EU terms for recovery of aid granted to Polish shipyards in Gdynia and Szczecin - briefing

The European Commission has concluded, following four years of investigation, that state aid granted to Gdynia shipyard and Szczecin shipyard gives rise to disproportionate distortions of competition within the Single Market, in breach of EC Treaty state aid rules, and must be repaid. The Commission has simultaneously agreed to accept commitments from Poland for the implementation of the decisions in a way that will quickly create opportunities for viable and sustainable economic activities at the Gdynia and Szczecin sites and so maximise the number of sustainable jobs there. In particular, the Polish authorities have committed to sell the yards' assets through open, transparent, non-discriminatory and unconditional tenders and subsequently liquidate the Gdynia and Szczecin shipyard companies, claiming the state aid back through this process. As a result, companies acquiring the assets will not be liable to repay the illegal subsidies, even if they choose to continue shipbuilding. To help any workers that are made redundant, the Commission has offered assistance in devising flanking measures under existing EU programmes (European Social Fund or European Globalisation Adjustment Fund).

Why did the European Commission take the decisions now? If the Commission is not satisfied with the restructuring plans presented, it should have given Poland a chance to bring them in line with EU state aid rules. Why is a bit of good will not shown in this difficult situation?

The Commission says it wanted to put an end to the uncertainty hanging over the shipyard workers for far too long. The Commission has been investigating the cases for more than four years. Since in the accession negotiations Poland did not propose transitional arrangements allowing flexibility for the shipbuilding industry, as did Malta for example, the Commission started investigating the continuous state support for the shipyards immediately after Poland's EU accession. Poland asked the Commission repeatedly for more time, claiming that this would allow a positive outcome of the investigation. In late 2006, two years after the start of the Commission investigation, Poland decided to privatise the shipyards. Once more, the Commission agreed to await the outcome of the privatisation, which was postponed several times: first until mid-2007, then end-2007 and finally mid-2008. When the privatisation efforts failed in May this year, the Commission again accepted the plea of the Polish Government to extend the deadline until September 2008.

Despite these numerous delays, Poland has not managed to restructure the two companies or to find a credible private solution that would be in line with the EU rules on state aid. The yards have been surviving and operating only thanks to the state subsidies. Despite this, the yards continued to generate losses, were unable to pay taxes and social security obligations and have accumulated debts towards the state and towards suppliers. Delaying restructuring and privatisation rendered the prospects of finding a viable long-term solution increasingly unlikely. Any further delays therefore do not make sense.

After four years of flexibility and patience by the Commission, Poland cannot claim that it has not received a second chance in this file. It has had at least five chances.

Why does the Commission apply the State aid rules more strictly in the Polish cases than in other cases (for example rescuing of banks)?

The Commission applies exactly the same rules for all restructuring cases and treats Poland in the same way as any other Member State.

There are numerous recent examples where the Commission authorised Poland to grant substantial amounts of state aid in compliance with EC state aid rules. For example, the Commission approved state aid awarded by Poland as part of long-term Power Purchase Agreements of PLN 11.5 billion (€3.3 billion at today's exchange rate) and excise duty reduction for bio-fuels with a budget of PLN 4.9 billion (€1.4 billion). Only in 2007 and 2008 the Commission approved state aid for the coal sector in Poland of a total amount of PLN 1.8 billion (€514 million).. In the context of accession, Poland negotiated an exception to the EU rules and was able to grant restructuring aid of PLN 3.4 billion (€970 million) to its steel sector. The Commission has authorised state aid for large investment projects in Poland, such as PLN 184 million (€53 million) aid for Sharp Manufacturing Poland of or an aid package of close to €200 million to investment projects in the electronics cluster in Kobierzyce. Poland benefits from European structural funds, where the total planned support for Poland for years 2007-2013 amounts to € 67.3 billion.

On the other hand, there are several cases in the shipbuilding sector, where the Commission adopted negative decisions ordering repayment of past aid concerning other Member States, such as the Spanish public shipyards IZAR and the Hellenic Shipyards.

The Commission also applies the state aid rules and the underlying principles of the Guidelines concerning restructuring of companies in difficulties in the financial sector. Indeed, recently the Commission has approved significant rescue packages for several banks. However, following intensive cooperation between the Commission and Member States, financial support schemes have been substantially modified, to bring them in line with the EU state aid rules and to put in place adequate safeguards to avoid distortions of competition. Financial institutions benefitting from aid had to commit to severe growth limitations and restructuring measures. Also, none of the rescued banks have benefited from prolonged operating aid in the past, like the shipyards in Poland, which have been artificially kept afloat for many years. Finally, the potential risk inherent to the difficulties of the banking system for the whole European economy due to potential spill-over effects cannot be compared to the shipyards cases.

