Shipyards fight to salvage a future

Jorge González Gurriarán, a professor at the University of Vigo, highlights the problems facing the Spanish shipbuilding industry by pointing out that in 1975 the shipyards in the Galician city where he teaches employed 15,000 people in 1975. Now the figure does not even reach 5,000. Vigo has been through the reconversion of the sector in the 1980s and the partial privatization of the 1990s. Now, after struggling through three difficult decades, the financial backers of the shipbuilding industry in Vigo and across Spain have been ordered by the European Union to return tax breaks granted through the so-called tax lease system in the period 2007-2011.

The last piece of bad news for the sector in Spain was delivered on June 17 by the European Union's vice commissioner responsible for competition, Spaniard Joaquín Almunia. The amount of tax deemed by the Commission to constitute illegal aid that has to be returned has been left to the discretion of the Spanish government. When announcing his decision, it was Almunia himself who said: "The future of the shipyards, of auxiliary industries and of the workers in the maritime sector will depend fundamentally on their capacity for innovation and ability to attract customers and investors."

This view is shared by Almudena López del Pozo, the chief executive officer of Pymar, the association that groups together private shipbuilders in Spain. Although López del Pozo describes the Commission's decision as "unjust and discriminatory," she agrees that: "The future of the Spanish shipyards will depend on building ships with a high technological content. This is our future; that's the only way we can compete with countries in Southeast Asia and their very cheap labor.

"Shipyards and ship-owners will not have to return anything. The Commission's decision applies only to so-called Economic Interest Groups (EIG), intermediaries formed by banks and other companies that agree to finance the building of vessels for maritime transport companies by leasing the ship while it is being built in exchange for tax breaks.

However, Pymar's López del Pozo insists that uncertainty regarding the amount of tax breaks that have to be returned has paralyzed the sector, 80 percent of whose orders come from overseas. "We put the figure at around 2.8 billion euros," she says, although European sources calculate it could be less than half that amount. "As long as there are no official figures, nobody is going to risk investing in the construction of ships. We need judicial security to start using the new tax-lease system that has been in place since November 20 of last year and which is sanctioned by the European Union."

Uncertainty on tax breaks deemed illegal by the EU has paralyzed the sector

The Pymar executive believes a capital-intensive industry such as shipbuilding needs some sort of mechanism to facilitate financing. "Building a ship requires a lot of money; the shipyards can't survive without a system that helps the task of investors," she says.

According to a report by López del Pozo, European shipyards built 75 vessels in 2012, of which 69 percent were oil industry support ships and offshore oil platforms themselves. "Spain only won contracts for six ships," the report reads, "without mentioning the number of shipyards that closed or went into receivership."

Legal action is being prepared against the Commission's decision on tax breaks. "We are going to appeal to the European Court of Justice; we expect the full collaboration of the government and hope that the decision will be overruled," the report goes on to say.

According to figures compiled by the Institute of Foreign Trade (ICEX) for 2010, the year before the European Commission began its probe into tax breaks in the sector, industry exports amounted to de 1.290 billion euros, guaranteeing 7,657 direct jobs and 38,000 including those in support industries.

The increasing internationalization of the sector can clearly be seen in some of the shipyards with the highest sales. This is the case of Construcciones Navales P. Freire, which in its 2011 annual report highlighted its decision to focus on alternative markets where "the main customers are public organizations, which don't need the tax-lease system to finance the construction of ships." The company believes this strategy will help it to get through "the current economic crisis and aggressive competition, mainly from Asian shipbuilders."

In response to a drop in orders, the company also had to introduce restructuring measures to cut down on labor and other costs. This was also the case for Factorías Vulcano, which went into voluntary receivership in January 2011.

Building a ship costs a lot; we can't survive without help for investors"

Vigo witnessed some of the angriest protest about the Commission's move against the tax breaks and Almunia would be well advised to stay clear of the Galician city, whose Socialist mayor Abel Caballero - a political bedfellow of Almunia in the 1980s declared the European commissioner persona non grata in the city, a move later replicated by Cádiz in Andalusia.

A report presented on July 24 to the Economic Forum of Galicia by University of Vigo's Gurriarán, who is also a former director of Factorías Vulcano, pointed out that Europe's share of global shipbuilding has fallen from 30 to 5 percent, and in the case of Spain from over 4 percent to under 1 percent.

Gurriarán argues that subsidy systems could be discriminatory and lead to "sick systems in a state of constant and expensive reconstruction, which in many cases favor bad managers over true entrepreneurs." The academic elaborated on his comments in a subsequent telephone interview. "If you have to offer assistance, you have to do so in those sectors that generate social value," he argues. "I'm referring to fish farming and tourism. The Spanish shipbuilding sector has never had a value-added rate of higher than 4 percent." Gurriarán explains that this is the case because 90 percent of its raw materials are imported. Spanish shipyards limit themselves to assembling ships, but all the equipment installed [which according to the ICEX can account for up to 70 percent of the value of the final product] comes from other companies."

The former Factorías Vulcano director says there are two shipyards, which he declines to name, which have managed to carry on normally despite the European Commission's decision, showing that public aid is not necessary for the shipbuilding sector. Gurriarán also concludes that the most effective way to reactivate the sector is by focusing on technological content, given that it is impossible to compete on price with Asia as up to 35 percent of the costs of building a ship are on labor. He also points to new scenarios such as the recent acquisition by Mexican state oil company Pemex of a stake in Galician shipbuilder Barreras, a development that could foreshadow a greater foreign presence in the sector.

Other solutions could include pushing Europe to allow greater exploitation of fishing grounds to boost the production of factory ships. Gurriarán also suggests lobbying Europe to increase the current quota for commercial ships held by Navantia, the large state-owned shipbuilder that centers on military vessels.

Almunia has said that if in five years' time, shipyard cranes continue to be dot the skyline in northern Spain, the pessimists who predicted his decision on tax breaks would kill off the sector will have to "eat their words." That remains to be seen.