• / The Maritime Aids of the Six Major Maritime Nations ■■■■■Buni U.S. DEPARTMENT OF COMMERCE Maritime Administration Office of Policy and Plans November 1977 The Maritime Aids of the Six Major Maritime Nations U.S. DEPARTMENT OF COMMERCE Maritime Administration Office of Policy and Plans November 1977 Section 211(f) of the Merchant Marine Act of 1936 states that: The Secretary of Commerce is authorized and directed to investigate, determine, and keep current records of - The extent and character of the governmental aid and subsidies granted by foreign govern- ments to their Merchant Marine .... This document has been compiled in accordance with the authority granted in the passage above. THE MARITIME AIDS OF THE SIX MAJOR MARITIME NATIONS Contents Introduction I. Executive Summary II. The Maritime Aids of Japan III. The Maritime Aids of the United Kingdom IV. The Maritime Aids of Norway V. The Maritime Aids of Sweden VI. The Maritime Aids of West Germany VII. The Maritime Aids of France Appendices: a. eastern bloc maritime activity b. opec maritime activity c. less developed country maritime activity d. synopsis of the oecd understanding on export credit for ships e. bibliography Digitized by the Internet Archive in 2012 with funding from LYRASIS Members and Sloan Foundation http://archive.org/details/maritimeaidsofsiOOunit INTRODUCTION Contents page a. objectives of the maritime aids study 1 b. trends in world shipping and ship" 3 building c. relationship of the six maritime nations 7 to world activity 1. Ship Operating 7 2. Shipbuilding 9 D. CHARACTERISTICS OF THE SIX MARITIME 13 NATIONS 13 14 15 15 16 17 ANALYTICAL METHODS 18 1. Categories of Assistance Programs 18 2. Treatment of Exchange Rates 20 3. Treatment of Interviews 20 4. Measures of the Effectiveness 21 and Benefits of Maritime Aid 5. Previous Studies of Foreign 22 Maritime Aids 1. Japan 2. United Kingdom 3. Norway 4. Sweden 5. West Germany 6. France Introduction List of Exhibits and Charts exhibit title page 1 Measures of Maritime Activity - World 4 Shipbuilding Activity and World Fleet 2 Measures of Maritime Activity - World 5 Shipbuilding and World Fleet - 1970-1976 3 Relationship of the Six Study Countries 8 to the World Shipping and Shipbuilding Industries - 1975 4 Six Major Maritime Nations National Ship- 10 building and Relationships to Fleet Re- quirements in Million Deadweight Tons - 1970-1975 5 Six Major Maritime Nations - Shipbuilding 11 Deliveries and Year-end Backlogs - 1970-1976 6 Six Major Maritime Nations - Combined De 12 liveries and Year-end Orders Outstanding in Deadweight Tons and as a Percent of World Activity INTRODUCTION A. OBJECTIVES OF THE MARITIME AIDS STUDY This study of Maritime Aids of the Six Major Maritime countries was undertaken to accomplish the following objectives : • To document the maritime aids employed by each of the six major maritime nations in order to assist its shipping and ship- building industries. • To document the trends in types of aids em- ployed over the 1971-1975 period and sub- sequently. • To evaluate the effectiveness of the aids in achieving the stated goals of the pro- grams. In the absence of stated goals, the effectiveness of the aid programs is evaluated in terms of "public interest" goals such as shipyard capacity generated, national flag fleet capacity generated, jobs created or maintained in these sec- tors, balance of payments contribution by these sectors, etc. • To evaluate the effectiveness of aid pro- grams both in terms of benefits and in terms of financial performance achieved by the shipping or shipbuilding industry of the country. • To investigate how the expanding maritime activities of Comecon, OPEC, and less de- veloped countries will affect the major maritime powers and what measures the major powers may take to offset the im- pact of these other countries ' maritime activities. To document and analyze the effectiveness of government responses to tanker and shipbuilding overcapacity situations and to assess the effectiveness of the aid programs in reducing the adverse impacts of these overcapacity situations. To investigate how trends and < the economic environment of each country affected the performance of the maritime industry in that country. • To document and analyze recent and pro- spective maritime policy changes in major maritime nations and to evaluate their prospects for success in terms of future economic, environment, and competitive conditions . Chapter I presents an Executive Summary of the maritime aids employed by the six nations studied. The coun- tries included are Japan, United Kingdom, Norway, Sweden, West Germany and France. Chapters on each country address in detail the maritime aid pro- grams employed by these six major maritime nations. Each chapter documents the maritime aids in effect during the 1971-1975 period, summarizes their bene- fits and effectiveness, and analyzes the recent and prospective programs these nations have developed. These six nations not only are world leaders in ship- building capacity and size of home fleet but also represent a broad spectrum of approaches and reactions to the opportunities and challenges of large-scale maritime activity. For each nation studied, the maritime industry has a unique importance and effect on national economics. Chapter II focuses on Japan, following its ascendance in the past two decades to the position of world leader in shipbuilding and ship operations. Chapters III and IV address the United Kingdom and Norway, major fleet operating countries. Chapters V and VI -3- discuss the shipbuilding-oriented nations of Sweden and West Germany. Chapter VII presents the maritime aid programs of France, whose shipbuilding and ship operating activities are fairly well balanced. The appendices summarize the activities of selected Comecon, OPEC and LDC countries, include the OECD Understanding on Ship Exports, and contain a detailed bibliography of references and source materials. The remainder of this introduction reviews trends in world shipping and shipbuilding during the 1971- 1975 period and the relationship of the six nations to world activity, and describes the analytical methods employed in the conduct of this study. B. TRENDS IN WORLD SHIPPING AND SHIPBUILDING The objective of this study is to analyze the types of assistance programs for national shipping and ship- building industries employed by the six major maritime countries over the 1971-1975 period as well as recent and prospective programs and trends. It is not the purpose of this study to address conditions in the world's shipping and shipbuilding industries. Other studies have covered the matter extensively. Never- theless, trends in world market conditions have certainly had an impact on the economies of the shipping and shipbuilding industries in the six countries studied and in turn have influenced the effectiveness and types of assistance programs em- ployed. It is therefore important to consider some of the principal trends in the world shipping and shipbuilding industries over the study period. Between the end of 1970 and 1975, the world ship- building and shipping industries experienced a virtual explosion followed by one of the most severe collapses in history. The world fleet increased by some 70 per- cent on a deadweight basis and by 58 percent on a gross registered tonnage basis. These rates of ton- nage growth represent compound annual growth rates of 11.2 and 9.5 percent, respectively. Shipbuilding deliveries increased at similar rat.es over the period, with tanker construction representing the largest in- crease (see Exhibits 1 and 2). Exhibit 1 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY WORLD SHIPBUILDING ACTIVITY AND WORLD FLEET Oceangoing Ships of 1,000 Gross Tons and Over (DWT and GRT in thousands) 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate | SHIPBUILDING | -—Orders Outstanding at \ Total Ships a - Number DWT GRT 2,790 130,730 3,004 162,807 2,449 160,029 2,826 224,993 2,796 216,299 127,156 3,123 176,846 104,343 2.3 6.2 f!A Tankers - Number DWT GRT 648 75,517 803 99,991 898 116,744 1,280 184,239 1,310 178,511 103,060 1,031 129,550 74,380 9.7 11.4 NA Bulk Carriers - Number DWT GRT 732 41,499 840 49,527 572 33,826 631 32,262 589 29,190 18,269 792 34,513 20,902 1.6 -3.6 NA Freighters - Number DWT GRT 1,410 13,714 1,361 13,289 979 9,459 915 8,492 897 8,598 5,827 1,256 12,682 8,722 -2.3 -1.5 NA Total Ships 9 - Number DWT GRT 1,086 35,178 20,002 1,092 39,817 22,612 1,119 44,350 25,424 1,094 52,093 29,152 1,098 59,512 32,499 1,097 59,053 31,912 0.2 10.9 9.3 Tankers DWT GRT 222 20,259 10,306 223 20,559 10,532 216 21,241 10,669 291 29,268 14,931 363 41,747 21,518 387 44,261 22,804 11.8 16.9 17.2 Bulk Carriers - Number DWT GRT 242 9,408 5,592 294 13,933 8,003 333 17,394 9,880 305 17,906 10,093 288 13,485 7,744 249 10,770 6,182 0.6 2.7 2.0 Freighters - Number DWT GRT 619 5,499 4,073 563 5,281 3,971 553 5,645 4,702 486 4,869 3,999 436 4,243 3,145 450 3,996 2,822 -6.2 -6.2 -7.1 1 ^EET | » . o) . oy , 5/4 ci— + Total Ships 3 - Number DWT GRT 19,980 326,999 211,401 20,544 361,739 230,302 21,009 399,552 250,543 21,600 446,370 275,727 22,449 503,348 306,366 22,872 556,572 333,042 2.7 11.2 9.5 Tankers - Number DWT GRT 4,232 153,075 88,896 4,431 173,196 99,105 4,581 192,894 108,558 4,813 220,481 122,370 5,121 261,440 143,399 5,311 302,217 163,731 4.6 14.6 13.0 Bulk Carriers - Number DWT GRT 2,954 77,173 47,199 3,218 90,962 55,009 3,539 108,512 64,822 3,800 126,140 74,660 4,075 139,267 82,313 4,272 150,080 88,194 7.7 14.2 13.3 Freighters - Number DWT GRT 11,899 92,355 67,820 12,013 93,297 68,805 12,029 94,128 70,073 ■ 12,173 96,083 72,027 12,478 99,270 74,288 12,575 101,248 75,284 1.1 1.9 2.1 Includes Combination Passenger/Carqo vessels not shown separately. Source: SHIPBUILDING - New Ship Construction, Maritime Administration, U.S. Dept. of Commerce. FLEET - Merchant Fleets of the World, Maritime Administration, U.S. Dept. of Commerce. -5- Exhi bit 2 MEASURES OF MARITIME ACTIVITY WORLD SHIPBUILDING AND WORLD FLEET 1970-1976 " m □ KEY: - Freighter - Bulk - Tanker „ ' ° World Fleet • ll P P P P /////, ty 1 1970 1971 1972 1973 1974 1975 1976 Del iveries 250 ■. m. w w m m ^ 11 . m 11 w, |i 1 '- = If i Orders Outstanding Source: Merchant Fleets of the World and New Ship Construction , Maritime Administration, U.S. Department of Commerce. The growth in total demand for new ships, reflected in outstanding orders, peaked at the end of 1973. At that time, orders outstanding on a deadweight ton- nage basis were 72 percent above the comparable figure of just three years earlier, and were equivalent to 50 percent of the existing world fleet. By early 1974, the effects of the recession began to cause a decline in outstanding orders as record de- liveries and cancellations worked off the backlog. By the end of 1975, new orders had fallen off sharply, and outstanding orders represented le-, OH O. I— Q. GO i— =) n: q CO ^ i-h un X LU C_> •— < 1-4 Credit assistance and investment guarantees, for ex- ample, may result in beneficial interest rates to the shipping and shipbuilding industries. The value of the investment supported, however, may be 50 to 100 times greater than the annual benefit derived from compari- sons with alternative financing arrangements. During the study period, the fleets studied have been assisted in the pursuit of varied goals of growth or replacement. Exhibit 1-3 summarizes the fleet replace- ment and net growth profiles of the six major maritime nations over the 1971-1975 period. In the near future, the emphasis of fleet aids will necessarily be on re- placement; the aids will be designed to stimulate orders for domestic shipyards while simultaneously modernizing and increasing the competitiveness of the developed nations' fleets. In the past year, increases in im- plicit restrictions on the ordering of vessels abroad have been observed in France and Sweden, through the use of limited aids, conditional benefits and case by case reviews of owners' aid applications. This trend will continue to increase, despite any international agreements prohibiting explicit pro- tection of domestic shipbuilding. Tax allowance aid programs proved successful in a number of countries in achieving the goal of increasing shipowners' liquidity in good periods to buffer industry slumps through various tax benefits, including accelerated depreciation and capital gains tax deferrals. Although selected Norwegian owners were faced with financial collapse due to the precipitous decline in the tanker market, the use of such tax allowances made large contri- butions to the resilience of the shipping industry in general. The performance of the United Kingdom's fleet during the recession was in part the result of the country's effective tax allowance programs combined with good management practices. In mid-1977, Japanese owners were calling for a continuation of Japan's in- creasing use of tax allowances through liberalized de- preciation schedules. Other countries will certainly review and redesign their tax benefit programs in light of post-1973 experience. 1-5 FLEET REPLACEMENT AND FLEET GROWTH SIX MAJOR MARITIME NATIONS AND WORLD 1971-1975 (deadweight in thousands) Fleet Deadweight Deadweight % of Del veries 1970 1975 Net Fleet Deliveries Growth Net Growth Net Fleet Replacement Total Vessels Tankers Bulk Carriers Freighters 39,142 16,036 13,249 9,782 63,238 33,950 21,270 7,945 33,989 24,096 20,066 17,914 38,598 8,021 6,213 (1,837) 70.8 89.2 20.7 0.0* 29.2 10.8 79.3 100.0* Total Vessels Tankers Bulk Carriers Freighters 37,065 20,863 6,603 8,955 54,913 32,869 14,508 7,322 28,231 17,848 16,581 12,006 9,506 7,905 2,186 (1,637)* 63.2 72.4 83.1 0.0* 36.8 27.6 16.9 100.0* Total Vessels Tankers Bulk Carriers Freighters 32,374 17,351 11,637 2,335 47,796 28,467 16,696 2,559 26,606 15,422 17,268 11,116 8,615 5,059 681 224 57.9 64.3 58.7 32.8 42.1 35.7 41.3 67.2 Total Vessels Tankers Bulk Carriers Freighters 6,898 2,887 2,375 1,623 11,230 4,935 4,839 1,437 8,001 4,332 4,631 2,048 2,960 2,464 380 (186) 54.1 44.2 83.2 0.0* 45.9 55.8 16.8 100.0* Total Vessels Tankers Bulk Carriers Freighters 11,697 2,956 2,859 5,854 13,453 5,627 3,993 3,822 7,246 1,756 3,265 2,371 2,178 1,134 1,723 (2,032) 24.2 72.6 52.0 0.0* 75.8 27.4 48.0 100.0* Total Vessels Tankers Bulk Carriers Freighters 9,007 5,799 1,240 1,852 17,690 13,190 2,405 2,062 11,058 8,683 7,318 7,391 1,486 1,165 649 210 78.5 100.0 78.3 32.3 21.5 0.0 21.7 67.7 Total Vessels Tankers Bulk Carriers Freighters 326,999 153,075 77,173 92,355 556,572 302,217 150,080 101,248 254,825 229,573 157,076 149,142 73,488 72,907 24,034 8,893 90.1 94.9 99.2 37.0 9.9 5.1 0.8 63.0 *A11 new deliveries were used to replace vessels deleted from the 1970 fleet. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. 1-6 The diversification of fleets was also a proven support in the recent recession. Government programs requiring consolidation of different types of vessels will probably be seriously considered in the coming decade. The re- silience of the Japanese and Swedish fleets, in compari- son with the poor condition of some sectors of the Norwegian fleet, exemplifies the benefits of owners having diversified operations. Nearly all the nations studied faced serious challenges to the competitive positions of their fleets. Primarily citing high labor costs, owners have asked for and re- ceived consideration and permission to "flag abroad", charter, or otherwise move some portion of operations to nations under whose flags lower costs may be incurred. This raises issues of domestic employment, the balance of payments on maritime services, and national strategic issues on the one hand, and the competitiveness of export goods and the landed cost of vital imports on the other. Recent balances between offshore and home fleet operations have been developed in Japan, while the U.K.'s use of free depreciation has attracted U.K. operators back to the home flag. The governments of developed nations with key interests in cross trading have recently eased restrictions on joint ventures abroad so as to ensure the continued utilization of their fleets in cross trades. While the use of indirect aids has generally proven ef- fective in extending benefits to fleets, the use of direct aids to shipbuilders has become increasingly common. The transition of the shipbuilding environment from one of over-demand, where relatively high cost yards could attract the orders in excess of Japanese capacity or delivery requirements, to one of over- capacity, in which high cost producers are unable to be competitive even with large differential subsidies, has impaired the effectiveness of any aid to the ship- building industry. Given the inability of even exten- sive subsidies to keep yards occupied, restrictions on aid to owners ordering abroad and increased export pro- grams to facilitate the financing of export orders will see development in the coming decade. Assistance to Less Developed Countries and emerging national fleets and shipbuilding industries have also become areas of increased interest for developed nations. 1-7 Aids to shipbuilding will include programs that help to finance an increase in productivity so as to improve areas of potential competitiveness. Future aids will help finance improved methods of construction so as to reduce labor inputs and to produce sophisticated vessels in which labor inputs constitute a lower share of added value. LNG, LPG , Roll-on/Roll-of f , container, chemical, heavy-lift and other specialized vessel types will be supported by directed maritime aid benefits such as France's equipment grants and Norway's selected acceler- ated depreciation schedules. The recent nationalization of two of the six shipbuilding industries studied marks the importance of shipbuilding to national economies and its vulnerability in developed countries to changes in demand and competition. The benefits that a nation derives from the industry are significant, but equally significant are the costs required to support its continued survival. The sig- nificance of shipbuilding has not precluded radical and lasting cuts in capacity under Sweden's nationalization while the Japanese seek to vary output within the existing capacity in order to preserve its potential for future markets. These very different reactions to a similar situation emphasize the congruity of govern- ment actions to national needs and expectation. Mari- time aids will continue to reflect these national con- siderations and the impact of international developments upon them. The years since 1970 have pointed to the importance of anticipation and recognition of developments in the marine industries. With the continuation of ship- yard overcapacity demanding resolution and the prospects of unilateral and bilateral cargo preference codes in- creasing, the maritime aids of the developed nations will play an even greater role. 2. Trends in Aids to National Fleets The three largest fleet operators have supported their fleets in three distinctly different ways. Japan, with the largest fleet, utilized extensive investment finan- cing assistance during the 1960s. The U.K. fleet ex- panded rapidly in the 1970s as the result of heavy expenditures through a grant program. The Norwegian fleet benefited primarily through indirect tax allowance programs. The three other study nation fleets benefited primarily from indirect tax allowances (Sweden) and equipment grants (Germany and France), and interest subsidies (France), I-s Over the study period, Japan has de-emphasized invest- ment financing assistance and increased the availability of tax allowances. The initial use of investment financing fostered a rapid growth of the Japanese fleet. As lower growth objectives were established for the Japanese flag, tax allowances have provided cash flows for financial stability and incentives for vessel replacement. As the growth of the Japanese fleet slowed, the country's shipping industry created an offshore fleet that grew to equal the size of the national fleet. This fleet benefited from Japan's shipyard export aids and provided the Japanese with the benefits of lower cost crews. Both fleets serve the interests of national trade since they are primarily employed in Japan's foreign trade. Current problems facing Japanese owners include in- vasion of their trade routes by the Soviet fleet and continuing increases in crew costs. Owners have recently called for free depreciation, similar to that offered in the United Kingdom; government support of fleet modernization; and resistance to Comecon con- ference undercutting. The U.K. cash investment grant program provided ex- tensive contributions during the study period but has now been phased out. A relative shift to depreciation allowances took place over the study period. The effectiveness of this type of program in periods of low profitability is reduced. Investment guarantees have been utilized to support operators, particularly those hurt by the tanker overcapacity situation. Norway's program has continued to rely on tax allowances. However, recently Norway has had a requirement for investment guarantees to support the investment of owners in highly exposed financial situations. The lessened utility of tax allowances for low profit operators, combined with continuing increases in wage costs has led to a potential expansion of Norwegian operators into other flags. This expansion has been closely controlled, however, and currently is aimed at situations involving cargo preferences from which Norwegian owners might lose their third flag share of existing markets. Norway has also increased the tax allowances for home constructions in an effort to provide support to the shipbuilding industry. Sweden, like Norway, has continued to emphasize tax allowances, which in general have brought financial stability to the fleet. The more diversified Swedish operators have not as yet required the guarantees provided to selected Norwegian owners. As in Norway, wage costs in Sweden have precipitated a potential shift in policy concerning offshore fleets. A test case of this issue has granted ship- owners permission to "flag abroad", provided they are granted special allowance and a new Swedish vessel with a similar number of berths is ordered. West Germany has continued to increase its grants for shipbuilding and temporarily added a special pro- gram for VLCCs that has since been cancelled. The country is also maintaining its use of tax allowance programs. The broadening of shipbuilding credits to domestic owners represents an increase in investment financing assistance to West German owners. The French construction subsidy program has been expanded over the study period and is forecast to greatly increase under Program VII, the current national plan. This represents the most significant change in French assistance programs. Government ownership of two major shipping lines, which has been consolidated recently into a single company, is not forecast to increase. 3. Trends in Aids to Shipbuilding The recession in world shipbuilding demand during the study period 1971-1975 precipitated the nationaliza- tion of both Sweden's and the United Kingdom's ship- building industries in 1977. Sweden, a shipbuilding nation, and the United Kingdom, a fleet operating nation, both were required to ultimately take over their shipbuilding industries to preserve employment and inject the funds necessary for survival. 1-10 While Japan, the largest shipbuilder of the three shipbuilding study nations benefited from a large domestic market and extensive export credit assistance, Sweden, with neither the domestic industry nor domestic capital markets, primarily utilized state guarantees to finance the export credits required by its industry. West Germany, with large domestic capital markets, has provided the shipbuilding industry export assist- ance in the form of low interest loans and interest subsidies. Japan has relied primarily on credit assistance, but over the study period both the Japan Development Bank and the Export-Import Bank financing were reduced. Export-Import Bank budgets have recently been increased to support expanded demand for deferred credit. Ex- port-Import Bank financing has also been recently utilized to assist in the market diversification efforts of the integrated Japanese shipbuilding companies. During the study period, Japan instituted a special tax allowance program to minimize the effects of re- valuation losses. With the exception of the recent increase in Export-Import Bank credit, Japan has generally decreased its assistance to shipbuilders. All other countries have been forced to increase their assistance programs in attempts to narrow the price differentials between European yards and Japanese and South Korean shipyards. Sweden maintained its use of credit guarantees as the primary support to shipbuilding over the study period. However, the financial instability resulting from currency realignments and the limited market for the principal Swedish vessel types have required Sweden to turn to nationalization, greatly expanded guaran- tees, and several program elements which potentially will result in government subsidization of construction costs. West Germany's assistance to shipbuilders has remained primarily in the area of increasing credit assistance. 1-11 In the fleet-dominated countries (United Kingdom and Norway), a large proportion of the shipbuilding output has gone to the national flag fleets, with relatively little direct assistance. Both countries have chosen to attract and not specify domestic con- struction for their home fleets and have increased programs aimed at expanding exports. The United Kingdom shipbuilding industry was nationalized in July 1977. In conjunction with the nationalization, the British assistance programs were expanded to in- clude inflation insurance, government guarantees prior to natioanlization , and direct subsidies in support of contracts for LDCs and more recently domestic operators. Norway has also expanded sub- sidies for LDCs and has made domestic construction more attractive. Both countries have planned for reductions in' shipbuilding capacity. France, which reduced its reliance on the national fleet at great cost, has also provided support to export markets. The French shipbuilding program effectively shifted from direct construction subsidies to the extensive funding of inflation costs over the base study period. By mid-1977 the likelihood of direct French subsidies for larger shipyard domestic orders and smaller shipyard export orders was under serious consideration. These aids would replace the costly French inflation insurance that has lost much of its effectiveness. 1-12 B. SUMMARY OF THE EFFECTIVENESS OF MARITIME AIDS EMPLOYED BY THE SIX MAJOR MARITIME NATIONS 1971-1975 1. The Effectiveness of Aids to National Fleets Total assistance to national fleets has been variable and is forecast to decrease in all countries but France (see Exhibit 1-1). The three largest fleet operators (Japan, United Kingdom and Norway) provided average levels of assistance in excess of $200 million annually. In France and the United Kingdom, countries supporting the objective of fleet expansion, levels of assistance averaged in excess of 9 percent of revenue (see Exhibit 1-2). In contrast, Germany sought fleet modernization through the replacement of tonnage, and this objective was supported by aids representing 4.3 percent of revenues. Fleet replace- ment and growth of the six major maritime nations was summarized in Exhibit 1-3. Highlighting national fleet objectives, the exhibit also reveals the dif- ferences between freighter, liquid and dry bulk car- rier procurement. While the freighter fleets of Japan, United Kingdom, Sweden and West Germany contracted as they were modernized, the freighter fleets of Norway and France expanded consistent with program objectives. France's fleet growth objectives complemented the strategic objective of increased control of bulk raw material supply and resulted in net growth in the bulk sectors. West German tanker additions and French liquid and dry bulk fleet expansion were the results of government policy and aid programs. Overall, the six study nations tended to emphasize replacement of liquid and dry bulk vessels at rates in excess of world trends and their replacement of freighter tonnage was a significant departure from the world trend of limited expansion. The importance of vessel replacement to the six study nations was a direct result of their need to increase competitiveness by advanced vessel technologies to counter increasing freighter competition manned by low-cost crews. Exhibit 1-4 presents the average fleet age of the study nations' fleets. In Germany 1-13 Exhibit 1-4 AVERAGE FLEET AGE IN YEARS Fleet 1970 1971 1972 1973 1974 1975 Japan 9 7 7 6 7 7 United Kingdom 12 11 11 10 10 10 Norway 10 8 8 8 8 8 Sweden 11 9 9 8 8 8 Germany 11 10 9 6 7 7 France 12 11 11 10 10 10 World 17 13 13 12 12 12 Source: A Statistical Analysis of the World's Merchant Fleet , Maritime Administration, U.S. Department of Commerce. tax allowances promoted vessel replacement and pro- curement in order to encourage an increase in German flag carriage of high value exports and bulk commodi- ties. The young age of the German fleet reflects the effectiveness of these programs. Exhibit 1-5 illustrates the effectiveness of the study nations' aids in promoting the fleets' national flag share of national foreign trade. The fleets of the six maritime nations have generally maintained national flag shares of expanding foreign trade, with the ex- ception of West Germany and Japan's exports. These figures do not reflect adjustments for the chartered tonnage of Japanese operators and the equivalent ac- tivity of the French fleet. The effectiveness of maritime aids as reflected in international maritime account balances is less evident. Japan's maritime balance is consistently negative despite the size of her modern and efficient fleet. This deficit is the result of payments to foreign-owned vessels on charter to the Japanese and is largely offset by the payments Japan's ship- yards receive from abroad for the construction of these very same vessels. The United Kingdom registered fleet shows large re- ceipts and net foreign earnings, but the industry as a whole incurs significant outflows of cross trade earnings in payment of foreign-flag charter hires. The relationship of domestic shipbuilding capacity to the needs of the home fleets is a critical considera- tion in the United Kingdom, for her fleet requires ton- nage greatly in excess of domestic production capacity. Thus an outflow of currency is required to purchase and charter the needed vessels from abroad. Both the fleets of Norway and Sweden are engaged in extensive cross trade activities. Norway's fleet contributes one of the highest percentages of her nation's current accounts, even when the cost of vessel imports is considered. The Norwegian fleet is large relative to her population and thus the fleet and the aids employed to support it have been designed to foster activity in the cross trades and to minimize the use of foreign-flag tonnage. Sweden's fleet also earns extensive foreign exchange. Payments for offshore construction are less of a factor for Sweden. Exhibit 1-5 NATIONAL FLAG SHARE OF NATIONAL FOREIGN TRADE (percent) 1970 1971 1972 1973 1974 1975 Japan Imports Exports 45 39 45 37 42 29 44 27 41 24 46 a 23 a United Kingdom Imports Exports 31 47 32 44 31 40 30 43 29 44 31 46 Norway Imports ) Exports i 37 N/A N/A N/A N/A N/A N/A N/A N/A 37 39 Sweden Imports Exports 14 26 13 25 14 27 13 25 13 23 15 23 Germany Imports Exports 25 39 23 37 21 34 17 28 15 25 18 27 France Imports Exports N/A N/A 30 23 32 25 30 22 29 23 34^ 24 b including chartered tonnage, Japanese operators in 1975 carried 74 percent of imports and 54 percent of exports. French fleet total carriage declined from the equivalent of 63 percent of France's foreign trade in 1970 to 60 per- cent in 1975. Source: Exhibits 11-14, III-ll, IV-12, V-9, VI-7 and VII-13. 1-16 The maritime accounts of France and West Germany are both negative because of the relatively low participa- tion of these countries' home fleet in national trade, and the fleets' high operating costs that reduce their ability to compete in cross trades. Although the German fleet was modernized, trade requirements have out-stripped its capacity. The French aid programs have contributed to the increased carriage of the fleet, particularly in crude oil deliveries to oil pipeline terminals in Northern Europe, where goals of equivalent carriage relative to domestic trade have been attained. Cross trade revenues offset much of the negative balance in France, however. 2 . The Effectiveness of Aids to Shipbuilding The programs of shipbuilding assistance have exhibited an even wider range of benefit levels than those pro- vided to the national fleets. Noteworthy is the mere two percent of revenues provided to Japanese shipyards by government programs that include $100 million per year of investment financing assistance to Japanese operators. The equipment grant subsidies utilized by the United Kingdom and France significantly contributed to assistance levels of 14.6 and 24.1 percent of in- dustry revenues. These ratios emphasize the high cost of grants to shipbuilding. (See Exhibit 1-2.) Shipbuilding assistance programs have resulted in expansion of productivity over the study period. Japanese output increased by 77 percent between 1970 and 1974, and has held steady throughout the remainder of the study period as shown in Exhibit 1-6. France recorded the largest increase in output which was a direct result of the 1976 delivery of several ultra- large tankers. Norway and Sweden recorded similar Increases in capacity of 65 and 63 percent, respec- tively, which result from the countries' production- oriented shipyards and the yards' abilities to attract orders during the boom years preceding 1974. The aids of the United Kingdom were not sufficient to effect a major increase in shipyard production. 1-17 Exhibit 1-6 SHIPYARD DELIVERIES Indexed to 1970 = 100 (dwt basis) 1970 1971 1972 1973 1974 1975 1976 Japan 100 110 129 152 177 177 172 United Kingdom 100 111 98 87 114 120 118 Norway 100 128 122 165 136 154 112 Sweden 100 98 109 127 125 127 163 W. Germany 100 138 80 119 176 188 154 France 100 134 119 150 145 136 197 Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. 1-18 Aids for shipbuilding, in general, have not been able to stimulate sufficient demand for vessels to maintain national shipyard output. Exhibit 1-7 records the net additions to national orderbooks for the 1974-1976 period and presents 1975 production. Only France at- tracted net orders over this three year period equiva- lent to one year's production at 1975 levels. Norway suffered from massive tanker cancellations in 1975 and Japan experienced similar backlog erosion in 1976. Norway's creation of the Norwegian Guarantee Institute to alleviate liquidity pressures on owners of tankers and drilling rigs was a well designed aid indirectly benefiting shipyards. Created in December 1975, the Institute was founded too late to stem that year's cancellation of vessel orders, which would have repre- sented two years of work for Norwegian shipyards. The maritime aids employed during the study period were unable to increase shipyard performance to the levels that the industry could reduce its dependence on assistance programs. The world recession and the emergence of LDC and Comecon shipbuilding capabilities have increased the problems faced by the six study nations' shipyards, as the six country share of orders outstanding fell from 71 percent of world orders to 54 percent, and production of the six fell from 77 percent to 75 percent of world output between 1974 and 1976. Exhibit 1-7 NET ADDITIONS TO NATIONAL SHIPYARD ORDERBOOKS 1974-1975 (million dwt) 1974 1975 1976 1975 Deliveries Japan 23.5 9.9 (10.9) 31.3 United Kingdom 1.3 1.5 (.7) 2.3 Norway .5 (3.4) (.2) 1.8 Sweden 2.9 (.8) (.5) 4.3 West Germany 2.9 (.9) (1-1) 4.1 France 2.4 (.6) .2 1.9 NOTE: Negative numbers denote years in which cancellations exceeded orders for new ships. Source: New Shipyard Construction , Maritime Administration, U.S. Department of Commerce. 1-20 C. SUMMARY OF MARITIME AIDS EMPLOYED BY THE SIX MAJOR MARITIME NATIONS 1971-1975 1. Overview Exhibits 1-8 and 1-9 summarize the level of benefits by country provided under each of the seven categories of aid programs to the shipping and shipbuilding in- dustries, respectively. It should be recalled that the benefits shown for a particular category are frequently the sum of several principal programs in a given country. This summary chapter cannot address the specifics of each program for each industry in each country. Therefore, while the maritime aids are discussed in this section by category or type of assist- ance, reference to the discussion in the chapter on each country should be made for program specifics. For each category of assistance, Exhibits 1-8 and 1-9 show the average annual benefit provided to each in- dustry. They also illustrate the range of benefit levels, that is, the highest and lowest annual amount observed over the 1971-1975 study period, and the observed trend in the level of benefits for the five year base study period. The term variable is fre- quently used to describe the trend. The variable trends observed resulted from several factors . First , the level of benefits of many assistance programs is related to the level of activity in the shipping world, and many program benefits decreased in 1974 or 1975 after rising during the early part of the study period. In other instances, two programs within a category may have opposing trends which cause the category sum to move in a variable pattern. Third, special programs instituted for a year or two introduce a sporadic element into the observed trends. The figures in Exhibits 1-8 and 1-9 are absolute levels of benefits in millions of dollars. Section I.B. discussed the levels of total assistance relative to revenue levels for the shipping and shipbuilding industries in each country. Exhibits I-8A and I-9A graphically present the average annual benefits to the two industries by category of assistance. ll. O o 1 00 !5 «J t O 1 (O 01 -« > Q 00 Ol o> ^H > Q O Ol Ol S£j o c c o If is (5 o .— 8 1 = | n -OO Ol A3 >> -QO c o O 0) o s- oi-o if fii J TT O+JPTJ + ! -E o j ^ _| Q 00 IS -o 1 1 *Ilf "Ill s sl| ! • 2 * 2 B 3 « 2 s, 3 * 2 1 ■* c? i— 12 ! <5h ° ' <* a? £ £ I < 5 h- £ I «* 2 £ i2 I *-> in! i 1-24 1-24 Exhibit I-9A SUMMARY OF AVERAGE ANNUAL BENEFITS OF PRINCIPAL ASSISTANCE PROGRAMS TO THE SHIPBUILDING INDUSTRY 3 1971-1975 KEY: 1 - Other Benefits ^ - Direct Subsidies 2| - Tax Allowances S3 - Credit Assistance ~i . Investment Financing -1 Assistance Japan Norway Sweden W.Germany France United Kingdom Composition is derived from averages and are rounded. b U.K. Investment Financing includes government ownership. C French aid included in Other Benefits is primarily inflation insurance. Source: Exhibit 1-9. 2. Summary of Aids to National Fleets The six maritime nations have developed direct and indirect assistance programs to advance various goals including fleet growth or modernization, control of national trade, employment, and foreign currency earnings. The principal quantifiable forms of assistance are investment financing assistance, tax allowances, and direct subsidies. (See Exhibit 1-8.) (i) Investment Financing Assistance Investment financing assistance has included the pro- vision of low interest loans, interest subsidies and loan guarantees. The programs may result in shipowners benefiting from lower interest rates in the financial markets. Such assistance usually is intended to bene- fit the domestic shipbuilding industry as well. Fre- quently programs for domestic owners include longer repayment schedules and grace periods on interest or both interest and amortization. In Japan and France, investment financing assistance for ship operators has been used extensively. The Japanese utilized four complementary programs to develop and renew various segments of the merchant fleet. In 1970, the Japan Development Bank (JDB) participated in 75 percent of all Japanese ships con- structed, but due to increasingly restrictive require- ments for owner equity participation and requirements for charters, the use of JDB loans decreased and the program funded only 36 percent of all Japanese fleet orders in 1975. The JDB also provided assistance for the scrapping and replacement of older tonnage, and interest subsidies on both JDB and non-JDB loans. Reconstruction of the coastal fleet was aided by Maritime Credit Corporation financing. The relative strength of Japanese capital markets combined with the concentration of six core shipping lines afforded Japan effective financing at home. The relative strength of the yen and the efficiency and price com- petitiveness of Japanese shipyards eliminated any need for Japanese owners to construct and finance abroad. The French investment financing assistance has princi- pally been through interest subsidies provided on the financing of new vessels. The size of Sweden's capital markets has forced owners to finance vessels out of earnings and has limited government investment financing assistance to govern- ment guarantees on special bank funds for ship mortgage loans. Although Germany's capital markets are far more developed, investment finance assistance to ship- owners has been limited to small amounts of post-war recovery funds. Currently, such programs are expected to increase in importance in both nations as a means to stimulate shipbuilding demand. In Norway, as in Sweden, limited capital markets mini- mized the role of financing assistance and maximized the use of other aids.. The government of Norway did attempt to alleviate the liquidity erosion of certain Norwegian shipping firms in the wake of the tanker crisis by creating and funding the Norwegian Guarantee Institute (NGI) in December 1975. With its mandate to support owners of tankers and drilling vessels jeopardized because of decreased earnings and high debt requirements, the NGI provides funding sufficient to permit owners to meet variable costs and serve the interest due on their outstanding loans. (ii) Credit Assistance is Not Applicable to National Fleet Operators (Hi) Tax Allowance Programs These programs are the most broadly used form of assistance given to shipowners. In Japan, U.K., West Germany and France, they represent approximately 30 percent of the average assistance provided. In Norway and Sweden they have been virtually the sole form of assistance to the national fleets. Tax allowance programs are mostly indirect aids in the form of depreciation allowances and tax free reserves. They also include tax exemptions, tax credits, low tax rates, and special reimbursement of certain taxes. Because the majority of the benefits from these pro- grams are derived from depreciation allowances and reserves, their use is a function of both activity levels and profitability. With new ship construction and profitability levels forecast to decrease, the future benefits from these programs will be reduced in all of the study countries. However, these pro- grams provide large cash flows and support the establishment of large reserves during periods of high profitability and through the high levels of liquidity achieved and long loss carry forwards, in- directly provide benefits during shipping recessions. As mentioned, Norway and Sweden have extended owners an array of tax related aids primarily through ac- celerated depreciation allowances on new construction and deferred tax liability on the capital gains re- sulting from the sale of vessels. Given limited availability of capital necessary for fleet renewal and expansion, the Scandinavian countries have thus aided shipowners in the formation and retention of capital at only a deferred cost to the nation. As the major portions of maritime aid, tax reserves and depreciation allowances in Norway and Sweden facili- tated fleet additions of 26.6 and 11.2 million dead- weight tons respectively, at costs per deadweight ton of $47 per ton in Norway and $46 per ton in Sweden. The Swedish tax allowances include a significant benefit from an investment tax credit affecting de- liveries between 1972 and 1974. West Germany also employed a temporary tax credit which affected vessels delivered after the base study period. Germany's goal of increased competitiveness through fleet moderniza- tion was supported by a program providing tax deferral capital gains provisions combined with direct subsidies which totaled $68 for each of the 7.25 million dead- weight tons added. The above figures approximate the effect of indirect tax deferral and depreciation benefits. Precise figures cannot be derived due to other factors in- cluding additional aids, currency valuations, etc. The deferral of government income through such programs is, however, an apparently lower cost than the ex- penditures required at the time of vessel construction. Recently, Norway has increased depreciation allowances for domestic construction to support shipyard activity and employment . 1-28 Governments can also utilize these aids to help stimulate fleet growth or replacement. The United Kingdom does not extend owners tax deferral on ship sales and while France employs only a 10 percent tax on capital gains, the tax is payable upon conclusion of the ship sale, with no deferral. Both nations, there- by, effectively discouraged vessel replacement and em- phasized growth. The U.K. and France occupied fifth and sixth places respectively in percent of deliveries for replacement, among the six study nations. The United Kingdom not only discouraged vessel replace- ment by not deferring capital gains taxes, but it has actively sought to attract new ships to the U.K. fleet through free depreciation. This program commenced in 1965 but only in the early 1970s did it become an effective stimulus for capital investment and an al- ternative to the costly grants and subsidies that were straining government funds. One effect of the de- preciation plan was the entrance of banks into ship- owning. The banks sought tax shelters through the depreciation and extended the benefits to U.K. ship operators through favorable terms on charters and leases. Germany extended a different form of tax benefit to encourage cross trading through reduced taxes on foreign earnings. Confronted by high manning costs and the need to aid the home fleet and reduce owner demands for "flagging out" tonnage, the governments of Norway, Sweden and France have underwritten various taxes, fringe and social benefit costs of seamen. Such programs have not resulted in lower wage costs. Japan's use of tax allowance programs increased during the study period. Depreciation allowances were liberalized and reserves established for gains from second hand sales. Increases in the special deprecia- tion accounts and reserves provided large cash flow increases to Japanese operators during 1973 and 1974. Japanese operators have requested a further liberaliza- tion of tax allowances. A free depreciation, similar to that employed in the United Kingdom, would allow the Japanese operators to shelter the large profits earned in 1976 and reduce the potential of those profits and the reintroduction of special depreciation allowances to trigger the repayment provisions on interest subsidies . 1-29 (iv) Direct Subsidies In the United Kingdom, West Germany and France, the principal direct subsidy programs for national fleets have been equipment grant programs. Although all grants did not restrict the benefits to domestic construction, German shipyards point to the utiliza- tion of loopholes by owners for constructions abroad and U.K. builders expected a larger volume of orders than they received. The acquisition of the French fleet was more closely controlled. The construction grants in the United Kingdom were eliminated in 1971 for reasons of cost, but payments on orders delivered throughout the study period amounted to more than $1 billion and constituted the largest benefit to the fleet. West Germany utilized grants throughout the study period, including a short-lived supplemental VLCC program. Consisting of subsidies on 10 percent to 12.5 percent of vessel cost, the non- VLCC programs expended $199.5 million between 1971 and 1975 for the construction of 158 ships of 2.32m grt, (approximately 3.8m dwt ) , or approximately $50/ dwt . The German subsidy grant program will continue at a reduced level without the VLCC funds but has been increased to 17.5 percent of new orders. The French equipment grants were designed under Plan VI in 1971 to direct shipowners from general cargo tonnage towards high speed liners, containerships , roll-on/roll-off tonnage, and product and bulk tankers through selectively scaled grants. Plan VII in 1976 adjusted the Plan VI selective subsidies for current world conditions and maximal effectiveness, with sub- sidies of up to 15 percent for container and Ro/Ro vessels and only 2 percent for bulk carriers larger than Panamax size. Not surprisingly, capital-short Sweden and Norway relied on tax deferrals and accelerated depreciation to stimulate fleet modernization and expansion and have not employed direct grants. Norway's support of coastal services took the form of a subsidy of ferry operations and short-haul cargo transportation. A similar program exists in Japan. 1-30 (v) Preference Programs Cabotage protection is utilized by several countries. Coastal preference assistance has not been quantified in this study. France employs an oil preference pro- gram in the foreign trade, which has achieved its goals, if cross trade activities are included. (vi) Government Ownership The French government owns the majority shares in two large shipping lines through a wholly owned holding company. No government cost data are available on this program. The lines are operated as private companies . (vii) Other No principal programs were identified other than those discussed in the previous sections. 3. Summary of Aids to Shipbuilding Assistance to the shipbuilding industry encompassed a broader range of programs than those for the shipping industry. The dominant category of assistance used in the largest shipbuilding countries (Japan, Sweden and Germany) was credit assistance. To stimulate ship orders and ensure the competitiveness of home yards, the United Kingdom and France introduced direct sub- sidies, supplemented and largely replaced by inflation protection in France and by investment financing assistance in the U.K. Norway employed a customs tax rebate program which was based on the sale price of new vessels. Because few shipbuilding materials are subject to taxes, the rebate may be considered a form of subsidy. A summary of aids to the shipbuilding industry by category appears in Exhibit 1-9. 1-31 The acceptance of OECD export credit guidelines by the developed shipbuilding nations has resulted in increased emphasis on credit assistance that provides customers OECD financial terms. Costly construction subsidy programs have been eliminated for export orders and used more sparingly for domestic orders. (i ) Investment Financing Assistance During the 1960s Japan's shipbuilding industry was given high priority and underwent enormous expansion with the Japan Development Bank and the city banks participating in shipyard facility development and modernization. Although JDB participation amounted to only 7 percent of the $2.1 billion expended from 1970-1975 by Japanese yards, its participation is considered important in obtaining commercial financing. For ten years preceding its nationalization on July 1, 1977 of 40 shipyards and engine builders, the United Kingdom provided investment financing assistance to the industry, including the injection of funds for equity grants and low interest loans. The Ship- building Industry Act of 1967 and its successor, the Industry Act of 1972, provided the basis for such assistance. Because the majority of funds went to yards partly or wholly government-owned, much of this assistance could be considered government ownership. A portion of the assistance was directed to privately owned shipyards and thus can be classified as investment assistance to the industry. During the study period, $240 million in loans for improvement were extended to various yards. European Recovery Plan (ERP) funds supported a rela- tively small amount of investment by West German shipyards . (ii) Credit Assistance Credit assistance extended to shipyards and owners to reduce the financing costs of ship production through government provided or guaranteed credit, supported a significant levels of construction value in several countries . 1-32 The Japanese Development Bank (JDB) financing provided to the Japanese fleet benefited Japanese shipyards because all Japanese flag tonnage was built in domestic shipyards. Export-Import Bank financing permitted Japanese yards to extend competitive supplier credits to export customers, including vessels ordered by Japan's expanding offshore charter fleet. Current Export-Import Bank participation in non-ship construc- tions by Japanese yards is providing additional support to the Japanese shipbuilding industry. Faced by a declining share of world shipbuilding and the emergence of certain Less Developed Nations and former colonies as builders of general cargo and bulk tonnage, the government of the United Kingdom has guaranteed export orders at competitive terms. These loans have not been sufficiently attractive, however, to overcome the delivery date and pricing obstacles which have plagued the British shipyards. The Norwegian government has participated in the finan- cing of domestic and export orders via second mortgage financing and more recently through loans that covered an increasing percentage of a vessel's contract cost. This feature has served to counter the reduction in many ship types' market values and their value to banks as collateral. Credit assistance, as part of Norway's foreign aid programs to less developed coun- tries, has recently been employed by Norway to obtain shipbuilding orders. The shortage of domestic capital has necessitated Swedish government guarantees of loans in foreign currencies. As the world's second largest shipbuilder and ship exporter, these programs of export credits and guarantees played an important role in Sweden's specialization in tanker construction. In 1977, the Swedish guarantee program was greatly in- creased and supports a larger percentage of the market value of new constructions, as well as speculative con- struction to occupy shipyards. Combined with these guarantees are funds to anticipate write-downs on the ultimate sale prices of the vessels and depreciating loans to Swedish shipowners, both of which have characteristics of direct subsidies. 1-33 German export construction has been supported by low interest loans and interest subsidies which provide competitive credit. The program has provided exten- sive funds over the study period, is forecast to in- crease, and has been broadened to include domestic owners to attract German orders into home yards. French credit assistance has been primarily through interest subsidies. (Hi) Tax Allowances Tax allowances are generally indirect assistance pro- grams related to investments in shipyard facilities. The decline in the demand for larger ship types and the overcapacity of all major shipyards has decreased investments in shipyard equipment drastically. As mentioned earlier, Norway has provided rebates on customs duties of 6 percent of new ship construction value and 4 percent of ship repair value. These re- flect a subsidy as most ship-related materials are duty free. Sweden and West Germany have employed investment credit tax allowances, while the Japanese introduced a special tax allowance on losses resulting from the 1971 yen revaluation. (iv) Direct Subsidies Construction subsidies for export orders were essentially eliminated by 1974 in all six countries in accordance with the terms of the 1971 OECD agreement. The United Kingdom and France utilized such programs; France con- tinued to use a 0.5 percent subsidy until 1976. As France phased out construction subsidies over the study period, inflation guarantees were provided which have resulted in funding levels far in excess of the previous construction subsidies. France recently has reinstituted direct subsidies. (v) Preference Programs Customs duties and permits on vessel imports have been utilized in Japan and France, but have had little quantifiable effect. The regulations in both countries have been greatly liberalized or eliminated over the study period. (vi) Government Ownership The shipbuilding slump has ultimately led to the nationalization of British shipbuilding and all but one major yard in Sweden. The costs of nationaliza- tion in these countries are quite high and are dis- cussed in greater detail in the respective country chapters. (vii) Other Other assistance programs, which have been quantified, primarily take the form of support of research and development activities. The French inflation program was referred to under direct subsidies. This program has been extremely expensive for France, but is fore- cast to decrease due to lower inflation rates and the raising of the minimum level of inflation covered. 1-35 D. RESPONSE OF THE SIX MAJOR MARITIME NATIONS TO WORLD MARINE OVERCAPACITY 1 . Response to Shipping Overcapacity The precipitous decline in the demand for the transport of oil after 1973 reduced not only the opportunities for tanker tonnage, but also the demand for bulk carrier and general cargo transport because of generally depressed world economies. Owners were afflicted by this shipping recession primarily in tanker operations and more recently as a result of excessive commitments for the construction of dry bulk tonnage. In 1975, 50 percent of the Swedish tanker fleet was laid up. Despite the traditional strength of Swedish owners' liquidity positions, the need to honor ship financial commitments when tanker operations barely recovered variable costs strained owners' current accounts. As in other developed nations, the current depression in shipping has permitted Swedish owners to win certain concessions from the government in the form of selected sales of vessels to foreign flags. These will increase competitiveness through charter back arrangements using low cost foreign crews. The Norwegian government was required to aid owners much less diversified than those in Sweden. While tax deferrals and accelerated depreciation benefits had been designed to provide stability for owners in the cyclical liquid bulk sector, the serious decline in tanker demand threatened many owners. The creation of the Norwegian Guarantee Institute in late 1975 was a new and effective means to protect owners from the need to sell fleets in order to pay for them. As a nation with a small population and small economic base relative to its fleet which depends upon success- ful cross-trading for its survival, Norway has begun to recognize the challenge of emerging national fleets 1-36 and increased cargo preference and has been considering in recent years softened stands on foreign flag opera- tions, joint ventures, and other competitive possi- bilities. The remaining four nations have been less exposed to problems of tanker overcapacity and the general shipping depression for a variety of reasons. Japan's highly diversified fleet was engaged in long hauls of energy independent of the Suez Canal opening and its charter fleet could soften the brunt of reduced demand. Germany's highly efficient fleet of ships was buoyed by relatively strong export activity while the devalua- tions of the English pound, combined with efficient fleet management, aided U.K. vessels. The U.K. tanker fleet did suffer to some extent as smaller tankers with many berths for English seamen were withdrawn from service. The French merchant marine has been heavily deployed in the carriage of France's foreign trade. Thus, these four nations required little government intervention to meet the challenges presented to their shipping industries. 