A Ship Owners Choice of Flag State - Assignment Example

With reference to the history of so-called open registers discuss those factors, which might influence a ship owner’s choice of flag Introduction The criteria on which business decisions are based are often difficult to be clearly identified or understood. Commonly, the financial benefits involved are of critical importance for such decisions. However, it is possible for other factors to intervene, especially in case of business activities developed internationally. Current paper focuses on the choice of flag state by ship owners. The literature published in this field has been examined and critically analyzed in order to highlight the factors that can influence a ship owner’s choice of flag state. Particular reference is made to open register, as the term has been used for describing the flag state chosen for specific maritime activities. Appropriate empirical research has been also used, where available, in order to develop accurate assumptions and suggestions. It has been proved that in the context of the global market, the decisions of ship owners in regard to the flag state are likely to be based on similar criteria, such as taxation, costs of crew and costs of compliance. However, under certain terms, other factors like the national pride or the reduced insurance premiums may also affect the specific choice of ship owners. In any case, the choice of factors on which the relevant decision is based cannot be controlled, meaning that ship owners are, primarily, free to use one or more of these criteria regarding the flag state. The effects of these decisions though on the performance of the relevant vessels, in terms of their profits, are critical, a risk that can be reduced by switching flags, as analyzed below. 2. Choice of flag state 2.1 History – description of open register For centuries, the choice of flag has been a critical issue for ship owners. In the 16th century, ‘British ships used the Spanish flag for avoiding trade restrictions in West Indies’ (Mansell 2009, p.92). During the 17th century, the French flag was popular among British ships for avoiding fishing restrictions imposed by the British authorities in regard to the region of Grand Banks (Mansell 2009, p.92). Similar practices were used in the centuries that followed in order to avoid fishing restrictions or for taxation reasons. The avoidance of surveillance, as aligned with the international law, has been another criterion for the choice of flag state. In this context, during the 19th century, American ship owners were likely to avoid the flag of their country, referring to both the North and South American countries (Mansell 2009, p.92). The reason for this decision was that during the particular period the trade of slaves between America and African countries was highly developed, a phenomenon that had led to the increase of surveillance of British ships on ships with American flag. During the 20th century, emphasis has been given on the quality of vessels involved in maritime activities. Ship owners have been asked to improve their vessels following the relevant national and international regulations (Mattli and Woods 2009, p.204). These efforts have resulted to the increased of costs and the limitation of corporate activities. More specifically, after increasing the fees for transportation through their vessels, many ship owners had to face the limitation of their competitiveness, especially compared to the owners of small vessels who have been able to keep their fees low (Mattli and Woods, 2009, p.204). At this point, searching for a flag state that offer to the ship owners financial advantages no matter the size of their vessels has become a common phenomenon in the international market. On the other hand, Mansell (2009) notes that the aspects of the choice of flag state can be clearly understood only by referring primarily to the context of flag state, as this phrase has been used for explaining the relationship between a ship and the country in which the ship is registered. In accordance with Mansell (2009) there are many different types of flag states, or else registers, including ‘the National flag, the Classic register, the Open register, the Closed register, the Second Register and so on’ (Mansell 2009, p.100). The term ‘Open register’ has been used instead of the term ‘Flag of convenience’ in order to reflect the registration of a ship in a state for achieving specific economic, social or political benefits, usually in the short term (Mansell 2009, p.101). While all countries have set specific standards for allowing a ship to acquire their flag, meaning the registration of the ship in the relevant register, only few countries offer an open register, preferring to keep strict standards for the registration of ships (Draper 1980). Moreover, in the study of DeSombre (2006) emphasis is given on the increased chances of inspections on ships of a flag of convenience, i.e. of an Open register. In other words, the Open register attracts the ship owners for its benefits but it can be also related to certain disadvantages. In any case, a ship is likely to use the Open register ‘for claiming the nationality of a state with which the ship has no relationship’ (Strate et al. 2006, p.152), a fact that is negatively criticized by legislators and academics worldwide. At the same time, the alteration of maritime laws internationally has permitted the growth of Open registers; for example, reference can be made to the case of the reform of the British ship-ownership in 1988, an initiative that made the registration in the British register optional allowing the increase of Open registers worldwide (Mandaraka-Sheppard 2007, p.294). In accordance with Cowie (2009) the key problem of Open registers is the following one: Open registers are used by ship owners in order to avoid the employment regulations of their home country and comply rather to the employment laws of another country, that of the Open register, which are less favourable for the crews. This practice has caused the strong opposition of ‘the International Transport Workers Federation’ (Cowie 2009, p.305). 