Review of the Framework on State Aid to Shipbuilding - European ...

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REVIEW OF THE FRAMEWORK ON STATE AID TO SHIPBUILDING CESA RESPONSE TO THE CONSULTATION PAPER

I.

Summary of main items

Background A. Shipbuilding is a high tech sector providing thousands of high skilled jobs at shipyards and countless suppliers of equipment and services to the yards. Shipbuilding forms a keystone the maritime cluster with its tight network including many SMEs and invaluable scientific excellence. Together, they offer unique capabilities to drive the development in well established growth markets such as the cruise industry as well as new markets including low emission ships, ocean energy related hardware, deep sea mining and other off-shore applications, and many other highly specialised fields of maritime activities. B. The global economic crisis has deeply affected the shipbuilding industry worldwide. The temporary but deep demand gap in combination with massive global unbalances and unfair trade practices in Asia threatens to jeopardize Europe’s successful path of the past years. An abolition of the Shipbuilding Framework would further aggravate this situation. View on the Shipbuilding Framework C. The “Framework for State aid to Shipbuilding” (hereafter referred to as Shipbuilding Framework or SF) serves as an instrument enabling the application of EU State aid rules to the sector specific conditions in shipbuilding. It is considered as a helpful instrument that simplifies the rule application without creating any new or additional forms of state aid. The Shipbuilding Framework should therefore be maintained. D. To contribute to the better understanding of the nature of the Shipbuilding Framework, CESA proposes to modify its title to “Framework for the application of EU State aid rules to the shipbuilding sector”. Such a modification would help to correct the unfortunately still widely spread misperception that shipbuilding still benefits from specific subsidies. E. Europe has a long tradition rejecting to engage in a subsidy race in the shipbuilding sector. In line with the view expressed above, the industry is taking this general European position fully into account and is not advocating any new support measures or instruments exclusively for this sector. F. The global competitive position of the European industry is under severe pressure due to the difficult market environment and in particular due to extensive support measures in competing countries. As there is no base to compete on labour cost, European industry has

to advance in superior products regarding ship safety, efficiency and marine environment protection as well as in innovative processes to further increase productivity. The Shipbuilding Framework provides appropriate incentives in this direction and is indispensable to achieve these results. G. The intensity of the market distortions, for which no globally effective trade rules are in place, are seriously endangering Europe’s long-term capabilities in this field. Consequently, the Shipbuilding Framework should provide Member States with clear guidelines for the application of generally available instruments if considered appropriate to enhance the competitive position of their shipbuilding industry. H. Innovation is not only driving the competitiveness of European producers, it is also essential to improve the efficient, safe and clean operation of ships and other maritime hardware and to open new fields of utilising the ocean and seas in a sustainable way. The need for innovative solutions in the maritime world has significantly increased over the past years. Innovation aid under the Shipbuilding Framework has been an effective instrument to stimulate research, development and innovation activities in the shipbuilding industry. With low aid intensity it has been able to generate significant results with investment volumes approx. 100 times of the aid volume. This successful approach must remain in place. I. The current review of the Shipbuilding Framework provides the ideal opportunity to incorporate specific provisions to facilitate market penetration of “green technologies”. Incentives to go beyond regulatory requirements should be introduced along the lines of the State aid framework for environmental protection. However, the application of this horizontal framework to the shipbuilding sector has hardly advanced. Appropriate and practical provisions along the requirements of the horizontal rules should be incorporated in the Shipbuilding Framework. This would be an effective contribution to the simplification of EU state aid rules and would provide an appropriate policy solution to a number of environmental challenges linked to maritime operations including harmful emission of SOx and NOx, greenhouse gases as well as a number of other pollutants. J. Policy considerations, which have resulted in a restrictive approach to facility investments in the context of regional aid, have become obsolete. Consequently, the respective provisions in the Shipbuilding Framework are no longer necessary or should be modified in line with the horizontally applicable rules. K. The definition of shipbuilding activities should be reviewed in order to ensure a proper reflection of all relevant activities of the sector.

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II.

General Questions (Section A)

A.1. b) Application of the Shipbuilding Framework – assessment by stakeholders 1. Was your enterprise or members of your association a beneficiary of aid under the Shipbuilding Framework since 2004 until June 2010? If yes: Yes 2. Please indicate the total amount of aid (in million €) received by your enterprise between 2004 and June 2010, on a yearly basis, under the Shipbuilding Framework. Please specify the aid amounts under each specific provision of the Framework and if possible distinguish whether the aid was given under an approved State aid scheme or as individual aid: ¾ Innovation aid ¾ Closure aid ¾ Employment aid ¾ Export credits ¾ Development aid ¾ Regional aid This information is not available to CESA 3. In general terms what is your experience with the application of the Shipbuilding Framework? The SF is a welcome instrument providing, despite low aid intensities, effective incentives for the European shipbuilding industry to further enhance productivity and the development of more efficient, safe and clean products and processes. 4. What are the positive and negative impacts of this aid? In particular, 4.1. What impact does it have on the global competitive position of the EU shipbuilding industry? Does it impact on productivity of this industry? The global competitive position of the European industry is under severe pressure due to the difficult market environment and in particular due to extensive support measures in competing countries outside the EEA. As there is no base to compete on labour cost, European industry has to advance in superior products regarding ship safety, efficiency and marine environment protection as well as in innovative processes to further increase productivity. The SF does provide the right incentives in this direction and is indispensable to achieve these results.

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Consequently we would recommend to maintain the SF. The modifications proposed below would further improve its use and effectiveness. 4.2. Does it have an impact on individual companies or certain regions? Does it have an impact on employment levels in this industry, for instance in terms of jobs created or lost? The application of aid instruments under the SF has had significant benefit to numerous shipyards, many of which being located in economically weaker regions. These benefits have significantly contributed to the direct and indirect employment situation through job creation, job safeguard or reduction of job losses. 4.3. How does aid under the Shipbuilding Framework contribute to the specialisation of the EU shipbuilding industry? Does it promote better qualifications of workers, better environmental conditions/products? See above; there are clear cases, which demonstrate that jobs have been created, specialisation has been further developed, access to new shipbuilding markets has been improved, higher qualifications of workers have been facilitated and environmental performance has been improved. As aid for standard products is rarely possible, experience is supporting what seems evident namely that indeed further specialisation has been supported by instruments under the SF. 4.4. How do you evaluate the administrative burden related to the application of the Shipbuilding Framework? Generally speaking, the implementation of support measures is well facilitated by the SF. The administrative burden is considerable but for most instruments acceptable taking into account that the system should not be open to misuse. Problems have been experienced mainly with regard to smaller companies and smaller projects. A constructive way forward would be to allow simplified procedures. This would also be recommendable for Regional aid, which will be addressed in section C.3.

A.3. Market developments 5. How would you describe the development of the shipbuilding capacity in the EU in the past decade? What conclusion do you draw of this development for the mid to long term future, in terms of capacity evolution? The production capacity in the EU has remained fairly stable over the past decades. While some facilities have been closed others have increased production capacity mainly by improving productivity. However, supply and demand balance is to be considered in a global context. Therefore it must be noted that, the stable European

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capacity development compares to a substantial capacity increase elsewhere. Between 1999 and 2009 global output increased to approx. 250% and is expected to reach nearly 300% end of this year. Consequently the European capacity market share has dropped from roughly 25% to less than 10%. Anticipating a continuous trend for the coming years both globally as well as in Europe it is evident that a European policy to address overcapacity can have no meaningful impact any longer. 6. Do you consider that there is overcapacity (or threat of) for the market segments in which your shipyard(s)/company operate? If yes, please provide an estimate of overcapacity, per market segment. In your view is overcapacity structural (persisting despite the cycles of the market) or linked with the current (2009-2010) situation? Do you perceive that overcapacity still has the effect of depressing prices in the relevant market segment? Please provide a detailed explanation. To distinguish overcapacity situations by market segments makes only limited sense, as shipyards are generally able to supply a quite wide range of market segments. The overall overcapacity situation globally has significantly aggravated since the start of the economic crisis and is considered today as high as 50%. Most niche markets appear to be much more balanced albeit with significant pressure from companies, which try to enter the niche market. The high overcapacity in mass markets provides a strong incentive for players to attempt entries in niche areas. For example, shipyards in South Korea, strongly supported by state support, react to low price competition from China by aim to enter high tech niche markets. Such moves are often undertaken by offering prices below own production cost. In case of South Korea and China, this is further facilitated by undervalued currencies. In conclusion, overcapacity exists and leads to strong pressure on prices even in market segments not immediately characterised by strong overcapacity. 7. Please explain how, from your perspective, employment has developed in the EU shipbuilding industry. In particular, how was employment affected by the financial and economic crisis in this industry? What are the perspectives for the future in this regard? After several years of positive development yards have intensified their recruitment efforts attracting highly skilled workers. With the advances in the production technologies and the complexity of the products, the skill level in the industry was further raised. However, the collapse in demand that resulted from the economic crisis has caused substantial production disruptions in numerous yards, which reacted by reducing jobs temporarily or permanently. Some yards have discontinued operations partly or fully. Temporary production disruptions, temporary lay-offs and other indication of uncertain company prospects can substantially damage the company’s competitiveness as the most qualified people may be motivated to search alternative employment. With further shrinking orderbooks, this trend has not been stopped yet. Therefore, further loss of jobs is expected in the short term. This temporary drain of skilled workforce could amplify the skills shortage already experienced by a number of shipyards. It is anticipated that the industry will further increase its efforts in attracting talented young naval architects and engineers.

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8. In your view, are there developments in the structure of the EU shipbuilding industry, which call for changing the State aid regime for shipbuilding? Please provide a detailed reply. A number of structural developments have been observed over the past decade, which should be taken into account for the definition of future provisions of the SF. o The specialisation of European Shipyards has strongly progressed and this process needs to be continued and fostered. o The share of standard shiptypes in the production portfolio of the European industry has significantly reduced. o Global competition is today also felt in smaller ships, including vessels for inland navigation. o While most European yards have remained in size similar to the situation one or two decades ago, they are today faced with competitors which have massively grown in size. o The importance of environment friendly products and processes has strongly increased. This will continue namely by necessary action on air emission including SOx, NOx and greenhouse gases. o The increase of offshore activities demands a direct reply by the European Shipbuilding Industry, to satisfy the local demand locally. 9. Do you perceive that there are significant trade distortions in the world shipbuilding market that concern the shipbuilding segment on which your shipyard(s)/company is active? If so, please specify the nature of these distortions1 and the way they impact on your activity. Numerous shipbuilding nations, well established as well as newly emerging ones, provide huge amounts of support and financial assistance to their domestic producers, which cause substantial trade distortions. Countless examples of the application of various forms of subsidies including investment aid, government bailouts, aid related to the financing of newbuilding contracts, loans and payment guarantees to shipbuilders and suppliers, direct loans and debt guarantees to shipowners, subsidy on ship prices for domestic ocean going ships’ buyers, mandatory requirements to place orders at domestic yards and loans at competitive rates, subsidized loans for domestically built ships, loans for newbuilding for export purposes, tax exemption covering all foreign-source income, etc. With the global economic crisis, the intensity of the trade distortions has further increased and has reached unprecedented levels of government interventions in the shipbuilding sector. The absence of effective global trade rules to address these market distortions has exacerbated the situation. These developments have prevented effective market corrections in terms of overcapacity outside the EEA. Companies which had offered prices below cost of production have been bailed-out. Additional liquidity, access to cheap financing and a number of other forms of support have enabled companies to continue offering unreasonably low prices. CESA has passed information on an exemplary injurious

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Examples of distortions could be subsidies by other countries.

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pricing case to the European Commission last year. Further efforts in this context are on-going. Additional evidence will be provided in a supplement document.

A. 4. Financing of shipbuilding activities 10. Please describe how shipbuilding is generally financed (working capital financing) in your company/Member State. In this regards, has the financial and economic crisis changed the normal sources of financing? Please specify. The general financing of shipbuilding activities as it has been described in the LeaderSHIP context, has in principle not changed. However, since the financial crisis it has become much more difficult to obtain financing in Europe as a number of financial institutions have reduced or withdrawn from their engagement in pre- and post-delivery financing of ships. Public guarantee instruments have therefore become much more important. The credit squeeze in the shipbuilding sectors remains despite first signs of a positive market development. 11. Based on your experience (as a shipyard; ship owner/Member State) what is the proportion of public financing (i.e. State aid and other State support in any form, for example advanced payment guarantees at market rates) versus private financing in shipbuilding? How do you see the role of State aid for shipbuilding financing in the short/medium/long term? No general information is available at CESA concerning the proportion of public financing versus private financing in shipbuilding. Access to competitively priced financing is often a decisive factor in the acquisition of new projects. The engagement of government authorities, state owned banks and other state entities in pre- and post delivery financing of ships in particular in Asia has sharply increased over the past years. For the short to medium-term perspective it can be assumed that financing for shipbuilding projects will generally require support by state credit / guarantee instruments also in Europe.

III.

Definitions and Scope (Section B)

12. Do you consider that section 2 of the Framework accurately reflects the activities of the EU shipbuilding industry? If not, how should it be modified? Please justify your reply. No, the definitions set out in Section 2 originate from provisions from the 80s and do not - due to a significant evolution of the production portfolio - accurately reflect the current EU shipbuilding activities any longer. New shiptypes have been developed and existing shiptypes have undergone significant modifications that are not adequately reflected in the wording defining shipbuilding, ship repair and ship 7

conversion activities. In this respect, the production of floatable, moving offshore structures regardless of shape (ship or pontoon/barge type or equivalent) or material with or without self propulsion capabilities as well as inland waterway vessels should be included in the definition of shipbuilding. Such a revision is also appropriate considering that intense global competition exists today also in these market segments. Furthermore, innovative solutions are needed in more and more maritime activities, which are relevant for the successful implementation of EU policy goals such as modal shift towards sustainable transport systems or the exploitation of marine resources in particular offshore energy through wind farming. On the other hand, the application of the shipbuilding framework for related companies that have no involvement in shipbuilding or supply activity is inappropriate, and the current wording should be improved. A CESA proposal for revised definitions is available a supplement document. 13. Do you agree with the scope of the Framework? In particular, do you consider that the Framework should include State aid to both ship yards and ship owners and third parties, or should it be limited to aid to shipyards? If not, what type of "third parties" is/could be beneficiaries of aid? In order to maintain clear safeguard of fair competition, the scope of the SF should be principally maintained in the sense that any aid which primarily aims at improving the competitive position of the European shipbuilding industry should be covered by the SF independently of the direct recipient. The parallel existence of the Guidelines for Maritime Transport however, must not lead to negative discrimination observed in the past, namely when aid instruments made available to third parties e.g. shipowners could apply only if not in connection with a project at a European yard. Any aid provision applicable to any third party when dealing with non-EU shipbuilding enterprises must equally apply to EU shipbuilding enterprises. 14. Do you consider that there are provisions - in the Shipbuilding Framework overlapping with those of the maritime guidelines2,– in particular the provisions on investment aid in these guidelines- which set out the rules under which aid to the shipping industry can be approved by the Commission? Existing inconsistencies, as mentioned above, should be removed. 15. Do you have any other comments concerning the scope of the Framework? Please justify your reply. No further comments.

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Commission communication C(2004)43 – Community guidelines on State aid to maritime transport, OJ C 13 of 17.1;2004, p.3

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IV.