2 . Response to Shipbuilding Overcapacity The response of governments to the impending long-term overcapacity of the world's shipyards has been far more determined and concerted than in response to shipping overcapacity. Even if the six study nations were in agreement as to how domestic orders could have been apportioned, the capacity of centrally controlled Comecon (Polish and Yugoslavian) shipyards and the emerging Brazilian, South Korean and Taiwanese capa- bilities as well as those of other developed and less developed nations threatens their survival. The need of domestic merchant fleets to procure vessels at low costs to reduce the fixed portions of their cost structare provides another complicating factor. This need frequently runs counter to governmental hopes for home fleet construction in domestic yards. 1-37 Because of the recent boom in tanker construction, a vessel type with low-labor inputs per deadweight ton, the figures on deadweight production are not an accurate measure of the productivity of the workforce. In 1967 the Association of Western European Ship- builders (AWES) and the Shipbuilders Association of Japan proposed the measure of the compensated ton, a surrogate gross ton assigning equivalent work value to the deadweight tonnage of various ship types. Each VLCC deadweight ton represents less than one-third the labor input of a standard cargo vessel deadweight ton, for example. A comparison of deadweight and compen- sated ton productivities for the six nations appears in Exhibit 1-10 for the years 1970 and 1975. The exhibit reveals the high productivity of Swedish and Japanese shipbuilders and the relatively lower pro- ductivities of the other four nations. Assuming the 30 percent reduction in man-hours worked Japan is committed to, the conversion of the orderbook to high labor content vessels could maintain 70 percent of the force on less than one-sixth the deadweight tonnage built in 1975. This fact explains why the Japanese would agree to limit themselves to 50 percent of the world's future orderbook on a compensated gross ton basis and why (AWES) representatives are adamantly opposed to such a proposal. In the first half of 1977 Japanese shipyards secured 66 percent of new ship orders repre- senting a potential increase in share of the world's shipbuilding work for Japanese shipyards, despite the revaluation of the yen and a 5 percent price increase which the Japanese suggest have added some 15 percent to the cost of Japanese ships. Sweden, the world's second largest shipbuilders, did not build a single freighter in 1974 or 1975, while its high labor cost forced it to compete within a narrow range of products and with intense investment in ship- building processes. Just as Norway failed to induce its owners to diversify their fleets, so did the Swedish government fail to learn from its shipowners the value of diversification and design aids and stimuli for all types of ship construction. Despite 1-38 1 ' S L — S m Si A p— — ; — - R. en 3: M 1 j "1 « 5 s i cS JCTIVI . Tons ons/ i [ — 2 -2 """ oi si PROD dweigh n-year sated ar S «5 J I i? * = "o" — >i -a o e L_r 1970 1975 United Kingdo -cent of total U.K. m al construction, .ed tonnages calculat luropean Shipbuilders 1 1 1975 in 40 pe i on na )mpensa jstern L_l 1970 Jap a Exclude expende NOTE: C W 1-39 recent orders for smaller vessels, Sweden's major yards can still produce only bulk vessels efficiently; building small vessels in enormous shipyards is inefficient. As a result , the Swedish government has been required to stimulate the demand for ships artificially and speculatively. The government has also called for an initial cutback of 30 percent of production, 40 percent of employment and its takeover of all but one major yard has specific provisions for the selected abandon- ment of shipbuilding capacity. France has specialized its industry by adding container- ships, vehicle carriers, LPG, LNG, and other specialized tonnage to orderbooks. This specialization upset the coincidental but healthy balance between French shipping and shipbuilding, causing a divergence that has forced the shipyards to seek and become more dependent upon export orders. In late 1976 the French cabinet approved subsidies to domestic yards for domestic and export orders . The German shipyards have employed a policy of restraint in investment in VLCC capacity and remaining diversified. While forgoing high profits in the boom years of tanker construction, the Germans did increase capacity and took some VLCC orders when orders were not sensitive to higher German prices. The current slump has re- emphasized the high cost of German labor as the demand for smaller tonnage can be met by many low labor cost nations that have recently emerged as shipbuilders. Current credit assistance programs are aimed at bringing more German orders to domestic yards. Meanwhile, Germany plans to reduce output by 30 percent and has cut the shipyard work week by 10 percent . The German government has increased its 12.5 percent subsidy to 17.5 percent to support domestic shipyards. Although OECD terms require Germany to supply such funds to German vessels built in any OECD country, the governments' intent is clearly to support the home yards. Given a 30 percent differential on price between German and Japanese yards, the subsidy cannot be expected to have any significant effect. The Norwegian government has combined its expertise and experience in maritime affairs with offers to LDCs on extremely low foreign aid financial terms. The measure has served to generate small and large ship orders, contracts for entire fleet development, and the construction of ship repair and shipbuilding facilities, which will help occupy Norwegian ship- yards. Relocation plans for displaced employees have also been drawn up. Norway's hold on signifi- cant outstanding LNG and LPG orders is another area where national experience may be sufficient to re- sist Japanese entrance to this market. The takeover of the United Kingdom's shipyards and marine engineering firms by the government on July 1, 1977 was not the direct result of world shipbuilding overcapacity. Rather, the cancellation of numerous tanker orders only compounded the problems the govern- ment faced. After injecting equity, loans, equipment subsidies and modernization grants the government will now attempt to remold 40 establishments into a cohesive, profit-oriented industry capable of contributing to the British economy. In contrast to Sweden, which plans to permanently reduce capacity by liquidating facilities, Japan has resisted all demands by the European shipbuilders to cut capacity and has only agreed to reduce man-hours by 30 percent. In addition to enforcing and overseeing the conduct of Japanese shipyards, the government has extended attractive Export-Import financing to al- ternative shipyard activities including plant con- structions for non-shipping related industries. The Japanese face competition from South Korean and other LDC/Comecon shipyards that are characterized by their high efficiency and low labor costs. This competition maintains pressure on Japan to keep prices low. Despite the above steps, the six shipbuilding industries, particularly of the countries other than Japan, have continued to lose ground to growing LDC/Comecon compe- tition, increasing the probability of further expansion of assistance programs. 1-41 E. THE CURRENT AND FUTURE IMPACT OF COMECON, OPEC AND LDC MARITIME IN- DUSTRIES UPON THE MAJOR MARITIME NATIONS 1 . Overview The 1971-1975 period saw great change in the structure of the maritime world. Developments in developing nations seriously altered the prospects for the marine industries of the study nations. The major maritime nations have made very little response to the gravity of challenges posed by the socialistic and developing nations . One reason for this limited response is the highly international nature of shipping and shipbuilding; another is the relative importance of diplomatic considerations. Shipbuilders have been forced to recognize that the competitiveness of national fleets may depend on their ability to procure lower cost vessels from foreign shipyards. Similarly, the shipping industry has been troubled by the Comecon entrants' increasing disruption of the liner conference system, the development of OPEC and LDC fleets, and the impli- cations of cargo preference. 2. Comecon Maritime Activity During the study period the fleets of major maritime nations were challenged by the competition of the Soviet merchant fleet. The Soviets have sought foreign currency and year-round trading opportunities free from ice-bound Russian ports. Both considerations led the Soviet fleet into cross trading operations. The years 1971 to 1975 witnessed the Soviets' continuing replacement of general cargo tonnage and semi-container vessels with sophisticated service-oriented vessels on many high traffic trade routes. These Soviet activities have affected German and Swedish fleets serving the Baltic, Japanese and U.S. companies on trans-Pacific routes (particularly those engaged in container service), and most European fleets on trans-Atlantic dry cargo routes. In addition to these general cargo developments, the Soviet dry bulk fleet doubled in size (keeping pace with world dry bulk fleet growth) primarily to meet the requirement for grain imports. The tanker fleet grew at a slower rate in relation to those of the six nations studied and other maritime countries. Projections indicate major' expansion of the Soviet tanker fleet and the further replacement of a substantial portion of its general cargo vessels with roll-on/roll-off, container and other specialized vessels. The economic structure of the Soviet fleet makes it difficult to compare with those of Western operators. Similarly it is difficult to compare Soviet aid pro- grams with those of Western nations. Depreciation, replacement costs and capital charges, as well as in- surance expenses are not comparably reflected in Soviet freight rates. Fuel is purchased at pre-1973 oil embargo prices. Low manning costs and pooled shore support cost accounting also serve to support low Soviet freight rates. The shipping industry of the West has pointed consistently to Soviet policies and cost advantages. Certain com- panies have joined or defected from liner conferences in reaction to Soviet non-conference operations. Western government support of the fleets has lacked cohesion, primarily because of diplomatic and general trade con- siderations. Sanctions against Soviet cross trading are not acceptable to leading cross trading nations such as Norway and Sweden. Thus, criticism and pro- tests against specific Soviet tactics and policies would appear to be the likely extent of Western resist- ance until overall issues of cargo preferences are re- solved. The shipbuilding capacity of Poland is of similar sig- nificance to Western shipbuilders. Poland traditionally was the major supplier of tonnage to Russia, particularly when naval construction requirements occupied all effi- cient Soviet shipyards. Seeking foreign currency, Poland now is looking towards the major maritime nations' shipping companies for orders, competing on price and quality with modern methods, good designs, and low wages. 1-43 Poland secured 5.8 percent of 1975 ship orders, fol- lowing only Japan and Brazil. The nation's shipbuilding annual production increased tenfold between 1965 and 1975 to one million dwt and will double again by 1985. This capacity could represent 6 percent of 1985 ship demand, as compared to Poland's supply of 1.7 percent of 1975 production. This past and projected performance represents the nation's major inroad into the six study nations' traditional shipbuilding markets. Short of government restrictions on orders in Comecon shipyards, this threat will continue. 3. OPEC Maritime Activity In the future the maritime activity of OPEC and its powerful Arab component OAPEC will increase and impact more severely the rest of the maritime world. In an effort to meet their goals of increased control of oil shipments and energy industry vertical integration, OPEC nations have embarked upon the near-term expansion of crude oil tanker fleets. This step has been the subject of great concern to the world tanker industry. Realistic expansion by 1980 will not likely exceed 10 million dwt, however, representing a minimum short term expansion of the world's tanker supply. Neither this short-term expansion nor longer-term goal of fleet growth will significantly alter the structure of the world tanker market. The OPEC nations are constrained by manpower, but also can take advantage of market mechanisms provided by oil company and in- dependent tankers. Another OPEC consideration that limits crude oil tanker fleet development is the nature and extent of future national oil refinery and petro- chemical capacity, which would require large procure- ments of product and chemical tonnage. OPEC nations are also expanding their general cargo fleets, for reasons of cargo control and national in- terest. This expansion has already provided some orders for world shipyards and will continue to do so. OPEC liner operations to date have not detracted from the attractiveness of Mid-East liner routes to Western fleets. The long-term OPEC requirements for vessel construction may bring some orders to the shipyards of the study nations, but price competition and mutual in- terest will probably favor developing nations' shipyards. 1-44 4. LDC Maritime Activity The four LDC study nations selected have demonstrated their ability to develop shipping and shipbuilding industries. Brazil and Korea represent major shipbuilding powers. Both have successfully attracted domestic and export orders which otherwise would have been available to the six study nations. The combined orders of Brazil and Korea could represent 12 to 15 percent of the world's outstanding orders by 1980. Both nations' shipyards operate under unique government aid umbrellas. Brazil's centralized marine superintendency SUNAMAM manages nationally-oriented programs for fleet and shipbuilding development and coordination. The young Korean ship- building industry is dominated by a few large shipyards. Because of this domination, the Korean government, unlike the Japanese government, has not been required to protect small shipyard interests by restricting the transition of large yards into small ship construction. The response of the study nations to these emerging shipbuilding powers has been limited, despite Korea's direct and fairly successful competition with Japan. The fact that their fleets required the low cost tonnage that nations like Korea and Brazil can supply is one reason for the lack of response from the study nations. As less developed countries, Korea and Brazil may offer more attractive financial terms for vessel orders than those of developed countries. This differential in financing terms is supported by international agreement. Singapore has also developed her shipbuilding industry, but her significance lies in her expansion as a flag of convenience and ship repair center, which uses low- cost labor to compete directly with Japan. India has developed a large dry bulk fleet in addition to her general cargo fleet as a means of reducing a deficit maritime balance of payments. This step, combined with the development of shipyards to meet a greater share of home-fleet ship demand, has reduced India's dependence on world fleets and shipyards. 1-45 Overall, these challenges to the Western marine in- dustry have been countered only by joint ventures, professional and management support, or marine-related foreign aid packages, exemplified by Norwegian efforts following the onset of the world shipbuilding recession. The ultimate effects, however, are yet to be felt by the six study nations. Decreasing shares of world shipbuilding orderbooks and increasing competition by OPEC and LDC fleets will necessarily force a further reshaping of assistance programs and industry structure. II. The Maritime Aids of Japan Contents PAGE SUMMARY ii-l 1. Background II-l 2. Conclusions II-8 AIDS TO THE JAPANESE NATIONAL FLEET 11-12 1. Aid Programs 11-12 a. Principal Aids to the Japanese 11-13 National Fleet, 1970-1975 (i) Investment Financing Assistance 11-13 Program 1 - Japan Development 11-15 Bank Loans Program 2 - Interest Subsidies 11-19 Program 3 - Maritime Credit 11-21 Corporation Financing Program 4 - Japan Development 11-23 Bank Replacement Program (ii) Credit Assistance 11-25 (Hi) Tax Allowance Programs 11-25 Program 5 - Special Deprecia- tion Allowances 11-25 Program 6 - Tax Free Reserves 11-27 (iv) Direct Subsidies 11-30 Program 7 - Cross Trade 11-30 Subsidies Program 8 - Island/Mainland 11-30 Operating Subsidy (v) Preference Programs 11-31 Program 9 - Cabotage Preference 11-31 (vi) Government Ownership 11-31 (vii) Other 11-31 (i) PAGE b. Benefits of Japanese Assistance 11-31 Programs to the National Fleet 2. Effectiveness of Aids to the Japanese 11-35 National Fleet 3. Recent and Prospective Programs 11-41 AIDS TO THE JAPANESE SHIPBUILDING INDUSTRY 11-46 1. Aid Programs 11-48 a. Principal Aids to the Japanese 11-48 Shipbuilding Industry, 1970-1975 (i) Investment Financing Assistance 11-48 Program 1 - Japan Development 11-48 Bank Modernization Loans (ii) Credit Assistance 11-50 Program 2 - Domestic Operator 11-51 Assistance Programs Program 3 - Export Import 11-51 Bank Financing (Hi) Tax Allowance Programs 11-57 11-57 11-58 11-59 11-59 11-59 11-59 11-60 11-60 Program 8 - Export Insurance 11-60 Program 9 - Research and Develop- 11-60 ment Support b. Benefits of Japanese Assistance 11-61 Programs to the Shipbuilding Industry 2. Effectiveness of Aids to the Japanese 11-61 Shipbuilding Industry 3. Recent and Prospective Programs 11-66 Program 4 - Depreciation Allowances Program 5 - Tax Free Rese Program 6 - Exchange Rate Allowances (iv) Direct Subsidies (V) Preference Programs Program 7 - Customs Duty Protection (vi) Government Ownership (vii) Other Japan List of Exhibits exhibit title page 1 1 - 1 Summary of National Flag Fleet and 1 1-2 Shipbuilding Activity - 1970-1975 1 1-2 Share of World Fleet and Average Age 1 1 -4 1966-1975 1 1 -3 Comparison of Fleet Growth - Japan and 1 1— 5 World - 1970-1975 1 1-4 Owned and Chartered Tonnage of Japanese H-6 Operators 1 1-5 Outline of Principal Assistance Programs 11-14 to the Japanese National Fleet 1 1-6 Terms of Financing for Japanese Owners of 11-17 Oceangoing Ships - Fiscal Years 1971-1975 1 1-7 Shipbuilding for Japanese Owners Financed 11-18 with Japan Development Bank Loans - Fiscal Years 1960-1975 1 1-8 Outstanding Japan Development Bank Loans 11-16 to Shipowners I 1-9 Interest Subsidies Provided by the Japa- 11-20 nese Government for Japan Development Bank Loans and Other Bank Loans - Fiscal Yeras 1960-1975 11-10 Maritime Credit Corporation Financing - 11-22 1970-1976 11-11 Japan Development Bank Replacement Loans - 11-24 1970-1973 11-12 Reserves for Replacement 11-29 11-13 Island/Mainland Operating Subsidies - 11-32 1970-1976 11-14 Summary of Benefits to Japanese Operators - 11-33 1971-1975 (iii) EXHIBIT TITLE PAGE 11-15 Oceangoing Vessels of 1,000 grt and Over - 11-37 1965-1975 11-16 Measures of Maritime Activity - Fleet 11-39 Operators - Oceangoing Vessels of 1,000 Gross Tons and Over 11-17 Outline of Principal Assistance Programs 11-47 to the Japanese Shipbuilding Industry - 1970-1975 11-18 Plant and Equipment Investment at Major 11-49 Shipyards and Percentage from Japan Develop- ment Bank - 1968-1975 11-19 Terms of Financing for Export Ships Built 11-52 in Japanese Shipyards - Fiscal Years 1970-1975 11-20 Japan Shipbuilding Export Orders and 11-54 Export- Import Bank Financing - Fiscal Years 1970-1975 11-21 Japan Export-Import Bank Loans to Ship 11-56 Financing - 1966-1977 11-22 Summary of Benefits to Japanese Ship- 11-62 builders - 1970-1975 11-23 Measures of Maritime Activity - Ship- 11-64 building - Oceangoing Vessels of 1,000 Gross Tons and Over (iv) II. THE MARITIME AIDS OF JAPAN A, SUMMARY 1 . Background As of December 31, 1975, the Japanese national fleet was the largest fleet in the world with the single exception of Liberia, the principal flag of conven- ience. As shown in Exhibit II-l, the Japanese na- tional fleet took delivery of 6.0 million gross tons in 1970 and 9.4 million gross tons in 1972 before deliveries declined in 1974 and 1975 to roughly half the 1972 level. All deliveries to the Japanese fleet during the period were built in Japanese ship- yards . At the same time the Japanese shipbuilding industry was unsurpassed in volume, delivering seven times the shipyard output of the next largest shipbuilding nation, Sweden. Originally developed to meet domestic demand, the shipbuilding industry's deliveries to the home fleet comprised between 34 and 41 percent of Japan's output between 1970 and 1972 and declined in relative importance in later years. As export production was emphasized and Japan's offshore char- tered fleet expanded, Japanese flag deliveries de- clined to 14-16 percent by 1974 and 1975 and total shipyard output increased from 17.6 million gross tons in 1970 to 31.2 million gross tons in both 1974 and 1975. This increase in shipbuilding capacity contributed greatly to Japan's aggressive drive to secure a major share of world orders, competing on quality, service, delivery time and price. The recession in world shipbuilding demand is expected to increase the importance of Japanese fleet orders. In 1976 deliveries to the home fleet comprised 21 per- cent of shipyard output but Japanese orders comprised 14 percent of the year-end orderbook reflecting con- tinued emphasis by the Japanese on securing export orders . Exhibit II- 1 SUMMARY OF NATIONAL FLAG FLEET AND SHIPBUILDING ACTIVITY 1970-1975 1970 1971 1972 1973 1974 1975 T t=1 n-Hwa /a% Vessels 440 403 417 411 498 502 DWT (000 17,602 19,318 22,756 26,892 31,283 31,250 GRT (000 9,698 10,510 12,487 14,191 16,708 16,229 n i ' ries fc r Japanese Rec istry from J< panese Shi pyards- e ive Vessels 241 185 198 157 127 109 DWT (000 6,013 7,166 9,406 8,141 4,430 4,846 GRT (000 3,565 4,127 5,427 4,510 2,590 2,630 n i veries for Japanese Registry from World Ship . e yar s Vessels 241 185 198 157 127 109 DWT (000 6,013 7,166 9,406 8,141 4,430 4,846 GRT (000 3,565 4,127 5,427 4,510 2,590 2,630 Owners Share of 46 Japar ese Shipyard 47 Del i veries 38 fP »+\ Vessels 55 26 22 DWT (000 34 37 41 30 14 16 GRT (000 37 39 43 32 16 16 l ipyards Share of Del veries to Japanese Owne rs (Per . , P Vessels 100 100 100 100 100 100 DWT (000 100 100 100 100 100 100 GRT (000 100 100 100 100 100 100 Source: New Ship Construction , U.S. Maritime Administration, U.S. Department of Commerce, annual. II-3 As shown in Exhibit 11-2, the Japanese national flag fleet increased from 8.9 percent of the world's dead- weight tonnage in 1966 to a peak level of 13.1 per- cent in 1972. Subsequently, the Japanese fleet's relative growth declined, and by the end of 1975 had fallen to 11.4 percent of the world's deadweight tonnage. As noted above, however, at the end of 1975 the Japanese fleet was still unsurpassed in size among non-convenience flag nations. The relative de- cline in the Japanese fleet is typical for industrial- ized nations with fleets engaged in home trades. The expansion of the fleet slows as market penetration peaks and highly efficient additions to the fleet carry the more slowly growing share of total national tonnage. The increases in fleet size were accompanied by sub- stantial reductions in average fleet age, but the average age of all segments of the Japanese fleet began to increase by 1974. A comparison of Japanese fleet procurement to world activity appears in Ex- hibit II-3. In considering the effects of assistance programs on the Japanese national fleet, it is necessary that the chartered tonnage controlled by Japanese flag operators also be reviewed. Between 1970 and 1976, the gross tonnage of the Japanese flag fleet increased by 64 percent. Through 1973, the Japanese flag share of world tonnage had increased, but fell off in the suc- ceeding years. However, as the relative growth of Japanese flag fleet slowed, the foreign-flag tonnage chartered to Japanese operators continued to increase rapidly as owners attempted to ensure competitiveness for Japanese cargos through low-cost foreign crews and the advantage of Japan ship export incentives available to foreign owners. During the same six years, the gross tonnage chartered by Japanese operators increased by over 300 percent . By June 30, 1976, the chartered fleet represented 45 percent of the total fleet controlled by Japanese operators and was equivalent to 82 percent of the Japanese flag fleet, up from 33 percent in 1970 as shown in Exhibit II-4. 1 1 -.4 Exhibit 1 1-2 SHARE OF WORLD FLEET AND AVERAGE AGE 1966-1975 Total Fleet Tankers Bulk Carriers Freighters Total Fleet 1 Tankers Bulk Carriers Freighters Total Fleer Tankers Bulk Carrier: Freighters Total Fleet 1 Tankers Bulk Carriers Freighters ■-Vessels Registered Under Japan Flag-' Percent of World Fleet 12.0 10.5 17.2 10.6 13.1 12.1 17.9 10.1 Average Age of Vessel s- ( Years) ■ Average Age of Vessels- (Years) 12.0 11.7 15.2 Includes Combination Passenger/Cargo not shown separately. Source: Merchant Fleets of the World , Maritime Administration, U.S. Department of Commerce, semi-annual . Exhibit 1 1-3 COMPARISON OF FLEET GROWTH - JAPAN AND WORLD 1970-1975 (deadweight tons lill ions) J rpnuT| , IN REGISTERED n rrT I— "1 G " v0WT " LLLT | --World Tons 1975 Percent Change Percent Change Deadweight 1970 Deadweight Tons 1970 1975 Total Fleet 39.1 63.2 61.6 327.0 556.6 70.2 Tankers 16.0 34.0 112.5 153.1 302.2 97.4 Bulk Carriers 13.2 21.3 61.4 77.2 150.1 94.5 Freighters 9.8 7.9 (19.4) 92.4 101.2 9.6 — NEWBUILDING DELIVERIES TO THE FLEET J 1971-1975 Percent of 970 Fleet DWT Deadweight Tons Del ivered to Fleet 1 Percent of 970 Fleet DWT Deadweight Del ivered to Tons Fleet 1 Total Fleet 34.0 87.0% 254.8 77.9% Tankers 20.1 125.6 157.1 102.6 Bulk Carriers 38.6 192.4 73.5 95.2 Freighters 6.2 63.3 24.0 26.0 1 SH WE OF NEWBUILDING DELIVERIES USED FOR FLEET GROWTH AND FOR VESSEL REPLACEMENT P Net J NET ercent for el Replacement ercent Fleet for P 3rowth Vess Percent for Net Fleet Gro Percent for fl/th Vessel Replacement Total Fleet 70.8 29.2 90% •10% Tankers 89.2 10.8 95 5 Bulk Carriers 20.7 79.3 99 1 Freighters 0.0* 100.0* 37 63 *A11 new deliveries were used to replace vessels deleted from the 1970 fleet. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. 11-6 o 1 CD c o r*. o co ON Cxi CXI ^t- "St -Q CO 2: E cu (XI CXI CNJ (XI CXI 3 > Z CJ3 ^ o oo LO CO co oo ON oo r-> LO O CO ■o o o LO CXI ON o LO 00 CD CXI CXI oo i- CD tf- H3 O CO JZ CNJ C\J LO o oo OvJ o S- CD LO ON LO (XI r^ LO < CD CO *t LO LO co ON -O CO 2: E cu Z3 > 2: CO - 1/1 c: LO o oo oo o LO ON oo oo oo CNJ oo CO "St en "St ON o LO CNJ *t oo LO ro CNJ O0 CXI oo OO ll- cd CO cu c 00 o LO r-. Q_ S- CD o oo co r*- oo < fO CD co LO LO LO *t «* oo >"0 -Q CO E CU 2: 2: j_ o J, (XI co LO LO r-. r-» r*. CU ON ON ON ON ON ON ON Through 1973 deliveries to the Japanese national fleet combined with the increases in the chartered tonnage represented approximately two-thirds of the output of Japanese shipyards. By 1974 and 1975, the additions to the two fleets (Japanese flag and chartered) were equivalent to approximately 40 percent of shipyard output with only 16 percent represented by the Japanese flag fleet alone. The lower per- centage during 1974 and 1975 is in part due to the extraordinary high rates of deliveries of remaining export tanker orders. Both the Japanese flag and chartered fleets have been primarily deployed in the carriage of Japanese foreign commerce. As shown in Table II-l, the percentage of freight revenues of the Japanese shipping industry (excluding time charter receipts) in the cross-trades was only 14 percent in 1974 and 13 percent in 1975. Thus, over 86 percent of the Japanese shipping in- dustry is involved with Japan's foreign trade, despite the significant growth of the chartered segment of the fleet controlled by Japanese operators. Table II-l FREIGHT REVENUES OF JAPANESE SHIPPING INDUSTRY (mi lions of dollars ) Japanese Flaq Chartered Foreign Ship Total Percent .___ Exports 967 948 1,915 32 Imports 1,837 1,467 3,304 55 Cross-trade 381 404- 785 13 Total 3,185 2,819 6,003 100 Exports 939 735 1,674 29 Imports 1,878 1,403 3,281 57 Cross-t ade 462 351 813 14 Total 3,279 2,489 5,768 100 Source: Wh Mir te is Paper on Shipping 1976, B try of Transport. ureau of Sh 'pping, II-8 2 . Conclusions Japan has employed a vast array of assistance programs in the development of the world's largest shipbuilding industry and national flag fleet. Over time, the type and level of aid provided to these industries has changed significantly. During the 1970s many of the aid programs employed in building the fleet and ship- building sectors were phased down or eliminated. Short term specific measures were used extensively as changing conditions warranted. Such changes were made as Japanese shipping and shipbuilding became profitable, highly competitive and sensitive to do- mestic and internatonal accusations that subsidies were harmful to free competition and Japan's trading partners . In the face of a world shipping and shipbuilding down- turn, Japan has not been required to greatly expand the aid programs to these industries, as has been re- quired in several of the other countries studied. In large part, this is because the industries have been strengthened greatly by past assistance programs and coordinated restructuring, which afforded Japan diversified companies, large market shares, and economies of scale. The principal aid to the national fleet has been the provision of investment financing assistance. By the 1970s approximately $2.6 billion in credit was out- standing in loans from the Japan Development Bank to Japanese flag operators . 1 A large part of the credit granted during the 1960s was combined with interest sub- sidies on the JDB loans and loans from private city banks to provide 100 percent financing. Even during the 1970s, as owner equity requirements were increased, over 60 per- cent of the gross tonnage added to the Japanese fleet was financed using these credits, combined with interest subsidies . Dollar figures in this chapter have been converted at the 1975 exchange rate of 296.80 Japanese yen to the dollar. II-9 As growth in the fleet slowed after 1972, tax allow- ances including special depreciation allowances and capital gains reserves were liberalized, and yielded significant cash flow benefits to the ship operators. The tax allowance programs tend to encourage replace- ment as opposed to the high growth stimulus of the rapidly expanding credit availability of the 1960s. Two-thirds of the Japanese-flag fleet is comprised of six diversified shipping groups, whose restructuring through mergers was a requirement of participation in the "subsidy" programs, i.e., the low interest invest- ment financing and interest subsidies. These groups are financially strong due to their diversified opera- tions and the recent buildup of reserves from the various tax allowance programs. These six large shipping groups' fleet replacement requirements should be of such a magnitude that a large portion of Japan's future shipbuilding production can be assured, this ongoing basic replacement demand being stimulated by the requirements of the recent tax allowance programs. As a result of rising labor costs, the Japanese ship- owners greatly increased the level of chartered ton- nage under their control over the past five years. Currently, the chartered tonnage is almost equal to the national flag fleet. It is likely that this balance will continue for Japanese wages will not likely induce owners to decrease the proportion of non- national flag tonnage, while union pressures through political channels will not likely allow Japanese operators a greater proportion of chartered capacity. The tax allowance programs should accommodate this balance by requiring a certain level of timely Japa- nese flag replacement constructions of efficient specialized vessels, while at the same time providing a reasonable level of employment for Japanese seamen. Additional tax allowance programs in the form of free depreciation schedules were requested by the Japanese shipping industry in 1977, in order to shelter the high profits of the diversified shipping companies. It is expected that these programs will be further ex- panded but will be patterned in a fashion that main- tains the above balance in the future. 11-10 Aids to the shipbuilding industry have been heavily tied to the provision of credit. The major financing assistance programs for Japanese ship operators di- rected large volumes of construction activity to Japanese yards. Credits for export financing were made available through the Japanese Export-Import Bank, initially at very attractive interest rates. The Export-Import Bank level of credits to the ship- building industry reached $2.6 billion during the 1970s. Over the past five years, however, the de- creasing demand for yen financing and deferred pay- ments due to the strength of the yen reduced the level of Export-Import Bank participation in exports. In 1976 the budgets have been increased, however, in order to service a renewed requirement for deferred credit . In 1975, 84 percent of Japan's orderbook consisted of export orders but for the duration of the shipbuilding recession the importance of domestic and charter fleet construction is expected to increase. These fleets have an aggregate capacity of 115 million dwt and could be replaced at the rate of nearly 6 million tons per year. Such activity would represent a major portion of Japan's reduced ship production. The re- maining orders must be realized from the export sector. Tax allowances have also been available to the Japa- nese shipbuilding industry. However, the most sig- nificant of these was a special program aimed at minimizing the effects of revaluation losses after the 1971 current realignments. The largest Japanese shipbuilding companies are part of larger diversified conglomerates. Faced with re- quired reductions in shipbuilding output, recent Ex- port-Import Bank financing of diversified activities such as offshore energy structures and various floating structures as well as plants and heavy equipment from Japan's diversified shipbuilding companies has been made particularly attractive. The costs of this program cannot be estimated. Efforts to diversify the ac- tivities of the shipbuilding companies have shown positive, but somewhat mixed results. 11-11 Japanese policy with regard to shipbuilding appears to be aimed at indirectly minimizing the effects of the reduced worldwide shipbuilding demand. Low Japa- nese prices have captured extremely high shares of the recently available shipbuilding market. Other than an increase in Export-Import Bank funds to finance a greater demand for deferred credit , within OECD export guidelines, no apparent special government assistance programs have been instituted. In contrast, the other countries studied have been forced to utilize extensive additional assistance in order to reduce the price differentials between their shipyard costs and the prices in Japan. Re- cently, however, Japan has faced price competition from Korean shipyards, using low cost labor and the ability as an LDC to offer non-OECD export credit terms. Although Japanese prices were increased by 5 percent in early 1977 to narrow the gap between Japanese and European prices, and yen revaluation raised the ef- fective cost of ships from Japan by an additional 10 percent , Japan may be forced to lower prices again in order to meet the LDC shipbuilding competition. While certain Japanese shipyards have abandoned selected slipways and building docks, the Japanese reaction to world overcapacity has been marked by the desire to preserve infrastructures and organiza- tions and adjust production volumes. This reaction reflects not only the unique responsibilities of Japanese industry to its labor force, but the per- ception of shipbuilding as a national asset that will emerge in future years when demand increases once again . 11-12 B. AIDS TO THE JAPANESE NATIONAL FLEET 1. Aid Programs Japan's policy toward the national-flag fleet has been directed toward securing a significant share of the foreign trade for Japanese flag vessels. Japan's economy is more dependent on foreign trade than any of the other major maritime nations covered in this study and the Japanese government seeks to minimize the dependence of this important sector of Japan's economic activity on foreign-flag vessels whose costs are beyond the Japanese government's influence. By having a large share of raw material imports and manu- factured goods exports and imports on Japanese flag vessels, the government can coordinate policy in the shipping area with overall economic policy and minimize the likelihood of unexpected price fluctuations in shipping having an adverse impact on Japan's economic growth. The Japanese government has employed an extensive range of direct and indirect assistance programs to foster the development of the Japanese national fleet. Primary emphasis was initially on investment financing assistance through low interest loans and interest subsidies, but more recently has shifted in emphasis to tax allowance programs including depreciation al- lowances and tax-free reserves. During the 1960s and early 1970s, investment financing aids played an important role in the development of the f leet , but the programs eventually were made more restrictive and became less effective. The tax al- lowance programs increased during the early 1970s and provided important contributions to Japanese operators until 1975, when reduced profitability lessened the potential benefits of tax related programs. The im- portance of aid programs with benefits designed in anticipation of not only high profit/high shelter periods, but times of low profits was revealed in Japan and in the Scandinavian countries as well. 11-13 Direct subsidies have to a lesser extent also been utilized by Japan, and are currently employed only in the domestic trades. Similarly, preferential cargo availability is employed only for domestic cargo. Exhibit II-5 outlines the principal assistance programs available to the Japanese national fleet during the early 1970s. Each of the programs is discussed in detail in the following section. Section B.2. dis- cusses the effectiveness of these programs. Section B.3. addresses recent and prospective programs. a. Principal Aids to the Japanese National Fleet (i) Investment Financing Assistance During the 1960s, the most significant form of as- sistance to the Japanese national fleet was investment financing assistance. During the 1970s, however, as the principal financing arrangements became more re- strictive, the impact of this form of aid decreased both in absolute terms and relative to other programs. Due to the length of financing arrangements the bene- fits of these programs have continued at high levels. The financing assistance provided during the 1960s included 100 percent financing and was combined with interest subsidies. These extremely attractive pro- grams were very important to the initial growth of the Japanese national fleet, which had already become the second largest fleet in the world by 1970. The operators utilizing this assistance were required to agree to participate in mergers, which has resulted in the combination of about 40 current companies into six major groups of operators, or core companies, in the "subsidized" sector of the Japanese fleet. The fleets of these six groups account for approximately two-thirds of the deadweight tonnage of the Japanese flag fleet, and each comprises vessel operators, owners, and owner-operators in the liner, dry bulk and tanker sectors. The diversified structure of the current fleet has been most important recently in providing financial stability for the fleet as different sectors of the shipping industry have been disproportionately affected by the current shipping slump. Exhibit 1 1-5 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE JAPANESE NATIONAL FLEET 1970-1975 i . Investment Financing Assistance Program 1 - Japan Development Bank Loans Program 2 - Interest Subsidies Program 3 - Maritime Credit Corporation Financing Program 4 - Japan Development Bank Replacement Program ii . Credit Assistance i i i . Tax Allowance Programs Program 5 - Special Depreciation Allowances Program 6 - Tax Free Reserves iv. Direct Subsidies Program 7 - Cross Trade Subsidies Program 8 - Island/Mainland Operating Subsidy v. Preference Programs Program 9 - Cabotage Preference vi . Government Ownership vi i . Other Investment financing assistance for Japanese flag operators has taken the form of: • Low interest loans from the Japan Develop- ment Bank (JDB) for foreign trade vessels. In 1970 3 75 percent of the gross tonnage built for the Japanese flag utilized JDB loans. By 1975 the figure had fallen to 36 percent. • Interest subsidies on both the JDB loans and the city bank (private banks) portions were also provided on vessels built prior to April 1975. • The Maritime Credit Corporation provides financing for the construction of coastal vessels. • The Japan Development Bank also provided special financing for replacement of small foreign trade vessels. This program was limited in application and was terminated in 1973. Program 1 - Japan Development Bank Loans to Shipowners Loans to Japanese owners for the construction of oceangoing vessels are provided through the government- owned Japan Development Bank. The conditions of the loans are more favorable than Japanese owners could expect to receive from private sources of capital. In the 1960s, these loans carried an interest rate of 4 percent while the prime rate in Japan ranged from 7.5 to 8.7 percent. The loans were usually com- bined with loans from city banks to cover 100 percent of a vessel's cost. In the 1970s, the terms became more restrictive, re- quiring higher levels of self-financing by the owners, but still provided financing at more favorable terms than private capital sources could offer. The Japan Development Bank loans combined with city bank loans and government interest subsidies provided financing for up to 95 percent of the cost for certain vessel types as shown in Exhibit II-6. These loans were utilized by Japanese owners for $3.08 billion of new construction from 1971 to 1975, in- clusive. Of the $3.08 billion, Japan Development Bank loans accounted for $1.64 billion, other bank loans for $0.92 billion, and self-financing by the owners for $0.54 billion. Vessels constructed using these financing aids aggregated 142 ships of 11.4 million grt and accounted for 18 percent of the vessels and 59 percent of the gross tonnage added to the Japanese fleet from 1970 to 1975 (see Exhibit II-7). financing. By 1974-1975, the limited availability of charters coupled with the increasing equity require- ments and the elimination of interest subsidies re- duced the demand for this form of financing. Aggregate outstanding Japan Development Bank loans to Japanese shipowners increased from $2.0 to $2.6 bil- lion between 1970 and 1974 as shown in Exhibit II-8. However, the decreasing use of the JDB loans and the lower participation by the JDB slowed the growth of outstanding funds as the loans being paid off began to approach the reduced level of new commitments. Exhibit I 1-8 OUTSTANDING JAPAN DEVELOPMENT BANK LOANS TO SHIPOWNERS (millions of dollars) Amount Out- standing 1970 1971 1972 2,014 2,257 2,502 1973 2,598 1974 2,600 1975 N/A Source: Handbook of Shipping Statistics, 1976, Ministry of Transport. Of sufficient magnitude to assure the recovery of the cost of the vessel within ten years. Freight or cargo guarantees as short as three years may he approved, while liner vessels require specific JDB screening . 11-17 £;! >, Q. O E Q. O cnooococo » ^^-mo r^ ro O O csjLnr- ro cm q- en <\j oi O f^ rorodr-~! cq S cnj r-i ci en d oo cm CO *3" ro cm lt> <3- O <=r O cm CO O r» « • ^ ' N w o ■<- k£> en lti voo^^>a-cnc->:> ror-o So i ci to en *j """ " +jSooo Siiocoo en i- -— q- r-^ —> ^ ,— « ■ ol r«* CM O n_ ^iroro cO(-.inOLno r~ co o ua i CO cm o OOOOCO-l->i^Oroo en 4J m r» r~i s_- - c r-. cm O S ' 2 CM r^ — ' CM r^ ' S CM O ro en cm >=r cm to * co n en ~ o ca; £ a. s-q. c ^ The interest rates shown in Exhibit II-6 are net of interest subsidies, which are described in the fol- lowing section. In Exhibit II-9, the interest rates before subsidy are shown. As can be observed from Exhibit II-9, the JDB interest rates before subsidy were on average approximately two points below the rates on the City Bank loans. Approximately the same spread existed between the JDB loans before subsidy and prime market rates. Thus, the JDB loans provided a benefit to Japanese operators approximately equal to the two point spread in interest rates. If this estimated interest differential is applied to the outstanding loans to shipowners in Exhibit. II-8 the benefit can be estimated at between $25 and $40 mil- lion per year between 1970 and 1974. Program 2 - Interest Subsidies Interest subsidies on Japan Development Bank loans and other bank loans used in the financing of the construction of oceangoing vessels for Japanese owners were provided until April 1975. On the finacing de- scribed in Exhibit II-6, the interest rates that are shown in each year on the Japan Development Bank loans and on the loans for other banks are net interest rates after government interest subsidies. As shown in Exhibit I 1-9, the subsidies on Japan Development Bank loans ranged from 0.7 to 1.63 percentage points and totaled between $31.4 million and $37.1 million per year from 1970 to 1974. Interest rate subsidies on other bank loans ranged from 1.2 to 2.5 percentage points and totaled between $8.1 million per year and $13.7 million per year from 1970 to 1974. The program was eliminated in April 1975. However, provisions in the agreements require the repayment of the interest subsidies if within the 15 year period following the first drawdown of the loan the company has unconsolidated net income in any year in excess of 10 percent of its capital stock. The subsidy to be repaid is determined on a progressive scale up to 75 percent of net income in excess of 15 percent of capital stock. Given this potential liability, the tax allowance programs discussed in the following sections take on a greater significance. 11-21 Program 3 Maritime Credit Corporation Financing A government-owned credit institution, the Maritime Credit Corporation, finances part of the cost of a new vessel for the domestic trade if it replaces an obsolete vessel being scrapped. The purpose of the Maritime Credit Corporation's program is to encourage the scrapping of older, inefficient vessels in the coastal trade and to replace them with new, more ef- ficient vessels. Terms of the MCC financing have been as shown in Exhibit 11-10. The Maritime Credit Corporation takes 70 percent equity in the vessels financed under this program, and operators make monthly payments comparable to debt service charges. At the end of the financing period the Maritime Credit Corporation sells the vessel to the operator for its scrap value. The payments to the Maritime Credit Corporation provide constant an- nual amortization of the principal, plus interest on the outstanding balance. Thus, for the first years of a financing under this program, an operator's payments are equivalent to the percentages of the acquisition cost of the vessel shown in Table II-2. Table II- ANNUAL OPERATOR PAYMENTS UNDER MCC LOANS (Percent of Vessel Acq isition Cost) 1970 1975 18 years repayme 6.5% interest it 12 years repayment grace period - 8.9% ifter 3 years interest First Year 8.44% 6.23% Second Year 8.19% 6.23% Third Year 7.93% 6.23% Fourth Year 7 . 68% 12.06% Fifth Year 7.43% 11.54% Sixth Year 7.18% 11.03% Source: Ex Mbit H-10. Compared to a commercial loan to a domestic operator, if indeed credits of the length offered by the Mari- time Credit Corporation would be made available to domestic operators, the terms offered by the Maritime Credit Corporation provided benefits worth at least $3 million per year to Japanese operators of domestic trade vessels. Between 1970 and 1975, 260 vessels totaling 237,385 grt have been constructed under this program. As can be inferred from Exhibit 11-10, the vessels are, in fact, small coastal vessels and the cyclical alloca- tion of Maritime Credit Corporation loans reflects the exogenous factors in the Japanese economy and the ability of coastal operators to compete using older vessels if demand is sufficiently high as it was in 1973. Program 4 - Japan Development Bank Replacement Program A program for owners of oceangoing vessels, similar to the scrap-and-build program for home-trade vessels described above, was available through the Japan Development Bank. The Development Bank financed up to 50 percent of a new vessel of 4,000 grt or more that replaced an obsolete vessels of 3,000 grt or more. The program placed a ceiling on the amount of financing available for a given project, thereby effectively limiting the size of the vessels which could be constructed under this program. Due to the limited demand for smaller vessels for the Japanese flag fleet, the program was terminated in 1973, after providing $24.25 million in financing between 1970 and 1973 (Exhibit 11-11). If the shipowners had paid commercial rates of interest on these loans, they would have incurred at least $0.5 million per year in additional expense between 1970 and 1973. 11-24 Exhibit 11-11 JAPAN DEVELOPMENT BANK REPLACEMENT LOANS (1970-1973) Fiscal Year 1970 1971 1972 1973 Percent of Financing Provided by the Japanese Development Bank Interest Rate 1 {%) 6.5% 6.5% Repayment Schedule 8-10 years after 3 year grace per on amortization ( principal Amount of Financing provided by the Japan Development Bank ($ millions) $3.37 $6.06 50% 6.5% 50% 6.5% od )f $8.42 $6.40 No interest subsidies are available for vessels built under this program. Source: Handbook of Shipping Statistics 1976, Ministry of Transport. 11-25 (ii) Credit Assistance Credit assistance is not applicable to national flag operators. (iii) Tax Allowance Programs During the 1970s the tax allowances available to Japanese shipowners were liberalized and became more significant to Japanese flag operators. The princi- pal programs were: • Special depreciation allowances for vessels and other equipment. The amount of special depreciation allowed was increased in 1972 and has been modified since. The program provided significant cash flow benefits until 1975, when profitability pressures diminished the primary effects of the pro- gram. • Tax-free reserves have been available to Japanese operators for a variety of purposes, including repairs. During the mid-1970s, a fund into which capital gains could be deposited took on a greater significance as the growth of the fleet slowed and smaller vessels were sold off. • Twenty- five percent of the social security payments for seamen are also financed by the government under the "Seamen 's Insurance Law. " By 1976, the government budget pro- vided $41.3 million for this purpose. Program 5 - Special Depreciation Allowances Special depreciation allowances have been made avail- able to Japanese shipowners. During the 1970s the programs have undergone significant revisions to en- courage fleet replacement and other specific equipment related objectives. 11-26 The special depreciation programs allow an operator to take additional depreciation above normal de- preciation allowances. The special depreciation must be "repaid", that is, taken back in as income within specified time periods. Until April 1, 1976, the special depreciation was repayable over ten years. After that date the special depreciation is repayable over seven years. The special depreciation allowances in effect for ships over 2,000 gross tons available at different time periods have been as follows: — from April 1976 - 20% — from April 1973 - 25% — from April 1972 - 33% — from April 1971 - 20% 3 —before April 1971 - 10% 3 Prior to April 1972 the above special depreciation was available only to domestic vessels under rationaliza- tion programs. For vessels in the overseas trades, special depreciation allowances were scaled in pro- portion to the ratio of overseas revenues to total revenue. That system was abolished in 1972 and the above program was temporarily increased to a 33 per- cent allowance and applied to foreign trade vessels. The special depreciation program is the most signifi- cant of the tax allowance programs. Between March of 1972 and September of 1974, the six core companies and affiliates increased their cumulative special de- preciation reserves from $445 million to over $903 million. 4 Over the 2-1/2 years, the increase equates to an annual rate of $183.2 million. Domestic vessels only. Six cove companies are: Yamashita-Shinnion (YSLine) ; Kawasaki Risen Kaisha (KLine); Nippon Yusen Kaisha (NYKLine) ; Japan Line; Mitsui 0SK; and Showa Line. 11-27 Special initial depreciation is also allowed on certain types of other assets. This special first year de- preciation is available to Japanese corporations in general and has application to the shipping and ship- building industries. Eligible items include pollution control equipment , certain safety-related equipment , advanced data processing equipment, and other items, and the initial depreciation percentage typically falls in the 20 to 50 percent range. The aggregate special depreciation reserves for pollu- tion control and other equipment on the balance sheets of the six core companies and affiliates amounted to $23.5 million as of September 1975. Program 6 - Tax Free Reserves Special reserve funds that defer or eliminate tax liability have been employed by Japan. Some of the ma- jor reserves available to Japanese shipowners include: 1. Reserve for tax deferment of replace- ment of special business assets. 2. Reserve for special repairs of vessels . 3. Reserve for price fluctuations of in- ventories and securities. 4. Reserve for overseas investment losses. 5. Reserve for overseas market develop- ment costs. 6. Reserve for retirement allowances and bonuses . Of the variety of reserves available, the most signifi- cant has been the use of the reserve for replacement of assets, that is a reserve to which book profits from the sale of a ship (or certain other land or building properties) can be credited. These reserves subsequently can be applied to the purchase price of new vessels. 11-28 Analysis of the reserve accounts of the six core companies, shows the following- aggregate reserve funds for reserves other than the special depreciation reserves discussed in the previous section (Exhibit 11-12). Exhibit 11-12 measures the benefit of the reserves, solely on the net increases in the reserve fund. Other capital gains would have been directly employed in the reduction of the book value of new constructions during the period. The capital gains program has been available since 1972, hence, $200 million at the end of 1973 reflects the extent of the other reserve funds. The large increase in 1974 in the replacement reserve, coincides with the slower growth of the fleet which results from both lower orders and higher second-hand sales. In determining the benefit of the tax allowance programs, the incremental reserves have been estimated as the net tax shelter provided by the program. Thus, the special depreciation provided an estimated $150 million in 1973 and an additional $75 million in 1974. In 1975, the depreciation reserves of the six core companies showed no increase and therefore provided no future net bene- fit that year. However, as discussed, the requirements to reintroduce the special initial depreciation into income will place pressure on the Japanese operators to make additional investments in Japanese flag vessels in order to offset this income within the seven to ten year period. With regard to the replacement reserve, the benefit of the program has been estimated as the tax shelter ob- tained during 1974 when the reserve fund increased by $92 million. These funds must be reinvested in Japa- nese flag vessels in order to maintain the tax benefit of the reserves. Thus, the current character of this program has shifted from providing additional benefit to Japanese shipowners to providing a significant in- centive for reinvestment. 11-29 UD C\J ~ L.O o m ID CO __, 00 00 U3 en l-«. m ■-I tn cT. — ' • r- CO •r- Qi I £ 11-30 (iv) Direct Subsidies Direct subsidies have been available to Japanese flag operators, but the programs have been both specialized and limited. • Operating subsidies for initiating new cross trades were provided until 1969. Small amounts of previously committed funds were paid after that date. • Subsidies are paid to coastal operators which, primarily result in offsets to losses on those operations. Program 7 - Cross Trade Subsidies Operating subsidies for initiating new cross trade services were eliminated in 1969 as Japanese lines became highly competitive. These subsidies had been granted previously for liner services in the amount of 3 percent of the cross trade freight revenue in the first two years after initiation of service, 2 percent for the third year, and 1 percent for the fourth and fifth years. For tramp services, the subsidy amounted to 2 percent for the first year and 1 percent for the second and third years. Payments for cross-trade services initiated before 1969 continued into the 1970s. Budgeted levels for the cross trade subsidies decreased from $2.8 million in 1965 to $.76 million in 1969 after which the amounts budgeted were inconsequential. Program 8 - Island/Mainland Operating Subsidy Operating subsidies are provided by the government for Island/Mainland services. These subsidies for the home fleet have increased from $0.9 million in 1970 to $4.5 million in 1975 and $6.4 million in 1976. 11-31 As shown in Exhibit 11-13, the subsidies have been paid to an increasing number of operators and routes and have offset approximately 75 percent of the ag- gregate deficits of the operators on those routes. (v) Preference Programs Program 9 - Cargo Preference Cabotage trades are reserved for Japanese-flag vessels. There are no restrictions on trading in cabotage trades with subsidized oceangoing vessels as in the United States. No formal restrictions exist in the foreign trade but Japanese companies and operators are encouraged to arrange import purchases on an f.o.b. basis and to make export contracts on a c.i.f. basis to facilitate Japanese control over the shipping decisions. One of the conditions for operators acquiring the favorable terms of Japan Development Bank financing is the re- quirement for a cargo commitment for the Japanese-flag vessel to be built (e.g., bulk carriers obtaining Japan Development Bank financing are required to have ten year charters for importing raw materials to Japan). (vi) Government Ownership None (vii) Other b . Benefits of Japanese Assistance Programs to the National Fleet Exhibit 11-14 provides a summary of the aids to Japa- nese flag operators by program and year for the period 1971 to 1975. As shown in the exhibit, the principal programs during 1971 and 1972 were in the area of in- vestment assistance. During 1973 and 1974, the ex- panded depreciation allowances and the tax free re- serves increased in magnitude, but during 1975 pro- vided no incremental benefit. 11-32 Exhibit 11-13 ISLAND/MAINLAND OPERATING SUBSIDIES 1970-1976 (millions of dollars) Year No. of Operators No. of Routes Deficits Amount of Subsidies 1970 54 64 $1.44 $1.09 1971 58 67 1.55 1.17 1972 79 88 1.91 1.44 1973 87 97 2.84 2.13 1974 91 102 4.03 3.02 1975 92 103 6.03 4.54 1976 105 115 8.51 6.41 Source: White Paper on Shipping 1976, (Japanese Version), Bureau of Shipping, Ministry of Transport. 11-33 h T S "D •— I CT> .a co r-- 2: r— LO O O O LO LO en C\i ^ CO ! ! *d- ^3- LO ^1- CO "^r CNJ LO O rH O *~J CU Cn C\J CO LO CNJ CO Ln 13 LO LO r>~ cr. r^ a-i CVI LD cn a; 4- -a c CU Q. CU O OI LO +-> CT» CNJ cr> CO O 1 cnj 1^ ,_ CO O LO «3- LO LO ro co E c: E O) i- 4-> CU S- -0 cnj 01 LO O ^d- cu CX> CO C\J ,_; LO 2 E LO <3- CO LO ^~ Z5 O) CJJ O LO LO CNJ a. (Ti LO ,_; CO LO ^ r-- X cu CD «* -3- LO LO U ~~ . CO CD -a c CU i_ CD CU o_ CO .a CU 33 O E CO Cn n3 CU CO -O X- O
