Operating aid to shipbuilding has been authorised by the Community since the early 1970s. For many years the aid rates were exceptionally high. In the 1987 Sixth directive on shipbuilding, a tighter, more restrictive policy was introduced. The reason for introducing the stricter policy was the need to ensure increased efficiency and improved competitiveness in the sector, to spur further restructuring to that end, and to ensure fair intra-EU competition. The aim was to gradually phase out operating aid, which normally is not allowed in the EU for well-known reasons of economic inefficiency.

The aid ceiling for operating aid in 1987-1988 was 28%, which was reduced to 26%in 1989 and 20% in 1990. The policy was maintained in the Seventh directive on shipbuilding, which was in force between 1991-1993. The operating aid ceiling was set at 13% in 1991 and then reduced to 9% from 1992. The operating aid rules of the Seventh directive were then prolonged six times.

Initially, through the progressive reduction in the aid ceiling, operating aid encouraged changes towards greater competitiveness and structural change.

However, the necessary impetus was not sustained in more recent years as the level of the ceiling became static. Overall, the aid has served to cushion yards from the full rigours of the market. It has also resulted in significant budgetary costs for most Member States. Shipbuilding is the only sector of manufacturing industry that systematically benefits from operating aid. It is highly 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 variation in the actual levels of aid granted by the Member States. For example, in 1998 Germany provided large ships with 6,4%, the Netherlands with 4,4% and Finland with 3,1%, while France and Italy provided the maximum allowed aid of 9% (see Table 8 below).

In 1997 the Commission proposed that state aid needed to be refocused to promote and underpin efforts to improve the competitiveness of the industry since it was clear that many yards still lacked competitiveness, in particular lagging behind their Far Eastern competitors. This implied shifting away from operating aid to other forms of support, better geared towards helping industry achieve the necessary changes to overcome its weaknesses.

Council Regulation EC 1540/98 therefore provided a final two year prolongation of operating aid expiring as of 1 January 2001. It also introduced a set of other measures, which up until end of 2003 will continue to be available to the shipbuilding sector. Most of the aid forms that will be available to the sector in the future share the common purpose of providing an incentive to improve performance of EU yards. These aids can be summarised as follows.

In addition, the following aid possibilities exist.

Finally it should be noted that under Regulation EC 1540/98 operating aid can be provided for contracts signed until the end of this year, for ships delivered until the end of 2003. This means that yards may continue to benefit from such payments, for their stock of orders signed up until 31 December 2000.

Since the beginning of the 1990s the average (average over three years) total yearly amount of state aid awarded to shipbuilding has fluctuated between 1.445 million and 1.720 million euro (cf. European Commission, Fifth, Sixth and Eighth surveys on state aid in the EU). The main part of the aid has been provided in the form of operating aid and restructuring aid. The amount of operating aid provided since 1990 has fluctuated between 198 million and 1.102 million euro per year.

Operating aid is related to contract value. As a consequence most of the operating aid awarded during recent years have been for cruise ships, a market where EU yards have a dominant position in the world. The amount of operating aid provided for cruise ships between 1990 and 1998 was 1.374 million euro or 24% of all operating aid for the period. For 1998 the share of operating aid for cruise ships reached 57%of total operating aid, and such a high share is expected also for 1999 and 2000.

When relating shipbuilding aid to the sector's value added, the high level of support afforded to the sector can be observed. For shipbuilding, aid represented between 20% and 26% of the sector's value added at factor cost during the years 1990-1998.

For the latest period where data exist, 1996- 1998, the aid related to value added was 22%. In contrast, average aid for the manufacturing sector in 1996-1998 amounted to 2,3% of the sector's value added (cf. European Commission, Eight survey on state aid in the EU, Table 3. There may not be a direct comparability between the figures for shipbuilding and other manufacturing, but they give a correct indication of magnitudes).

Another way to relate the aid is to calculate aid per employed person. In the shipbuilding industry, aid per employed person in 1998 reached 28.000 euro. This can be compared to overall national aid for manufacturing per person employed in the EU, 1996-1998, which was 1.113 euro. The high aid rate in relation to value added and per person employed raises the question of whether scarce public resources are being spent in an optimal way, and whether the capital could not be used more efficiently.

Incentive related aid, such as aid for research and development, innovation and regional investment aid, appears to have been used only to a negligible extent. The reasons for the low interest in the use of these aid forms are not known. One reason may be that the rules are not sufficiently well adapted to the particularities of shipbuilding. It may also be that while contract related operating aid has been available, many yards have not considered it necessary to exploit the possibilities of other aid forms, despite the fact that they have been available for several years. It would be worth investigating the reasons for the low use of these aid forms, so that Member States and industry could make better use of the full range of available aid measures to support yards in meeting future challenges.