Shipyard aid case provides test for bid to change subsidy rules

Date: 20/05/1999

By Renée Cordes

SHIPBUILDING industry experts say the heavy fine likely to be imposed on the Norwegian firm Kvaerner could be a key test of attempts to change the rules governing the way subsidies are awarded.

Acting Competition Commissioner Karel van Miert said recently that Kvaerner might have to pay back a "considerable amount" of the €614 million in state aid it received from Bonn to restructure the Warnow Werft shipyard in north-eastern Germany. The subsidy was authorised by EU industry ministers in 1991 and Kvaerner bought the yard a year later.

The European Commission launched proceedings against Germany last year amid concerns that the shipyard had exceeded the capacity limit laid down as part of the conditions for approving the aid.

Competition officials could order repayment of part of the subsidy if they find that the parties involved did not comply with those conditions.

A 1998 EU law severely restricts the circumstances in which subsidies can be awarded to shipbuilders by, for example, banning them from being used to finance a yard's day-to-day operations. It does, however, allow other kinds of government spending such as aid for investment in more modern equipment and facilities, restructuring, or support for investment in research and environmental protection measures.

The case has thrown the spotlight once again on the continuing battle over plans for an internationally binding accord setting similarly strict conditions world-wide.

European shipowners are pressing the US and Korea to ratify the agreement drawn up by the Organisation for Economic Cooperation and Development (OECD), originally due to enter into force in 1996, which lays down "stringent" conditions for government subsidies, whether they are paid directly to the shipbuilder or indirectly through shipowners or other parties.

They argue that a global agreement is needed to ensure fair competition. "We are against these kinds of subsidies, because it will always result in overcapacity," said Christos Economou, executive advisor to the European Community Shipowners' Associations.

The organisation argues that the OECD accord will have no teeth without the participation of the US, whose support is needed to lend it credibility, or Korea, because of the scale of its shipbuilding activities. At present, Washington and Seoul's refusal to sign is holding up implementation of the deal.

The US administration is under intense pressure from its shipbuilding industry not to ratify the agreement, while Korea has come under heavy fire from the EU for allegedly using international financial assistance to subsidise its shipbuilders. European companies claim Seoul illegally used the funds to expand capacity at yards such as those owned by Halla Engineering and Heavy Industries. They also allege that Korean shipbuilders artificially lowered the price of their vessels, despite the fall in the value of their currency, giving them an unfair competitive advantage.

Seoul officials deny that their government has done anything wrong, arguing that international organisations closely monitor the use of the funds they disburse.

A spokesman for Acting Industry Commissioner Martin Bangemann said officials were trying to organise a visit to Korea some time next month in a bid to make progress on the issue ahead of an informal meeting of EU industry ministers in July.

Keyword: Kvaerner.