of the three-year delivery limit when this is  found 
justified  by the technical complexity of the individual shipbuilding project concerned or by 
delays resulting from unexpected disruptions of a substantial and defensible nature in the 
working programme of a yard due to exceptional circumstances, unforeseeable  and external to 
the company. 

3. 

The grant of aid in individual cases in application of an approved aid scheme shall not require 
prior notification  to, or authorisation from, the Commission. 

However, where there is competition between different  Member States for a particular  contract, 
the Commission shall require prior notification  of the relevant aid proposals at the request of 
any Member State. In such cases, the Commission shall adopt a position within 30 days of 
notification;  such proposals may not be implemented before the Commission has given its 
authorisation. By its decision in such cases the Commission shall ensure that the planned aid 
does not affect  trading conditions to an extent contrary to the common interest. 

Aid in the form of state supported credit facilities granted to national and non-national 
shipowners or third parties for the building or conversion of vessels may be deemed  compatible 
with the common market and shall not be counted within the ceiling if it complies with the 
terms of OECD Council resolution of 3 August  1981 ( OECD Understanding on Export  credits 
for Ships) or with any agreement amending or replacing that Understanding. 

Aid related to shipbuilding and ship conversion granted as development assistance to a 
developing country shall not be subject to the ceiling. It may be deemed  compatible with the 
common market if it complies with the terms laid down for that purpose by OECD  Working 
Party 6 in its Agreement concerning the interpretation of Articles 6 to 8 of the Understanding 
referred  to in paragraph 4 of this Article or with any later addendum or corrigendum to the said 
Understanding. 

The Commission must be given prior notification  of any such individual aid proposal. It shall 
verify  the particular development content of the proposed aid and satisfy  itself that it  falls 
within the scope of the Understanding referred  to in the first subparagraph and that the offer  of 
development assistance is open to bids' from different  yards. 

CHAPTER m 

RESTRUCTURING  AND CLOSURE  AID 

Article 4 

Aid for  Closures 

Aid to defray  the normal costs resulting from the total or partial closure of shipbuilding, 
conversion or repair yards may be considered compatible with the common market provided 
that the resulting capacity reduction is of a genuine and irreversible nature. 

The costs eligible for the aid referred  to in paragraph  1  are: 
payments to workers made redundant or retired before  legal retirement age; 
the costs of counselling services to workers made or to be made redundant or retired  before 
legal retirement age, including payments made by shipyards to facilitate  the creation of small 

16 

4. 

5. 

1. 

2. 

enterprises which are independent of the shipyards in question and whose activities are not 
principally shipbuilding, conversion or repair; 
payments to workers for vocational  retraining; 
expenditure incurred for the redevelopment of the yard(s), its buildings, installations and 
infrastructure  for use other than that specified  in Article  1  (b) - (d). 

3. 

In addition,  in the case of undertakings which totally cease shipbuilding, conversion or repair 
the following  measures may also be deemed compatible with the common market: 

4. 

5. 

1. 

aid of an amount not exceeding the higher of the following two values, as determined by an 
independent consultant's report  : the residual book value of the installations, ignoring that 
portion of any revaluation since  1  January  1991 that exceeds the national  inflation  rate, or the 
discounted value of the contribution to fixed costs obtainable from  the installations over a three 
year period(less any advantages the aided undertaking derives from  their closure); 

aid such as loans or loan guarantees for working capital needed  to enable the undertaking to 
complete unfinished  works provided that this is kept to the minimum necessary and a  significant 
proportion of the work has already been done. 

The amount and intensity of aid must be justified  by the extent of the closures involved, account 
being taken of the structural problems of the region concerned and, in the case of conversion to 
other industrial activities, of the Community  legislation and rules applicable to those new 
activities. 

In order to establish the irreversible nature of aided closures, the Member State concerned  shall 
ensure that the closed shipbuilding, conversion and repair facilities remain closed for a period of 
not less than ten years. 