  • c > CO -0 s- O *o s- -Q co S- 2 CU 3 S- cu O- O CO CO h- .— CD 4-> T3 +-> n- cr: ■0 CO c: .. CD 03 •• •• 21 1-1 O CNJ (D CO E «* O. LO •1- LO a 'ro CO ^ ^ CT> E E E E Ct- E cu E E C ro E E 03 03 CU ro ro J- «3 4-> ro ro CO 5- S_ CO S_ Q. i_ Q- S- O S- %- OI Q cn C cn cn Q CD CD cn ro cn CO CD cn O ■"0 O O ^ O ra O O jQ O O S- S_ S- s- S- 3 s- <- D_ Q. Q_ o_ o_ D_ Dl Q_ o_ 11-34 Two significant trends in the aid programs available to the Japanese national fleet are observable over the 1971-1975 period. First, the aid programs have generally decreased over the period as a result of programs that have been eliminated and others which have been made less attractive and utilized to a lesser degree by Japanese flag operators. Second, the emphasis of the aid programs available to the Japanese flag fleet has changed with the changing needs of the Japanese flag operators. Generally, the primary emphasis on investment finan- cing assisted Japanese flag operators to construct the largest national flag fleet of vessels in the world. Liberalization of tax allowances subsequently assisted operators as, first, large additions to the fleet, came on stream during a period of high profit- ability and then the sale of less competitive vessels took place in a less profitable period. In 1975 the benefit of the Japanese assistance pro- grams returned to the $100 million per year of on- going effects of the earlier investment financing aids. As the subsidized loans are paid off, the in- terest subsidy will decline. The Japan Development Bank financing, however, is likely to continue at its current rate in that the amount of outstanding loans has* leveled off and replacements for the Japa- nese fleet will be necessitated by the "repayment" requirements of the special depreciation allowances. As those reserves are brought back into income, new assets that provide shelter on the earnings will be required. In the short term, however, it may be possible that special exemptions on the depreciation repayments will be put into effect until the world shipping market stabilizes. The Shipping and Shipbuilding Rationalization Council called for an increase in Japanese flag capacity to meet growing Japanese trade levels. 5 However, it is likely that future maritime Shipping and Shipbuilding Rationalization Council (SSRC) re- port of Becmeber 1974 presented major recommendations and fore- casts for Japanese shipping and shipbuilding policy in view of the impending worldwide shipping and shipbuilding crisis. 11-35 aid programs will balance the rising costs of Japa- nese seamen and their concern for jobs with the re- quirements of operators for competitive home and offshore capacity through the use of tax allowances. 2. Effectiveness of Aids to the Japanese Flag Fleet The combination of inexpensive credits, liberal tax treatments and other aid programs described above encouraged the rapid growth and modernization of the Japanese fleet in the 1960s and 1970s. The gross registered tonnage of the fleet more than doubled from 10.9 million in 1965 to 24.5 million in 1970, raising its rank among world fleets from fourth to second with only Liberia having registered tonnage in excess of Japan's. Japan's share of the world fleet rose from 7.2 percent in 1965 to 11.6 percent in 1970, and at an average age of seven years the fleet was the world's most modern in 1970. Under a five year plan that began in 1969, Japan was committed to expanding its merchant fleet by 50 per- cent. This was a significant reduction from the growth rate achieved in the late 1960s but still con- stituted an increase of 10.2 million grt . By the end of 1974, Japan's fleet had grown to 36 million grt, 77 percent above the end-1969 figure. In December 1974, a report of the Council for Rationalization of Shipping and Shipbuilding industries suggested it was necessary to construct new Japanese flag vessels of 12-13 million grt between 1975 and 1979. Net of re- placements, this will result in a substantially lower growth rate. However, as noted elsewhere, Japanese flag and chartered ships carried 74 percent of im- ports and 54 percent of exports in 1975. In the early part of the 1970-1975 period, Japanese owners continued to acquire vessels at a rapid rate despite the requirements by the Japan Development Bank that a larger portion of vessels' cost be self- financed by the owners. From the five years average of 2.1 million gross tons per year financed with the 11-36 aid of Japan Development Bank loans in 1965-1969, the average rose to 3 million gross tons per year from 1970-1972. The owners share of the financing rose from zero to 18 percent between 1968 and 1972 and the Development Bank's share dropped from 78 percent to 52 percent. Other banks supplied the remainder of the financing. By 1973, however, the rate of growth began to decline. An average of 1.96 million gross tons per year was financed using the Development Bank loans in 1973- 1974 and only 0.95 million tons in 1975. Total growth of the Japanese fleet, including vessels not financed through the Development Bank's credit facilities, showed similar decline in 1973-1975. Exhibit 11-15 illustrates the magnitude of the de- cline in the growth rate. Japan's rate of fleet growth fell below the growth rate for the world fleet in each year after 1972, causing Japan's share of the world fleet's gross tonnage to decline from 12.7 percent in 1972 to 12.5 percent in 1973, 11.7 percent in 1974, and 11.2 percent in 1975. For the freighter sector of the fleet, rapid addi- tions of tonnage in the late 1960s increased Japan's share of the world freighter fleet from 7.2 percent of the gross tonnage in 1965 to 10.0 percent in 1970. The average age of Japan's freighter fleet declined from ten years to seven years between 1964 and 1970 while the average of the world's freighter fleet in those years was 15 years and 13 years, respectively. In 1965, Denmark's freighter fleet was more modern than Japan's while the freighter fleets of West Ger- many and the Netherlands were approximately equal in age to Japan's. By 1970, however, Japan's freighter fleet ranked first in terms of lowest average age. From 1970 to 1975, however, Japan's freighter fleet declined in both number of vessels and gross regis- tered tonnage while the world's freighter fleet in- creased by 5.7 percent in vessels and 11.0 percent 11-37 Exhibit 11-15 JAPANESE FLEET OCEANGOING VESSELS OF 1,000 GRT AND OVER 1965-1975 Year Regis Gross tered Tonnage (000) Growth in GRT from Previous Year (000) 1965 10,886 - 1966 13,447 2,561 1967 16,101 2,654 1968 18,797 2,696 1969 21,968 3,171 1970 24,519 2,551 1971 27,710 3,191 1972 31,804 4,094 1973 34,389 2,585 1974 35,994 1,605 1975 37,164 1,170 Source: Merchant Fleets of the World, Maritime Administration, U.S. Department of Commerce, annual. in grt . Japan's share of the world fleet's tonnage declined from 10.0 percent in 1970 to 7.3 percent in 1975, although it continued to remain among the most modern having the lowest average age among fleets that represent more than 1 percent of the world's freighter vessels and had the second lowest age of all freighter fleets. These declines in absolute tonnage of the fleet and in percentage of the world's fleet occurred despite the most favorable terms of the Japan Development Bank's financing being reserved for containerships and liner vessels. Exhibit 11-16 summarizes the growth of the Japanese fleet by vessel type.- Also shown are the summary figures on national flag carriage, profitability and employment. As shown in Exhibit 11-16, the Japanese flag fleet has carried between 41 and 45 percent of Japan's im- ports and between 23 and 39 percent of Japan's export tonnage. Including the chartered tonnage, Japanese ship operators carried 74 percent of imports and 54 percent of exports in 1975. The freighter fleet de- clined by almost one-fifth in size over the study period. Despite the growth in tonnage of the fleet, the number of vessels registered under Japanese flag has de- creased slightly over the study period. The fleet has provided employment for between 120,000 and 130,000 seamen, which until recently had been totally Japanese nationals. Japanese wages have escalated at rates exceeding 20 percent per year and owners have developed bareboat charter arrangements in order to employ non-nationals to reduce operating costs. On an IMF 6 basis, Japan's shipping account shows a deficit over the study period. Shipping receipts and payments for exports and imports are in balance; Balance of payments for shipping goods and services as calculated under International Monetary Fund (IMF) guidelines. 11-39 Exhibit 11-16 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY FLEET OPERATIONS Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Japan 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate b Total Ships - Number DWT GRT 2,109 2,153 2,210 2,145 2,143 39,142 44,900 52,267 57,286 60,167 24,519 27,710 31,804 34,389 35,994 2,051 63,238 37,164 -0.6 10.1 8.7 Tankers - Number DWT GRT 368 388 436 485 520 16,036 19,299 23,281 27,694 30,707 9,399 11,087 13,077 15,268 16,891 531 33,950 18,640 7.6 16.2 14.7 Bulk Carriers - Number DWT GRT 429 481 525 530 542 13,249 15,958 19,420 20,973 21,196 8,254 9,891 11,875 12,822 12,955 535 21,270 12,871 4.7 9.9 9.3 Freighters - Number DWT GRT 1,284 1,257 1,217 1,098 1,049 9,782 9,571 9,486 8,535 8,191 6,760 6,635 6,732 6,171 6,026 954 7,945 5,526 -5.8 -4.1 -4.0 (where intended registry is known) Total Ships - Number DWT GRT 241 185 198 157 127 6,013 7,166 9,406 8,141 4,430 3,565 4,127 5,427 4,510 2,590 109 4,846 2,630 -14.7 -4.2 -5.9 Tankers - Number DWT GRT 24 27 45 68 59 2,357 3,366 4,371 5,204 3,375 1,275 1,763 2,239 2,677 1,894 43 3,750 1,956 12.4 9.7 8.9 Bulk Carriers - Number DWT GRT 57 70 76 38 32 1,525 3,111 4,266 2,523 698 2,520 1,888 2,486 1,460 435 26 773 449 -14.5 -12.7 1 -29.2 Freighters - Number DWT GRT 159 88 71 48 35 1,130 689 751 410 354 762 476 669 361 306 Vessels on Order at Year-End (where intended registry is known) 38 319 212 -24.9 -22.4 -22.6 Total Ships 3 - Number DWT GRT 157 255 213 204 199 8,078 22,420 22,855 18,368 20,111 10,797 231 15,068 8,409 8.0 13.3 NA Tankers - Number DWT GRT 22 77 107 99 119 4,505 13,788 18,233 15,056 16,999 8,902 80 10,613 5,647 29.5 18.7 NA Bulk Carriers - Number DWT GRT 65 117 65 66 51 2,824 7,752 4,110 2,906 2,859 1,682 86 3,721 2,193 5.3 5.7 NA Freighters - Number DWT GRT 70 61 41 39 27 749 880 512 406 250 210 65 735 569 -1.5 -0.4 NA 11-40 Exhibit 11-16 Fleet Operations (continued) Country : Japan 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate Imports 45 45 42 44 41 46 d 0.4 Exports 39 34 29 27 24 23 d -10.0 (millions of dollars) Revenues e 3,012 3,371 3,512 4,918 7,079 7,107 18.7 Profits e 214 146 50 286 321 38 -29.2 Outstanding Debt e 2,273 2,777 3,122 3,186 3,160 2,946 5.3 p y n Nationals NA NA 124,288 118,258 NA NA NA Total NA NA 124,288 118,258 120,357 129,628 NA Includes Combination Passenger/Cargo Vessels not shown separately. Source: New Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Including chartered tonnage: 74 percent of imports and 54 percent of exports. e The figures shown are for the six Japanese core companies and affiliates. In 1974 and 1975, the 40 companies included accounted for about two-thirds of the deadweight under the Japanese flag. y Source: White Paper on Shipping 1976 , Ministry of Transport. 11-41 however, Japanese flag vessels and chartered tonnage are involved in cross trades to only a small degree while the costs of the large chartered fleet place the overall account into the negative. The above shipping balance does not reflect two key factors. First, over two-thirds of the total foreign trade is carried on Japanese owned or con- trolled vessels. The foreign exchange effects of this are significant. Second, much of the controlled ton- nage has been constructed in Japan and the charter payments in large part are a delayed "repayment" of prior exports by the shipbuilding industry. Thus, Japan's objective of controlling a large portion of the payments in its shipping account has certainly been achieved. Second, while showing a deficit in the shipping account due to payments to offshore con- trolled charters, the effects on the Japanese economy are far more positive than negative due to the econo- mies of offshore charters and the domestic production of a majority of the vessels. Third, while maintaining a reasonable level of employment for Japanese seamen, Japan has a large national fleet with resources which can sustain a volume of shipbuilding output for the domestic and controlled fleets. 3, Recent and Prospective Programs The Japanese government eliminated interest subsidies on Japan Development Bank loans and on city banks' loans to Japanese owners as of April 1, 1975. These subsidies had come under severe criticism in Japan when shipping companies were enjoying high profitability in recent years. The competitiveness of Japanese ship- yards and declining interest rates supported this elimin- ation. They had been a major benefit to Japanese owners, total interest subsidies on outstanding loans having reached $50 million per year in 1974. Interest subsidies will continue to be paid on outstanding loans committed before April 1, 1975, but new ships financed after that date carry interest rates on JDB loans 1.35 to 1.63 percentage points higher than in fiscal year 1974 and other bank loans that had previously been sub- sidized carry rates 2.5 percentage points higher than in fiscal 1974. As discussed previously, this con- tributed to the decline in new financings with these programs to 14 vessels of 0.95 million grt in fiscal 1975 from the 25 vessels of 1.94-1.99 million grt in each of the previous two years. The elimination of these subsidies also had a detri- mental effect on Japanese shipbuilding although orders from Japanese owners have represented less than 20 percent of the Japanese yards' output in recent years. Rising labor costs have caused considerable concern among Japanese owners. In May 1976, the shipowners Management Association representing seven large owners announced plans to reduce within one year the number of vessels owned by its members by 72 of the 753 ships currently in operation. ? Other owners have also sought to sell ships, especially smaller labor-intensive vessels, to foreign fleets, but they have not met with much success so far. Foreign crews on Japanese vessels have also been intro- duced through special bareboat/time charter back arrangements as a means of alleviating high manning costs. By April 1976, 152 Japanese vessels of 1.47 million dwt were manned by foreign crews, and within the next year another 38 ships of 0.61 million dwt were expected to join the fleet under similar circum- stances. These measures have met with considerable opposition from the All Japan Seamen's Union, but the Ministry of Transport has allowed this approach as a way of relieving the Japanese shipowners of excessive manning costs. 7 Shipowners Management Association members: YSLine; KLine; NYKLine; Japan Line; Mitsui OSK; Showa Line; and Sanko Line. Japanese shipowners have voiced objections to emerging trends in several nations toward cargo preference, and they have urged the government to consider re- taliatory steps against the ships of nations that implement cargo preference rules. Higher port entry fees and banishment from Japanese ports have been suggested as potential retaliatory measures. The Japanese ministry of Transport commissioned a study by the Shipping and Shipbuilding Rationalization Council (SSRC), an advisory council to the Minister of Transport, which is currently reviewing long term approaches to future Japanese aids to shipping and shipbuilding. Thus, specific new programs and major changes to existing programs are not likely in the very short term. In the future, the areas likely to receive particular emphasis are the relationships between the controlled and Japanese flag fleets, and the future role of and effects of the programs on Japanese seamen. Currently, the Japanese operators have a package of programs available to them with little ongoing addi- tional benefit in an environment of reduced fleet ex- pansion and low profitability. However, the effects of the programs from prior years of high profitability have established a fairly sound base for the existing operators during the currently depressed shipping markets. Only the repayment clauses of the programs, which include the reintroduction of special deprecia- tion which could trigger interest subsidy repayments, raise the potential for added pressure and negative effect from the existing programs due to depressed freight rates, a fleet of fairly constant size, and the 20 year useful lives of the ships. The assistance programs available to Japanese flag operators have provided between $100 and $300 million per year to Japanese flag operators over the period 1971 to 1975. During 1973 and 1974, when tax allow- ances (depreciation and capital gains) were increased, the allowances, coupled with the ongoing benefits of investment assistance programs yielded the largest benefits to the industry. By 1975, the reduced profitability of the industry curtailed the utility of tax allowances and reduced the principal government assistance to the level of the ongoing investment financing programs. However, by 1975 these programs also were not providing sig- nificant additional assistance to Japanese flag operators, in that new commitments for interest sub- sidies were no longer available and operators had re- duced their use of the Japan Development Bank loans. As a result, the current Japanese assistance programs for national flag operators are likely to play a re- duced role in the future development of the Japanese flag fleet, unless they are greatly altered by the SSRC study. The potential repayment of interest subsidies and the reintroduction of the depreciation allowances into income will provide operators some incentives to construct Japanese flag vessels to offset tax liabili- ties from other sources and from the profits of chartered vessel operations. At the same time the reserves built up from past investments will play a role in providing some stability to Japanese opera- tors during the current shipping recession. A second factor affecting the future stability of the Japanese flag operators is the diversified structure of the subsidized companies. Past Japa- nese policies directed aids to carriers agreeing to merge into major groups. As a result, the tanker segments of the fleet are part of large shipping groups which provide an overall stability to the operators and significantly lessen the exposure of the tanker segments of the fleet. Other factors affecting future policies include a probable reduc- tion in the level of Japanese flag construction, which will more likely continue to take the form of replacement and modernization as opposed to the previous rapid expansion in an effort to preserve the competitiveness of the Japanese fleet. 11-45 In mid-1977 the Japanese Shipowners Association (JSA) called for increased and altered government aid for the industry. While admitting to fleet per- formance that exceeded expectations, the JSA called for the introduction of free depreciation similar to that in the United Kingdom to improve the liquidity of owners and enable lines to reserve funds in periods of prosperity for recessions. The Association also called for reaction to COMECON undercutting of con- ference rates and the resulting abandonment of con- ferences by certain Western shipowners. Japanese owners also have requested overall support of South- east Asian operations, fleet modernization and govern- ment support to resist cases of possible double taxation on Japanese terminals in foreign ports. C. AIDS TO THE JAPANESE SHIPBUILDING INDUSTRY In the 1970s, the Japanese shipbuilding industry has shifted toward an increasing concentration on export business. In the 1960s, the 100 percent financing for new oceangoing vessels provided to Japanese owners by the Japan Development Bank and city banks served to generate substantial business for Japanese shipyards since all of the orders by Japanese owners were placed in domestic yards. In addition, the Japa- nese owners not using the Japan Development Bank financing also placed their orders in domestic ship- yards . In the 1970s, orders from domestic owners continued at a strong pace through 1972 and although they de- clined somewhat in the latter half of the 1970-1975 period, export orders remained strong longer than the domestic orders did, supported in part by orders for vessels chartered to Japanese operators. Thus ex- ports, which accounted for 45 percent of the ships and 63 percent of the gross tonnage delivered by Japanese yards in 1970, rose to 78 percent of the vessels and 84 percent of the gross tonnage delivered in 1975. The measures employed by the Japanese government to aid the shipbuilding industry have included both direct and indirect aids, some of which were long- range programs and others which were more special- purpose and transitory in nature. Exhibit 11-17 summarizes the principal aid programs for the Japa- nese shipbuilding industry. Each program is dis- cussed in greater detail in the following section. Section C.2. addresses the effectiveness of the 1971-1975 programs, and Section C.3. summarizes recent and prospective programs. 11-47 Exhibit 11-17 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE JAPANESE SHIPBUILDING INDUSTRY 1970-1975 i . Investment Financing Assistance Program 1 - Japan Development Bank Modernization Loans ii . Credit Assistance Program 2 - Domestic Operator Assistance Programs Program 3 - Export Import Bank Financing i i i . Tax Allowance Programs Program 4 - Depreciation Allowances Program 5 - Tax Free Reserves Program 6 - Exchange Rate Allowances iv. Direct Subsidies v. Preference Programs Program 7 - Customs Duty Protection vi. Government Ownership v i i . Other Program 8 - Export Insurance Program 9 - Research and Development Support 1 . Aid Programs a. Principal Aids to the Japa - nese Shipbuilding Industry (i) Investment Financing Assistance Program 1 - Japan Development Bank Modernization Loans Loans to shipyards at low interest rates have been made available for modernization or expansion of facilities. These loans were provided by the Japan Development Bank and city banks to encourage in- dustrial development in key sectors of the economy. Shipbuilding was one of these high priority industries, especially in the 1960s. As the cost of labor rose in Japanese shipyards, the equipment and yard modern- ization investments, encouraged by the government- assisted loans, attempted to offset the increasing wage scales with increases in productivity. Exhibit 11-18 summarizes the total investments by Japan's major shipyards over the period 1968 through 1975. The Japan Development Bank and other government agency participation in the total investment is also shown. Investments in shipyard facilities using Japan Development Bank loans totaled $158.4 million from 1970 to 1975, which represented 7.4 percent of the $2.1 billion of investment during the period. Until 1968, these investments were available for general purpose improvements in shipyard production facilities, but in 1968, their application was re- stricted to the financing of special-purpose facili- ties, primarily the expensive VLCC production facili- ties. After 1972, the Japan Development Bank re- stricted its shipyard loans to investments under its regional credit program. This action was taken to comply with the OECD guidelines on aids to shipbuilding II-4S Exhibit 11-18 PLANT AND EQUIPMENT INVESTMENT AT MAJOR SHIPYARDS* AND PERCENTAGE FROM JAPAN DEVELOPMENT BANK 2 1968-1975 (millions of dollars) Total Deve Japan opment Bank 2 Percent of Total from? Japan Development Bank 1968 149.2 14.2 9.5 1969 132.6 7.0 5.3 1970 165.7 5.8 3.5 1971 404.8 1.1.9 2.9 1972 450.7 29.9 6.6 1973 468.4 41.4 8.8 1974 388.9 46.9 12.1 1975 266.6 22.5 8.4 38 major yards. 2 Plus other government agencies. Source: Handbook of Shipbuilding Statistics 1976, Ministry of Transport. in its member countries. Investment levels remained high, however, as the major shipyards invested in new facilities in more remote regions. Despite the low level of participation by the govern- ment in the financing of investment, there is an im- plicit benefit to the shipbuilding companies derived from the government approval of a portion of the financing which potentially improves the availability of the remaining financing. The benefit of the Japan Development Bank loans has been estimated at 4 percent of the loaned amount, which is the discounted equivalent of a 1 percent interest differential. Thus, the benefit to Japanese shipyards from the $158.4 million in JDB loans from 1970 to 1975 was approximately $6.3 million. (ii) Credit Assistance The principal government assistance to Japanese ship- builders has been through the provision of funds to finance credits for domestic and export sales. The two principal programs available during the 1970-1975 period are: • The Japan Development Bank financing made available for Japanese flag con- struction 3 which was described earlier under aids to the national fleet; and • Export-Import Bank financing for con- struction of vessels for export. The OECD General Agreement for the Progressive Removal of Obstacles to Normal Competitive Conditions in the Shipbuilding Industry was designed to eliminate direct aid } discriminatory taxes,, trade tariffs and barriers, and. specific aid for in- vestment in and restructuring of domestic shipbuilding in- dustries. A summary of this Agreement may be found in Appendix D. Program 2 - Japan Development Bank Loans to Operators For orders from domestic owners, the government pro- vides the aids described in Section II.B.l. on aids to the national flag fleet. Since the ships ordered with these aid programs were all ordered in Japanese yards, the aid programs could be considered as assis- tance for the domestic shipbuilding industry also. Program 3 - Export-Import Bank Financing The Export-Import Bank, wholly owned by the Japanese government, provides financing with attractive terms to shipyards who are then able to offer inexpensive supplier credits to export customers by passing the savings on to the customer. The Export-Import Bank loans were usually combined with loans from the city banks to cover up to 70 per- cent of the cost of a ship to be exported. The ship- yards were responsible for financing 10 percent. The remaining 20 percent was supplied by the ship's owner. The required owner's participation was increased to 30 percent in 1975. The terms of the Export-Import Bank loans and city bank loans during the 1970-1975 period are described in Exhibit 11-19. Prior to 1968, the terms available for export orders were even more favorable. The Export-Import Bank loans covered 64 percent of a ship's price at an in- terest rate of 4 percent. The city banks provided loans for 16 percent of the cost at interest rates between 8.2 percent and 9.1 percent. These terms permitted the yards to offer financing to export customers for 80 percent of the vessel's cost to be repaid over eight years with an interest rate of about 4.8 to 5.0 percent. As shown in Exhibit 11-19 the percentage of the ship's price covered by the Export-Import Bank has decreased over time and the interest rates have increased. 11-52 •— i LO LO Q m CC (— <: cc >- n O D. D_ >— . rn x _c I-Z' LU GO to CC LU \- O CO Ll_ LU OJ "Z. >- '-.'") --t 2: D. 1— 1 < LU <_> '"3 u > CD > a S- S- S ill n_ 13 a. c en to CTCCQ £Z O a s- c c C O * 3 t(1 a; 4-> o LO LO o r-^ p». 00 > OOOO O •!- -I- ^ r-l o ^-1 11-53 Exhibit 11-20 summarizes the value of Japanese ship- building export orders and the trends in Export-Import Bank financing. During the period 1970-1975, the Export-Import Bank loans to shipbuilding decreased steadily. This has been in part a result of currency realignments which altered the demand for deferred yen financing during the period due to the strength of the currency, changing patterns of demand for ships, and the decreasing percentage participation by the Export-Import Bank, as down payment terms were raised from 20 percent to 30 percent in 1975. Export-Import Bank financing became less attractive after 1971 when the yen appreciated from 360¥/U.S. dollars to 308¥/U.S. dollars. Potential borrowers having access to the dollar capital markets, pre- ferred to borrow a weaker currency, dollars, rather than yen. Shortly after the oil crisis of late 1973, borrowing reverted to yen as opinion about the future relative strength of the yen reversed. The yen de- preciated 9.8 percent from 265¥/U.S.$ in the third quarter of 1973 to 291¥/U.S.$ in the first quarter of 1974. Without a domestic energy supply, Japan's trade balance was expected to deteriorate steadily over the foreseeable future as oil prices and prices of other imported materials rose rapidly, impeding the growth and competitiveness of Japanese industry. The yen sank an additional 3 percent during 1974, ending the year at 300¥/U.S.$. Because of an unexpected strong economic recovery during 1976 and the relative unattractiveness of U.S. dollar assets in 1976 caused by low U.S. interest rates, confidence in the yen was improved and it rose from a low of 303¥/U.S.$ to 291¥/ U.S.$ during 1976 and to 260¥/U.S.$ by mid-1977, re- gaining its position as a currency which borrowers attempt to avoid. The attractiveness of Export-Import Bank financing has been diminished even further since mid-1975 as the prime lending rate has declined from 8.5 percent to 6.75 percent. Intermediate term financing for prime customers has been available at about 50 11-54 Q O cm 2: < uo ■21 r>« y- »-• en CC Ll_ O Q_ ^ X S r^- LU <£ rr> OQ CD Z= h- r-~ O h» *t CM tO co 00 l ^- «-"• in IO O O r-. O 00 MO LO CO Cxj r^- CO co CM &5 O VO O CO O CO r ^ '"J, 1—1 CM *t C71 c C ta 00 c O 03 <— c -C 5- CO c t/) O -M O >i 03 CL S- 1— u - -O -— - "■ — to E C O Q.H- 4- T3 CO E O O OJ to E +J -O S- <1J S- S- 1 +-> <1J E d) 03 +-> c e > c >> Q. -C S- (U =5 O as. X 4-> O a S- UJ h- a. s_ E x a> < LU CL. 11-55 basis points above the prime short-term lending rate in recent years, making comparable financing available at 8.5 percent during 1975 and 7.25 percent during 1976 9 . The programs were substantially more attrac- tive during 1973 and 1974, when, combined with an ex- pected softening of the yen, intermediate-term rates were at levels of 9 percent and 9.75 percent, respec- tively. However, during 1973 the proportion of cash payments was quite high as the currency factors dominated. In 1974 the Export-Import Bank percentage of the value of export orders increased even though the amount of financing decreased. By 1975, the use of the Export- Import Bank financing had decreased again. Nevertheless, budgeted levels for Export-Import Bank financing have been increased significantly for 1976 and 1977. This is in part due to expected continued increases in the demand for deferred payments. A possible factor is the refinancing of orders taken during previous years. Exhibit 11-21 summarizes the yearly and outstanding ship credit loans of the Export-Import Bank. The 1971 and 1972 loan commitments were the highest levels be- fore the 1976 and 1977 budgets. At the current lower Export-Import Bank percentage of the financing, these levels would support a substantially higher volume than in the past. Over the period 1970 to 1975, the outstanding loans averaged $2.5 billion. At even a 2 percent savings estimate on the Export-' Import Bank portion of the yard financing of supplier credits, the average value of the outstanding loans would have provided the yards an average benefit of approximately $50 million per year. Exhibit H-21 JAPAN EXPORT-IMPORT BANK LOANS TO SHIP FINANCING 1966 to 1977 (millions of dollars) Year Total Outstanding New Loans 1966 1,095 449 1967 1,405 487 1968 1,663 451 1969 2,049 603 1970 2,416 706 1971 2,628 710 1972 2,588 710 1973 2,653 510 1974 2,529 327 1975 2,279 241 1976 N.A. 711 a 1977 N.A. 825 a "Budgeted Source: Handbook of Shipping Statistics 1976, Ministry of Transport. 11-57 Japanese shipowners have not been allowed to utilize this financing for the construction of vessels for flags of convenience. However, the chartered fleet, much of which is under flags of convenience, con- trolled by Japanese operators and owned by others (e.g., Hong Kong shipowners), have utilized these credits during periods when yen financing was advan- tageous. In the event of a buildup of an offshore fleet owned by Japanese operators, it is possible the export financing in yen would be attractive to them, if made available. (Hi) Tax Allowance Programs Tax allowances are available to Japanese shipbuilders. Most of the programs have resulted in little benefit. The most significant action by the Japanese government in this area over the study period was a special pro- gram to reduce the impact on the industry of exchange losses resulting from the revaluation of the yen in 1971 as discussed under Program 6 below. While not treated here as a principal program, customs duties are waived on imported materials used for ships to be built or repaired in Japan. Since most ship- building materials are produced domestically, this tax program has had little impact. Program 4 - Depreciation Allowances Tax benefits are made available to shipyards from special depreciation allowances. Japanese tax law contains provisions for special initial depreciation on certain capital items, many of which are appli- cable to the shipbuilding industry. For example: 11-58 Special Initial Item Depreciation (percent) Traveling cranes used to construct steel ships of more than 3,000 gross 25% tons. Equipment for control of environmental r n » pollution. Machinery for industrial production in underdeveloped areas. 33% Since this depreciation reduces the basis value of the capital asset, the government recoups the lost tax revenue from the initial year over the remaining economic life of the asset. The benefit to industry from the special depreciation thus derives from the timing difference for the tax liability. Assuming profitable operations, the additional de- preciation shield has a current value of approximately 5 percent of the investment in such equipment. Based on the levels of investment shown in Exhibit 11-18, the maximum benefit of the depreciation allowances can be estimated at an average of $20 million per year. Operations were not profitable, however, due to ex- change losses on a large percentage of the contracts early in the period. As a result, much of the benefit from the program was eliminated. Program 5 - Tax Free Reserves Special tax-free reserve funds are available to Japa- nese corporations. The Japanese tax law also contains provisions for special reserve funds that shelter earnings from tax liability, either temporarily or permanently. As for the depreciation allowances, the Japanese shipbuilding industry did not receive any significant benefit from these reserve funds over the study period. Program 6 - Exchange Rate Allowances The Japanese government gave special tax relief to companies which suffered heavy exchange losses in the December 1971 revaluation. A special tax provision allowed for the immediate deduction of the entire exchange loss, estimated at $866 million, for tax purposes, even though the actual losses on foreign currency loans would not be incurred until the repay- ment of the loan was made in subsequent periods, and the losses carried forward for ten years. One-tenth of the exchange losses would then be added back to income for ten years along with any possible gains on loans after the 1971 revaluation which would be added back in the next year. The Shipbuilders Association of Japan estimated the current value of the tax measure at 20 percent of the loss. This can be estimated as the equivalent of about $17 million per year, and is the result of the current value of the reserves established against the expected future period losses. (iv) Direct Subsidies There are no direct subsidies to the Japanese ship- building industry. (v) Preference Programs Program 7 - Customs Duty Protection Customs duties protected imports of vessels under 10,000 gross tons from 1972 until April 1, 1975. Imported vessels under 10,000 gross tons were subject to customs duty at 6.0 percent of their declared valuation except for vessels transported from preferential countries. This measure was kept in force to protect the small and medium-sized yards, which specialize in the smaller vessel sizes, from foreign competition. The duty rate was 7.5 percent before 1972, 10.5 per- cent before 1971, and 15 percent before 1969. Prior to 1969, customs duties were also applied to ships above 10,000 grt . There were no imports of vessels under 10,000 grt while this import duty was in effect. The duty on vessels between 100 grt and 10,000 grt was eliminated as of April 1, 1975. During the last nine months of 1975, no oceangoing vessels under 10,000 grt were imported. (vi) Government Ownership None (vii) Other Program 8 - Export Insurance Insurance is made available for exporters against failure of the buyer to make payments for certain reasons and against losses from the inability of the exporter to fulfill an export contract for certain reasons. Insurance policies are underwritten by the government's Ministry of International Trade and Industry (MITI) to insure against a wide range of commercial and political risks concerning export transactions. The Japan Ship Exporter's Association has a group insurance policy with MITI which is less cumbersome to administer than individual contracts with exporting yards. The Export-Import Bank requires shipyards to have government-approved export credit insurance in order to qualify for loans. Program 9 - Aid to Research and Development The government's Ministry of Transport sponsors the work of the Ship Research Institute which performs important theoretical and fundamental research. The annual budget for running the Institute is approxi- mately $3 to $5 million. 11-61 b . Benefits of Japanese Assistance Programs to the Shipbuilding Industry Exhibit 11-22 summarizes the benefits of the principal assistance programs to the shipbuilding industry. The estimated level of benefit increased from $59.8 million in 1970 to $98.1 million in 1973. Approxi- mately one-half the benefits consisted of Export- Import Bank financing while depreciation allowances on high investment levels and exchange rate allowances composed the bulk of the remaining benefits. These values do not include the incentives to Japa- nese operators to construct in Japan's shipyards, which accounted for 29 percent of the volume over the six years, and which were estimated in Section B.l. to have provided benefits at a level of about $100 million per year including both the JDB low interest loans and interest subsidies. 2 . Effectiveness of Aids to the Japanese Shipbuilding Industry The direct assistance to the Japanese shipbuilding industry over the study period has been quite low considering the magnitude of this industry relative to all other countries. The principal assistance to the industry has been through the provision of massive amounts of credit assistance coupled with a very large domestic demand. Particularly during the 1960s, 100 percent credit availability for Japanese flag operators coupled with a policy of controlling the ocean transport of a large proportion of the Japanese foreign trade pro- vided a base load demand to the industry. In a similar fashion the development of an offshore con- trolled fleet contributed greatly to the export volumes of the industry. Export-Import Bank financing for export credit provided further assistance to this volume of demand, which again was tied to cargos in the Japanese trade. OO ,— .-1 i— ( UJ CT> LO cn 03 CO oo _Q O O CO r~- cn LO oo h«. CO «3- Cn CO "St -O o OO cn CD O cn i^. CO LO cn co CO 03 "5fr o oo h- cn OO oo oo CO lo CM cn CM CM 03 00 LO -Q o o Q1 CM oo LO LO CM cn LO fO LO CM _o o o co O . CNJ O oo CO LO CM r-- o ro -Q o o C0 cn oo CO oo cn 1-1 <^l- LO S- o 03 O) c: CD 03 o O) O o cd o CD CL CD > s- O o < S- o_ C s_ e 4J > S- H- 'I- +-> o o +j C3 +-> O- or C£ CO S- 3 to rtj E .. cd •• CD U .. Q. rC -r- CM <* LO a> CO cn c cn a. r*. CO O C O +J U =3 E E _J S_ £ E S. C E QJ E Li_ E O S- ca -a s- Lfl s. ac 5- Q. S- i- cj .— S- O o CL CT) Q o cn Q qx-r- cn cn 3 cn O -a :>: o ■D O UJ u_ o Q O t— O LaJ O) i— 11-63 As a result of the above, Japanese flag vessels and chartered tonnage carry approximately two-thirds of the total foreign trade of Japan and credit volumes of approximately $5 billion have in large part been applied to these fleets. Only in 1974 and 1975 did the percentage of shipyard output for Japanese flag and controlled vessels fall below 60 percent. In those years, shipyard output had grown to almost twice the 1970 level. The economies of scale resulting from these production volumes have allowed the Japanese shipbuilding in- dustry to produce low cost vessels with assistance levels at less than 2 percent of the revenues of the industry by 1975. During the period, a special program to diminish the effects of yen revaluation provided a supplemental cash flow to the industry. Beyond this the continued order volumes and credit availability provided the basic support . As the financial strength of the industry increased, the credits were made available in amounts sufficient to maintain the competitiveness of Japanese newbuildings but far less than the funds required to significantly reduce ship prices. The reduced assistance to individual orders over time allowed a level volume of credit to support the expanding volume of output from increasingly efficient Japanese yards. The shipbuilding industry has provided work for ap- proximately 250,000 direct employees and an additional 328,000 in related industries (Exhibit 11-23). Revenues reached $10 billion in 1975, and shipbuilding was one of the largest Japanese export industries in 1975 at $6.1 billion in export earnings. The ongoing cost to the government has been under $100 million during the study period and could be estimated at twice that if the financing assistance to Japanese operators were considered. Exhibit 11-23 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY SHIPBUILDING Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Japar lotal Ships b - Number Tankers - Number DWT GRT Bulk Carriers - Number DWT GRT Freighters - Number DWT GRT Total Ships - Number ulk Carriers - Number Total Ships - Number DWT GRT Tankers - Number DWT GRT 3ulk Carriers - Number DWT GRT Freighters - Number DWT GRT 5,653 3,331 22,756 12,487 26,892 14,191 31,283 16,708 31,250 16,229 80 10,386 5,124 134 16,410 8,109 184 23,650 12,031 183 24,894 12,378 219 11,194 6,362 160 9,461 5,324 167 6,199 3,652 130 4,724 2,785 110 1,155 964 113 1,014 743 145 1,427 1,016 187 1,629 1,053 -Orders During Year • -Cancellations During Year 12 33 1,335 2,805 20.5 19.8 19.5 3. 12. 7 a NA 10. j a 14. l d Exhibit 11-23 Shipbuilding (continued) Country : Japan 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate ♦.J. ^-o »+ v< „ c „w c b Total Ships Number DWT GRT 658 44,749 775 647 70,261 73,833 908 102,599 862 95,528 50,335 877 74,066 39,764 5.9 10.6 NA Tankers Number DWT GRT 135 24,225 236 308 44,067 57,808 490 87,523 493 83,172 43,004 341 58,056 30,040 20.4 19.1 NA Bulk Carriers - Number DWT GRT 350 18,364 421 258 24,604 14,978 285 13,639 222 10,975 6,376 313 13,615 7,994 -2.2 -5.8 NA Freighters Number DWT GRT 173 2,160 118 81 1,590 1,047 f 133 1,437 143 1,376 937 223 2,395 1,700 5.2 2.1 NA Revenues NA NA NA 8,420 10,542 10,065 9 6.1 h Profits NA NA NA 184 163 174 9 -1.8 h Outstanding Debt NA NA NA 3,666 3,934 4,117 9 3.9 h _ , mp oyment Employees j 234,534 246,552 247,276 253,658 273,904 256,271 1.8 at Year-End (No. of yards) 592 567 594 593 627 657 2.1 4-year annual growth rate, 1971-1975. Includes Combination Passenger/Cargo Vessels not shown separately. Source: New Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Source: Derived from Orders Outstanding, Deliveries, and Cancellations. Approximate due to timing differences in sources. e Source: Fairplay International Shipping Weekly, World Ships On Order , quarterly. Seven major shipbuilding companies. 9 Based on first half results. 3-year annual growth rate, 1973-1975. includes subcontractors for shiDyard work. Employment in related industries at the end of 1975 equalled 328,627 workers. The apparent benefits of this level of assistance far outweighs the comparable ratios for the other coun- tries studied. Moreover, the industry output has continued to increase, while the level of assistance has not been altered considerably over that time. In evaluating the effectiveness of the current assis- tance, however, the prior injection of credit avail- ability and the related high levels of demand must be considered. 3 . Recent Programs and Trends At the end of 1974 Japan had a backlog of 95.5 million dwt under construction or on order, down only 7 per- cent from the record 102.6 million dwt at the end of 1973. Tankers represented 57 percent of the vessels and 87 percent of the deadweight tonnage on the order- book in Japan at the end of 1974 compared to 47 per- cent of the vessels and 77 percent of the deadweight on the world orderbook. Despite the enormous backlog, Japan's position among world shipbuilders had begun to slip in 1974. While Japan delivered between 46 and 49 percent of world's gross tonnage output and between 49 and 52 percent of the deadweight output each year from 1970 to 1973 , its share fell to 38 percent of the gross tonnage of new vessels ordered^ in 1974. This came after three years of record successes in 1971-1973 when it cap- tured 54 percent, 63 percent, and 49 percent of the new tonnage ordered, the last percentage representing a record 35.8 million grt in the boom year of 1973. Although Japan's orderbook stood at 95.5 million dwt at the end of 1974, its shipbuilding capacity had also grown to record levels. Japanese yards delivered 31.3 million dwt of new vessels during 1974, and thus its order backlog represented only 3.1 years of work Vessels of 100 grt or more, Lloyds Register of Shipping, Annual Report 1975. 11-67 at the pace of 1974 deliveries. The other five major shipbuilding nations addressed in this study had backlogs at the end of 1974 that represented between 3.3 and 5.0 years of work at 1974 rates of delivery. This backlog situation plus the higher-than-average concentration of tankers in the backlog caused concern in the Japanese shipbuilding industry. Although Japa- nese yards had suffered relatively few cancellations during 1974, their large tanker orderbook became in- creasingly vulnerable in 1975 as the tanker over- capacity situation worsened. Cancellations in Japa- nese yards during 1975 totaled over 17 million dwt , although some of the cancelled vessels were replaced with orders for other vessels of different types and sizes. Japanese yards pursued several strategies for coping with the declining orderbook situation. Yards that had concentrated on building tankers and other special- ized vessels broadened their marketing efforts to capture increased bulk carrier, containership , general cargo and other specialized vessel orders. The smaller Japanese yards perceived themselves as being particu- larly vulnerable as the large yards diversified into ship types and sizes that have been the strength of the small- and medium-sized Japanese yards. The smaller yards, in order to avoid takeovers or bank- ruptcies, have employed sharp price cuts as a means of securing orders to fill their production capacity and sought and won legislative restrictions on the use of VLCC building docks for the construction of small vessels. The price cuts have met with severe criticism from West European shipbuilders and even from some of the larger Japanese yards. Contract quotes from Japa- nese yards have been some 30 to 40 percent below those offered by their European counterparts on some vessel types on occasion, despite Japanese government efforts to reduce price differentials, particularly against orders by European shipowners. Prices were raised by 5 percent in early 1977, which combined with the appreciation of the Yen in 1976- 1977 may have raised effective Japanese prices by up to 15 percent. As discussed in subsequent chapters, assistance programs of other countries have attempted to reduce the differential as well. Japan's share of orders for new vessels rebounded to 49 percent of the gross tonnage in 1975 from the 38 percent in 1974. In the most recent four quarters ending in April 1977, Japanese yards landed 52 per- cent , 74 percent , 59 percent and 52 percent , re- spectively, of the world's new orders in terms of deadweight tonnage. The Japanese have been particu- larly successful in landing orders for larger ship types. In the third quarter of 1976, for example, the Japanese took 90 percent of world bulk orders. The Japanese government has been under heavy pressure from Japanese yards for assistance in coping with the declining world demand for ships. Simultaneously, other shipbuilding nations have been pressuring the Japanese government to curb the price cutting and the alleged dumping by Japanese yards and to implement capacity cutbacks in the Japanese shipbuilding in- dustry . The government's Ministry of Transport (MOT) commis- sioned a study to be performed by the Shipping and Shipbuilding Rationalization Council (SSRC) to investi- gate measures for alleviating the current problems of the maritime industries. In mid-1976, the SSRC made recommendations to the Ministry of Transport and • subsequently the MOT issued guidelines to the 40 most important shipbuilding companies in Japan for their output levels in fiscal years 1977 and 1978. These guidelines are intended to stretch the current order- book of the yards over a longer period of time. Under the MOT guidelines, large yards are expected to reduce capacity utilization to 65 percent of the peak output achieved in fiscal year 1974. Medium-size yards and small yards are expected to reduce utilization of capacity to 70 percent and 75 percent, respectively, of their peak output achieved in fiscal year 1975. These guidelines envision Japanese yards retaining their recent 50 percent share of world shipbuilding. II-6S The SSRC study also called on the government to assist yards in relocating and retraining 100,000 employees from shipbuilding and ancillary industries for employment in other industries by 1980. Employ- ment in shipbuilding was 256,271 in 1975 and in an- cillary industries was 328,627 in 1975. The ancil- lary enterprises in Japan were unique in their dedi- cation to fabricating ship components in support of the enormous shipbuilding industry. Steel fabrica- tors, machine shops and engineering works have all suffered as declining volumes caused shipyards to end sub-contracts and bring such work in-house. Bankruptcies have occurred among the supporting in- dustries as some firms failed to re-orient capacity successfully to non-marine markets. The Ministry of Transport has asked for funds in its fiscal year 1977 budget to compensate and retrain 30,000 shipbuilding and associated industry workers. The 1977 Export-Import Bank budget also calls for $825 million of funding for Export-Import Bank loans, up from $711 million in fiscal 1976 and $241 million in fiscal 1975. The projected gross tonnage of ex- port ships to be financed in fiscal 1977 is 4.67 million. The budget also requests $169 million in funds for Japan Development Bank financing to cover 0.70 million grt of newbuildings for domestic owners. Other measures taken by the MOT to stem the overseas criticism of Japanese yards include the institution of a requirement that MOT approve new ship contracts. MOT also requires that yards utilize price guidelines which provide for approximately 8 percent escalation in ship construction costs during the period from contract signing to delivery. MOT approval for con- tracts will be withheld if the price does not meet the guidelines. In 1976 Japan's major shipyards all recorded modest profits due to consolidation, but orderbooks had de- clined by 6 to 34 percent. Employment had decreased by 26,000 workers to 230,000 and by year-end the 11-70 Japanese orderbook stood at 32.8 million dwt against 1976 production of 30.4 million dwt. Thus, despite all actions and advantages, the Japanese shipbuilding industry backlog was reduced by 44 million dwt and more than one year's work in 1976, reflecting some 12 million dwt in cancellations. Future shiporders , no matter how won, are sorely needed and despite any controls, Japanese competition will remain formidable. III. The Maritime Aids of the United Kingdom Contents A. SUMMARY 1. Background 2. Conclusions B. AIDS TO THE BRITISH NATIONAL FLEET 1. Aid Programs a. Principal Aids to the British National Fleet, 1970-1975 2. 3. (i) (ii) (iii) (iv) Investment Financing Assistance Program 1 - Government Loan Subsidies Credit Assistance Tax Allowance Programs Program 2 - Free Depreciation Direct Subsidies Program 3 - Cash Investment Grants Program 4 - Domestic Operating Subsidies (V) Preference Programs (vi) Government Ownership (vii) Other b. Benefits of British Assistance Programs to the National Fleet Effectiveness of Aids to the British National Fleet Recent and Prospective Programs PAGE [1-1 [1-1 II-4 II-7 [1-7 [1-7 [1-7 [1-7 [1-13 [1-13 [1-13 [1-14 [1-14 [1-19 [1-19 [1-19 [1-19 [1-19 [1-21 [1-24 (i) AIDS TO THE BRITISH SHIPBUILDING INDUSTRY 1. Aid Programs a. Principal Aids to the British Shipbuilding Industry, 1970-1975 (i) Investment Financing Assistance Program 1 - Low Interest Loans (ii) Credit Assistance Program 2 - Export Credit Guar- antee Department (Hi) Tax Allowance Programs Program 3 - Indirect Tax Relief (iv) Direct Subsidies Program 4 - Construction Subsidy Grants Preference Programs Government Ownership Program 5 - Government Ownership Other Program 6 - Research and Devel- opment Assistance Benefits of British Assistance Programs to the Shipbuilding Industry (v) (vi) (vii) b. Effectiveness of Aids to the British Shipbuilding Industry Recent and Prospective Programs PAGE [1-29 [1-29 [1-31 [1-31 [1-31 [1-33 [1-33 [1-35 [1-35 [1-37 [1-37 [1-37 [1-39 [1-39 [1-40 [1-40 [1-40 [1-40 11-42 (ii) United Kingdom List of Exhibits exhibit title page II-l Summary of National Flag Fleet and Ship- building Activity - 1970-1975 HI-2 1 1-2 Share of World Fleet and Average Age - 1966-1975 II 1-3 1 1-3 Comparison of Fleet Growth - U.K. and World - 1970-1975 III-5 1 1-4 Outline of Principal Assistance Programs to the British National Fleet - 1970-1975 Hl-8 1 1-5 U.K. Government Guarantees on Loans to U.K. Owners Under Shipbuilding Industry Act and Home Credit Scheme of the Industry Act of 1972 - Financial Years 1970/71-1975/76 111-10 I 1-6 Conditions of Loans to U.K. Owners Guaran- teed by Secretary of State for Industry 1 1 1- 11 1 1-7 Comparison of Loans to U.K. Owners Under Government Guarantee Programs to Loans Without Guarantee Provisions - Financial Years 1970/71-1975/76 In _ 12 1 1-8 Estimated Benefit of U.K. Shipping from Free Depreciation 111-15 1 1-9 Cash Investment Grant Expenditures - 1967-1977 111-17 11-10 Registered Fleet and Shipyard Activity - 1965-1973 I I 1-18 11-11 Summary of Benefits to United Kingdom Owners 1970-1975 111-20 11-12 Tonnage Registered - Vessels of 1,000 GRT or More Registered at December 31 - 1966-1975 1 1 1-22 11-13 Earnings in Foreign Trades Less Disbursements by U.K. Owned and Registered Fleet and U.K. Shipping Industry - 1970-1974 1 1 1-23 11-14 Revenues of U.K. Shipping Industry Total and from U.K. Owned and Registered Ships 1 1 1-23 (Hi) EXHIBIT TITLE PAGE 1 11 — 15 Percentage of Freight Receipts from U.K. Export and Import Trades and from Cross- trades - 1971-1974 1 11-23 111-16 U.K. Flag Share of U.K. Foreign Trade by Type of Cargo - 1970-1975 111-25 III- 17 Measures of Maritime Activity - Fleet Opera- tions - Oceangoing Vessels of 1,000 Gross Tons and Over 1 1 1-26 III- 18 Outline of Principal Assistance Programs to the British Shipbuilding Industry - 1970-1975 IH-30 1 1 1-19 Government Equity, Grants and Loans Under the Shipbuilding Industry Act of 1967 and the Industry Act of 1972 Between 1965 and June 1976 1 1 1-32 1 1 1-20 Performance of U.K. Shipbuilding Industry - 1969-1975 In _ 34 1 1 1-21 Estimated Value of ECGD Credit - 1970-1975 111-36 1 1 1-22 Indirect Tax Relief 1 1 1-36 1 11-23 Construction Subsidies Paid to U.K. Ship- yards - Financial Years 1972/73-1975/76 111-38 1 1 1-24 Measures of Maritime Activity - Shipbuilding - Oceangoing Vessels of 1,000 Gross Tons and Over II 1-41 1 1 1-25 Measures of Martime Activity - Shipbuilding 111-44 111-26 Shipbuilding Industry Companies Whose Securities Are to Vest in British Ship- builders 1 1 1-47 (iv) THE MARITIME AIDS OF THE UNITED KINGDOM A. . SUMMARY 1. Background The fleet of the United Kingdom ranked third in the world in deadweight tonnage behind Liberia and Japan in 1975. Between 1966 and 1975, the fleet registered only a slight decline in world share of deadweight tonnage registered. The large additions to the fleet during the period were applied about evenly to growth and replacement resulting in only minor reductions in the average age of the U.K. fleet. As noted in the Introduction, the U.K. national fleet dominates the national shipbuilding industry. Deliveries to the U.K. national fleet averaged about four times the total output of the national shipbuilding industry. A large proportion of the shipbuilding output enters the U.K. fleet, averaging about two-thirds of shipyard output over the period 1970-1975. The U.K. is very much a net ship importer in that national shipyard deliveries to the U.K. fleet represented only about a quarter of the total deliveries to the fleet. Thus, based on levels of activity, the shipping industry has been far more significant in the U.K. than shipbuilding, al- though levels of employment have been comparable for the two industries. Exhibits III-l and III-2 depict the performance of U.K. fleet and shipyards during the study period. An island nation like Japan, the United Kingdom has a long history of maritime activity. The United Kingdom national fleet, without the partially-captive national foreign trade cargo market available to Japanese operators, has maintained a rate of growth almost equal to Japan over the study period and obtained over half of its receipts from the cross-trades. In contrast to Japan, the U.K. shipping industry, which also employs a significant volume of chartered tonnage, has tended to increase the percentage of U.K. owned and registered vessels while the Japanese opera- tors have rapidly increased their chartered fleet. III-2 Exhibit III-l SUMMARY OF NATIONAL FLAG FLEET AND SHIPBUILDING ACTIVITY 1970-1975 UNITED KINGDOM i 1970 1971 1972 1973 19 74 1975_ ■ UK <5h' Vessels 71 65 61 59 40 45 DWT (000) 1,881 2,087 1,849 1,639 2,144 2,265 GRT (000) 1,178 1,246 1,070 1,025 1,210 1,261 l ver ies for U.K. Reg stry from U.K. Shipyards- e Vessels 55 42 45 41 23 25 DWT (000) 1,444 1 , 484 1,158 1,043 1,841 1,511 GRT (000) 916 895 695 671 1,013 828 1 ver ies for U.K. Peg stry from World Shipyards e Vessels 92 Ill 132 120 74 68 DWT (000) 4,993 5,027 5,213 6,366 6,634 4,991 GRT (000) 2,819 2,899 3,335 3,737 3,678 2,953 U.K. ■wne rs Share of U.K. Vessels 77 65 74 69 58 56 DWT (000) 77 71 63 64 86 67 GRT (000) 78 72 65 65 84 66 9h Dya rds Share of 38 Del veries to U.K. Owners (Percent)- 34 34 Vessels 60 31 37 DWT (000) 29 30 22 16 28 30 GRT (000) 32 31 21 18 28 28 Source: New Ship Construction , Maritime Admini strati U.S. Department of Commerce, annual. Exhibit III-2 UNITED KINGDOM FLEET SHARE OF WORLD FLEET AND AVERAGE AGE 1966-1975 1966 1968 1970 1972 1974 1975 R gistered Under Percent of Wor United K1 Id Fleet n dom Fla Total Fleet Tankers Bulk Carriers Freighters 10.8 11.6 14.1 9.9 9.5 10.9 11.2 8.7 8.9 10.3 10.0 8.1 7.7 9.5 9.2 6.8 7.2 9.1 8.1 6.2 6.9 8.6 8.0 5.9 Deadweight Ton nage Registe Percent of red Wor Under Un Id Fleet ted Kingdom Total Fleet 1 Tankers Bulk Carriers Freighters 11.5 12.0 9.9 11.2 11.0 12.4 8.9 10.2 11.3 13.6 8.6 9.7 10.9 12.7 9.9 8.4 10.5 12.0 9.9 7.6 9.9 10.9 9.7 7.2 . ngdom Fleet - Average (Years) Age of Vessels Total Fleet 1 Tankers Bulk Carriers Freighters 12 10 10 12 11 9 9 11 11 9 9 12 10 9 8 10 10 9 8 11 10 9 8 11 World Fleet - Ave (Y rage Age c ears) f \ Total Fleet 1 Tankers Bulk Carriers Freighters 17 11 11 16 13 11 9 15 13 11 8 13 12 11 8 13 12 11 9 13 12 11 9 13 Includes Combination Passenger/Cargo not shown separately. The national shipbuilding industry, in contrast, has shown relatively little growth and overall has ex- perienced poor financial results. 