Ukrainian shipbuilding: awaiting a renaissance
5 June, 2013
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The shipbuilding sector in Ukraine inherited the significant industrial legacy of the Soviet Union. Ukrainian shipyards can build virtually any class of ship, from freezing fish factories, general cargo and reefer vessels to supertankers, aircraft carriers and missile cruisers. Nevertheless, during the past two decades the shipbuilding industry has lost much of its competitive edge in both international and domestic markets. This slowdown has been caused by a number of factors, including:
increasing steel prices;
limited credit resources; and
a lack of government backing.
For many years the outlook has been far from bright, and now Ukrainian shipbuilding is experiencing a deep systematic crisis. Shipyards are operating at 15% to 30% of their production capacity, while the shipbuilding sector’s contribution to overall industrial production has dropped from 5% to less than 1%. Several large enterprises are in financial distress or close to bankruptcy. Some Ukrainian shipyards are owned by European shipbuilding brands; these shipyards constitute the first link in the brands’ international production chain, with the main portion of their output concentrated in the low value-added production segment (eg, building hulls that are further outfitted in European shipyards).
Ukrainian shipbuilders have been forced to lobby the government for protective and incentive measures to restore the full cycle of complete shipbuilding, with lobbyists repeatedly warning of the potential demise of this strategically important industry. In 2000 a law providing for government support for the shipbuilding industry entered into force. However, this initiative proved unsuccessful, as in 2005 its most important provisions were repealed and the industry came to a standstill once again.
In September 2012 Parliament adopted the Law on Conducting an Economic Experiment on State Support for the Shipbuilding Industry (5209-VI). This law envisages the shipbuilding industry as a top-priority sector in the Ukrainian economy and provides for a 10-year economic experiment, beginning on January 1 2013. The economic experiment is intended to create the conditions and incentives necessary to increase production in the shipbuilding industry and thereby increase government revenues.
The law provides for a number of measures aimed at improving the efficiency and competitiveness of the Ukrainian shipbuilding industry, including:
preferential tax treatment for the shipbuilding sector and the establishment of special tax regimes;
the writing off of government penalties accrued on taxes payable;
exemption from value added tax and customs duties for imported goods, parts and components used in shipbuilding, provided that such components are not produced in Ukraine or do not meet the requirements of classification societies;
increased access to commercial credit for shipbuilding enterprises through partial compensation for interest rates on commercial bank loans by the National Bank of Ukraine; and
granting of government guarantees for loans provided by foreign governments, banks and other financial institutions.
The new law is expected to give a powerful boost to the revival efforts for the sector. Nevertheless, the industry remains in a state of alert anticipation. The legislative initiatives necessary to bring the law into force are not yet ready, while key industry players fear that the law’s implementation mechanisms may remain inert for a long time due to the incongruity of the law with existing regulations. Implementation of the economic experiment will require extensive legislative work to harmonise the regulations.
It is crucial to take prompt measures so that the law does not remain a mere declaration, as has been the case with previous initiatives. In this respect, the adoption of amendments to the Tax Code and the Customs Code should be arranged as soon as possible, as the absence of such amendments would call into question the future of the economic experiment. Other important initiatives include the development of:
a system of government financial guarantees for loans provided by foreign governments, banks and other financial institutions; and
a mechanism to increase access to commercial credit for the shipbuilding sector through partial compensation for interest rates on commercial bank loans by the National Bank of Ukraine.
There has been discussion over the possibility of arranging a meeting of shipbuilders, bankers and industry ministers to resolve the problems regarding implementation of the law, although a date for this meeting has not yet been set.
Considering these circumstances, it remains to be seen whether the economic experiment will be a second chance to save the shipbuilding industry.