Article 5 

Restructuring  aid 

Aid for rescue and restructuring of undertakings in difficulties,  including capital  injections,  debt 
write-offs,  subsidised  loans, loss compensation and guarantees, may exceptionally  be 
considered compatible with the common market provided that it complies with the general 
Community  guidelines on state aid for rescuing and restructuring firms in difficulty,  as currently 
set out in Official  Journal of the European Communities No C 368 of 23 December  1994, and 
any amendments thereto, and in particular in relation to restructuring it fulfils  the  following 
specific  conditions: 

the undertaking has not been granted any such aid pursuant to Council Regulation  1013/97 of  2 
Junel99712; 
the amount and intensity of the aid is limited to the strict minimum  necessary; 
there is a viable restructuring plan that will restore the long-term viability  of the undertaking 
within a.reasonable time scale; 
the aid is a one-off  operation, with clear and unequivocal undertakings from  the Member  State 
concerned that no further  aid will be granted to the undertaking or its legal successors  in the 
future; 
the aid shall not unduly reduce the undertaking's net financial  charges; 

12  OJNoL148,  6 June  1997,pl 

17 

the undertaking or its legal successors shall not claim or be granted tax reduction or relief on the 
basis of past losses covered by the aid; 
there is a genuine and irreversible reduction in the shipbuilding, conversion or repair capacity of 
the undertaking concerned commensurate with the level of aid involved( in that regard the level 
of actual production in the preceding 5 years will be the determining factor in the level of 
capacity reduction required); 
the closed capacity must have been regularly used for shipbuilding, conversion or repair up to 
the date of notification of the particular aid in accordance with Article 10; 
the closed capacity must remain closed for not less than 10 years as from the Commission's 
approval of the aid; 
the Member State concerned must agree to co-operate fully with monitoring arrangements 
established by the Commission, including on-site inspections. 

2. 

In assessing the regularity of production and the capacity reduction involved, the Commission 
will base its decision not only on the theoretical capacity of the yard(s) of the undertaking but 
also on the level of actual production over the preceding 5 years. No account will be taken of 
capacity reductions in other undertakings in the same Member State unless capacity reductions 
in the beneficiary  undertaking are impossible without undermining the viability of the 
restructuring plan. 

3. 

The Commission shall seek the views of Member States on all such cases where the aid is in 
excess of 10 mecus before adopting a position on them. 

CHAPTER IV 

OTHER MEASURES 

Article 6 

Investment Aid for Innovation 

Aid granted for innovation in existing shipbuilding, shipconversion and shiprepair yards may be 
deemed compatible with the common market up to a maximum aid intensity of 10% gross provided that 
it relates to the development and industrial application of innovative products and processes that are 
genuinely and substantially new, ie are not currently used commercially by other operators in the sector 
within the European Union, and which carry a risk of technological or industrial failure, subject to  the 
following conditions: 

it is limited to supporting expenditure on investments and engineering activities directly and 
exclusively related to the innovative part of the project; 
the amount and intensity of the aid  is limited to the minimum necessary taking account of the 
degree of risk associated with the project. 

18 

Article 7 

Regional Investment Aid 

Afd granted under general regional aid schemes for investment in upgrading or modernising existing 
yards, not linked to a financial restructuring of the yard(s) concerned, with the objective of improving 
the productivity of existing installations may be deemed compatible with the common market provided 
that: 

- it is limited to supporting eligible expenditure as defined by the applicable regional aid scheme; 
-the amount and intensity is within the applicable regional aid ceiling; 

Article $ 

Research and development 

Aid granted to defray expenditure by shipbuilding, conversion or repair undertakings on research and 
development projects may be considered compatible with the common market if it is in compliance 
with the rules laid in the Community framework for State aid for research and development, as 
currently set out in Official  Journal of the European Communities No C 45 of 17 February  1996, or any 
successor arrangements. 

Article 9 

Environmental protection 

Aid granted to defray expenditure by shipbuilding, conversion or repair undertakings for environmental 
protection may be considered compatible with the common market if it is in compliance with the rules 
laid down in the Community guidelines on state aid for environmental protection, as currently set out in 
Official journal of the European communities No C 72 of 10 March 1994, or any successor 
arrangements. 

CHAPTER V 

MONITORING PROCEDURES 

Article 10 

1. 

