The 1973 authorization included $56 million to pay 15% subsidies on new VLCC construction and $37 million to pay 10% subsidies on other types of vessels. German subsidiaries of foreign companies were eligible only for the 10% subsidy, even if they built VLCCs. Since applications from other operators did not exhaust the $37 million authorization in 1973, foreign-owned oil companies did obtain such subsidies. The 1974 program was increased by some $7 million in order to permit continued help to such subsidiaries, while reserving a full $37 million for ships other than tankers, as originally intended.

The 1974 proposal was to finance the first year of the eighth shipbuilding program, covering contract awards between 1974 and 1977 for delivery between 1976 and 1979. It was anticipated that the same sums as were proposed for 1974 would be appropriated for grants in each of the succeeding three years. On an average annual basis, the eighth program thus expected to provide almost twice as much direct subsidy for new ships to be delivered to domestic owners as the seventh program. It would finance new contracts in the amount of $3.26 billion over the four-year period. Each yard received a ceiling, so that the government contribution could be continued at the proposed 1974 level over the life of the program without the need for supplementation. The seventh program had to be supplemented when funds were exhausted though some of the yards had poor order books and no new contracts in prospect.

The government also subsidized the scrapping of older tonnage by smaller operators until the program was terminated toward the end of 1972. Budgetary expenditures for this purpose in 1971 totalled $4.9 million.

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Sales of New Ships to Foreign Flag Operators

The German multi-year shipbuilding programs include provisions for helping yards to export ships, as well as to build for the

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domestic fleet. The seventh program was originally intended to cover a contract volume of DM 3.9 billion and was increased by DM 1.5 billion in October, 1972, when the funds for the full program had been obligated. At end-1973 exchange rates, the seventh program thus supported about $2 billion worth of export orders, about $500 million per year.

The government contribution is now designed to enable German yards to offer as favorable financing terms to foreign buyers as they can obtain in other shipbuilding centers. The sixth program provided 2 to 2.5% interest subsidies to the yard on loans to finance deferred payment terms to foreign buyers. In the late 1960s, the yards may well have been able to borrow on the private market at 7% or less and thus offer credit to foreign buyers at 5.5-6%, with a gain to themselves on 1/ interest account equal to 3-5% of the cost of the ship.·

The seventh program originally set the interest rate subsidy at 3% for export ships to be delivered between 1973 and 1975. This was changed to a maximum of 2% after the entry into force of the OECD Agreement that limited ship export credits to a minimum rate of 7.5%. Interest subsidies on export orders cost the government $9.1 million in 1971, $11.6 million in 1972 and $24.8 million in 1973. Further expenditures of $36.5 million were projected for 1974. Since the credits run for 8 years, the government's obligation to continue payments on account of ships delivered under the seventh program will continue until 1983. Further appropriations of about $225 million will be required to fulfill such existing commitments. The seventh program combined ERP credits with a 2% interest subsidy on commercial loans. Together they provided some sort of credit

1/ A 1% interest subsidy on an 8-year credit is equal to a construction subsidy of 2.77%, using an 8% rate of discount.

subsidy to the yards on all export orders. In 1971 and 1972, the yards were probably able to obtain private financing at 8% on the average. With a 2% subsidy, they financed 7.5% supplier credits at a net cost to themselves of 6%. Thus they had profits on account of deferred payment credits equal to about 4% of their construction costs.

By the middle of 1973, they probably had to pay 10.5% and more for their private credits, so that they had to absorb a loss of 3% of their construction costs on account of their financing of foreign sales. The seventh program involved new grants for interest subsidies of $140 million, in addition to $133 million of ERP loans.

Until 1972, the yards could get the 2% interest subsidy even if foreign buyers preferred to pay cash, which would have permitted them to absorb 5.5% of their construction costs on such orders. In 1973, the subsidy on such orders was reduced to 1. 25% to conform to a Common Market agreement to limit construction subsidies to yards to 4%. From 1974, onwards, cash sales will not be eligible for interest subsidies.

The eighth program is more restricted. It foresees a maximum subsidy of 2%, again made up of a combination of interest rate subsidies and ERP loans. Funding to the yards will not exceed 80% of the cost of the ship. However, the yard will only obtain the full subsidy if the private market requires 9.5% or more for long-term loans against ship mortgages. If the market rate falls below that level, the interest subsidy will be reduced correspondingly, so that the credit subsidy cannot be used as the equivalent of a construction subsidy on foreign orders. Early in 1974, the market rate was about 11%, so that either the foreign

buyer had to agree to a 9% interest rate or the yard had to absorb the difference between that rate and the 7-1/2% rate that could have been offered by other shipbuilding centers. For 1974-77 contracts, the government has offered to provide about $200 million in interest subsidies, in addition to $200 million in ERP loans at 7.5% to finance $3.55 billion worth of shipbuilding contracts. While the program is primarily concerned with foreign buyers, domestic buyers who are denied ship construction grants will also be eligible for subsidized credit within this total program.

German shipyards have, on the whole, not shown profits in recent years. Between 1968 and 1970, the five largest yards had accumulated losses in excess of $50 million and existing contracts appeared likely to produce further losses of $30 million through 1973. The yards were caught between fixed price contracts, rising domestic costs for labor and materials and a series of currency revaluations. The bulk of such losses were written off by the end of 1973 and profitable operation was being predicted for 1974. The loss carry-forward provisions of the German tax laws, plus provisions for depreciation and other reserves, should insulate the industry from significant payment of corporate income tax for a number of years more.

Under the circumstances, tax benefits have been of minimal value and the yards have neither sought nor received special tax privileges, other than those generally available to German industry. The corporate owners of the shipbuilding companies have been able to write-off part of the losses against their own tax liabilities.

Goods used in ship construction or repair are exempt from customs duties. The shipbuilding industry is also exempted from the value-added

tax, whether its ships are delivered to foreign or domestic owners. Shipbuilders get a rebate of the tax paid by their suppliers (11%), thus reducing the cost of their purchased materials.

Yards located in areas eligible for regional investment benefits (about half the industry is so located) may take a 7-1/2% tax credit on the cost of new investments. The credit was 10% before February, 1973. Shipping Lines

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Ship operators, on the other hand, are very dependent

on tax benefits. The special tax-deferred reserves that they are permitted to establish was said in 1970 to constitute a third of their equity. A current report to the government says that the rate is 75-80%. In good years, shipowners write-off large sums to depreciation and other tax deferred reserves and in poorer years they write-off less. The depreciation accounts can be varied by most companies to show a profit after taxes that is barely sufficient to finance the dividends they wish to pay. The corporate tax rate on income disbursed as dividends is 15%. Tax payments are reported as aggregates, including all property and business taxes as well as corporate and income taxes. The shipping lines report very light payments. Moreover, the ability to establish taxable losses through various reserve provisions and to credit such losses against taxable personal income played a major role in financing the reconstruction of the German fleet. The methods and results were comparable to those permitted the U. S. housing industry.

In addition, German shipping companies enjoy a number of special benefits. Customs duties are not levied on imported ships. Moreover, they are assessed only half the normal corporate tax rate on the revenues they earn abroad. For 1974, they will be required to pay 75% of the normal rate on such revenues. However, the provision is of limited