Specific provisions (Section C)

Section C 1-Aid to research, development and innovation 16. Please provide examples of projects that were financed with innovation aid and explain what the innovation consists of. Please also indicate whether these projects consisted mostly of (a) innovative processes for the shipyard, (b) ship prototypes or (c) components of products. In a supplement document, sample cases are compiled to facilitate the understanding about the different forms of innovations and the positive effects and high efficiency of innovation aid. 17. How much does your shipyard spend on R&D activities, as a percentage of total operating expenses, on a yearly basis? What percentage of these costs was clearly incurred for innovation projects? Due to the absence of long series production shipbuilding, the cost for product development take a comparatively high amount of the total expenditure. In a study published by CESA in 2002 was established that on average approx. 10% of turnover invested in RDI activities taking into account all costs necessary to develop a prototype. The majority of this amount is directly linked to innovation projects. In addition, CESA would like to highlight that a clear increase in pre-competitive research activities has been recorded since the introduction of the innovation aid. 18. In a given year, how many innovative projects 3 (i.e. expressed as a percentage of the number of ships produced, or of the turnover) are carried out by your shipyard? In 2003, a consultant analysed on behalf of CESA the at that time existing order book of European shipyards and found that one out of four ships was considered a full prototype ship and another one out of four a “semi-prototype” namely a sistership with significant new features compared to the first of her class. It should be noted this ratio is lower when more sister vessels can be sold, which can be the case in times of high demand for certain types of vessels. 19. Do you consider that without innovation aid, your shipyard (or shipyards in general) will in any event produce innovative vessels/ projects, as this is normally required from the market? If not, please explain why. The shipbuilding market is generally rather conservative. Ships as investment goods have a long life span and the majority of customers prefer proven technology rather 3

Innovative projects are to be understood as projects bearing innovation in the sense of the Shipbuilding Framework (i.e. compared to the state of the art existing in this industry in the Community)

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than taking risk with innovative solutions. In fact, a number of factors in the shipping markets such as current chartering practises and standards establish additional discouragement to employ innovative solutions. Higher safety margins or higher fuel efficiency will e.g. not necessarily yield higher charter rates. In this respect, shipping markets often fail in utilising technological progress despite clear economic benefits. This market failure leads to some extent to an underperformance in terms of quality and sustainability of operation. Due to their set of competitive advantages and disadvantages, European shipyards need to offer better products to be successful in a market. While RDI activities are a necessity to this end, they can only be conducted if the market is prepared to accept the related or perceived risks. It must be underlined that the risk exposure related to the production of prototype ships is substantial. Contrary to most other sectors, sales contracts in shipbuilding stipulate product performance definitions which are untested at the time of signature. Even small incidents related to e.g. one innovative element can be the origin of significant changes requiring significant additional resources and causing substantial disturbances for the production rpocess. Often such problems lead to considerable delays, which could even affect the production of the following products. Experience demonstrates that the production of prototype ships (like many large scale projects also in other sectors) often faces additional cost due to unforeseen difficulties even if delays can be compensated. It is safe to assume that all shipyards have made such negative experience with cost over-runs up to 10% and in rare cases even above. Such cost over-runs are always fully borne by the shipyards as the buyers do not accept to participate in the risk-taking (an aspect no always standard in other sectors as media reports in the construction industry seem to indicate.). The availability of innovation aid influences the risk assessment of each innovative element in the development of new products or processes. It allows companies to take additional steps towards new solutions, increasing the chances of market success for innovative products and, in consequence, stimulating further RDI activities. The accelerating effect of innovation aid can be considered as an important factor leading to higher efficiency and competitiveness, which is crucial in order to maintain the technological leadership in the field of complex shiptypes. Innovation speed is a crucial competitiveness element particularly considering the limited possibilities to protect intellectual property in maritime technology. 20. Based on experience, are there situations where the innovative project can/could be completed without State aid? Were there situations in which the application for innovation aid was not successful and if so was the project completed anyway? Please specify We have no information about such cases. However, there are examples where projects have failed because innovation aid was not made available. In some cases, this was due to problems with the low notification threshold for highly innovative small ships, in other cases the applications were delayed or the aid amount had to be reduced due to lack of funds in the Member State. In such cases the implementation speed is hampered and in some cases the projects failed to be profitable.

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21. Are the innovative aspects of a project likely to be driven by demand of the ship-owner, or developed on the initiative of the shipyard, or the equipment manufacturer, or other? Process innovation is usually the result of new solutions developed by the yard, which will cooperate with suppliers of production equipment to implement the innovative methods. Product innovation at shipyards usually involves several parties, including the endcustomer as the ultimate decision maker and various suppliers which often stimulate new ideas and can play important roles for the implementation of new concepts. The yard conceives the projects from the beginning, undertakes the integration of various systems including all coordination requirements and remains fully responsible for the final performance of the product. While no innovation process can be conducted alone, the shipyard forms the centrepiece between project idea and delivery. 22. Are the innovative aspects of a project usually used for a whole series of ships or do they usually concern a single ship, based on technical specifications required by the shipowner? Please give examples from your practice. In most cases the advances achieved through innovation aid go beyond the actual project. While this is obvious for process innovation it can be considered as a fact even for highly specialised one-off prototypes as there are always general learning effects recorded. 23. Do you consider that since the entry into force of the Shipbuilding Framework, innovation aid has contributed to improving the efficiency and competitiveness of your shipyard/the EU shipbuilding industry? In particular, does it facilitate the introduction and dissemination of new production methods, technologies and products? Does it stimulate or hinder research and development? Do you consider that the present "innovation aid" rules are the right tool for reaching these objectives? Or there could be alternative rules/instruments for promoting the efficiency and competitiveness of EU shipyards? Please provide a detailed reply, with concrete examples. As explain above, innovation aid has clearly contributed to improving the efficiency and competitiveness of the EU shipbuilding industry. It has facilitated the introduction and dissemination of new production methods, technologies and products and it has stimulated research and development. Therefore, we clearly consider the present "innovation aid" concept as the right tool for reaching these objectives. 24. Please provide an estimate of the economic impact of innovation aid for your shipyard. Please also explain if the projects that benefited from innovation aid had benefits for the environment. Based on previous analysis and on an approximation of the data available to CESA, we estimate that innovation aid has significantly contributed to stimulate investments in products and processes of more than 100 times the aid amount. Innovation is not

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only driving the competitiveness of European producers, it is also essential to improve the efficient, safe and clear operation of ships and other maritime hardware and to open new fields of utilising the ocean and seas. The need for innovative solutions in the maritime world has significantly increased over the past years. 25. Have you experienced any problems with the application of the current innovation aid rules? In particular, do you consider the rules as existing in your country complex/discouraging? Should the notification thresholds be reviewed? If yes, please specify the details and explain how, in your view, the rules should be modified. Experience has shown that the administrative burden is significant, but not generally too complex or discouraging. In comparison to time and effort required in R&D projects of comparable size the method of application of innovation rule constitutes an improvement, which has yielded a significantly increased implementation speed that is necessary to achieve competitiveness goals. The administrative burden, however, becomes prohibitive when the individual notification threshold is exceeded. While this effect has been intended particularly for larger projects, experience has shown that it has undermined to some extent the participation of smaller enterprises / smaller projects. For small projects, the eligible cost per cgt is on average higher than for large projects. The threshold thus not only leads to small total aid amounts but also often cover only a small part of the actual innovation expenditure. As a result, shipyards sometimes refrain from considering the use of the instrument. This problem can be corrected without modifying the SF text by revising the notified national programme accordingly. CESA proposes to make reference to the block exemption threshold of €7,5 mio for product innovation with small ships and process innovation as well. 26. Do you consider that innovation aid could be more effective than it is now for the purpose of building "greener' ships"? Would you prefer to exclude from the eligibility for innovation aid other types of innovation and only keep innovation if linked to "greener ships"? Or, do you take the opposite view and recommend a widening of the scope of application. Please specify which sort of amendments you would like to see and justify. To exclude other types of innovation than those linked to "greener ships" from the eligibility for innovation aid would clearly weaken the effectiveness of the instrument substantially. In particular the strong positive effect of process innovations for the strengthening of the competitiveness of the European industry would be lost. Also a number of product innovations e.g. linked to improved safety, security or crew and passenger comfort to name but a few, could no longer be supported. Furthermore, new products for potential maritime growth markets of the future such as deep sea mining, off-shore energy generation or arctic exploitation would be hampered by a withdrawal of eligibility. Nevertheless, support instruments to facilitate market penetration of “green technologies” are an important objective, which deserve to be incorporated in the SF. An appropriate and effective instrument to do so would not be identical to the scope of innovation aid. In fact, many “green solutions” going significantly beyond regulatory requirements are already well known and not innovative but simply have

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not yet become industry standard. As an example, reference can be made to the current debate on low-sulphur fuel which is becoming mandatory in Emission Control Areas such as the North Sea and the Baltic Sea. The requirements will lead to a significant increase in fuel cost, which can be addressed by installing sulphur abatement technologies. Alternatively, a switch to LNG as main fuel, which is particularly interesting for newbuildings, would be a superior solution as the emissions will be further reduced significantly. A number of other areas of environmental protection related to the operation of ships has been identified by regulators, which clearly demonstrates that such considerations have been increasingly important to the shipbuilding sector. Incentives to go beyond regulatory requirements should be introduced along the lines of the State aid framework for environmental protection. However, the application of this horizontal framework to the shipbuilding sector has hardly advanced. Appropriate and practical provisions along the requirements of the horizontal rules should be incorporated in the SF. This would be an effective contribution to the simplification of EU state aid rules. 27. Do you consider that it is necessary to maintain innovation aid for shipbuilding, in addition to aid under the horizontal RDI Framework? Please justify your reply. The horizontal RDI Framework also includes provisions for innovation activities, including “the development of commercially usable prototypes and pilot projects […] where the prototype is necessarily the final commercial product and where it is too expensive to produce for it to be used only for demonstration and validation purposes.” The respective provisions actually foresee higher aid intensities than the SF and, to some extent, a wider ranger of eligible costs. However, they also stipulate that “in case of a subsequent commercial use of demonstration or pilot projects, any revenue generated from such use must be deducted from the eligible costs.” Whereas this provision is workable in most manufacturing sectors due to series production where development costs are amortised over a larger number of products, it is unworkable for prototype ships. The eligible RDI costs as defined in the SF will always only constitute a rather small portion of the total revenue resulting from the sale of the prototype ship. It must be borne in mind that an innovative ship is typically sold on the basis of a concept design, which is far from representing a complete product definition. Consequently, the largest part of the product development and of the innovation activities is carried out after the signature of the sales contract. In fact, only after concluding the contract, the yard is in the position to clarify all the specific RDI needs. Costly unplanned adaptations during the construction of the prototype may become necessary, in order to achieve the contractually defined performance data. By ordering an innovative vessel, the costumer takes the risk of unproven technology that, in the end, will demonstrate its full performance only during its life time operation. In the building contract he therefore ensures that any risks resulting from the implementation of the concept design with regard to technical performance or costs are fully borne by the shipyard. In view of the particularities of the shipbuilding sectors, the horizontal RDI Framework does not offer an appropriate solution for innovation aid for shipbuilding.

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28. Can you identify policy instruments other than State aid which could improve the conditions for innovation activities in the shipbuilding sector (such as regulatory instruments, improving networking, coordination and dissemination of information, education and the labour market)? Regulatory pressure e.g. related to better safety and environmental performance of vessels can have a positive effect, but can not be a substitute for innovation aid, because regulatory impact can only be achieved on large time scales. An immediate impact can not be anticipated since new requirements have to be phased in gradually to avoid market distortions. Furthermore, the shipbuilding market is global, and EU regulations may not apply at all to vessels utilized in other parts of the world. Requiring European shipyards to meet additional regulations that do not apply to the areas where the vessels will be deployed could put the European shipbuilding industry at a serious disadvantage. Also many other measures in the field of research policy stimulate intensified efforts related to R&D. Such complementing policies are creating synergises e.g. there is evidence that the use of innovation aid has also increased in parallel the respective companies participation in national and/or European research projects. Again it has to be noted that such measures could amplify the effects of innovation, and could form elements of an integrated innovation strategy stretching from industrial research, followed by experimental development to implementation in commercially used prototypes.

Section C 2 – Closure aid CESA does not feel to be in the position to assess the general appropriateness of closure aid and does not have sufficient information to respond to the questions posed below. However, from a general observation of the current market situation the initial motivation to introduce closure aid may still prevail. It should be taken into account that between the introduction of the SF in 2004 until the beginning of the global economic crisis in mid 2008, shipbuilding experienced a period of strong demand, thus low motivation for the industry to consider any facility closures. This demand situation has changed dramatically over the past two years with the orderbook of the European industry declining to it lowest level since more than one decade. The provisions on Closure aid allow shipyards to partly restructure, without the need to go through the fully-fledged restructuring process under the Rescue and Restructuring Guidelines; this model should be taken over when reviewing those guidelines. If this was done, then of course there would be no need to maintain separate provisions on closure aid in the shipbuilding framework. 29. In cases where a shipyard in financial difficulties has applied for aid, what was the main objective of this aid (maintain/reduce the business, maintain/reduce employment, change activity, close down the business)?

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30. In your view, why did shipyards that closed down in recent years not apply for closure aid under the Shipbuilding Framework? 31. Did you experience any problems which prevented the application of the current closure aid rules? If yes, please specify the details and explain how the rules should be modified. 32. In your view, is there a justification for maintaining closure aid, in the light of other existing aid instruments which could provide a suitable legal basis for aid to cover similar costs? In particular, is there in your view an overlap between costs eligible for closure aid and costs eligible for training aid? Is there any overlap between closure aid and aid to cover the social costs of restructuring provided for in part 3.2.6 of the Rescue and Restructuring Guidelines? Finally, would the provision for the remediation of polluted sites under the Environmental Aid Guidelines suffice for the remediation aspect of the closure? 33. Moreover, do you consider that closure aid overlaps with the Rescue and Restructuring Guidelines in so far as in cases of partial closure of a yard, closure would be part of the restructuring costs needed for the yard to regain viability and as such, would be eligible for aid and the rescue and restructuring guidelines? 34. What would be the impact for the EU shipbuilding industry if closure aid was abolished And if it was maintained? Please justify your reply. We do not consider the impact of closure aid, its existence nor its abolition, to have major impact on the shipbuilding industry.

Section C.3 -Regional aid – 35. Please provide an estimate of the number of shipyards located in assisted regions in your Member State. Which regions benefited most from State aid in the shipbuilding sector in the Member States? Information not available at CESA. 36. What is the relative importance, in economic and social terms, of shipyards for your region? Please provide a quantitative estimate. Shipyards are often among the biggest employers in coastal regions. Their importance in the context of the regional economies has been underlined by a Joint Declaration of European Shipbuilding Regions (annexed). 37. Please describe briefly the type of projects that have benefited from regional aid since 2004. Would it be possible to carry out the same project without aid? If not, please specify.

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The types of projects supported, which to the knowledge of CESA have benefited from regional aid are facility investments which significantly improved the productivity of existing installations. Such investments are vital for the future of the European shipbuilding industry but are often difficult to finance. 38. In case the regional aid rules as currently existing in the Shipbuilding Framework are maintained, do you consider that the scope and aid intensities of these rules are adequate for the type of investments that are necessary in this industry? Please justify In case regional aid rules are maintained, the scope and aid intensities need to be aligned with the ones applicable under the Regional Aid Guidelines. The limitation of the scope to existing installations of existing yards is neither adequate nor justified. The European shipbuilding industry needs to invest in more efficient production methods and facilities in order to strengthen its competitive position. This may make it necessary to create larger production units, in order to use synergies, become more efficient and use economies of scale. The current rules hamper, or make impossible, the granting of regional aid for such projects. Huge investments in Asia have been the key driver to their successful development. These investments have often been facilitated by direct or indirect state support. The restrictive European rules for shipbuilding capacity expansion have taken the opposite direction. While this has limited the contribution to global overcapacity, it has put the European industry at a further disadvantage compared to its global competitors. As argued above, Europe needs to recognise that its approach on shipbuilding capacity has not succeeded in obtaining a more balance global market. In view of the limited market of the industry in Europe, this policy can no longer result in any significant contribution to such rebalancing efforts. Therefore, the maintenance of restrictive rules, which in result aimed at minimising any support to capacity expansion, can no longer be justified. 39. In case regional aid was prohibited for shipbuilding (as is the case for the steel sector) would this prevent investments in the shipbuilding industry? Please specify. Shipbuilding investments would not be prevented generally, but would in some cases not take place. The reference to the steel sector is totally inappropriate. Significant structural differences exist: the steel sector is marked, inter alia, by much larger average company size, considerably stronger investment activities, substantially larger global market share and effective and often applied global trade rules (incl. tariffs, quotas and effective anti-dumping provisions). Furthermore, State aid rules are meant to prevent competitive distortions among EU producers. The distortions in the shipbuilding sectors mainly stem from outside the EU, but, especially Far Eastern producers not subject to such rules. No effective global trade instruments exist for maintaining a level playing field in shipbuilding, as ships are not goods “imported” and cannot be subject to Customs and import rules – by contrast to steel products. CESA sees no reason which would justify a comparison to the steel sector rather than to any other industry.

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40. If the regional aid rules for shipbuilding were aligned to the common rules would there be a danger of increased distortions of competition, given the cyclical nature of the shipbuilding market and the fact that only shipyards in assisted areas would be eligible for regional aid? Is it your perception that there is an appetite among European shipbuilders to increase production capacity and that regional aid could provide an incentive to do so? Do you consider that creating new capacity with the help of State aid would be a right step in a sector with problems of cyclical overcapacity? Regional aid generally could generally be considered to distort competition to some extent in any sector. However, cohesion objectives are also important to be taken into account. The European shipbuilding industry has a need to invest into the modernization of installations. Incentives to do so make economic sense and are necessary. A discrimination of shipbuilding compared with other sectors is not justified. 41. In your view has regional aid had a positive impact for the regions where shipyards are located? If yes, please provide concrete examples. There are examples of positive development of shipbuilding companies, which have undertaken investments supported by regional aid. In balance the support has brought positive result for the regional economic development. 42. Did you experience any problems with the interpretation or application of the current regional investment aid rules? If yes, please specify the details and explain how the rules should be modified. Key problems are linked to the restrictive nature of the SF regional aid rules compared to the horizontal provisions. In particular the strict interpretation of limiting the aid to investments in existing installations has unreasonably narrowed the scope of this instrument and has caused significant problems to its application.

