Bills Digest No. 128  1998-99 Bounty (Ships) Amendment Bill 1999

Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

Bounty (Ships) Amendment Bill 1999

Date Introduced: 10 February 1999

House: House of Representatives

Portfolio: Industry, Science and Resources

Commencement: On Royal Assent

Purpose

To amend the Bounty (Ships) Act 1989 (the Ships Act) so as to

• extend the shipbuilding bounty at a rate of 3% until 31 December 2000
• introduce a three year phase-out period for the production bounty, and
• introduce the Shipbuilding Innovation Scheme from 1 July 1999.

Background

This Bill gives effect to the recommendations of the Shipbuilding Industry Review Panel which reported to the Government on 23 June 1998. The Panel, which comprised representatives of government and industry, was established in January 1998 by the then Minister for Industry, Science and Tourism, Hon John Moore, to report on

• the long-term strategic direction of the Australian shipbuilding industry
• the impact of the bounty on lightweight shipbuilding in Australia in the context of overseas subsidies to competitors of the Australian industry
• OECD and other competing countries' assistance arrangements, and
• options for any transitional arrangements in the event of the OECD Shipbuilding Agreement and Australia's accession to the Agreement, coming into effect.

Australia has a long history of assistance to the shipbuilding industry, reflecting the importance of shipping to the country. (A chronology of assistance to the Australian shipbuilding industry is attached to this Digest.) The current scheme has operated since 1989 and provides a bounty on the contract cost of vessels between 150 and 20 000 gross construction tonnes. The rate of bounty was originally set at 15% in 1991, reducing by 5% every two years until it was proposed to be phased out in 1995. In 1993 the scheme was extended until 30 June 1997 with the bounty set at 9% (to correspond with the general manufacturing tariff) from 1 July 1993, reducing by 1% every year until it reached 5% between 1 July 1996 and 30 June 1997.

In the 1996-97 Budget, the Government announced that the bounty would be removed from 20 August 1996 and that transitional provisions would apply where contracts had been exchanged before this date or where work would be completed before this date but the bounty not claimed. Following representations from shipbuilders, the Australian Shipbuilders Association, and the Governments of Western Australia and Tasmania in particular, the former Minister for Industry, Hon John Moore announced that the bounty would be extended until 31 December 1997. He stated that while the 1996/97 Budget had sought to scrap the bounty as a cost-cutting measure, it had since become clear to the Government that the world shipbuilding industry was not a 'level playing field' and that the OECD Shipbuilding Agreement was stalling. On 7 May 1997 it was announced that the Government was extending the bounty to 30 June 1999 for commitments entered into by 31 December 1997. To be eligible, vessels must be at least 50% complete by 30 June 1999. Pro rata payments will apply for vessels between 50 and 100% complete. In September 1998 the Prime Minister announced that the bounty would be further extended until 31 December 2000 at a rate of 3%.

The Labor Party has stated that the shipbuilding bounty should be extended at 5 per cent indefinitely, until the OECD Shipbuilding Agreement, or a similar agreement, is ratified. They estimate that this would cost $86 million over three years to 2001-02.(1)

There appears to be almost universal agreement that the Shipbuilding Bounty has had a beneficial impact on the development of Australia's lightweight shipbuilding industry. In retrospect, the changes made to the bounty in the 1980s, particularly its extension to exports, and the fact that the rate was progressively reduced, provided a successful framework for the development of the industry.

Bounty payments and number of recipients by State*: 1991-92 to 1996-7

* Number of recipients in brackets.

Source: Industry Commission, Submission to the Shipbuilding Industry Review, March 1998, p.13.

The majority of bounty payments have gone to shipbuilders in Western Australia and one builder in Tasmania. There are currently eleven firms registered as eligible for bounty payments.

