Subsidies for maritime security of supply do not recognize the risks of long supply chains and the changing world

Finnish shipping industry is supported with tens of millions of euros annually. In order for the Finnish maritime cluster to continue to develop, maritime subsidies should be refined towards innovation and eco-efficiency, and security of supply should be considered separately.

Subsidies to shipping, the export industry or security of supply?

The Ministry of Finance states in its publication 2019: 19 that subsidies for maritime costs are primarily subsidies for competitiveness, but they have also been linked to support for Finland’s security of supply.

The EU’s competitiveness support policy for the maritime sector aims to strengthen the Member States’ maritime cluster by encouraging the registration and return of ships to the Member States’ registers and supporting the employment of Member States’ seafarers.

Security of supply, on the other hand, means safeguarding the functioning of critical infrastructure, production and services so that they can meet the most vital basic needs of the population, economy and national defence  in the event of serious disruptions and exceptional circumstances. With regard to maritime transport, the Security of Supply Act has been implemented by ensuring the adequacy of the maritime fleet under the Finnish flag and the maintenance of sufficient know-how.

The most important state subsidies received by shipping companies in Finland are crew subsidy and tonnage tax, a total of approximately EUR 90 million per year. Crew subsidy means that the state pays back to the shipping companies e.g. taxes and pensions on seafarers. Tonnage taxation means that shipowners are taxed in proportion to the size of the vessel instead of income tax. In addition to the above, in the corona year 2021, almost EUR 70 million in corona subsidies were allocated to passenger car ferries.

Sometime it is also stated, that state aid to shipping companies also includes the halving of the fairway charge and the exemption from VAT and excise duty for passenger ferries. In recent years, the halving of fairway charges has been about 40 million euros a year. However, it is considered to be more support for the export industry than for shipping. Exemption from VAT and excise duty is again based on EU regulations, in which Finland has little influence. Its size was estimated at more than 200 million euros in 2017.

Competitive support successful

In terms of competitiveness, subsidies have been reasonably successful. At present, about a third of foreign maritime trade are transported under the Finnish flag. Finnish merchant ships currently employ less than 5,000 people, of whom about 2/3 are in actual seafaring positions and 1/3 in restaurant and other service positions.

A functioning domestic shipping sector and sufficient maritime personnel have enabled a living and developing maritime cluster. According to research, in 2019 the Finnish maritime cluster, consisting of the maritime industry, shipping companies, ports, etc., employed a total of 50,000 people and had a turnover of more than EUR 14 billion. Compared to other European countries, our maritime cluster is small but vibrant and innovative.

Challenges in security of supply

In 2021, logistics chains coughed. Sea transport to Finland is operating without problems, but due to the sudden rise in demand after the pandemic and on-going restrictions, the world’s major ports are currently operating at half capacity. Container ships are waiting to be unloaded. Consumers and industry are waiting for raw materials, semi-finished products and finished products. Transportation costs have risen and there are difficulties in accessing products worldwide.

The crisis challenges the question of whether current maritime subsidies are the best way to support security of supply in a world where product transport chains are much longer than mere maritime transport and the availability of tonnage is only one part of the risks in the supply chain.

Companies are innovative in ensuring security of supply. In 2011, among other things, it was studied how companies were equipped to stop maritime transport during the 2010 port strike (Yliskylä-Peuralahti et al. 2011). Business patterns varied: companies raised their inventory levels before the strike, changed or postponed the completion times of their products, changed modes of transport or transport routes, and even relocated production outside the strike area. In the extreme case, they even bought products from their competitors to meet the needs of their customers.

The subsidies should be better targeted

Aid to companies tends to stifle business development – companies seek to stay within the support system. The biggest threat to the maritime subsidy system is to ignore the change in the sector. Shipping is going to be the biggest upheaval in decades as international regulations force shipping companies to reduce their carbon emissions. Shipowners have a number of options to reduce their emissions, including low-carbon fuels, improved ship design and other technological solutions, as well as operational solutions such as ship type selection and speed.

Maritime cluster subsidies should therefore be aimed at the following two areas:

• Development of the competence of the Finnish maritime cluster. Eco-efficient shipping and port operations, developing expertise in the field in educational institutions and increasing research, development and experimental funding.

• Development of Finnish shipping operations towards environmental friendliness. Competitiveness subsidies should be targeted at the lowest emitting vessels in proportion to the volume of goods transported.

The actual security of supply measures should be separated from these maritime subsidies. In order to ensure security of supply, it is necessary to look at the entire transport chain, alternative routes, stock levels for critical products, forecasting systems, alternative products, etc. For the fleet, contractual arrangements with shipping companies can also be considered.

The blog has been published in Navigator Magazine 3.1.2022.

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