C.4 – Employment aid – assessment requested from public authorities 43. In the light of the above, the current provision on employment aid in the Shipbuilding Framework no longer appears justified. Do you agree with this view? If not, what would be the reason to keep this provision? CESA agrees that there is no reason to maintain provision on employment aid in the SF. The generally applicable horizontal rules should apply.

C. 5 – Export credits and development aid

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44. If you are a public authority, please provide information on the amount of aid granted under approved export credits schemes since the entry into force of the Framework in 2004, (amount of aid granted and number of beneficiaries per year). 45. If you are a ship owner, please provide information on aid received as export credits since the entry into force of the Framework in 2004, on a yearly basis. 46. Do you consider it is useful to maintain specific provisions on export credits and development aid for shipbuilding? In your view, what is the added value of these provisions? CESA considers the OECD provisions to establish binding commitments to Member States in any case. However, we understand, the specific reference of the OECD provisions in the SF provides welcome clarification for administrations. It is evident that this reference can not be harmful. Therefore, CESA prefers these provisions to be maintained. 47. Did you experience any problems with the application of the rules on export credits and development aid? If yes, please specify the details and explain whether in your view the rules should be modified. Please provide a detailed answer. CESA is not aware of any specific problems with the application of the rules on export credits and development aid.

V.

Options for the future of the shipbuilding framework/ Other issues (Section D)

48. Do you have any other comments on the application of the Shipbuilding Framework or proposals for its modification on issues other than the ones covered in the previous questions? With reference the answer of question 26, CESA repeats the proposal to incorporate appropriate and practical provisions for State aid for environmental protection in the SF. Such provision would not establish an additional State aid instrument but would simplify the rule application and facilitate important EU objectives. 49. Based on your replies above, do you consider that the Shipbuilding Framework should (a) be maintained, (b) modified or (c) allowed to expire in December 2011 and shipbuilding become subject to common rules? Please provide a detailed answer. CESA has argued in detail why the SF is an important policy instrument which must be maintained. It contributed to the achievement of the addressed policy objectives. The continued existence of sector specific provisions is mainly justified by sector

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specific circumstances, which have already been recognised in the current SF and which in principal have not changed. Furthermore, CESA has described in detail were certain modifications of the SF should be undertaken to reflect policy and market developments.

CESA remains at the disposal of the Commission services for any further details on the information submitted, if required.

List of supplement documents: 1. 2. 3. 4.

Evidence for market distorting practises in the global shipbuilding market CESA proposal for revised definitions Samples of innovative projects supported by innovation aid Joint Declaration of European Shipbuilding Regions

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Supplement

EVIDENCE FOR MARKET DISTORTING PRACTISES IN THE GLOBAL SHIPBUILDING MARKET

Section A.3 on the consultation document on the Review of the Framework on State aid to Shipbuilding requests information on significant trade distortions in the world shipbuilding market. In its response, CESA explains that numerous shipbuilding nations, well established as well as newly emerging ones, provide huge amounts of support and financial assistance to their domestic producers, which cause substantial trade distortions. Reference is made countless examples of the application of various forms of subsidies including investment aid, government bailouts, aid related to the financing of newbuilding contracts, loans and payment guarantees to shipbuilders and suppliers, direct loans and debt guarantees to shipowners, subsidy on ship prices for domestic ocean going ships’ buyers, mandatory requirements to place orders at domestic yards and loans at competitive rates, subsidized loans for domestically built ships, loans for newbuilding for export purposes, tax exemption covering all foreign-source income, etc. This paper covers a collection of press articles and reports from 2009 onwards on measures taken by governments to support their domestic shipbuilding industry. Information about the following countries is compiled: SOUTH KOREA .......................................................................................................................21 CHINA........................................................................................................................................32 BRAZIL......................................................................................................................................42 CANADA....................................................................................................................................46 INDIA .........................................................................................................................................47 INDONESIA ..............................................................................................................................49 USA.............................................................................................................................................50 RUSSIA ......................................................................................................................................51 TURKEY....................................................................................................................................52

Market distorting factors in shipbuilding are also examined by the OECD Working Party 6. A Inventory of support measures in shipbuilding is maintained and available on-line: http://www.oecd.org/document/55/0,3343,en_2649_34211_44210490_1_1_1_1,00.html Following OECD documents could complement this list of support measures for shipbuilding: o C/WP6(2009)5/REV1 from 02-Jul-2009 o C/WP6(2009)11 from 12-Oct-2009 o C/WP6(2010)4 and C/WP6(2010)5 from 12-Mar-2010 20

SOUTH KOREA Developments regarding insolvency or restructuring efforts by shipbuilding companies in Korea and supporting articles: Status of Corporate Restructuring Promotion Law (CRPL) proceedings. Recently, the financial institution creditors decided to inject new/additional funding into some of the shipbuilding companies undergoing CRPL workout proceedings. Specifically, the relevant financial institution creditors decided to inject KRW 70 billion (approximately USD 60 million) into SLS Shipbuilding and KRW 45 billion (approximately USD 40 million) into 21st Century Shipbuilding to address the liquidity problem. In connection with the CRPL proceeding involving Daehan Shipbuilding, in November 2009, the financial institution creditors decided to inject additional funding in the amount of KRW 60 billion (i.e., approximately USD 50 million) and appointed DeloitteAnjin as arranger of an M&A transaction in which such creditors hope to sell Daehan Shipbuilding to a suitable buyer. To date, STX Offshore & Shipbuilding, Daewoo Shipbuilding & Marine Engineering, S&T Daewoo and Gahdie Investment (Iranian company) have submitted letters of intent, expressing their interest in acquiring Daehan Shipbuilding. The creditors of 21st Century shipbuilding accepted the yard’s application for debt restructuring and company rehabilitation after being supported via the FAST TRACK program, a government funded liquidity injection scheme for small and medium companies. The procedure will undergo with support from the yards’ main creditor- KDB. The financial losses of the yard stem partly from losses in derivative trading, or the so called hedging scheme “Knock-in, Knock-out” which was blown by the plunge in value of the Korean Won. The yard had won only one order in 2009 for 2x20.000 Dwt stainless steel tankers. 21C bank-led rehabilitation-Asiasis- /12/2009 21st century in financial squeeze- Asiasis – 11/01/2010 Hot liquidity for SLS and 21st- Asiasis- 29/01/2010 SLS shipbuilding is also to start a workout procedure led by its main creditor- KDB (Korea Development Bank). At the beginning of 2010 SLS had received KRW45bn in emergency funding from its creditors. Under the recent workout plan the shipbuilder needs to restructure its debt as it suffers from severe financial difficulties. As the lack of new orders translated into a liquidity problem to fund the construction of its USD4Bln orderbook, the yard rushed to its creditors bank, despite recent examination of the public prosecutors over suspicion of building up slush funds and accounting fraud. Eventually, the creditors offered around KRW70Bln in new loans for SLS at the beginning of 2010. According to the press, an official from a creditor declared that the bank will provide hot liquidity for the shipbuilder to continue operation and is planning to set up a detailed workout plan by the end of this March according to the result of due diligence ended in January." SLS workout- Asiasis- 22/12/2009 Hot liquidity for SLS and 21st- Asiasis- 29/01/2010 Daehan Shipbuilding has received KRW240Bn in total before New Year and is said to have received another KRW60Bn in additional loans in February 2010. The creditors also issue refund guarantees for the recent order intakes. Attracting investors is the main issue for 21

Daehan. Samsung HI, STX Offshore & Shipbuilding, Daewoo Shipbuilding & Marine Engineering, Gahdir Investment, and S&T Daewoo already submitted LOI of acquisitions. Considering the Korean fear of leaking technology, the possibility of selling to foreign companies is low. Moreover, the concessions Daehan had received for using the public land had always attracted the attention of the other shipyards. The regular bidding for acquisition is scheduled for end of February. 4-way war for Daehan Shipbuilding--Asiasis-03/02/2009 Hot liquidity for SLS and 21st- Asiasis- 29/01/2010 The shipbuilding and marine equipment industry of Busan requested government financial support and tax benefits including expansion of credit guarantees, controlling interest rates and reductions of corporate and income taxes. The vice-minister of Ministry of Strategy and Finance, Lee Yong-Cheol collected suggestions and requests regarding pending economy issues. Korean ask for gov’t support – Korean Shipping Messenger – 11/02/2010 Korea Development Bank (KDB)’s initiative to help domestic shipowners took shape under the name of “KDB Shipping Program” and its financing covers $1.6bn to prevent the collapse of companies in which it had invested. This is a second program to help shipowners, the first being offered from Kamco- the Korea Asset Management Corporation is purchasing existing vessels from shipping companies to avoid the foreign owners taking over Korean controlled ships. KDB fund to help newbuilding programs- Asiasis- 2009/07/31

KDB and KAMCO target to buy nearly 70 ships in 2010 under efforts to support marine companies. They created a restructuring fund of $8.9Bn and will take over bad loans and assests of the companies in bad financial shape. Korea to invest in vessels- Ship Technology- 13/01/2010 For the second time the banks in Korea offered support to save 21st Century yard as it injected too much in it already. Earlier in 2010 KDB was reported to have offered USD 38.8Mln and more recently another USD100Mln credit facility. The losses incurred by the yard are said to stem from the KIKO financial hedging scheme and the lack of newbuilding orders to finance its current orderbook. Banks offer 21st Century $100m lifeline – Tradewinds – 05/03/2010 21st Century wins $39m bank lifeline – Tradewinds - 29/01/2010 The Japanese media reports that the South Korean Knowledge Economy Minister gave signs that comprehensive measures will be arranged for small and midsize shipyards. Specifics have yet to be revealed, but it appears the measures will include loan expansions through government-run financial institutions and government guarantees pertaining to cash settlements. Shipyards in the country are scheduled to submit financial statements for the period ending December 2009 to financial authorities at the end of March 2010, and based on this, financial institutions will re-examine their creditworthiness and are expected to advise troubled yards to file for reconstruction or closure. Similar reviews were undertaken in early 2009 and several shipyards fell under banks' control, but it is thought that shipyards' financial situations have continued to deteriorate since then due to the suspended order taking. Korean gov't studying support measures for smaller yards - KAIJI PRESS - 4/03/2010 Smaller S. Korean yards in management crisis once again - KAIJI PRESS - 4/03/2010

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Total government credit to the shipbuilding industry in Korea is reported to have been increased by more than 40% this year to KRW 6.28 trillion ($5.4bn). Export Import bank will also increase loans to yards from KRW 1.84 trillion to KRW 3.1 trillion. Financing loans to subcontracted companies are also set to increase from KRW 2.69 trillion to KRW 3.28 trillion. The measures are taken to fill a shortfall in cash caused by delays in delivering orders and the resulting extension of payment schemes. One problem for Korean yards is the reserved money on the foreign-exchange markets and the lack of the expected funds in place to meet payments because of delayed instalments. Korea and Japan boos state newbuild funding – Tradewinds – 05/03/2010

SEOUL BUYS SHIPS TO ASSIST OWNERS Trade Winds - 26/6/2009 The South Korean government is set to buy 62 ships to ease the financial pressure on some of the country's troubled shipowners.State-owned Korea Asset Management Corp (Kamco) has identified the vessels it intends to purchase under a scheme that will see the owners take them back under a bareboat-charter arrangement. "We understand companies that are selling vessels include listed ones," added the source. TradeWinds is told that the ships for sale range from bulkers and tankers to multipurpose (MPP) units and containerships. Kamco will buy them at market levels and lease them back for five to 10 years at "attractive" rates. The total investment for the 62 vessels has not been disclosed but Kamco says it has been given around USD4bn for acquisitions from financially strapped players. Kexim offers loan help for ailing yards and owners - 8 may 2009 Lloyds List

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In South Korea it has been effectively left to state-owned stalwarts such as the Korea ExportImport Bank and the Korea Export Insurance Corp to bail out those domestic shipbuilders and foreign and domestic shipowners who overreached or have fallen victim to bankers with overarching ambitions that eventually overwhelmed them. On April 30, the South Korean government pledged to boost the funding of both Kexim Bank and KEIC. Both institutions will now share Won21trn ($16.5bn) this year to either directly assist ailing shipyards needing to raise refund guarantees or shipowners who need funds or topping up for newbuilding orders. But Kexim Bank’s director of the ship finance department, Ho-seob Jeung, said that the bank’s experience in ship finance goes back to 2002 following the OECD Amendment. Since then, Kexim Bank has committed $12.5bn to the financing of orders at Korean yards. Of the total 42.9% has gone to European owners, 39.4% has been taken up by Asian ship operators and North America has gained the remaining 17.7%. Following the government’s action in April, Kexim has a Won4.1trn war chest to assist shipbuilders and owners. Traditionally, Kexim has only been interested in new loans. With the government’s latest funding proposal, refinancing is now an option. Kexim’s ship finance programme is divided into direct loan and guarantee schemes which, despite the injection of additional government funds, will be offered on a more stringent basis than in the past. Mr Jeung said: In the case of direct loans we were able to offer borrowers up to 80% of the export contract amount. I’m afraid 60%-70% is a more likely maximum credit line in the current difficult circumstances.” As such, shipowners looking to finance a newbuilding project will be expected to put down 30%-40% of the total project cost prior to first drawdown. The loan will be offered at a fixed interest rate and the loan premium can be paid either up front or on a margin basis. Commitment fees on the undrawn amount are due annually and the management fee on the committed amount is paid up front. Prepayment fees represent Kexim’s opportunity costs following prepayment, said Mr Jeung. Prepayment is usually arranged over a 12-year term from the date of vessel delivery by quarterly or semi-annual instalments. In reality, Kexim Bank is rarely a standalone financier. Mr Jueng said: “In order to optimise the financial structure of the transaction, a commercial bank may be invited to provide a tranche that has a flexible repayment schedule which ranks pari-passu with the Kexim tranche.” Many shipowners in a funding plight will also welcome the news that the time it takes to gain Kexim internal approval for a loan is often as little as two weeks.

KDB sets up $1.6bn fund to help newbuilding programmes –Tradewinds weekly-31-0709 South Korea's state-owned Korea Development Bank (KDB) has set up a fund to help domestic shipping companies finance their newbuildings. Sources say, the fund, named the KDB Shipping Programme, will amount to some $1.6bn and will be made available to clients who are facing difficulties in securing loans from local and foreign banks due to the credit squeeze. They add that KDB's decision to establish the fund did not happen overnight. "It has been planning this since early this year and is now ready to start the financing," said a source.

