End to UK Subsidies Will Change Ship Finance

by Paul Richardson

From the beginning of 1996, government subsidies towards shipbuilding contracts placed at yards in Europe, including the U.K., will be no longer. The much-debated financing, labeled unfair by U.S. authorities, and constantly questioned by the Asian shipyards, will be phased out, and all commercial shipbuilding projects, should they carry any form of subsidy, will need to be backed by the private sector, such as banks or even owners’ equity.

A Paris meeting organized by the Organization for Economic Cooperation & Development (OECD) in mid-July reached an initial agreement to end the government subsidies, although a reciprocal requirement relating to ship operations under the so-called Jones Act, was placed on the US doorstep, leading to a compromise from the Clinton administration.

In place of the government subsidies, yards which include those in the U.K., will be open to cheap ship finance, but, more importantly, the incorporation of a new “injurious pricing code” will be introduced, to stop newbuildings being booked at loss-making prices by shipyards keen to gain a major market share.

Until 1996, the maximum level of government subsidy on shipbuilding contracts placed in all EC countries is 9%, but there are tremors throughout the industry that in the run up to January 1996, a certain amount of panic contracting will take place, as European shipyards and shipowners looking to place newbuilding orders in the EC on the back of existing government subsidy arrangements, will be fighting to firm up orders before the deadline passes. If that happens, the entire market position could become close to chaotic, and the future of many small time shipyards post ’96, particularly in the U.K., will be questionable.

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