Estimates of recent expenditure on the shipbuilding bounty are $20 million in each of 1997/98 and 1998/99 with the bounty at 5%, and $28.3 million from 1 July 1999 to 31 December 2000 with the bounty at 3%.(2)

While significant, the Australian shipbuilding industry is small compared to a number of other manufacturing industries. The shipbuilding industry directly employed about 6700 people at June 1996 and had a turnover of $1.6 billion in 1995-96.(3)

The particular niche market that the Australian industry occupies is for fast ferries (passenger and passenger/car combinations) and luxury cruisers and yachts. Lesser lines include fishing vessels, rig tenders, tugs and harbour service vessels. Eighty to ninety per cent of bountiable ships are exported. Asian countries have provided the main export markets (particularly China, Hong Kong, Taiwan and Singapore), but there are also sales to ferry operations across the English Channel and the Irish Sea, elsewhere in Europe, the Middle East, and the Americas, with the important exception of the United States where imports of ships for domestic purposes are prohibited by the Jones Act.(4)

Reports suggest that Australia's bountiable shipbuilders are at the leading edge of shipbuilding technology in their particular markets. This applies particularly to the use of lightweight materials in high-speed designs. Design and production processes are also very advanced, including computer-aided design and computer-aided manufacture.

Shipbuilders constructing vessels for export may also benefit from general export programs such as the services of the Export Finance and Insurance Corporation (EFIC). In 1995 the Bureau of Industry Economics considered EFIC services to be one of the main non-bounty forms of assistance available to the shipbuilding industry.(5) EFIC provides loans to buyers of up to 80 per cent of the contract value of eligible ships - EFIC pays the shipbuilder and the buyer repays EFIC on extended terms. These arrangements are consistent with the OECD Arrangement on Export Credits, which specifies export finance conditions for new sea-going vessels.

OECD Shipbuilding Agreement

In 1994 the OECD 'Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry' (OECD Shipbuilding Agreement) was signed by the USA, the EU, Japan, Norway and Korea, covering around 80% of the world shipbuilding capacity. There are three basic elements to this Agreement:

• a subsidies discipline which bars both direct and indirect subsidies and government regulations which favour local producers
• an injurious pricing instrument which prevents 'dumping', and
• a binding dispute settlement procedure before an international panel.(6)

The Agreement has yet to come into force because, despite support from the United States Administration, the US Congress has not ratified it. This is because of concerns about how the future competitiveness of the US shipbuilding industry may be affected.

Australia has not yet acceded to the Agreement. The Shipbuilding Industry Review Panel recommended that Australia should sign the Agreement, firstly because, in their opinion, the benefits of accession far outweigh the costs, particularly as they accept that the shipbuilding bounty will not be a permanent payment. Secondly, they argue that failure by Australia to sign a ratified Agreement could lead to increasing difficulties for Australian shipbuilders in terms of market access.(7)

Shipbuilding policy in the European Union

A significant recent development in assistance provided to overseas shipbuilders has been the announcement by the Council of Industry Ministers of the EU in May 1998 of a new shipbuilding policy. As a result of this strategy:

• shipbuilding will not receive special treatment after the year 2000
• direct operating subsidies to European shipbuilders will not be available for vessels with final contracts signed after 31 December 2000
• from the beginning of 2001 aid to shipbuilders will be confined to assistance for the purposes of innovation, research and development, re-structuring and environmental protection, and
• regional investment aid will be capped at 22.5 per cent for less developed regions (currently 75%) and 12.5% for regions in decline (currently 30%).

According to the Shipbuilding Industry Review Panel, this new policy by the EU has the potential to create a much more favourable international environment for the Australian shipbuilding industry.(8)

Research and Development in the Australian Shipbuilding Industry

In 1997 the Australian Marine Industries and Sciences Council (AMISC) provided a Strategic Report on the shipbuilding industry. The Report argued that the industry's continued growth would depend on staying ahead in innovative design and construction and maintaining high standards of quality and cost competitiveness. It said that:

The Report added that the industry will need to investigate and target new niches and applications. It suggested that these might include transferring the high speed passenger designs to cargo applications or further investigating the longer term prospects and implications for new developments such as 'flying boats' or 'wing-in-ground' effect craft.(10)

