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Marine Log

July 16, 2008

EC gives Poland deadline for yard restructuring rethink

The European Commission has given Poland until September 12 to rethink the restructuring of the Gdynia and Szczecin shipyards.

Competition Commissioner Neelie Kroes said: "We have now entered the second half of extra time..."

Poland submitted plans for the two yards just within an earlier EC deadline.

The EC has concluded that those plans do not comply with the guidelines on rescue and restructuring aid and that on this basis the aid paid to the shipyards would be incompatible with EC Treaty state aid rules and give rise to serious distortions of competition.

However, the Commission says it "cannot exclude that recent expressions of interest from private investors could lead to an acceptable solution within a short space of time."

In view of the formal undertakings given by the Polish Government to submit, by September 12 , alternative, viable restructuring plans that would comply with the applicable state aid rules, the Commission has postponed its decision.

In the Commission's view, unless the new plans comply fully with EC Treaty state aid rules, and in particular remedy the shortcomings which the Commission has identified in the current plans, it will have no option but to adopt a negative decision and require repayment of the aid.

Competition Commissioner Neelie Kroes said: "In the last four years, we've made a tremendous effort to work with the Polish authorities to find a positive solution, to ensure sustainable jobs and the long-term profitability of the yards. Unfortunately, the restructuring plans on the table today are not acceptable for the Commission because they would not achieve that objective. Nevertheless, in view of ongoing negotiations with potential buyers of the two yards, and of the commitment of Prime Minister Tusk that new restructuring plans will be submitted by September 12, the formal adoption of the negative decision is postponed. We have now entered the second half of extra time and it is essential that the Polish authorities use this final opportunity to come up with solutions that will guarantee the viability of the shipyards without undue subsidies."

The state aid measures in question were granted after Poland's EU accession in 2004. Gdynia shipyard benefited from various aid measures (in particular capital injections and loans) worth Euros 497 million and from production guarantees of Euros 915 million (nominal value). Szczecin shipyard received aid worth Euros 165 million, as well as production guarantees of Euros 570 million (again, nominal value).

The two yards have been in constant difficulties since the 1990s, caused by internal deficiencies and cyclical demand for ships. In 2002, Szczecin shipyard went bankrupt, which undermined financial markets trust and caused liquidity problems for the yards. Increasing steel prices, the falling dollar and rising zloty have exacerbated the situation. Since at least 2004, neither of the yards has made a profit on any of the ships produced and neither would have survived in the absence of the subsidies.

Poland notified restructuring aid for the two yards in April 2004 and the Commission launched formal investigations in June 2005 (IP/05/644). Poland submitted restructuring plans for both yards, in September 2005 and September 2006, both with substantial delays. Neither ensured long-term viability for the yards, and the restructuring was to be financed entirely by state aid (with no contribution from the companies themselves). An attempt of the Polish authorities to partially privatize Gdynia shipyard in 2006 failed.

At the end of 2006, Poland committed to privatize the yards by mid-2007 and the Commission agreed to postpone its decisions until then. The privatization process was considerably delayed by Poland. First, in summer 2007, the Polish Government explained that additional time until the end of 2007 is needed. Finally, the Polish Government announced in January 2008 that the process would not be finalized before mid-2008. Negotiations with the only investor for both yards lasted for nearly five months but failed in May 2008, after which Poland attempted to find new potential investors.

However, it became apparent that all the potential offers were conditional upon receiving very significant additional state aid. None of the investors was able to demonstrate that the yards would restore viability in the long run and create stable jobs or that they had sufficient resources to make a significant contribution to the financing of the restructuring costs.

Prime Minister Tusk has now informed the Commission that the talks with potential investors are very advanced and has given a commitment to submit a complete restructuring plan for each of the two yards by September 12, respecting all the requirements of the state aid rules on rescue and restructuring companies in financial difficulties.

Under EC state aid rules, the restructuring plans for the shipyards must:

(i) ensure the long-term profitability of the shipyards

(ii) include adequate compensatory measures to limit the distortion of competition caused by the aid and

(iii) be financed to a large extent from the companies' own resources.

Unless the new restructuring plans to be submitted in September remedy the shortcomings which the Commission has identified in the current plans, the Commission says it will have no option but to declare the state aid unlawfully provided to the yards since May 2004 to be incompatible and to order its recovery with interest.

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