2.2 Factors that influence a ship owner’s choice of flag state Different approaches have been used in the literature in order to explain the criteria of the flag choice. It seems that the relevant decision of ship owners is likely to be influenced by a series of factors. Emphasis has been given on the fiscal policy of a state. In accordance with Cullinane (2005, p.160) ‘governments tend to focus on encouraging ship owners to flag in the country’. Moreover, reference is made to the results of research developed in the particular field. Of particular importance is the work of Cullinane and Robertshaw (1996, in Cullinane 2005, p.161) who tried to identify the reasons for which ship owners are likely to prefer UK and Isle of Man as flag states. It has been proved that ship owners would choose a more expensive flag in case that one or more of the following benefits would be achieved: ‘reduced chances for port inspections, high vessel market value on sale, perceived quality and national pride’ (Cullinane and Robertshaw 1996, in Cullinane 2005, p.161). The level of insurance premium has been also found to be an important factor for the choice of flag state, as also revealed through the research mentioned above. The costs related to the de-registration of the flag or those resulting in case of switching flags seem also to be important for ship owners when having to choose a flag, as highlighted in a report published by the Lloyd’s Shipping Economist in 2002 (Cullinane 2005, p.161). The protection offered by the flag state can be also an important factor influencing the choice of flag state, an issue also highlighted in the study of Force and Davies (2005). The term ‘protection’, as mentioned above, refers mostly to the safety of the vessel during navigation. Stopford (1997) refers to an example of such case; during the 1980s ‘many ship owners switched to US flags in order to be protected when navigating in the Gulf region’ (Stopford 1997, p.432). Moreover, the performance of flag states, in terms of their penalty points, does not seem to be a decisive criterion for ship owners when having to choose a flag state. As revealed through the Table 1 below, even bad flag states are likely to attract ships, at a lower level though compared to good flag states. Table 1 – Flag performance worldwide (source: Corres and Pallis 2008, p.6) Through the research developed by Bergantino and Marlow (1998) it has been revealed that the sector that the choice of flag is closely related to the sector of the vessel involved. For example, it is noted that ‘general cargo vessels are more likely to be flagged out than tankers’ (Bergantino and Marlow 1998, in Cullinane 2005, p.161). It is not explained though whether the choice of flag can be based on similar criteria for vessels operating in the same sector but with different characteristics, for instance those manufactured in different dates. At this point another issue appears: is the type of vessel or the sector in which it operates decisive criteria for the flag choice? Can other factors, like the expertise or the costs of the crew influence the particular choice? It seems that the answer to the above question is positive, at least as proved through the research developed by Bergantino and Marlow (1998). The above researchers examine the role of various costs in the flag choice and found that the costs of crew, the compliance costs and the level of the tax have a critical role in the flag choice. It has been also revealed that companies, which have managed to identify states that offer low costs and taxation, as described above, tend to prefer keeping the relevant flag in the long term (Bergantino and Marlow 1998, in Cullinane 2005, p.161). From another point of view, Force et al. (2005) note that the choice of flag state becomes of critical importance in the case of a conflict or violation of the rules of international maritime law, issues that have to be discussed before the courts of appropriate jurisdiction (Force et al. 2005, p.408). Wilson (2008) emphasizes on the necessity of a ‘connection test’ through which the potential connection of a party with the law of a state is identified; such connection can be established through the registration of a ship in a particular state, as noted in the Coast Line Ltd v Hudig case (UK, Court of Appeal, in Wilson 2008, p.319). In the context of this view, jurisdiction may be one of the criteria for choosing a flag state. In practice, the identification of jurisdiction in such cases can be extremely difficult, a problem which has been addressed in the ‘1952 Brussels Convention on Civil Jurisdiction’ (Force et al. 2005, p.408), the power of which is, in any case, limited since it has not been ratified by those nations that most influence the international maritime law, meaning those states that have a key position in the maritime activities worldwide (Force et al. 2005). The importance of law as a factor influencing the choice of flag by a ship owner is also highlighted in the study of Stopford (1997). In accordance with the above author, when a ship is registered in a particular state it has to follow this state’s laws in regard to taxation, employment and safety. States with law taxation for registered ships are more likely to be preferred by ship owners than states with high taxes for their registered ships (Stopford 1997). Of course, the international laws referring to critical maritime issues, such as safety and employment are also likely to be used when relevant conflicts appear. An example of this type is the ‘1974 Safety of life at sea Convention’ (Stopford 1997, p.432), which imposes high standards for all vessels worldwide. 3. Conclusion The increase of Open registers worldwide has revealed the following problem: the reduction of costs is often set as a priority by ship owners when having to choose a flag state (Anderson 2008). This problem has been made clear during the Third Conference on the Convention on the High Seas, in the article 5 of which the nationality of ships is discussed (Anderson 2008, p.235). During the above Conference, which took place in 1973, emphasis has been given on the increase of the number of ‘sub-standard ships’ (Anderson 2008, p.235) as related to the expansion of Open registers. On the other hand, it seems that the benefits of Open registers are highly appreciated by ship owners worldwide, as proved by the following fact: Open registers ‘have a larger number of modern tankers than traditional maritime flags’ (Boczek 2005, p.280). Through the research developed on the issue under discussion, as analyzed above, it has been made clear that the choice of flag state is based on a series of factors, which can be differently evaluated by ship owners. In this context, the Open register can be a potential solution when it is not established as a common practice, i.e. when it is used only in the short term for achieving specific benefits. Moreover, international regulations such as the United Nations Convention on the Law of the Sea (United Nations, 2011), guarantee the protection of standards related to navigation worldwide, even if the challenges involved can be many, as indicated in the relevant report of International Maritime Organization (IMO) in 2008. 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(2005) Jurisdiction and forum selection in international maritime law: essays in honor of Robert Force, Hague: Kluwer Law International. International Maritime Organization (IMO), (2008) Implications of the United Nations Convention on the Law of the Sea for the International Maritime Organization [Online], Available, http://www.imo.org/ourwork/legal/documents/6.pdf [5 Nov 2011]. Mandaraka-Sheppard, A. (2007) Modern maritime law and risk management, London: Routledge. Mansell, J. (2009) Flag state responsibility: historical development and contemporary issues, New York: Springer. Mattli, W. and Woods, N. (2009) The politics of global regulation, New Jersey: Princeton University Press. Stopford, M. (1997) Maritime economics, London: Routledge. Strate, A., Gavouneli, M. and Skourtos, N. (2006) Unresolved issues and new challenges to the law of the sea: time before and time after, Leiden: Martinus Nijhoff Publishers. 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