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The source adds that KDB aims to use the fund to prevent the collapse of companies in which it has invested. "KDB has pumped big sums into the shipping sector during the last few years through financing of ships. There are companies that KDB had made loans to earlier and which are now facing a crisis as they could not get banks to give them newbuildings loans. KBD wants to help these companies complete their newbuilding programmes," he said. It is thought KDB will provide 30% of the $1.7bn, with the remaining 70% coming from insurance companies, domestic banks and private institutional investors. TradeWinds is told that KDB's fund is different from that of state-run debt-clearing agency Korea Asset Management Corp (Kamco), as the latter, worth $3bn, is being used to purchase existing vessels from shipping companies ( see story, above ). "KDB's fund will mainly be used for filling up the difference [in cash] that shipping companies cannot put down for their newbuildings," said a source. Sources say Korea Line Corp (KLC) is the first company to participate in KDB's programme. It is set to receive $200m from the bank to pay for three capesize newbuildings under construction at Daewoo Shipbuilding & Marine Engineering and STX Shipbuilding. $1.6bn distressed asset fund launch –Fairplay-31-07-09 KOREA Development Bank has launched at two trillion Won ($1.6 billion) distressed asset fund to support the restructuring of Korean companies that are suffering in the current economic difficulties. The agreement to set up the new fund, the “KDB Let’s Get Together Shipping Fund”, was signed with an anchor investment of one trillion Won from KDB, STX Pan Ocean, Daewoo Shipbuilding and Dongbu Insurance. The other one trillion Won will be sought from domestic and foreign investors. The programme will buy ships under construction and also second-hand vessels from shipping companies. Acquired vessels will be leased back to the sellers or, alternatively, chartered out to other shipping companies. Vessels brought into the programme can later be sold back to the original sellers or, alternatively, released onto the open market at the maturity date of the programme. A local Korean market observer comments that the hope of the founders of the programme is that Korean shipping companies will be able to access funds for the purpose of improving their capital structure while Korean shipbuilders will be able to continue to build ships ordered by Korean ships as originally planned. KDB fund to help newbuilding programs: July 31, 2009 Asiasis.com South Korea's state-run Korea Development Bank (KDB) set up a fund to help domestic shipowners finance their newbuilding programs. Sources say, the fund, called ¡®KDB Shipping Program¡¯, will amount to some $1.6bn and will be made available to clients who are facing difficulties in securing loans from local and foreign banks due to the credit squeeze. They add that KDB's decision to establish the fund did not happen overnight. "It has been planning this since early this year and is now ready to start the financing," said a source. The source adds that KDB aims to use the fund to prevent the collapse of companies in which it has invested. "KDB has pumped big sums into the shipping sector during the last few years through financing of ships. There are companies that KDB had made loans to earlier and which are now facing a crisis as they could not get banks to give them newbuildings loans. KBD wants to help these companies complete their newbuilding programs," he said. It is believed KDB will provide 30% of the $1.6bn, with the remaining 70% coming from insurance companies, domestic banks and private institutional investors. Industry players say KDB's fund is different from that of Korea Asset Management Corp (Kamco), as the latter, worth $3bn, is being used to purchase existing vessels from shipping companies. "KDB's fund will mainly be used for filling up the difference [in cash] that shipping companies cannot put down for their newbuildings," said a source. Sources say Korea Line Corp is the first company to participate in KDB's program. It is set to receive

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$200m from the bank to pay for three capesize newbuildings under construction at Daewoo Shipbuilding & Marine Engineering and STX Offshore & Shipbuilding.

Korean sale and leaseback scheme extended 16 November 2009 Lloyds List KOREA Asset Management Corp has widened its ship sale and leaseback scheme for South Korea’s financially pressed shipping companies after inviting owners and financiers to offer further vessels to the scheme. Kamco has also broadened the programme by allowing shipping lines and banks to put forward newbuildings that are due to be delivered within the next six months. The government controlled body launched its Won480bn ($415.6m) fund in July and has so far bought and leased back 17 ships. Carriers including Hanjin Shipping, Hyundai Merchant Marine and STX Pan Ocean offered more than 60 vessels and negotiations are taking place for Kamco to buy a total of 45 ships. Kamco confirmed on Sunday that it had extended the scheme and was accepting applications from carriers and banks to put forward further vessels for sale and leaseback. The agency gave no deadline when the application period would close, although the sale and leaseback programme is only open to South Korean shipping lines and banks. Kamco is also set to increase the size of the war chest available under the programme to around Won1trn although this is likely to be expanded further to Won4trn. The Kamco scheme is closely linked to the Korea Development Bank ‘Let’s together’ ship finance initiative. The Kamco programme covers the sale and lease back of vessels, while the KDB fund helps provides finance to South Korea shipowners for newbuildings. The bank agreed its first deal, a capesize newbuilding ordered by Korea Line, in October and is finalising a financial package for a further two Korea Line bulkers.

Korea Eximbank to Support Shipyards Staff Reporter Korea Times - 01-14-2009 The Export-Import Bank of Korea (Korea Eximbank) Chairman Chin Dong-soo said the staterun lender would come to the rescue of struggling shipbuilding companies. ``I've recently been asked why Korea Eximbank doesn't offer loans to the nation's small- and medium-sized enterprises,'' Chin said at a press conference held at the Bankers' Club in Seoul, Wednesday. ``Thus far, we have supported mid-sized firms for specific exports. But down the road, we plan to provide comprehensive support to others as well,'' the 59-year-old said. To this end, Chin said Korea Eximbank had established a division early this month specializing in loans for small companies. In addition, the bank will put aside 8.5 trillion won for these companies in 2009, marking a substantial rise from last year's 6.5 trillion won. In particular, Chin said the bank will focus its energy and funds on domestic shipbuilders, which have recently struggled due to the global credit crunch and subsequent financial distress. ``The shipbuilding industry is crucial for the country since we have an unrivaled competitive edge in the field. The problem is that shipyards have to shoulder increasing burdens in the midst of the financial crisis,'' Chin said. ``We seek to relieve them of their burden in terms of garnering funds to build vessels. But we plan for a careful screening before providing loans,'' the bureaucrat-turned-CEO said. Over the past few weeks, banks have worked on picking up mainly non-viable shipyards for restructuring with governmental support. When asked about Ssangyong Motor subcontractors, Chin said Eximbank will support them in line with its creditors' resolutions. ``We will do what we can after creditors reach a conclusion,'' he said. Ssangyong, the country's smallest carmaker acquired by Shanghai Automotive Industry Corporation back in 2004, filed for court receivership last week due to snowballing deficits. Many of Ssangyong's subcontractors have

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asked for help as a result. Seoul raises yard loan total-Fairplay-09, November 2009 SEOUL has decided to increase loans tied to ship construction to 3 trillion won ($2.6M), from 2.5 trillion won. The Export-Import Bank of Korea is offering the money to eight South Korean builders that are being restructured. Seoul seeks to shift these builders into ship repair, block fabrication or maritime leisure sector. The government would also extend medium and long-term export insurance to the Korea Export Insurance Co under the proposal. The transport and maritime industry damage is increasing for Korean builders because of postponements and cancellations. For this year’s first nine months, the volume of new orders was less than 10% of the figures posted in the same period last year, it said.

S. Korean government widening scope of ship acquisition fund - KAIJI PRESS 11/Nov/2009 The South Korean government has compiled an additional support plan for the country's shipping industry and reported it to President Lee Myung Bak on Nov. 5. In addition to increasing the investment ratio in the ship acquisition fund of the government's structural adjustment fund to 60% from the previous 40%, it has also widened applicable scope of the fund to include ships still under construction. Because the fund had thus far been used only by major shipping companies, the government has eased the requirements in an effort to see the fund more widely used, including by small and midsize companies. In addition to this, the South Korean government's supplemental support policy has also eased loan-to-value (LTV) requirements for ship funding through the Export-Import Bank of Korea, and has widened the scope of insurable vessels by the Korea Export Insurance Corp. (KEIC) to include those owned by not only domestic but also overseas owners. Other than financial support, a government-led shipper, shipping and shipbuilding caucus has been established to examine the promotion of dedicated ships by the nation's maritime industry. The ship acquisition fund is part of the policies the government mapped out in April 2009 for structural reorganization and enhancement of international competitive edge to combat the predicament the nation's shipping industry has been in since autumn 2008. The fund works by buying ships and leasing them back to financially-battered shipping companies in the country in order to prevent them from dumping their ships on overseas buyers. Funding is provided by the government structural reform fund and loans from financial institutes, while the Korea Asset Management Corp. (KAMCO) performs the fund operation. According to local media sources, the fund has thus far received purchase/lease-back applications for 19 ships from Hanjin Shipping, six from Hyundai Merchant Marine (HMM), eight from STX Pan Ocean and three from SK Shipping. Of those, the fund has acquired 16 ships from Hanjin and one ship from HMM. So far, only 480 billion won (about Y37 billion) of the initially planned four trillion won has been used to acquire ships, and there had been criticism from members of Parliament, among other parties, that most of its users had been large-scale enterprises such as Hanjin.

Koreans seeking to swell yard aid –Tradewinds weekly-13-11-09 Seoul's call for more cash for its yards is ruffling rivals' feathers.

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The South Korean government has called for upward of $1bn in extra financial support to be injected into shipping and shipbuilding in a joint public/private initiative to get both sectors through the recession. The stimulus package from state-backed financial institutions now tops more than $4bn and is likely to save more than 100 orders facing cancellation because of a lack of funding. But it could also lead to claims of foul play from competitors seeking to eliminate subsidies and oversupply. The government has asked the state-run Export Import Bank of Korea to increase its lending to yards by KRW 500bn ($432m). The bank had set aside some KRW 2.5 trillion to help them overcome the liquidity squeeze but it is now being urged to up the amount as the order drought continues. In a separate move, Seoul has opened talks with the country's commercial banks, asking them to loosen their loan-to-value requirements for funding orders. A 30% to 40% fall in newbuilding values has seen banks, which were previously prepared to lend up to 100% of the value of a ship, shrink that to just 60%. One local broker says he is unsure if the banks will bite. "Korea is not a communist country and the government cannot force the banks, especially the private ones, to follow its instructions. This is just a guideline," he said. But to help provide security to the banks, Korean Export Insurance Corp has been asked to increase its insurance cover for newbuilding loans from 95% to 100%. The government is also providing an extra fiscal boost to Korea Asset Management Corp (Kamco), which has been running a programme to buy and bareboart charter back vessels to domestic owners. State funding for these deals was restricted to 40% with the remaining 60% coming from senior lenders. Given the uncertainty in the market, the Kamco fund has only concluded deals for 16 ships worth KRW 480bn, as against its target of 62 ships. In a bid to boost the fund, the state will now provide 60% of funding for the Kamco business. Prospective deals are in line for one VLCC and a containership for Hyundai Merchant Marine (HMM). State-owned Korea Development Bank earlier set up the "Let's Get Together Shipping Fund" with some $1.8bn to finance newbuildings and secondhand acquisitions. Funding for a Korea Line Corp (KLC) capesize bulker has already been provided and it is ready to finance two more of KLC ships. Forty-four other applications have been made for funding by 16 Korean shipping companies. Increasing support for shipbuilding is set to rile competitors in Japan and Europe ahead of an OECD meeting in Paris to discuss state support for the sector. Each country has been asked to outline its shipbuilding assistance as part of an ongoing process to come to an international agreement on support and capacity. Korea's measures will be scrutinised to see if they breach international agreements on export credit. European yards have made their own proposal for a subsidy scheme that will encourage the scrapping of older vessels operating within Europe and replace them with newbuildings from European yards. The Chinese government is also offering a stimulus package to its shipping and shipbuilding industries. Former Shipbuilders Association of Japan head Nobutaka Nambu recently hit out at subsidies on offer in South Korea and China. Speaking at the Asia Ship Industry Summit in Shanghai, he was quoted as saying such aid leads to "unnecessary subsidised ships, which will only serve to delay a proper economic recovery". S. Korean gov. formulates additional SB support measures - KAIJI PRESS 13/Nov/2009 The South Korean government has decided to take additional measures to support the country's shipbuilding industry. It will promote the prevention of cancellations and the bagging of new orders through such means as expanding ship financing through government-affiliated financial institutions. The government is also thinking of urging small/medium-size shipyards mired in financial difficulties to divert to the business of ship repair yards and block plants. While it can be said that the South Korean government has

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embarked upon the rectification of the excessive supply in the shipbuilding industry by incorporating restructuring measures, there is growing criticism toward government subsidies for newbuildings not only from the shipbuilding industries of other countries, but also from the shipping industry, so it is possible that the above additional measures could cause controversy. The Ministry of Knowledge Economy (MKE) of South Korea (equivalent to Japan's Ministry of Economy, Trade and Industry) announced on Nov. 9 that it has formulated an action plan to prop up the country's shipbuilding industry. According to the MKE, the ExportImport Bank of Korea will raise the ship construction funds that can be loaned out to shipyards to 3 trillion won (Y230 billion), from the originally set 2.5 trillion won (Y190 billion). The bank will divert the backlogged amount in its budget that was initially meant to fund shipbuilding-related companies. Meanwhile, the Korea Export Insurance Corp. (KEIC) intends to support the short-term liquidity of shipyards through such means as easing the cash settlement guarantee conditions. Further, it is studying the time-limited increase in export insurance coverage to 100% from the current 95%. In addition, the government is contemplating on formulating a package program combining the direct loans of the Export-Import Bank and the medium-term export insurance of the KEIC for shipowners seeking financial support. As reported earlier, the government has worked out measures for propping up the country's shipbuilding industry, including mitigating the loan-to-value requirements for financing vessels, as well as raising the government's investment ratio in the ship acquisition fund. However, there are local shipbuilding-related entities who strongly feel that these measures are essentially aimed at protecting the booked newbuilding orders of South Korean yards. Meanwhile, the government has included restructuring measures in its action plan in view of the projected oversupply in the shipbuilding industry. Eight emerging and small/mediumsized shipyards in South Korea have withdrawn from the business or have been undergoing workout procedures since the turn of this year through structural adjustments led by financial institutions. However, the government is planning to urge these shipyards and the other struggling builders to shift their business to ship repair or block production. Further, the government intends to sound out the possibility of business diversion to the recreational marine facility industry whose global market scale reaches $47 billion. The MKE claims that the series of measures was formulated against the backdrop of the difficulty of shipyards to return their order volume in the next five years to the same level as the volume recorded during the buoyant period of 2003-2008. "The action plan aims to activate the financial support to excellent shipyards and overseas operators and at the same time, secure core fundamental original technologies over a medium/long-term basis and increase the direct exports of shipbuilding-related machines and materials," said an MKE official. Korea Development Bank rescues DSME newbuild –Lloyd’s List- 26 October 2009 THE Korea Development Bank has finalised its first ship finance rescue after stepping in to provide $67m for a Korea Line capesize newbuilding on order at Daewoo Shipbuilding and Marine Engineering, writes Keith Wallis . The bank’s shipping finance team head Lee Dong-hae told Lloyd’s List that negotiations were also under way to arrange financing for two other capesize vessels that have been ordered by Korea Line. All three ships have been arranged on long-term charters, which was a key ingredient in KDB being able to arrange the finance. Mr Lee said that the financial assistance was only available to South Korean shipowners, but moves were under way to launch a similar scheme for foreign owners with orders at South Korean yards. Explaining the details of the new agreement, Mr Lee said Korea Line ordered the capesize ship at a cost of $81m and made advance payments of $16m, leaving a funding gap of $65m.

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Under the auspices of the KDB, a senior lender agreed to provide $36m, with the bank providing the balance together with a further $2m to cover the cost of arranging the financial package. He said the deal worked because the bank used the value of future charter earnings to help bankroll the vessel, which will be chartered by Korea South-East Power. Mr Lee said Clarkson and Drewry were used to carry out a ship valuation. He declined to give many details about the other two bulkers because the bank is in negotiations with potential senior lenders, but he said one of the vessels was on order at DSME and would be put on long-term charter to Hyundai Steel, while the other would be constructed by STX Offshore & Shipbuilding and chartered to China Shipping Development. Korea Asset may buy two more ships to aid local lines 28 October 2009 Bloomberg Korea Asset Management Corp., the state agency that buys and sells distressed assets, may purchase two more ships this year to boost liquidity at domestic shipping lines struggling with plunging trade and tumbling rates. Kamco is in talks to buy and lease back a very large crude carrier as part of a 1 trillion won ($841 billion) fund set up earlier this year, Chang Sung-soo, head of Kamco's ship investment team, said in an interview on Monday in Seoul. He declined to say which company was selling the vessel or to give details on the second ship. State-owned Korea Development Bank also last week set up a $1.8 billion fund to buy vessels as the government helps local shipping lines cope with a fall in demand caused by the global recession. The nation's five biggest shipping lines likely lost a combined 1.61 trillion won in the first nine months, according to KDB. Kamco and domestic lenders raised an initial 480 billion won for the fund in July, with the aim of buying and leasing back 17 vessels for five years. At the end of the contract period, lines will repurchase the ships at an agreed price, Chang said. Kamco was reorganized in 1997 to buy distressed assets in South Korea during the Asian financial crisis. It owns stakes in Daewoo Shipbuilding & Marine Engineering Co. and Ssangyong Engineering & Construction Co.