In 1996 the Australian Science and Technology Council initiated the Shipping Partnership which involves industry partners and is investigating future science, technology and training needs in the shipping and shipbuilding industries. The Partnership released a report in September 1996, which emphasised the role the Department of Defence could play in:

• considering longer term contracts covering both the acquisition phase and through life support requirements
• considering the use of ship design consultancies when developing conceptual designs for tendering processes
• giving consideration to industry needs in terms of skills retention and development when programming shipbuilding, maintenance and repair requirements, and
• investigating the feasibility for military operations of high speed lightweight vessels.(11)

The Shipbuilding Industry Review Panel reported in June 1998 that, while there was widespread agreement that innovation is the key to building sustainable competitive advantage in the industry, strong differences of opinion emerged when seeking to identify the most profitable approach to future R & D. One view put to the review was that another 'quantum leap' in technology, akin to the first fast vehicle-carrying catamarans, is required for the industry to stay in front. Proponents of this view tend to believe that the individual shipbuilders cannot afford the research and development necessary to accomplish this, and that a large cooperative R & D effort is required with public sector participation, probably through a Cooperative Research Centre.

The industry's view is different. The shipbuilders suggest that the success of the fast ferry was based on its simplicity and cost effectiveness relative to existing high speed vessels such as the hovercraft. Their preferred strategy is to undertake incremental research and development to continue to improve the existing product and stay in front of their competition by applying continuous improvement to a type of vessel with a proven record. They argue that the rivalry between Australian shipbuilders is a major source of competitive advantage for the industry in international markets. Proprietary research and development is an important vehicle for pursuing that rivalry.(12)

There are a number of examples of successful cooperation between the Australian shipbuilding industry and the public sector. In Western Australia Curtin University's Cooperative Research Centre and Austal Ships Pty Ltd jointly developed the 'Ocean Leveller' ride control system which significantly enhances the seakeeping properties of suitably equipped vessels. Curtin's principal contribution was to provide computing and electronic expertise.(13) In Tasmania the state government has allocated $7 million for a purpose-built training centre adjacent to the Incat yard. Operating under Technical and Further Education (TAFE) auspices, the centre has up to 120 new trainees under instruction at any time. Existing workers are also able to use the facilities for retraining in order to keep up with the industry's rapidly evolving skill requirements.(14)

Also in Western Australia, the State government has assisted the concentration of shipbuilders at Jervoise Bay south of Perth. Since 1995 it has invested in purpose-built facilities including rerouting the existing coast road to allow unimpeded access to the foreshore, extensions to existing breakwaters to permit greater use of the ship lift and launching facilities, and the development of a marine technology park involving related industries and the local universities.(15) On 26 January 1998 the Prime Minister, Hon John Howard, announced that $80 million from the Federation Fund would be committed to the Jervoise Bay Infrastructure Development project.(16)

The Shipbuilding Innovation Scheme was announced by the then Minister for Industry, Science and Tourism, Hon John Moore MP, on 8 September 1998.(17) He described the purpose of the scheme as 'to encourage a strengthened focus on product research and development, and design innovation'. The scheme will provide assistance to manufacturers within the shipbuilding industry on a dollar-for-dollar basis, up to a maximum of 2% of total eligible production costs. The scheme is expected to cost $40 over the next four years and the amount will be absorbed within the $1 billion announced in the Government's industry policy statement, Investing for Growth, released in December 1997.

Main Provisions

Transitional (Registration)

Clause 4 protects applicant shipbuilders from being disadvantaged by the removal of the construction bounty provisions in the Act. The clause allows the Minister to register such applicants as registered shipbuilders for any period between 31 December 1997 and the day that the Bounty (Ships) Amendment Act 1999 commences. Although section 17 of the Bounty (Ships) Act 1989 (the Ships Act) allowed the Minister to make year long 'retrospective' registrations, for applicant shipbuilders to avoid possible disadvantage, they may need to receive retrospective registration for a period greater than one year, which means more than one application would have to be lodged. Under clause 4, if a shipbuilder applies within 30 days after the commencement of the Act, they are only required to make one application to receive full retrospective registration.