Does the privatisation not offer sufficient guarantees that the yards will be restructured and become competitive? After all, the investors are risking losing their money if the companies close down.

In more than two years, the privatisation effort has not succeeded in attracting investors capable of preparing a convincing restructuring plan that would permit the yards’ operation without continuous recourse to state aid.

By way of example, ISD Polska offered to purchase the state's shares in Gdynia Shipyard, one of the biggest shipbuilding facilities in Europe, for only a symbolic price and inject merely PLN 100 million (€29 million at today's exchange rate) in the company. ISD conditioned its purchase to the state injecting over €500 million (in addition to the €€700 million million of direct aid the yard has already received since 2002, plus production guarantees of €916 million - both in nominal value), mainly to finance the yard's liabilities and working capital needs. In addition, the state is expected to continue granting production guarantees on more advantageous terms than those required for healthy companies.

Such state intervention would free the investor from any risk related to the yard's past. The investor essentially would acquire the shipyard for free and at the same time invest only a comparatively small amount of money of his own. Therefore the mere fact of privatisation is not guaranteeing that the yard would be genuinely restructured.

As to Szczecin Shipyard, even though an investor – Mostostal - was found, the restructuring plan contains such important deficiencies that it cannot be considered apt to restore the yard's viability.

On the basis of what criteria did the Commission decide to reject the restructuring plans submitted in September?

When assessing restructuring plans, the Commission has to decide whether the positive effects achieved by the aid are more significant than the negative effects brought about by the distortion of competition created by the state intervention.

For companies in financial difficulties, like the shipyards, the most important criterion is that the aid is linked to the implementation of a sound, far reaching restructuring plan, ensuring the restoration of long term viability. The restructuring plan should be based on realistic and verified assumptions and should be sufficiently robust to withstand small changes in the macroeconomic environment (such as the appreciation of the local currency or increased wage levels). It should propose convincing and tailor-made solutions to the problems that triggered the difficulties.

The Commission verifies whether the plan correctly identifies the reasons for the difficulties, whether the proposed solutions (modernisation, organisational and employment restructuring, financial restructuring, cost reduction, risk-mitigating measures and other) are concrete, realistic and timely and whether their costs and effects are estimated on the basis of realistic and verified assumptions. The Commission also verifies the analysis of the sensitivity of the financial projections to changes in the macroeconomic assumptions. An important component of a restructuring plan is the business plan for each of the company's activity: projections on output, turnover and costs based on realistic assumptions, supported by a market analysis and an analysis of the company's capabilities. Finally, the Commission seeks validation that the financing of the restructuring is secured up-front to avoid the company's recourse to additional state aid to complete its restructuring.

The joint plan for Gdynia and Gdansk Shipyards and the plan for Szczecin Shipyard that the Commission received on 12 September 2008 are more detailed than the drafts presented in June 2008. However, none of the revised plans bring sufficient improvements on demonstrating the return to viability, on significant financing from investors’ own resources or on compensatory measures.

The revised joint plan for Gdynia and Gdansk Shipyards projects an exceedingly long period of 10 years for achieving a positive pay-back on equity. It is only in 2018 that the investor foresees to start making money on his investment – and only if all his long-term projections are correct. The revised financial projections show an improvement of one year with regard to the initial projection. However, this is not based on more far-reaching restructuring, productivity improvement, investments or market reorientation but on more optimistic assumptions on sales prices, which in turn lead to better profitability results. There is, however, no evidence that these price assumptions would be prudent and sound.

The reviewed sensitivity analysis, although more detailed than the earlier one, still shows an excessive sensitivity of the financial projections to rather minor changes in basic macroeconomic assumptions.

A detailed business plan for the steel construction segment, which is to occupy 20% of the capacity, is entirely missing.

The contribution (credibly demonstrated) of the investor and the yard itself remains limited to 14% of the restructuring in both plans. This is well below the 50%-threshold in principle required by the applicable state aid rules to ensure a viable restructuring without undue distortions of competition.