KDB started to make use of the USD1.72Bln created to help Korean maritime industries by providing liquidity to financially squeezed shipping and shipbuilding companies. The fund aims distress assets to support the Korean ship owning companies by giving them access to funds “for the purpose of improving their capital structure while Korean shipbuilders will be able to continue to build ships as originally planned”. The fund was initiated by KDB, STX Pan Ocean DSME and Dongbu Insurance with one trillion won (USD 800Mln) with same sum to be sought from other local or foreign investors. One ship was bought from Korea Line Corporation and will be leased back to the owner. The Canadian Nova Scotia Bank funded 54% of the total USD67m with 30Mln provided by KDB. The bank also provides USD2Mln to cover the costs of arranging the financial package. Negotiations for financing another 2 capesize vessels from KLC have started. Lee Dong Hae, KDB finance team head confirmed for Lloyd^s List that “financial assistance was only available to Shoth Korean shipowners, but moves were underway to launch similar scheme for foreign owners with orders at South Korean Yards”. KDB Vessel Deal Boosts Shipping Industry- Ship-technology.com- 01/12/2009 USD1.6Bln distressed asset fund launch- Fairplay- 31/07/2009 Korea Development Bank rescues DSME newbuold- Lloyds List- 26/10/2009 KDB sets up USd1.6Bn fund to help newbuilding porgrammes- Tradewinds weekly31/07/2009 The officials of KDB affirmed that “state companies have to step in and fill in some of the gap left by the global commercial banks” as there “are conflicts between banks and shipping 30

lines because there is a big gap in the valuation of assets”. The bank had asked financial companies from Hong Kong to participate in the program. So far 14 vessels were reported as bought by the fund, according to Bloomberg. Various sources however attribute a number of up to 100 for the vessels to enter the scheme, without mentioning how many are yet to be constructed. KDB run an analysis on 38 Korean shipowners with debts exceeding USD42.2Mln and concluded most of them have temporary liquidity problems. Up to now, Hanjin participated with 2 tankers and 3 bulkers second hand and 4 bulkers newbuildings. STX Pan Ocean and KLC each registered 3 bulker newbuildings each while Hansang Shipping- 1 bulker newbuilding. KDB steps in to help pay for shipbuilders' orders - Bloomberg – 26/10/2009 South Korean owners line up for domestic funding aid- Lloyds List- 30/09/2009 Tradewinds mentioned earlier this year that “KDB fund is different from the state-run debtclearing agensy KAMCO fund as the latter, worth USD 3 Bln, is being used to purchase vessels from shipping companies”. Recently KAMCO “invited owners and financiers to offer further ships” to the sale-and-lease back scheme and widened the scope by accepting newbuilding to be delivered within next 6 months. Until now 17 ships were bought and leased back but more than 60 vessels were offered from domestic owners. There is no deadline for the application and the scheme is valid only for Korean owners, as Lloyds List reports. KAMCO widens ship sale-and-lease back scheme- Lloyds List-18/11/2009 The ship construction loan offered by Export-Import Bank of Korea is increasing the loans for the builders that are being restructured from 2.5trillion won to 3 trillion. Seoul will restructure the companies by shifting them into ship repairers, block fabrication or maritime leisure sector and will extend the medium and long term export insurance. KEIC also intends to ease the cash settlement guarantee conditions. Seoul raises yard loan total - Fairplay- 09/11/2009 S. Korean Government formulates additional SB support measures- Kaiji Press- 13/11/2009 USD 1 Bln in extra financial support for shipping and shipbuilding is the amount called for by the South Korean Government. The join public/private initiative is on top of more than USD 4 Bln planned initially to save more than 100 ships orders from cancellation. The government urged the state-run Export Import Bank of Korea to increase to USD432Mln the lending to yards. At the beginning of 2009 together with KEIC it put aside a combined USD 7.1Bln in loans and payment guarantees for shipbuilders and suppliers. Separately, the banks received “guidelines” to loosen the loan-to-value requirements and KEIC “has been asked to increase its insurance cover for newbuilding loans from 95% to 100%”. Koreans seeking to swell yard aid- Tradewinds weekly- 13/11/2009 Korea doubles support for shipbuilders to USD7Bln- Reuters- 30/04/2009 A conclusion of a maritime forum in Tokyo predicts that the global meltdown in shipping might facilitate the shift of forces in maritime industry from Europe to Asia in all its aspects. The determination of Asian governments to protect their waterborne transportation and related industries and western banks empty pockets demolishes the predictions that the capacity oversupply and financing lacking will correct the bearish shipping markets. While German KG, Norwegian financiers and UK banks are lacking financing capacity, the Chinese (state-owned ship-owners are being offered 17% subsidies to absorb the cancelled ships from foreign owners) and Korean (USD18.2bln in guarantees and buy-and-lease-back schemes) governments are creating funds to take over the domestic contracted ships and protect nationally owned tonnage while keeping yards running at full speed.

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Financial crisis will see Asia become the world’s dominant maritime force- Lloyds List2009/05/27

CHINA State finance supports China's shipbuilding industry - KAIJI PRESS - 7/Sep/2009 Government-sponsored financial aid is the bread and butter that support the Chinese shipbuilding industry today. Under its "shipbuilding industry adjustment promotion plan," the government has defined (1) provision of sufficient operating funds to shipyards and (2) expansion of financial support to owners who order export ships as its top priority policies. "Funds made available to shipyards are actually working," a local shipbuilding official told Kaiji Press. The total volume of fresh loans made by Chinese financial institutions in the first half of 2009 is estimated at 6 trillion yuan (about Y83 trillion). Believe it or not, the value is roughly equal to the state revenues in 2008. In the fall of 2007, the Chinese government tightened its monetary policy in what it called "window guidance". It shifted to an easy policy in November 2008. Banks, willing but unable to lend before, are now expanding their loan portfolio. The bulk of bank loans has been reportedly funneled into the real estate business. Local media reports say that 70% of new loans have been set aside for small- and medium-size enterprises. But there is no doubt that a good amount of funds have been put into the shipbuilding business, which is one of China's top 10 industries. In fact, the Nantong branch of the Bank of China made a Y150 billion loan agreement with Jiangsu Rongsheng Heavy Industries in June. Earlier in April, the Export-Import Bank of China (China Exim Bank) agreed to provide loans totaling more than Y2 trillion to China State Shipbuilding Corp. (CSSC) and China Shipbuilding Industry Corp. (CSIC), the state-run entities that have a number of shipbuilders under their wings. Loans are being made not only to support shipbuilders' operations but also to finance their newbuilding programs. "At the initiative of China Exim Bank, four major state-run banks are stepping up their lending activities. The Bank of China is particularly aggressive," the shipbuilding official said. Due to the impact of the global financial crisis, South Korean banks are having difficulties raising dollar funds. But China has foreign exchange reserves totaling more than $2 trillion, the biggest in the world. This solid financial environment serves as lubricant for dollar-denominated ship finance. China Exim Bank set up a credit line for National Iranian Tanker Co. (NITC) in August to finance the construction of 12 VLCCs. It also opened a similar facility for Spain's Arborec Desarrollos SA in July to cover 10 offshore drilling rigs. These facilities have begun to be turned into actual deals. "Our government won't let down shipbuilders," the official said, adding that the proof of it is the abundance of its financial aid to them. "So far, so good," he uttered tersely. According to him, the Chinese government has again begun to tighten its credit policy. It is worried about risks of nonperforming loans and possible stock market gyrations. The favorable financial environment for Chinese shipyards is not likely to persist long. Their future looks murky.

Ex-SAJ executive condemns state subsidy for SB industry - KAIJI PRESS 11/Nov/2009 Nobutaka Nambu, former executive managing director of the Shipbuilders' Association of Japan (SAJ), gave a key-note speech at the Asia Ship Industry Summit held in Shanghai on Oct. 29-31, during which he pointed out the problems over state-sponsored subsidy systems

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for the shipbuilding industry being implemented in one country after another. He criticized such measures, stating that plans currently in place in China and South Korea to stimulate the shipbuilding industry mean building unnecessary subsidized ships, which will only serve to delay a proper economic recovery. Nambu also noted that it will only create more orders for low-priced ships, which will further aggravate the current market. He stated that the problem lies in mixing up industrial policies with labor policies. He pointed out that while he understands the emotional argument that shipyards should not be forced to go under, a distinct line must be drawn between the two and labor policies should be done such as by establishment of a safety net. Nambu also held discussions with representatives from the China Association of the National Shipbuilding Industry (CANSI) and the Korea Shipowners' Association (KSA) regarding shipbuilding industry structuring policies, and explained Japan's first round of facility disposal measures. He added that nations in Asia should share the same concern in terms of (shipbuilding) excess capacity, and while the methods that should be taken may differ from country to country, those measures should be taken under a shared philosophy. The Asia Ship Industry Summit began two years ago, with the latest event marking its third. The October summit was attended by about 150 participants, including shipyard executives from China and officials from shipping industry.

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China’s hard line on yards –Lloyd’s List- 9 November 2009 EARLIER this year, the Chinese government controversially called on the nation’s lenders to loosen their financial grip and buffer China’s suffering shipyards. Whatever readers think of the protectionism inherent in this policy, everyone thought the outcome a fait accompli. The government decrees, the banks follow and the shipyards survive. But that is hardly happening in all cases. After the Chinese government unveiled its shipping stimulus package, state-owned Exim Bank, Bank of China and Industrial and Commercial Bank of China did extend big loans to major shipyards. The loans included a Yuan11.2bn ($1.6bn) credit line by BoC to China’s largest private shipbuilder, Jiangsu Rongsheng Heavy Industries. Other big shipbuilders, including New Century Shipbuilding, China State Shipbuilding and China Shipbuilding Industry, have had no trouble getting access to credit. But the total loan volume has been minuscule compared with the amounts needed to solve the problem. One expert predicted that the Chinese shipbuilding industry would face a liquidity shortage of up to $60bn over the next four years. Loans have fallen far short of that, and lending to the constituency that is suffering most — the small- and medium-sized shipyards — has been effectively nil. The big state banks shun the smaller players, and local privately owned institutions — some of China’s best managed — are wary of the yards’ high default risk. This means hundreds of small- and medium-sized shipyards are unable to receive any financial support from lenders. Smaller shipyards are surviving on the cash flow from orders received one or two years ago. Many are expected to shut down next year. What is happening here appears to be similar to government intervention in the coal and steel industries. Larger players had access to credit through state-owned banks, while smaller players were left to twist in the wind. As they began to fold, they were bought up and consolidated. Protectionism this may be, but it is not a straightforward or orderly process. Shipowners with standing orders at small yards should prepare for the eventuality of consolidation as they adjust their purchase strategies. Shipping industry demurs state subsidies to shipbuilders - KAIJI PRESS - 14/Oct/2009 Shipping executives across the world are leveling strong criticisms against the official subsidies being offered in succession by various governments to help their hard-pressed shipyards. They argue that provision of government loans to finance newbuilding programs and direct subsidies to shipyards will add to a global tonnage glut, delivering a serious impact on the shipping market. Since the turn of the year, China and South Korea have launched intensive ship financing schemes through government-affiliated financial institutions with the aim of spurring demand and preventing newbuilding order cancellations. There are similar moves in the making in some European countries as well. These government-backed incentives to the shipbuilding industry are drawing harsh criticism from shipping operators. Cesare d'Amico, CEO of Italian operator d'Amico Societa di Navigazione, warned in an interview with Kaiji Press, "The support measures offered in China and South Korea would only disrupt both the shipping and shipbuilding industries." He added, "At this moment, it is clear that ship bottoms are in oversupply. The market should be autonomously adjusted. The only thing we can do is for all of us to make an effort to reduce the enormous global tonnage with minimum pain." He said that demand-spurring measures by provision of official subsidies will be only counterproductive. Chee Chen Tung, chairman of Hong Kong owner Orient Overseas (International) Ltd. (OOIL), echoed in his recent contribution to a foreign newspaper. He said that the "direct subsidies will work to distort the shipping market" and urged governments to discontinue such policies. The criticism leveled by d'Amico and Tung has won support from many other shipowners since the early autumn. Bloomberg.com reported that a Marine Money forum held in Singapore in late September was highlighted by a chorus of similar criticisms. C.K. Ong, president of Taiwan owner U-

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Ming Marine Transport Corp., was quoted as telling the gathering, "What worries me is whether the Chinese and South Korean governments are ready to see their shipyards fail to deliver their ships and run into management troubles. Personally speaking, I don't think they are." Ong expressed his concern that most of the newbuildings on order (at the Chinese and Korean yards) are going to be completed with official assistance. Philip Clausius, president and CEO of FSL Trust Management Pte. Ltd. (as trustee manager for First Ship Lease Trust (FSL Trust), also said at the forum, "Chinese and South Korean yards will complete their newbuildings without fail. This appallingly large volume of newbuildings will directly hit the shipping market in the next 3-5 years, delaying recovery of the depressed freight rates." An analyst with HNS Nordbank AG, the world's biggest ship finance firm, was quoted as saying that, "There is the possibility that China's aim to become the world's biggest shipbuilding nation in 2015 will aggravate the global tonnage glut." He warned that the government support for the Chinese shipbuilding industry's expansion of market share will "inevitably bring about an oversupply". The Beijing government unveiled a "shipbuilding industry structural adjustment and promotion plan" earlier this year, putting top priority on provision of working funds to shipyards and loans to finance their newbuilding programs. The plan has begun to produce effect, allowing the country's yards to resume taking newbuilding orders. South Korea also enacted a "bill for structural adjustment of the shipbuilding industry and enhancement of its competitive edge" this year. Based on the legislation, the government has announced a policy to make up to 21 trillion won (Y1,623 billion) available to shipbuilders in loans from government-affiliated banks. For years, official assistance to shipyards has been a major issue in dispute in various countries, with critics arguing that it will only distort fair competition. The latest criticism by shipping operators and other users, who had been rather taciturn in the past about statesponsored measures for shipyards, may add new dimensions to the classic dispute.

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China earmarks $5bn fund for Greek owners 04 October 2010 by Nigel Lowry Chinese premier says fund to be established to bankroll Greek ships constructed in the country CHINA is to bankroll dozens of newbuildings for Greek shipowners in one of the clearest signs it is committed to financing international orders at its shipyards. Prime Minister Wen

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Jiabao said a $5bn fund would be established for financing Greek ships constructed in China. The pledge came on a state visit to Athens where the Chinese premier and Greek counterpart George Papandreou witnessed the signing of breakthrough ship finance deals with three leading Greek owners. Export-Import Bank of China inked its first two loans to Greece-based owners, while China Development Bank signed what is believed to be the first full bilateral deal with a Greek owner without participation of a non-Chinese bank. The largest of the loan facilities signed in front of the two premiers is a loan facility of $111m for the Angelicoussis Shipping Group from China Exim bank and DnB NOR. The Norwegian based bank is acting as facility agent and trustee for the loan, which is to finance three mini-capesize bulk carriers of 114,500 dwt the group has on order at Shanghai Shipyard for delivery next year. China Exim bank and DnB NOR have also teamed up to provide a $82.6m loan for two so-called newcastlemax bulker newbuildings of 206,000 dwt ordered by Diana Shipping at Shanghai Jiangnan-Changxing Shipbuilding for delivery in 2012. The only known previous major facility provided by Exim bank for a Greek owner was financed together with Citibank for a series of offshore vessel newbuildings for the Gregory Callimanopulos group, which is largely based outside Greece. Li Ruogu, chairman and president of China Exim bank, signed the two new loan agreements, while DnB NOR’s head of shipping in London, David Grant, and head of its Greek office, Christos Tsakonas, represented the Norwegian bank. “We are very pleased to be acting with China Exim bank on these first deals and we view this as a long-term relationship,” said Mr Grant. “We hope to do more.” While the two banks were co-operating for the first time on loans to Greek owners, they had done business together in other markets. In the other ship finance deal, CDB executive vice-president Gao Jian signed a loan facility of $74.2m for a very large crude carrier ordered by George Economou’s Cardiff Marine. The VLCC is on order at Shanghai Jiangnan-Changxing for delivery in August 2011 and will be a sistership to the 300,000 dwt Solana delivered by the yard to Cardiff in May this year. “It is a milestone,” said George Xiradakis, managing director of XRTC Business Consultants, the Greek project adviser for the CDB loan. “Until now the few finance Greek-Chinese deals concluded always had a foreign bank involved.” At the same ceremony, held at the Greek prime minister’s mansion, a framework of cooperation pact was signed between Cardiff Marine and China Classification Society. The agreement provides for extensive information-sharing between the two sides and for Mr Economou’s new VLCC to be dual-classed by CCS with ABS. Mr Economou was also to the fore at a bilateral ceremony earlier this year to seal a number of Greek-Chinese projects. While several other Greek owners initialled orders with Cosco Shipyard Group, Cardiff signed a draft joint venture with Cosco Bulk Carrier Co that foresaw extending the Greek owner’s extensive relationship with the Chinese charterer. Further details were scarce on the huge newbuilding fund earmarked for Greek owners that was outlined by the Chinese premier. But CDB and China Exim bank are both candidates to be involved in such a fund. Prime Minister Wen also said that the two countries intended co-operating on maritime research and developing green shipping technology. The shipping deals penned at the weekend were complemented by agreements in other areas such as tourism, construction and telecommunications as China steps up its interest in Greek projects. Among other deals inked were a broadband co-operation between the Hellenic Telecommunications Organisation and major Chinese contractor Huawei, and an accord on cargo freight between Athens International Airport and Cosco, which has expressed interest in investing in a major logistics hub outside the Greek capital. During the visit the Chinese premier also talked up the prospects for Greece’s battered economy, which he said was already on the road to recovery. China intended to increase purchases of Greek state bonds, he said. Doubts over China scrapping scheme Hui Ching-hoo 1 Juli 2010