2 . Conclusions Aid to the U.K. shipping industry increased signifi- cantly over the period 1970 to 1975. During the study period direct investment grants totaling $1.1 billion were paid out from a program that was cancelled in 1971. Simultaneously, the British system of free depreciation on the fleet investments provided in- creasing benefits, estimated at levels of approxi- mately $100 million per year after 1972. 1 Beyond these two programs, guarantees of loans to U.K. owners provided potential benefits of between $23 and $30 million per year. These guarantees, however, were primarily employed during the study period for special situations, such as the problems of Maritime Fruit Carrier's overextension. The significant direct aid to ship operators, followed by the indirect benefits of the depreciation allowances have contributed to the growth of a large U.K. fleet. Assisted by low wage scales relative to other Western countries and a devaluing currency the fleet has been able to compete effectively in world trades and earn substantial contributions to the U.K. current account. Exhibit III-3 portrays the activity of the U.K. fleet expansion relative to the world and the expansion of the bulk fleets and replacement of freighters. The aid programs to the shipbuilding industry were aimed at maintaining its competitiveness for orders from both U.K. and foreign owners. The massive programs for the shipping industry translated into little benefit for the shipbuilding industry while the specific aids to shipbuilding (e.g., construction grants and credit assistance) fell short of providing sufficient strength to the industry due to low productivity, labor strife, a wide range in the ages of production 1975 exchange rate of 2.2218 English pounds to the dollar. Exhibit 1 1 1-3 COMPARISON OF FLEET GROWTH - UNITED KINGDOM AND WORLD 1970-1975 (deadweight tons in millions) GROWTH IN REGISTERED I Urn FLEET | —World- ted Kingdom Deadweight 1970 Tons Percent 1975 Change Deadwe 1970 ght Tons 1975 Percent Total Fleet 37.1 54 . 9 48% 327.0 556.6 70.2% Tankers 20.9 32.9 57 153.1 302.2 97.4 Bulk Carriers 6.6 14.5 120 77.2 150.1 94.5 Freighters 9.0 7.3 (19) 92.4 101.2 9.6 1 DING DELIVERIES TO I THE TLEuT | Id- Percent of 1970 Fleet DWT ngdom Percent of 1970 Flaet DWT Wor Deadweight Tons Del ivered to Fleet Deadweight Tons Del ivered to Fleet Total Fleet 28.2 76% 254.8 78% Tankers 16.6 79 157.1 103 Bulk Carriers 9.5 44 73.5 95 Freighters 2.2 24 24.0 26 1 SHARE OF NEWBUILDING DELIVERIES USED FOR I I NET FLEET GROWTH AND FOR VESSEL REPLACEMENT - World Percent for Percent for et Fleet Growth Vessel Reolacement Percent for Percent for Net Fleet Growth Vessel Reolacement *• Total Fleet 63.2 36.8 90% 10% Tankers 72.4 27.6 95 5 Bulk Carriers 83.1 16.9 99 1 Freighters 0.0* 100.0* 37 63 *A11 new deliveries were used to replace vessels deleted from the 1970 fleet Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. III-6 methods and equipment, and inflation. The ship- building industry was nationalized on July 1, 1977. Additional grants and government guarantees have been necessitated in order to maintain large segments of the industry, until the nationalized industry is reorganized. The low value of the British pound, will tend to make orders in the U.K. attractive, particularly when com- bined with the recent grants. At the same time, British shipowners will be faced with potentially higher costs for construction overseas. The large percentage of receipts in harder currencies from the cross-trades, however, will minimize some of the costs of ship importing. B, AIDS TO THE BRITISH NATIONAL FLEET Over the past ten years, the principal U.K. aid pro- grams for the national flag fleet have shifted away from direct subsidy grants to U.K. operators and towards indirect programs in the form of tax incentives for investing in new vessels. Government aid programs for the U.K. flag fleet are primarily oriented towards encouraging the acquisition of modern vessels by U.K. owners. The large proportion of high-productivity new vessels in the fleet is ex- pected to promote efficiency in operations that should offset cost advantages accruing to fleets employing lower wage crews. The U.K. does not employ operating subsidies except for minor sums paid to operators in selected domestic trades. In addition, financing assistance has been provided for construction in the U.K. However, inasmuch as the re- quirements of the U.K. national fleet far surpass the shipbuilding output, this aid is primarily aimed at maintaining the competitiveness of the domestic ship- building industry for U.K. orders. Exhibit III-4 outlines the principal aid programs to the British national fleet. These programs are dis- cussed in detail in the following section. Section B.l. below discusses the aid programs in effect between 1971 and 1975. Section B.2. reviews the effectiveness of those aids. Section B.3. ad- dresses recent and prospective programs. 1 . Aid Programs a. Principal Aids to the British National Fleet (i) Investment Financing Assistance Program 1 - Government Loan Guarantees U.K. operators have had access to government guaran- tees on loans from commercial lending institutions for the purpose of constructing new vessels or mobile offshore installations in U.K. shipyards. The interest on the guaranteed loans is at a fixed rate determined by the government. The credit terms are similar to those of the OECD Export Credit Understanding for Ships. Exhibit 1 1 1-4 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE BRITISH NATIONAL FLEET 1970-1975 i . Investment Financing Assistance Program 1 - Government Loan Guarantees ii . Credit Assistance i i i . Tax Allowance Programs Program 2 - Free Depreciation iv. Direct Subsidies Program 3 - Cash Investment Grants Program 4 - Domestic Operating Subsidies v. Preference Programs vi . Government Ownership vii . Other III-9 The intent of this program was to give U.K. operators access to credits from domestic yards at terms compa- rable to the financing terms available abroad. This guarantee program was administered by the Shipping Industry Board until its dissolution in 1972. Ad- ministration of loan guarantees was then transferred to the Department of Trade and Industry under the Home Credit Guarantee Scheme of the Industry Act of 1972. Under the Home Credit Scheme of the Industry Act of 1972, the loan to a U.K. owner is granted by the purchaser's bank through arrangements with the clearing (commercial) banks of England and Scotland. The clearing banks may refinance with the Secretary of State for Industry any loans to shipowners over a certain minimum. Guarantees given under the Industry Act of 1972 to U.K. owners are shown in Exhibit III-5. The terms of loans to U.K. owners under the Home Credit Scheme are shown in Exhibit III-6. The prevailing interest rates available to U.K. owners on non-guaranteed first mortgage loans during the 1970-1972 period were approximately 2 to 3 percentage points above those available through the government- guaranteed loan programs, and during 1973-1976 the difference in interest rates rose to 4 to 9 percentage points. An indication of the benefit derived from the guaranteed loans can be observed from Exhibit III-7. Through the end of the 1975-1976 financial year, there have been no defaults on loans guaranteed under the Home Credit Scheme of the Industry Act of 1972. Even though the guarantees had been applied to such special situations as vessels on order for financially troubled Maritime Fruit Carriers, defaults are not considered if the obligations are assumed by second parties. Thus, the cost to the government of providing these guarantees has thus far been nil. The government's risk exposure is substantial, however, standing at $1.8 billion at March 31, 1976. :xhibit 1 1 1-5 Financial Years 1972/73 - 1975/76 (1 April - 31 March) 1972/73 1973/74 1974/75 1975/76 Guarantees Outstanding 1 at Beginning of Financial Year --Number 226 255 286 342 --Amount ($ millions) $1,192 $1,415 $1,484 $1,902 Guarantees Given During Financial Year --Number 36 42 78 48 --Amount ($ millions) S 449 $ 228 $ 523 $ 435 Guaranteed Loans Repaid 1 During Year --Number --Amount ($ mi 11 ions) (7) ($122) (11) ($133) (22) ($168) (22) ($198) Guarantees Outstanding at End of Financial Year? --Number —Amount ($ millions) 255 $1,415 286 $1,484 342 $1,902 368 $1,818 Exchange Rate Impact on Guarantees Outstanding (S millions) ($104) ($26) $63 ($321) At exchange rate prevailing on January 1 closest to beginning of financial year 2 At exchange rate prevailing on January 1 closest to end of financial year. Difference between guarantees outstanding at year-end calculated at year-end exchange rates (closest to January 1) and the same balance calculated at exchange rates prevailing at the beginning of the financial year (closest to January 1). III-ll Exhibit II 1-6 CONDITIONS OF LOANS TO U.K. OWNERS GUARANTEED BY SECRETARY OF STATE FOR INDUSTRY Financial Year (April 1 - March 31) 1972/73 1973/74 1974/75 1975/76 Portion of Vessel 's Cost Covered by Guaranteed Loan (%) 80 80 80/70* 70 Maximum Repayment Period (years) 8 8 8/7* 7 Maximum Interest Rate (percent per annum) --Actual 7.0 7.0 7.0/7.5* 7.5 --Effective (including departmental and bank 7.5 7.5 7.5/8.0* 8.0 charges *New terms on guaranteed loans were put into effect on July 1, 1974. Source: Reports to Parliament, Industry Act 1972. 111-12 Exhibit III-7 COMPARISON OF LOANS TO U.K. OWNERS UNDER GOVERNMENT GUARANTEE PROGRAMS TO LOANS WITHOUT GUARANTEE PROVISIONS Financial Years 1972/73 - 1975/76 (April 1 - March 31) 1972/73 1973/74 1974/75 1975/76 Guaranteed Loans to U.K. Owners made During Financial Year ($ millions $449 $228 $523 $435 Effective Interest Rate on Guaranteed Loans (Percent per Annum) 7.5 7.5 7.5/8.0 8.0 Industrial Bond Yield 1 (Percent per Annum) 9.7 11.4 16.3 16.0 Estimated Total Benefit to Borrowers from Differential Interest Rate Over Life of Loans ($ millions) $38 2 $30 3 $35 2 $27 3 $173 2 $150 3 $126 2 $110 3 Total Outstanding Loans ($ millions) $1,192 $1,415 $1,484 $1,902 Estimated Annual Benefit at an Average 2% Interest Spread on Outstanding ($ millions) $23.8 $28.3 $29.7 $38.0 Industrial Bond Yield pertains to calendar years, i.e., calendar year 1972 is reported in the column entitled "financial year 1972/73" Assumes borrowers' cost of capital of 8 percent per annum Assumes borrowers' cost of capital of 12 percent per annum. Source: Exhibits 1 1 1-5 and III-6. 111-13 (ii) Credit Assistance Credit assistance is not applicable to national flag operators. (Hi) Tax Allowance Programs Program 2 - Free Depreciation The Cash Investment Grant Program (discussed in the next section) was the principal element of aids to the U.K. national fleet in effect at the beginning of the 1970-1975 period. Because the Cash Investment Grant program became too expensive, the government eliminated it in 1971. Free depreciation had been available to U.K. ship- owners from 19652, but became relatively more important as the capital investments ballooned. The effective change in programs from a direct aid in the form of investment grants to an indirect aid in the form of liberal write-off provisions against income was a major shift in the type of aid programs employed by the U.K. government to assist the fleet, but the basic government policy behind each of these programs appears not to have changed. The free depreciation schedule also encourages investment in new ships as the primary means of making the U.K. fleet competitive, the same basic policy that motivated the Cash Investment Grant program. The free depreciation schedule caused some changes in the traditional financing patterns for ships in the U.K. The clearing banks, which made ship loans to U.K. operators, found the depreciation schedule to be a valuable source of tax shelter for their earnings. Since they had few depreciable assets, they became in- terested in owning vessels and leasing them to opera- tors. The banks thus took advantage of the depreciation 2 The initial provisions were developed in 1965; codified under the Capital Allowances Act 3 1968; and the system simplified in October 1970. 111-14 shield and passed some of these tax savings on to the operators in the form of favorable leasing terms. Other groups of investors were also attracted to the depreciation shelters. Some large U.K. operators felt that this attracted unknowledgeable interests to shipping with potentially bad results until the use of the depreciation was somewhat constrained. The free depreciation schedule does not change the amount of a vessel owner's tax liability but does shift significantly the timing of that tax liability. The benefit value is between the alternative cash flows using "normal" depreciation and accelerated deprecia- tion. If one uses 8-year straight line depreciation as a baseline for "normal" depreciation, the savings to U.K. owners from the use of free depreciation may be estimated at approximately 11 percent of capital investment at 8 percent cost of capital. When applied to the capital expenditures of the industry, the po- tential benefits are significant, as shown in Exhibit III-8. The U.K. assistance programs do not include deferred or tax free reserves for capital gains. Hence, the incentives for reinvestment by profitable companies resulting from the rapid depreciation are oriented more towards growth than towards replacement . The effects of devaluation and relatively low operating costs combined with rapid depreciation and the cash investment grants discussed in the next section have permitted a high proportion of deliveries to the U.K. fleet to be net growth additions to a rapidly expanding merchant marine. (iv) Direot Subsidies Program 3 - Cash Investment Grants The Cash Investment Grant Program of the 1966 Ship- building Act benefited U.K. owners ans was the largest U.K. aid program in terms of expenditures during the latter half of the 1960s and early 1970s. The program 111-15 Exhibit II 1-8 ESTIMATED BENEFIT OF U.K. SHIPPING FROM FREE DEPRECIATION (millions of dollars) Net Fixed Estimated Capital Expenditure Benefit 9 1970 626.1 68.9 1971 660.5 72.7 1972 951.2 104.6 1973 1,092.2 120.1 1974 951.2 104.6 1975 b 928.8 102.2 Estimated at 11 percent of capital investment. Assumes 8 percent cost of capital, 8-year straight line depreci- ation versus free depreciation taken at end of year one. Annual level estimated by doubling first half 1975 amounts. Source: British Shipping Statistics 1975, General Council . of Dritish Shipping. 111-16 goal was vessel acquisition, granting 20 percent of vessel cost in 1966, 25 percent of vessel cost in 1967 and 1968 and again 20 percent in 1969 through 1971. In 1972 some $230 million of commitments were still outstanding after the program's cancellation due to its high costs in 1971. The bulk of the expenditures under this program occurred after 1970, as can be seen in Exhibit III-9. The Cash Investment Grant program under the 1966 In- dustrial Development Act provided about $325 million between 1966 and March 31, 1970 in grants to U.K. operators and U.K. branches of foreign shipping com- panies for the purpose of acquiring ships to be registered under the U.K. flag. These grants were equal to 20 percent or more of the cost of ships delivered under the program. The intention of the program was to expand and modernize the U.K. fleet by the addition of new capital-intensive vessels and to provide a substantial number of orders for the U.K. shipyards . In practice, the program succeeded in getting signifi- cant amounts of new tonnage registered under the U.K. . flag, but the incentives under the program were not especially well suited to having owners place their orders with U.K. shipyards. This was primarily due to the fact that the requirements of the U.K. fleet exceed the capacity of U.K. shipyards several fold. With the cash grants from the U.K. for 20 percent of the ship's price in 1966 (25 percent in 1967-1968, 20 percent in 1969-1971) and favorable terms on ex- port credits available from foreign yards through their governments' aid programs, U.K. owners were able to order new vessels abroad with little or no capital outlay on their own part. Exhibit 111-10 illustrates the effects of the program on the U.K. fleet and U.K. shipyards. As can be observed from Exhibit 111-10, the deliveries to the U.K. fleet from foreign yards increased greatly while the deliveries from U.K. yards rose at a lower rate as evidenced by the declining U.K. yard share of 111-17 Exhibit III-9 CASH INVESTMENT GRANT EXPENDITURES (1967-1977) Financial Year Investment Grant Expenditure ($ mill ions) (1 April -31 March 1967-1968 $ 50.3 1968-1969 106.8 1969-1970 167.9 1970-1971 146.8 1971-1972 254.6 1972-1973 229.1 1973-1974 233.2 1974-1975 142.1 1975-1976 94.3 1976-1977 and thereafter 51.8 (estimated) Totals: 1967-1968 through 1969 -1970 325.0 1970-1971 through 1975 -1976 1,100.1 1976-1977 and thereafter 51.8 (estimated) Total Cash Investment jrant Program $1,476.9 Source: General Council of British Shipping. m r>- >— r-~ O en p>. LO CvJ r-. LO en ,— ' n «* CvJ lo LO co LO r~» en r-~ CO 00 f--. CvJ co CO CvJ a-. r " 1 CvJ CO 1—1 «3- ^ LO f CM CvJ co =d- CvJ LO or, CO ,-; O "vt- LO or, ■rr-i «3- O "St «* !--. (£> vo CO CvJ CvJ CO Ch rH «-< *-< OJ 1 1-1 rH QJ ■a i- ** On ai LO LO >i LO >X) ^d- co LO en u_ LO CO CvJ .^" LO ro O LO i^ CVJ CvJ x: 00 7-1 v: CO lo LO CO 1 LO LO O CD LO >sf O l-O -1 *d- O- CT> LO or. 00 CM co O CO CNJ co Cvj O LO LO co n <3" LO co ■=r en 1-1 l_H rH - LO co LO co CO 00 O CO CvJ .O r— <5f kO co r^ O- , " H LO CvJ O CvJ LO CvJ Lf) LO ■^ en ro CvJ r-«. CT> O co en "" ^ 5- QJ ^i O a QJ ID 00 ^ ^ UJ U_ E E 00 OJ m O O -O => ^ 4- 4- TO >- E O +-> 4- ID CO S- LO 00 O QJ O) c 4- QJ QJ •r- CJ OJ S- 00 S- -r- Q S- +J 4-) QJ T3 qj qj C T3 QJ QJ CJ rt3 £Z . > J- > s- QJ S- > QJ > +-J QJ ■r- ra O O S- >- 1— O) qj O qj QJ CU QJ a en D_ O a o_ 111-19 deliveries to the national fleet. During the early 1970s, while the largest expenditures were made, the absolute level of U.K. shipbuilding did rise slightly, based on a higher level of deliveries to the home fleet reflected in the higher shares of U.K. deliveries to the national fleet. Nevertheless, it is clear that the bulk of the program funds was applied outside of the U.K. yards. Program 4 - Domestic Operating Subsidies Domestic operating subsidies are paid to coastal and ferry services to the Scottish Highlands and Islands, services considered essential for social reasons that would be unecomomic otherwise. The estimated level of these subsidies is $2.0 million per year. (v) Preference Programs None (vi) Government Ownership None (vii) Other None b . Benefits of British Assistance Program Exhibit III-ll summarizes the benefit of U.K. owners from the aids to the fleet described above. The direct and indirect aids to the U.K. fleet totaled more than $380 million in 1973. At this rate, the U.K. would pay approximately $55 in aid for each dead- weight ton delivered to the fleet in the six-year period covering 1970 to 1975. Deliveries during that period totaled 20.2 million DWT of tankers, 10.4 mil- lion DWT of bulk carriers, and 2.5 million DWT of freighters . Exhibit 1 11-11 SUMMARY OF BENEFITS TO UNITED KINGDOM OWNERS 1970-1975 ($ millions) 1970 1971 1972 1973 1974 1975 Program 1: Guarantees on Loans to United Kingdom Owners 23. 8 a 23. 8 a 23.8 28.3 29.7 ; 38.0 Program 2: Free Depreciation Schedule 68.9 72.7 104.6 120.1 104.7 ! 102.2 Program 3: Investment Grant Program 146.8 254.6 229.1 233.2 142.1 276.4 94.3 234.5 Total Benefit to b United Kingdom Fleet 239.5 351.1 357.5 381.6 Estimated at 1972 level. Excluding Program 4 - Domestic Operating Subsidies. The main elements included in the $1.84 billion in total aids for 1970-1975 were previously committed cash investment grants of $1.1 billion, savings of $167 million on government guaranteed loans, and savings of $573 million due to free depreciation. 2 . Effectiveness of Aids to the British National Fleet From the mid-1960s to the early 1970s, the U.K. fleet increased 62 percent in DWT registered and increased by about one-third in gross tonnage registered. In the three years from 1972 to 1975, the deadweight tonnage of the fleet increased another 26 percent and the gross tonnage, 22 percent (Exhibit 111-12). The average age of the vessels in the U.K. fleet declined from 12 years in 1966 to 10 years in 1972, as large numbers of small post-war general cargo vessels were replaced, and remained at 10 years through 1975. Tanker deadweight tonnage led fleet growth, more than doubling between 1966 and 1972. The average age of tankers in the fleet declined from 10 years to nine years. The deadweight tonnage of the bulk carrier fleet almost tripled during the same period, and the average age of this fleet segment fell from 10 years to eight years. The freighter fleet, however, de- clined 23 percent in deadweight tonnage, but replace- ment of some older tonnage by new vessels lowered the average age of the freighter fleet from 12 years to 10 years. The average ages of the tanker and bulk carrier fleets remained at nine years and eight years, respectively, through 1975, but the freighter fleet's average age increased to 11 years in 1975. The U.K. shipping industry provides major contribu- tions to the U.K. current account. Exhibit 111-13 summarizes the net receipt and disbursements of the owned and registered fleet and the total shipping in- dustry including chartered vessels. Contributions of the owned and registered fleet are higher than for the total industry due to the disbursements outside the U.K. for charters. Nevertheless, the industry pro- vided between $1.1 billion and $1.8 billion annually over the study period, while the contribution of the U.K. fleet ranged from $1.3 to $2.0 billion. Exhibit 1 1 1-12 UNITED KINGDOM FLEET TONNAGE REGISTERED, 1966-1975 Vessels of 1,000 GRT or More Registered at December 31 (DWT, GRT in millions) 1966 1972 1975 Total Ships - DWT - GRT 26.8 20.0 43.5 27.2 54.9 33.2 Tankers - DWT - GRT 11.8 7.7 24.4 13.6 32.9 18.3 Bulk Carriers - DWT GRT 3.8 2.6 10.8 6.5 14.5 8.5 Freighters - DWT GRT 10.2 7.9 7.9 6.3 7.3 5.9 Source: Merchant Fleets of the World, Maritime Administration, U.S. Department of Commerce. 111-23 Exhibit 111-13 1970-1974 (mil 1 ions of dollars) U.K. Owned and Registered Ships U.K. Shipping Industry Disbursements Disbursements Receipts Abroad Net Receipts Abroad Net 1971 1,983 581 1,302 3,299 2,165 1,133 1972 2,035 736 1,299 3,199 2,038 1,161 1973 2,511 848 1,663 4,044 2,497 1,546 1974 3,263 1,250 2,012 4,955 3,172 1,784 Exhibit 111-14 Receipts of U.K. Receipts from U.K. Owned Percent of Shipping Industry and Registered Ships Shipping Industry 1971 3,299 1,983 60% 1972 3,199 2,035 64% 1973 4,044 2,511 62% 1974 4,955 3,263 66% Exhibit 1 11-15 1971-1974 (percent) U.K Owned and Reg stered Fleet U.K . Shipping Industry Expor ts mports Crosstrades Expor ts i Imports Crosstrades 1971 23 26 51 14 ! 25 61 1972 23 30 47 14 25 61 1973 21 28 50 13 24 63 1974 23 23 54 14 23 63 111-24 Over the study period the receipts from owned and registered vessels increased from 60 percent to 66 percent of total industry receipts, (see Exhibit 111-14). However, the owned and registered fleet did not show an appreciable increase in the percentage of total receipts in the U.K. foreign trade. As shown in Exhibit 111-15, the receipts of the U.K. owned and registered fleet varied from 47 to 54 percent in the cross-trades, while the total industry showed between 61 and 63 percent of receipts in the cross-trades. The U.K. fleet share of national waterborne foreign commerce, as a result, remained steady over the period at approximately 31 percent of imports and 46 percent of exports. Most of the increase in the U.K. shipping industry thus entered the cross-trades while the por- tion active in the national foreign trade maintained a consistent share of the U.K. export and import volume. Comparing the U.K. fleet to the nations trading re- quirements, the national fleet has carried between 30 and 40 percent of the U.K. foreign trade. The national fleet's capability could accommodate almost the entire U.K. foreign trade if no capacity were dedicated to cross-trading, while the industry, including chartered vessels, has capacity that far exceeds the U.K. foreign trade requirements (see Exhibits 111-16 and 17). 3 . Recent and Prospective Programs The U.K. fleet growth has slowed due to the recession and the resulting overcapacity situation in the tanker market and to a lesser extent in the dry bulk and general cargo markets. U.K. owners have reduced their orders for new tonnage causing outstanding orders for the U.K. fleet to decline from 18.7 million DWT at the end of 1973 to 14.5 million DWT at the end of 1974 to only 6.4 million DWT at the end of December 1976. The December 1976 total, however, still places the U.K. third in the world in terms of tonnage on order for the national flag fleet. Only Liberia with 19.3 million DWT and Norway with 9.0 million exceeded the U.K. Exhibit 111-16 1970 1971 1972 1973 1974 a 1975 1. U.K. Imports --Total Tons (mi 1 1 ions ) 30.2 29.6 31.7 35.3 36.2/29.1 26.5 --Tons on U.K. -flag Vessels (millions) 12.1 11.2 11.4 12.7 13.4/11.1 10.1 --U.K. -flag Share of Total 40 38 36 36 37/38 38 2. U.K. Exports --Total Tons (millions) 20.1 22.1 22.3 25.1 25.4/22.1 20.6 --Tons on U.K. -flag Vessels (mil 1 ions) 9.3 9.3 8.9 10.3 10.9/9.5 8.9 —U.K. -flag Share of Total (%) 46 42 40 u ] |< 41 43/43 43 y 1. U.K. Imports --Total Tons (millions) 45.1 46.4 46.6 49.7 48.1/54.4 46.6 --Tons on U.K. -flag Vessels (mill ions) 17.6 20.4 18.6 16.4 13.9/16.3 15.4 --U.K. -flag Share of Total (%) 39 44 40 33 29/30 33 2. U.K. Exports --Total Tons (millions) 12.0 9.6 9.4 12.2 12.7/15.5 15.8 --Tons on U.K. -flag Vessels (millions) --U.K. -flag Share of Total {%) 5.6 47 3.9 41 -Liquid 4.5 48 5.7 47 6.2/7.4 49/48 7.4 47 u 1. U.K. Imports --Total Tons (millions) 124.6 130.5 127.6 136.1 129.6/130.4 104.1 --Tons on U.K. -flag Vessels (millions) 33.6 35.3 33.2 38.1 33.7/33.9 30.2 --U.K. -flag Share of Total (S) 27 27 26 28 26/26 29 2. U.K. Exports --Total Tons (millions) 18.2 17.9 18.9 18.8 15.6/16.1 14.9 --Tons on U.K. -flag Vessels (millions) 3.9 3.6 7.0 8.1 6.7/6.9 7.1 --U.K. -flag Share of Total CO 49 48 37 43 43/43 48 In 1974, the commodity groupings wen figures are shown for both the earl i the 1975 basis 111-26 Exhibit 1 11-17 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY FLEET OPERATIONS Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Country: United Kingdom Total Ships - Number DWT GRT Tankers - Number DWT GRT Bulk Carriers - Number DWT GRT Freighters - Number Total Ships 3 - Number Tankers - Number Bulk Carriers - Number Freighters - Number Total Ships 3 - Number DWT GRT Tankers - Number DWT GRT Bulk Carriers - Number DWT GRT Freighters - Number 1970 1971 1972 1973 1974 Fleet Size Registered, Fleet Growth 1,772 1,713 1,627 1,596 1,609 37,065 40,673 43,495 47,783 52,980 24,070 25,754 27,214 29,405 32,153 4 3 ; 451 8,362 6,462 437 442 7,651 6,145 467 Deliveries to the Fleet (where intended registry is known) —Vessels on Order at Year-End where intended registry is known) 1,576 54,913 33,229 14,508 8,510 14,461 8,705 11,825 6,836 91 11,320 6,657 78 9,309 5,177 55 44 2,553 1,611 1,717 1,113 Exhibit 111-17 Fleet Operations (continued) Country : United Kingdom 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate Ch,.. Q „* Wa «.*„„:,! T~,A a fr> a „. a „*\f Imports 31 32 31 30 29 31 0.0 Exports 47 44 40 43 44 46 -0.4 (millions of dollars) d Revenues NA 3,299 3,199 4,044 4,955 NA NA Profits Outstanding Debt . e p y Nationals NA NA NA NA NA NA NA Total NA NA NA NA 82,721 88,986 NA a Includes Combination Passenger/Cargo vessels not shown separately. c Source: New Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Includes revenues from non-U. K. registered vessels. e Source: Maritime Transport , Organization for Economic Co9peration and Development, annual. Source: Exhibit III- 16. The U.K. owned and registered fleet continued to make a large positive contribution to the U.K.'s balance of payments in 1974 and 1975 in the amounts of $1.43 billion per year and had gross revenues of $3.6 bil- lion in 1975. This strong performance is attributable mainly to the size, efficiency, and low average age of the fleet which permitted the U.K. fleet to compete in cross-trades and participate fully in the rapid ex- pansion of trade to the Middle East. The government aid programs for the U.K. fleet thus appear to have worked well during the past two years of difficult times in the shipping industry. The declining value of the British pound against other currencies undoubtedly also helped the competitiveness of the U.K. merchant marine in the world shipping. Tankers were the most seriously affected sector of the U.K. fleet in the past two years. As of November 1975, 4,000 U.K. seamen had been laid off out of 88,000 em- ployed in the merchant marine. Most of these layoffs were due to lay-ups of tankers. In late 1975, British Petroleum announced disposal plans for 24 vessels by November 1977 which would displace 830 officers. Another recent problem for the U.K. fleet has been the threat of takeovers of publicly held companies by foreign interests due to the declining value of the pound. By mid-1975, Vlasov-Capitalf in , Hilmar Reksten, and Canadian, Panamanian, and Arab interests had taken control of or purchased substantial holdings in several U.K. shipping companies. Beyond the maintenance of the guarantee program and the depreciation allowances, no special programs are expected to be developed to further support the United Kingdom national fleet. C. AIDS TO THE BRITISH SHIPBUILDING INDUSTRY 1. Aid Programs The government policy toward U.K. shipyards has been one of encouraging them to compete for orders from both domestic and foreign owners in the world ship- building market. Protectionist measures have not been employed by the U.K. government to aid the domestic shipbuilding industry. Although a large percentage of U.K. yard output has entered the national fleet, the government support for the yards has been directed toward exports. Aids provided for the yards have been primarily direct aids including: • Subsidized loans to permit the yards to offer supplier credits competitive with those of foreign yards, m Direct grants of percentage construction subsidies, • Subsidized loans for capital improvement projects, and • Direct government rescues by acquiring ownership of yards experiencing financial difficulties. Some indirect aids are also employed but have tended to be small compared to the direct aids. The indirect aids have included: • Tax relief from indirect taxes, • Free depreciation schedule on certain capital investments by yards, and • Exemption from import duty on certain shipbuilding materials. Exhibit 111-18 summarizes the principal assistance programs to the British shipbuilding industry between 1970 and 1975. 111-30 Exhibit 1 11-18 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE BRITISH SHIPBUILDING INDUSTRY 1970-1975 i . Investment Financing Assistance Program 1 - Low Interest Loans ii . Credit Assistance Program 2 - Export Credit Guarantee Department i i i . Tax Allowance Programs Program 3 - Indirect Tax Relief iv. Direct Subsidies Program 4 - Construction Subsidy Grants v. Preference Programs vi . Government Ownership Program 5 - Government Ownership vii. Other Program 6 - Research and Development Assistance — 111-31 The aids provided over the study period have been recently overshadowed by the passage of the Ship- building Nationalization Bill, under which a national- ized British Shipbuilding Corporation, formed out of 39 existing yards, will be created. The remainder of this section discusses each of the principal aid programs to the British shipbuilding industry in effect between 1971 and 1975. Section C.2. addresses the effectiveness of those programs and Section C.3. summarizes recent and prospective programs . a. Principal Aids to the British Shipbuilding Industry (i) Financing Assistance Program 1 - Low Interest Loans and Grants Low interest loans to yards have been made available for improving and expanding their facilities and for financing the supplier credits that yards offer on ex- port orders. The Shipbuilding Industry Board provided loans and interest relief grants totaling $50 million between 1968 and 1971. Under the Industry Act of 1972, yards in development areas were eligible for low in- terest loans to upgrade or expand their facilities so that employment at these facilities might be made more secure. The first loan under these provisions was made to Sunderland Shipbuilders in late 1973, and since the $21 million loan was interest-free for the first two years, Sunderland benefited by over $2 mil- lion per year in 1974 and 1975. Exhibit II 1-19 summarizes the loans and grants made to U.K. shipyards for improving their facilities under the Shipbuilding Industry Act of 1967 and under the Industry Act of 1972. Over and above the government equity purchases of $67.8 million, the assistance to the shipbuilding in- dustry in the form of grants and loans totaled $344.0 million over the period 1965-1976. Of this assistance, $240.3 million was in loans and $103.7 million in direct grants. Most of the funds were made available during the study period. Exhibit 1 1 1-19 GOVERNMENT EQUITY, GRANTS, AND LOANS UNDER THE SHIPBUILDING INDUSTRY ACT OF 1967 AND THE INDUSTRY ACT OF 1972 1965 - June 1976 (millions of dollars) Equity Grants Loans Subtotal Unexpended Total Private Companies - 14.1 37.5 51.6 - 51.6 Partly or Wholly Owned 1 59.9 38.4 103.0 201.4 46.4 247.8 Harland and Wolff 2 7.9 51.2 99.8 158.9 51.6 210.5 Total 67.8 103.7 240.3 411.9 98.0 509.9 NOTE: Partly or wholly owned shipyards included: Company : Shares Owned : Cammell Laird Govan Shipbuilders Appledore Shipbuilders Sunderland Shipbuilders North East Coast Shiprepairers 2 Harland & Wolff 50% Government 100% Government Government Government Government 47.6% Northern Ireland Government Source: Shipbuilders and Repairers National Association, June 1976. 111-33 Using a 2 percent interest rate differential as a conservative estimate of the benefit of the loans to the troubled shipbuilding firms, the benefits from the government loans can be estimated at $6.2 million per year. Grants averaging $17.3 million per year over the six years 1970-1975 brought the government bene- fits to the yards to approximately $23.5 million per year plus interest grace periods on loans to finan- cially strapped shipyards such as Sunderland. (ii) Credit Assistance Program 2 - Export Credit Gurantee Department Export credits financed by the clearing banks and guaranteed by the government's Export Credit Guaran- tee Department are intended to allow U.K. yards to offer financing terms on export orders competitive with terms offered by foreign yards. Exhibit 111-20 presents the performance of U.K. shipbuilders 1969-1975. The interest rates that these loans carry is deter- mined by the government. As with the loans to U.K. shipowners under the Home Credit Scheme described earlier, the clearing banks are responsible for granting these loans. Any amount of financing that the clearing banks provide over a certain level earns them entitlements to refinance the excess amount with the government's Export Credit Guarantee Department. The government-subsidized loans for export credits do not seem to have been effective in helping U.K. yards maintain or improve their share of world ship- building orders. C\J i— i CO LT> o_ r~- • r- ^1 en O" i_n| CO vo "5j o • en • o c o o "*! LD MD «=*• • CTi o o lo °°l CO m r~-J r-i CX> . LT> O «* CO col ud co CO r~«. en • CvJ o O CO o £ r^ C\J cr> • ^d- o ol .— 1 CTi CO o • en cvj o •r- >> Q. ■r- S- S- X cc LU c\> > CO CD •r- =S r- "C CI) Q l—l ^D Q Although the prices, delivery times, and other elements of newbuilding contracts influence the overall per- formance of the U.K. yards, it can be inferred from Exhibit 111-20 that the export credits offered by the U.K. yards either were not competitive with the terms offered by foreign yards or were not sufficient to overcome disadvantages that U.K. yards may have had with respect to the other contract elements mentioned above . The U.K.'s share of new orders declined steadily from 1969 to 1975 with the exception of the boom year 1973 when total gross tonnage ordered in the world jumped to 73.6 million following 1972's 30.4 million and 1971 's 29.6 million. Export deliveries exhibited an irregular pattern. Exhibit 111-21 summarizes the estimated value of U.K. shipbuilding exports over the period 1970 to 1975 and the discounted value of the ECGD credit, assuming a 2 percent advantage in interest rates on 80 percent financing. (Hi) Tax Allowances Program 3 - Indirect Tax Relief Two percent of the value of ships delivered by the U.K. shipbuilding industry can be taken as a tax exemption. This program is aimed at providing relief to ship- builders from 2 percent Value Added Taxes incurred by the industry and suppliers. Based on the total value of ships delivered by year, the following amounts of benefit are estimated for the study period (see Exhibit 111-22). The program was cancelled in January 1977. 111-36 Exhibit 1 1 1-21 ESTIMATED VALUE OF ECGD CREDIT 1970-1975 (millions of dollars) 1970 Estimated Val U.K. Merchant Exports je Sh of ip Estimated Value of ECGD Guarantee 3 3.9 62.0 1971 81.0 5.2 1972 117.0 7.5 1973 122.0 7.8 1974 58.0 3.7 1975 146.0 9.4 Based on value of ship exports. Source: Shipbuilders and Repairers National Association Exhibit 1 1 1-22 Indirect Tax Relief (millions of dollars) Year Amount 3 1970 7.6 1971 8.5 1972 8.8 1973 9.7 1974 10.8 1975 10.6 Based on 2 percent of the value of ships de- livered by the U.K. shipbuilding industry. Source: Exhibit 111-21. 111-37 (iv) Direct Subsidies Program 4 - Construction Subsidy Grants Construction subsidy grants, administered by the Department of Trade and Industry were established under the Industry Act of 1972 and have been reduced from the original 10 percent of the contract price of vessels in 1972 to 4 percent in 1973 and 3 percent in 1974. These subsidies expired at the end of 1974 in line with the OECD agreement to eliminate direct construction subsidies. The following exhibit summarizes the amounts paid to U.K. shipyards under the construction subsidy grants during the 1972-1975 period. The reported amounts represent payments in the year made, not commitments in the years in which the vessels or mobile offshore installations were contracted. Also, payments include payments on account for vessels under construction as well as payments on vessels delivered during the financial year. The amounts reported in Exhibit 111-23 for financial years 1972/1973 and subsequent years are payments under the Construction Grant Scheme for Shipbuilding of the Industry Act of 1972. As can be observed from Exhibit 111-23, the subsidies paid were distributed approximately in proportion to the domestic and export production of the industry. Approximately 63 percent were granted on ships for U.K. owners and 37 percent on ships for foreign owners. (v) Preference Programs There have been no preferences established which direct national fleet construction orders to the U.K. shipbuilding industry. 111-38 Exhibit 1 1 1-23 CONSTRUCTION SUBSIDIES PAID TO U.K. SHIPYARDS Financial Years 197<2/1973 - 1975/1976 (April 1 - March 31) 1972/73 1973/74 1974/75 1975/76 For U.K. Owners --Applications 109 188 175 113 --Amounts Paid ($ millions 1 ) 18.5 24.9 17.4 6.4 For Foreign Owners —Applications 36 64 89 50 --Amounts Paid ($ millions 1 ) 9.7 16.6 11.3 2.2 Total 2 --Applications 145 252 264 163 --Amounts Paid ($ millions 1 ) 28.1 41.6 28.7 8.5 At the exchange rate prevailing on January 1 during each financial year. 2 Totals may not add due to rounding. Source: Reports to Parliament, Industry Act of 1972. (vi) Goveimment Ownership Program 5 - Government Ownership The most notable trend in government aid to the U.K. shipbuilding industry is the increasing participation of government in the ownership of yards. Between 1970 and 1975, the government has acquired: • 50 percent ownership in Cammell Laird Shipbuilders, Ltc. • 100 percent ownership of Govan Shipbuilding,, Ltd. 3 operator of three of the four yards formerly owned by Upper Clyde Shipbuilders (UCS). UCS went into liquidation in June 1971. • 47.6 percent ownership of Harland and Wolff j Ltd. in Northern Ireland. • 100 percent ownership of Scotstoun Marine 3 Ltd. • 100 percent of Appledore Shipbuilders 3 Ltd. • 100 percent of Sunderland Shipbuilders 3 Ltd. m 100 percent of North East Coast Shipre- pairerSj, Ltd. The first three acquisitions above involved govern- ment commitments of over $160 million, and as shown in Exhibit 111-19, by June 1976 total government equity purchases, grants, and loans to partly or wholly owned shipbuilding companies, including Harland and Wolff, totaled over $360 million. In view of the recent nationalization of 39 major U.K. yards, the distinctions between past equity participations, grants, and loans becomes less important in considering the magnitude of the aids. The Aircraft and Shipbuilding Industries Act 1977 is discussed more fully in the following section. (vii) Other Program 6 - Research and Development Assistance The United Kingdom has supported approximately $2 million per year of research and development related to shipbuilding. b . Benefits of Assistance Programs to the British Shipbuilding Industry Exhibit 111-24 summarizes the benefits of assistance programs to the industry. The assistance to the British shipbuilding industry has primarily been in the form of direct subsidies to make the prices for construction in the U.K. competitive, both for exports and for orders from U.K. owners. The subsidies were granted in propor- tion to the domestic/export production of the industry, but were eliminated in 1974 although payments continued on prior commitments. The second largest source of benefits to the shipbuilding industry were the tax exemptions on the value of con- structions. These aggregated $56 million over the period, but the program was cancelled in January 1977. Through the Export Credit Guarantee Department the U.K. government also provides credit assistance to shipyards for competitive financing arrangements. Despite the direct subsidies, credit assistance and the high proportion of orders for U.K. owners, the industry continued to experience significant difficulties over the study period requiring special government inter- vention through grants, loans, and equity purchases. As noted, ultimately, the industry is currently being nationalized. 2. Effectiveness of Assistance Programs to the British Shipbuilding Industry Overall, the British shipbuilding industry's total out- put on a compensated ton basis declined, productivity stagnated and nationalization became inevitable over the period 1970 to 1975. Assistance in the form of construction subsidies and credit guarantees have been CJ Q CO CD +J Q Q. I •<- CD *-* O •r- i-i CO cr> JC ^ «~f ■3- CO LD o O r^ .O en CO CT\ O co *3- CM " i LT> ■3- lo r^ CO r- o r-^ _o cn en ro o co CM CO cm CM CD oo un oo r^ CD O CD r*-. .a CT> CO cr> CM >!T C\J ^ l " co CM un LD co . O CT, -Q CT> ro r^ CO co CM CT. CM CD CM LO O CO r^ -O CTi LD co CO CM CM CM CD O CTi CO CM CT. CO CO co CM -Q O CM ID CD Q. >> 4- ■a O) c iz 10 cu o cu 3 c cu ct: CO o o c +-> X c fD to a> CD •♦-J E 1-1 CM CO o cu «* 13 LO "l <: r- E E E S- E E CD E fD rO Q 13 ra TO Q 2 CD S- -o C S- O s- o3 O CD o cx> O CD c CD o cn CD CX> a: +-> o O UJ O o CJ o o -O s- S- S- s- s- ^ D_ <=L- Q_ Cl D_ cl 111-42 aimed at maintaining the competitiveness of the in- dustry. Assistance programs to the massive U.K. shipping industry translated into little indirect benefit to the shipbuilding sector, despite two- thirds of the shipbuilding output being for the U.K. fleet. As a result, the industry exhibited only a 1.4 per- cent annual growth in GRT output over the period, as compared with 10.8 percent for Japan, 10.6 percent for Germany and 4.7 percent for Sweden. The gross tonnage of the U.K. fleet increased at an annual rate of 6.7 percent during the period. Thus, with direct assistance and a high potential for indirect assistance from the growing national fleet, the problems of the U.K. shipbuilding industry have continued. Productivity and labor unrest caused de- livery dates to slip as well as cost and despite high quality and a devaluing currency, prospective custo- mers looked elsewhere. Government intervention in the form of special loans and grants were required to support segments of the industry during the study period. The shipbuilding industry has provided employment for 60,000 workers out of a total work force of approxi- mately 90,000. The location of this workforce in high unemployment areas, has been an important con- sideration leading to the nationalization of the in- dustry. 3. Recent and Prospective Programs The U.K. shipbuilding industry did not fare well in the recent declines of world shipbuilding. Even be- fore the situation of tanker surplus arose, the U.K. government had to rescue some financially troubled yards. With the recession and increasingly strong competition in price and credit terms from foreign yards, the U.K. yards' orderbooks suffered. 111-43 In the summer of 1974, a plan to nationalize over 40 shipyards and related establishments by the beginning of 1976 was put forth as a means of aiding finan- cially troubled yards and of maintaining employment in the industry. Many U.K. yards are located in areas of- high unemployment and any cutbacks of the yards' labor force would be politically sensitive since the current Labor Party government sought support in its successful election bid with promises of nationaliza- tion for the shipyards. Government takeover was seen by many as a preferable alternative to the yards having to close. The shipyards employed 60,000 persons in 1975 out of a total shipyard labor force of about 90,000 with another 180,000 working in auxiliary sectors of the economy. Additional unemployment among shipbuilders was expected to reach 10,000 by the end of 1976. Exhibit 111-25 reviews U.K. shipyard performance during the study period. The nationalization scheme produced much heated dis- cussion in Parliament and the implementation schedule slipped to the fall of 1976 and was finally realized in July 1977. In another move to generate export orders for U.K. yards, the U.K. government also approved a cost escala- tion insurance program that covers up to 18 percent in- flation in the cost of export contracts-^, thus per- mitting the yards to offer fixed-price contracts. To improve the competitiveness of U.K. yards for attracting orders from U.K. owners, the government in- tended to extend the cost escalation insurance program to include domestic as well as foreign orders. By having the government absorb the inflation risk on contracts, the yards gain a benefit equivalent to a construction subsidy in the amount of the inflation experienced during the life of the contract, subject to the 18 percent maximum. Also, in connection with the nationalization scheme, the government proposed to guarantee to customers placing orders in U.K. yards to be nationalized that progress payments would be refunded should the yard collapse before nationalization. After nationalization, the contract was to be honored by the nationalized yard. 10 percent escalation is included in the contract; from 10-18 percent is covered by the government guarantee; anything over 18 percent is the responsibility of the yard. Exhibit 1 1 1 -25 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY SHIPBUILDING Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Country: United Kingdom 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate twn„.„.<„ c Total Ships b - Number DWT GRT 71 1,881 1,178 65 61 2,087 1,849 1,246 1,070 59 1,639 1,025 40 2,145 1,210 45 2,265 1,260 -8.7 3.8 1.4 Tankers - Number DWT GRT 15 736 391 13 11 892 675 480 354 11 407 224 7 1,085 566 13 1,116 598 -2.8 8.7 8.9 Bulk Carriers - Number DWT GRT 26 765 481 16 15 739 804 431 464 15 767 451 10 730 406 16 915 499 -9.3 3.6 0.7 Freighters - Number DWT GRT 29 376 296 36 35 456 370 335 252 d 32 459 326 22 328 224 16 240 163 -11.2 -8.6 -11.2 Total Ships b - Number DWT GRT 35 11 2,301 617 103 5,453 58 1,749 28 2,687 -5.4 a 4.0 a NA DWT GRT 7 4 1,515 272 33 3,730 13 679 21 2,504 31. 6 a 13. 4 a NA Bulk Carriers - Number DWT GRT 11 4 2,033 241 26 1,070 21 727 3 100 -27. 7 a -52. 9 a NA Freighters - Number DWT GRT 17 3 161 104 43 647 23 341 4 90 -30. 4 a -13. 5 a NA Total Ships b - Number DWT GRT 6 501 7 12 296 227 3 219 4 400 5 1,253 -3.6 20.1 NA Tankers - Number DWT GRT 5 351 4 400 5 1,253 0.0 29.0 NA Bulk Carriers - Number DWT GRT 1 150 4 4 216 108 3 219 -100.0 -100.0 NA Freighters - Number DWT GRT 3 8 80 119 NA NA NA 111-45 Exhibit 1 1 1-25 Shipbuilding (continued) Country: United Kingdom 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate Orders Outstanding at Year-En 158 96 7,812 6,353 - Total Ships b - Number DWT GRT 195 7,894 137 9,948 151 9,152 5,845 129 8,321 5,031 -7.9 1.1 NA Tankers - Number DWT GRT 36 3,057 30 23 3,680 3,277 45 6,600 47 5,794 3,642 50 5,929 3,457 6.8 14.2 NA Bulk Carriers - Number DWT GRT 55 3,454 46 31 3,124 2,453 39 2,537 50 2,534 1,670 37 1,719 1,148 -7.6 -13.0 NA Freighters - Number DWT GRT 104 1,383 82 42 1,008 623 53 811 54 824 534 42 674 427 -16.6 -13.4 NA (millions of dollars) Revenues 380. I 426.6 440.3 485.0 504.0 531.5 6.9 P of ts MA Outstanding Debt - - NA - - Employment Employees (000) at Year-End 98,833 97,129 94,738 92,774 91,048 90,881 -1.7 ■ a 4-year annual growth rate, 1971-1975. Includes Combination Passenger/Cargo Vessels not shown separately. c Source: New Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Source: Derived from orders outstanding, deliveries, and cancellations. Approximate due to timing differences in sources. e Source: Fairplay International Shipping Weekly, World Ships on Order , quarterly. Value of ships completed including naval vessels. In addition to the measures discussed above, the government has also appealed to U.K. owners to place more orders in domestic yards and has exerted some pressure on the owners by publicly discussing the possibility of requiring them to place their orders in U.K. yards. Owners have traditionally resisted any home-purchase requirement arguing that they should not have to absorb inefficiency penalties on account of uncompetitive ship prices from U.K. yards. Talk of "buy British" requirements has raised the possi- bility that U.K. owners might flee to convenience flags rather than accept cost inefficiencies due to a protectionist shipbuilding policy. Other measures to secure orders for the yards have been considered by the government including accele- rating military shipbuilding for the Royal Navy, having yards build ships for their own accounts or for the government's account to be chartered out or stockpiled until the market for vessels improves, and offering cheaper credit for operators ordering in U.K. yards. Options such as building and stockpiling ships are considered measures of last resort, however, since they would artifically increase the tonnage on an al- ready overtonnaged market. A grant program to cover orders over an 18-month period was also established. An initial funding of $111.8 million was established, with the first half expected to be expended over the first half of 1977, prior to the then expected startup of the nationalized industry at mid-year. The funding would offset slightly under 10 percent of the prices of British construction. Combined with devaluation effects, the funds were expected to reduce the overall price levels by approximately 15 percent. In March 1977, after the ship repair industry was dropped from the rationalization scheme, the plan was voted through Parliament. The companies to be vested into the British Shipbuilding Corporation are shown in Exhibit 111-26. Actual vesting took place on July 1, 1977. 111-47 Exhibit 1 1 1-26 NATIONALIZED SHIPBUILDING INDUSTRY COMPANIES WHICH FORMED BRITISH SHIPBUILDERS July 1, 1977 Shipbuilding Companies Appledore Shipbuilders Limited Austin & Pickersgill Ltd. Brooke Marine Limited Cammell Laird Shipbuilders Limited Clelands Shipbuilding Company, Ltd. Ferguson Brothers (Port Glasgow) Limited The Goole Shipbuilding & Repairing Co., Ltd. Govan Shipbuilders Limited Hall Russell & Company, Ltd. Lithgows Limited Robb Caledon Shipbuilders Limited Scott and Sons (Bowling) Limited Scotts 1 Shipbuilding Company Limited Smith's Dock Company, Ltd. Sunderland Shipbuilders Limited Swan Hunter Shipbuilders Limited Vickers Shipbuilding Group Limited Vosper Thornycroft Limited Yarrow (Shipbuilders) Limited Companies Manufacturing Slow Speed Diesel Marine Engines Barclay, Curie & Company Limited George Clark & NEM Limited Hawthorn Leslie" (Engineers) Ltd. John G. Kincaid & Company Limited Scotts' Engineering Company Limited Training Companies The Scott Lithgow Training Centre Limited Swan Hunter Training and Safety Company Limited Yarrow (Training) Limited Source: Aircraft and Shipbuilding Industry Act 1977, Chapter 3, 1975. The purchases of equity from the current private owners were scheduled to take place by July 1, 1977 under a formula based on 1974 share prices. Approxi- mately $258 million was expected to be required with- out the shiprepair industry with the equity being swapped for treasury stock. Required capital investments of $344 million have been estimated. Under the nationalization bill the British Shipbuilding Corporation can borrow, with Treasury consent, up to $516 million. Thus, with the prior injecture of approximately $412 million, the current commitments can bring government funding up to a level of well over $1.2 billion, not counting the special intervention fund of $111 mil- lion and any amounts for the inflation guarantees. Led by a triad of management representing government, labor and industry, British Shipbuilders Corporation (BSC) plans to employ the economies and efficiencies of centralized marketing, finances, controls and ad- ministration. BSC seeks efficiency through utiliza- tion of the best U.K. yards to win orders in the interim, with or without subsidies and to develop a range of good ship types for future economies. BSC maintains that the U.K. can be competitive with Japanese bids for 12,000 dwt dry cargo vessels. BSC will seek to structure its shipyards in a decentral- ized manner so that the performance of individual shipyards may be measured. Questions have been raised concerning the closure of shipyards and the prospect of sharing the hard-won orders of one yard with other yards. BSC has stated that orders would be pooled only when customer delivery requirements for multi-ship procurements were in a time frame where pooling would facilitate securing the order. The extent of impending closures of selected U.K. shipbuilders remains to be seen, as does the resolution of certain prospective shiporders of formerly distinct shipyards. IV. The Maritime Aids of Norway Contents page A. SUMMARY IV-1 1. Background IV-1 2. Conclusions IV-7 B. AIDS TO THE NORWEGIAN NATIONAL FLEET IV-10 1. Aid Programs IV-10 a. Principal Aids to the Norwegian IV-12 National Fleet, 1970-1975 (i) Investment Financing Assistance IV-12 Program 1 - Guarantee Institute IV-13 Program 2 - Guarantees for IV-14 Coastal Vessels (ii) Credit Assistance IV-14 (Hi) Tax Allowance Programs IV-14 Program 3 - Additional and IV-15 Initial Depreciation Program 4 - Tax-Free Reserves IV-16 Program 5 - Reduced Seaman's IV-21 Tax (iv) Direct Subsidies IV- 2 2 Program 6 - Subsidies in IV-22 Coastal Trades (v) Preference Programs IV-22 (vi) Government Ownership IV-22 (vii) Other IV-22 b. Benefits of Norwegian Assistance IV-25 Programs to the National Fleet 2. Effectiveness of Aids to the Norwegian IV-25 National Fleet 3. Recent and Prospective Programs IV-31 PAGE AIDS TO THE NORWEGIAN SHIPBUILDING INDUSTRY IV-35 1. Aid Programs IV-35 a. Principal Aids to the Norwegian IV-35 Shipbuilding Industry, 1970-1975 (i) Investment Financing Assistance IV-35 (ii) Credit Assistance IV-35 Program 1 - Second Mortgage IV-35 Financing Program 2 - First Mortgage IV-39 Guarantees (Hi) Tax Allowance Programs IV-39 Program 3 - Customs Duty IV-40 Rebates Program 4 - Initial Depreciation IV-40 Program 5 - Reserve Funds IV-41 Program 6 - VAT Exemption IV-41 (iv) Direct Subsidies IV-41 (v) Preference Programs IV-41 (vi) Government Ownership IV-41 (vii) Other IV-41 b. Benefits of Norwegian Assistance IV-42 Programs to the Shipbuilding Industry 2. Effectiveness of Aids to the Norwegian IV-42 Shipbuilding Industry 3. Recent and Prospective Programs IV-46 (ii) Norway List of Exhibits exhibit title page IV- 1 Share of World Fleet and Average Age - IV-2 1966-1975 IV-2 Summary of National Flag Fleet and Ship- IV-3 building Activity - 1970-1975 IV-3 Comparison of Fleet Growth - Norway and IV-5 World - 1970-1975 IV-4 Trends in Seamen's Wages, Number of Vessels IV-6 and Number of Seamen - 1970-1976 IV-5 Current Accounts of the Shipping Sector - IV-8 1970-1975 IV-6 Outline of Principal Assistance Programs to IV-11 the Norwegian National Fleet - 1970-1975 IV-7 Estimated Value of Additions and Deletions IV-17 of the Norwegian National Fleet - 1972-1975 IV-8 Results for a Sample Norwegian Shipowner IV-20 IV-9 Summary of Daily Costs for Various Types of IV-23 Vessels Under Selected Flags - 1974-1976 IV-10 Subsidies to Coastal Trades - 1974 IV-24 IV-11 Budgeted Subsidies for Domestic Water Transport IV-24 IV-12 Summary of Benefits to Norwegian Operators - IV-26 1971-1975 IV-13 Measures of Maritime Activity - Fleet Operations IV-29 IV-14 Outline of Principal Assistance Programs to IV-36 the Norwegian Shipbuilding Industry - 1970-1975 IV- 15 Outstanding Loans and Terms of the Norwegian IV-38 Mortgage Institute IV-16 Summary of Benefits to Norwegian Assistance IV-43 Programs to the Shipbuilding Industry - 1971-1975 IV-17 Measures of Maritime Activity - Shipbuilding IV-44 IV, THE MARITIME AIDS OF NORWAY A. SUMMARY 1 . Background The Norwegian national fleet at the end of 1975 in- cluded 8.6 percent of the world's total deadweight tonnage and ranked fourth after Liberia, Japan, and the United Kingdom, In 1968, Norway had ranked second in the world after Liberia. Despite significant growth in the Norwegian fleet, the Norwegian share of the world's fleet has declined steadily over the past 10 years. The Norwegian fleet is on average consid- erably more modern than the average of the world's fleet, but the average age of the fleet has not im- proved over the past five years (Exhibit IV-1). As an industry, the national fleet is significantly larger than the Norwegian shipbuilding industry. Over the past five years, deliveries to the Norwegian fleet were three to four times the total output of the Norwegian shipbuilding industry (Exhibit IV-2). Whereas, about three quarters of the national shipyard output has gone to the Norwegian fleet, those de- liveries represented less than 25 percent of the total deliveries to the national fleet. In 1975 the Nor- wegian fleet employed 30,800 persons and earned Norway $774 million as compared to the $481 million in foreign exchange earned by Norway's 33,400 ship- yard workers through ship exports. Norwegian's ship- ping's $3,174 million in gross receipts in 1975 was equal to some 11 percent of Norway's $28,321 million GNP. The principal aids to the Norwegian national fleet have taken the form of tax allowances, which shelter income and include incentives for reinvestment. The aids provide for the creation of capital in a country with limited capital markets. However, since the principal sources of capital for shipowners are from the depreciation of new assets and the reinvestment SHARE OF WORLD FLEET AND AVERAGE AGE 1966-1975 1966 1968 1970 1972 1974 1975 Registered Percent of Under Norweg World Fleet ian Flag Total Fleet 1 Tankers Bulk Carriers Freighters 7.4 12.5 12.2 5.3 6.8 10.6 12.9 4.4 5.9 8.6 11.5 3.7 5.7 8.2 10.2 3.5 4.6 6.6 7.9 2.7 4.3 6.3 7.4 2.5 — Deadweight To nnage Regis Percent of tered Under Norwegian World Fleet Fla Total Fleet 1 Tankers Bulk Carriers Freighters 10.9 15.2 15.0 5.2 11.2 14.1 16.7 4.4 9.9 11.3 15.1 3.6 9.6 10.5 12.6 3.6 8.6 9.4 11.5 2.8 8.6 9.4 11.1 2.5 n Fleet - Average Age of (years) Vessels Total Fleet 1 Tankers Bulk Carriers Freighters 10 8 6 12 8 7 5 11 8 7 5 11 8 8 6 11 8 7 6 11 8 7 7 11 — - World Fleet - Average Age of V (years) Total Fleet 1 Tankers Bulk Carriers Freighters 17 11 11 16 13 11 9 15 13 11 8 13 12 11 8 13 12 11 9 13 12 11 9 13 Includes Combination Passenger/Cargo not shown separately. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce, annual. IV-3 Exhibit IV-2 SUMMARY OF NATIONAL FLAG FLEET AND SHIPBUILDING ACTIVITY 1970-1975 | NORWAY I 1970 1971 1972 1973 1974 1975 Tot il Deliveries - Norwegi an Sh , py r Vessels 33 54 58 41 44 42 DWT (000) 1,152 1,474 1,401 1,898 1,568 1,775 GRT (OOC) 642 845 791 1,091 916 1,034 Deliver ies fo r Nowegiar Registry from Norwegian Sh ipyards Vessels 18 25 25 23 20 21 DWT (000) 782 1,111 1,048 1,527 1,164 1,047 GRT (000) 425 600 552 808 616 554 n i ' eries for Norwec ian Registry from ^Jorld Shi pyards- v Vessels 58 84 77 78 59 75 DWT (000) 3,876 4,108 4,062 6,385 5,182 6,869 GRT (000) 2,151 2,312 2,265 3,466 2,818 3,666 Owners Share of Norwegian Sh pyard Deliveries (Percent) Norwegian Vessels 55 46 43 56 45 50 DWT (000) 68 75 75 80 74 59 GRT (000) 66 71 70 74 67 54 Norwegian Sr ipyards Share oi Del iveries to Norwegian Owners (P , ercen ; Vessels 31 29 32 29 34 28 DWT (000) 20 27 26 24 22 15 GRT (000) 20 26 24 23 22 15 Source: Merchant Fleets of the World , Maritime Administration U.S. Department of Commerce, semi-annual. of gains from the sale of older assets, the net growth of the fleet has been limited by incentives for the replacement of older tonnage as shown in Exhibit IV-3. Increasing wage costs have also hindered the ability of the Norwegian fleet to expand rapidly. Orders for the modern vessels required to increase the Norwegian fleet's competitiveness were stimulated by the aid programs, but the high costs of manning rendered existing small Norwegian vessels uncompetitive. While deadweight and gross registered tonnage increased, the number of vessels decreased, reducing the number of berths for Norwegian seamen. (Exhibit IV-4) One of the aids to the national fleet is a reduced level of income taxes for seamen as well as government underwriting of seamens' travel. This aid appears to have been offset, however, by increases in wage levels, likely demanded by the unions as the number of available jobs aboard Norwegian vessels has de- creased so that no net gain was realized by Norwegian owners . Water transport accounted for 8.4 percent of Norway's GNP in 1974. Until the expansion of the offshore oil industry, shipping was the keystone to Norway's balance of payments situation. In 1974, Norway incurred a current deficit of $630-*- million, but net ship trans- actions made a positive contribution of $214 million and net freight earnings contributed $2.15 billion. Shipping sector loans made a negative contribution of $199 million to long-term capital transactions. The foreign currency account (excess of foreign currency income over foreign currency expenditures) of the Norwegian national fleet during the 1970-1975 period Dollar figures in this chapter have been converted at the 1975 exchange rate of 5.2269 Norwegian kroner to the dollar. IV-5 Exhibit IV-3 COMPARISON OF FLEET GROWTH - NORWAY AND WORLD 1970-1975 (deadweight tons in millions) GROWTH IN REGISTERE ) FLEET Deadwe 1970 _gh_t Tons 1975 Percent Change Deadwei 1970 g_ht Tons 1975 Percent Change Total Fleet 32.4 47.8 48% 327.0 556.6 70.2 Tankers 17.4 28.5 64 153.1 302.2 97.4 Bulk Cam' ers 11.6 16.7 44 77.2 150.1 94.5 Freighters 2.3 2.6 13 92.4 101.2 9.6 NEWBUILDINC DELIVERIES TO THE FLEET j Percent of 1970 Fleet DWT - World- Deadweight Tons Del ivered to Fleet Deadweight Tons Percent of Delivered to Fleet 1970 Fleet DWT Total Fleet 26.6 82 254.8 78 Tankers 17.3 99 157.1 103 Bulk Carriers 8.6 74 73.5 95 Freighters .7 30 24.0 26 1 SHARE OF NEWBUILDING DELIVERIES USED FOR 1 I NET FLEET GROWTH AND FOR VESSEL REPLACEMENT | for acement Percent for Percent for Percent for D ercent Met Fleet Growth Vessel Replacement Net Fleet Growth Vessel ReDl Total Fleet 57.9 42.1 90 10 Tankers 64.3 35.7 95 5 Bulk Cam- ers 58.7 41.3 99 1 Freighters 32.8 67.2 37 63 Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. O CT> CC I LU O an cm c CI o ^r CXi en o> fOI <=C E sz\ O C\J ■=* ^ 03 Ul 4- CD o 00 ^il S- C CD ro _Q •>- E D =3 CD ^ 2 S-l CO CT> oo (Ul •^r h- cn o -Ol .ai fv o CVJ cn < ^ Ei C3| Oil o cn z: a cm CO o c c: Cl O) •t- CO ^t E C .ci c_>i a> «3 OO UJ ^2-' +-> > 13 SZ -a +-> 001 en en cn IV-7 has been between $774 and $1,784 million. New ship exports have added another $155 to $481 million each year (Exhibit IV-5 ) . On average, shipping has con- tributed approximately $1.75 billion per year between 1970 and 1975 to the Norwegian current account. 2 . Conclusions The Norwegian national fleet has provided a continuous stream of positive contributions to the Norwegian balance of payments. Although less significant, the shipbuilding industry has provided an important source of employment, particularly in certain regions. As a developed industrial nation with a small popula- tion, the maritime industries have been forced to compete for funds in capital markets that are unable to meet the needs of all sectors of industry. These markets were strained even further during the study period, as Norway commenced its costly development of offshore energy and sought domestic and foreign capital. To meet the demands of the Norwegian fleet, the govern- ment has provided a number of indirect tax allowances. These allowances have permitted owners to reserve funds on a pre-tax basis for use in fleet expansion and also for use in severe downturns of world shipping when the high capital burdens of ship procurement re- quire liquidity. Built up during normal and boom cycles through operations and the prudent disposal of vessels, these allowances have permitted the Norwegian tanker fleet to expand rapidly over the study period. The recent shipping recession has placed large liquidity pressures on the reserves of Norway's bulk operators and owners of drilling rigs. In response to the cur- rent situation, the Norwegian programs have been broadened to include financing assistance through the Norwegian Guarantee Institute. Aids other than tax allowances have also been a part of Norway's maritime aids. The shipbuilding industry operated over the study period with relatively little IV-9 assistance. The primary aid had been through the continuation of customs duty rebates and relatively small credit programs. Indirectly Norwegian shipyards benefit from the government aids extended to the Norwegian fleet for 72 percent of the yards' output in 1970 to 1975 was for Norwegian owners. As the price differentials between Norwegian yards and Japanese and Korean yards increased between 1974 and 1976, the domestic demand for Norwegian-built vessels declined. In response, the government has created incentives to Norwegian owners for home con- struction. These have principally taken the form of expanded tax allowances, e.g., increased depreciation allowances, aimed at reducing price differentials. Also significant is the opening of credit facilities permitting financial assistance to Norwegian owners, rather than only to export ship orders. These include both government-sponsored second mortgages and guaran- tees on loans. With top level government and Norwegian Export Council support, special foreign aid grant programs using generous OECD "gift" financial terms have been de- veloped. Designed to be non-competitive with Nor- wegian shipping interests, orders for a number of small and medium-sized vessels and orders for compre- hensive fleet development including Norwegian expertise and experience have been secured using generous finan- cial packages. The terms of such projects include 90 percent credit and 10 years to repay at 3.25 percent and amount to subsidies to shipyards for which Nor- wegian authorities have set aside nearly $96 million. When combined with some orders from Norwegian ship- owners and Norway's expertise in building vessels for the expanding LNG and LPG markets, the shipbuilding industry should be able to manage an orderly reduction. Additional government assistance through special loans and funds for restructuring and retraining have also been provided to the yards to facilitate the ship- building industry's activities. B. AIDS TO THE NORWEGIAN NATIONAL FLEET 1 . Aid Programs The principal objectives of the aids to Norwegian shipowners have been to encourage the replacement of older vessels and the retention of profits within the industry. The accelerated depreciation and the reinvestment incentives of certain reserve funds have also served to smooth the industry's cyclical income pattern by allowing the owners some discretionary tools to adjust the timing of their book profits. Indirect aids in the form of accelerated depreciation and tax-deferred reserve funds have been the major elements of the government's assistance for this purpose . Norway has no direct operating subsidy or construc- tion subsidy for the national-flag fleet with the ex- ception of subsidies paid to certain combination passenger/cargo liner services in the coastal trade. As shown in Exhibit IV-6, six principal aids were available to the Norwegian fleet over the 1970-1975 study period. A recent aid categorized under Invest- ment Financing Assistance is the Guarantee Institute, which was established towards the end of the study period. Prior to that, the principal aids to Nor- wegian operators were tax allowances which assisted owners in managing the cash flow and capital re- serves necessary to finance new investment. The re- duced seaman's tax income tax rate provided limited assistance to owners in relieving the effect of high Scandinavian wage costs. Finally, a small financing guarantee program and direct operating subsidies were provided in the coastal trades. Each of these pro- grams is discussed in detail in the following section. Section B.2. discusses the effectiveness of the assistance programs employed over the 1970-1975 period. Section B.3. addresses current and prospec- tive programs. Exhibit IV-6 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE NORWEGIAN NATIONAL FLEET 1970-1975 i . Investment Financing Assistance Program 1 - Guarantee Institute Program 2 - Guarantees for Coastal Vessels ii . Credit Assistance i i i . Tax Allowance Programs Program 3 - Additional and Initial Depreciation Program 4 - Tax-Free Reserves Program 5 - Reduced Seaman's Tax iv. Direct Subsidies Program 6 - Subsidies in Coastal Trades v. Preference Programs vi . Government Ownership vi i . Other IV-12 a. Principal Aids to the Norwegian National Fleet (i) Investment Financing Assistance The tax-related maritime aids of Norway have been de- signed to match the financial resources and needs of its financial markets and shipowners. The capital resources of Norway have been stressed to meet the needs of the Norwegian economy's requirement for in- vestment capital and the policies of the Bank of Norway have reacted to these demands. Norway's ratio of investments to the gross domestic product increased by 30 percent over the study period, driven by the need for capital to develop North Sea oil projects. This demand for capital necessitated the use of foreign capital and thus pressure on the Norwegian kroner developed. The Bank of Norway was forced to tighten credit policy, which made the raising of capital more difficult for shipowners. Norwegian shipowners share the burden of capital formation with other Norwegian industries. Compared with their international counterparts, Norwegian banks are strictly controlled by the government and are small. The largest commercial bank in Norway ranks 250th in assets in the world. At the end of 1974, approximately 55 percent of total private and municipal investment in Norway was financed by in- ternally generated funds, 18 percent by foreign credit sources, and 27 percent by domestic credit sources. Some 40 percent of the domestic credit financing uses foreign capital. The domestic credit sources in toto were financed 12 percent by commercial and savings banks, 10 percent by state banks and only 5 percent by the bond market. The financial requirements necessary to support the worlds 4th largest fleet have therefore required substantial investments by the shipping sector and are mainly financed out of current and past profits and IV-13 out of the proceeds of exports of used ships. Ap- proximately 10 percent is financed by net borrowing, almost exclusively from foreign banks, due to the limited domestic availability of medium- and long- term credits. Although the foreign indebtedness of Norway is very large in relation to the size of its gross domestic product, the large current account deficits are not expected to be a source of concern to Norwegian monetary authorities, in view of the abundance of the expected oil revenues that will last well into the next century. Norwegian banks have played an important role in the recent government initiative to help owners of oil rigs and ships through the present slump by providing the Norwegian state-backed Guarantee Institute for Ships and Drilling Rigs long-term loans with vari- able maturities. Most of the Norwegian subscription to the 40 percent non-government shares in the syndi- cate was by already heavy investors in Norwegian shipping interests, while some foreign financial in- stitutions also joined the syndicate. Program 1 - Guarantee Institute Prior to 1975, Norway provided no financing assistance to the offshore fleet. Aids to the national fleet had almost exclusively taken the form of tax allowance programs; the principal programs over the 1970-1975 period being depreciation allowances, tax free re- serves and seaman's income tax allowances. These aids provided assistance to Norwegian owners in the areas of reinvestment and stability of earnings. The recent tanker overcapacity situation, however, proved too difficult for Norwegian owners, who unlike the more diversified Japanese and Swedish operators, and Norwegian owners of non-tanker tonnage, had been encouraged to heavily invest in the tanker sector by the various tax deferment and depreciation programs. As a result , the Norwegian government was required to implement a new program in 1975, aimed at pro- viding additional interim support for the large investments made by certain operators of tanker tonnage. The Norwegian Guarantee Institute was created as a temporary measure to strengthen the possibilities for financing Norwegian ships and drilling rigs. Due to the timing of the initiation of this program, the Guarantee Institute will be more fully dis- cussed under Recent and Prospective programs (Section IV-B.3). Program 2 - Guarantees of Lower Priority Mortgages on Coastal Vessels The Ministry of Transport may guarantee lower priority mortgages on coastal vessels. The guarantees are not restricted to vessels built in Norwegian yards and the total amount guaranteed under the program has risen from a ceiling of $9.6 million in 1973 to $28.7 mil- lion in 1976. The benefit of this program to Nor- wegian owners has been less than $1 million per year. (ii ) Credit Assistance Credit assistance is not applicable to national flag operators . (Hi) Tax Allowance Programs The Norwegian tax allowances programs include: • Depreciation allowances, which provide for accelerated depreciation of new assets to shelter taxable income. • Several tax-free reserve funds which provide a range of benefits from the funding of recurring operational costs to the shelter of large cash flows from vessel sales for reinvestment • A lower income tax rate for seamen. IV-15 Program 3 - Depreciation Allowances Additional and initial depreciation on ships is per- mitted above the normal straight line percentage of 5 to 8 percent per year . This accelerated deprecia- tion can be taken under either of the two options: • Additional depreciation at 1-1/2 times normal straight line rate for up to five years until a oumulative 15 percent over straight line is reached, or • Initial depreciation up to 25 percent of the cost of a vessel (maximum of 5 percent per year) between the time of the first progress payment on construction and four years after delivery. This option has a maximum, however, of 50 percent of other- wise taxable income in each year. As a result of this latter requirement, the initial depreciation is utilized to a lesser extent than the additional depreci- ation,, except in special cases. As discussed under tax-free reserves, the gains from the sale of vessels can be applied to new assets, reducing the total depreciation available, but not the basis for the accelerated depreciation schedules. When combined with the rapid depreciation schedules, an asset may be fully depreciated in only a few years. The full proceeds of the sale of that asset are then effectively the gain after only a short period. Using the difference in cash flows between ordinary and additional/initial depreciation to quantify the benefit to Norwegian owners, the discounted flows of additional depreciation are equivalent to approximately cent for tankers and bulk carriers. Riskier vessels such as gas carriers are allowed up to 15 percent per year. IV-16 4 percent of the cost of the vessel. The initial depreciation has a discounted value of approximately 8 percent of the vessel cost, without consideration of the use of the initial depreciation before de- livery. Both of the above are based on a comparison with an estimated average normal depreciation of 6.5 percent per year and an 8 percent cost of capital. Exhibit IV-7 summarizes the estimated value of addi- tions and deletions to the Norwegian national fleet between 1972 and 1975. Based on an average discounted value of the additional and initial depreciation of 6 percent, the depreciation allowances on the net value of imports plus domestic deliveries ranges from $54.3 million in 1972 to $97.1 million in 1975. The gains on second hand ships reduces the amount of depreciation that may be taken, but not the basis for determining the amount of depreciation per year. As a result, the depreciation allowances have been estimated at the above levels. Were the depreciation basis af- fected, the value of the allowances would range from $28.6 million in 1972 to $63.2 million in 1975. Program 4 - Tax Free Reserves Norwegian operators have available several important reserve funds for sheltering taxable income, which include : • A fund for deposit of capital gains from the sale of ships where taxes can be deferred up to eight years and oan be postponed further if gains are reinvested in new ships. Taxes are eventually recouped by the government because the total deprecia- tion tax deduction of the new assets is re- duced by the amount spent from the reserve fund increasing profits, but the book value of the new asset for future capital gains determination is unaffected. Waen combined with the depreciation allowances, vessels may be fully depreciated in only a few years. IV-17 Exhibit IV-7 ESTIMATED VALUE OF ADDITIONS AND DELETIONS TO THE NORWEGIAN NATIONAL FLEET 1972-1975 (millions of dollars) 1972 1973 1974 1975 Total Value of Norwegian Shipbuilding Output 492 598 715 840 Export Value of Norwegian Shipbuilding 252 264 384 481 Net Value to Norwegian Ship Owners 240 334 331 359 Value of Imports of New Ships 665 1,126 949 1,259 Net Value of Imports Plus Domestic Deliveries 905 1,460 1,280 1,618 Second-hand Sales 429 727 779 564 Net Increase in Un- depreciated Value of Norwegian Fleet 3 476 733 501 1,054 Assumes write-off of gains against value of deliveries. Source: Exhibit IV-5 and TBS estimates. The timing of the tax liability thereby provides significant benefit to the Norwegian owners. With recurring invest- ment and second hand sales 3 significant funds are made available for reinvestment and the tax liability is continuously moved into the future. • A fund for extraordinary repairs to vessels that are required as a result of periodic classification survey inspection. • A fund for owners to self-insure that por- tion of their hull risks not covered by commercial i?isurance. Deposits to the fund equal to equivalent insurance premiums for the risk covered are allowed. • Norwegian tax laws provide for a fund into which companies may deposit a maximum of 25 percent of earnings in any year. Amounts withdrawn from the fund receive favorable tax treatment if used to purchase new assets. Taxes are forgiven on 15 percent of amounts from this fund used to purchase new assets, and taxes on the remainder are deferred but not eliminated as the 85 percent must be used to reduce the depreciation basis of the new asset. The funds must be placed in blocked accounts for four years and rein- vested in certain northern areas, however, and for this reason are minimally utilized by the shipping industry. • Foreign exchange reserves for freight con- tracts and for other payments subject to devaluation effects. Since the gain on the sale of ships does not reduce the depreciation basis, but does reduce the amount of depreciation that is taken, the benefits of the two programs are in part additive. That is, the value of the depreciation allowances is more than the discounted value of the depreciation on the net increase in un- depreciated value. The discounted value of the reserves for gains on ship sales is approximately 30 percent of value of the second-hand sales, assuming the shelter is eventually lost and taxes paid in the future. If the shelter is maintained, the value of the reserve is equal to the taxes or 50.8 percent of the sale value. Based on the 30 percent discounted value, ship sales yielded between $129 million and $234 million per year between 1972 and 1975, for the Norwegian fleet. Exhibit IV-8 summarizes the three year results for a sample Norwegian ship owner. Over the three years the company placed an average of 76 percent of its earnings after ordinary depreciation into special depreciation and reserve accounts, not including the gain on the sale of a vessel. Including the gain from the sale, the company was able to place 86 percent of its ordinary and extra- ordinary earnings after ordinary depreciation into special accounts. Taxes totaled 5 percent of the above earnings. The company applied these earnings to write off over 20 percent of its newbuilding con- tracts. Total accumulated depreciation declined from 65 percent of the initial value of the vessel to only 44 percent of the value of ships and newbuildings , even though that value had more than doubled in the two years. At the same time, other reserves were in- creased by over 50 percent . The result of these tax-related reserves permitted Norwegian shipowners to pay little or no corporate income tax while expanding their fleets. The costs to the Norwegian government of this indefinite or infinite postponement of tax revenue can be estimated to be as low as the Norwegian bond rate, which repre- sents the cost of funds available to the government. Norwegian bond rates have been low relative to Euro- pean neighbors and have not been subjected to sharp fluctuations, averaging about 7 percent. IV-20 Exhibit IV-8 RESULTS FOR A SAMPLE NORWEGIAN SHIPOWNER (millions of Norwegian Crowns) 1973 1974 1975 T ^„ M Q +a+omfl „* T^ m . Results from Ship Operations 34.1 33.9 45.2 Profit Before Depreciation and Taxes 32.8 30.2 48.9 Gain on Ship Sales - 45.5 - Ordinary Depreciation (16.2) (18.2) (12.3) Advance Depreciation (2.4) (4.0) (12.8) Initial Depreciation (3.5) (2.7) (4.6) Newbuilding Fund - (45.5) 39.4 Depreciation from New- building Fund .. .. (39.4) Devaluation Fund (7.1) 1.2 2.2 Classification Fund - (2.3) (6.4) Self-Assurance Fund (1.3) (1.4) (2.3) Profits for Tax Purposes 2.3 2.8 6.2 Tax (1.0) (1.7) 3.1 Newbuil dings .. 196.8 284.1 Accumulated Depreciation - 2.7 50.2 Ship Value 256.6 227.1 260.4 Accumulated Depreciation 166.9 159.6 181.2 Newbuilding Fund - 45.5 6.1 Classification Fund 9.2 9.5 15.9 Self-Assurance Fund 2.6 3.6 5.9 Devaluation Fund 7.1 5.9 3.8 IV-21 The resulting benefit from the more than $875 million in tax-free reserves afforded shipowners between 1971 and 1975 had a low cost to the government and was highly effective in promoting Norwegian modernization and tanker expansion. Program 5 - Lower Income Tax Rate for Seamen The state and local tax rates on income for seamen are up to 30 percent below the personal tax rates of other Norwegian citizens. The taxes of each group are progressive, but the ceilings for seamen are about 30 percent below that of non-seamen 3 . This translates into a potential benefit to Norwegian ship- owners in that the salary that they have to pay to achieve any level of after-tax take home pay for sea- men is less than it would be if the seamen had to pay full income tax rates. Wage costs for the Norwegian fleet totaled $447 mil- lion in 1974, 14 percent of the total revenues for the fleet. Comparison of the wage and tax levels of seamen and Norwegian taxpayers excluding seamen in 1973 indicated that the average tax level for seamen was approximately 30 percent of total wages as com- pared to 35 percent for non-seamen. This difference in tax levels translates into $22.3 million on the 1974 wage levels. It has been the government's intention to reduce the manning costs experienced by Norwegian shipowners so that the fleet might be more competitive, but the pay scales for Norwegian seamen have risen despite the tax differential. Thus, even with the benefit of lower taxes on seamen's wages, the daily manning costs of Norwegian-flag vessels are among the highest in the For example, the progressive state tax ceiling is 33 percent for seamen versus 48 percent; the municipal tax ceiling is 16 percent versus 23 percent. IV-22 world. As shown in Exhibit IV-9, daily manning costs in the past three years for Norwegian vessels fall below those of Swedish vessels but are well above those vessels of British, Greek, or Liberian registry. (iv) Direct Subsidies Program 6 - Subsidies for Coastal Trades The state and municipal governments provide direct subsidies to a variety of coastal services. In 1974, these totaled $62 million and were divided by service area and level of government as shown in Exhibit IV-10. These subsidies, while substantial, are primarily directed to local and ferry services which would be unprofitable without government support , but which are required by the regional economies as the princi- pal means of transport. As shown in Exhibit IV-11, the budgeted levels of subsidy are expected to in- crease . (v) Preference Programs None (vi) Government Ownership None (vii) Other None IV-23 o o o o o c o o o o o o o o o o o o Jo'El5^ aj| £ 2 o = u ■- - Exhibit IV-10 SUBSIDIES TO COASTAL TRADES 1974 (millions of dollars) Central Local Government Government Total 1. Total Services 59.7 2.3 62.0 2. Long-Distance Services 10.7 - 10.7 3. Local Services 20.8 0.1 20.9 4. Ferry Services 27.5 2.0 29.5 5. Rural Services 0.6 0.2 0.8 6. Inland Waterway 0.1 Service 0.1 0.0 Source: Transport and Communication Statistics 1975, Central Bureau of Statistics, Oslo Exhibit IV-11 BUDGETED SUBSIDIES FOR DOMESTIC WATER TRANSPORT (millions of dollars) Year Coastal Subsidies 1974 61.2 1975 70.2 1976 72.7 1977 87.1 Source: National Budget of Norway 1976, 1977, Royal Norwegian Ministry of Finance. b. Benefits of Norwegian Assistance Programs to the National Fleet Exhibit IV-12 summarizes the benefits of the Norwegian assistance programs over the study period. Excluding the guarantee for coastal vessels (less than $1.0 million per year) and the coastal subsidies (about $40 million to $70 million per year) the benefits of the three principal tax related programs are esti- mated at between $200 million and $330 million per year. 2 . Effectiveness of Aids to the Norwegian National Fleet The previously described aids appear to have three basic purposes: • to encourage investment in new vessels so that the Norwegian fleet can compete successfully in world shipping. The high productivity vessels offset to some extent high manning costs incurred by using Norwegian crews, • to remove some cyclicality risk from vessel ownership and thus encourage in- vestment in the industry, and • to ease the burden on owners of employing high-wage Norwegian crews and thus create employment opportunities for Norwegian nationals . The shield for taxable income provided by accelerated depreciation is smaller in Norway than that in countries such as the United Kingdom and Sweden. Thus, the em- phasis appears to be less on the rapid modernization of the fleet and to be addressed more to accommodating the cyclical nature of certain sectors of the shipping industry in which Norwegian owners are heavily involved. Exhibit IV-12 SUMMARY OF BENEFITS TO NORWEGIAN OPERATORS (mil 1 ions of dollars) 1971-1975 1971 1972 1973 1974 1975 Program 1: Guarantee Institute a a a a a Program 3: Depreciation Allowances 54. 3 b 54.3 87.6 76.8 97.1 Program 4: Tax Free Reserves^ 128. 7 b 128.7 218.1 233.7 169.2 Program 5: Lower Seaman Tax 15. 6 C 17. 3 C 19. 8 C 22.3 22.3 d Program 6: Coastal Subsidies 42. 7 e 48. 4 e 54. 7 e 62.0 70.2 Subtotal f 198.6 200.3 325.5 332.8 288.6 Benefits estimated to begin in 1976. Estimated at 1972 level. Based on tax rate differential computed for 1974. Estimated at 1974 level . Estimated at levels decreased by 1974-1975 rate. Excluding Program 2: Guarantees for Coastal Vessels,, and Program 6: Coastal Subsidies. 9 Tax-free reserves consider the value of capital gains reserve only. IV-27 The weak liquidity positions of some Norwegian owners necessitated the creation of the Guarantee Institute for Ships and Drilling Vessels. The reserve fund has been funded to 4.0 billion kroner ($765 million) until 1980 and by June 1977 two thirds of this amount had been allocated. Some 1.8 billion kroner was designated to cover 32 tanker guarantees of 8.8 mil- lion dwt , while 1.1 billion kroner guaranteed the drilling rigs of nine firms. The Norwegian shipping commun aid provisions may not have p extent that the owners deemed design of the reserve clauses may not have anticipated that in the shipping industry woul of the current slump. By mid Institute was being proposed, 11.5 million dwt were laid up 9.2 million dwt, 38 percent o fleet. ity feels that government rovided liquidity to the necessary, although the in the tax law itself the depth of recession d reach the proportions 1975 when the Guarantee 107 Norwegian ships of including 84 tankers of f the Norwegian tanker The Norwegian tanker fleet was the fourth largest in the world after those of Liberia, Japan and the U.K. and had an average age of seven years at the end of 1975, one of the newest in the world. As of October 1, 1975, the tanker fleet included 57 ships of over 200,000 dwt, with another 23 ships on order. The composition of the Norwegian fleet at the end of 1975 consisted of the vessels and tonnage presented below in Table IV-1. Table IV -1 OCEANGOING VESSELS OF 1 ,000 GRT AND OVER Number of Sh P^ Deadweight (mil 1 ions) Tankers 332 28.5 Bulk Carriers 318 16.7 Freighters 309 2.6 Other 32 " Total 991 47.8 Source: Exhibit IV- 13 IV-28 Although the Norwegian fleet was still among the largest and most modern in the world in 1975, its growth during the 1970-1975 period was slower than that of the world fleet. In 1968, Norway had the second largest fleet in terms of deadweight tonnage, exceeded only by the Liberian fleet. Since then, Japan and the United Kingdom have surpassed Norway in deadweight tonnage registered, and in 1975 the fleet tonnages of these two countries were 32 percent and 15 percent larger, respectively, than that of the Norwegian fleet. Norway's share of the world fleet has declined steadily over the past ten years, dropping from 7.4 percent of the vessels registered in 1966 to 4.3 per- cent in 1975. In terms of deadweight tonnage, Norway's share has declined from 10.9 percent in 1966 to 8.6 percent in 1975. Exhibit IV-1 summarizes Norway's declining share of the total world fleet and also shows Norway's share of the tanker, bulk carrier, and freighter segments of the fleet. While the Norwegian fleet has grown 48 percent in deadweight tonnage and 39 percent in gross registered tonnage from 1970 to 1975, the number of vessels in the fleet declined 16 percent from 1,173 to 991 (Exhibit IV-13). Employment in the merchant marine also declined, registering a 22 percent drop from 46.2 thousand in 1970 to 36.2 thousand in 1975. Norwegian nationals fared better than foreign nationals employed in Norwegian flag vessels. Their numbers declined 15 percent from 36.4 thousand in 1970 to 30.8 thousand in 1975. Foreign nationals employed dropped 45 percent during the same period from 9.8 thousand to 5.4 thousand. Under Norwegian law, the master of a vessel and at least two-thirds of the crew must be Norwegians. In special cases, however, the Maritime Directorate may permit employment of an all-foreign crew. IV-29 Exhibit IV- 13 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY FLEET OPERATIONS Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate b Total Ships 3 - Number DWT GRT 1,173 1,199 1,118 1,102 1,028 32,374 36,196 38,211 40,781 43,306 19,586 21,705 22,665 23,894 25,095 991 47,796 27,157 -3.3 8.1 6.8 Tankers - Number DWT GRT 363 373 376 349 337 17,351 19,158 20,280 21,941 24,472 9,813 10,699 11,204 12,023 13,319 332 28,467 15,207 -1.8 10.4 9.2 Bulk Carriers - Number DWT GRT 341 364 362 344 320 11,637 13,625 14,502 15,702 15,983 7,194 8,338 3,754 9,280 9,381 318 16,696 9,749 -1.4 7.5 6.3 Freighters - Nun.. K er DWT GRT 442 431 419 374 336 3,335 3,330 3,347 3,050 2,763 2,430 2,412 2,430 2,233 2,038 309 2,559 1,895 -6-9 -5.2 -4.9 (where intended registry is known) Total Ships 3 - Number DWT GRT 58 84 77 78 59 3,876 4,108 4,062 6,385 5,182 2,151 2,312 2,265 3,466 2,818 75 6,869 3,666 5.3 12.1 11.3 Tankers - Number DWT GRT 21 34 21 22 29 2,120 2,377 2,145 3,694 3,858 1,083 1,239 1,098 1,867 2,058 39 5,194 2,725 13.2 19.6 20.3 Bulk Carriers - Number DWT GRT 25 21 22 31 18 1,508 1,550 1,666 2,521 1,261 944 907 930 1,414 719 22 1,617 904 -2.5 0.1 -0.9 Freighters - Number DWT GRT 11 26 31 21 12 146 170 237 155 62 106 111 177 106 41 14 57 37 4.9 -17.1 -19.0 (where intended registry is known) Total Ships a • Number DWT GRT 254 231 186 290 299 18,302 19,138 19,112 34,855 31,387 18,653 263 19,272 11,211 0.7 0.5 NA Tankers - Number DWT GRT 35 73 86 173 179 11,497 11,986 14,217 29,748 25,851 15,822 124 15,279 3,751 7.S 5.8 NA Bulk Carriers - Number DWT GRT 92 75 53 69 64 6,711 6,504 4,532 4,330 4,227 2,629 59 3,529 2,135 -8.5 -12.1 NA Freighters - i. umber DWT GRT 77 78 47 48 56 594 613 363 277 309 203 460 313 0.5 -5.0 NA Exhibit IV- 13 Fleet Operations (continued) Country : Norway 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate Share of National Trade (perce it)- 9 Imports I V NA NA NA NA 37 NA Exports J NA NA NA NA 39 NA (millions of dollars) d Revenues 2,178 2,416 2,411 2,761 3,110 NA 9.3 Profits 1,079 9 NA Outstanding Debt f p oym Nationals 36,346 34,533 34,478 33,294 32,339 30,758 -3.3 Total 46,173 44,459 43,972 41,462 39,738 36,164 -4.8 Includes Combination Passenger/Cargo Vessels not shown separately. b Source: Merchant Fleets of the World , Maritime Administration, U.S. Dept. of Commerce, semi-annual. Excludes time freights from Norwegians, which were $177 million in 1974. e Working profits from operations, before depreciation and overhead accounts. f Source: Maritime Transport , Organization for Economic Cooperation ana Development, annual. ^Source: Central Bureau of Statistics, Oslo, (preliminary). IV-31 As discussed previously, the Norwegian fleet has pro- vided significant contributions to the Norwegian balance of payments. In Exhibit IV-5, it was esti- mated that the Norwegian shipping industry has con- tributed approximately $1.75 billion per year to the Norwegian current account between 1970 and 1975. These figures include the net costs of ship purchases and sales. The Norwegian maritime aids to the fleet succeeded in supporting the development of a large modern and competitive fleet of new tankers capable of competing in cross-trade oil transport, and the modernization of other sectors of the fleet. The aids employed were designed to provide reserves for the cyclicality of the shipping industry but proved to be unable to permit owners to absorb the major down-turn in tanker demand that following the 1973 oil embargo. The cre- ation of the Norwegian Guarantee Institute was a unique and thus far effective government measure to ease the financial strain of Norway's tanker owners. 3 . Recent and Prospective Programs The Norwegian government has recently begun several initiatives affecting the national fleet operators. These are: • The creation of the Guarantee Institite, which was previously mentioned 3 in order to ease liquidity problems of selected segments of the industry; • Relaxation of Norwegian registration re- quirements; • Specific government ownership initiatives to relax financial pressures on shipping companies and to maintain non-shipping enterprises; and • New depreciation allowances as an incentive for placing new construction orders with domestic shipyards. IV-32 The declining market for tanker tonnage has hit the Norwegian shipping industry particularly hard because of the number of large tankers in the fleet. By February 1976, 44 percent of the tanker fleet was laid up, but revenues from other sectors have kept most Norwegian owners from experiencing severe finan- cial difficulties. With little reason to be optimis- tic about a strong recovery for shipping in 1976, how- ever, the owners in mid-1975 sought credit assistance from the government to tide them over the depression in the market without their having to sell parts of their fleets at depressed prices. The Norwegian Guarantee Institute for Ships and Drilling Vessels was established by the government with a 60 per- cent government contribution to the $180 million share capital and a 40 percent contribution from vessel owners, drilling vessel owners, and financial institu- tions. The Institute gives loans and loan guarantees to enable owners to meet carrying costs necessary to maintain possession of ships and drilling rigs presently in their fleets. It also has assisted owners in meeting financial commitments for cancellation fees. The Institute's maximum exposure was initially limited to $382 million but was subsequently raised to $765 mil- lion in June 1976. Commitments by late 1976 had reached $395 million. The Norwegian Shipowners Federation had estimated that the requirement for guarantees by owners of ships and drilling rigs as approximately $1 billion — $580 million for ships, $450 million for drilling rigs — and they had asked the government to raise the ceiling on guaran- tees. The current ceiling is now expected to be suf- ficient to meet the needs of Norway's tanker and drilling rig owners. The needs of the drv bulk fleet have only recently exceeded expectations and the Nor- wegian Guarantee Institute may be tested again in this sector, which is more fragmented in both vessel owner- ship and financial structure. IV-33 The Norwegian government also granted permission in late 1975 for Norwegian owners to register some of their tonnage in foreign countries, including con- venience flag countries, under certain circumstances— e.g., if manning costs are too high on a particular type of vessel, or if it is the best way to accommo- date cargo preference rules of other countries. This change in government policy specifically recognizes it to be in Norway's interest to establish good relations with developing countries in the maritime area. In addition to creating the Guarantee Institute for Ships and Drilling Vessels, the Norwegian government also provided specific assistance to a major shipowner, Hilmar Reksten, who faced serious liquidity problems in 1975. The Norwegian government authorized $38 mil- lion for public acquisition of Reksten's holdings in two non-shipping companies, Hoeyer-Ellef sen , an off- shore platform builder, and Norsk Hydro. Although the Norwegian fleet has absorbed a significant percentage of the Norwegian shipbuilding output over the last five years, there have been no major incentives or directives towards that end. A recent temporary special law now provides an incentive to Norwegian owners to purchase from Norwegian yards. It provides for depreciation up to 25 percent above the cost of the contract on vessels ordered between February 15 and December 31, 1977 for delivery before 1979. The order must be in a government approved yard. In addition, losses generated by the depreciation can be carried forward for 10 years and can also be retro- actively applied to 1976 earnings. These measures are aimed at reducing the prices of Norwegian vessels, bringing them closer to the recent levels of Japanese prices. The recent programs instituted by Norway appear to indicate several major policy shifts and suggest several important impacts on the Norwegian national fleet. IV-34 Although Norwegian owners have operated independently of the government and the national shipbuildng in- dustry in the past, the establishment of the Guaran- tee Institute and incentives for home construction indicate a closer relationship in the future. Also, with continued wage pressure and declining em- ployment for seamen potentially exaggerated by the ex- pansion of Norwegian owners into other flags, the future size of the Norwegian fleet is more likely to be given closer government review. As a small nation heavily engaged in cross-trading, impending unilateral or bilateral cargo preference legislation is a major threat to the current structure of Norway's fleet. Government action in response to world shipping developments to ensure the survival of the interests of the Norwegian fleet and the economy's ties to it may ultimately support "flagging out" vessels, joint ventures and other offshore activity. IV-35 C. AIDS TO THE NORWEGIAN SHIPBUILDING INDUSTRY As discussed earlier, the Norwegian shipbuilding industry is significantly smaller in size than the shipping industry of the country. Nevertheless, in terms of employment, the shipbuilding industry ac- counted for 8.7 percent of 1974 industrial employment in the country and in several regions ranged between 11 and 20 percent of industrial employment. Principal assistance programs to the Norwegian shipbuilding industry are outlined in Exhibit IV-14. The principal aids to the shipbuilding industry have been in the areas of credit assistance and tax al- lowances. These aids have been aimed at allowing the industry to remain competitive in terms of its ability to offer credit to customers, despite the limited capital markets available in Norway. The following section discusses in detail the assist- ance programs in effect between 1970 and 1975. Section C.2. addresses the effectiveness of those aids and Section C.3. addresses recent and prospective programs. 1 . Aid Programs a. Principal Aids to the Nor- wegian Shipbuilding Industry (i) Investment Financing Assistance None (ii ) Credit Assistance Program 1 - Second Mortgage Financing The Norwegian Mortgage Institute grants loans to Nor- wegian yards for 20 percent of vessel costs. Loans are secured by a second mortgage on the vessel and are guaranteed by the state. Recent interest rates were 8 percent, only 0.7 percent above the rates on long- term government bonds for 1975. Considering the risk of second mortgage loans on ships, the rate provides a benefit to Norwegian yards in financing the supplier credits that they offer their customers. These loans can be used to finance vessels sold either to domestic or foreign customers. Exhibit IV-14 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE NORWEGIAN SHIPBUILDING INDUSTRY 1970-1975 i . Investment Financing Assistance i i . Credit Assistance Program 1 - Second Mortgage Financing Program 2 - First Mortgage Guarantees i i i . Tax Allowance Programs Program 3 - Customs Duty Rebates Program 4 - Initial Depreciation Program 5 - Reserve Funds Program 6 - VAT Exemption iv. Direct Subsidies v. Preference Programs vi . Government Ownership vii . Other The total commitments by the Mortgage Institute during the 1970-1975 period are shown in Exhibit IV-15. Although the Mortgage Institute loans covered only 20 percent of the cost of a new vessel, they nonetheless provided a significant benefit to Norwegian yards because the yards' access to domestic financing is limited by the small size of the Norwegian capital market . The yards or owners usually secure financing for 50 percent of a vessel's cost from one of the four "In- stitutes", consortia of Norwegian commercial banks, or from foreign capital markets and use the government supported Mortgage Institute loans to raise the addi- tional 20 percent on the Norwegian capital market, bringing total financing to 70 percent. The combina- tion of the commercial loan and the Mortgage Institute loan usually results in a net cost to the borrower lower than the cost of a commercial loan for 70 per- cent of the vessel's cost. By 1975, the Norwegian shipyards, due to the slump in the international shipping market, were having difficulty raising capital to finance new vessel constructions. The second mortgage financing provided by the Mortgage Institute became a less effective aid for the yards during this period due to the yards' diminished ability to raise first mortgage financing in international credit markets. After April 1975, the Norwegian government began a program of guaran- tees of the first mortgage loans, up to a level of $191 million. This program is described in the following section. In 1976, the Mortgage Institute was authorized to pro- vide second mortgage financing up to a level of 80 percent (from 70 percent) of the contract cost on domestic orders. Since first financing from the four Norwegian commercial banking Institutes, which are the principal sources of domestic ship financing, has been at 50 percent of the market value, the Mortgage IV-38 Exhibit IV-15 OUTSTANDING LOANS AND TERMS OF THE NORWEGIAN MORTGAGE INSTITUTE 1970 1971 1972 1973 1974 1975 Total Outstanding Loans of the Mortgage Institute ($ millions) NA NA 237 254 268 315 Interest rate on Mortgage Institute Loans 7% 7% 7% 7% 8% 8% Repayment Schedule (years) 10 10 10 10 10 8/12 a Domestic vessels. Source: Laneinstituttet for Skipsbjggerienne, Statement of Accounts, 1975, 1973, and interviews. IV-39 Institute now covers both the additional 10 percent of the contract cost and the reduction in market value (below cost) of the vessels ordered. With reduced market values, this second mortgage money would repre- sent a considerably greater percentage of the sales price. Program 2 - First Mortgage Guaran t ees Loans obtained by shipyards in foreign capital markets are guaranteed by the Ministry of Commerce and Shipping. This guarantee program was established by Parliament on April 29, 1975. Limits for loans guaranteed under this program were $191 million in 1975 but recently have been raised to $453 million. Commitments under the program were at $254 million in late 1976. The guarantees have been approved only for special projects, such as an LNG design project. The guaran- tee commitments permit the yards to obtain financing from foreign sources of capital at lower rates than would otherwise be available to them. (Hi) Tax Allowance Programs In addition to the relatively minor financing assistance, the Norwegian shipbuilding industry also has available a range of tax programs. These aids also are not particularly extensive. Included among the tax al- lowance programs are: • Customs Duty Rebates • Initial Depreciation • Tax Free Reserves • VAT Exemptions The by-laws of the Mortgage Institute allowed loans up to 30 percent of the construction cost. IV-40 Program 3 - Customs Duty Rebates Customs rebates are given to yards for 6 percent on the sale price of new vessels and 4 percent on the cost of vessel repairs. These rebates are viewed by some of Norway's competitors as construction sub- sidies since many of the materials imported by ship- builders have no customs duty assessed on them. Based on the value of deliveries from Norwegian yards and an estimated 5.5 percent, the rebates have yielded the shipbuilding industry between $27 and $47 million per year over the study period. Program 4 - Initial Depreciation Initial depreciation on shipyard facilities is avail- able on terms similar to the initial depreciation for shipowners described earlier. The accelerated depre- ciation is in addition to normal straight line de- preciation and may be taken under either two options: 1. 1-1/2 times normal straight line rate until a cumulative 15 percent over straight line is reached, or 2. Up to 25 percent of the cost of invest- ment in shipyard facilities may be taken in amounts not exceeding 50 per- cent of taxable corporate income. In 1974, the Norwegian yards signed an agreement with the government covering expansion of the industry in the years 1975-1977. The shipyards agreed not to ex- pand their shipbuilding capacity, without first ob- taining permission from the Ministry of Industry. In return, the government agreed to review the problems that the yards were having in obtaining sufficient long-term credits to finance any expanded levels of ship production. IV-41 Program 5 - Tax Free Reserve Funds Norwegian yards may establish reserve funds that per- mit them to defer or eliminate tax liability on profits earned in good years. These reserves are similar to those applicable to shipowners described earlier. These have not been used extensively by Norwegian shipyards. Program 6 - Exemption from Value Added Tax Deliveries, repairs and maintenance and vessels are exempt from the 13 percent non-deductible investment tax on new facilities and equipment. Shipbuilders pay the tax on the materials they purchase from sup- pliers but obtain a refund of the tax from the govern- ment. Whether this investment tax relief constitutes a benefit to shipyards is the subject of some contro- versy. Norwegian shipyards are also exempt from Norway's 20 percent Value Added Tax on goods and services. Because most European shipyards are exempt from such taxes, this exemption constitutes an indirect aid common to nearly all shipbuilding industries. (iv) Direct Subsidies None (v) Preference Programs None (vi) Government Ownership None (vii) Other None IV-42 b . Benefits of Norwegian Assistance Programs to the Shipbuilding Industry Exhibit IV-16 summarizes the benefits of Norwegian programs for the shipbuilding industry. As can be observed, the assistance provided this industry has been relatively minimal, ranging from about ^32 mil- lion to $56 million, primarily based on the rebate of customs duties on vessels produced and repaired. In 1975, the initial effects of new financing assis- tance programs raised the level of assistance. How- ever, most of the effects of recently instituted pro- grams will occur after 1975 and will be discussed in greater detail in Section III.C.3. 2 . Effectiveness of Aids to the Norwegian Shipbuilding Industry Norwegian shipyards delivered between 2.8 percent and 3.7 percent of the world shipbuilding industry's gross tonnage output in each year from 1970 to 1975. This share showed almost no change from the previous five- year period when it ranged from 2.9 percent to 3.8 percent. Exhibit IV-17 presents Norwegian ship- building activity over the study period. The Norwegian yards' deliveries to Norwegian-flag operators have represented about two-thirds of their total deliveries in terms of tonnage in the past six years although this represented only about one-fourth of the new tonnage acquired by the Norwegian-flag fleet. Deliveries from Norwegian yards surpassed one million GRT for the first time in 1973 and have averaged approximately one million GRT since then. This repre- sents a rise of 33 percent from the 0.76 million per year average for 1970-1972. Tankers represented an increasing portion of Norwegian shipbuilding activity in the 1970s, rising from 60 percent of gross tonnage delivered in 1970-1972 to IV-43 < CD — >— < 2T U") LiJ q cn 3 —I r-H ct 1— < 1 LO r-«. 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D_ C/0 Exhibit IV- 17 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY SHIPBUILDING Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Country: Norway 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate veries Total Ships b - Number DWT GRT 33 1,152 642 54 1,474 845 58 1,401 791 41 1,898 1,091 44 1,568 916 42 1,775 1,034 4.9 9.0 10.0 Tankers - Number DWT GRT 15 873 452 14 825 438 15 470 19 1,457 823 27 1,264 727 24 1,464 841 9.9 10.9 13.2 Bulk Carriers - Number DWT GRT 8 197 125 13 493 294 14 387 231 9 376 222 5 234 140 6 244 139 -5.6 4.4 2.1 Freighters - Number DWT GRT 10 82 65 27 156 113 29 130 90 13 65 46 13 70 49 12 67 54 3.7 -4.0 -3.6 A p,,»-,-„^ Vn.^ Total Ships b - Number DWT GRT 58 2,150 8 48 72 5,203 39 2,201 46 (949) -5.6 a NA NA Tankers - Number DWT GRT 42 1,772 5 37 46 4,618 25 2,019 5 (1,139) -41. 3 3 NA Bulk Carriers - Number DWT GRT 4 276 1 2 9 482 3 121 2 (95) -15. 9 a NA Freighters - Number DWT GRT 12 102 ns Dur 2 9 e 17 103 12 61 39 285 34.3 d 29.3a Total Ships b - Number DWT GRT 3 55 2 12 5 1,686 7 2,416 23 " 6 a 159. 4 a Tankers - Number DWT GRT 1 50 1 2 4 1,680 7 2,416 62. 7 a 163. 7 a Bulk Carriers - Number DWT GRT MA NA Freighters - Number DWT GRT 5 1 10 1 6 NA NA Exhibit IV-17 Shipbuilding (continued) Country: Norway 5-Year Annual 1970 1971 1972 1973 1974 1975 Growth Rate Total Ships - Number DWT GRT 147 148 98 6,344 6,965 5,612 127 8,905 117 7,852 4,875 114 -5.0 2,712 -15.6 1,679 NA Tankers - Number DWT GRT 46 73 63 4,318 5,715 4,368 89 8,027 83 7,102 4,397 57 4.4 2,083 -15.4 1,265 NA Bulk Carriers - Number DWT GRT 37 28 15 1,221 1,004 619 15 725 13 612 389 9 -24.6 273 -25.9 160 NA Freighters - Number DWT GRT 64 47 20 305 246 125 23 153 21 138 90 48 -5-6 356 3.1 254 NA p „ u Revenues NA NA 492.1 597.7 715.2 839. 9 f 19. 5 ^ Profits Outstanding Debt • °y men Employees at Year-End NA NA 30,352 29,966 31,794 33,400 direct g 12-15,000 ancillary 3.2 ' 4-year annual growth rate, 1971-1975. Includes Combination Passenger/Cargo Vessels not shown separately. C Source: ' Jew Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Source: Derived from orders outstanding, deliveries, and cancellations. Approximate due to timing differences in sources. e Source: Fairplay International Shipping Weekly, World Ships on Order , quarterly. Value of production during year. S870.5 million in 1976. S 3-year annual growth rate, 1972-1975. IV-46 75 percent in 1973 and 79 percent in 1974. The tanker tonnage under construction or on order at the end of 1973 represented 90 percent of the total orderbook and this percentage remained constant for the end-1974 orderbook as well. On the world orderbook tankers represented 82 percent of the tonnage in 1973 and 83 percent in 1974. This concentration in building tankers placed Norwegian yards in a vulnerable position when the tanker overcapacity situation occurred. Tanker cancellations in Norwegian yards exceeded 4 million dwt in 1974-1975, a substantial sum compared to the 1.7 million dwt in annual deliveries that Nor- wegian yards averaged in the past three years , 1973 to 1975. These cancellations, combined with the rate of new orders running at only 46 percent of deliveries in 1974 and 25 percent of deliveries in 1975, have reduced the orderbook backlog of Norwegian yards to an average of only 1.5 years of work at 1975 rates of delivery. Akers , the largest shipbuilding group in Norway, was particularly hard hit by cancellations. 