Scandal dogs failed ship builder

Investigation under way into what happened to huge EU grants given to Vulkan to modernise old east German yards

THE DEMISE of Bremer Vulkan, Germany's largest ship builder, is rapidly turning into a huge financial scandal.

Last week, demonstrators in the Baltic seaport of Stralsund reacted angrily to news that Vulkan's failure would swallow a European grant of DM850m (pounds 390m) earmarked for the modernisation of three former East German shipyards.

"We face a ruined investment and the loss of jobs," claimed Andreas Klar, a union official. "We need a political solution if we are not to lose jobs."

Last week, Vulkan reported losses for 1995 of DM1bn and filed for protection against creditors' demands of DM220m.

After German reunification, Vulkan expanded swiftly eastwards acquiring the shipyards in Stralsund, Rostock and Wismar, while obtaining generous grants from Brussels, Bonn, Bremen and the Treuhand privatisation agency. These grants are believed to have totalled DM4bn.

Much of this money was diverted or held in the West to prop up Vulkan's existing, ailing yards at Bremen and Bremerhaven. Now it is feared that as much as DM1.5bn has been lost.

"We are trying to find out what has happened to the money," said Heinrich Hornef, head of the German federal agency for reunification affairs. Accountancy firm KPMG has been given the task of finding out when Vulkan managers knew the grants were no longer being used properly.

To date, the company admits to misusing DM60m of the DM850m provided by the European Union; the remainder has disappeared into the holding company's balance sheet.

In the Baltic ports, the affair has created great bitterness. None of the DM1bn promised by Vulkan to acquire the east German shipyards has been invested. "We have not seen any money from Vulkan," said Inge Pohlmann, a union official.

In Stralsund, the core of the modernisation programme was intended to be a covered dock for building container ships. It was to be paid for by Vulkan from its own resources. Because the money has not been paid, the dock has not been constructed and the container ships, due for delivery next year, cannot be built.

Since the company went into receivership, the government of Mecklenburg- Pomerania has provided emergency guarantees of DM600m. Regional politicians and the heads of the yards insist that the yards will survive.

"If they don't, then we are finished," claimed Karin Gerke, a reporter on the local newspaper, Die Ostseezeitung. "There is nothing else here."

Five years ago, Helmut Kohl came to Rostock for the first free east German elections and promised that a reunited Germany would provide "a flourishing landscape". Ms Gerke said that promise "is still some way off". At nearly 20 per cent, local unemployment is the worst in Germany.

Even if the east German yards are completed, it is not certain they can avoid the problems that have dogged Vulkan in the West. For years, the company has only survived thanks to thelargesse of Bremen. Vulkan is Bremen's largest employer, with 9,000 of its 22,500 employees coming from the town.

Friedrich Hennemann, the architect of Vulkan's ambitious expansion in east Germany, was himself a leading Bremen politician before becoming the company's chairman. At Vulkan, he pursued a vision of a "maritime technology business", acquiring engineering, electronics and service companies to complement the yards. Banks, notably Commerzbank, and politicians backed the vision with billions of marks.

Unfortunately, investing in Vulkan was seen as a way of securing jobs and pleasing voters, not as a way of making the business able to compete. In recent years, Vulkan has mainly built small frigates and freight ships; its most famous cruise liner is the Europa, built for Hapag-Lloyd.

For years, its costs have been 50 per cent higher than those of its competitors in Korea and Japan. While its order books are full, most of its contracts are believed to be loss-making. In the Bremen and Bremerhaven yards, it is currently building two cruise liners, but few think new money will be made available to finish them.

Since 1977, Vulkan has not paid a dividend. And German banks have injected DM700m into the company since last August. The banks are thought to have little appetite for lending more, while Bremen is already strapped for cash. It is believed to have acquired 40 per cent of the company's shares through Swiss intermediaries and to have outstanding guarantees of DM700m.

Henning Scherf, head of the Bremen Council, admits that jobs will inevitably be lost but demands financial support from Bonn. Despite mass demonstrations in Bremen and Bremerhaven, the idea has already been firmly rejected by the trade minister, Gunther Rexrodt.