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Weak shipbreaking regulation could undermine subsidy effectiveness CHINA’s new incentive scheme to encourage shipowners to scrap older vessels has received a mixed reaction from the country’s maritime industry. Shipowner representatives have in principle welcomed the move. While other players have questioned the effectiveness of the measures, pointing to the dearth of appropriate legislation governing shipbreaking and the difficulty of changing business practices of some Chinese shipping companies. China Shipowner Association executive vice-chairman Xu Guibin welcomed Beijing’s new policy, and said it would help optimise Chinese shipowners’ fleet structure and enhance their competitiveness. “China is ranked as one of the world’s four largest maritime countries in terms of total tonnage, but the high average age of the nation’s vessels is one of the main obstacles hindering long-term development of the Chinese industry,” Mr Xu told Lloyd’s List. He added that the high fuel consumption of old tonnage increased shipowners’ operating costs, and that some of the old vessels were unsafe. The new measures, announced earlier this week in a joint statement by China’s Ministry of Transportation, the National Development and Reform Commission and the Ministry of Industry and Information Technology, provide for a subsidy of Yuan1,500 ($220) per tonne. However, to qualify, ships must be China-registered vessels of at least 1,000 dwt or singlehull oil tankers that carry 600 tonnes or more. In addition, disposal of the old vessels must be pursued two to 10 years prior to the official retirement age of 30, and disposal of single-hull tankers must be pursued one to 10 years prior to the retirement age, also 30 years. Shipowners must replace the disposed tonnage with the same amount of tonnage, or greater, which must be ordered at Chinese shipyards, and vessels must be licensed to operate both domestically and internationally. Chin’a Ministry of Transport estimated the number of old vessels that meet the requirement of the subsidy amounts to 2,000, totalling 12m dwt. The incentives apply from June 11 until the end of June, 2012. Mr Xu said the policy would mainly encourage small and mid-sized shipowners to replace their old fleet. “But the large shipping lines, such as Cosco Group, already have set a timetable for the disposal of their old ships, so the new policy will have little effect on their fleet optimisation plans.” A spokesman for China Shipping Group’s Hong Kong-listed affiliate China Shipping Development, Ma Guoqiang, said his company had already made plans for disposal and rebuilding following an announcement by China’s Maritime Safety Administration late last year which called on Chinese shipowners to get rid of tonnage aged 30 years or over. Mr Ma said CSD was studying the new policy and had not yet decided whether it would speed up disposal of ageing vessels in order to meet the policy’s criteria. CSD had sold two 30-year-old single-hull oil tankers of 6,215 dwt and 15,256 dwt so far this year, and planned to scrap a 59,645 dwt single-hull tanker by the end of this year, he said. According to CSD’s 2009 annual report, the company owned 63 oil tankers totalling 5.1m dwt at the end of 2009. Average age of the tanker fleet was just under nine years. Last year, CSD disposed of 11 ageing vessels comprising 279,000 dwt. A spokesman for Hebei Ocean Shipping, a leading Chinese shipping company which operates a fleet of 28 bulk carriers and very large crude carriers totalling 4.4m dwt, said the new policy was unlikely to pose any tangible impact on the company. Most of Hebei Ocean Shipping’s vessels were registered overseas and so were not included in the scope of the government’s new subsidy plan, the spokesman said. Meanwhile, a senior official with China National Shiprecycling Association doubted the effectiveness of Beijing’s latest scrapping scheme. “For sure the new policies will have a positive effect on the ship recycling industry, but first, the government needs to ensure that proper regulations are in place,” said the official, who is familiar with the situation. China Exim bank to boost ship finance funds - Thursday 30 September 2010 • by Colum Murphy

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AN OVERHAUL of the Export-Import Bank of China is expected to be completed by the end of this year, according to a senior bank official. A fresh capital injection will increase funds available for ship finance. In addition, the bank will adopt a new operating framework, which will change the way the policy bank provides support to China’s shipbuilding industry. Li Dan, director of shipping finance at the transportation finance department, told Lloyd’s List that while the move did not represent a “shift”, it did mean the bank would play a bigger role in ship finance. In September 2009, China’s State Council, the country’s top decision-making body, gave the green light for state-owned investment vehicle, Central Huijin Investment, to inject a yet-to-be disclosed amount of additional capital into Export-Import Bank of China. A similar injection for China Export & Credit Insurance was also approved. The move aims to strengthen the financial status for the two state-owned institutions in order to facilitate overseas investment by leading Chinese enterprises. Some of these additional funds will be earmarked for maritime-related activity. However, as Ms Dan explained to delegates at Shipping China in Beijing earlier this week, China would make some changes to its approach to ship finance as the country was facing a “new situation”. Ms Li said that, in the past, loans were made to support Chinese shipbuilders to become a global leader in terms of shipyard capacity and total delivery tonnage, and to push Chinese exports. Under the new framework, ship finance would be conducted from a broader perspective. The scope of ship finance would expand from encouraging exports and supporting shipbuilding itself, to promoting the industry as part of the government’s wider cross-sector blueprint that included energy, transport and the marine economy. She singled out offshore vessels as an example. “Offshore is highly related to energy, a sector which we are going to put more resources,” she said. There would be greater flexibility in the terms and conditions offered to borrowers depending on the nature of each deal and the kind of asset involved. “More facilities shall be injected to value added products in the coming years,” she said. Greater importance would be attached to borrowers’ profitability in making lending decisions, she said. Ms Li indicated there would be a greater openness to non-Chinese players. “We encourage overseas shipowners to borrow in yuan for their newbuildings,” she said. In September, it was reported that Chinese government-owned banks would lend Brazilian ore giant Vale more than $1.2bn to finance 80% of the cost of building 12 very large ore carriers. Ms Li said the aim was to expand lending from shipbuilding to the broader maritime industry, including to shipping. “Helping Chinese shipping companies be stronger is also our mandate for national security reasons,” Ms Li said. However, UOB Kay Hian Research analyst Lawrence Li said the reform of Exim Bank was unlikely to affect the bank’s lending policy to shipbuilders and shipowners. “The bank is unlikely to loosen its benchmark for lending, which is highly dependent on the factors such as orderbook (size), reputation and business scale of the shipbuilder and shipowners,” Mr Li said. China’s Exim bank was established in 1994. It has 14 domestic branches and three overseas representative offices. Over the past 15 years, it has helped finance around 3,000 export vessels, amounting to 100m dwt.

Drewry Shipping Consultants warned that government support for yards in China and Korea will only hurt the industry. Following a shipping meeting in Singapore, the Managing Director Arjun Batra stressed those unprofitable yards should not be kept on the market through measures introduced by the state. A slow trade will not recover lost demand and long term problems are expected as the big shipbuilding nations do not rationalize their shipbuilding production. China, Korean shipyard support may hurt industry, Drewry says- Hellenic shipping News2009/09/29

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Under the Shipbuilding Industry Adjustment Promotion Plan the Chinese Government has define 2 methods of financial assistance: provision of sufficient operating funds to shipyards and expansion of financial support to owners who order export ships. According to Chinese officials, the program already brought results, with 12 VLCC orders places from NITC and 10 offshore drilling rigs for Spanish Arborec Desarrolos SA. A big amount of funds will be available for shipbuilding as one of top 10 Chinese strategic industries. Officially posted Japanese in China are quoted as assaying in chorus that the Chinese Government wouldn’t let down their shipbuilders, as the yards offer thousands of jobs. Social disorder would be on the streets if farmers that came to bigger cities to work in small shipyards would be left with no jobs. In the meantime, the big shipyards are protected to compete on the international market and random cancellations occur where the threat of ruing the customer relationship is threatened. State finance supports China´s shipbuilding industry - Kaiji Press- 2009/09/07 Chinese shipbuilding industry after the market crash- Kaiji Press- 2009/09/07 After the Chinese government called the lenders to buffer the nation’s yards, state owned Exim bank, Bank of China and Industrial and Commercial bank of China extended loans to the big yards. BoC extended a credit line worth Yuan11.3Bn (USD1.6Bn) to the private Jiangsu Rongsheng Heavy Industries while the other large shipyards did not encounter any problems in accessing credits. There are rumors in the country that smaller yards have less access to the state owned banks which may threaten their existence and shipowners might need to adjust their purchasing strategy as weaker players might disappear from the market in a year or two. China’s hard line on yards- Lloyds List- 09/11/2009 New incentives are on the way for the Chinese shipbuilders as the Government is preparing to help shipbuilders to heal after more than 300 ships were cancelled since the economic crisis begun. The Ministry of Transport of China launched green light for domestic owners to purchase the cancelled ships by foreign and local owners at Chinese yards. Under this stimulus action to last till December 2010 the cancelled ships must have a build date before March 31. The notice released said that preferential terms will be involved. One major requirement potentially taking business away from foreign classification societies is that all the ships involved in the scheme would have to be classed by China Classification Society. China allows domestic owners to acquire cancelled ships- Lloyds List- 22/10/2009 China sets up incentive for shipbuilders- Asiasis- 09/11/2009 US and European regulators have different concerns than their Chinese peers. While US and EU officials encourage banks to raise money to rebuild the capital the Chinese regulators are concerned with the soaring lending. The current capital adequacy level is comfortable, but the officials want to ensure that the banks will be able to provide capital and lend next year should it be needed to sustain economic growth. The China Banking Regulatory Commission confirmed that banks were discouraged from engaging in extra lending and show moderation before the end of 2009 and raise more capital. The international bank capital adequacy standard is 8% and many Western banks are struggling to meet it while the Chinese banks ratios are about 11%. A newspapers of Peoples Bank of China – the Chinese central Bank- cited that “if China did not curtail its economic stimulus policies, the property prices and the market may go out of control”. China asks its banks to slow down - International Herald Tribune- 24/11/2009

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Foreign owners can now secure funding for their newbuilding program via the statebacked funding programme for foreign owners offered by the China Eximbank to boost domestic shipbuilding. Some owners reported to be very happy with the existing “competitive” fund. The same bank extended a $50Mln facility to Montenegro to build up its fleet at Chinese ship yards at the beginning of 2010 and other $389Mln for a US-based tanker operator in 2009. China ramps up newbuilding loans – Tradewinds – 05/02/2010 The smaller Chinese yards have to cope with the crisis despite the available package for shipbuilding industry. They say that the stimulus package which included a reduction in the ship age limit and tax exemptions to encourage breaking of old ships and building new vessels at local instead of foreign yards helped larger shipyards and spurred ship financing activities and had left them out. As a consequence they had to cut the prices by 30% and still did not attract orders since the market takes time to resume balance. China stimulus package leaves nation’s smaller yards reeling – Lloyd’s List - 0 5-03- 2010 The Export-Import Bank, Chinese largest ship finance lender, is increasing its efforts to address the order drought and announced future services such as seller’s credit and buyer’s credit, payment guarantees, advance payment refund guarantees and alike to help shipyards secure and maintain orders. The bank would provide financial support to shipowners that placed orders at local yards, including foreign shipowners. The bank is also supporting merger and acquisition activities to steer large shipyards towards high-end ships and offshore projects. The move comes following a major strategic measure taken by the Chinese government to develop Shanghai into an international shipping centre to enforce the country’s status in the shipping arena. Financial support would also be given to producers of marine engineering equipment and foreign research and development institutions that plan to move to Shanghai. China offers Eximbank boost to shipyards – Lloyds List 26/032010 In June the Chinese Government had announced a new incentive scheme to encourage owners to scrap old vessels and build new ones. The shipowning community welcomed the move, as it would help optimize Chinese owner’s fleet structure and enhance their competitiveness. The players that questioned the effectiveness of the measure compared the move with the legislation on ship breaking, leaving aside the benefits of younger fleet such as lower fuel consumption and the benefits deriving from it, such as lower emissions and operation costs. The new measure will provide a USD220/ton subsidy for owners to replace the disposed tonnage with the same or greater amount of new tonnage to be built at Chinese shipyards. Ships that qualify for the scheme must be of at least 1000dwt or any single hull tankers, carrying 600 tonnes or more and the vessels must be disposed of 2 to 10 years prior of the official retirement age of 30. The ships must be registered to operate both domestically and internationally. The incentive would apply from June 11 until de end of June 2012. Industry divided over China ship scrapping incentives – Lloyds List – 30-06-2010

BRAZIL Brazilian president Luiz Inacio Lula da silva is pushing the nation´s companies to support the domestic shipbuilding industry by ordering ships at local yards. He said “It is impossible that Vale do Rio Doce should continue buying ships in China when we are setting up a naval industry here”.

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Build Brazilian- radewinds-2009/09/05 Lula urges Vale to look to home market - Llloyd´s List-2009/09/15

Ship Financing Developments Offer Attractive Conditions to Owners - January 10 2007 Brazil has a clearly defined and well-regulated legal system for the financing of shipbuilding. It offers some of the lowest interest rates and most extended payment terms on the market, in addition to various tax and other benefits. These conditions are particularly attractive to anyone looking to invest in Brazilian shipping companies and/or build Brazilian flag vessels in the country. Merchant Marine Fund The Brazilian government has developed a special programme for the financing of the national shipbuilding industry. The programme is funded by the Merchant Marine Fund and operated by the Brazilian Development Bank (BNDES). In order to increase the Brazilian merchant and offshore fleets and aid the recovery of the Brazilian shipbuilding industry, the programme and its related legislation have undergone substantial modifications. In accordance with Article 26 of Law 10,893/2004 fund resources will be available in the following priority order to: • Brazilian shipping companies for the financing of up to 90% of the value of construction, modernization and repair projects; • shipping companies and shipyards for the training and development of skilled manpower; and • the shipyards for Brazilian shipping companies and vessel exportation. The National Monetary Council recently established interest rates of between 2.5% and 5% a year with a repayment term of between 10 and 20 years. The guarantees required by the BNDES are equivalent to 120% of the financed amount and usually include: • a mortgage or fiduciary property on the financed vessel; • corporate collateral; • bank guarantees; or • assignment of earnings. The loan instalments are in Brazilian reals or US dollars on a pro rata basis according to the revenues generated by the financed project. Regarding the repayment of loans to the BNDES, Law 10,893/2004 allows repayments to be made through the Freight Surcharge for the Renovation of the Merchant Marine Fleet (AFRMM). AFRMM is a tax on freight payable by importers and cargo interests, which is due on the discharge of the freight at any Brazilian port and is deposited monthly in a special account set up for the issuer of the bills of lading (ie, the Brazilian shipowner). Brazilian shipowners engaged in merchant activities (ie, the transportation of goods from abroad to Brazilian territory or between Brazilian ports) are the beneficiaries of such credits. The account is controlled by the Merchant Marine Fund and the credits are available to shipowners exclusively for the purposes of: • acquiring new vessels built at Brazilian shipyards; • upgrading, converting, repairing or dry-docking at Brazilian shipyards; and • repayment to the BNDES of loans relating to the construction, upgrade or repair of Brazilian vessels. Domestic navigation is subject to 10% AFRMM, and ocean navigation is taxed at 25%. The tax is levied on freight carried by both Brazilian flag merchant vessels and foreign vessels chartered by Brazilian shipping companies. Projects presented by or involving Brazilian shipping companies have priority in the fund; however, in order to establish a shipping company as Brazilian, certain legal requirements must be fulfilled. Although the company can be fully controlled by foreign investors, the 43

administrator must be a Brazilian citizen or a foreign individual holding a permanent Brazilian visa. In addition, although the company may be incorporated as a corporation or a limited liability company, it must have an office within Brazilian territory. On November 19 2002 the Agência Nacional de Transportes Aquaviários (ANTAQ), the federal government agency for inland and ocean transportation, issued Resolution 193/2002, stating that in order to obtain authorization to operate as a shipping company, a company must prove: • ownership or bareboating of a Brazilian flag vessel of the same type for more than one year; • a minimum net worth of: • $3.72 million for ocean navigation; • $2.79 million for domestic navigation; or • $1.16 million for maritime support (eg, offshore/supply vessels) and port support navigation; and • a positive equity level. However, if the purpose of the company is initially not to operate, but rather solely to apply for Merchant Marine Fund financing and the construction of a Brazilian flag vessel at a Brazilian shipyard, previous ownership or bareboating of a Brazilian flag vessel is not required. Brazil Shipbuilding Fund Set To Grant BRL13 Billion FinancingDow Jones 11-18-10 RIO DE JANEIRO (Dow Jones) -- Brazil's Merchant Marine Fund, part of the Transport Ministry, may approve 13 billion Brazilian reais ($7.6 billion) of financing for new shipbuilding projects at a meeting on Dec. 17, fund director Amaury Ferreira Pires Neto said Thursday. A total of 165 new shipbuilding projects will be considered for the funding, and these may be completed within the next four years, Pires Neto said. Projects can get up to 90% financing, he said at a press conference in Rio de Janeiro. Over the past eight years, since the start of the government of President Luiz Inacio Lula da Silva, the fund has approved financing of BRL17.3 billion for 406 shipbuilding projects. The fund has BRL15 billion available in the Brazilian treasury and a further BRL4.8 billion that has been made available by government decree, Pires Neto said. One of the fund's users is oil giant Petroleo Brasileiro SA's transport arm Transpetro, which is investing BRL10 billion on 49 new oil tankers for delivery between 2010 and 2015 for Petrobras' expansion program. Before 2000, the merchant marine fund granted less than BRL1 billion a year in financing due to lower demand, Pires Neto said. "There's been a fantastic leap in shipbuilding activity and this may intensify further in coming years," he said.