3. Recent and Prospective Programs Although Norwegian shipyards' orderbooks were heavily dependent on tanker tonnage when the tanker market declined, the yards had some cushion due to the healthy size of the backlog. Of the 7.9 million dwt on order in Norwegian yards at the end of 1974, 90 percent was tanker tonnage, but the total deadweight tonnage on order represented 5 years of work at the 1974 rate of delivery. Cancellations during 1975 eliminated 1.5 years worth of work from the orderbook. The Aker Group, which had been responsible for over half the tonnage built in Norway during the years before the decline in the tanker market, suffered from massive cancellations of ULCCs in 1974 and 1975. By August 1975, 11 vessels worth about $750 million had been cancelled from Aker * s orderbook. Included in these were four ULCCs, each of 420,000 dwt, cancelled by Hilmar Reksten and four 370,000 dwt vessels cancelled by Biornstad and IV-47 Co. and Hagb , Waage . Akers ' orderbook at July 1975 showed only 14 vessels totaling 128,000 dwt . On April 1, 1977 only one vessel on order in Norway exceeded 100,000 dwt and Akers' orderbook consisted of seven vessels totalling 87,000 dwt. With government policy taking a go-slow approach toward the developing offshore oil industry, the work for drilling platforms and oil industry supply vessels has not provided much employment for the yards to re- place the lost ship construction work. A major shift in Norwegian government policy occurred in early 1975 when it relaxed its tight restrictions on foreign currency flows. This permitted shipowners to establish overseas companies and was also bene- ficial to a number of small Norwegian yards who formed North West Engineering A/S. The intended area of specialization for the NWE group is supply and support vessels for the offshore oil industry, but the group's first major order came from Indonesia for 30 small vessels for its inter-island fleet. The deal partially hinged on the credit terms which in- cluded a $92 million loan to the Indonesian govern- ment by A/S Eksportf inans of Oslo payable over 15 years starting three years after delivery and a Nor- wegian government loan of $13 million to Indonesia for development of the inter-island fleet. Thus, the combination of the Norwegian government's relaxing currency restrictions and participating in the financing package has helped Norwegian yards, at least in this case, to secure foreign orders in a fiercely competitive market. As mentioned in the discussion of aids to the Nor- wegian fleet, the government in 1975 set up the Guaran- tee Institute for Ships and Drilling Vessels, jointly funded by the government, vessel and rig owners, and financial institutions. The $765 million in authorized loans and guarantees for Norwegian owners also provides a large measure of security for Norwegian shipyards because ships for domestic owners account for approxi- mately two-thirds of Norwegian yards' deliveries. In late 1976, the Norwegian government allocated $29.5 million in the 1977 budget to help maintain employment in Norwegian shipyards. The new alloca- tions were divided between various Ministries and state lending institutions and were aimed at enabling fishermen, local authorities and the Norwegian government to spend more next year on new ships and ship repairs. The ships to be built are mainly small ferries and service vessels. Further government ordering may be forthcoming soon for seven coastal surveillance craft worth approxi- mately $200 million and five to nine passenger cargo vessels worth up to $94 million. The government in- tends that all of these vessels should be built in Norway despite the fact that cheaper prices could be obtained abroad. Ultimately, in March 1977, the Norwegian government passed a legislative package of additional assistance to the shipbuilding industry. The shipbuilding package is over and above the special depreciation allowances made available to shipowners for orders in domestic yards. The magnitude of the depreciation allowance is aimed at reducing the price differential between Norwegian yards and Japanese and LDC yards. The principal elements of the recent Norwegian pro- gram for shipbuilding are: • Increased shipyard or edit for domestio owners. Financing assistance to domestic owners in the form of second mortgages on up to 80 percent of the vessel cost. The first priority mortgage would be on about the first 40 percent. The secoyid mortgages would carry fixed interest rates of approximately 8.5 to 9 percent 3 for up to 12 years 3 or for a shorter period with a 2 year grace period. The Second Mortgage Institute previously pro- vided second mortgage financing for ex- ports only. • As noted under Program 2 3 limits on loan guarantees were raised from $191 million to $453 in 1976. IV-49 • The government will guarantee up to $76.5 million (400 million Norwegian kroner) of loans to domestic owners. Previously 3 guarantees were available only on export orders. The guarantees will cover between 15 and 20 percent of the total cost and thus will cover between half to two- thirds of the second mortgage money. The guaran- tees are only available for ships ordered during 1977 for delivery before 1979. • Special loans to shipyards aimed at re- structuring employment. A limit of $1.91 million has been placed on each loan. The total funding of this program is $57.4 million in 1977 and an additional $38.25 million after 1977. The loans are interest free for five years and carry 7 percent for the subsequent three years, due to their structure 3 the loans will not be useful for subsidizing ship orders. • Special funds for retraining of $38.26 million have been made available to cover a percentage of the wages. • A special aid program for exports to de- veloping countries has been established with a maximum of $95.66 million to assist in obtaining approximately $383 million worth of orders. The aids are in line with OECD guidelines concering the financial terms of LDC programs which require at least a 25 percent gift element. The aid typi- cally is taking the form of favorable credit terms 3 such as 90 percent financing over 15 years at 5-6 percent^ with a grace period of three years. The funding for this program has been al- most entirely committed. With the combined package of incentives to the Nor- wegian owners, special aids for restructuring and re- training and favorable export credits, the nature and level of assistance to the shipbuilding industry have been dramatically changed. While in 1975 shipbuilding aid was primarily the $46.2 million of customs rebates and $10 million of second mortgage financing and first mortgage guarantees, the shape of government aid to shipbuilding was radi- cally different by early 1977. By that time the govern- ment had guaranteed up to two-thirds of the yards' orderbooks through the Guarantee Institute and had ordered nearly $300 million of vessels. Shipyard credit programs had been expanded as had guarantees for loans to domestic owners. Retraining funds and the provision of nearly $100 million for maritime- related foreign aid highlighted a radically different program of assistance to Norwegian shipbuilders. V. The Maritime Aids of Sweden Contents PAGE SUMMARY v-l 1. Background V-l 2. Conclusions V-5 AIDS TO THE SWEDISH NATIONAL FLEET V-7 1. Aid Programs y_7 a. Principal Aids to the Swedish V-10 National Fleet, 1970-1975 (i) Investment Financing Assistance V-10 Program 1 - Swedish Ships V-10 Mortgage Bank V-ll V-13 V-13 V-14 V-16 V-16 V-17 V-17 V-17 V-17 b. Benefits of Swedish Assistance V-17 Programs to the National Fleet 2. Effectiveness of Aids to the Swedish V-20 National Fleet 3. Recent and Prospective Programs V-23 (i) (ii) Credit Assistance (Hi) Tax Allowance Programs Program 2 - Depreciation Allowances Program 3 - Tax Free Reserves Program 4 - Special Investment Credits (iv) Direct Subsidies (v) Preference Programs Program 5 - Cabotage Protection (vi) Government Ownership (vii) Other PAGE AIDS TO THE SWEDISH SHIPBUILDING INDUSTRY V -26 1. Aid Programs V-26 a. Principal Aids to the Swedish V-26 Shipbuilding Industry, 1970-1975 (i) Investment Financing Assistance V-26 (ii) Credit Assistance V-28 Program 1 - Export Financing V-28 Program 2 - Government Guaran- V-31 tees of Loans Program 3 - Swedish Ships V-34 Mortgage Bank (Hi) Tax Allowance Programs V-37 Program 4 - Inventory Write-offs V-37 Program 5 - Rapid Depreciation V-37 Program 6 - Investment Credit V-38 Program 7 - VAT Exemption V-39 (iv) Direct Subsidies V-39 (v) Preference Programs V-39 (vi) Government Ownership V-39 Program 8 - Government V-39 Ownership (vii) Other V-41 b. Benefits of Swedish Assistance V-41 Programs to the Shipbuilding Industry 2. Effectiveness of Aids to the Swedish V-41 Shipbuilding Industry 3. Recent and Prospective Programs V-48 (ii) Sweden List of Exhibits exhibit title page V-l Summary of National Flag Fleet and Ship- V-2 building Activity - 1970-1975 V-2 Share of World Fleet and Average Age - V-3 1966-1975 V-3 Comparison of Fleet Growth - Sweden and V-4 World - 1970-1975 V-4 Summary of Daily Costs for Various Types of V-8 Vessels Under Selected Flags - 1974-1976 V-5 Outline of Principal Assistance Programs to V-9 the Swedish National Fleet - 1970-1975 V-6 Loans of the Swedish Ship Mortgage Bank and V- 12 Bank for the Granting of Loans Secured by Second Mortgages V-7 Value of Vessel Additions and Deletions of V-15 the Swedish Fleet - 1970-1975 V-8 Index of Wage Costs V-18 V-9 Benefits of Assistance Programs - 1970-1975 V-19 V-10 Measures of Maritime Activity - Fleet Operations V-21 V- 11 Outline of Principal Assistance Programs to the V-27 Swedish Shipbuilding Industry - 1970-1975 V-12 Financing of Export Credits for Ships by Swedish V-30 Export Credit Association - 1970-1975 V-13 Swedish Goverment Guarantees on Second Mortgage V-32 Institute Loans for Ships Built in Swedish Yards V-14 Percentage of Guaranteed Loans by Currency of V-35 Loan - 1972-1975 V-15 Benefit of Swedish Assistance Programs to the V-42 Shipbuilding Industry - 1970-1975 V-16 Percentage of World Orders Placed in Principal V-44 Shipbuilding Countries - 1969-1975 V-17 Value of Deliveries - Newbuilding and Ship V-45 Repairs from Swedish Yards - 1970-1975 V-18 Measures of Maritime Activity - Shipbuilding V-46 SWEDEN'S MARITIME AIDS A. SUMMARY 1 . Background The Swedish shipbuilding industry has ranked second in output of the shipbuilding countries of the world during the period 1970 through 1975. The industry's production has over that period ranged between three and ten times the total deliveries to the Swedish national fleet. While only 10 to 30 percent of the shipbuilding output has been delivered to the Swedish national fleet, that volume represented about 70 per- cent of the vessels delivered to Swedish operators in all years but 1974. (Exhibit V-l) The deadweight of the Swedish national fleet has represented between 2.1 and 2.6 percent of the world fleet over the study period, despite the rapid growth of the world fleet. Steady additions to the Swedish national fleet have resulted in continued moderniza- tion of all segments of the fleet, with reduction in the average ages of all vessel types through 1974. On average the national fleet has remained considerably more modern than the world fleet in total. (Exhibit V-2) The national fleet figures reflect the principal ob- jective of Sweden's aid programs for the national fleet , which is to encourage owners to acquire modern high productivity vessels in order to offset high wage costs and allow Swedish operators to remain competitive in the cross trades which provide the main source of earnings for the industry. Exhibit V-3 shows the rapid expansion of the Swedish tanker and bulk carrier fleet as well as the replace- ment of one-fourth of Sweden's freighter fleet with modern tonnage during the study period. SUMMARY OF NATIONAL FLAG FLEET AND SHIPBUILDING ACTIVITY 1970-1975 1970 1971 1972 1973 1974 1975 T t i n«Hw ey- ies - Swedish 38 Sh pya rds 39 Vessels 38 37 37 33 DWT (000) 3,401 3,317 3,695 4,353 4,236 4,320 GRT (000) 1,759 1,736 1,957 2,293 2,256 2,213 Oeliv eries fc r Swedish Registry from Swedi sh Shipya rds Vessels 8 10 10 13 8 5 DWT (000) 329 747 945 1,287 882 1,225 GRT (000) 177 391 511 680 453 617 Del iveries for Swedish Registry from Wor Id Shipyards Vessels 16 19 28 28 20 11 DWT (000) 454 1,084 1,264 1,585 2,401 1,667 GRT (000) 272 604 722 876 1,337 874 Swedish Owners Share of Swedish Shipyard Deliveries (Pe t) cent; Vessels 21 27 26 33 22 15 DWT (000) 10 23 26 30 21 28 GRT (000) 10 23 26 30 20 28 Swedish Shipyards Share of Deliveries to Swedish Owners (P rcent) Vessels 50 53 36 46 27 45 DWT (000) 72 69 75 81 37 73 GRT (000) 65 65 71 78 34 71 Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce, annual. Exhibit V-2 SWEDISH FLEET SHARE OF WORLD FLEET AND AVERAGE AGE 1966-1975 1966 1968 1970 1972 1974 1975 Regis terec Percent of Under Swedi World Fleet Total Fleet 1 Tankers Bulk Carriers Freighters 2.4 2.3 4.0 2.0 2.1 2.0 3.6 1.9 1.3 1.9 2.5 1.7 1.6 1.7 2.2 1.5 1.5 1.4 2.: 1.3 1.4 1.5 2.1 1.2 -Deadweight Tonnage Regi Percent of stered Under World Fleet Swedish Flag Total Fleet 1 Tankers Bulk Carriers Freighters 2.6 2.5 4.8 2.0 2.5 2.2 4.3 2.0 2.1 1.9 3.1 1.8 2.1 2.0 2.8 1.6 2.2 1.9 3.5 1.4 2.3 2.2 3.2 1.4 Sweden Fleet - Average Age of (Years) V 1 Total Fleet Tankers Bulk Carriers Freighters 11 7 9 13 9 6 7 10 9 6 11 8 6 7 9 8 6 6 9 8 6 10 World Fleet - Averaae (Year; Age of ) , Total Fleet 1 Tankers Bulk Carriers Freighters 17 11 11 16 13 11 9 15 13 11 3 13 12 11 3 13 12 11 9 13 12 11 9 13 Includes Combination Passenger/Cargo not shown separately. Source: Merchant Fleets of the World , Maritime Administration, U.S. Department of Commerce, semi-annual. Exhibit V-3 COMPARISON OF FLEET GROWTH - SWEDEN AND WORLD 1970-1975 (deadweight tons in millions) GROWTH I M REGISTERED FLEET 1 —World- --Sweden- Deadweight 1970 Tons 1975 Percent Change Deadwei 1970 q_ht Tons 1975 Percent Change Total Fleet 6.9 11.2 62 327.0 556.6 70.2 Tankers 2.9 4.9 69 153.1 302.2 97.4 Bulk Carriers 2.4 4.8 100 77.2 150.1 94.5 Freighters 1.6 1.4 (12) 92.4 101.2 9.6 I [ 1971-1975 c , World- Deadweight Tons Del i vered to Fleet Percent of 1970 Fleet DWT Deadweight Tons Percent of Delivered to Fleet 1970 Fleet DWT Total Fleet 8.0 116 254.8 78 Tankers 4.6 159 157.1 103 Bulk Carriers 3.0 125 73.5 95 Freighters - 4 25 24.0 26 J SHARE OF NEWBUILDING DELIVERIES USED FOR ! ■ NET FLEET GROWTH AND FOR VESSEL REPLACEMENT j for acement Sweden World Percent for Percent for Percent for Percent Net Fleet Growth Vessel Replacement Net Fleet Growth Vessel ReD T otal Fleet 54.1 45.9 * 90 10 T ankers 44.2 55.8 95 5 Bulk Carriers 83.2 16.8 99 1 c reighters 0.0* 100.0* 37 63 *A1 1 new deliveries were used to replace vessels deleted from the 1970 fleet. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. 2 . Conclusions The assistance programs to the shipbuilding industry have been almost exclusively in the area of credit assistance . The benefits of the assistance programs has been esti- mated at a relatively modest level, ranging between $10 and $50 million per year. However, through the mechanisms of state guarantees of second mortgage financing over $1.5 billion worth of credit has been provided to assist in the financing of virtually all exports by the industry, while direct export financing of about 25 percent of the value of exports has been provided through the Swedish Export Credit Association. The guarantees allowed shipyards to obtain financing for supplier credits in other countries. Currency realignments significantly increased the cost of that financing, ultimately placing the Swedish yards in severe financial difficulty. Most of the growth in the output of the shipbuilding sector was in tanker tonnage. With significantly re- duced demand for tankers and cancellations, the finan- cial pressures on the industry reached critical levels. Sweden has, as a result, been forced to institute the most extensive assistance programs for its shipbuilding industry of any of the countries studied. The recent government programs have involved the ex- pansion of the guarantee program to a level of $5.6- billion, of which almost half will support speculative constructions. The amount of direct aid provided by the Swedish government in conjunction with the national- ization of all but one major shipyard has cost $229 million and potentially an additional $1.2 billion may be ultimately required. The assistance to the shipowners, primarily in the form of indirect tax allowances, has resulted in sub- stantially higher levels of benefit to that industry. V-6 The assistance programs are similar to Norway's. However, due to the more diversified structure of the much smaller Swedish shipping industry, no special programs similar to the Norwegian Guarantee Institute to redress liquidity problems have been required. Incentives for Swedish owners to construct new vessels in Swedish yards have been developed, but due to the relative sizes of the fleet and the shipbuilding industry, the potential impact on shipbuilding from these incentives is less than the impact of similar incentives in Norway. As in Norway, the high costs of wages have forced Swedish owners to seek relief through offshore owner- ship, although chartered tonnage represents a larger percentage of Swedish shipowner receipts than for the larger Norwegian fleet. While recent court rulings have eased restrictions on the sale of Swedish vessels to escape high operating costs, the replacement of existing general cargo tonnage by highly efficient specialized vessels is a longer term solution to Sweden's competitive stance. In the meantime, a large segment of the national fleet has been sold with restrictions on the availability of charterback agreements . B. AIDS TO THE SWEDISH NATIONAL FLEET 1 . Aid Programs The principal goal of Sweden's aid programs for the national flag fleet has been to encourage owners to acquire modern high-productivity vessels. Sweden's wage costs are among the highest in the world, and high-productivity vessels are viewed as necessary if Sweden is to compete effectively in world trade. Of total gross freight receipts of the Swedish fleet, which were $1,336! million in 1974, approximately 58 percent were derived from cross trading. An addi- tional $457 million in revenues was earned by Swedish operators from chartered foreign vessels. Thus, with high wage Swedish seamen manning the ves- sels, it is important that the vessels be highly pro- ductive in order to compete effectively with lower- wage operators for cargos in the cross trades. In the home trades, means of aiding Swedish operators other than encouraging the acquisition of high pro- ductivity vessels might be possible, but the home trades provide a small enough portion of the fleet's total employment that aids designed to meet conditions in the cross trades are necessarily the most important. A comparison of the daily costs for three types of vessels under Swedish registry and under four other registries illustrates the magnitude of the wage dis- advantage faced by Swedish owners in international shipping. (Exhibit V-4) The principal Swedish aid programs for the national flag fleet in effect between 1970 and 1975 are listed in Exhibit V-5. The remainder of this section dis- cusses these programs in detail. Section B.2. ad- dresses the effectiveness of the aid programs and Section B.3. discusses recent and prospective programs. Dollar figures in this chapter have been converted at the 1975 exchange rate of 4.1522 Swedish kroner to the dollar. o o o o o o o o o o o o o o o o c oooooo ooooo r> < O _J ooooo oooooo ooooo D O O O O uS ^ =3 LU C£ \— o q: C > O h- r-~ Q. CC x o LU D_ <_> LU LO r - -. «* CTi CO o CNJ i-^. CTi «3" co ro CO LO CO CnJ co LO LO ^3" CO CM CTi *t LO o ho I s *. >sfr CxJ CnJ LO *3" o r*- r^ CO CO LO *J" CM LO CO CO r*. CM LO LO CM LO ,_« CTi LO CO cn CO co ro CO CD CnJ CO "St CnJ ro r-~- o o CnJ co CM CnJ co co O ^H LO CTl LO LO co o ro r*». LO «* CnJ LO CO 1-1 CM CnJ +j o> 13 -— > o lOr-^ ex 03 00 CO > c LU to en «3 CO a> en o c co _c c en o cn+J -f- c "O c -a en QJ •r- M- ^~ u c 3 5- O O -r- c =3 C 13 03 -o 03 -Q 03 rO +-> -O c c > s D. CCS 03 O) CD 03 •r- CU ^ ^: cc O 3 4-> +-> I— 2 (UM- CD =J O d) o_ o ^: o H ~ ^z en en c i-H c « -o -t-> O) CD 5- +J ■— c =3 ai ■M E •i- at -a +-> CD %. S- ro S- -r- ra s- > +-> 4-> C ai -a CO CD c c ro CD C <+_ r- C!_ CO -L- O <: CD co co cn c > >> CU u As a result , the Association loans have increased significantly between 1972 and 1975, but as shown in Exhibit V-12 have represented a small proportion of the value of shipyard output. In the following section, increases in the second mortgage guarantee program were employed to make up for the declining availability of first mortgage money. Conservatively estimating a 2 percent interest bene- fit on the outstanding Swedish Export Credit Associ- ation loans, the benefits of this program ranged from $3.3 million to $6.6 million per year over the study period. Program 2 - Second Mortgage Institute Government guarantees are provided for loans to ship- yards and are the principal aid to Swedish shipyards. These guarantees, administered by the Second Mortgage Institute, permit the shipyards to secure financing in domestic and overseas capital markets at favorable rates of interest. The loans are secured by second mortgages on the ships delivered and cover 25-30 per- cent of the contract price. Since the size of Sweden' capital markets is not sufficient to support the bor- rowing needs of Swedish shipyards and shipowners, the government guarantees are important to the yards in that they give the yards access to the larger foreign capital markets for loans which might be difficult or very expense to obtain without the government's backing . Exhibit V-13 summarizes the amounts of guarantees authorized and extended as of June 30 for the years 1970 to 1975. Also shown are the yearly increases in the authorized levels of guarantees. Over the five year period between 1970 and 1975, the amount of guaranteed financing increased by $903 million, ap- proximately 26 percent of the total value of new vessels delivered from Swedish yards. That Second Mortgage Institute's guarantees were widely utilized CD Q - o n= o f— co i— i UJ ZD LU CQ •i- CC i— I -e < :n a: < uj o > —i >» >. -O -Q CD •o -o -i c co — ' E LO CD COCTi E C -n 4-> CD 0) <^ c 3 CD +J H cu s- en CD -r- l/l +J E E fO CD E <4- u_ 5 a; 1/1 10 CD E > >> CD s- -»-> 4-> CD V-33 can be determined from the 26 percent of the value of all 1970-1975 Swedish construction that was guaranteed. Allowing for some guaranteed vessels that were not delivered and deliveries to Swedish owners, nearly all Swedish export ship orders would appear to have utilized the state guarantee program. Government guaranteed loans to Swedish shipyards saved the most credit-worthy ship purchases at Swedish shipyards a minimum of about 25 basis points from market rates during the period. Since 1974, financing of sales to less credit-worthy purchasers would probably have been difficult at any market rate with- out the guarantees from the Swedish government. Be- cause of the small domestic capital markets in Sweden, Swedish shipyards financed much of their sales abroad and suffered from the appreciation of both the Swiss franc and the DM against the dollar and the Swedish kroner. From 1971 through 1976 the Swedish kroner appreciated 23 percent against the dollar, while the DM rose 52 percent and the Swiss franc rose over 60 percent during the period. Purchasers from Swedish yards place their loans in money markets throughout Europe and the evaluation of the government guarantee program can consider only the differential that it provides and not the actual levels of rates which vary depending on the market in which the borrowing occurs. Interest rates on second mortgages would likely be quite high or potentially not available without the state guarantee. At a minimum it may be estimated that the program saved the yards on average approxi- mately 2 percent in interest rates. Based on the out- standing guarantees, the benefit to the shipyards can be estimated to have increased from $6.7 million in 1970 to $24.8 million in 1975. V-34 A differential of 2 percent over the 5 year median length of the guaranteed loans is equivalent to ap- proximately 5-6 percent on the value of the financing. This would have been quite advantageous were it not for the effects of currency revaluations of 18 per- cent over the period. Exhibit V-14 summarizes the currencies in which the guaranteed loans were obtained by the shipyards. As Exhibit V-14 shows, less than 25 percent came from Swedish currency sources. The largest source of loans were Swiss francs, which accounted for about 45 percent of the loans between 1973 and 1975. The Swiss franc, in particular, increased approximately 34 percent relative to the Swedish crown between 1972 and 1975. As a result, far more than the benefit of the financing assistance was lost due to the require- ment to repay the expensive loans. This has created serious financial difficulties for the Swedish ship- building industry. As noted above, however, the guarantee program has been utilized for virtually all exports and has been the principal vehicle employed by the Swedish govern- ment to support the shipbuilding industry. The pro- gram has recently been greatly expanded in order to supplement the limited first mortgage financing and to provide major support for the Swedish shipbuilding industry over the next few years. This is discussed in greater detail in Section V.C.3. Program 3 - Swedish Ships Mortgage Bank Construction of Swedish-flag vessels is financed through the Swedish Ship Mortgage Bank. This source has been important in financing small and medium sized ships for Swedish owners. The first mortgage loans are at government bond rates plus 0.5 percent, are payable over periods up to 15 years, and cover up to 50 percent of the ship's cost. A more complete discussion of Swedish Ship Mortgage Bank loans is pro- vided in Section V.B.I, of this report on aids to the Swedish-flag fleet. V-35 Exhibit V-14 PERCENTAGE OF GUARANTEED LOANS BY CURRENCY OF LOAN 1972-1975 Currency 1972 1973 1974 1975 (%) (%) {%) [%) Swedish Kr 20 21 27 24 U.S. Dollar 34 25 21 27 Swiss franc 38 46 45 44 Deutch Mark 7 7 6 5 Belgium franc 1 1 1 1 Total in Dollars $658 $749 $869 $1 ,110 (millions) Source: Fartygsfinansiering, Betankande av Varvskreditutredningen, Statens Offentliga Utredningar, 1975:101, Industridepartementet, Stockholm 1975. Swedish companies generally rely heavily on internally generated funds for primary capital needs. Internally generated funds in Swedish companies generally provide close to 90 percent of financing requirements as com- pared with about 60 percent in the U.S. and 20-30 per- cent in Japan. This high ratio of equity to debt financing results in large Swedish companies being financially sound and generally good credit risks and therefore would benefit only from government financing programs with competitive interest charges. Ship owning companies, while generally having a substantial percentage of equity in the financing of the overall firm due to the amortization of older vessels, gen- erally finance about 70 percent of the cost of a new vessel in the capital markets. The vessel is the sole collateral for these loans making them riskier than bonds of other corporations of the same size and structure. As a result, the Ship Mortgage Bank pro- vides financing which would not be available at all during periods of tight capital markets and which would be relatively expensive at all times. Other important sources of financing in Sweden include the three large domestic banks: the Svenska Handels- bank , Gotebank, and the Skandinaviska Enskildabanken-- which control 70 percent of Swedish banking; the National Pension Insurance Fund, which is a government operated pension plan for nearly all Swedish workers; and investment consortia, which generally include foreign partners who want to invest in Sweden. There are several of the latter consortia devoted primarily to ship financing whose foreign investors seek ad^- vantages of ship ownership and rely on their Swedish partners for knowledge of shipping. The Swedish government tightly controls the structure of interest rates in the private markets through a fixed structure of rates pegged to the central bank (Riksbank) discount rate. The private lending rate is set 300-325 basis points above the discount rate to provide banks with an average spread of 3.8 percent on private loans. This spread is low by European standards and leads to a creative mixture of traditional private lending and lending in the unpegged call money market during periods of tight money. The Swedish Ships Mortgage Bank and other programs enable shipowners to minimize the effects of vacilla- tions in the overall domestic capital markets. During the period of 1970 to 1975 the long-term government bond yield, to which Ship Mortgage Bank loans are pegged, varied between 7.23 and 8.79 percent on yearly averages, while the private lending rate varied from 8.00 to 10.25 percent and the prime lending rate in Germany, an important external source of Swedish ship financing, varied from 6.99 to 12.59 percent on yearly averages, or three times as widely as Swedish Ships Mortgage Bank loans. (Hi) Tax Allowances Program 4 - Inventory Writeoffs In order to prevent Swedish companies from having to report profits due to inflation in the value of in- ventories that they hold, Swedish tax law permits the company, after writing off obsolete inventories com- pletely, to write down the balance of its inventory to a floor of 40 percent of its value on a cost or market value basis. Cost is determined on a first- in-first-out basis. Normally, this would not apply to ships under con- struction. However, in situations in which the con- tract is cancelled for a vessel in progress or for the construction of a vessel by the shipyard on specula- tion, the importance of this tax code may increase. Program 5 - Rapid Depreciation The rapid depreciation and reserve fund provisions described under aids to the shipping industry are also available to the shipbuilding industry. These, however, are not estimated to have provided signifi- cant benefit to the shipbuilding industry over the study period. Program 6 - Special Investment Credit The investment credit described under aids to the national-flag fleet was also available to shipyards. The investment credit permitted a 20 percent write- off of the cost of capital investments against in- come in 1971 and 1972 and 30 percent for orders placed in the first half of 1973 that would be de- livered by the end of 1974. The Swedish shipyards had capital expenditures of $30 million in 1971, $41 million in 1972, $76 million in 1973, and $146 million in 1974. 3 The value of the investment credit to shipyards may be estimated to have been approxi- mately $3.3 million in 1971, $4.5 million in 1972, $12.5 million in 1973, and $24.1 million in 1974.4 The Swedish shipyard investments in the 1970s were significantly higher than the levels of investment in the previous fifteen years. Between 1955 and 1970, investments at Swedish shipyards ranged between ap- proximately $10 million and $40 million annually. In 1973 through 1975, however, investments were $76 million, $146 million, and $202 million. Thus, the tax credit appears to have stimulated significant new investment as the yards sought to modernize their facilities in order to produce vessels more efficient- ly and to accommodate the requirements for larger vessels such as VLCCs and ULCCs. It is difficult to assess if any of the reported 1975 investments were also affected by the tax credit. Planned investment for 1976 declined to $133 million, with no significant additions expected that that year. Source: Swedish Shipbuilding 1975, Swedish Shipbuilding Association, p. 28. 4 Computed on the basis of a 55 percent tax rate on corporate income for national and municipal income taxes. Assumes all capital investments used the full investment credit available in each of the above years. Program 7 - VAT Exemption The Value Added Tax (VAT) paid by suppliers on items they sell to shipbuilders is returned to the ship- builders by the government . There is no VAT assessed on ships sold to either foreign or domestic buyers. As discussed previously, it is arguable whether the credit of indirect taxes should not be considered an aid to the shipbuilding industry. (iv) Direct Subsidy There are no direct subsidies provided to the Swedish shipbuilding industry. (v) Preferences Preferences have also not been employed in Sweden. Swedish shipowners have operated in a totally free environment vis-a-vis the shipbuilding industry. Recent government programs have continued this posture, providing incentives to Swedish owners as opposed to direct preference measures. (vi) Government Oimership Program 8 - Government Ownership Direct government ownership has been used in Sweden and has ultimately led to government ownership of all major shipyards with the exception of Kockums by mid 1977. • In 196 3 s 50 percent of the Uddevalla yard was acquired. The remaining 50 percent was bought in 1970. The govern- ment share of capital was increased from $9.6 million to $24.1 million in 1971. • In a joint Salen Shipping /Swedish government rescue of the Gotaverken yard in 1971 3 the government provided a 10 year loan of $18.1 million with a four year grace period and V-40 guaranteed another loan of $18.1 million. In 1974 } $6.0 million of the loaned funds were converted to 10 -percent equity paritici- pation 3 with the remainder to be amortized over 10 years. • On July 1 3 197 5 j the government took over 100 percent of the shares of the Eriksberg Shipyards in Bothenburg. The takeover in- volved a nominal sum to the Brostrom group, which was required to pay Eriksberg $55 million before the takeover _, 60 percent of which was financed by a government guaranteed loan. Brostrom also agreed to order two bulk carriers from the yard. In May 1977 the Swedish government commenced parlia- mentary proceedings for the reorganization of Eriks- berg, Uddevallavarvet , Karlskrona, and Gotaverken group shipyards into one state shipbuilding company after several years of study. The study investigated the problems involved in the reorganization and also how much cash will be needed both to get the venture off the ground and to cover the losses already in- curred by the yards involved. The losses incurred by the 51 percent government-owned Gotaverken group in 1975 and the first half of 1976 were approximately $136 million, and the losses forecast for the Eriks- berg yard until its scheduled closing in 1979 are approximately $240 million 5 . The total amount of the government package includes $922 million in direct government subsidies and $2,500 million in state credit guarantees. The decision of the government to close the Eriksberg shipyards after it completes its orderbook in 1979 reflects the government's belief that a reduction in shipbuilding capacity by the major shipbuilding nations is necessary in light of the reduced levels of demand that are expected to exist for the rest of the decade. Eriksberg accounted for 22 percent of the tonnage delivered from Swedish yards in 1975. stablished in 1977 3 and $156.5 million for Gotaverken. V-41 The plan for reducing capacity at Sweden's shipyards recommended to the government by the Shipbuilding Council calls for a reduction in volume of deliveries to approximately 2 million dwt per year by 1978 from the current 4.5 million dwt per year. This would en- tail a reduction in shipbuilding employment of 30 per- cent or about 8,000 workers. The adoption of these targets by the Swedish govern- ment represented the first firm commitment to reduce shipbuilding capacity by any of the major shipbuilding nations . (vii) Other None b. Benefits of Swedish Assistance Programs to the Shipbuilding Industry Exhibit V-15 summarizes the benefits of the assistance programs to Swedish shipbuilders. Excluding the financing assistance to Swedish shipowners, a large part of which financed Swedish built vessels, the aid to the shipbuilding industry has ranged from $10 mil- lion to $50 million over the study period. The largest assistance program has been the Second Mortgage Institute, which quadrupled over the period. The special investment credit potentially provided a significant benefit during 1973 and 1974. However, as discussed above and in greater detail in Section C.3., past assistance levels are vastly outweighed by current programs. 2. Effectiveness of Aids to the Swedish Shipbuilding Industry The principal government programs in existence over the past five years have supported one of the most modern, efficient shipbuilding industries in the world, V-42 o >- a- l— 1—1 Q_ Q 1—1 •=d- cr> ro ld u 1 — •— 1 s- CM " L - 00 c- in O >.o ,__ 4-> -a 5- h c (- F TT F F m ! ) (tj "U !_L s- V. 0) O 0) S- X CT ai m 5 m m a O - CD - CD t/) - cd CD O U. •r- i— +J (Hi) Tax Allowance Programs Program 2 - Special Depreciation A special depreciation allowance may be taken by German owners on new constructions or purchases of vessels (new vessels only). The special depreciation may be used in the first five years of the vessel's life including the year of construction or purchase, and the cumulative amount of special depreciation was originally up to 30 percent of acquisition cost. This special depreciation is in addition to regular depreciation and may only be used if the ship is being depreciated under the straight line method. After five years, the remaining value of the ship is depreciated in a straight line over the vessel's re- maining useful life. Vessels that use this special depreciation may not be sold within eight years of construction or purchase. The special depreciation percentage was raised from 30 percent of the vessel's cost for 1971-1974 to 40 percent for vessels constructed or purchased from 1975 to 1978 and can now be taken in the first year and the remaining value must then be depreciated over the useful life of the vessel. The special depreciation on ships ordered from 1971 onward cannot generate a loss for the owner unless the owner has provided a minimum of 30 percent of the equity for a vessel. In that case, losses up to 15 percent of the value of a vessel are permitted with the use of special depreciation. Exhibit VI-5 illustrates the effect of the special depreciation allowance against ordinary straight line depreciation and against the maximum declining balance alternative . T3 ■(-> — 2 the first year, giving the investor a further advance- ment in the timing of the depreciation shield available from this provision of the law, and providing cash flow for the down payment. The depreciation shelter has been available to indi- vidual investors in Germany. The individuals can re- ceive substantial tax savings in this manner, and the vessels are chartered to German ship operators, who would receive a portion of the benefit. This provides a source of additional capital for West German ship operators. The construction grants are not made avail- able to such ship owners, however, being generally restricted to German ship operators. The after tax value of the accelerated depreciation is approximately equal to 4.4 percent of the value of the investment compared to straight line at an 8 per- cent cost of capital and a 50 percent tax rate. In the three years between 1973 and 1975 the value of deliveries from German shipyards to the national fleet were $578, $827, and $532 million, respectively. Averaging the total value of deliveries to the fleet by year, an annual value of deliveries of $727.8 mil- lion can be estimated. At 4.4 percent, the potential tax benefit of the accelerated depreciation is estimated at $32.0 million. This calculation does not adjust this benefit for the deduction in the depreci- ation base that results from capital gains on the sale of ships. This program is treated in the following section. A 50 percent tax rate has been assumed, this rate approximating actual German corporate taxation. Because the lower tax rate on foreign earnings reduces the effective tax rate and the value of any tax shield simultaneously, this calculation does reflect the effects of this lower tax rate as well. VI-12 The effect of the increased special depreciation to 40 percent, all taken in the first year beginning in 1975, would increase the current value of the accel- erated depreciation shield by 36 percent. The ability to take a portion of the depreciation prior to deliveries further increases the value of the program. Program 3 - Tax Deferral on Gains from Ship Sales Capital gains from the sale of vessels may be deposited in a special fund that permits the taxpayer to defer the tax liability on the gain for two years. If the amounts in the fund are used toward a new construction or major reconstruction with the two years, the tax liability is eliminated but the basis value of the new asset must be reduced by the amount used from the special fund. The government thus recoups the tax over the life of the vessel due to the reduction in the depreciation shield available to the owner. The timing difference in the payment of the taxes, however, pro- vides a substantial benefit to the owner. If the new vessel being purchased is under construction at the end of the two year period mentioned above, the tax-deferred period is extended to four years. The use of these capital gains reserve funds is limited to vessels that were owned by shipping companies for six years prior to their sale. Program 4 - Tax Rate on Foreign Earnings The corporate tax rate on revenues earned abroad was three-fourths2 the normal tax rate of 50 percent through 1973 and 60^ percent of the normal tax rate beginning in 1974. 2 Based on 50 percent of earnings at 1/2 the normal rate. - J on 80 percent of earnings at 1/2 the normal rate. (iv) Direct Subsidies Program 5 - Construction Subsidy Construction subsidy may be paid to German owners ordering ships either in German or foreign shipyards. The subsidy covered 10 percent of the cost of the vessel from 1965 to 1974, 12.5 percent in 1975, and for the first time in 1976 could be combined with other aid programs (e.g., interest subsidies), to cover up to 17 percent of the cost of the vessel. The total amount covered would be a function of the interest subsidy level, which currently varies with prevailing interest rates. A recapture provision re- quires that the subsidy must be repaid to the govern- ment in full if the ship is sold within six years of being subsidized. The recapture amount declines 20 percent each year thereafter and is payable at the closing of the ship sale. These subsidies are available only up to the maximum amount allocated by the government each year. The total amount of construction subsidy available has been fixed under the authorization for each ship- building program. Exhibit VI-6 summarizes the sub- sidies authorized for German owners under the con- struction subsidy program over the period 1971-1977. Recent interest rates have essentially negated the effects of interest subsidy. The government raised the construction grant level to 17.5 percent and in- creased the budgeted 1977 level for construction subsidies from $73.1 million to $89.4 million. Program 6 - Special Tanker Construction Subsidy A special construction subsidy program of up to 15 percent of a vessel's cost was initiated in 1974 for German owners ordering VLCCs as part of the pre- viously described program. The program provided for repayment of the subsidy to the government if the ship is sold within 12 years. This program was directed toward improving the German flag share of Germany's petroleum imports. Initially the program was to be limited to domestic corporations, but in part was utilized by subsidiaries of overseas companies. Exhibit VI-6 CONSTRUCTION SUBSIDY APPROVALS BY YEARS 1971-1977 Year Amount Number of Ships GRT a millions) (thousands) 1971 22.0 28 300 1972 40.2 22 800 1973 40.2 37 583 1974 48.8 43 409 1975 48.3 28 228 1976 69.1 67 285 1977 89.4 NA NA NOTE: Excludes VLCC construction subsidy program funding, (see Program 6) Source: Interviews VI-15 For 1973, 1974 and 1975 the budgeted VLCC construction subsidies were $61.0 million per year. However, the 1975 budgeted volumes were only minimally utilized due to low demand for tankers. The program was can- celled in 1976. (v) Preferences Program 7 - Cabotage Restrictions Cabotage trade is restricted to German flag vessels. Foreign-flag vessels are permitted if German flag vessels are not available or if the rates for German flag vessels are substantially higher than those for the available foreign-flag vessels. Program 8 - Cargo Pooling The German government's approval is required for cargo pooling or revenue pooling agreements that involve non-resident shipping companies. Also, freight con- tracts and charters with carriers from countries that exclude German ships from free competition must be approved by the government . (vi) Government Ownership None (vii) Other b . Benefits of West German Assistance Programs to the National Fleet Exhibit VI-7 summarizes the benefits of the West German assistance programs for shipowners. The principal aid programs have been the construction subsidies, which were increased temporarily to about VI-16 i— i co i— r^ -o -Q o nz r~» 00 •i- h- en CvJ (XI co *f CO «=f VO <3- CO CO o « cr> C\J (XI o > o C -a -C CTI * CO , cd U_ -o c a. E o CO CD s- O -O CO Q s- Z3 •• JZ .. Q) • • Qi 00 • • a .. CO 1-1 ra O C\J ■^ CO <«*■ 4-> cn rO C ir> =3 S- UD S- ,_ E E E Q E OC -r- E +-> E o LxJ O o 1— o 1— LU o o O h- -Q s- <~ S- J- Z3 Q. C- D_ a. Q_ D_ CO 1 o o aj 00 00 $100 million per year during 1973 and 1974, with funding levels of $61 million per year for a special VLCC tanker program. Similar appropriations were made for 1975 but were not utilized. Tax allowances provided an estimated benefit of $32 million per year, bringing the total assistance up to levels ranging from $56 million in 1971 to a peak of $144.6 million in 1974. 2 . Effectiveness of Aids to the West German National Fleet The construction subsidies and ERP loans to German shipowners for acquiring vessels are parts of the government shipbuilding programs that assist both German shipyards and German vessel owners. The pro- grams were begun in 1961 as aids to the shipyards for refinancing export credits and were expanded in 1965 to include construction subsidies for German owners and European Recovery Program (ERP) loans to German owners. The expansion of the programs in 1965 also included interest subsidies on commercial loans to shipyards and inexpensive ERP loans to shipyards. Both of these forms of aid were intended to reduce the cost to German yards for refinancing export credits. The direct and indirect aid programs aimed at modern- izing the fleet were very successful in achieving their goal. Construction subsidies to owners under the "principles for promotion of the German Merchant Marine" (Federal Register No. 94, May 20, 1965) and other programs in effect in the late 1960s had given Germany a very modern freighter fleet whose average ■ age of nine years in 1970 was bettered only by Japan's seven year average age for its f rieghter fleet . At the end of 1970, Germany had 188 freighters of 1.57 million dwt on order. This was equivalent to 27 per- cent of its existing fleet in terms of dwt and exceeded by a considerable margin the rate of new freighter ton- nage on order in the world which was 15 percent of the VI-18 existing fleet at the end of 1970. By 1972, these developments caused the average age of the German freighter fleet to drop to six years, less than half that of the world's freighter fleet, and moved the German fleet past Japan's as the most modern in the world. The other sectors of the fleet were also active in acquiring new vessels in 1970 but not at the same rate as the freighter sector. Total German dead- weight tonnage on order as a percentage of the existing fleet in 1970 (31 percent) was just slightly higher than the world's percentage on order that year (26 percent ) . By 1972, the German fleet had an average age of six years, sharing first place with Japan's fleet as the world's most modern. This rank for the German fleet was maintained through the remainder of the 1970-1975 period (Exhibit VI-8). The VLCC program appears to have been partially successful. Orders outstanding at year-end for tankers to be registered under the German flag jumped to 4.0 million dwt in 1973, the first year of the program, from the 1.6 million to 1.9 million that had been on order at the end of each of the three previous years. Deliveries to the fleet totaled 2.7 million dwt in 1974 and 1975 after deliveries in the preceding four years had totaled 1.4 million dwt. The tonnage of the tanker fleet increased from 3.2 million dwt at the end of 1973 to 5.6 million dwt at the end of 1975, increasing its share of the world tanker tonnage from 1.46 percent to 1.86 percent and carrying 12.7 per- cent of Germany's oil imports in 1975 compared to 5.4 percent in 1973 (Table VI-1). Low demand for the program in 1975 due to tanker overcapacity led to its cancellation in 1976. VI-19 Exhibit VI-8 AVERAGE AGE OF THE FLEET W. GERMANY AND WORLD 1966-1975 1966 1968 Worl d 1970 1972 1974 1975 Total Fleet 17 13 13 12 12 12 Freighters 16 15 13 13 13 13 Bulk Carriers 11 9 8 8 9 9 Tankers 11 11 11 11 11 11 Total Fleet 11 10 9 6 7 7 Freighters 11 10 9 6 7 8 Bulk Carriers 9 8 8 6 5 6 Tankers 10 8 7 6 6 6 Source: Statistical Analysis of the World's Merchant Fleet, Maritime Administration, U.S. Department of Commerce, 1966-1975. VI-20 Table VI-1 GERMAN FLAG SHARE OF CRUDE OIL IMPORTS THROUGH GERMAN PORTS 1973-1975 Total Crude Crude Oil Imports German-flag Year Oil Imports on German-flag Vessels Share (tons in mil . ) (tons in mil.) jj) 1973 43.76 2.38 5 4 1974 47.34 3.70 7.8 1975 37.26 4.75 12 7 Source: Interviews As Exhibit VI-9 shows, deliveries to the German fleet were equivalent to 62 percent of the total fleet's 1970 deadweight tonnage compared to 78 percent for the world fleet. The uses for the new fleet additions were significantly different for Germany than for the world, however, with fleet modernization absorbing a much higher percentage of new deliveries in Germany and net fleet growth absorbing a lower percentage. This was especially pronounced in the bulk carrier and freighter sectors of the fleet. Exhibits VI-10 and VI-11 summarize other figures on fleet performance during the study period. While deadweight tonnage of the world fleet grew 70.2 percent from 1970 to 1975, Germany's fleet grew only 15 percent. The average age of the world fleet, how- ever, declined only from 13 years to 12 years while the German fleet's age declined from the already modern nine years in 1970 to seven years in 1975. The tanker sector of the German fleet experienced substantial growth in addition to declining in average age from seven years to six. 3. Recent and Prospective Programs The construction subsidy program contemplates con- struction subsidies to German owners in the order of $90 million during 1977. While the construction sub- sidies have been available to owners for having ves- sels constructed in either German or foreign yards, Exhibit VI-9 COMPARISON OF FLEET GROWTH - W. GERMANY AND WORLD 1970-1975 (deadweight tons in millions) GROWTH IN REGISTERED F .EET 1 Deadwe 1970 is 'l f Tons 1975 Percent Change Deadweiaht 1970 Tons 1975 Percent Chance Total Fleet 11.7 13.5 15.0 27.0 556.6 70.2 Tankers 3.0 5.6 90.4 153.1 302.2 97.4 Bulk Carr ers 2.9 4.0 39.7 77.2 150.1 94.5 Freighter 5.9 3.8 (33.7) 92.4 101.2 9.6 NEWBUILDING DELIVERIES TO THE FLEET | West Germany Deadweight Tons Percent of Delivered to Fleet 1970 Fleet DWT World- Deadweight Tons Del ivered to Fleet Percent of 1970 Fleet DWT Total Fleet 7.25 62°^ 254.8 78% Tankers 3.27 111% 157.1 103% Bulk Carriers 2.18 74% 73.5 95% Freighters 1.80 31% 24.0 26% ' SHARE OF NEWBUILDING DELIVERIES USED FOR 1 ! NET FLEET GROWTH AND FOR VESSEL REPLACEMENT | Percent for Percent for Percent for Percent for Net Fleet Growth Vessel Replacement Net Fleet Growth Vessel Replacement Total Fleet 24% 76% 90% 10% Tankers 82% 18% 95% 5% Bulk Carri ers 52% 48% 99% 1% Freighters 0% 100%* 37% 63% *0f the 5.85 million dwt in the West German freighter fleet at the end of 1970, 3.85 million dwt were deleted from the fleet through scrapping, sale, or transfer to other flags. Of these deletions, 1.80 million dwt were replaced with new deliveries. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. -C I I — I 1 CD 1 fO 1 C|_ <1J 1 1 S- 1 C fC CT> "!* CO LO r-» l 03 .C oo ro ro CM CM CM i E tn 1 s- 1 O) 1 CD co -M en S- 03 O C i— CO Q- O <4_ r- O un O^ CX> r-- X 1 . 00 r-v 1 C 03 CO 1 O E CD 1 1— s- > 1 CD 1 CD J 'JZ CO ID <* CM co LT) IT) o CO CM CM CM CO en i , — i <+- cd 1 1 s- 1 C 03 LT) ro un CO CM CM CM i E co 1 s- 1 CD 1 CD 4-> en S- 03 O C i— CO ao^r- ^J- CO cr> OO o «=t E 1 CD •-H co c: co «!* CO CO 1 C 03 CO CM CM CO i o E a; i h- s- > i a> 1 CD CO o O o CO i 2- s CT> ID CM o LO CTi O O o CT> r_< o CM ro «tf LT) r^ r*> r~^ r^ cr> en CT> en en CTi VI-23 Exhibit VI- 11 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY FLEET OPERATIONS Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Country: West Germany 1970 1971 1972 1 973 1974 1975 5-Year Annual Growth Rate Total Ships' 3 - Number DWT GRT 993 958 797 11,697 12,545 11,536 11 7,761 3,207 7,612 7 702 668 ,417 13,616 ,455 8,494 611 13,453 3,347 -9.3 2.8 1.5 Tankers - Number DWT GRT 59 69 70 2,956 3,457 3,184 3 1,681 1,926 1,781 1 70 84 ,228 5,563 ,786 2,981 83 5,627 3,005 7.1 13.7 12.3 Bulk Carriers - Number DWT GRT 92 87 78 2,859 3,271 3,277 3 1,774 1,972 1,945 2 75 77 ,675 3,876 ,153 2,259 79 3,993 2,321 -3.0 6.9 5.5 Freighters - Number DWT GRT 836 795 643 5,354 5,784 5,050 4 4,189 4,188 3,797 3 552 503 ,497 4,161 ,453 3,216 445 3,322 2,983 -11.8 -8.2 -6.6 (where intended registry s known) Total Ships a - Number DWT GRT 113 118 89 1,975 1,769 1,034 1 1,201 1,139 802 38 31 ,154 2,481 700 1,303 15 808 438 -33.2 -16.4 -13.3 Tankers - Number DWT GRT 13 14 9 818 216 81 424 124 49 7 16 257 2,132 134 1,094 6 579 301 -14.3 -6.7 -6.6 Bulk Carriers - Number DWT GRT 7 10 9 367 764 287 214 426 163 10 5 675 262 384 149 4 190 108 -10.6 -12.3 -12.8 Frei ghters - Number DWT GRT 93 94 71 790 739 666 563 589 585 21 10 222 87 182 61 5 39 29 -44.3 -45.2 -44.7 (wnere intended registry i s known) Total Ships 3 - Number DWT GRT 246 194 91 4,798 4,096 3,580 5 68 37 ,191 2,671 1,792 117 2,644 1,795 -13.8 -11.2 NA Tankers - Number DWT GRT 32 34 21 1,564 1,571 1,907 4 27 14 ,047 2,012 1,345 16 1,376 899 -12.9 -2.5 NA Bulk Carriers - Number DWT GRT 26 25 22 1,664 1,324 1,183 18 11 947 516 346 14 442 234 -11.6 -23.3 freighters - Number DWT GRT 188 135 43 1,570 1,201 490 23 12 157 143 101 825 611 -14.3 -12.1 NA VI-24 Exhibit VI- 11 Fleet Operations (continued) Country: West Germany 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate t)- 6 - 15 Imports 25 23 21 17 18 -6.4 Exports 39 37 34 28 25 27 -7.1 (millions of dollars) Revenues 2,038 2,160 1,906 2,007 2,659 2,778 6.4 Profits n / a Outstanding Debt . d p oy Nationals 37,782 34,394 29,375 26,831 24,869 24,756 -8.1 Total 49,085 45,981 39,315 34,996 31,914 31,962 -8.2 includes Combination Passenger/Cargo Vessels not shown separately. b Source: Me rchant Fleets of the World , Maritime Administration, U.S. Dept. of Commerce, semi-annual. c Source: New Ship Construction , Maritime Administration, U.S. Dept. of Commerce, semi-annual . d S 0urce: Maritime Transport , Organization for Economic Cooperation and Development, annual . e Source: Institut fur Seeverkekiswirtschaft Bremen. the large majority of German owners' orders were placed with domestic yards until recently. In 1974, 71 percent of the ships delivered to German owners came from domestic yards and these accounted for 96 percent of the gross tonnage delivered to the fleet. In 1975, the domestic yards' share of deliveries to German owners dropped to 67 percent of the vessels and 82 percent of the grt , and in the first half of 1976 orders placed in domestic yards accounted for 67 percent of the vessels and 69 percent of the grt. Further erosion of the domestic yards' share of Ger- man orders in the second half of 1976 has prompted the German yards to seek from the Bonn government some form of protection against foreign competition. Japan, due to aggressive pricing, has been the major benefactor of the increasing shift to overseas or- dering. The declining orderbook in late 1976 has reached crisis proportions for many West European yards, thus increasing the possibility that govern- ments may institute protectionist measures. Ironically, two actions by the Bonn government that were meant to aid German owners and shipyards may have contributed to the increase in overseas share of German owners' orders. Effective October 1974, the government repealed the Bardepot cash deposit legisla- tion introduced in March 1972 that required the recipient of a foreign loan to deposit 50 percent of the amount exceeding 50,000 DM in a non-interest bearing account in the Central Bank. At the beginning of 1973, the Bardepot deposit requirements were lowered from 50 percent to 20 percent. The effect of the deposit requirement was that German shipowners and German shipyards had to finance an in- creased share of their requirements in the domestic capital market where interest rates were high com- pared to alternative foreign sources of financing. This, according to the Association of German Ship- builders, had a detrimental effect on investments by the German shipping industry and led to a decline in investments. Moreover, since interest rate differ- entials between Germany and abroad had substantially VI-26 narrowed by 1974, the repeal of the Bardepot legisla- tion was not expected to lead to a substantial in- crease in investments. Bardepot balances in the Central Bank at the end of each year in the 1970-1975 period were as shown in Exhibit VI-12. Shipowners attempted to have financing of new ships built in foreign shipyards exempt from the deposit requirement provided that the term of the foreign financing for the vessel did not exceed eight years and that a down payment of at least 20 percent of the vessel's cost was applied. However, by establishing companies in an overseas country, investments without the required deposits were possible. With the repeal of the Bardepot legislation, the ship- ping industry benefited from the release of working capital that had previously been tied up in required deposits. Simultaneously, however, the government's action removed an impediment to the use of supplier credits offered by foreign shipyards, thus enabling the foreign yards to compete more effectively with any domestic yards that use domestic sources of credit. The second government aid contributing to the increase in overseas orders by German owners was the 7.5 percent Industrial Investment Grant introduced in January 1975. Although intended for German owners ordering ships from German shipyards for German-flag registry, the legislation contained some loopholes that enabled German owners to use the grants for orders placed abroad. The investment grant could be used in con- junction with the construction subsidies. The Associa- tion of German Shipbuilders estimated that vessels worth approximately $480 million were ordered from foreign shipyards by German owners using the Investment Grant. This order volume would involve about $38 million in subsidies from the Investment Grant. The Industrial Investment Grant program was replaced in late 1976 with a combination interest subsidy- construction grant program. The maximum 2 percent interest subsidies to the yards are to be passed on Exhibit VI-12 BARDEPOT BALANCES 1972-1975 Year Bardepot Balance ($ millions) 1972 $417 1973 $ 92 1974 $ 54 1975 $ 98 Source: Institut fur Seeverkekrswirtschaft Bremen. to owners ordering ships in West German yards for West German registry. Previously, the construction grant and interest subsidy could not both be applied to a ship. The value of the maximum 2 percent interest subsidy over the life of a seven year loan for 70 per- cent of a contract's value amounts to an equivalent 4.3 percent of a ship's cost. Thus, the interest sub- sidy plus the construction grant of 12.5 percent could produce a benefit of approximately 17 percent of a ship's cost under the maximum conditions of the pro- gram. The large and well developed German capital markets reflect fluctuations in world interest rates despite Bundesbank efforts to adjust the rate level in re- sponse to domestic needs for economic stimulus or stabilization. Despite the size of the German capital markets, borrowing is directed at large corporations and public enterprises causing small and medium-sized companies to pay substantial interest rate differentials, often 4 or 5 percentage points above the prime lending rate which has fluctuated between 6.97 and 12.59 per- cent between 1970 and 1976. As a result, the 2 percent interest subsidy brings the cost of traditionally more stable long-term government bonds which have fluctuated from 7.87 to 10.58 percent between 1970 and 1976 closer to the rates available to shipyards in other countries under OECD guidelines. However, recent and substantial portfolio losses have resulted in more conservative lending practices at formerly aggressive German financial institutions and should result in continued high rates for ship financing and shipyard financing. This trend will constrain the capital available to these industries. During 1977, however, with the reduced effect of the interest subsidies due to lower interest rates, the construction grants were raised to 17.5 percent. Such aids are vital due to the losses incurred by owners holding foreign currency reserves. According to the German Shipowners' Association, exchange losses in 1974 caused a serious reduction in the amount of capital available for rationalization and new capital investment. Germany has a balance of trade surplus but a deficit for invisibles. Shipping is a large portion of Ger- many's invisible trade deficit as is shipbuilding in recent years. This deficit is largely the result of German trade policies that have encouraged the use of lowest cost transportation. This policy minimizes the delivered price of German exports to customers, but penalizes the high cost merchant marine which despite moderniza- tion operates with high cost vessels and high cost crews that can only compete on developed trade routes on which other developed nations operate. German ship- owners recognize the policy of German export industries and frequently call upon industries and freight for- warders to specify German-flag vessels for reasons of national interest. Cargo preference has gained increased acceptance among West German shipowners in recent years. Despite a traditional free-trade posture in the past, German owners see the effects of the Code of Conduct for Liner Conference as preferable to the damage that could result from prolonged rate-cutting by Eastern Bloc nations intent on securing an increased share of world trade. The German owners also view opposi- tion to the increasing demand for cargo sharing by third-world nations as futile. West Germany, France and Belgium are among the countries that have signed the UNCTAD agreement on