Mostostal modified its plan for Szczecin Shipyard primarily with regard to the corporate restructuring of the yard: the yard should be divided in a number of successor companies designed to carry on shipbuilding and other activities. However, the revised plan shows serious deficiencies on all other aspects. Most importantly, it does not contain any business plan for one of the successor companies (Shipyard Odra) due to continue the current shipbuilding business of Szczecin Shipyard. This is a major problem, as Shipyard Odra should, according to the plan, generate almost 50% of the total turnover of the group and employ 800 people.

The plan is very brief also on the envisaged operations of the other successor companies. It does not describe or substantiate planned output volumes, assumed prices and costs. The description of restructuring measures is short and very generic.

The own contribution (credibly demonstrated) to the restructuring costs is also very limited, at only 12%, well below the 50%-threshold in principle required by the applicable state aid rules to ensure a viable restructuring without undue distortions of competition.

Does the Commission take into account the possible social consequences of a negative decisions ordering aid recovery, which would probably lead to bankruptcy and loss of jobs?

In its four year investigation, the Commission believes it has been very patient precisely because it is aware of the possible consequences for the local economies and for employment.

The unlawful and incompatible aid received by the Gdynia and Szczecin shipyards, which is forbidden for all companies in the EU, artificially kept the yards alive for years, sheltering them from the usual consequences of inefficient management in the form of a declining financial situation, insolvency and exit from the market. During the same time, other shipyards in Europe, not benefiting from such state backing, had to continuously restructure by taking painful measures and disposed only of their own financial means to adjust to the evolution on the shipbuilding market, in particular to the rising prices of steel, the depreciation of the US dollar and strengthening competition from China and other countries, even at the cost of loss of jobs and capacity reductions.

Gdynia Shipyard has received since 2004 some €569 million of state support, not counting State guarantees of almost €916 million, both in nominal value, which enabled it to maintain 4700 jobs. This means that some €121 000 of tax payers' money have been committed to save one job there.

By applying EU competition rules, the Commission ensures that companies throughout Europe operate on a level playing field in the Single Market, thereby creating the conditions to maximise prosperity and job creation in Europe as a whole. The objective of the Commission decisions is not to penalise the yards, but to restore the situation which would have existed if the aid had not been granted. In the absence of state aid the yards would have become insolvent already some years ago, as a result of their internal inefficiencies, loss making activity and inability to adjust to market changes.

But it was precisely to minimise adverse economic and social consequences that the Commission took the initiative to propose to the Polish authorities that they could implement the recovery of the illegal state aid from the Gdynia and Szczecin shipyards by a controlled sale of the yards' assets and subsequent liquidation of the companies.

The Commission is convinced that this procedure, previously applied to Olympic Airlines, will quickly create opportunities for viable and sustainable economic activities at the Gdynia and Szczecin sites and so maximise the number of sustainable jobs there. Under this procedure, the Polish authorities have committed to sell the yards' assets through open, transparent, non-discriminatory and unconditional tenders and subsequently liquidate the Gdynia and Szczecin shipyard companies, claiming the state aid back in the liquidation process. As a result, companies acquiring the assets will not be liable to repay the illegal subsidies, even if they choose to continue shipbuilding, and so they will be able to conduct their business activities hindered by the burden of past subsidies to repay.

In addition, the Commission would encourage Poland to make use of European structural funds (for example € 9.7 billion was allocated to Poland from the European Social Fund) and financial instruments available under the employment policy to cushion the short-term social consequences (for example the European Globalisation Fund).

How can the European Globalisation Adjustment Fund be used to assist the shipyards workers?

Poland could apply to make use of the European Globalisation Adjustment Fund (EGAF), who can co-finance with the Member State concerned maximum 50% of the costs of labour market policy measures aimed at redundant workers. To date, the support per worker from the EGAF ranged between €500 (Lithuania –Textiles) and €10 000 (Italy-Textile), matched by the same amount provided by the respective Member State.

The use of the EGAF is conditioned by two criteria: the globalisation criterion (economic disruption caused, among other, by a rapid decline of European market share in a given sector) and the size criterion (at least 1 000 redundancies in a company over a period of four months, including workers made redundant in related entities, such as suppliers).

Eligible measures are for example: job-search assistance, occupational guidance, tailor-made training and re-training, certification of acquired experience, outplacement assistance, entrepreneurship promotion, aid for self-employment; special time-limited measures, such as job-search allowances, mobility allowances or allowances to individuals participating in lifelong learning and training activities; and measures to stimulate in particular disadvantaged or older workers, to remain in or return to the labour market.