Clause 5 Transitional (Claims)

Paragraph 11(2)(d) of the Ships Act provides that any claim in regards to the construction or modification of a bountiable vessel must be lodged within 12 months of the construction or modification being completed. With the bounty for vessels being extended to cover vessels completed on or after 1 January 1998, it is possible that a vessel could be completed more than 12 months prior to the commencing of the Act. To cover such builders, clause 5 allows such claims to be made, as long as they are lodged within 30 days after the commencing day of the Act.

Clause 6 Application (Firm commitment requirement)

Clause 6 removes the 'firm commitment' requirement set out at paragraph 8(3)(a) of the Ships Act, with effect from 1 January 1998. The result of clause 6 is that an applicant is not required to prove a 'firm commitment' in order to be eligible for the bounty.

Schedule 1 - Bounty (Ships) Act 1989

Administration of the Act

Item 18 provides the Secretary with the power to determine the date on which the construction or modification of a vessel is complete. (This date determines an applicant's right to claim the bounty).

Eligible Research and Development Expenditure

Item 20 sets out the requirements relating to research and development expenditure in the new section 5A. These are:

• eligible research and development expenses are those expenses incurred which fall under the definition of eligible research and development, as provided in section 5B
• the expenditure must be incurred between 1 July 1999 and 30 June 2004
• the expenditure can't be for research and development performed on behalf of another party.

Eligible Research and Development Activities

Item 20 contains the new section 5B, which sets out the eligible research and development activities. To be eligible, activities must:

• be carried on by or on behalf of a shipbuilder during the period of 1 July 1999 and 30 June 2004, and relate to the construction or modification of bountiable vessels. The activities must also be performed at least partly in Australia, or be design and testing activities carried on at an approved hydrographic test facility.
• be systematic, investigative or experimental in nature and carried on for the purpose of either acquiring knowledge (whether of practical application or not) or creating new or improved materials, products, devices, processes or services for that business.

The Minister may determine, in writing, that a class of activity is not eligible for the purposes of this section, and such a determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Other Commonwealth Assistance

New section 5C sets out when a shipbuilder is deemed to have received 'other Commonwealth assistance'. Such assistance is deemed to have occurred if they have received financial assistance, other than bounty, that they are entitled to from the Commonwealth. The Minister may determine in writing whether such assistance is or is not financial assistance for the purpose of the Act. If the Minister deems that it is financial assistance, the determination may also specify the method by which the assistance is to be worked out. Such a determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Power of Secretary to determine valid expenditure

Where the expenditure claimed by a shipbuilder is in question, item 22 provides that the Secretary may, in writing, determine whether it is eligible research and development expenditure for the purpose of the Act.

Extension of Bounty

Item 28 repeals subsections 8(2) to (3B), and replaces them. New subsections 8(2) and 8(3) extend the eligible costs bounty to cover construction or modification of a bountiable vessel, completed on or before 31 December 2003.

New subsection 8(3A) provides for the payment of eligible costs where full or part construction is undertaken, and eligible research and development costs are incurred before the completion of construction or modification.

New subsection 8(3B) restricts the payment of eligible research and development expenditure to that incurred on or before 30 June 2004.

New subsection 8(3C) requires that to be eligible for eligible costs, a party must be a registered shipbuilder at all times during the construction or modification, which must be completed on or before 31 December 2000.

New subsection 8(3D) provides that if the construction or modification is completed after 31 December 2000 and on or before 31 December 2003, the shipbuilder is not entitled to a payment, unless:

• the shipbuilder is a registered shipbuilder at all times during construction/modification, and
• the vessel is delivered on or before 31 December 2003 into the possession of the vessel's owner or agent, and
• the construction is carried out as a result of a contract entered into before 1 January 2001, and
• a copy of the contract or other evidence is lodged that satisfies the Minister of the existence of the contract, as well as the form approved by the Secretary.

