Getting Maritime Subsidies Right

by Olaf Merk, ports and shipping expert at the International Transport Forum

Many countries support their shipping industry via maritime subsidies. The value of well-functioning maritime transport for trade is undisputed. But is this, in itself, a justification for passing taxpayers’ money on to operators? Clearly, the private sector can provide shipping services. Subsidies would only make sense if they serve a clearly defined public interest that cannot be achieved otherwise. They would also need to be designed in ways that will not distort shipping and logistics markets.

In practice, this appears to be challenging. To begin with, nobody really knows how much governments spend on maritime subsidies. Support often comes in the form of favourable tax treatment, which is largely invisible in most government budgets. Even countries that make an effort to monitor maritime subsidies, notably in Northern Europe, have difficulties in establishing the actual numbers. Many countries seem to be little fussed, perhaps even happy, that the monetary value of their maritime subsidies remains unknown.

More worryingly, maritime subsidies often do not have a clearly defined public interest purpose. The usual justification is that they support the competitiveness of the shipping industry. The standard threat evoked is the relocation of a shipping registry or of ship management activities to low-tax jurisdictions. The problem with that is that hosting these is no guarantee for good maritime connectivity or for a maritime cluster that adds significant value to the economy.

Many subsidy schemes assume specific outcomes, but do not actually make direct or indirect financial support conditional on achieving them – be it on ships flying a domestic flag, operators hiring domestic seafarers or vessels reducing emissions. Unsurprisingly then, only a few subsidies seem to actually achieve their stated goals. Despite an impressive range of subsidies, only 16% of the world fleet sailed under the national flags of OECD countries in 2019, down from 54% in 1980. The share of domestic seafarers has continuously declined in maritime countries like Germany, France and the UK.

A vicious circle is also at work. Maritime subsidies by one country provoke subsidies by others. This happened already in the 19th century, and it continues to be the case. This perverse dynamic has been fuelled by “flagging out” of vessels to countries with low taxes and little regulation. This development has led to the emergence of the tonnage tax in the European Union: a very favourable tax the shipping sector pays in lieu of corporate income tax. In some cases, regulations have been put in place to avoid a race to the bottom. The proliferation of tonnage tax schemes within the EU has prompted the European Commission to formulate maritime state aid guidelines to avoid tax competition between EU member states. Yet the tendency over time has been to allow more generous schemes that opened the door for other countries to apply similar generosity.

Finally, there is evidence that maritime subsidies distort wider logistics markets. A new study by the International Transport Forum at the OECD found that many tonnage tax schemes for shipping companies can also be applied to their cargo-handling operations in ports. The European Commission has approved this practice in its decisions when it reviewed the tonnage tax schemes of individual EU countries. This creates a competitive advantage for shipping companies that are vertically integrated with terminal operators, by allowing theses to profit from a lower tax burden compared to corporate income tax. This distorts the market for cargo handling, as independent terminal operators do not have these fiscal advantages.

How can these challenges be solved? Governments should be more transparent about the money they spend on maritime subsidies, as well as the impacts generated. And subsidies could be better justified if more conditions were set regarding those impacts, tying support closely to specific outcomes governments want to see. Distorted markets should not be among those, and subsidy schemes ought to be carefully crafted to this. Finally, governments should understand that it is in their own best interest to avoid a maritime subsidies race.

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Subsidies in Aviation: The elusive flight towards fair competition

aviationby Alain Lumbroso

Subsidies in aviation are almost as old as air transport itself. Most if not all countries at one point or another have provided public funding to some parts of their aviation value chains, be it air carriers, airports or air navigation services such as air traffic control.

This year, much attention has been focused on three Gulf carriers. Their strong growth and increasing market share, especially between Europe and points east and south, has generated concern from competitors that they are being unjustly subsidised and thus distorting the marketplace. Is this a legitimate concern or simply old-fashioned protectionism?

Although each side makes an eloquent case in the ongoing debate, some arguments do not pass muster. For example, while operating in a labour union-free environment can certainly reduce costs, it is by no means a subsidy. Airports the world over receive generous public subsidies which are passed on to their customers, the airlines. Although airlines who hub at a subsidised airport benefit most from the subsidy, it’s tenuous to affirm that a specific airline gets a subsidy and not others. Likewise, benefits accorded under US bankruptcy laws to any company that places itself under its protection should not be considered a subsidy, nor should provisions in competition law that permit the issuance of anti-trust immunity to help companies perform better together. A key point to remember here is that sovereign jurisdictions have the right to set their own labour, fiscal, bankruptcy and competition policies and legislation and, of course, as they vary country by country, they will confer comparative advantages or disadvantages to companies operating in those countries.