cargo preference, but the EEC has considered taking these members before the Euro- pean Courts of Justice for their action. The juris- diction of the EEC in this matter has been challenged by the German Shipowners' Assocation, claiming that it falls strictly under shipping policy for which the EEC has no responsibility according to the Treaty of Rome, Article 84, paragraph 2. Despite the German fleet's participation in cross- trading (approximately 20 percent of revenues), the German attitude toward cargo preference is under- standable. If one considers the low German-flag participation in German foreign trade (Exhibit VI-10), the implementation of the UNCTAD agreement would cause realignment of trading patterns and perhaps of fleet composition for German owners but the net effect would likely be a German fleet equal to or larger than the current one . VI-30 C, AIDS TO THE WEST GERMAN SHIPBUILDING INDUSTRY 1 . Aid Programs The major objectives of West German aid programs for the shipbuilding industry have been: • to enable the yards to compete effectively for export orders by subsidizing the sup- plier credits that the yards offered to customers; • to make the yards competitive for orders from domestic owners by equalizing the price that they could offer domestic owners with prices paid by competitive shipowners in other shipbuilding nations; • to promote efficiency in shipbuilding opera- tions and offset high labor costs by sub- sidizing modernization programs ; and • to promote industrial activity and provide employment in certain under- developed parts of the country. The principal aid programs used to accomplish these objectives are outlined in Exhibit VI-13. As shown in Exhibit VI-13, West Germany has employed a wide range of assistance programs for the ship- building industry, incorporating all major categories of shipbuilding assistance programs except for pref- erences. The most significant programs have been under the credit assistance category, primarily ERP funds for export credit combined with interest sub- sidies. Construction grants are the second most significant maritime aid to shipbuilding. Exhibit VI -13 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE WEST GERMAN SHIPBUILDING INDUSTRY 1970-1975 i . Investment Financing Assistance Program 1 - ERP Funds for Yard Modernization Program 2 - Eastern Border Loans for Modernization i i . Credit Assistance Program 3 - Interest Subsidies Program 4 - ERP Loans for Export Credit Program 5 - ERP Loans to West German Owners i i i . Tax Allowance Programs Program 6 - Customs Duty Exemptions Program 7 - Inventory Loss Reserves Program 8 - Investment Tax Credits iv. Direct Subsidies Program 9 - Construction Grants v. Preference Programs vi . Government Ownership Program 10 - Government Ownership vii . Other Program 11 - Export Credit Insurance Program 12 - Research and Development VI-32 West Germany has also provided tax allowances and investment financing assistance to the national ship- building industry. These programs, however, are smaller than the credit and direct subsidy programs. Finally, small government participation and other assistance programs have been utilized. These programs are discussed in detail in this Section. Section C.2. addresses the effectiveness of the aid programs, and Section C.3. discusses recent and prospective programs. a. Principal Aids to the West German Shipbuilding Industry (i) Investment Financing Assistance The West German programs for assistance in the finan- cing of shipyard modernization and regional development were primarily employed prior to and only to a limited degree in the early part of the study period. The programs were not large. Program 1 - ERP Funds for Yard Modernization Low interest loans to West German shipyards from Euro- pean Recovery Program funds to finance yard moderniza- tion programs have been provided to German shipyards. Loans of this type are not unique to shipbuilding, however. Similar special loans to all geographical regions and to all industries are made available with ERP funds. These loans are intended to assist yards in improving their productivity as discussed under Program 2. Shipyard investments totaling $70 million were made between 1969 and 1973. These investments included funds from the ERP (25 percent), loans from state governments (25 percent), and commercial loans with 3 percent interest subsidies provided by the state (50 percent). The loans have been utilized by even the largest shipbuilding concerns and are quanti- fied in Program 2. VI-33 Program 2 - Eastern Border Loans Special ERP investment loans are also available for yards near the Eastern border with participation from both the federal and state governments. These loans carried an interest rate of 6 percent (5 percent in the case of yards for non-shipbuilding uses) in the late 1960s and early 1970s. The yards had a four year grace period before serving an eight year amorti- zation schedule. Between 1966 and 1971, $38.2 million (1975 conver- sion rates) in credits were granted in 37 situations. However, there is only one major shipyard in the Eastern border area, and it is likely the greatest proportion of the funds were utilized in that shipyard development. Since 1971, however, there have been no major investment aids under either the Eastern border on modernization programs. In estimating the benefit of the modernization loans, an average benefit of 3 percent has been applied to the $108.2 million in loans provided up through 1973. The 3 percent approximates the aggregate benefit of the lower interest rates on the ERP and state modern- ization loans, the interest subsidy on the commercial loans, and the average benefit of the four year grace period on the ERP Eastern Border loans. In aggregate, the benefit of these modernization loans can be esti- mated at $3.3 million per year over the study period. (ii) Credit Assistance The major West German assistance to the shipbuilding industry over the study period has been the provision of funds for export credit . Funds have been made available from the ERP program at low interest and government funds have been made available to provide interest subsidies. The total funds for ship export credit are managed by the Kreditanstalt fur Wiederaufbau (KW), a special credit institution responsible to the West German federal government. The KW is an intermediary between the state and private banking and has a wide range of responsibilities including long-term export financing, capital aid for developing countries, and promotion of domestic industry. Ship exporting programs are operated within the overall KW program of export financing . The first program related to the promotion of ship- building and geared to exports was initiated in 1961 and had the objective of putting West German shipyards in a competitive world market position. Seven programs have followed; the current Eighth Program was initiated on May 24, 1974 and covers deliveries between 1976 and 1979. Exhibit VI-14 summarizes the ERP funds, federal funds for interest subsidies, and KW ' s own funds ap- propriated for each of the eight programs since 1961. The KW funds are provided at essentially market rates. Thus, the total program of export credit assistance from 1961 through 1979 deliveries is estimated at DM 1.82 billion of low interest ERP funds and DM 1.20 billion in government funds for interest subsidies. By combining the low interest ERP funds with KW funds and/or other market funds, against which the government interest subsidies are applied, an estimated DM 22.6 billion volume of orders will have received financing assistance through the eight shipbuilding assistance programs. Dr. Gunter Wolf estimated the total value of the assistance over the eight programs to be $684.7 million (at 1975 conversion rates). This was the sum of $156.9 million in the value of the low interest rates on the ERP funds (implying between a 2.5 and 3.0 percent in- terest rate spread from commercial loans); $487.4 mil- lion in interest subsidies; and $40.4 million in the value of the KW funds provided (implying a 0.5 percent average interest rate spread on those funds). Schiffs-Export Finanzierung Deutsche Werften im Auf Und Ab Pes Weltmartes, Gunter Wolf, 1975. VI-35 EXPORT CREDIT SHIPBUILDING ASSISTANCE PROGRAMS 1961-Present -- First Programme — - Fifth Programme -- Initiated: July 24, 1961 Initiated: February 1, 1966 Duration: Until funds were used up February 22, 1967-guidel ines Total Commitment Volume DM200 m. ERP Special Funds Duration: Deliveries 1967-1969 DM 200 m. KW Total Commitment Volume: CM 139 m. ERP Special Fund Order Volume Promoted: DM 697 m. DM 110.04 m. Federal Budget Al location of Funds: DM 150 m. for projects in , Order Volume Promoted: DM 2,015 m. developing countries Credit Periods: 8 years DM 250 m. for projects in Rate of Interest: 5.5 percent p. a. non-developing countries Credit Periods: Developing countries-10 years non-developing countries-3 years -- Sixth Programme — Rate of Interest: 5 percent p. a. Initiated: VI: July 18, 1968-guidel ines Via: September 1, 1969 -- Second P ogramme -- VI E: August 13, 1969 Duration: Deliveries 1970-1972 Initiated: January 10, 1963 Total Commitment Volume: DM 225 m. ERP Special Fund Duration: Until funds were used up DM 178.6 m. Federal Budget Total Commitment Volume DM 75.5 m. DM 539 m. KW DM 94.5 m. Order Volume to be Order Volume Promoted: DM 334 m. Promoted: DM 3.2 bn. Allocation of Funds : DM 75 m. for projects in Credit Periods: 8 years developing countries OECD Rate: May 30, 1969-6 percent p. a. DM 95 m. for projects in January 1, 1971-7. 5 percent p. a. non-developing countries Credit Periods: Developing countries-at most 10 years -- Seventh Programme -- non-developing countries-8 years Rate of Interest: 5.5 percent p. a. Initiated: July 1, 1970-guidel ines Duration: Deliveries 1973-1975 Total Commitment Volume: DM 359.5 m. ERP Special Fund -- Third rogramme -- DM 372.2 m. Federal Budget DM 880.4 m. KW Initiated: June 5, 1964 Order Volume to be Duration: Until funds were used up Promoted: At least DM 5.4 bn. Total Commitment Volume DM 120 m. ERP Special Fund Credit Periods: 8 years DM 170 m. KW OECD Rate: January 1, 1971-7.5 percent o.a. Order Volume Promoted: DM 608 m. July 1, 1974-8 percent p. a. Allocation of Funds: DM 60 m. for projects in developing countries DM 230 m. for projects in -- Eighth Programme -- non-developing countries Credit Periods: 8 years Initiated: May 24, 1974-guidel ines Rate of Interest: 5.5 percent p. a. Duration: Deliveries 1976-1979 Total Commitment Volume: DM 538.4 m. ERP Special Fund DM 538.4 m. Federal Budget -- Fourth Programme — DM 1,076.8 m. KW Order Volume to be Initiated: April 1, 1965 Promoted: DM 9.6 bn. Duration: Until funds were used up Credit Periods: Depending on OECD terms Total Commitment Volume DM 110 m. ERP Special Fund Rate of Interest: Minimum OECD terms 7.5/8 DM 155 m. KW percent p. a. Order Volume Promoted: DM 530 m. Interest cost reduction at Allocation of Funds: DM 60 m. for projects in maximum of 2 percent o.a. developing countries Financing Quotas: Determined by yards under DM 205 m. for projects in their individual credit non-developing countries lines; limits: OECD terms Credit Periods: 3 to 10 years and guidel ines Rate of Interest: 5. 5 percent p. a. VI-36 Program 3 - Interest Subsidies Based on Exhibit VI-14, the value to the shipyards of the interest subsidies over the study period can be estimated. Exhibit VI-15 below shows the Program VI, VII and VIII interest subsidy funds distributed over the years of the deliveries of each of the pro- grams. The funds, in fact, would be expended over the period of maturity of the loans. As discussed above, these subsidies are applied to loans from commercial credit sources that are used to finance the supplier credits offered by yards on ex- port contracts. The subsidy enables the yards to offer cheaper credit terms to export customers, and yards used these cheap credits as competitive tools to secure orders in the 1960s. Since the OECD agree- ment on Export Credits for Ships came into effect in 1969, the interest rate subsidy has served to bring the terms on credits offered by German yards into line with the OECD terms, and its value as a competi- tive tool has been diminished. The subsidy nonethe- less remains important to German shipyards since it enables them to offer export credits at competitive OECD rates which are generally below the rates at which yards can obtain credit in the capital markets. Under the Eighth Shipbuilding Assistance Program, the maximum interest rate subsidy is 2 percentage points. This limit means that when the prevailing market rates exceed the OECD minimum by more than two points, the yards must either increase the interest rates on their export credits to customers or absorb the difference themselves. When prevailing market rates fall to within 2 percentage points of the OECD minimum, the interest subsidy is reduced accordingly to cover only the actual differential. Prior to the OECD agreement, interest subsidies of 2.0 to 2.5 percent were available regardless of rates prevailing in capital markets. This was in line with co rs «a- i r-- & in —< pH LD O 1 IT) r-l r- _< in o i m — p~- rt o^ o ! oo r-» o en o « o I C. ^ o the intended purpose of the program during that period, i.e., to increase the international competitiveness of West German yards by providing cheap credits. The Eighth Shipbuilding Assistance Program covering deliveries in 1976-1979 also extends the availability of interest subsidies and ERP loans for financing the yards' supplier credits, previously limited to export orders, to cover orders by domestic owners from West German yards. Program 4 - ERP Loans for Export Exhibit VI-15 also shows the ERP and KW funds es- tablished for the programs covering the years 1970 to 1979. Based on average interest rate spreads as described above for the eight year period of the loans, the present value of the interest rate differential on the loans is shown for each year. As with the interest subsidies, the value of the lower interest rates would be received over the term of the loan. These loans are combined with the interest subsidy program described above to provide yards with financing for their export credits at competitive rates in the international shipbuilding market. Program 5 - ERP Loans to West German Owners Low interest loans to West German owners from European Recovery Program funds are described above in the section on aids to the West German national fleet, but since ships financed with ERP loans are required to be ordered from West German shipyards , this aid program provides an important source of business for the West German yards. (Hi) Tax Allowance Programs Program 6 - Customs Duty Exemptions Imported material for the building of oceangoing ships is exempt from customs duty, whether the ship is ex- ported or delivered to a domestic owner. Most materials for use in shipbuilding are, in fact, made domestically. VI-39 Program 7 - Inventory Loss Reserves Special reserve funds against inventory losses are permitted under German tax law. These and other re- serve funds have not been a major benefit to German shipyards over most of the 1970-1975 period since the yards experienced losses in several years and thus had little need to shelter income with reserves. As shown in Exhibit VI-16, nine shipbuilding firms increased their statutory reserves by approximately $10 million (24.7 million DM) in 1974. Other than another $10 million increase posted by HDW in 1972, reserve fund transactions by West German shipyards have been minor during the 1970-1974 period. The benefit to the yards from deposits to these re- serves is the difference in the timing of tax liability that yards gain by making deposits to the reserve funds. (Example: Deferral of $5 million in tax liability-- $10 million deposit in reserve — for four years is a benefit of about $2.1 million at 15 percent cost of capital . ) Program 8 - Investment Tax Credits Investment tax credits of 7.5 percent of cost of capi- tal assets were made available to all German industry in 1975. This was referenced under aids to ship operators. Investments by German shipbuilders have been increasing over the period 1970-1974, despite a tax on investments during 1973. (Exhibit VI-17) No data is available on the investments during 1975. If investments continued at the 1974 rate, this would have provided a benefit of $8.2 million that year. However, as discussed under aids to the national fleet, the 7.5 percent investment credit coupled with construction subsidies provided the ability for German shipowners to order heavily in overseas yards. As a result, the investment credit probably hurt the ship- yards far more than it assisted them. VI-40 Exhibit VI-16 RESERVE FUNDS OF NINE MAJOR SHIPBUILDING COMPANIES 1970-1974 (millions of DM) 1970 1971 1972 1973 1974 H } Reserves HDW 5 5 38 44 44 AG Weser 12 12 12 12 20 Bremer Vulkan 14 14 14 14 17 Rheinstahl Nordseewerke 2 2 2 2 2 Blohm & Voss AG - - - - 11 Flender Werft 9 11 12 10 10 FSG 5 5 5 5 9 SUAG n.a. n.a. 2 2 0.7 Werft Norbiskrgu GmBH 2 6 7 6 6 Increase (Decrease) in Reserves from Previous Year HDW 6 . n.a. - 33 AG Weser n.a. - - - 8 Bremer Vulkan n.a. - - - 3 Rheinstahl Nordseewerke n.a. - - - - Blohm & Voss AG n.a. - - - 11 Flender Werft n.a. 2 1 (2) - FSG n.a. - - - 4 SUAG n.a. n.a. n.a. - (1.3) Werft Norbiskrug GmBH n.a. 4 1 (1) - Total 9 Yards n.a. 6 35 3 24.7 Source: Shiffsexport Finanziering, Deutsche Werften In Auf Und Ab Des Wectmarktes, Dr. Gunther Wolf, Frankfurt, 1975. VI-41 Exhibit VI-17 CAPITAL INVESTMENTS BY THE NINE LARGEST WEST GERMAN SHIPBUILDERS 1970-1974 Year Capital Investments ($ millions) 1970 $11.7 1971 24.7 1972 53.8 1973 60.7 1974 109.5 Source: Shiffsexport Finanziering, Deutsche Werften In Auf Und Ab Des Wectmarktes, Dr. Gunter Wolf, Frankfurt, 1975. (iv) Direct Subsidies Program 9 - Construction Grants Construction grants have been provided to German owners for 10 percent of the contract price of a new vessel, 12.5 percent in 1975 and 1976, and 17.5 per- cent in 1977. These grants are described above under aids to the West German National Fleet. Although the subsidy is available by law for orders placed by West German owners in either foreign or West German shipyards, an informal understanding between German owners and German yards effectively caused most orders for new vessels under this program to be placed in West German shipyards. Only recently have the German owners placed a substantial order volume with foreign shipyards using the construction grant program. Some ships ordered by German owners outside the con- struction grant program have been contracted in foreign shipyards. From 1970 to 1972, 39 percent of the gross tonnage delivered to the German fleet came from foreign shipyards, and for 1973-1975, the foreign yards' share was 11 percent . (v) Preference The Bardepot deposits discussed in the previous section appear to have been the only program creating an in- centive for domestic construction. However, the pro- gram had minimal effect on the shipowning industry and was eliminated during the study period. (vi) Government Ownership Program 10 - Government Ownership One major shipyard is owned 25 percent by the state government of Schleswig-Holstein and 75 percent by a state-owned steel mill. VI-43 (vii) Other Program 11 - Export Credit Insurance Government insurance of export credits to cover up to 90 percent of the political and economic risks of such credits. This program is operated by HERMES, a government owned institution, but is not used exten- sively by the shipbuilding industry. Program 12 - R&D Support The West German government sponsors Research and Development projects conducted by private organizations. This aid amounted to approximately $1.0 million per year during 1970-1975. b . Benefits of West German Assistance Programs to the Shipbuilding Industry Exhibit VI-18 summarizes the benefits of West German assistance programs to the shipbuilding industry. The principal assistance has been in the form of financing assistance for the provision of supplier credits. This aid, in the form of interest subsidies and low interest loans, has increased from $34 million to $66 million per year out of total assistance of from $39 million to $78 million between 1971 and 1975. The above figures do not take into consideration the construction grants to West German shipowners. Al- though by law the grants can be used for foreign or- ders, a large proportion of these grants were used for construction in West German yards. Given the high proportion of deliveries to the national fleet, which averaged 73 percent over the period 1970-1975 and even higher during the latter part of the period when the VLCC subsidies were available, and also the questionable influence of the Bardepot deposits, it is estimated that construction grants in excess of $200 million were used on orders in West German yards. VI-44 co co co ro OD r— lo .— i lu o z: l— LU CO CO -o •4-> 3 ^*> O) o ,1^ c C CO St V O oo p en 3 Z3 i- CD +J i- E S QJ s- E oSS C E E +J E ro +J ro dj (D ro a; ro 5~ D_ +j D_ S- > s- c c q: CT ra CT c D1 or cr c cn c CX> o en o O UJ o O LjJ o c o C_3 O 5- J_ i- !-. S~ i- V. D. Q_ Q_ D. Q_ a. Q_ Q_ s- -a •!- o , o o o s- <■}> O) o Cl> .c: -r- +-> r— w E -TD >C\J < E o a> i- s_ > VI-45 2 . Effectiveness of Aids to the West German Shipbuilding Industry As shown in Exhibit VI-19, the West German share of world shipyard orders decreased significantly in the 1971-1972 period and again in 1975. The strength of the industry in 1973 and 1974 was due primarily to the institution of the VLCC construction grants. Exhibit VI-20 reviews shipyard performance. The variances in German shipyards' ability to compete for and secure shiporders raises the issue of whether high labor cost nations can expect to continue to compete for vessels on a competitive basis. While German grants and interest subsidies did permit the development of efficient VLCC construction capacity during the pre-embargo boom years, the real strength of German shipbuilding is its technological expertise which serves a much more select market. German shipbuilding aids were not sufficient to cause the industry to become locked into process-oriented long-series production requirements for bulk tonnage, but did promote the construction of such tonnage as part of a national goal for increased energy transport independence. To the extent that German shipyards were encouraged to expand and invest in the short- lived VLCC building boom, German aids were detrimental and too late to permit Germany to develop the economies necessary to overcome the intrinsic handicaps of high labor costs. German maritime aids did promote fleet modernization but did not identify key ship types and create selective inducements as France had done. Given the enormous technological potential of German yards, the development of government supported standards, sophisticated ship designs and components, similar to those in Japan for bulk and general cargo tonnage, might have increased the competitiveness of German yards in the current recession. The role of exports for the German industry is sig- nificant and has been hampered by the strength of German currency and its implicit cost to foreign cus- tomers through revaluations. While assisting German Exhibit VI -19 WEST GERMAN SHARE OF WORLD SHIPBUILDING ORDEPS 1969-1975 1969 1970 1971 1972 1973 1974 1975 Tonnage Ordered from World Shipyards - GRT (millions) 30.1 41.0 29.6 30.4 73.6 28.4 13.8 W. German Yards' Share of Tonnage Ordered Worldwide {%) 7.0 5.7 4.0 2.5 7.1 8.9 5.2 Tonnage Ordered From W. German Shipyards - GRT (millions) 2.1 2.7 1.2 0.8 5.2 2.5 0.7 Sources: Lloyds Register of Shipping, Annual Report VI-47 Exhibit VI-20 FOREIGN MARITIME AIDS MEASURES OF MARITIME ACTIVITY SHIPBUILDING Oceangoing Vessels of 1,000 Gross Tons and Over (DWT and GRT in Thousands) Cou itry: West Germany 1970 1971 1972 1973 1974 1975 5-Year Annual Growth Rate rwi«..„ 4~ C Total Ships b - Number DWT GRT 105 2,205 1,318 115 35 3,043 1,764 1,794 1,397 66 2,613 1,745 58 3,877 2,050 73 4,140 2,131 -7.0 13.4 10.6 Tankers - Number DWT GRT 8 639 376 24 12 1,374 591 666 293 10 788 393 23 2,887 1,471 22 3,216 1,587 22.4 38.2 33.4 Bulk Carriers - Number DWT GRT 9 605 342 8 2 828 83 459 47 11 1,124 622 15 831 470 14 576 319 9.2 -1.0 -1.4 Freighters - Number DWT GRT 88 857 600 82 70 834 1,083 649 1,037 45 701 730 19 156 96 35 34 5 265 -16.3 -16.6 -15.1 Total Ships b - Number DWT GRT 37 11 2,446 521 115 10,146 89 2,870 142 1,622 40. Of -9.8 a NA Tankers - Number DWT GRT 7 2 1,410 342 40 8,315 28 1,599 29 272 -33. 1 NA Bulk Carriers - Number DWT GRT 10 3 399 112 23 1,251 7 683 21 433 20. 4 a -16. ~ a NA Freighters - Number DWT GRT 19 5 130 60 51 580 49 578 92 915 48. 3 a 52. 9 a Total Ships - Number DWT GRT 6 60 58 194 9 148 2 8 10 2,486 10.8 110.6 NA TanNi B iii. Employees at Year-End --Shipyard Employees (wage earners & salaried employees) 80,424 80,221 77,764 73,629 75,002 77,982 -0.6 -of which, those em- ployed in shipbuilding 68,770 66,703 65,052 61,917 64,316 66,672 -0.6 -of which, wage earners employed in ship- building 55,029 53,356 52,037 48,987 50,753. 52,870 -0.8 4-year annual growth rate, 1971-1975. Includes Combination Passenger/Cargo Vessels not shown separately. c Source: Mew Ship Construction , Maritime Administration, U.S. Dept. of Commerce, annual. Source: Derived from orders outstanding, deliveries, and cancellations. Approximate due to timing differences in sources. e Source: Fairplay International Shipping Weekly, World Ships on Order , quarterly. shipyards, export and domestic ERP loans and interest subsidies used to adjust financing costs to OECD terms on export orders have not been able to counter this larger economic problem. Despite subsidy grants offered to owners, Germany has refrained from re- stricting the procurement policies of owners, consistent with the government's view of shipbuilding as a free market . 3 . Recent and Prospective Programs The West German shipbuilding orderbook was in a less vulnerable position than those of several major ship- building nations when the tanker overcapacity situation occurred. West German yards had chosen to remain diversified in several types of vessel construction and to avoid specializing in tankers as had certain other countries. By foregoing heavy participation in the potentially large profits in the tanker sector of the market, the German yards chose to minimize their exposure to a downturn in any single sector of ship- building. At the end of 1974, German yards had orders for 156 vessels of 1,000 GRT or more. Of these, only 56 ves- sels or 36 percent were tankers. Twenty-three bulk carriers and 73 freighters rounded out the orderbook. The average size of the tankers was larger than the average size of the other vessels, however, so tankers represented a larger percentage of the tonnage ac- counting for 80 percent of the deadweight tonnage on the orderbook. In contrast , tankers accounted for 57 percent of the vessels on order and 87 percent of the deadweight tonnage on order in Japan, and 84 percent of the vessels and 88 percent of the deadweight tonnage on the order- book in Sweden at the end of 1974. The West German yards have had difficulty in competing for new orders in 1975 and 1976 due to the low prices offered by Japanese and South Korean yards. Both ex- port orders and orders for domestic owners have been affected. In the domestic market, West German yards supplied 73 percent of the gross tonnage delivered to German owners in the 1970-1975 period, and in each of the last three years their share exceeded 80 percent. In 1975 and 1976, however, low contract quotes by Japan, in some cases 25 to 40 percent below those offered by West German yards, have attracted an in- creasing share of the orders from West German owners, and the 17.5 percent German construction grant in force in 1977 is insufficient in its ability to re- tain orders at home. West Germany's Eighth Shipbuilding Assistance Pro- gram, covering deliveries from 1976 to 1979, has made available $370 million for construction grants to German owners to aid in the purchase of new vessels. The Eighth Program extended aids to German owners to generate business in German yards, but there is no restriction in the program against ordering in foreign yards. In contrast to France which has restricted French orders abroad, the German government appears determined to preserve the European shipbuilding market as a relatively free and non-protectionistic arena, no matter what the cost to its shipyards may be. In the first half of 1975, the German government also introduced a 7-1/2 percent investment grant for all German investors which also lacked effective re- strictions against ordering ships abroad. As a re- sult, approximately $480 million of new orders were placed by German owners in foreign yards during 1975. These were supported by $36 million in subsidies by the German government under the 7-1/2 percent invest- ment grant program. These vessels could also have utilized the 12.5 percent construction subsidy, but instances of both being used together were limited. The 17.5 percent grants of 1977 did not explicitly restrict German orders abroad, but the intent of the government has been made clear to the industry through government review mechanisms. The domestic yards' share of German owner's business in 1976 continued at levels substantially below the 1970-1975 average, declining to 44 percent of the ships and 36 percent of the gross tonnage in the first half. German yards received orders from German owners for 34 vessels of 107,453 grt in the first half of 1976 while foreign yards received orders from German owners for 43 vessels of 187,900 grt in the same period. The 7.5 percent Industrial Investment Grant was re- placed in mid-1976 with a combination of two existing programs that had previously not been permitted to be used simultaneously. By extending the yards' 2 percent interest subsidy program on supplier credits to cover domestic orders as well as the previously covered export orders, as well as the 12.5 percent investment grant, the Bonn government sought to decrease the dependence of the West German yards on export orders. Although the combination program appears to have been received unenthusiastically by West German owners, the share of their business generated by domestic owners rose in the second half of 1976 to 74 percent of the vessels and 81 percent of the gross tonnage compared to deliveries of 14 percent of vessels and 17 percent of gross tonnage to domestic owners in 1975 and 49 percent of vessels and 39 percent of the gross tonnage to domestic owners in the 1970-1975 period. Thus, while the programs have not generated orders for substantial tonnage from German owners (the second half of 1976 rate of orders for tonnage from domestic and foreign sources represented only 12 percent of the rate of deliveries in 1975), the lack of orders for large amounts of tonnage appears to be even more acute in the export sector which had accounted for the majority of the tonnage delivered from West German yards in five of the past six years. With the capacity to deliver 4.2 million dwt per year and a year-end 1976 backlog of 3 1 million dwt, the challenge of the survival of German shipyards was enormous. While recent subsidies of capital and in- terest costs stimulated some orders, the absence of additional orders for large tanker and bulk carrier tonnage caused shipyards to compete for higher labor input/ton mid-sized vessel types against tough foreign competition including Japan and South Korea. By January 1977 German shipyard orderbooks contained 3.51 million dwt of orders, 29 percent of the tonnage for the German flag. In 1975, the average vessel delivered was 59,000 dwt and by year-end the order- books held orders for vessels with an average dead- weight of 35,000. The early 1977 German orderbook contained an average sized vessel of 16,500 dwt and this rapid decline in vessel size represents a chal- lenge even to the flexible processes and high sophisti- cation of the German shipbuilding industry. VII. The maritime Aids of France Contents SUMMARY PAGE 1. Background VII-1 2. Conclusions VII-3 B. AIDS TO THE FRENCH NATIONAL FLEET VII-12 1. Aid Programs VII-12 a. Principal Aids to the French VII-13 National Fleet, 1970-1975 (i) Investment Financing Assistance VII-13 Program 1 - Interest Subsidies VII-13 (ii) Credit Assistance VII-16 (iii) Tax Allowance Programs VII-16 Program 2 - Accelerated Depreciation VII-16 for New Vessels Program 3 - Low Capital Gains VII-17 Tax Program 4 - Value Added Tax VII-17 Exemption Program 5 - Reimbursement of VII-17 Social Taxes Civ) Direct Subsidies VI 1-18 Program 6 - Equipment Grants VII-18 (v) Preferences VI 1-22 Program 7 - Cargo Preference VII-22 Program 8 - Cabotage and VII-22 Bilateral Trade (vi) Government Ownership VII-22 Program 9 - Government VII-22 Ownership Benefits of French Assistance VII-23 Programs (i) PAGE 2. Effectiveness of Aids to the French VII-23 National Fleet 3. Recent and Prospective Programs VI 1-26 AIDS TO THE FRENCH SHIPBUILDING INDUSTRY VII-35 1. Aid Programs VII-35 a. Principal Aids to the French VII-35 Shipbuilding Industry, 1970-1975 (i) Investment Financing Assistance VII-35 (ii) Credit Assistance VII-37 Program 1 - Export Credits VII-37 (Hi) Tax Allowance Programs VII-37 Program 2 - Custom Duty VII-37 Exemption Program 3 - VAT Exemption VII-37 (iv) Direct Subsidies VII-37 Program 4 - Construction VII-37 Subsidies (v) Preference Programs VI 1-40 (vi) Government Ownership VI I -40 (vii) Other VI I -40 Program 5 - Inflation Insurance VII-40 Program 6 - Reorganization of VII-41 Shipyards b. Benefits of French Assistance VII-42 Programs 2. Effectiveness of Aids to the French VII-42 Shipbuilding Industry 3. Recent and Prospective Programs VII-49 (ii) France List of Exhibits EXHIBIT TITLE PAGE VII-1 Summary of National Flag Fleet and Ship- VI 1-2 building Activity VI 1-2 Share of World Fleet and Average Age - VI 1-4 1966-1975 VI 1-3 Comparison of Fleet Growth - France and VI 1-5 World - 1970-1975 VI 1-4 Revenues of the French National Fleet - V 1 1-7 1973-1974 VI 1-5 Tonnage of the French National Flag - 1974-1975 VI 1-8 VI 1-6 French Fleet Share of French Commerce and Total VI 1-9 Carriage as a Percent of French Trade VI 1-7 French Balance of Maritime Transport - V 1 1 - 10 1971-1975 VI 1-8 Outline of Principal Assistance Programs to VI 1-14 the French National Fleet - 1970-1975 VI 1-9 Government Contributions to French Seamen VI 1-19 Social Costs - 1972-1976 VII-10 Comparison of Plans V, VI and VII - 1966-1980 VII-20 VII-11 Equipment Grants to French Shipowners - VI 1-21 1971-1975 VI I- 12 French Flag Share of Petroleum Imports VI 1-21 VI I- 13 Summary of Benefits to French Operators - VI 1-24 1971-1975 VI I- 14 National Flag Shares of French Seaborne VI 1-27 Foreign Trade - 1971-1975 VI 1-15 Measures of Maritime Activity - Fleet Operations VI 1-28 VII-16 Planned Growth of the French Flag Fleet VI 1-31 VII-17 Estimate of Plan VII Subsidy VII-31 (iii) EXHIBIT TITLE PAGE VI 1-18 Objectives and Current Achievements to Date VI 1-32 of the Development Plan of the French Merchant Fleet as of September 15, 1976 VI I - 19 Division of Current Orders Between French VI I -33 Yards and Foreign Yards as of September 15, 1976 VI 1-20 Outline of Principal Assistance Programs to the French Shipbuilding Industry - 1970-1975 VI 1-21 French Construction Subsidies and Inflation Insurance Appropriations and Expenditures VI 1-22 Summary of Benefits to the French Ship- building Industry - 1970-1975 VI I- 23 French Share of World Deliveries - 1970-1975 VII-24 Deliveries from French Shipyards - 1970-1975 VI 1-25 Measures of Maritime Activity - Shipbuilding VII- -36 VII- -39 VII- -43 VII -44 VII- -45 VII -47 (iv) VII. THE MARITIME AIDS OF FRANCE A. SUMMARY 1 . Background The French national fleet increased its share of world deadweight tonnage f ron> less than 2.8 percent to nearly 3.2 percent over the period 1966 to 1975, and is the only study country to show an increase other than Japan, which increased its share early in the study period but began to decline in share towards the latter part of the period. France's shipbuilding output also increased over the study period. The relative sizes of the French ship operating and shipbuilding industries were more similar than any of the other study countries. Between 1970 and 1975, total deliveries to the French national fleet and total output of the French shipbuilding industry were within 3 percent on a deadweight basis. Moreover, over the five year period, about two-thirds of French yard out- put entered the national fleet, while two-thirds of the deliveries to the fleet came from French yards. The coincidental congruity of the two industries has begun to diverge, however. As shown in Exhibit VII-1, the respective fleet and yard shares of the other's deliveries have trended downward over the period. By 1975, only 35 percent of yard output entered the. fleet, and 42 percent of the deliveries to the fleet came from French shipyards. This was due to the French fleets ordering of general cargo and bulk carrier tonnage abroad, primarily in Japan, while ordering high tech- nology ship types in France. Simultaneously, the French program of building LNG vessels, container and vehicle carriers domestically resulted in a number of foreign fleets placing orders in France. VII-2 Exhibit VII-1 SUMMARY OF NATIONAL FLAG FLEET AND SHIPBUILDING ACTIVITY 1970-1975 1970 1971 1972 1973 1974 1975 Total Deliveries - French Shipyarc s Vessels 27 24 23 25 19 27 DWT (000 1,363 1,829 1,620 2,041 ] ,982 1,855 GRT (000 798 1,053 928 1,164 ] ,093 1,190 n l ver es for French Registry from French Shipyards Vessels 12 17 10 14 9 10 DWT (000 816 1,720 752 1,242 ] ,099 648 GRT (000 469 927 412 663 567 383 n l ive ies for French Registry from World Shipy e Vessels 18 29 22 22 34 21 DWT (000 913 2,329 1,067 2,099 3 ,104 1,546 GRT (000 533 1,254 583 1,130 1 ,674 858 F Owners Share of French Shipyard Del ive ries (Percent)-- rencn Vessels 44 71 43 56 47 37 DWT (000 60 94 46 61 55 35 GRT (000 59 88 44 57 52 32 F h Sh-i"><= rds Share of 59 Deliv eries to 45 : rench Owners 64 (Percent) Vessels 67 26 48 DWT (000 89 74 70 59 35 42 GRT (000 89 74 70 59 34 45 Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce, annual. VII-3 A large percentage of the deliveries to the French fleet contributed to the growth of the fleet, rather than replacement of older vessels. As a result, the average age of the fleet improved over the study period, but less so than for other countries with a high re- placement rate (Exhibit VII-2). Exhibit VII-3 presents the growth and replacement of the French fleet, all tankers being added for fleet expansion and not replace- ment . 2. Conclusions The assistance programs for the French national fleet have been directed towards increasing the French share of foreign trade and reducing the amount of France's negative maritime transport balance of payment account. Towards that end, France's assistance programs have been oriented towards growth of the fleet. The French government has assisted the shipping industry via five- year plans, with Plan VII covering 1976-1980 repre- senting the seventh comprehensive national plan in post-war France. The principal assistance programs have been interest subsidies on ship financing and accelerated deprecia- tion. Over the course of the study period, the empha- sis shifted to rapidly increasing direct construction subsidies and equipment grants. The capital gains tax is low in France, but no provisions for deferral of the tax exist. Thus, the principal benefits of the French assistance programs are structured to stimulate new growth construction rather than to encourage rapid turnover of the fleet. The assistance programs for the French national fleet result in one of the highest assistance levels per revenue dollar and per deadweight ton in the fleet and reflect the importance placed on stimulating growth. During the study period, the French national fleet re- corded the largest growth rate in registered tonnage. Contributing to this was France recording the highest percentage of deliveries allocated to net growth as opposed to replacement. Despite its growth, the French national fleet did not significantly increase its share of French foreign commerce during the period nor did the deficit balance VII-4 Exhibit VII-2 FRENCH FLEET SHARE OF WORLD FLEET AND AVERAGE AGE 1966-1975 1966 1968 1970 1972 1974 1975 s Registered Under Frenc Percent of World Fleet Total Fleet 1 Tankers Bulk Carriers Freighters 2.9 4.2 2.8 2.4 2.5 3.6 2.4 2.1 2.3 3.2 2.1 2.0 2.0 2.9 1.8 1.8 1.9 2.9 1.4 1.7 1.9 2.9 1.3 1.8 -Deadweight Tonnage Registered unde Percent of World Fleet • French Flag- Total Fleet 1 Tankers Bulk Carriers Freighters 2.9 4,0 1.9 2.0 2.8 3.9 2.0 1.9 Fleet - Averag (Years 2.8 3.8 1.6 2.0 ; Age of 2.9 4.2 1.6 1.9 Vessels 3.2 4.6 1.6 1.9 3.2 4.4 1.6 2.0 Total Fleet 1 Tankers Bulk Carriers Freighters 12 11 10 13 11 10 7 12 11 10 8 12 10 10 9 11 10 9 8 10 10 8 8 11 lrl Fleet - Average (Years Age of \ Total Fleet 1 Tankers Bulk Carriers Freighters 17 11 11 16 13 11 9 15 13 11 8 13 12 11 8 13 12 11 9 13 12 11 9 13 Includes Combination Passenger/Cargo not shown separately. Source: Merchant Fleets of the World , Maritime Administration, U.S. Department of Commerce. Exhibit VII-3 COMPARISON OF FLEET GROWTH - FRANCE AND WORLD 1970-1975 (deadweight tons in millions) GROWTH IN REGISTERED 1 Deadweight 1970 FLEET |— g_h_ --World- — . Tons 1975 Percent Tons 1975 Percent Change Deadwe 1970 Total Fleet 9.0 17.7 97 327.0 556.6 70.2 Tankers 5.8 13.2 128 153.1 302.2 97.4 Bulk Carriers 1.2 2.4 100 77.2 150.1 94.5 Freighters 1.9 2.1 11 92.4 101.2 9.6 | ., | Percent of 1970 Fleet DWT Deadweight Tons Delivered to Fleet World- Percent of Deadweight Tons 1970 Fleet DWT Delivered to Fleet Total Fleet 11.1 123 254.8 78 Tankers 7.3 126 157.1 103 Bulk Carriers 1.5 125 73.5 95 Freighters -7 37 24.0 26 J SHARE OF NEWBUILDING DELIVERIES USED FOR GROWTH AND FOR VESSEL REPLACEMENT 1 NET FLEET Percent for Net Fleet Growth Percent for Percent for Vessel Replacement Net Fleet Gro —World Percent for wth Vessel Replacement Total Fleet 78.5 21.5 90 10 Tankers 100.0* 0.0* 95 5 Bulk Carri ers 78.3 21.7 99 1 Freighters 32.3 67.7 37 63 *A11 new deliveries were used for fleet expansion. Source: New Ship Construction , Maritime Administration, U.S. Department of Commerce. of marine transport decrease to the desired level. However, French vessels operated almost 40 percent in the cross-trades on a revenue and tonnage basis. This cross-trading is a necessity due to the require- ment of serving a range of European ports short dis- tances apart and also for sophisticated French-flag vessels operating in multi-national consortia. Ex- hibit VII-4 presents French home and cross-trade revenues for 1973 and 1974. Exhibit VII-5 displays the tonnage related to these trades. Taking these operating factors into account, the re- ceipts from cross-trades offset significantly the negative balances on maritime transport, while the total carriage of the French national fleet was equiva- lent to over 50 percent of France's foreign trade in all years but 1974. Although this figure had been declining from 1970 through 1974, in 1975 the total carriage of the fleet rebounded to an equivalent 60.3 percent of French foreign trade. Exhibits VII-6 and VI 1-7 show cargo shares and fleet revenues. France has specified particular objectives in the carriage of oil and energy products to French shores and oil pipeline terminals in Northern Europe. By 1975 total carriage of oil by the French fleet reached an equivalent 71.3 percent of the carriage of oil tonnage in French foreign trade and was equivalent to over 75 percent of the ton-miles. The French assistance to the shipbuilding industry has also been expensive. France has provided credit assistance and construction subsidies to maintain the competitiveness of French shipyard prices, both for domestic buyers and for export markets. The construc- tion subsidy program was phased down during the study period, but continued to provide significant benefits through 1975. VII-7 Exhibit VI 1-4 REVENUES OF THE FRENCH NATIONAL FLEET 1973-1974 (millions of dollars) 1973 1974 Dollars Percent Dollars Percent French Exports $ 303.3 20 $ 478.3 25 French Imports 518.3 34 625.3 32 Crosstrades 599.6 39 723.2 37 Subtotal $1,416.1 93 $1,826.7 94 Passenger 105.0 7 116.6 6 Total $1,521.1 100 $1,943.4 100 Of Which Chartered in Vessels 191.3 13 233.3 12 Source: Interviews Exhibit V 1 1-5 TONNAGE OF THE FRENCH NATIONAL FLAG 1974-1975 (thousands of tons) 1 1974 1975 A. French Foreign Trade Export Import 4,410 42,095 4,261 43,703 B. French Zone* Export Import 2,511 12,670 2,464 10,628 C. Crosstrade 42,013 49,209 D. Cabotage 19,897 16,459 *French Zone includes Algeria, Morocco, Tunisia, Djibouti, Cameroon, Central African Republic, Gabon, Senegal, Benin, Niger, Ivory Coast, Upper Volta, Sierre Leone, French Guiana. Source: Le Transport Maritime Etudes Et Statistiques 1976, Comite Central Des Armateurs De France. cm c_> lu z o Q- uj «=t CD cn li- re , rT3 CO CO O *t CO •i- S- "O, o CO ID cn cn d S_ re h- «x> LO LO «*r c| id c en, +J . h- S- S- a» o, 4JQ.U.I a; Q) (O W| Ll_ CO dj| fO (_>, .e el o re, c S- 00 r-- cn Lf) co co ,+-> Cn CM O cn cn 1-13 O cn ro CM cn o re.l— l_ a; I—. S- re c, -e oi CO r. cn cn cn cn cn re re •4-> S- CO u_ •.- CL) VII-10 Exhibit VII-7 FRENCH BALANCE OF MARITIME TRANSPORT 1971-1975 (millions of dollars 1 1971 1972 1973 1974 1975 Receipts 652 681 824 1,236 1,292 Expendi tures 1,175 1,138 1,367 2,166 1,803 Balance (523) (457) (543) (931) (511) Crosstrade Receipts 600 723 Source: Exhibit VI 1-4 and Le Transport Maritime Etudes Et Statistiques 1976, Comite Central Des Armateurs De France. A special inflation insurance program aimed at in- creasing the competitiveness of French shipyards by allowing the quotation of fixed prices was the costliest assistance program. Rapid inflation over the study period required significant increases in the funding levels of this program. By 1975, the pro- gram expenditures were estimated at approximately 20 percent of the value of deliveries. With the recent decline in interest rates, lower inflation and the phasing out of the construction subsidy program, the French shipbuilding industry was faced with little potential current benefit from the French assistance programs, although the industry received one of the highest levels of assistance of any of the countries studied over the study period. The percentage of orders for export significantly increased during the study period. As the real value of the French assistance programs decreased towards the end of the study period the ability of French shipyards to secure new orders declined sharply and necessitated the re-introduction of direct assistance in 1976 and 1977. The primary source of orders currently appears to be for the construction of domestic vessels called for in Plan VII. However, although orders in French yards represent more than half of the French tonnage on order worldwide, the level of domestic orders is significantly below that which was previously expected to permit the maintenance of full employment in the French shipbuilding industry. B. AIDS TO THE FRENCH NATIONAL FLAG FLEET 1. Aid Programs The programs employed by the French government to aid the national flag fleet have been oriented toward in- creasing the French flag share of the French foreign trade. In particular, an increase in the French share of its liner foreign trade has been a principal focus of the two most recent five year plans of the French government . The principal French aids to shipowners are treated in each Plan as a comprehensive fleet program with multiple year appropriations. Plan VI, covering 1971- 1975, had a goal of increasing French exports to pro- duce a balance of trade surplus of approximately $2^ billion per year by 1975. It also sought to increase the export of services, particularly maritime trans- port and insurance. In 1971, French flag vessels carried 31.7 percent of French oceanborne imports and 23.3 percent of French oceanborne exports. These shares remained fairly constant through 1974 and rose slightly in 1975 to 33.6 percent of imports and 24.1 percent of exports. The principal types of aids employed by the French government to achieve these goals for the French fleet have been (1) equipment grants to French owners for the purpose of acquiring new vessels, (2) interest subsidies to reduce the cost of borrowing for French owners, (3) government absorption of a share of social welfare costs for French seamen, (4) accelerated de- preciation schedules on capital assets to encourage replacement of aging equipment, (5) cargo preference on limited sectors of the French foreign trade, and exchange rate of 4. 2864 French francs to the dollar. VII-13 (6) direct government ownership of certain shipping companies. The principal aid programs for French vessel owners during the 1970-1975 period are sum- marized in Exhibit VII-8, and discussed in detail in the remainder of this Section. Section B.2. addresses the effectiveness of these aid programs, and Section B.3. discusses recent and prospective programs. a. Principal Aids to the French National Fleet (i) Investment Financing Assistance Program 1 - Interest Subsidies The government assists French shipowners in financing new vessels through the use of interest subsidies. The National Credit Bank, a nationalized commercial bank, is a major source of loans to French owners. These loans are provided at normal interest rates and the French government subsidizes the difference between these rates and a lower fixed rate established by the government. The subsidies are available on credit from foreign sources as well. Between 1971 and 1976, two phases can be distinguished in the structure of French interest rates. From 1970 to the end of 1972, the discount rate fell from an average of 7.62 to 6.25 percent. Other interest rates followed the same pattern. From 1973 throughout 1974, interest rates rose with the discount rate, from 6.25 percent in 1972 to 12.5 percent in 1975. A period of easier monetary policy in the second half of 1975 and 1976 strongly supported the financing needs of French enterprises during the recovery of the economy. The discount rate was gradually lowered to 8.0 by the end of 1975. The fixed level of interest rate has increased over the study period, from 6.5 percent to 8.0 percent. The annual rate of interest subsidy for French ship- owners was fixed at 8 percent for contracts after November 1974. Thus, by the end of 1975, interest subsidies provided little benefit to new contracts because interest costs had declined to approximately the subsidized rate. (Table VII-1) VII-14 Exhibit VI 1-8 OUTLINE OF PRINCIPAL ASSISTANCE PROGRAMS TO THE FRENCH NATIONAL FLEET 1970-1975 i . Investment Financing Assistance Program 1: Interest Subsidies ii . Credit Assistance i i i . Tax Allowance Programs iv. Program 2: Accelerated Depreciation Program 3: Low Capital Gains Tax Proqram 4: Value Added Tax Exemption Proqram 5: Reimbursement of Social Taxes Direct Subsidies Program 6: Equipment Grants v. Preferences Program 7: Cargo Preference Program 8: Cabotaqe and Bilateral Trade vi . Government Ownership Program 9: Government Ownership vii . Other VII-15 Table VII-1 NET INTEREST RATES AFTER INTEREST SUBSIDIES ON LOANS TO FRENCH SHIPOWNERS 1970 1971 1972 1973 1974 1975 Net Paid Owne Interest Rate by French rs (Percent) 6.5 6.5 6.5 6.5 7.25 8.0 Source: Interviews Investment by the French shipping industry is estimated to have averaged $667 million per year over the study period. At this level of investment, a potential bene- fit of up to $64 million per year can be estimated from this program. This is based upon an average 3 percent differential on loans during the period, with the present value of the amortized loans reduced by 12 percent of the value of the financing. With the narrowing gap between the subsidized interest rate and the prevailing market rates, the benefits of this program can be expected to decline. Ongoing funding of earlier contracts will, however, maintain the costs of the interest subsidy program for several years. The French capital markets are among the most closely controlled in Western Europe. The government controls the largest banks and, like the Japanese banking structure, closely allocates the availability of credit through the Central Bank. The French Treasury is also a major source of financing for major industries. Even though the French credit and capital markets are among Europe's better developed, French enterprises will be forced to use an increasing portion of their own savings to finance investment. This results both from credit curbs of the Banque de France enforced in VII-16 the fall of 1976 and from the reluctance of foreigners to invest in France for fear that the monetary authori- ties might suddenly reapply major restrictions on capital movements. Close control of international capital movements is also exercised by the banks, making it difficult for industry to make major pur- chases abroad without government approval. French enterprises traditionally finance a large pro- portion of their investment through their own savings. Presently, only one-third of private investment is financed from external sources. Public enterprises derive the bulk of their external financing from long- term credits and the debenture market. They also re- ceive capital grants and capital equipment subsidies from the government. (ii) Credit Assistance Credit assistance is not applicable to national flag operators . (Hi) Tax Allowance Programs Program 2 - Accelerated Depreciation For New Vessels The depreciation schedules available to French industry permit declining balance depreciation rates up to 2-1/2 times the straight line rate on assets with useful life of more than six years. The normal straight line rate for vessels is 12.5 percent per year based on an eight year useful life. The depreciation on a vessel using a declining balance schedule at 2-1/2 times straight line, eight years useful life is as shown in Table VII-2. Table VII-2 ACCELERATED DEPRECIATION SCHEDULE Year Deprec at ion 1 2 3 4 31.0% 21.0% 15.0% 12.5%* e as permitted *Assum under rig switch French tax to straight 1 i r law. VII-17 Compared with straight line depreciation, the after tax current value of the accelerated depreci- ation is approximately 5 percent of the investment. The equipment grants discussed in the following section must be deducted from the depreciation base in determining a vessel's depreciation schedule. An estimated $667 million per year worth of new con- structions were added to the French national fleet over the study period. Based on the 5 percent dis- counted present values of the depreciation, an aver- age benefit of $33.4 million accrued to the owners. Program 3 - Low Capital Gains Tax The long-term (over two years) capital gains tax rate in France is only 10 percent. This applies to all industries. Although the capital gains tax rate is relatively low, the tax is fully payable and no re- serve funds are available to defer the tax liability. The absence of reserves and tax deferrals even if countered by accelerated depreciation creates a rela- tively low incentive for replacement and a higher in- centive for fleet growth. Norway, Sweden and more recently, Japan, have accelerated deferral on capital gains to foster replacement. The "non-assistance" may have contributed in part to the high percentage of deliveries applied to net growth of the French national fleet, the highest of any of the six countries. Program 4 - VAT Exemption Ships purchased by French owners are exempt from the 20 percent Value Added Tax (VAT). All capital goods purchased are exempt from the Value Added Tax, and the purchase of new vessels fall under this general pro- vision of the VAT. Program 5 - Reimbursement of Social Taxes The government reimburses French owners for part of their cost incurred under Article 79 of the Maritime Code, which covers "Accidents and illness occurring on board or in the course of embarking" . VII-18 These social benefits that French owners are required to pay have no counterpart in other major maritime nations. Thus, in order not to penalize French owners engaged in competition with the fleets of other countries, the government has absorbed a share of these social costs. The percentage absorbed by the government declined from 65 percent in 1966 to 47 percent recently. The government contribution to the French owners' costs under this program have been between $1.5 million and $3.6 million per year during the 1972-1975 period. The program was terminated in July 1976, with only minor payments made that year. French owners have requested that this program be reinstituted. Exhibit VII-9 presents the government's appropriations and expenditures for the reimbursement program. (vi) Direct Subsidies Program 6 - Equipment Grants Equipment grants to French owners for constructing or modernizing vessels are based on a percentage of the contract value of the construction. These have varied by vessel type and amount in the three most recent five year plans as shown in Exhibit VII-10. Under Plan VI , equipment grants to French shipowners increased from $5 million in 1971 to $21 million in 1974. In 1975, a combination of Plan VI and Plan VII funds yielded $42 million in grants. Plan VII initially authorized $233 million over the period 1976 to 1980. Amounts budgeted during 1976 and 1977 are approximately $40 million per year and are presented in Exhibit VII-11. However, as discussed in Section VII. B. 3., the Plan VII subsidy level was increased further to $280 million during 1976. Commitment of approximately 90 percent of the original funding had generated orders for only 41 percent of the original planned gross registered tonnage . Exhibit VII-9 GOVERNMENT CONTRIBUTIONS TO FRENCH SEAMEN SOCIAL COSTS 1972-1976 (millions of dollars) Year Amount Appropriated Amount Paid 1972 3.5 3.5 1973 3.6 3.6 1974 1.5 1.5 1975 4.0 2.3 1976 2.8 0.2 Source: Interviews VII-20 Exhibit VII-10 COMPARISON OF PLANS V, VI, AND VII EQUIPMENT GRANTS 1966-1980 Plan: Plan V Plan VI Plan VII Years: 1966-70 1971-75 1976-80 Percentage of Contract Value: up to 12% 3% for product tankers 3-8% for bulk carrier by size 10% for cargo liners 15% for container/RoRo 2% for bulk carriers above Panamax size 3% for product tankers 4% for bulk carriers 30M dwt to Panamax 8% for small bulk carriers 10% for conventional vessels 15% for container/RoRo Amount: $23 million $93 million $233 million Source: Interviews Exhibit VII-11 EQUIPMENT GRANTS TO FRENCH SHIPOWNERS 1970-1977 1970 1971 1972 1973 1974 1975 1976 1977 Equipment Grants 4.20 5.83 18.66 16.33 21.00 41.99 a 39.43 39.40 ($ millions) Includes allocation of outstanding Plan VI funds and approximately $15 million of Plan VII funds for second-hand vessels purchased with one-half the grant percentage of contract value. Source: Interviews Exhibit VII-12 FRENCH FLAG SHARE OF PETROLEUM IMPORTS 1971 1972 1973 1974 1925: 114.5 125.4 141.3 136.0 114.2 Petroleum Imports (millions of tons) French-flag Share 32.3% 33.9% 32.6% 32.9% 36.6% Source: Exhibit VII-14. VII-22 (v) Preferences Program 7 - Cargo Preference Two-thirds of the ton-miles of French crude oil im- ports for internal consumption must be carried on French flag ships or in ships whose charter parties have been approved by the Ministry of Transport and the Ministry of Fuel. Waivers of this requirement are frequently granted, but the French tanker fleet exceeds this carriage requirement when deliveries to Northern European pipeline terminals are included. On a tonnage basis, French crude oil imports and French flag share during the five years of Plan VI are recorded in Exhibit VII-12. French tanker fleet increased from 5.8 million dwt in 1970 to 13.2 million dwt in 1975, a growth of 127 percent in five years. The new large tankers added to the French fleet, however, have carried crude oil to other European ports. Including the ton-miles for such trade, by 1975 the French tanker fleet carried an amount of crude and product cargo that on a ton-mile basis was equivalent to 75 percent of the ton-miles for French crude and product imports that entered France through French ports. Program 8 - Cabotage and Bilateral Trade Trade between France and Tunisia and France and Algeria is reserved to vessels of French and Tunisian and French and Algerian registry, respectively. Coastal trade is totally protected and is the coastal trade between France and LaGuyana, LaGuade- loupe, and La Martinique. (vi) Government Ownership Program 9 - Government Ownershi p The French government acquired 100 percent ownership of the Compagnie Generale Maritime (CGM) in December 1973. CGM is a holding company for the Compagnie Generale Transatlantique and the Compagnie des Messageries Maritimes, each of which still have minor- ity private ownership. b. Benefits of French Assistance Programs to the National Fleet Over the study period, the assistance programs to the French national fleet have been primarily programs for financing assistance in the form of interest subsidies. The equipment grant program, however, has been signifi- cantly increased during the period. Plan VI, which coincided with the study period, provided almost $100 million in equipment grants or four times the funding level of Plan V. Plan VII funding has been increased to $280 million, almost three times the level of Plan VI funding, and will over the next five years be the major source of assistance to the industry. Exhibit VII-13 summarizes the benefits that accrued to French operators during Plan VI, particularly the rise in utilization of equipment grants. 