The Polish Government asked the Commission to apply flexibility in the assessment of the conditions for the approval of restructuring aid, in particular with regard to the significant contribution from the investor to the restructuring costs. The financial situation of the yards deteriorated for reasons outside the yards' control and therefore it is not fair to punish them now. Why does the Commission refuse to be flexible?

Under the EU state aid rules, restructuring aid can only be approved if the company itself finances a significant part of the restructuring costs, normally more than 50%.

A large part of the restructuring costs corresponds to the costs of financial restructuring: paying accumulated public and civil liabilities, and covering losses on existing contracts. It is not true that this burden is attributable merely to external reasons outside of the control of the yards, in particular the appreciation of local currency and the raise of steel prices.

Admittedly, these developments influenced the profitability of the two yards, but this was equally the case for other yards in Poland and Europe. The real reason for the yards' decline is that they have not managed to adapt to these developments, in particular by restructuring their activities or implementing sales and risk-control policies. It is the inability of the management to steer such adaption and inaction of the shareholders for several years that has led to the poor financial situation in the yards. This adaption has been within the control of the yards and its shareholders.

The Commission has a discretion to apply a certain flexibility as to the level of own contribution if exceptional circumstances are met. However, the level of own contribution that the investors have been able to credibly demonstrate is so much below the 50%-threshold (in the area of 15%) that it is completely outside the margins of flexibility that the Commission could have applied. In the past, a lower own contribution (46% and 40%) in the manufacturing sector was accepted only twice in case of Lithuanian companies, because they qualified as small and medium-sized enterprises, which is not the case for the yards.

Shipyards elsewhere in Europe have received substantial subsidies for their restructuring, with the agreement of the Commission. Why does the Commission not treat the yards in Poland in the same way?

First of all, the Commission's firm practice is to allow restructuring aid only exceptionally, if based on a restructuring plan, with sufficient private financing and reduction of capacities. When these conditions were not met, the Commission has ordered the recovery of the aid, for example from the Spanish public shipyards and more recently from the Hellenic Shipyard in Greece. The Commission follows closely the restructuring process undertaken in the yards in Malta, which benefit from transitional rules laid down in the Treaty of Accession.

It is correct that five shipyards in East Germany underwent an in-depth restructuring in the 1990s, benefiting from substantial amounts of state aid of about €3 billion. The restructuring of these yards followed a pattern: the yards were privatised quickly after the political and economic changes following the reunification of Germany and then restructured between 1992 and 1997. Public support was used not only to support their operations, but also for a genuine modernisation of the yards. The restructuring was accompanied by a substantial capacity reduction of 40% on the overall level, including a closure of two shipyards.

Drawing a parallel in Poland, the process of restructuring has been much longer than in Germany. Despite comparable levels of state aid, Gdynia Shipyard and Szczecin Shipyard have not managed to restructure. The aid has not been used for modernisation and restructuring, but served merely to maintain the companies afloat at the expense of their competitors and at high costs for tax payers. Only in the period 2004-2008, they received state support of €2.3 billion in nominal value (Gdynia Shipyard: €569 million and production guarantees of €916 million; Szczecin Shipyard: €204 million and production guarantees of €697 million). In addition, the two yards had been receiving state aid long before Poland's accession to the EU in 2004. For example, between its bankruptcy in 2002 and 2004, Szczecin Shipyard received €800 million of additional state support (always in nominal value).

Taking into account the complexity of the issues, the Commission allowed Poland over four years to find a suitable market-based solution in line with the EC Treaty. Contrary to Germany in the 1990's, no solution has been found to date and the Commission had to take the long overdue decisions.

How do these decisions affect Gdansk Shipyard?

The decisions adopted today do not concern Gdansk Shipyard in any way. Gdansk is in a slightly different situation than the two other yards because it is smaller, it is already privatised and the level of subsidies received is considerably lower than in the case of Gdynia and Szczecin. The privatisation of the yard in October 2007 was a first step, appreciated by the Commission as a development that should have brought the necessary private capital for the yard's far-reaching restructuring based on a restructuring plan.

The Polish authorities now have an opportunity to submit a restructuring plan for Gdansk for the Commission to examine. The Commission hopes that the plan for Gdansk will meet its requirements and will ensure a viable and sustainable future for the Gdansk shipyard.

Source: European Commission