2. 

Aid to shipbuilding, conversion and repair undertakings covered by this Regulation shall be 
subject to, in addition to the provisions of Article 93 of the Treaty, the special notification  rules 
provided for in paragraph 2. 

The following shall be notified to the Commission in advance by the Member States and 
authorised by the Commission before they are put into effect: 

19 

(a). 

(b) 

(c) 

any aid scheme - new or existing - or any amendment of an existing scheme covered by this 
Regulation; 

any decision to apply a generally applicable aid scheme, including generally applicable regional 
aid schemes, to the undertakings covered by this Regulation in order to verify compatibility 
with Article 92 of the Treaty, in particular in cases referred to in Articles 6, 7, 8 and 9 unless the 
aid is below the de minimis threshold of 100000 ecus over any three year period13; 

any individual application of aid schemes in the following cases: 
(i) those referred to in the second subparagraph of  Article 3.3 and in Article 3.5, Article 4, and 
Article 5; or 
(ii)when specifically provided for by the Commission in its approval of the aid scheme 
concerned. 

Article XI 

1. 

To enable the Commission to monitor application of the aid rules contained in Chapters II to IV, 
Member States shall supply it with: 

(a)  monthly reports on each shipbuilding and conversion contract by the end of the third month 
following the month of signing of each contract, in accordance with the annexed Schedule 1; 

(b) 

(c) 

(d) 

(e) 

(f) 

2. 

completion reports on each shipbuilding and conversion contract including those signed before 
the entry into force of this Regulation, by the end of the month following the month of 
completion, in accordance with the annexed Schedule 1 ; 

yearly reports, to be provided by 1  March of the year following the year subject to the report, 
giving details of the total amount of aid granted to each individual national shipyard during the 
previous calendar year, in accordance with the annexed Schedule 2; 

in the case of shipyards able to build merchant ships over 5 000 gt, yearly reports to be provided 
not later than two months after the annual general meeting has approved the shipyard's yearly 
report, giving publicly available information on capacity developments and on the structure of 
ownership, in accordance with the annexed Schedule 3; 

in the case of shipyards which have received restructuring aid in accordance with Article 5, 
quarterly reports on the attainment of the restructuring objectives, including the following 
elements: disbursement and use of the aid, investments, productivity performance, employment 
reductions, viability; 

in the case of shipyards benefitting from contracts supported by aid in the form of development 
assistance, such information as the Commission may require to enable it to ensure that the 
conditions of Article 3.5 are respected. 

In the case of shipyards engaged in both commercial and military shipbuilding, conversion or 
repair, the reports referred to at (d) of paragraph 1  of this Article shall include information on 
these activities separately, including separate accounts with overheads apportioned accordingly. 

13 

Commission Notice, OJ No C68,6  March  1996 

20 

On the basis of the information communicated to it in accordance with Article'10 and paragraph 
1 of this Article, the Commission shall draw up an annual overall report to serve as a basis for 
discussion with national experts and the Council. The report shall also be sent to the European 
Parliament for information. Separate half-yearly reports will be drawn up on cases involving 
restructuring aids. 

Article 11 

This Regulation shall enter into force on 1  January 1999 and shall apply until 31 December 2003. 

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

21 

Schedule 1 
REPORT OF MERCHANT SHIP ORDERS/COMPLETIONS (DELETE AS APPROPRIATE) 

Section  1: Contract details 

1. New building / Conversion 

Section 3: Financial  arrangements 

14. Contract price 

Currency 

ECU 
(Prevailing 
rate) 

%  of 
contract 
price 

2. Company 

3. Yard 

4. Yard No 

15. Estimated contract loss (if any) 

5. Registered owner (name and nationality) 

6. Holding owner (name and nationality) 

7. Vessel's country of registration 

8. Date contract signed 

9. Completion / delivery date 

Section 2: Ship details 

10. Type of vessel (by OECD category) 

11. Dead-weight  (DWT). 

12. Gross tonnage (GT) 

13. Compensated  gross tonnage (CGT) 

16. Contract related aid 

A. Granted to yard: 

(a) grants 
(b) credit facilities 
O specific fiscal concession 
(d) other support 