New subsection 8(3E) requires that the approved form referred to in paragraph 3D must contain:

• the amount to be paid to the shipbuilder under the contract
• an estimate of each of the eligible costs
• the specifications of the vessel
• the timetable for construction, including the start and finish date
• the location of construction/modification
• the name of the person intending to purchase the vessel, or for whom the vessel is being modified, and
• the date and place of delivery of the vessel upon completion.

New subsection 8(3F) requires that a shipbuilder be a registered shipbuilder at all times during the construction or modification in order to be eligible for the bounty in respect to work completed on or before 30 June 2004.

New dates and rates for the eligible costs bounty

Item 30 provides a new subsection 10(1), which extends the bounty period to 31 December 2003.

Item 31 adds a new paragraph 10(1)(g) which contains the formula for calculating the rate of bounty payable for the period 1 July 1999 to 31 December 2003.
The formula is:

Item 31 also provides a new paragraph 10(1)(h), which provides that where the construction/modification is completed between 1 January 2001 and 31 December 2003, the rate of bounty will be the lesser of:

Item 32 repeals and replaces existing subsection 10(2) and inserts new subsection 10(3), which provide for the payment of eligible research and development expenditure bounty.

The new subsection 10(2) sets the eligible research and development expenditure bounty (in respect of construction/modification of a vessel that is completed before 1 July 2004) as being the lesser of:

A shipbuilder's adjusted eligible research and development expenditure is calculated by the following formula [new subsection 10(3)]:

Repeal of bounty phase out provisions

Item 46 repeals subsections 17(7A)-(7D) of the Ships Act. It removes the requirement for shipbuilders to provide business plans for construction/modification in the period 1 January 1998 and 30 June 1999.

Eligible research and development to be published in the Gazette

Item 49 requires the Secretary to publish particulars of eligible research and development expenditures in the Gazette.

Powers of Authorised Officers(18)

Items 52 to 61 provide amendments to sections 21, 22, and 23, and extend the existing provisions, with respect to the construction bounty, relating to entry on premises occupied by a registered shipbuilder. These extensions include the power to inspect:

• any bountiable vessel, in respect of which eligible research and development activity is or is intended to be carried out
• any step in the carrying out of an eligible research and development activity, and
• and take copies of or take extracts from the accounts, books, documents and other records relating to eligible research and development activities

With respect to the power to require persons to answer questions or produce documents, Item 61 extends this to apply also to an eligible research and development activity.

Applicant's right of review

Item 68 provides an amendment to paragraph 31(1)(g), and extends the existing provisions, relating to an applicant's right of review, to also apply to transitional registration decisions made by the Minister [pursuant to new subsection 4(3)].

Item 69 amends paragraph 31(2)(a), and extends the powers of the Administrative Appeals Tribunal to also apply to eligible research and development expenditure.

Chronology of Bounty Assistance to Shipbuilding

1941. Shipbuilding bounty introduced.

1944. Bounty withdrawn as no claims for payment made.

1948. Bounty re-introduced to equate vessel building costs with those in the United Kingdom. The maximum level of subsidy was set at 25% of Australian construction costs. The subsidy scheme was supported by a scheme of import controls that prevented ships being imported, except with the approval of the Minister for Shipping and Transport.

1976. Cost-based scheme (from 1947) replaced by a bounty on selling price. At the same time the Government sought to encourage a specialised industry capable of constructing vessels generally below 6 000 tons gross register.

1981. Bounty (Ships) Act 1980 provided for a bounty, as a percentage of construction cost, for vessels over 150 tonnes and fishing vessels over 21 metres, as well as for the costs of modifications to vessels where costs exceeded $400 000. Bounty payable only for vessels intended for use in Australian waters. In 1982 there were about 40 shipbuilding yards registered under the Bounty (Ships) Act 1980. They employed around 5,000 people.

1985. Bounty extended to cover eligible vessels built for export.

1989. Two rates of bounty payment set - 20% of construction costs for prescribed vessels (eg. tugs, bulk carriers and fishing vessels) and modification work, and 15% for construction of other eligible vessels.