Brazilian Fund of Merchant Navy will fund 161 projects worth 8.34 billion dollars The Maritime Executive, Wednesday, December 23rd, 2009 The Board of Directors of the Merchant Marine Fund (CDFMM) approved funding for the first 10 ships of the second phase of the Expansion and Modernization Transpetro Fleet Program (Promef). The Fund will support the construction of seven oil tankers in the South Atlantic Shipyard (EAS) and three vessels for transportation of bunker (fuel oil) Shipyard Superpesa.

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The Petrobras Transporte S / A (Transpetro) is a Brazilian company, wholly owned subsidiary of Petrobras. It aims to make the transport of oil and oil products, natural gas and alcohol, using the pipelines and vessels. The planned investment in these contracts will be $ 3 billion reais (1.71 billion U.S. dollars). In the construction phase, the FMM covers 82% of the investment. The remaining funds are disbursed by the Shipyard (8%) and Transpetro (10%). After delivery of the vessel, the portion financed up to 90%. The president of Transpetro, Sergio Machado, said that approval of funding raised for ships of Promef II demonstrates the commitment of the Federal Government with the program and the reconstruction of the Brazilian naval industry. "The Fund has guaranteed support for all projects approved by its Board of Directors. We have enough credit and long-term demand. 2009 was a year for the successful shipping industry and the opportunities opening up in 2010 with the launch of the first six ships of Promef are even more encouraging, "he says. Unlike oil tankers of the first phase of Promef these seven vessels ordered to the South Atlantic will be dynamic positioning (with the ability to maintain their positions in terms of wind and sea provided to operations). It is the first time this type of vessel will be manufactured in Brazil. The operation of the relief ships have crucial importance to the development of production of oil and gas in the pre-salt (subsalt) layers. This type of vessel transporting oil produced in the offshore areas to the terminals of Transpetro. At today's meeting (18/12), the CDFMM also approved a funding of 400 million reais (229 million U.S. dollars) for the works in the AtlânticoSul Shipyard, which is being done in the state of Pernambuco (Northeast of Brazil). The AtlanticoSul Shipyard has the largest number of orders of Promef. In all, 22 ships of the program will be built in the shipyard, the largest in Southern Hemisphere. The Promef - who revitalized the Brazilian naval industry - is already generating 15 thousand direct jobs in Brazil and this number of jobs will reach 40 thousand. The program, launched in 2004, provides for the construction of 49 vessels (26 in the first phase and 23 in the second), adding four million dwt of shipping. Already been auctioned 33 vessels, where contracts are U.S. $ 3.9 billion. The scale generated by the orders of Transpetro program changed the face of the Brazilian naval industry. Brazil has the fifth largest worldwide portfolio of orders for tankers and the projected construction of new shipyards in various parts of the country. Moreover, the Promef is stimulating the naval-parts industry and attracting investors for the construction of ship repair yards

AUSPICIOUS TIDES IN THE BRAZILIAN SHIPBUILDING INDUSTRY: OPPORTUNITIES FOR FINANCIERS IN AN EMERGING MARKET - by Godofredo Mendes Vianna and Tereza Cristina A. M. Gorito, 16/07/2010 The heat is on for the Brazilian shipbuilding industry For the last 10 years the Federal Government has built up a local content requirement, which started through Petrobras’ tenders for offshore supply vessels. The obligation to build the OSV in a Brazilian shipyard brought back to business an industry that had collapsed during the 1980s economic turmoil in Brazil. The local content requirement was extended to rigs, platforms and tankers, which led to a recent process of importation of technology from the traditional shipyard market located in South Korea and Singapore. Several joint ventures between Brazilian yards and the foreign technology and knowhow holders are in place, aiming to get a share of the massive orders that will be tendered by Petrobras.

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A shortage of resources to meet the increasing demand for funding through the Merchant Marine Fund to build shipyards, vessels and offshore units in Brazil, led the National Treasury to grant a financial contribution to the fund in the amount of R$15bn (over US$8.5bn), which resulted in 161 priority projects being approved out of 164. This has not been the first time the Brazilian Government acts upon the new findings and the significant increasing demand. Back in 2008 still amidst a worldwide economic crisis, R$10bn (almost US$6bn) were released for capitalisation of the Brazilian shipbuilding industry. Financing is granted through the Merchant Marine Fund’s agents (BNDES – Brazilian Public Development Bank being the most active agent) to Brazilian shipyards for projects of implementation, expansion and modernisation of its facilities and for ship/unit construction, conversion and repairs, as well as to Brazilian shipping companies to cover orders of new vessels and equipment, repairs and upgrading works, placed with Brazilian shipbuilders and the Brazilian navy. No wonder it is estimated that Brazil already has the fifth word’s largest portfolio of orders for tankers and there are projects to install new shipyards all over the country. The Brazilian ship financing structure - Financing cost Financing has been granted at a very attractive cost and made available through governmental financial agents, the most active one being BNDES – the National Bank for Economic and Social Development. In regards to BNDES markup, some of the financing options that cover up to 90% of the project value are very attractive, with interest rates that range from 2.5% to 6% a year. Repayment conditions may reach up to 20 years and with grace periods from one to four years. It is also important to stress that there are no restrictions to the participation of foreign entities or individuals in Brazilian shipping companies or shipyards, however it is necessary to observe certain legal, technical and economic requirements.

CANADA Canada’s new National Shipbuilding Procurement Strategy brings new hopes to Davie yards – the scheme will be used to build 50 ships to renew the navy and the coast guards fleets over 30 years old. The company hopes this will assist the company in the restructuring process. Davie welcomes lifeline –Tradewinds - 04-06-2010

Canada’s DAVIE Yards had “temporarily” laid off 1,590 workers of its workforce of 1,750 as it entered bankruptcy protection in Canada. Following a review undertaken when Davie recently embarked on the most complex aspects of ship construction, the corporation concluded that the learning process involved in building offshore vessels is more challenging than anticipated and has resulted in additional delays and costs for ships under construction. In 2008, the federal government guaranteed C$300M ($285.7M) in financing for the yard to help it build five ships for two Norwegian companies. Before that, the yard had undergone periods of virtual shutdowns and then brisk building activity.

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Davie layoff starts in Quebec – Fairplay - 01-03-2010

Export Development Canada (EDC) agreed to lend $40m and Investissement Quebec (IQ) CAD 53.5m ($49.24m) to Davie Yards to aid its financial restructuring. The EDC loan is destined towards building two multipurpose accommodation vessels for Ocean Hotels of Cyprus. The Quebec part of the loan will finance Davie's refundable tax credits for 2009 and 2010. The company was said to have ran out of cash last year and laid off workers temporarily before Christmas. It started the production again from February. Canadian cash- Tradewinds- 2009/07/24

STX Canada Marine Inc. has been awarded a $2.48 million contract to design a 90metre offshore ocean research vessel, while another one, Robert Allan Ltd. will design three 60- to 65-metre fisheries research vessels in a $2.5 million contract. The new vessels will be replac the old one under the federal government’s National Shipbuilding Procurement Strategy (NSPS). North Vancouver’s Washington Marine Group is reportedly in the running to be named as a long-term shipbuilder under that multi-billion-dollar strategy. The contract STX received was originally awarded to a Norwegian firm a couple years ago. Vancouver shipbuilders receiving more Canadian work – Business Today.com – 26-112010

Export Development Canada Bank is financing $100m against a first-priority mortgage for the building of 2 accommodation vessels at Davie Yards. The financing will ensure construction of the vessels ordered in 2007 for the support of offshore rigs with accommodation, storage ROV support and dive support and heavy-lift crane operation. Cash for flotels – Tradewinds -13/10/2009

INDIA The Indian Authorities are reported to be working on a shipping and shipbuilding subsidy-proposal that would keep owners placing orders at domestic yards and cover some export orders as well. The estimations for fleet revival spending over next 3 years are in the magnitute of nearly USD13Bln. According to Tradewinds, the industry seeks subsidies between 20 and 30% for orders at local yards and the government may provide nearly USD4Bln. Order subsidies on India agenda- Tradewinds- 03/12/2009

The ministry of Shipping in India intends to boost the domestic shipbuilding industry with a proposal for the Indian shipowners to place contracts at the local yards. The proposal comes after the ship owning industry in India asked for level playing field after distortions in favor of foreign owners took place through the previous 5 years term 30% subsidy scheme. The subsidy was given in installments to the state-owned shipyards and after delivery to the private yards. Shipbuilders were lobbying the government for the scheme to be reintroduced after it expired in 2007. The shipping companies in India say that half of the Indian fleet is over 20 years old and will be needed to be replaced in the next 5 years. Govt drafting subsidy scheme to promote shipbuilding- Livemint WSJ- 24/11/2009

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Indian shipyards are lobbying for oil and gas companies to only charter only offshore support ships made and flagged in India, similar to the Jones Act in the US. Current rules state that companies give preference to Indian-flagged vessels, but make no mention of country of build. Yards like ABG and Bharati would stand to gain most from an adoption of the proposals. Yards want Indian Jones Act –Tradewinds-28-05-2010

Local shipbuilders to benefit from proposed cargo norms P.R. Sanjai livemint.com Sun, Apr 25 2010

Industry says any move to help indigenous ship makers is welcome, but meeting demand may be a difficult task. Mumbai: In a move that will likely give domestic shipbuilders a shot in the arm, the Indian government plans to give first preference to ships built and registered in India for moving cargo imported by domestic entities such as Oil and Natural Gas Corp. Ltd, Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd. Currently, only Indian-flagged vessels, or ships that are registered locally and bear the Indian tricolour, have the right of refusal to match the lowest rate quoted by a foreign flagship for cargo transportation. This is in accordance with the rules set by regulator Directorate General of Shipping, or DGS. All Indian-flagged vessels are not necessarily Indian-made vessels. “It is proposed in the draft action plan, that to promote Indian shipbuilding sector, we may give the first right of refusal to Indian-built, Indian-flagged vessels and second right of refusal may be given to the other Indian-flagged vessels,” R.K. Sen, assistant director in the shipbuilding and repair division of the ministry of shipping, wrote in a recent circular inviting comments from DGS. This could be done by modifying existing guidelines issued by DGS, Sen wrote. Mint has reviewed the circular. Besides cargo import opportunities, the country’s coastal trade is reserved for Indianregistered ships and foreign ships are hired to operate in Indian territorial waters only when Indian ships are not available and that too with the regulator’s approval. If indeed this proposal comes into force, leading private shipyards such as ABG Shipyard Ltd, Bharati Shipyard Ltd, Larsen and Toubro Shipbuilding Ltd and Pipavav Shipyard Ltd will stand to benefit, given their shipbuilding capability. India has 27 shipyards, including state-run entities such as Cochin Shipyard Ltd, Hindustan Shipyard Ltd and Hooghly Dock and Port Engineers Ltd. ABG Shipyard, India’s largest private shipbuilder, has an order book of Rs12,100 crore and its closest rival Bharati Shipyard’s order book is to the tune of Rs4,987 crore. S.S. Kulkarni, secretary general of the Indian National Shipowners’ Association, an industry lobby, said DGS had sought its comments on the proposal made by the ministry of shipping, but declined to comment on it as he is still collating the opinions of member firms. A senior executive from a leading shipping company said the Indian shipbuilding industry isn’t mature enough to meet demand. “Indian shipyards are still not up to the standards of international shipyards and could not cater to the requirements of Indian demand,” said the executive, who didn’t want to be named. “It will take at least 10-15 years for Indian ship makers to reach global standards. Moreover, there could be conflict of interest as most ship makers have their own shipping companies.” According to him, companies such as Shipping Corp. of India Ltd (SCI) and Great Eastern Shipping Co. Ltd have huge fleet acquisition plans to meet cargo demand.

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Indian shipping companies largely rely on South Korean and Japanese ship makers although they have in recent years started placing orders with domestic shipyards. “Any move to help indigenous efforts are welcome,” said S.S. Hajara, chairman and managing director at SCI, “Also, I do not see any difficulty in fleet acquisition for SCI because of this new proposal as we purchase ships through a global tender. It is quite appropriate to give support to Indian shipbuilders.” Under the government’s national maritime development programme, SCI is in the process of acquiring 76 new vessels at a cost of Rs15,000 crore. The acquisition will be completed in phases by 2011-12.

Differential subsidy for shipbuilding proposed - Livemint 30.06.2010 The shipping ministry has proposed sharply lower and differential rates of subsidies for shipbuilding in a new scheme being prepared to replace the earlier one that lapsed in 2007, two persons briefed on the plan said. Local shipbuilders would get a 12% incentive on the price of ocean-going merchant ships sold to overseas buyers, according to the draft scheme. The subsidy on ships made for the domestic market has been pegged at 16% to neutralize the impact of a value-added tax of 4%. For dredgers, a subsidy of 20% would be available to local shipbuilders on both export and domestic orders. The earlier scheme had provided a 30% incentive for merchant vessels longer than 80m sold to Indian companies. For export orders, ships of all types and capacities were eligible for the subsidy. That scheme ended on 14 August 2007 after a five-year run. The shipping ministry will discuss the proposed scheme with the committee on non-Plan expenditure in the finance ministry in the next few days. The new scheme, too, will run for five years if approved by the government. After several rounds of consultations, the shipping ministry has now reached a “broad consensus” on the issue, a shipping ministry official—one of the two briefed on the plan—said on condition of anonymity.

INDONESIA Indonesian yard PT PAL gets USD44Mln in special aid from the Indonesian government to support the operations at the time when the yard is reducing dependency on imports of naval and merchant vessels. The yard is under supervision of state asset management agency and is set to be rescued after default on business obligations due to currency losses in the financial turmoil. Struggling Indonesian State-owned yard PT Pal Indonesia is to get special aid- New Ships- 2009/09/07

Two Indonesian state lenders have agreed to provide a total loan of US$173 million for PT PAL INDONESIA to finance shipbuilding. The loan funds - US$78 million from PT BANK NEGARA INDONESIA (BNI, JSX:BBNI) and US$95 million from BANK MANDIRI

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(JSX:BMRI) - will be used to build five ships including chemical tankers and cargo ships. PT PAL also is seeking a loan of US$10 million from INDONESIA EXIM BANK, to finance the construction of two smaller ships, Harsusanto, the president of the state-owned shipbuilding company, said. Meanwhile, the state owned asset management company PT PERUSAHAAN PENGELOLA ASET has agreed to provide Rp280 billion for PT PALs restructuring. Two Indonesian state banks to loan US$173 mln to PAL for ships - Asia Pulse Sep 21, 2010

USA Grants of up to 75% of the costs for repowering ships with cleaner engines are the most recent initiative of the US Environmental Protection Agency. Publicly owned passenger ships qualify for the proposal but private vessel operators are not eligible by themselves. However, if a ferry vessel is leased or available to a public agency it may compete for a grant. The Program is called National Clean Diesel Assistance and is coordinated by EPA. EPA Grant could help vessel operators – EPA.com – 09/11/2009 Washington State Ferries state-program to replace the ageing ferry fleet had awarded a contract to Todd Pacific Shipyards to build 2x64 car ferries for USD114Mln. The WSDT’s fleet has 9 out of 20 ferries between 45 and 65 years old. To serve challenging route, the state is leasing vessels until new ones will be built. The first vessel is valued at USD65.5Mln with additional expectation of spending US11.5Mln for lifeboats outfitting, design and others. The second vessels and 2 options will be built at around USD57Mln because of the economies of scales in building multiple models of the vessels. Seattle company secures contract to build Ro Ro ferries- Ship&Boat International- December 2009 The US maritime Administration runs a new round of funding totalling $14.7mln under the Small Shipyards Grant Program. It was authorised originally in 2006 under which $9.8Mln went to 19 shipyards. The 2009 American recovery and reinvestment Act increased the funding to $100Mln and over 500 applications were submitted requesting $1.5Bn. The Small Shipyards Grant Program assists shipyard in making capital improvements and investing in maritime training programs, particularly in communities related or dependant upon the maritime industry, and focus on increasing efficiency, vessels quality and employee productivity. Marad announces new round of Small Shipyard Grants –Marine Log- 14/01/2010

US shipyard seeks aid for speculative building –Lloyd’s list- 21 September 2009 Aker Philadelphia asks government for $150m AKER Philadelphia Shipyard is seeking $150m in US federal assistance to build two speculative product tankers after it completes its current series of 12 ships under construction for Overseas Shipholding Group. Pennsylvania governor Ed Rendell wrote to US vice-president Joe Biden that the shipyard might systematically have to lay workers off from March next year and shut down totally in 2011 if such funding is not received. Shipyard advocates are citing the fact that bank lending has dried up completely, so a ‘”bridge loan” of $150m from the US Maritime Administration has become inevitable.