B. Granted to customer or ultimate owner : 

(â) grants 
(b) credit facilities14 
O guarantees11 
(d) fiscal concession 
(e) other support 

17. Date aid granted 

Contact for inquiries: 

Date: 

for credits granted the following  information  shall be provided: 
- volume 
- repayment  period 
- frequency of payments 
- interest  rate 
for guarantees granted the following  information  shall be provided: 
- volume 
- premium paid 
- duration 
- other terms and conditions 

22 

Schedule 2 
REPORT OF COMPANY FINANCIAL SUPPORT 

Name of company 

1.  Contract 
value 
2. Costs/loss 

Direct aid 
received 

Indirect 
aid  support 

Legal basis 
Oncluding 
date of 
approval by 
Commission) 

> 

Costs1* 

Aid 
received 

Legal basis 
(Including 
date of 
approval by 
the 
Commission) 

Section 1: Public aid 

Operating aid 

1. Contract support: 

(a) related to contracts concluded before 
s  1 January of the year concerned 

(b) related to contracts concluded  after 
1 January of the year concerned, 
of which. 
• related to development assistance to 
developing countries 
• related to contracts subject to 

Article3 (3) 

2. Investments 

3. Social aids 

4. Other cash closure costs 

3. Asset disposal costs/receipts 

6. Rescue and restructuring costs 

7. Research and development costs 

8. Environmental protection 

9. Other costs 

Contact for inquiries: 

Date: 

Position: 

Signature:. 

14 includino  for 3, details of numbers of workers  involved 

Section 2: Turnover and  profit / (loss) to be completed by all companies in receipt of direct production aid 

Reporting year 

Previous year 

10. Turnover 
11. Of which related to merchant shipbuilding and ship conversion: 

(a) related to contracts concluded before  1 January of the year 

concerned 

(b) related to contracts concluded after  1 January of the year 

concerned, of which 
- related to development assistance to developing countries 

12.  Losses (if any) 
13. Of which related to merchant shipbuilding and ship conversion: 

(a) related to loss on contracts 
(b) related to movement in provisions 
O related to restructuring expenditures 

Section 3:  Cash flow  to be filled in for all companies which have.registered losses under 12 and have received 
funding from any public sources) 

• 

Reporting year 

Previous year 

Expenditures 
14. Trading losses before  depreciation 
15. Investment expenditure 
16. Other expenditures 
17. Other changes in working capital 
Source of funds 
18. Equity receipts: 

(a) from public shareholders 

(b) from private shareholders 

19. Loans and overdrafts: 

(a) from public sources 
(a') of which contract support 
(b) from private sources 
(b') of which contract support 

' 

23 

Schedule 3 

REPORT ON YARDS ABLE TO BUILD MERCHANT SHIPS OF OVER 5 000 GT 

1. Name of the company 

2. Total available capacity 

3.  Data on the dockfàerth 

(..... 

( 

) 

) (CGT) 

Dock or berth 

( 
( 
( 

• 

• 

• 

) 
•••) 
) 

Maximum size of ships (GT) 
( 

• 

( 
( 

;••• 

• 

• 

: 

) 

) 
) 

4.  Description of any plans for future capacity expansion or reduction 
5.  Structure of ownership (capital structure, share of direct and indirect public ownership) 
6.  Financial statements (balance sheet, profit and loss statement, including, if available separate 

accounts covering the shipbuilding activities of holding) 

7.  Transfer of public resources (including debt guarantees, bond infusions, etc.) 
8.  Exemptions from financial or other obligations (including tax privileges, etc.) 
9.  Capital contribution (including equity infusions, withdrawal of capital, dividend, loans and their 

refunding, etc.) 
10.  Debt write-off 
11. 

Transfer of losses 

24 

ISSN 0254-1475 

COM(97) 469 final 

DOCUMENTS 

EN 

07  15  08  10 

Catalogue  number  :  CB-CO-97-507-EN-C 

ISBN  92-78-25572-6 

Office  for  Official  Publications of the European  Communities 

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