1990. Bounty (Ships) Act 1989 introduced. Payments on eligible construction costs for self-propelled navigable vessels greater than 150 tonnes and less than 20 000 tonnes regardless of end-use. Bounty applying to ship repairs terminated. Bounty rate set at 15% from July 1988, phasing down to 5% for the period July 1993 to June 1995.

1993. The Shipbuilding Industry: in the wake of the bounty, report by the House of Representatives Standing Committee on Industry, Science and Technology.

1994. Bounty (Ships) Amendment Act 1993 extended bounty in line with manufacturing tariffs, 9 per cent for 1993-94, 7% for 1995-96 and 5 per cent for 1996-97.

1995 Bureau of Industry Economics' Review of the Shipbuilding Bounty

1996. Bounty for shipbuilding terminated on 20 August 1996.

1997. (December). Government re-introduced shipbuilding bounty (at 5%) to December 1997 to align assistance for the industry with key overseas competitors.

1998. Government extended bounty to 1999 for commitments entered into by 31 December 1997. To be eligible, vessels must be at least 50% complete by 30 June 1999 (pro rata payments apply for vessels 50 to 100 per cent complete).

      1997Australian Marine Industries and Sciences Council, Marine industry development strategy 1997 identified prospects for a number of individual marine industry sectors, including shipbuilding.

1999. Shipbuilding Industry Review Panel announced. The Panel reported on 23 June 1998.

2000. Bounty (Ships) Amendment Bill 1999. Extends the bounty at a rate of 3% until 31 December 2000. Phase-out provisions for period 1 January 2001 to 31 December 2003. Introduces an industry specific bounty scheme for eligible research and development expenditure up to an amount of 2% of production costs of a bountiable vessel, to run from 1 July 1999 to 30 June 2004.

Endnotes

2. 'Labor on industry policy', Hon Simon Crean MP, Press release (Shadow Minister for Industry and Regional Development, 21 July 1998; 'Howard goes half way on ship bounty: fails to match Labor', Hon Simon Crean MP, Press release (Shadow Minister for Industry and Regional Development, 8 Sept. 1998.

3. The figures for 1997-98 and 1998-99 are budget estimates; the figure for 1999-31 Dec. 2000 comes from the Bounty (Ships) Amendment Bill 1999, Explanatory memorandum, p.2.

4. Shipbuilding Industry Review Panel, Report, 23 June 1998, p. 2. The Report is available at [http://www.dist.gov.au/industry/marine.ships.pdf] (8 March 1999).

5. U.S.C.. Merchant Marine Act, 1920 (Jones Act (Merchant Marine))

6. Bureau of Industry Economics, Review of the Shipbuilding Bounty, Occasional Paper 25, AGPS, Canberra, 1995, p.5.

7. ibid., p. 8-9.

8. Shipbuilding Industry Review Panel, Report, 23 June 1998, p. 4-5.

9. ibid., p. 5.

10. Australian Marine Industries and Sciences Council, Marine industry development strategy 1997, p. 19.

11. ibid.

12. Australian maritime industries: priorities in science and technology, report of the ASTEC Shipping Partnership, September 1996, p. 77.

13. Shipbuilding Industry Review Panel, Report, 23 June 1998, p. 4.

14. M. Beeson,, 'Industry policy and shipbuilding in Australia', Australian Journal of Political Science, vol. 32, no. 3, November 1997, p. 442. The author comments that 'it is worth noting that although this system provided an indigenous alternative to the U.S.-developed system favoured by Incat, Austal retained the proprietary right. There was no wider benefit to other Australian manufacturers.'

15. ibid., p. 443.

16. Western Australia Department of Commerce and Trade, 1995.

17. 'Jerviose Bay infrastructure development project', Press release (Prime Minister), 26 Jan. 1998.

18. 'Coalition strengthens support for shipbuilding industry', Hon John Moore MP, Press release (Minister for Industry, Science and Tourism), CMR 1300, 8 Sept. 1998.

19. An 'authorised officer' is a Customs officer appointed under section 20 of the Ships Act.

Contact Officer and Copyright Details

Rosemary Bell & Phil Bailey
9 March 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

Back to top