George M Mangion | Wednesday, 28 May 2008

An ode to Shipbuilding

Returning from a business trip in Asia last week I was impressed by the growth of their economies and the inventiveness of their politicians. Armed with a low cost of living, they are exploiting their comparative cost advantage in many sectors – such as in tourism, luxury residential and office space, manufacturing, shipping, large scale crop production and financial services. In particular, I was impressed by the advances in the shipbuilding industry which, for various reasons, in Europe, was dismissed as a dying industry until recently, but is now experiencing a record boom in Asia. As stated earlier the real heavyweights are to be found in Asia. Commercial shipbuilding is currently experiencing its biggest and most enduring boom in history. More than 5,300 new ships have been launched within the past three years. Average prices for new ships have jumped by more than half in the last four years. But what made this unexpected transformation in an industry which all over Europe has faced close downs and bankruptcy amid taxpayers protests on curtailing never ending state subsidies. The main answer is that the current growth in the industry differs markedly from the oil tanker boom 35 years ago, a trend that was driven primarily by growth in the oil business and collapsed during the oil crisis. This time round, growth is not dependent on one product, but to a large extent on one region: China and the Asian tigers. Many articles have been penned on the emergence of the Asian economic giants. Chinese economic growth has driven global trade for years and this has created an appetite for massive internal growth. This growth resulted in never ending orders for more steel, oil, raw materials and other supplies which China needs to satisfy its current demands. The shipping lanes between Asia and Europe have long been a major thoroughfare for shipping companies, as countless container ships shuttle back and forth, transporting finished goods in one direction and components and raw materials in the other. This growth in trade has also produced a growing demand for new ships, especially container ships, but also tankers to transport oil and liquid natural gas, as well as ore ships. By stark contrast our indigenous shipbuilding and repair yards have reported consistent losses and are constantly relying on subsidies to pay wages almost like a drip feed by the state. Briefly, we note how the Government of 1987-1992 donated the Dockyards millions of liri and forgave its huge debt. Subsequently the 1992-1996 Government under finance minister John Dalli gave more circa Lm80 millions to the Dockyards linked with a new plan for its development. Not much scope for sustainability was reached even after these generous handouts. Under the Labour government in 1996 followed the pragmatic quip by the then prime minister Dr Sant who went on record stating that it would be better to send all the workers home and keep paying them, then let the dockyard continue working. With the return of the Nationalist government in 1998, more efforts were made to negotiate a turnaround scheme with the unions. This has been a slow process with each side blaming the other for lack of progress. In 2002, a multi-million plan worth €825m (Lm354 m) was agreed with the EU , so that by this year the Malta Shipyards should have broken even or made a slight profit but this was elusive. The plan had the noble idea of helping the yard to start afresh and thus a total of €700 million (Lm300m) in debts accumulated over the years has been written-off. But writing off debts was not enough, so a €124.4 million (Lm53m) cash loan was provided to the company in operating aid, training grants and capital subsidies. Yet the subsidies are still indispensable due to chronic losses consequent to poor productivity and a general dearth of investment in new technology. The chickens will come home to roost this year considering that the restructuring programme under EU be terminated. Many ask why this problem has been allowed to fester for so long. Some say that the political clout of thousands of voters in a finely balanced two party system has favoured the workers, while another factor is that they are also strongly unionised. So what can the solution be? Can the union be persuaded to reason that the days of milk and honey for the yard are over? The GWU replies that while it agreed that it would take a major, collective and genuine all round effort to save the dockyard, it could not agree to a restructuring which would fragment the enterprise, giving away the most profitable areas or reducing the workforce while bringing in other workers with inferior conditions. Cynics say that over the past 30 years enough cash has been doled out to this ailing sector and the country has been held to ransom while taxpayers are paying the servicing costs of burgeoning national debts. Sadly, the commissioning of the Appledore study in the mid nineties has not provided the right medicine to the patient. Certainly the time for more studies is over as the public coffers have been taken to the cleaners by irresponsible policies. The EU has galvanised the public mood that, pouring good money down the drain in return for hollow promises must stop. As an aside, Malta has emerged as the most generous country, when subsidies are calculated as a share of gross domestic product, with 3.1 per cent, followed by Hungary, Finland and Sweden.
For example in the case of a potential new EU member we see how Croatia’s five indebted shipyards face restructuring or closure before the country joins the EU in the next few years. Unlike Asia, whose yards now control almost 85 per cent of the global market, the EU does not allow significant subsidies to relatively uncompetitive industries like shipbuilding.
Yes, our pragmatic new minister responsible for the yards did not mince words. He made it amply clear that the restructuring plan was the only salvation since subsidies will cease on December 31, 2008. Can a strategic partner be found to initiate the privatisation process and to introduce another voluntary retirement scheme while restructuring the steel metal working facilities to embark on profitable large scale domestic work. Asked what the government planned to do if the shipyards still made losses when these funds ran out, Dr Gatt said that the government did not want to close down the shipyards. In his words he stated: “restructuring is not a finite process. It is a continuous drive towards commercial improvement. We will continue doing our bit. But what happens next? Dr Gatt was crystal clear when he stated: “I will continue to tell the employees the truth, notwithstanding how tough this might be. I do not see why we should want to close the shipyards - but the future does not depend on our intention alone.”
Those with a social conscience will plead for more time to rescue the plight of yard workers and their families. With our aim to balance the 2008 budget we simply cannot afford to give workers redundancy pay or recruit them back with the mainstream civil service or join the council staff as has happened with most of the workers in the last restructuring plan. It is a consolation that in the past most of the workers made redundant when McNeill, VF and Denim closed down did find alternative employment. The new job prospects culminating in the SmartCity construction scheme may also offer some temporary respite for redundant skilled yard workers. The million dollar question to the new Gonzi administration is the acid test as to who should put the cards on the table? After the relatively painless restructuring that the economy sustained following the demise of the low added-value textile industry it seems that every effort must be done by stakeholders to smooth the transition to privatisation of the Cottonera enterprise alongside with the embellishment and complete rehabilitation of this historical part of the island.

George M. Mangion
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