2 . Effectiveness of Aid Programs The deadweight tonnage of the French fleet grew from 9 million in 1970 to 17.7 million in 1975, a 96 percent increase compared to a 70 percent increase for the world fleet during this period. In addition to growing faster than the world fleet, the French fleet also was replacing its older tonnage with new vessels at a faster pace than that of the rest of the world. Of the dead- weight tonnage delivered to the world fleet from 1971 to 1975 inclusive, 10 percent replaced old tonnage and 90 percent was used to increase the size of the fleet. For France, 21 percent of the deadweight tonnage de- livered to the fleet replaced old tonnage, leaving the remaining 79 percent for fleet growth. Thus, the rate of deliveries to the French fleet as a percent of the existing fleet in 1970 exceeded the world fleet's rate by more than the 96 percent to 70 percent margin men- tioned above, since a faster replacement program was underway in addition to the net growth in the fleet. In terms of the fleet tonnage that existed in 1970, the French fleet replaced 20 percent of that tonnage with new vessels in the 1971-1975 period while the world fleet replaced 7 percent of its 1970 tonnage. VII-24 cm i— ■i- i/> i-H _q l — r-^ •i- hh LT> o St CO o cr> *d- ro 03 C\J CVJ (O «3- "3" «=r o *d- LO o cr> r^- en -^ ro 03 CT> VO CO CM *-< CO o >* UD CO CO i^ CX> "vl- CO JD <~o CO r " H CsJ o «=*- LD r~- UD r^ CT> -=3- ro CO CO (Ti l£) ro 1-1 o «sf LO CO r*« r-- en «3- ro 03 CO LO UD " UD °° o >> o 03 O .. 4J • • c_> • • c lf> C\J S_ col a. 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Li_ i-H >^ CU +■> ro •r- CU 3 > CU C O r— CO U_ ■"3 " 4-> 4_ CD CU C^ n -r- ai > (/I i-i o CO n- >> C a; S- *+_ ro O a 3 Q LO C »Z ro ro O t. T5 ""3 T- CJ CU C0 +J 4- C rn u O ro 00 UJ a. CJ oo a CO X h- CU X Register of Shi pp Thus, the strength of a centralized and controlled national shipbuilding industry such as that of Poland, buffered by Soviet demand and offering proven standard design with Western machinery poses a major challenge to maritime nations in the coming decade. C. CONCLUSIONS In both shipping and shipbuilding the COMECON nations have made tactical advances in operations that are driven by deliberate governmental strategic objectives and executed under economic constraints that are unique to centralized economies. Both industries have striven for competitiveness on the basis of price and service, and both have succeeded in different ways. The impact of COMECON activity in both shipping and shipbuilding can only be detrimental to developed maritime nations. The enterprises operating with COMECON interference point to the basic undercutting of existing cost structures and artificial economies, but the attractiveness of Soviet freight rates to a European exporter or a Polish chemical tanker to a shipowner remains. This attractiveness exists in one of the freest of world industries, and short of governmental restriction on the utilization of COMECON competitiveness with all the encumbent diplomatic repercussions, developed nations' maritime industries can only educate the public and the government and internally counter COMECON price attractiveness. A-12 Recently a number of independent shipping lines have joined conference, an action which has caused Soviet lines to raise rates upward and increasing profits. Soviet operators appear to be prepared to discuss membership in conferences, but the absence of free world operators in non-conference competition only reinforces the Soviet market position as the low-cost independent service, with any resolution of the over- capacity of liner routes being deferred to diplo- matic initiatives. In contrast to independent shipping lines joining the conference system, certain Western operators have chosen to remain outside conferences. This tactic may increase their market share, particularly those of cross trade operations, but does not permit full competitiveness with COMECON fleets and if widespread, would represent a threat to the stability and service level of worldwide cargo liner service. Appendix B Contents page A. TANKER FLEET B-l 1. The Development of Independent B-6 Tanker Companies Without Direct Ties to Oil Producing Companies 2. The Development of Vertically B-6 Integrated Oil Companies That Will Own and Operate Tanker Fleets 3. Joint Ventures Between Existing Im- B-6 porting Oil Companies and Local Pro- ducing Companies or Independent Tanker Operators and Producers 4. Cargo Preference Laws, Similar to B-7 the UNCTAC 40-40-20 Percent Division, with 20 Percent of Energy Movements Left to Cross Trading Vessels B. OPEC LINER OPERATIONS B-7 C. SHIP CONSTRUCTION AND REPAIR B-8 D. CONCLUSIONS B-8 Appendix B List of Exhibits exhibit title page B-l OPEC Tanker Fleets - 1970, 1973 and 1975 B-2 B-2 OPEC Tanker Fleets - As of January 1, 1975 B-4 B-3 OPEC Shipping Demand in Context B-5 Appendix B OPEC MARITIME ACTIVITY A. TANKER FLEET The movement of crude oil from producing areas to con- suming areas represents the major tonnage and ton- miles of the shipping industry. Led by the Irabian Gulf states, the trend of nationalization and vertical extension by producing nations into tanker operating could upset the existing relationships between oil companies' fleets, their long-term charters and the spot market forever. Of the 1,360 million tons of crude oil moved by sea in 1974 for a total of 9,660 billion ton-miles, some 891 million tons of Irabian Gulf oil was transported 8,048 billion ton-miles. Thus, some 66 percent of world oil comprised some 83 percent of all crude oil movement prior to the re-opening of the Suez Canal. The Canal's re-opening reduced the ton-mile require- ment significantly, added to the overcapacity of the world's tanker fleet and upset many of the assumptions that led to its expansion. The importance of Irabian Gulf oil given the impending shortfall in world oil supply makes the Organization of Arab Petroleum States (OAPEC) plans for fleet expansion even more important to traditional maritime nations tanker operations . The relative growth of the OPEC tanker fleet by one- third may be seen in Exhibit B-l, with growth relative to the world taking place following the 1973 oil embargo. B-2 Exhibit B-l OPEC TANKER FLEETS 1970, 1973 and 1975 (thousands of dwt) 1970 1973 1975 --Arab Producers--- Kuwait Iraq Libya Algeria Saudi Arabia United Arab Emirates Abu Dhabi 787 6 790 245 5 82 28 1,294 384 415 169 170 Subtotal 793 1,150 2,432 Venezuela Iran Ecuador Indonesia 372 63 2 85 420 84 98 82 415 549 140 136 Nigeria -- -- -- Subtotal 522 654 1,240 Total 1,315 1,804 3,672 Percent of World .9 .8 1.2 Source: Merchant Fleets of the World , Maritime Administration, U.S. Department of Commerce. Of far greater significance to maritime nations than the 1.2 percent of the tanker fleet currently operated by OPEC, are the plans for its future expansion. A CIA report of March 1975 shows that the overall OPEC plan of expansion will lead to a fleet of 30.5 million dwt by 1980 as shown in Exhibit B-2. This fleet represents some 11.8 percent of the total 320 million dwt of tankers in existence February 1977 and 38.6 million dwt on order through 1980. This ten-fold in- crease in share of supply coupled with prospective cargo preference legislation in developing countries could impact on the viability of western oil companies and independent tanker owners. Another scenario sees OPEC members attempting to achieve a minimum 40 percent share of their exports and imports, as in the pending UNCTAD Liner Code Agreement. Were OPEC production to remain constant, some 35 percent of the world's 1980 tanker fleet or 125 million deadweight tons would be required to transport 1980 OPEC production. As only 39 million dwt of tankers is currently on order, more than 80 million tons would have to be purchased from the world's laid up fleet. The likelihood that the OPEC nations will achieve this goal is very slight, but the impending change in the structure of the world's tanker fleet has great significance. Exhibit B-3 presents the relationship of OPEC to the Irabian Gulf OAPEC states and Iran in required fleet size for various scenarios of carriage. To carry 40 percent of its cargo by 1980, OPEC would be required to spend more than $21 billion, reports Drewry's, assuming a mix of new and second-hand tonnage. This amounts to one-half the OPEC annual surplus revenues from oil sales. The greatest obstacle to OPEC fleet expansion is the lack of shipping operations and management expertise. Training schools and academies are being established as are joint ventures and management contracts, but Exhibit B-2 OPEC TANKER FLEETS As of January 1, 1975 (thousand DWT) Current Fleet On Order Cost 1980 Goal (millions) Total OPEC Members 2,305 7,577 $1,494 30,455 Arab Producers Kuwait 793 1,344 250 2,657 Iraq 269 1,781 400 4,350 Libya 263 754 184 1,467 Algeria 149 -- -- 949 Saudi Arabia 27 80 16 4,132 United Arab Emirates 19 -- -- 1,019 Abu Dhabi 1 -- 269 54 1,300 Arab Maritime Petroleum" 5 10.000 2 Transport Company „ -- 1,942 390 United Arab Maritime- 3 Company " " " 150 Total 1,520 Other 6,170 Producers 1,294 26,024 Venezuela 420 335 67 1,000 Iran 183 860 100 2,331 Ecuador 100 72 5 250 Indonesia 82 140 28 350 Nigeria " " -" 500 Total 785 1,407 200 4,431 The more complicated joint ventures are shown here; the less compli- cated joint ventures are included under individual country totals. Source: "OPEC Countries Tanker Fleet Expansion", Central Intelligence Agency, March 1975, p. 3, reported from "Recent Developments in the Growth of Arab Tanker Fleets", Nan K. Harles, Office of Policy and Plans, Division of Marine Plans, Maritime Administration, April 1975, p. 2. O -t- * £ 1 o o a) O r— 3 ° "* * ~— -^ ! ! Q. 01 <*o ___^ n o, 3: ra o E 00 si on O O O <~> ^o odd o vo o -a- § - 1 «^ o s: officers with sufficient experience to command tankers will not be available until 1985-1990. The continued use of chartered vessels of which OPEC currently has more than 1 million dwt , will afford OPEC owners time and flexibility. Oil producing states may then procure product and chemical carriers as OPEC re- fining and petro-chemical industries develop. A realistic forecast made by the Arab Maritime Petroleum Tanker Company (AMPTC) calls for an OAPEC fleet of 9.7 million tons by 1980 composed of 63 vessels. This fleet will not have major impact upon the existing conduct and structure of the world tanker market and will permit OPEC to develop its fleet in one of four ways: 1. The Development of Independent Tanker Companies Without Direct Ties to Oil Producing Companies The scenario appears to hurt independent tanker operators but the subsidiaries of large multi-nationals would be more likely to succumb. The option finds OPEC constrained by manpower shortages. 2 . The Development of Vertically Integrated Oil Companies That Will Own and Operate Tanker Fleets These companies transport baseload demand and use in- dependent tanker operators to absorb short-term vari- ations in market demand. This scenario would have an enormous impact upon existing oil companies. 3 . Joint Ventures Between Existing Im - porting Oil Companies and Local Pro - ducing Companies or Independent Tanker Operators and Producers This scenario does not provide OPEC with real control of energy fleets, but would hurt small independents most readily if enacted. Control issues would preclude its long-term likelihood. 4. Cargo Preference Laws, Similar to the UNCTAC 40-40-20 Percent Division , with 20 percent of Energy Movements Left to Cross Trading Vessels In the short-term this model could not be realized due to the shortgage of OPEC tankers. The scenario calls for the altering of the efficient market that is world tanker options and is therefore not congruent with long-term OPEC interests. Scenarios one and two would appear to be most feasible and will permit independent tanker operators and oil company fleets to compete with OPEC tankers on a competitive basis. Any subsidies from OPEC states to OPEC fleets might be in the form of low cost bunkers that would assure their fleets full utilization due to low costs and would leave only the size of the OPEC fleet to be resolved. The production of natural gas will be met in the 1980s by sophisticated LNG vessels in addition to the 450,000 grt currently operating and on order for Algeria and Kuwait. A number of VLCC orders were con- verted to LNG vessels by Arab owners. B. OPEC LINER OPERATIONS In 1975 the Arab and Iranian fleets comprised some 1.2 million dwt, up more than 100 percent from .5 million dwt in 1970. More than 1 million dwt of freighters were on order by these nations. The operation of liner fleets permits OPEC nations to exert a downward force on the high freight rates caused by port congestion. Vessels are frequently manned by Europeans and managed by western shipping companies. While the expansion of OPEC general cargo fleets is considerable, there will be sufficient traffic and op- portunities for independent operators for at least a decade and the market remains highly attractive, particularly to roll-on/roll-off operators. C. SHIP CONSTRUCTION AND REPAIR The Arab Shipbuilding and Repair Yard (ASRYi, the official dock project of OAPEC, entered operation in 1977. While ASRY will be capable of accommodating the great majority of VLCCs operating in the Irabian Gulf, it represents a further addition to world VLCC repair overcapacity. The shortage of domestic ship repair materials and skilled labor combined with its small scale implies that the impact of OPEC ship- building and ship repair projects upon world markets will be minimal, at least until 1985. The projects for shipyard and shiprepair expansion in Algeria, Bahrain, Dubai, Iraq, Kuwait, Saudi Arabia, Iran, and Egypt represent opportunities for western shipyards, contractors, and management firms in the near-term and lost work over the long-term. D. CONCLUSIONS The development of OPEC maritime activity is con- strained by organizational and personnel resources only in the coming decade. Whatever the final extent of fleet expansion may be, the growth will be signifi- cant in tankers and general cargo liners within ten years, and in sophisticated LNG, LPG , and dry cargo vessels by 1990. The shortages of manpower and material will restrict this expansion to shipping and shiprepair, but as LDCs seeking cost effective use of petro-dollars , orders for vessels are likely to be placed in developing nations to take advantage of their capacity and efficiency and to promote third world development. While certain colonial relation- ships may support Algerian/French or Kuwait i/U.K. cooperation, the bulk of orders will flow to low cost ship producers like Korea. Thus, the expansion of OPEC fleets may represent only an opportunity to developed nations' fleet managers and suppliers abilities, while the bulk of the vessel construction will fall to emerging shipbuilding nations. Appendix C Contents A. INTRODUCTION B. Braz IL 1. Overview 2. Brazilian Maritime Aids 3. Conclusions C. SOUTH KOREA 1. Overview 2. Korean Maritime Aids 3. Conclusions D. INDIA 1. Overview 2. Fleet Aid Programs 3. Shipbuilding 4. Conclusions E. SINGAPORE 1. Overview 2. Shipbuilding and Repair 3. Conclusions PAGE C-l C-3 C-3 C-3 C-8 C-9 C-9 C-ll C-13 C-14 C-14 C-16 C-17 C-19 C-21 C-21 C-21 C-24 Appendix C List of Exhibits EXHIBIT TITLE PAGE C-l Measures of Maritime Activity Oceangoing Fleet - Vessels of 1,000 C-2 GRT or More C-2 Brazil C-4 C-3 South Korea C-10 C-4 India C-15 C-5 Singapore C-22 C-6 Rigs on Order or Under Construction C-25 Appendix C LESS DEVELOPED COUNTRY MARITIME ACTIVITY A. INTRODUCTION This Appendix examines the impact of maritime ac- tivities of the Lesser Developed Countries (LDCs) upon maritime nations. There are a number of LDCs whose efforts to increase control of the maritime activities that affect their economies have had and will continue to have significant repercussions in the nations studied. In selecting a limited number of LDCs with active shipbuilding and fleet develop- ment programs underway, the representation of all forms of LDC policy is not possible. Therefore, the LDCs chosen represent nations in which dramatic government policy has fostered marked progress towards national shipbuilding and fleet expansion objectives for varying reasons and through distinc- tive programs. SELECTION The four nations selected for study as LDCs are Brazil, Kcrea, India, and Singapore. These four countries exhibited the most significant activity in shipbuilding activity during the study period 1971-1975. Exhibit C-l shows activity for these four LDCs combined as well as percentages of world activity. The emergence of Singapore as a flag of convenience is notable with registrations rising to 16th place in 1975. The ascendance of Brazil, South Korea and India as shipbuilders saw their share of the world orders increased from 2.7 percent in 1971 to 13.3 percent. Holding a total of 6 percent of world orders at year-end 1975 and 9 percent by April 1977, the importance of LDC shipbuilding and LDC fleet procurement and expansion will have a major impact on maritime nations. C-2 Exhibit C-l Measures of Maritime Activity A Activity Levels, 1975 Vessels DWT DWT as % World Delivered to 4 LDCs 82 3. 85m 6.5 On Order 1 )y 4 LDCs 243 9. 70m 5.5 Delivered by 4 LDCs 35 1. 25m 2.1 On Order at 4 LDCs 289 10.88m 6.2 B Trends 1970-1975 (World Rank by dwt) 1970 1971 1972 1973 1974 1975 Brazil 19 21 19 19 19 18 India 16 16 16 16 16 16 Korea 29 27 29 29 27 26 Singapore 37 36 28 18 Shipbuilding Orders a - (Percent of World) 18 16 Brazil NA 2.3 0.8 1.1 5.4 7.7 South Korea NA 0.0 0.0 1.3 2.8 3.7 India NA 0.4 0.1 0.0 0.0 1.9 Subtotal NA 2.7 0.9 2.4 8.2 13.3 a) Source: Lloyd's Register of Shipping, Annual Report 1975. B. BRAZIL 1. Overview Unique for its rapid development of both its ship- building capacity and its fleet, Brazil's progress was established by a series of five year plans controlled by highly centralized government mechanisms. In 1970 the Brazilian fleet was 2.0 million dwt and the goal for 1980 is a fleet of 10.0 million dwt. Although Brazil's gross tonnage grew at a compounded rate of some 15 percent, less than the LDC average, some 59 vessels of 2.52 million grt were added by the end of 1975, more than doubling the fleet's size. Brazilian fleet expansion is presented in Exhibit C-2. Simultaneously, Brazilian shipyard output expanded from 16 vessels of 150,700 tons in 1970 to 18 vessels of 541,100 dwt in 1975, a tonnage increase of 360 percent. Thirteen vessels of 633,000 dwt were de- livered in 1976. Brazil's first export ship order was won in 1972 for six standard SD-14 cargo vessels for West German owners . 2 . Brazilian Maritime Aids The government managed domestic fleet expansion and construction with funds generated by a 20 percent tax on imported and coastwise freight instituted in 1958. These revenues permitted loans of 85 percent of a vessel's cost at 6 percent interest over 15 years through the National Merchant Marine Refinancing- Fund created in 1967 and funded by loans and existing naval export appropriations. The Fund, managed by the Superintendency of the National Merchant Marine, SUNAMAM , was created to absorb the early shipbuilding cost differentials of more costly Brazilian-built vessels during 1971-1975. Presently, prices for general cargo tonnage are as low as one-half those of U.K. shipyards and the Fund is now being replenished as Brazilian owners pay higher prices for home-built o r>. «a- oo cm ur> co ld >^- ,-h co o «vt- IX) ^l" CO IX) ■— i CM CTi r^ cr> co LO CO U") CXI o lo ro iv n CO *d" CT) O IT) CM C\J CM IX) «— t IX) c\j r~- OIHO r-H CD LD CO 1X3 Hcoro CM r-H IX) UD ^3- CM CO IX) OO CO CM CM CM CM — h rv ix> -M Q. C CD 2: Q O r— vessels than do overseas customers. This replenish- ment will permit Brazil once again to absorb losses and to compete on the world market for more sophisti- cated and larger vessels than those currently under construction . SUNAMAM has absolute pricing power over Brazil's six major and three minor yards on domestic contracts and establishes costs based on detailed data, at- taching a 10 percent gross profit with 4 percent net profit. Brazilian owners pay SUNAMAM, not Brazilian shipyards. SUNAMAM controls the strategic policies of Brazilian shipping lines, in a radical departure from the lati- tude most shipowners enjoy worldwide. In mid-1975 SUNAMAM permitted private owners to move into dry bulk operations as part of the Second National De- velopment Plan for 1976 to 1980. Only 4 percent of all tonnage required for the completion of the Second Plan has been ordered from foreign shipyards, the re- mainder of the vessels are to be built in Brazil. Where the cost of Brazilian vessels exceeds that of the European market price, owners pay only the market cost, the government providing the difference. This quasi-subsidy is described by Brazilian shipbuilders as a tax rebate because of the obligations of Brazilian shipowners to SUNAMAM. Brazilian owners must provide 20 percent of a vessel's cost in cash, as compared to 30 percent in OECD nations. Owners must serve the remaining 80 percent of the vessel cost over 15 years, not the seven years specified by OECD, at an interest rate of 8 percent, the same rate that developed na- tions are permitted. The SUNAMAM requirements extend beyond vessel financing however, for owners must pay SUNAMAM 10 percent of all inbound freight revenues monthly and place another 10 percent of inbound revenues into a vessel purchase and repair account. As is Japan, SUNAMAM has adjusted maritime aids as owners and industries have gained experience and strength. Downpayments increased from 15 to 20 per- cent in 1974, as did interest rates, which rose from 6 percent to 8 percent . The government also purchased shipyard stock, pro- vided loans to all yards and assisted in site infra- structural development. Taxes are levied only on shipyard and ancillary industry income; no duty is charged on imported marine materials and equipment. However, a ban has been imposed on marine equipment imports due to balance of payments problems and a de- sire to develop the domestic industry. This ban has caused havoc in Brazilian shipyards, as delivery times slipped for want of components. The Brazilian fleet expansion via orders from domestic yards represented a lost opportunity for the six major maritime nations and other developed shipbuilding nations. The 43 cargo liners of 432,000 grt that entered the fleet between the ends of 1970 and 1975 represented 11 percent of all cargo liner tonnage added to non-Comecon fleets in this period. Of this new Brazilian tonnage, ten cargo vessels of 120,000 total deadweight were imported, all from Poland and of the 60 cargo liners on order at the end of 1975, none were on order abroad. This self-sufficiency, at a time when the study nations' cargo liner fleets declined by 1,142 ships and 3.94 million grt did not help major shipbuilding nations' yards traditionally engaged in liner construction. Under the Second National Development Plan, the Brazilian government has placed orders for 150 ocean- going vessels to be added between 1976 and 1980, adding some 5.3 million dwt to the 260 ship 4.54 mil- lion dwt Brazilian fleet of December 1975. Only 21 of these ships will be imported, mostly specialized types. Companhia Comercio e Navegacao (CCN), the most experienced shipyard, received orders for 45 of these vessels representing 859,000 dwt. To ease shipyard concern over equipment import bans, a consortium of yards created an engineering firm, CEC Equipamentor Maritimos e Industrials. CEC will com- pete for a large part of the $800 million of marine engineering contracts to be let for the 129 Brazilian- built vessels. This five-year plan for fleet expansion through domestic construction will increase Brazil's current output above the 541,000 dwt/327,000 grt delivered in 1975, futher diminishing foreign shipyard prospects for Brazilian orders. Tentative delivery schedules for 1977 call for deliveries of at least 30 vessels of 768,000 dwt , an increase of more than 40 percent. This projected output constitutes some 7.5 percent of the world's anticipated non-Japanese ship production in future years and represents a significant loss in potential market for the study nations. Although Brazilian shipyards were able to supply the fleet with liners, bulk carriers and tankers up to the Panamax size, the procurement policy was marked by pragmatism. When delivery times were long or one- of-a-kind vessels were required, Brazil sought vessels from other nations including the six study nations. Germany supplied a drydock and Norway supplied chemical tankers. Common early ships included the English SD-14 and Canadian 26/15 bulk designs. As the fleet progresses towards its goal of 40 percent of cargos carried in Brazilian bottoms, fleet expansion will continue. Despite active government regulation of trade, only 20 percent of all cargos were lifted by Brazilian vessels in 1975 and only by 1985 will the goal be achieved. The government has stipulated that all coastal cargos, paper, petroleum and government- financed imports and exports must be moved in Brazilian ships, unless released by the Superintendent of the merchant marine. Cargos not served by either nation's vessels are subject to designation of carrier by Brazil and if equal trade agreements exist, Brazil is en- titled to 50 percent of the movements. Equal carriage agreements exist with certain South American nations as well as the cargo bound for the United States. All foreign operators must be parties in Brazilian freight conference . C-8 The Brazilian fleet has engaged in cargo pooling arrangements, particularly with raw material-hungry Japan, in which Japanese tankers will deliver Persian crude to Brazil and Brazilian bulk vessels will take ore to Japan's steel mills. The presence of Japanese steel and shipbuilding expertise in Brazil no doubt contributed to the perceived mutuality of interests. 3. Conclusions The explosive growth of Brazil's shipyards and fleet over the study period represents the most determined and comprehensive commitment of any LDC government to these industries. The expansion of the Brazilian orderbook greatly outstripped the Brazilian capacity to produce vessels which has resulted in extremely long delivery times. At the 1976 level output, Brazil's shipyards held more than eight years of work. Despite forecast productivity increases, the long lead times are attractive only to shipowners hoping for deliveries at low current prices in time for the next shipping boom. Brazilian shipbuilding capacity has been less critical to the study nations than the export orders it has attracted through non-OECD terms and the lost work that resulted from SUNAMAM ' s comprehensive vessel procurement policies. The ability of Brazil to pro- duce sophisticated and specialized tonnage in the 1980s could increase the impact of Brazilian ship- building upon the world's traditional shipbuilding nations and further erode the position of high cost shipyards . C-9 C. SOUTH KOREA 1 . Overview Korea represents the rapid emergence of an LDC as a major world ship exporting nation. From deliveries of one tanker of 5,000 dwt in 1970, Korea's output reached a record ten ships of 615,700 dwt in 1975. Despite a flurry of cargo preference and fleet assistance measures, Korea's fleet gross tonnage grew at a compound rate of 11.6 percent in 1970-1975, only two-thirds the rate of all LDCs and only slightly better than the world average. Korean fleet activity is shown in Exhibit C-3. The growth of Korean shipbuilding was explosive. In 1962 Korea's total ship production was 4,600 grt and ten years later, when Korea's first ship exceeding 10,000 grt was launched, national output was 50,000 grt. In 1970 a single tanker of 5,000 dwt was de- livered. In 1973 a 260,000 dwt tanker was launched and deliveries were 1 million grt. Korea's 1975 out- put was ten vessels of 615,700 dwt. Today, Korea has 54 shipyards, 12 capable of constructing vessels greater than 500 grt. In the period 1974-1975, 13 ships of 933,400 dwt were exported and only four ships of 340,000 were imported. All ships less than 13,000 tons must be built in Korea. With support of the government, Korea's three major yards, Hyundai, Korea Shipbuilding and Dae Sun pursued numerous bulk carrier and tanker contracts into 1974, using costly high labor efficient facilities for big ship construction. The recession caused Korean yards much concern, but with great agility the yards con- verted to cargo ship construction capitalizing upon their cheap labor force. Korean yards underbid Japa- nese yards by 20 percent for 15,000-20,000 ton cargo liners and secured a Kuwaiti order for twenty-five 23,000 dwt liners due at 15-day intervals, using a U.K. design. In 1976 Korea held 2.5 percent of the world's order- book and industry leaders maintained that a 5 percent share by 1978 was possible on a competitive basis. Thus, the Korean and Brazilian share of the world orderbook may approach 12-15 percent by 1980. C-10 CO oo "53- VO O CM ^- O <£> C\J 00 CO CO CM CO ID *3- CT> VO «-i H O r-t r-. co cm rono CM «3" CM CM **• i-l CO CO (£> HON i-H V£> CO CM LD CO cm r>» oo CM *3" O <-> VO O r«» cr> u-> HCMO CO CM OltH^t «d-MO i— i vo r-» CM CO «d" «-H CO CO Lf> CO VO VO CM r>» cm i— i *d- CO r»- cm OCnvo r-H CO 00 CM CO VO cm co cr> VO CO i— CD s- o O S- co oo vo OPJIC HWN 00 O CO f-H >-< IX> CM r-» o r» <-> O 00 CO .-I r<» r^ <£) o r^ «3" CM 33^ -r- Oi E t— I— 2. Korean Maritime Aids As an LDC with cheap labor but limited credit, the Korean government has offered terms in excess of OECD guidelines of 70 percent, seven years, with 80 percent over eight years, and even 85 percent at 7.5 percent over 15 years. This has strained the goodwill of Korea's major trading partners, particu- larly Japan. The government offers financing in the customers currency and charges no duty on shipyard- related imports and no internal tax on similar goods produced domestically. The government provides ship- yards with short-term credit to cover the construc- tion period. The rapid growth of Korean shipbuilding marks yet another competitive and attractive supplier of world shipbuilding capacity. In the period 1974-1975 thirteen ships of 933,400 dwt were exported while four ships of 340,900 dwt were imported for Korean owners. The optimum capacity of the Hyundai Shipyard alone has been established at 2.5 million dwt, either in the form of 60 to 70 cargo vessels, or 15 VLCCs. While Japan has passed an ordinance forbidding large Japanese yards from building many small vessels in VLCC building docks as a measure to project small yards, Korea has few small yards and feels no need to limit construction policy. In contrast to Korea's ascendance as a leading ship- builder and ship exporter, Korea's fleet continues to lift less than 25 percent of its outbound cargo and 35 percent of all trade. The tremendous need for Korean ships was not filled and the rapid growth in Korean exports makes improvement in the home-vessel share of shipments more difficult. As rapidly increasing exports strained the relatively slower growing Korean fleet, the government established numerous cargo preference requirements. In terms of overall policy all coastal, petroleum, and certain other raw materials were required to be imported only in Korean vessels. All forwarders must specify only Korean vessels and the Korean government is prepared C-12 to subsidize the losses incurred by Korean vessels operating on regular international trade routes; vessels ordered to a route by the government; and vessels ordered replaced by the government. Korea refuses to share cargos with the Japanese. Trade with Japan represents 24 percent of Korea's cargos. The Korean fleet carries 99 percent of all her trade with Japan which amounts to approximately 2 million tons per year of non-containerized cargo and 1 mil- lion tons of containerized cargo. In mid-1974 the Korean Ministry of Transport in its third five year plan (1972-1976, determined that for 50 percent carriage of exports by 1981 a six-fold fleet expansion is required. A target of the fourth five year plan (1977-1981) is the acquisition of 6 million gross tons of new and used ships, including 1.4 million grt for the national line, the Korean Shipping Corporation. In mid-1976 the government announced that the plan will be supported by financial assistance and tax incentives for acquired bulk car- riers, chemical tankers, containerships, and cargo liners. Given the depressed market generally and competitiveness of Korean yards, many vessels are expected to be built at home. Despite such intentions, the Japanese amended a joint venture for a 150,000 ton capability yard downward to 80,000 tons. The agility of Korea's yards through efficiency, at- tractive financing and low labor costs coupled with government incentives for domestic owners permitted rapid growth in small ship orders. In 1975, 17 cargo vessels of 354,000 dwt were on order, all for export. By October 1976 Korea had orders for 53 cargo vessels of 908,000 dwt, six of them for the home fleet. In December 1975 Korea held orders for eight bulk car- riers of 120,100 dwt all for export. By October 1976 the orderbook consisted of 11 bulk carriers of 303,000 dwt including four for Korean owners and one for a Japanese owner. The Korean government has provided an effective helping hand to the Korean fleet through procurements under FOB rather than CIF contract. The state-owned Korean Shipping Corporation, the major carrier of government cargos receives a lower freight rate. The government will provide loans of 85 percent of a vessel's cost at 7.5 percent interest with 15 year terms for domestic owners and uses loans as a tool for the importation and chartering of ships if they are to become Korean within five years. Funds for the secondary objectives of improvement and repair are also available. 3. Conclusions Korea's capabilities emerged at the peak of the world shipbuilding boom and her strengths have per- mitted her to increase her performance relative to world leaders including Japan. Buoyed by cheap labor, the young Korean shipbuilding industry operates from a position of great strength. The monolithic structure of Korea's shipbuilding industry, frees it from any considerations of invasion of small domestic shipyard markets while her facilities are among the world's youngest and most advanced. Already an important supplier of steel to the Japanese shipbuilding in- dustry, Korea can now add greater value to the steel industry through shipbuilding and compete with Japan on the basis of price and product. C-14 D, INDIA 1 . Overview India is a nation with a long-standing tradition in cargo-liner and tramp operation. During the early 1970s the nation embarked upon a program of bulk car- rier and tanker acquisition, the largest increase in fleet size of any LDC in absolute terms. Although 45 percent of India's trade is with Europe, and 80 percent of all 1975 earnings of state-owned SCINDIA line were from liner operations, India's decision to invest in bulk carriers resulted in the acquisition of 39 bulk carriers of 1.03 million grt and 12 tankers of 1.0 million dwt . These procurements of ships represent 37 percent and 14 percent, respectively, of all such tonnages delivered to non-OPEC LDCs over the study period. Exhibit C-4 presents the growth of the Indian fleet over the study period. India's interest in bulk carriers and tankers in the early 1970s was due to the large volumes of such cargos in India's foreign trade. Increased oil prices caused interest by several nations in India's low-sulphur coal and Japanese, European, and Comecon-bound coal exports developed. Imports of fertilizers, grain, and oil also provided inpetus for the decision to increase the non-liner sectors of the fleet. This demand permitted the Indian fleet to resist the recession well, with no lay-ups. The re-opening of the Suez Canal in mid-1975 greatly reduced the distances for several of India's trades. This coupled with discoveries of offshore oil in the Bombay High area caused the government to reduce overseas orders for additional liquid and dry bulk carriers. In the liner sector, the large number of under- developed ports and the inland waterway network has generated interest by Scandinavian and American LASH operators in opportunities for increased efficiency C-15 o --> It IA V) oo no o «d- o co cr> «a- 00 CO in oo ^h cvj m o in co CT) vo in HO^t vo in cm co r>. cr> l-H en co en oo cm «t rHin cm cr> in cm en en «3- o o CO r^ en in cm CO COr-CM loco oo «a- m «3" CO ID co o «a- co *j- lt> co cr> ^t- vo cm «s- vo vo vo VO r*. r^ r^ cm m oo c\j m ix) cm «3- o VO lO Lf) «3- en vn r^ cm cm r-H CM 00 «-H «d" O rH _) +J CM O CO CM ^j" CM rHCOkD 00 VO o CO VO o CM CM LT) CM CT> *d" O 00 CO CTiO VO VO «tf- ■HM00 CO CM CM CO CM CM «vf i-H VO NO0 CO CM o o CO +-> +■> c CD Ehh i— S- O O S- C-23 IHI Freedomship . The government also operates the Keppel and the Sewambang yards, Sweambang with public participation. Both yards cater to superships plying between the Irabian Gulf and the Orient. Both Sewanbang and Keppel have management contracts with Swan Hunter, but both contracts are in the process of phasing out. The Development Bank of Singapore is prepared to extend eight year 9.5 percent loans to new or old yards. Two major Japanese shipbuilders, Hitachi Zosen and Mitsu- bishi, have established 51 percent owned repair yards in Singapore in an effort to exploit its location and labor force which is paid one-third that of Japanese labor but is one-third less productive. The government has provided training and urged wage restraint by its workers, recognizing that her shipyards will thrive only if they can compete successfully on labor and production costs against Scandinavian and other European yards in small ship production. As of October 1976, 26 vessels ranging from tugs and supply vessels to 96,500 dwt tankers were under con- struction in Singapore aggregating more than 410,000 deadweight. To support these local shipbuilding operations Singa- pore's Development Bank for vessels greater than 5,000 dwt will provide financing of 50 percent of a locally-built vessels' cost, with seven year terms and fixed OECD interest rates. The bank offers simi- lar loans at about 9.5 percent for vessels less than 5,000 dwt, the remainder of the capital available at commercial banks. The Development Bank will not finance locally-built drilling rigs, which are built by the American rigbuilders Bethlehem, Levmgston and Marathon . These three rig manufacturers made Singapore the world's foremost jack-up rig builders. However, the severe under-utilization of Japanese yards has pitted the two nations in direct opposition, Japan pushing its experience and the more sophisticated semi- submersible rigs, Singapore its jack-ups against a declining world demand. Singapore's rig builders are also pursuing offshore support craft contracts to remain busy (Exhibit C-6). 3. Conclusions The emergence of Singapore as a flag of convenience is a unilateral action of more concern to other flag of convenience nations than to traditional maritime nations. Singapore's development as a shipbuilder and shiprepair center represents the realization of natural competitive factors, both geographical and demographic. The competition between Singapore and Japan for small ship construction, repairs and drilling rig construction has been fierce, the result of a real threat to the strongest of shipbuilding nations by a relatively new entrant to a complex industry. Exhibit C-6 RIGS ON ORDER OR UNDER CONSTRUCTION l— Singapore Japan November 1974 Jack-ups 6 3 Semi-submersibles 1 4 Oil drilling rigs 1 1 8 8 November 1975 Jack-ups 10 5 Semi-submersibles 2 1 12 6 November 1976 Jack-ups 5 1 Semi-submersibles 1 3 Oil drilling rigs 1 6 5 Source: Fairplay, World Ships on Order , quarterly. Appendix D SYNOPSIS OF THE OECD UNDERSTANDING ON EXPORT CREDIT FOR SHIPS As amended by resolution December 16, 1970, July 18, 1974 and November 5, 1975. 1. From July 1, 1974, governments participating in the Understanding will abolish all existing official programs and not introduce any other programs for ship exports other than these terms : (i) maximum duration of loan seven years from delivery and repayment by equal installments of six months and not more than 12 months. (ii) payment by delivery of not less than SO percent of the contract price. (Hi) an interest rate of not less than 8 percent 3 net of all charges which are not directly related to the amount of credit. 2. This minimum interest rate of 8 percent will apply if official support is given for the whole or a part of the support by the shipbuilder or a bank to the buyer. 3. This minimum interest rate will apply to the ship- builder or to a customer in the shipbuilder's country, if official support is given for the whole or part of the credit. Insofar as other public bodies promote exports, governments agree to use all possible influence to prevent the financing of ships on terms which contravene the above principles. Governments will make their best endeavors to ensure that no terms more favorable than those of the Understanding will be offered to buyers by any other means. Any government participating in the Understanding may concede more favorable terms in a particular case for reasons of genuine aid. Notification must be made to all participating governments at least six weeks prior to the commitment of such funds . Should a Government participating in the Under- standing seek to extend terms more favorable for reasons other than those in clause 6, it must pro- vide adequate notice to participating governments. Adequate notice must be made in time to permit other governments to compete effectively on these terms. At least seven days must be provided if tenders are invited. Support including aid will be refused for any order finally placed on more favorable terms unless the terms of the clause and clause 6 are honored. Any Government participating in the Understanding may support more favorable terms in particular substantiated cases to match the terms of of- ficially supported transactions or to meet contra- vention of the above terms by particpating or non-participating governments provided maximum notice of the decision is given to all other participating governments. Appendix E Bibliography JAPAN—FLEET Handbook of Shipping Statistics . Japanese Government Printing Office and Shipping and Shipbuilders' Association, (1976). Bureau of Shipping. Statistics on Japanese Shipping Industry . Ministry of Transport (1977). Bureau of Shipping. Japan Statistical Yearbook 1973- 1974 (1975, 1976). Office of the Prime Minister. Japan International Cooperation Agency. Ministry of Transport's "White Paper on Shipping" 1976 . Ministry of Transport, Bureau of Shipping (1976). Japan Line Ltd., Annual Report 1973 (1974, 1975, 1976). Kawasaki Kisen Kaisha Ltd., Annual Report 1973 (1974, 1975, 1976). Mitsui-Osk Lines Ltd., Annual Report 1973 (1974, 1975, 1976). NYK. Annual Report 1973 (1974, 1975, 1976). Review of Japanese Shipping 1975 . The Japanese Shipowners' Association (1976). Showa Shipping Co. Ltd., Annual Report 1973 (1974, 1975, 1976). The Sanko Steamship Company Ltd., Annual Report 1973 (1974, 1975, 1976). Yama Shita-Shinnihon Steam Ship Co. , Annual Report 1973 (1974, 1975, 1976). E-2 JAPAN—SHIPBUILDING Handbook of Shipbuilding Statistics * Japanese Government Printing Office and Shipping and Shipbuilders' Association, (1976). The Effects of the Unstable Foreign Exchange Rate on Japanese Shipbuilding Industry . The Shipbuilders' Association of Japan (November 7, 1972). The Export-Import Bank of Japan, Role and Function . Export-Import Bank (April 1975). The Export-Import Bank of Japan. Annual Report 1975 . "The Shipbuilding Industry." Japanese Finance and Industry Quarterly Survey (October - December 1976), No. 33, pp. 16-36. JAPAN — GENERAL Handbook of Financial Data of Industries 1976 . The Japan Development Bank. Ministry of Transport. Annual Report of Transport Economy 1975 . Japanese Government. U. K. British Shipping Statistics 1975 . General Council of British Shipping (June 1976). Chamber of Shipping of the United Kingdom. Annual Report 1971 (1972, 1973, 1974). Department of Industry, Business Monitor. Nationality of Vessels in Seaborne Trade 1974 . London: Her Majesty's Stationery Office (1976). Ocean Transport & Trading Ltd. , Annual Report and Accounts "Ocean 1975. " E-3 U. K. — SHIPBUILDING Aircraft and Shipbuilding Industries Act 1975 Chapter 3 (1975) . London: Her Majesty's Stationery Office. "Credits, and Grants for Construction of Ships and Offshore Installations." U. K. Industry Act 1972, Chapter 63, Part III. "U.K. Merchant Shipbuilding: Orders, Output Orderbook: U.K. Export and Total Annual Totals and State at 31st March 1976." London: Shipbuilders' and Repairers' National Association. U. K. — General Peat, Marwick, Mitchell & Co., Memorandum on U. K. Corporation Tax . London: Peat, Marwick, Mitchell & Co. , (1974). NORWAY—FLEET Norsk Garantiinstitutt for Skip Og Borefartoyer A/S (Norwegian Guarantee Institute For Shipowners). Articles Of Association (December 5, 1975). Norwegian Shipowners' Association. Annual Report . Review of Norwegian Shipping 1975 (1976). Nygaard, Haakon. How Can the Guarantee Insitute Assist Shipowners — Its Influence on The Shipowners ' Activities , During and After the Crisis . Oslo: Nor-Shipping 1977. NORWAY — SHIPBUILDING "Establishment of a Temporary Guarantee Institute. Extract from Norwegian Government Proposal. Laneinstituttet For Skipsbyggeriene (Shipbuilding Loan Institute). Statement of Accounts 1975 . "Omtiltak Pa Skipsbyggingssektoren (Discussion of Shipbuilding Sector in Norway)." Industri- departementet, St. Prp.Nr . 101 (1976-1977). The Norwegian Shipbuilders' Association (Description of Member Yards) 1975 . Norwegian Shipbuilders' Asso- ciation (May 1975). NORWAY— GENERAL Arbeidsmarkedstatistikk 1975 . (Labour Market Statistics. ) Central Bureau of Statistics (1976). Godstransport Pa Kysten 1970 . (Coastwise Transport of Goods.) Central Bureau of Statistics (1972). Handbook Over Norske Obligasjoner Og Aksjer 1974 . (1975, 1976) (Norwegian Shipbuilding and Shipping Companies Performance.) Oslo: Carl Kierulf & Co. A.S. Kredittmarkedstatistikk 1972-1974 . (Credit Market Statistics.) Central Bureau of Statistics (1975). Lonn Sstatistikk Innenriks Sjofart November 1975 . (Wage Statistics Coasting Trade. ) Central Bureau of Statistics (1976). Lonn Sstatistikk Utenrifsfart Mars 1976 (Wage Statistics Ocean Transport.) Central Bureau of Statistics (1976). Sameferdselsstatistikk 1975 . (Transport and Communication Statistics.) Central Bureau of Statistics (1976). Skattestatistikk 1973 . (Tax Statistics) Central Bureau of Statistics (1975). Statistisk Arbok 1976 . (Statistical Yearbook 1976. ) (1974) Central Bureau of Statistics. The National Budget of Norway 1976 . (1977) Royal Norwegian Ministry of Finance Parliamentary Report No. 1. Veiviser I Norsk Statistikk 1975 . (Guide to Norwegian Statistics.) Central Bureau of Statistics (1976). E-5 SWEDEN--FLEET Rederiaktiebolaget TransAt lant ic. Annual Report 1971 (1972, 1973, 1974, 1975). Rinman, Thorsten and Linden, Rigmor. Sjofartens Bok 1977 . Svensk Sjofarts Tidning (The Swedish Shipping Gazette), December 27, 1976. Saleninvest AB. Annual Report 1975 . Salenrederierna AB. Annual Report 1973 (1974). Sjofart 1970 (1971, 1972, 1973, 1974, 1975). National Central Bureau of Statistics. Tirfing Steamship Company. Annual Report 1971 (1972, 1973, 1974, 1975). The Salen Group. Annual Report 1971 (1972). Verksamhetsberattelse 1972-1973 (1974-1975, 1975-1976). Sveriges Redaref orening. SWEDEN—SHIPBUILDING AB Gotaverken. Annual Report 1973 (1975-1976). Eriksberg Mekaniska Verkstads AB. Annual Report 1972-1973 , (1975). Fartygsfinansiering (Ship Financing). Statens Offentliga Utredningar Industridepartementet (1975). Kockums Mekaniska Verkstads AB. Annual Report 1973 (1975). Ministry of Industry. "Press Release" (Regarding Shipyard Collectivization and Subsidization.) (February 18, 1977.) RapportFran Analysgruppen For Vissa Varvsfragor (Analysis of Shipbuilding Problems). Industridepartementet (1977). E-6 "The Swedish Shipbuilding Industry During 1976." Gothenburg: The Swedish Shipbuilders' Association (1977). Uddeval lavarvet AB. Annual Report 1975 . SWEDEN—GENERAL AB Svensk Exportkredit (Swedish Export Credit Corporation). Annual Report 1975 . Some Data About Sweden 1975-1976 . Skandinaviska Enskilda Banken. Svenska Skeppshypotekskassan Och Skeppsf artens Sekundar- lanekassa (Swedish Guarantee Loan and Mortgage Bank). Annual Report 1972 (1975, preliminary 1977). WEST GERMANY— FLEET Hapag Lloyd Aktiengesellschaf t . Annual Report 1975 . Hansa. Annual Report 1973 . Seereederei "Frigga" Aktiengesellschaf t. Annual Report 1975 . Sloman Neptun Schiffahrts Aktiengesellschaf t. Annual Report 1975 . Verband Deutscher Reeder, Seeschif f ahrt 1970 , (1971, 1972, 1973, 1974, 1975, 1976). The Annual Report of the German Ship Operators' Association. WEST GERMANY — SHIPBUILDING Aktien-Gesellschaf t "Weser. " Annual Report 1975 . Blohm & Voss. Annual Report 1975 . E-7 Bremer Vulcan. Annual Report 1975 , Deutscher Schiffbau 1975 . Verband Der Deutschen Schif f bauindustrie E.V. (Association of the German Shipbuilding Industry). German Shipyards for Ocean-Going Vessels . Association of the German Shipbuilding Industry (August 1976). German Shipyards for Inland Waterway Vessels and Small Ships . Association of the German Shipbuilding Industry (August 1976). Howaldtswerke-Deutsche Werft. Annual Report 1974-1975 . & K (Orenstein & Koppel) Aktiengesellschaf t. Annual Report 1975 . "Tendenzen Am Schif fbaumarkt (Directions in Shipbuilding) 1976." Verband Der Deutschen Schif f bauindustrie E.V. (November 1976). Wolf, Dr. Gunther. Schif fsexport Finanzierung, Deutsche Werften Im Auf Und Ab Pes Wectmarktes (German Shipyards in the Highs and Lows of the World Market). Frankfurt, 1975. WEST GERMANY— GENERAL Annual Report of the European Recovery Program (ERP) 1975 . Herausgegeben Vom Referat Presse Und Information Des Bundesministeriums Fur Wirtschaft. (April 1975). Peat, Marwick, Mitchell & Co. , International Tax and Business Guide to West Germany . Peat, Marwick, Mitchell & Co. , New York (1973). Statistik Der Schiffahrt 1975 (Shipping Statistics 1975) (1976). Institute of Shipping Economics Bremen. E-8 FRANCE—FLEET Chargeurs Reunis. Annual Report 1971 (1972, 1973, 1974, 1975). Compagnie Des Messageries Maritimes. Annual Report 1970 (1971, 1972, 1973, 1974, 1975). Compagnie Generale Transatlantlique. Annual Report 1971 (1972, 1973, 1974, 1975). La Marine Merchande En 1975 . Comite Central Des Armateurs De France (March 6, 1976). Le Transport Maritime Etudes Et Statistiques 1976 . Comite Central Des Armateurs De France. Societe Francaise De Transports Maritimes. Annual Report 1970 (1971, 1972, 1973, 1974, 1975). FRANCE— SHIPBUILDING Chantiers De L 'Atlantique. Annual Report 1971 (1972, 1973, 1974, 1975). Chantiers Navals De La Cidtat. Annual Report 1975 . Compagnie Generale Maritime. Annual Report 1975 . La Construction Navale . Chambre Syndicale Des Construc- teurs De Navires Et De Machines Marines (June 1975) (June 1976). La Production Des Chantiers Francais En 1975 . Navires Ports Et Chantiers (March 1976) pp. 149-158. "Le Rapport De La Chambre Syndicale Des Constructeurs De Navires Et De Machines Marines." Journal De La Marine Marchande (June 10, 1976), p. 1386-1392. FRANCE — GENERAL \nnexe Au Rapport Du Conseil D 'Administration Annee 1975 . Chambre Syndicale Des Constructeurs De Navires & De Machines Marines. (Statistics Relating French Shipping & Shipbuilding to World). Annuaire 1975 De Statistique Industriele . Ministere De L' Industrie Et De La Recherche. Budget Vote De 1970. Transports, IV Marine Marchande (Budget Vote on Marine Transportation Issues 1970). (1971, 1972, 1973, 1974, 1975). Paris: Imprimerie Nationale. Bulletin Mensuel De Statistique . Insitut National De La Statistique Et Des Etudes Economiques. Journal De La Marine Marchande (Oct 16, 1975; June 10, 1976; July 29, 1976). Ministere De L'Economie Et Des Finances. Annuaire Statis- tique De La France 1975 . Paris: L'Institut National De La Statistique Et Des Etudes Ecoonomiques, Vol. 80. Peat, Marwick, Mitchell & Co., International Tax and Business Guide to France . New York: Peat, Marwick, Mitchell & Co. WORLD— FLEET A Review of Developments in World Trade and Their Effect on the Shipping Market . Lambert Brothers Shipping Ltd. , (1976). London, England. Averin, Igor M. The Soviet Merchant Marine: Looking Ahead . Oslo: Nor-Shipping Seminar 1977 (May 10, 1977). Al-Sultan, Abdul Rahman. Arab Intentions In Oil Transport & Future Developments . Oslo: Nor-Shipping Seminar 1977. Hayman, Christopher; Lones, Trevor; Robinson, David, and Barnard, Bruce. Arab Shipping: Poised for Takeoff . London: Seatrade Publications Ltd. , May 1975. Hayman, Christopher. Brazil . London: Seatrade Publications Ltd., May 1977. Jong, Jac de. The Impact of Comecon Maritime Policy on Western Shipping: A Literature Survey . Rotterdam, Netherlands Maritime Institute, March 1976. Lloyd's Register of Shipping Statistical Tables 1971 (1973, 1976). Lloyd's Register of Shipping. London, England. Marine Marchande 1976 . Journal De La Marine Marchande (Annual Review). Paris, France. Marad. A Statistical Analysis of the World's Merchant Fleets 1970 (1971, 1972, 1973, 1974, 1975). Office of Subsidy Administration, U.S. Department of Commerce. Washington, D.C. Marad. Merchant Fleets of the World 1965 (1966-1976). U.S. Department of Commerce. Washington, D.C. Maritime Transport 1970 (1971, 1972, 1973, 1974, 1975, 1976). Organization for Economic Cooperation and Development (1971). Paris, France. Russian Shipping: Background Data and Analyses . Lambert Brothers Shipping Ltd., (May 1976). London, England. Soviet Shipping . Seatrade Publications Ltd., (Feb. 1976). London, England. The Rise of National Fleets . H. P. Drewry Shipping Consultants Ltd., (1973), No. 16. London, England. United Nations Conference on Trade and Development. United Nations Conference of Plenipotentiaries on a Code of Conduct for Liner Conferences . New York: United Nations Publication (1975), Vol. I, Vol II. World Bulk Fleet , January 1976. Fearnley & Egers Chartering Co., Ltd., (March 1976). Oslo, Norway. World Bulk Trades, 1974 . Fearnley & Egers Chartering Co. , Ltd., (October 1975) Oslo, Norway. World Shipping Under Flags of Convenience . H. P. Drewry Shipping Consultants Ltd. , (July 1975) No. 37. London, England. E-ll WORLD — SHIPBUILDING Assessment of World Shipbuilding Situation in Late Seventies and Early Eighties . Awes (October 20, 1976). Communication From the Commission to the Council on Ship - building . Commission of the European Community (1976). Brussels, Belgium. Division of Foreign Costs. Overview of Economic and Ship - building Conditions in Europe . Marad (November 1976). Day, J. Graham. European Shipbuilding — Which Direction ? Oslo: Nor-Shipping Seminar 1977. Fairplay International. World Ships on Order (1970-1977). Fairplay International Records & Statistics. London, England. Marad. Relative Costs of Shipbuilding . U.S. Department of Commerce (June 1976). Washington, D.C. Marad. New Ship Construction 1970 (1971, 1972, 1973, 1974, 1975). U.S. Department of Commerce. Washington, D.C. Measures of Assistance to Shipbuilding . (1973, 1976). Organization for Economic Cooperation and Development. Paris, France. Report on the Long and Medium Term Development of the Ship - building Market . Commission of the European Communities (1972). Luxembourg. Shipbuilders Council of America. Annual Report 1973 (1974, 1975). Washington, D.C. Shipbuilding Credits and Government Aid . H. P. Drewry Shipping Consultants Ltd., (Feb. 1973) No. 13. London, England. Ships on Order (1974-1977). The Motor Ship, IPC Industrial Press Ltd. , London, England. Support for the World Shipbuilding Industry . H. P. Drewry Shipping Consultants Ltd., (Dec. 1976) No. 50. London, England. "Transport Ministry Surveys European Aids & Subsidies For Shipbuilding." TheKaiji, April 20, 1977. Ward, John W., et. al. The United States Shipbuilding Industry: Structure Conduct Performance . Massachusetts: National Technical Information Service, March 1975. World Shipbuilding Outlook . Office of Policy and Plans Divi- sion of Special Studies (May 14, 1976). Washington, D.C. WORLD— GENERAL Fairplay Shipping Weekly International . (1970-1977). Financial Times Ltd. , London, England. Governmental Buy - National Practices of the United States and Other Countries - An Assessment . U.S. General Accounting Office (Sept. 30, 1976). Washington, D.C. Guzhenko, T. "Report by Minister of the Maritime Fleet." Moscow Morskoy Flot, No. 2 (Feb. 1976), pp. 1-4. London, England. Shipping Statistics and Economics (1970-1977). H. P. Drewry Shipping Consultants Ltd., London, England. International Financial Statistics . International Monetary Fund (June 1977). Washington, D.C. Lloyd's Register of Shipping. Annual Report 1971 (1972, 1973, 1974, 1975). London, England. MarAd. Foreign Flag Merchants Ships Owned by U.S. Parent Companies 1970 (1971, 1972, 1973, 1974, 1975). U.S. Department of Commerce. Washington, D.C. MarAd. Foreign Maritime Aids . Collett, Gatenby and Hatfield, Inc. (June 1974). Washington, D.C. MarAd. Maritime Subsidies 1971 (1974, 1975, 1976). U.S. Department of Commerce. Washington, D.C. Marine Engineering Log (1972-1977). Simmons Boardman Publishing Corporation. Bristol, Conn. Norland, Q.R. Changes in International Finance of Shippi ng Shipbuilding and Related Industries . Oslo: Nor- Shipping Seminar 1977 (May 11, 1977). OECD Economic Outlook . Organisation for Economic Coopera- tion and Development (December 1976) Volume 20. Paris, France. Review 1976 . Fearnley & Egers Chartering Co. , Ltd. , (January 1977). Oslo, Norway. SeaTrade (1972-1977). SeaTrade Publications Ltd., London, England. Sychrava, Lev and Bush, Marian. Forecasting Ship Demand . London: Seatrade Publications Ltd., 1976. WORLD— GENERAL U.S. Senate Committee on Commerce. Soviet Ocean Activities: A Preliminary Survey . Washington: U.S. Government Printing Office, April 30, 1975. United States Maritime Commission. Economic Survey of the American Merchant Marine . Washington: U.S. Government Printing Office (1937). PENN STATE UNIVERSITY LIBRARIES AQQDDTlEbBAlb