Subsidies and the shipyards

What was agreed on subsidies to the shipbuilding and shiprepair sector?

Negotiations on the ship-building and ship-repair sector were concluded last week as part of talks on competition. Discussions focused on the issue of public subsidies that we pay to our state-owned shipyards.

For the shipyards, the prospect of EU membership had long been touted as an end to subsidies and therefore a closure of the yards.

However, during negotiations agreement was reached allowing Malta to continue subsidising the yards with up to four hundred and twenty million liri (Lm420 million) until the end of 2008. This aid is intended to return the sector to commercial viability over a period of seven years.

Talks on this issue were highly technical in nature and took the best part of two years for an agreement to be reached.

The issue was controversial for both sides. For Malta, the shipyards are much more than a normal industry. They are also a politically sensitive sector. But for the EU, subsidising shipyards is equally complicated. Apart from having to deal with similar requests from other candidate countries, such as Poland, the EU is also currently involved in an international clash over South Korea's subsidies to the sector.

In Malta, subsidies paid to the state-owned ship-building and ship-repair companies have long been the subject of much debate. Once a leading industry, the sector has been in decline for several years and has only survived thanks to generous hand-outs of public funds.

Technically, therefore, the shipyards are only open thanks to taxpayers' money.

In the main, subsidies took the form of operating aid, that is, payments that cover recurrent costs, such as wages. In 2000 alone the sector received around Lm19 million in grants. In addition, the state also provided loans and other advances that, over the years, accumulated to several millions in debt.

Evidently, the intention was to seek to return these important sectors to commercial viability. However, so far, this objective had not been achieved.

EU law regulates state aids paid to this sector. Operating aid, such as paying wage bills through subsidies, is prohibited because it does not support the improvements, such as investments, that need to be made to return the industry to competitiveness. This was an obvious problem for Malta because most of its subsidies were paid in the form of operating aid.

But EU law also allows certain type of assistance and puts conditions under which this may be paid. This includes aid for restructuring purposes, provided it is given on a "one-time-last-time" basis. It also includes regional investment aid, aid for innovation, research and development, training aid and aid for environmental protection. Aid is also possible in cases where a company operating in this sector is to be closed down, in order to facilitate the necessary adjustments, especially the social consequences that need to be taken into account.

Although Malta agrees with the principle that the sector should be returned to viability without the need of state assistance, it wanted to achieve this in a gradual manner.

For this reason, Malta set up a task force to prepare a restructuring plan for the yards. On the basis of this plan, during negotiations, Malta requested a transitional period of seven years "in order to ensure an orderly adjustment process in the light of the significant socio-economic implications." In other words, Malta wanted the sector to have sufficient time to implement a restructuring plan before subsidies are phased out.

After detailed negotiations, an agreement was finally reached on a transitional period until the end of 2008. By this time, the restructuring plan will be implemented and the Maltese yards should be in a position to compete effectively. To achieve this, the plan also envisages a reduction in the workforce and in capacity during the transitional period. Early retirement schemes to reduce the workforce have already produced some visible results.

The subsidy covered by the agreement until 2008 runs into four hundred and twenty million Maltese liri (Lm420m). This will be paid between 2002 and 2008. It includes a write-off of the yards' accumulated debt of some three hundred million liri (Lm300m). The remaining subsidies, of an average of some seventeen million liri (Lm17m) a year, will be paid for the purposes of investment, training, compensation for social costs and working capital.

Understandably, the agreement was very difficult to achieve. Little surprise therefore that in its final negotiating position the EU made it clear that "this unique case can in no way be regarded as a precedent."

Malta-EU Information Centre: Tel: 25909192; Fax: 21227580; E-mail address: euinfo.mic@magnet.mt; Website: www.mic.org.mt

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