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OSG has bareboat-chartered 12 ships from owner American Shipping Company, a company that is also associated with the Aker group of Norwegian entrepreneur Kjell Inge Rokke. American Shipping has previously revealed its inability to finance two ships in the OSG series, which OSG is to convert into shuttle tankers at another shipyard after delivery. The funding problems being circulated in Washington relate to two further ships beyond the OSG series, which the shipyard appears to have decided to build on its own account in the hope of finding a buyer. Parts for these two ships have been ordered, but the lack of bank interest and buyer interest has become a challenge. OSG chief executive Morten Arntzen said his company remained committed to taking delivery of its dozen ships, 11 of which were already chartered out. Seven ships have been delivered so far, with the remaining five due by 2011. The funding problems associated with the two shuttle tankers have partly been resolved. Mr Arntzen told Lloyd’s List last month, without providing details, that the company “would ensure completion” of the entire series if a non-binding agreement reached with American Shipping were to become permanent. Mr Arntzen said on Friday that “it was too early” to speculate on whether OSG might step in as buyer or facilitator on the two extra tankers the shipyard was having trouble financing. Industry observers say the Philadelphia story is typical of the global shipbuilding industry’s struggles in the current economy. Shipyards awarded a series of newbuildings tag on a few extra ships, hoping to use economies of scale first and find a buyer later. However, financing the construction becomes a problem without a committed owner. Mr Arntzen said: “There is no question that the lack of orders should be a concern [for the Philadelphia yard]. Otherwise, it faces a challenging future.” Aker Philadelphia chief executive Jim Miller is hopeful that the impending phase-out of single-hulled tankers under the US Oil Pollution Act of 1990 would open up an attractive longer-term market for double-hulled tankers such as the unfunded pair. Aker Philadelphia, which employs around 1,200 workers, is said to be the only Jones Act shipyard other than Nassco of San Diego capable of turning out such a product. Mr Miller said the yard was doing everything it could to find buyers for the two ships. “This is a darn fine company,” Mr Miller was quoted as saying in local media in Philadelphia. “One way or another, I am going to make this happen.” Mr Miller was unavailable on Friday, and a yard spokesperson declined further comment.

RUSSIA Russian Ministry of Industry and Energy intends to support the local shipbuilding industry through new legislation to prevent it from falling behind Western competitors. The ministry estimates that up to 40 platforms will be needed for oil and gas production on then continental shelf by 2030, along with 85 specialized ships and more than 140 support ships. Among the proposed measures are the elimination of VAT on imported equipment, interest-free credits for building ships, financing for modernization of production capacity. There would also be special measures “to reinforce the priority right of Russian industry to create means to develop the sea shelf,” limit the use of foreign ships for coastal and internal shipping, stimulate construction of fishing vessels and develop the leasing system for acquisition of river boats. The Complex Program to Advance Production of the Shipbuilding Industry on the Market between 2008 and 2015 was already approved by the cabinet of ministers last October. It promotes the establishment of a scientific center at the Krylov Institute, two engineering centers and three shipbuilding centers, the Western, Northern and Far Eastern Centers. Ship repair centers will also be developed on the Black and Caspian Seas. The program will receive 23.7 billion rubles in funding between 2008 and 2010. Of that amount, 16.4 billion rubles will come from the federal budget. From 2010 to

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2015, the program will receive 84.3 billion rubles, 80.6 billion rubles of which will come from the budget. State Support for Russian Shipbuilders - Kommersant.ru- 4/26/2007 Russian shipyard group United Shipbuilding Corp. (USC) plans to raise about $1bn of credit next year for shipyards construction project in the Far East, according to USC CFO Sergei Chenchik. He says the company has been in talks with VneshEconomBank and Sberbank of Russia. USC expects to get the Credit Facility for a period up to 10 years. The estimated payback period of Vostok-Raffles shipyard is 6-7 years, of Zvezda-DSME – 10-12 years. USC had projected to build two large shipyards in the Far East in cooperation with foreign partners: with Daewoo Shipbuilding & Marine Engineering Co.– Zvezda DSME, and Vostok-Raffles with Singapore Yantai Raffles Shipyard Ltd. USC to get $1bn for shipyards construction – Asiasis - 25-10- 2010

In the state budget for 2011 the Russian Government has allocated 14bn rubles, abt 330mln EUR to support the Russian commercial shipbuilding. It reinforced that the industry remains a priority for the government. Russian Government sets aside 14bn rubles to support the Russian shipbuilding industry– Portnews- 25-09-2010

Russia’s government will extend 14.3 billion roubles to support the country’s shipbuilding industry, Prime Minister Vladimir Putin told a meeting of the government’s presidium “Therefore we have a right to hope for an adequate response from our ship-building companies, the more so they have opportunities for this,” he said. Putin focused on the issue as the presidium discussed draft technical regulations for sea and river transport. “We need them to increase shipping security and for our domestic industry to be able to build more modern, reliable and effective naval equipment that will be necessary to develop our own commercial and fishing fleet. We also need this to explore natural reserves of the Extreme North and Russia’s offshore fields and to revive such a promising market as inland river traffic and tourism,” Putin said. Govt to inject over 14 billion rubles in the shipbuilding – Putin Freight News, August 10, 2010

TURKEY The Turkish government has given green light to a scheme designed to offer financial support to country’s shipbuilding industry as it faces major challenges. Following the government’s support for the industry, the banks are now more likely to consider lending to the yards as the loans would be guaranteed by the Turkish Treasury. With the loan, the yards or the owners would be able to complete unfinished newbuildings and then move the ships on the market. Turkey gives go-ahead to support for shipyards – Lloyds List- 30-09-2010

Rescue package ready in 15 days 05 Şubat 2009 Perşembe 09:55 TurkishMaritime.com.tr 52

New stimulus package that aims to turn things around will soon be introduced to Turkey's shipbuilding industry. Turkey's shipbuilding industry, which has grown exponentially in the last six years with orders coming in from around the world, has sustained heavy damage from a drop in global demand, but a new stimulus package that aims to turn things around will soon be introduced. Transportation Minister Binali Yıldırım said the rescue package, which is full of measures to address the problems faced by shipbuilders, will be finalized in 10 to 15 days. Speaking to the Anatolia news agency, the minister said preliminary discussions on the content of this package took place during the most recent Economy Coordination Board (EKK) meeting last month, when the problems of other major sectors were also discussed. Yıldırım said a working group, including officials from the Treasury Undersecretariat, Finance Ministry and the State Planning Organization (DPT), was formed after the EKK meeting to prepare a comprehensive report on what can be done to support ailing companies in the ship construction business. "This working group will submit their report to us, and we will bring it before the EKK, which will have the last say on the content, composition and application of the measures," he noted. At the time he was appointed as transportation minister in 2003, Turkey had 37 shipyards and 5,000 workers in the sector, Yıldırım recalled, comparing these figures with those from the middle of last year, when the crisis began to affect the economy. In the first sixth months of 2008, there were 150 shipbuilding docks along Turkey's shores, employing 36,000 workers. Nearly 9,000 people lost their jobs during the following seven months. The minister noted that the primary objective of the package would be to help ensure that orders that have already been received are fulfilled. "To do this, first we will offer a measure to expedite the process of receiving corporate loans from banks," the minister stated. He went on to describe other possible measures to be included in the package, saying: Secondly, there is the possibility of Eximbank extending loans for the construction of ships that will be sold to foreigners, as exports. Shipyard owners have already applied to us seeking to be able to benefit Eximbank loans, and they will be given an affirmative answer. Thirdly, the public sector will be encouraged to submit its ship orders to local manufacturers. In addition to this, there is the insurance matter. The state will probably be the financial guarantor for companies in trouble." Yıldırım noted that the EKK will decide which of these measures to prioritize, which of them to implement and which are unsuitable depending on the working group's report. "We haven't left any troubled sector on its own and have always held their hands to support them. Similarly, we will continue to stand by the strategic business of shipbuilding, which has a 15 percent share of the gross domestic product [GDP] and importantly serves to supply many of Turkey's needs," he said.

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Supplement

CESA PROPOSAL FOR REVISED DEFINITIONS

CESA proposes the following modifications to the text of Article 2 of the FRAMEWORK ON STATE AID TO SHIPBUILDING (2003/C 317/06): 2. DEFINITIONS 10. For the purposes of this Framework, the following definitions shall apply: (a) "shipbuilding" means the building, in the Community, of commercial vessels and floating and moving offshore structures; (b) "ship repair" means the repair or reconditioning in the Community of commercial vessels and floating and moving offshore structures; (c) "ship conversion" means the conversion, in the Community, of commercial vessels, on condition that conversion operations entail radical alterations to the cargo plan, the shell, the propulsion system or the passenger accommodation; (d) "commercial vessels” and “floating and moving offshore structures" means: (i) seagoing and inland waterway vessels of not less than 100 gt used for the transportation of passengers and/or goods, (ii) seagoing and inland waterway vessels of not less than 100 gt for the performance of a specialised service for the [waterborne transport] [shipping] and offshore technology (for example, dredgers and ice breakers, crane ships, work and maintenance platforms), (iii) tugs of not less than 365 kW, (iv) fishing vessels of not less than 100 gt, with regards to export credits and development aid if in compliance with the 1998 OECD Arrangement on Guidelines for Officially Supported Export Credits and with its Sector Understanding on Export Credits for Ships, or with any agreement amending or replacing either of them, as well as with the Community rules governing State aid in the fishery and aquaculture sector, (v) pontoons, platforms, barges and other floating and moving (not continuously mounted on the seabed) offshore structures for the performance of the tasks referred to in points (i) to (iv); (v) unfinished shells of the vessels and offshore structures referred to in points (i) to (v). Military vessels (i.e. vessels which according to their basic structural characteristics and capability are specifically intended to be used exclusively for military purposes, such as warships and other vessels for offensive or defensive action) and modifications made or features added to other vessels exclusively for military purposes shall be excluded, provided that any measures or practices applied in respect of such vessels, modifications or features are not disguised actions taken in favour of commercial shipbuilding inconsistent with State aid rules.

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Supplement

SAMPLES OF INNOVATIVE PROJECTS SUPPORTED BY INNOVATION AID

A comprehensive compilation of sample cases to facilitate the understanding about the different forms of innovations and the positive effects and high efficiency of innovation aid is yet to be finalized and will be supplied to the European commission in due course. Reference is made to submissions by CESA Member Associations and companies which also contain sample cases.

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Supplement

JOINT DECLARATION BY REGIONAL GOVERNMENTS ON THE FUTURE OF THE EUROPEAN SHIPBUILDING INDUSTRY

For the undersigning 33 regions, the future of the European shipbuilding industry is top priority for the economic development in the coming decades. As responsible representatives for our regions, we jointly speak on behalf of a population of more than 60 million people.

1. Shipbuilding is a high tech sector providing thousands of high skilled jobs at shipyards countless suppliers of equipment and services to the yards. Shipbuilding forms a keystone in the regional maritime clusters with its tight network including many SMEs and invaluable scientific excellence. In our regions, shipbuilding is an essential sector for the prosperity of our people. 2. Shipbuilding has been severely affected by the global economic crisis in combination with global structural imbalances and market distortions. Demand for new ships has collapsed since summer 2008. Due to long production lead-times, shipbuilding is a late-cycle industry. The impact of the demand collapse on employment will be felt with an 18 months delay. At the end of 2009 on average about 20% of the jobs at shipyards were affected. This figure could dramatically increase in 2010. Without new contracts before summer 2010, an employment crisis with half the jobs at stake could be unavoidable. 3. During the LeaderSHIP High Level Meeting in September 2009 chaired by Vice-President Verheugen, urgent action measures were proposed to decisively counteract against irreparable damages to this industry with its outstanding capabilities. We strongly support the proposed action programme including fleet investment stimulus, financing means, level playing field and expanded and accelerated research and innovation efforts. 4. The European institutions are urged to establish, without delay, appropriate conditions for an emergency programme, generating orders for markets, which are in need for new, safe and clean ships. A targeted fleet renewal programme is expected to boost regional investments and industrial activity, improve the infrastructure, reduce significantly dangerous emissions from ships and thus contribute to a healthy environment. 5. Shipbuilding has been and will be an attractive growth market. European yards have successfully developed from a labour intensive to a know-how intensive industry. While demand for standard shiptypes is expected to remain weak for several years, a number of new markets for European yards are anticipated. These include in particular new designs for low emission ships, deep sea off-shore support vessels, ocean energy related hardware

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and a number of highly specialised fields of maritime activities. In addition, well established growth market such as the cruise industry will continue to develop positively. 6. Shipyards are taking all necessary measures on their side to adjust to the changed business environment. The proposed support for the European industry aims at bridging the temporary demand gap and improving key framework conditions for technologically advanced and competitive companies. The measures are not considered as attempts to delay structural change. However, they will give this future growth sector the means to successfully face the challenges arising from the distorted conditions of the global market. 7. The EU must demonstrate its ability to jointly and effectively address the challenges of the shipbuilding sector. To this end, we request the European Commission and Member States to take all necessary decisions for swift implementation in line with the LeaderSHIP proposals. We count on the European Institutions to take its full responsibility in this context.

Brussels, 8th April 2010

Signatories: - Mrs. Eva M. Vazquez Sanchez, Director General for Industry Energy and Mines of Andalucía - Mr. Graciano Torre González, Governor of the Principality of Asturias - Mr. Bernabé Unda Barturen, Minister of Industry, Innovation, Trade and Tourism of Basque Government - Mr. Emil Dichev, Mayor of Municipality Beloslav - Mr. Aurel Gabriel Simionescu, Mayor of Braila - Mr. Martin Günthner, Minister of Economic Affairs and Ports of the Free Hanseatic City of Bremen - Mr. Dimitar Nikolov, Mayor of Burgas - President of the Campania Region - Mr. S. Galema, Member of the Provincial Executive Council of Friesland - Dr. Renzo Tondo, President of Autonomous Friuli Venezia Giulia Region - Mr. Dimitru Nicolae, Mayor of Galaţi - Mr. Ángel Bernardo Tahoces, Director General for Industry Energy and Mines of Galicia - Dr. J. C. Gerritsen, Member of the Provincial Executive Council of Groningen, - Mr. Axel Gedaschko, Senator of Economic and Labour Affairs Free Hanseatic City of Hamburg - Mr. Ivan Jakovčić, President of the Istria Region - Mr. Arūnas Burkšas, Governor of Klaipėda County - Mr. Claudio Burlando, President of Liguria Region - Mr. Gian Mario Spacca, President of the Marche Region - Mr. Jürgen Seidel, Minister of Economics, Labour & Tourism of MecklenburgVorpommern - Mr. Jörg Bode, Minister for Economics, Labour and Transport State of Lower-Saxony - Mr. Constantin Adrian Bragaru, Mayor of Orşova - Mr. Mieczyslaw Struk, Marshal of Pomorskie Voivodeship

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- Primorsko-Goranska County - Mr. Bojidar Jotov, Mayor of Regional Government of Ruse - Mr. Joël Batteux, President of La Carene, Mayor of Saint-Nazaire - Mr. Jost de Jager, Minister of Science, Economic Affairs and Transport of SchleswigHolstein - President of the Sicily Region - Splitsko-Dalmatinska County - Mr. Constantin Hogea, Mayor of Tulcea - Mr. Mikko Pukkinen, Lord Mayor of Turku - President of the Veneto Region - Mr. M. Wiersma, Member of the Provincial Executive Council of Zeeland - Dr. J.W.Asje van Dijk, Member of the Provincial Executive Council of Zuid-Holland

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