As accusations fly back and forth, it’s worth considering what actually constitutes a legal subsidy in aviation. Or what constitutes a balanced and fair competitive landscape, often referred to as a “level playing field”. Or fair competition for that matter. Unfortunately, none of these terms are actually defined for aviation, and simply adopting a commonly-accepted definition from other sectors may be an effective intellectual shortcut but has no basis in law.

What constitutes an acceptable subsidy is clearly defined for other industries. For example, the General Agreement on Trade and Tariffs defines what a subsidy is for the international trade of goods, but it is mute on what constitutes a subsidy in air transport, or any other service for that matter. The General Agreement on Trade of Services has so far failed to define what constitutes a subsidy and, in any case, specifically excludes air transport services from the agreement. Thus, reasonable people can disagree on what constitutes fair competition, especially when no competition law is broken.

The Chicago Convention of 1944, the key legal foundation of international aviation, speaks of equality of opportunity but not equality of outcomes. In that respect, operating in a low cost, low-taxation, non-unionised environment is opened to all airlines operating in the Gulf, with the local carrier benefiting the most simply because it has a higher concentration of flights there. The Chicago Convention only makes a single mention of subsidies, in Article 54i, where it tasks the International Civil Aviation Organisation (ICAO) Council to collect and publish information about public subsidies in aviation but fails to put an obligation on countries to report them or to set any kind of boundaries as to which type of subsidies are permitted and which are not.

While much focus has been on monetary subsidies, one cannot discount the impact of public policies and how they can favour domestic carriers. A prime example of this is how nearly all countries in the world outlaw cabotage, meaning that the domestic market is reserved for domestic carriers only, or, in the EU, that the intra-EU market is reserved for EU carriers. This can be a significant advantage for US, EU, Chinese, Japanese and Canadian air carriers, while remaining meaningless for carriers from smaller countries. A second example is how a number of countries negotiate air services agreements in a way to try and favour their home carriers rather than simply improving connectivity for travellers and shippers. Defending the interest of national carriers can arguably be a reasonable policy goal, but such a policy does have a very positive value for home carriers which does not show up in any accounting balance sheet.

Finally, one should note that most countries inject some sort of public funding into international aviation and that there exists no law, convention or treaty that forbids it or sets boundaries for country interventions, with the exception of the EU which has a legal framework for State-Aid of the air transport sector but applies only unilaterally to EU member countries, airlines and airports. While much of the attention has been on two countries and three carriers, most if not all countries have a rich history of public financing of the air transport value chain which continues to this day. Applying the remedies suggested by the Partnership for an Open and Fair Skies to all countries who have financially supported in some way their air transport industry, including the US, would significantly dampen efforts to liberalise global aviation and curtail the benefits that come from operating in an open and free market. And even when all public funding has ceased, the stock of subsidies has enabled the creation of the same global carriers and global hubs who are today calling for an end to subsidies in order to restore fair competition to the air transport industry.

So what could be done? Three things:

  1. In the absence of a clear legal framework defining acceptable and unacceptable behaviour, the first step is somewhat obvious: defining rules of conduct of what actually constitutes fair competition. Most likely through the auspices of the ICAO, countries must first define what is an acceptable and an unacceptable subsidy, a concept that right now is left wide-open to the interpretation of parties with a vested interest.
  1. Countries should agree on a mandatory, transparent and uniform reporting system for public subsidies that would inject some much needed transparency to the issue and avoid the volleys of accusations and counter-accusations we have witnessed this year.
  1. A binding arbitration process, preferably through ICAO, will need to be put in place and permit one country to file a complaint against another. Arbitration could lead to a monetary penalty paid by the country who granted unfair subsidies to the country whose carriers suffered from unfair competition. This monetary penalty would avoid the present situation where perceived wrongdoing is punished through traffic rights restrictions, in effect imposing a quota on the international trade of service, the most harmful of outcomes.

About the author
Alain Lumbroso is the aviation expert of the International Transport Forum (ITF). The International Transport Forum at the OECD is an intergovernmental organisation with 57 member countries. It acts as a policy think tank and organises an Annual Summit of transport ministers. The ITF is the only global body with a mandate for all transport modes.

Useful links

ITF work on air transport

ITF Discussion Paper: What do we mean by a level playing field in aviation?

ITF Research Report: Liberalisation of Air Transport. Summary: Policy Insights and Recommendations

ITF Country-Specific Policy Analysis: Air Service Agreement Liberalisation and Airline Alliance