Factors Which Might Influence a Ship-Owners Choice of Flag State - Essay Example

Factors which might influence a ship-owners choice of flag (in todays world) Leena [Pick the Executive summary This report is a critical analysis and review of the shipping industry’s practice of open registry with reference to the factors influencing a ship owner’s decision to operate and manage vessels through flags of convenience. It is seen that while open registry is a consequence of the fiscal consideration on part of the ship owner to maximize profits and minimize costs, there are other negative consequences of the decisions that are discussed in the report. It is noted that cost of operation, freedom of crewing and flexibility of regulatory compliance to international shipping policies are key factors influencing the ship owner’s decision for open registry. However, lack of standardization and quality in the open registry flag states in terms of compliance to international shipping regulations is seen to affect the flag state, shipping operations as well as the national flag states forcing a change in policy in the industry. Table of Contents 1. Introduction 2. Background 3. Narrative findings 4. Magnitude of change in the shipping industry 5. Conclusions 6. Affects on the business a. Requests of action b. Recommendations 7. References 1. Introduction Global transportation has opened up a levy of opportunities for maritime operators with the most advantage being in terms of convenience in revenue maximization with minimum expense. Global trade sustains mostly due to maritime transport and many maritime operators compete fiercely for profits in this industry mostly through a policy framework that helps them achieve the target of cost minimization and revenue maximization. Vessels are registered nationally and internationally for this purpose and to achieve uniform standards in the shipping industry. As 90 percent of the world trade is carried through shipping, there are regulations to achieve standardization of the industry and require that the vessels be registered under a flag state, much like the registration for motor vehicles (Toz and Cerit, 2011). There are regulations concerning sea navigation, seafarers, vessels, environment, etc. under the United Nations Convention on the Law of the Sea 1982 or the 1982 Convention that are aimed at ensuring safety at sea. These regulations also include vessel registration, flag state legal bindings, vessel operations, among other things (Goodman, 2009). Today, more than half of merchant vessels are registered with states other than their nationality, and there are several reasons that have been identified that have led to this trend, which will be discussed in this paper (Xu et al, 2009). The paper studies the trends in flag states and their registrations, the reasons behind the choice of particular flag states by the majority of shipping companies, the people or companies that take responsibility for the decision to register with a particular state and the impacts of these decisions on their businesses. 2. Background Usually, a ship flies the same flag as the nationality of the ship owner. However, there are a number of vessels or ships, both merchant and fishing ships that are increasingly shifting their preferences to fly the flag of another state other than the nationality of the ship owner. The 1982 Convention and other subsequent laws for shipping form the basis for this requirement by the ships to register under a particular state to operate under that state’s jurisdiction. However, there is a leeway for shipping companies to register under a different flag state other than its nationality which has gained prominence among ship owners and operators. This choice of open registry or flying Flags of Convenience (FOC) has gained popularity among ship owners and operators of merchant and fishing vessels, predominantly among merchant shipping companies. Open registry or Flag of Convenience (FOC) aims to enable shipping fleets, both merchant and fishing, to fly the flag of their choice state without considering the nationality of their own. An FOC ship is one that flies the flag of a country other than the country of ownership (Xu et al, 2009). Chung and Hwang (2005) observe that more and more ship owners are adopting the strategy of registering their vessels under FOC to gain a competitive advantage by comparing advantages of registering under a certain flag state. About 54 percent of the world’s ships are registered in the open registry or FOC and has doubled in the recent past. This trend is observed among ship owners who intend to compete in the international market (Open vs. Closed Registry, 2011). This trend is indicative of the increasing globalization efforts in the shipping industry as in other industries, leading to several advantages and disadvantages for the flag states, ship owners, operators and sea farers. However, it is seen that the decision by ship owners to fly a certain flag state is rid with many advantages than disadvantages. It is the FOC that entitles these ship owners to compete in the international market, reduce costs and maximize profits by considering the economical, legal and political environments of the flag states which are further taken to benefit the ship owners. The most basic rationale for ship owners registering under FOC is economic (Rationale for the operation of open registers, 2011). Registering under FOC entitles the flag state to exercise its jurisdiction in relation to the operations, protection and controlling of the ships to ensure safety of its waters, while giving the registered ships the freedom to employ crew of different nationalities, avail tax exemptions and other similar benefits (Ship registration, 2011). Prior to open registry, ships were required to employ nationals of flag state with legal bindings of the flag state which restricted the shipping companies in implementing best practices in the industry for profitability (Bergeron, 2005). Further, another strategic option, outsourcing of vessel management, has gained importance in the past decade which involves outsourcing of the complex ownership and operations of vessels to foreign logistics and supply chain management firms. This can be considered as a strategic move by the shipping companies to gain competitive advantage in the global market to improve quality and reliability of shipping, remove redundant costs in the operations and administration through collaborative learning while increasing the speed and flexibility of operations (Cariou and Wolff, 2011). Against this backdrop of enhanced modes of operations in the shipping industry, the concept of open registry can be seen as a method to enable efficient and effective vessel management. While the interests of the shipping companies are obvious in their selection of open registry, flag states also have a range of advantages in terms of local employment, tax incomes, boosting local tourism, increased collaboration with the global market, etc. by offering FOC (Xu et al, 2009). 3. Narrative findings There are about 32 countries with some of the largest controlled fleets that have been registered under FOC between 1997 to 2006 and which represent about 80 percent of the world’s fleet today, and the share of foreign flags is highest among European countries that are developed than among developing countries (Xu et al, 2009). A study revealed that oil tankers in Turkey and other countries are less likely to flag out due to specific requirements like having a double hull, restrictions on working standards, etc. that the ship owners of oil tankers find difficult to qualify for. Also, vessels with open registry are free to employ crew from different states other than the nationality or flag state, making it convenient for shipping operators to source cheap labour from developing countries like India, Philippines, Indonesia, etc. open registry flag states also offer the advantage of tax regimes to ship owners that the other states may not offer. The legal bindings too are less imposed by many FOC states as there is a lack of quality in operations and effective legislation in the global arena of ship management (Effective flag state control, 2011). While FOC may help generate revenue for flag states, it is observed that the percentage of revenue from fishing vessels owning up FOC of flag states is less when compared to revenue from merchant vessels. Also, there are professional operators that operate on market economy to register, control, administer and maintain open registries. This is to ensure that there is increased communication in the industry with professional operations involving the best practices and effective and standardized strategies that evolve with the market (Rationale for the operation of open registers, 2011). While economic factors influence the decision of ship owners in opting for FOC, there are a range of other influencing factors like legal and political factors of the flag states that have led the owners to flag out. Among these factors are the positive political developments in some countries with other countries implementing less legal restrictions on FOC ships in compliance to international obligations (Goodman, 2009). However, flag states are encouraged to increase their accountability of ships registered under their flags through effective regulatory control by involving in collaborative learning, genuinely linking the purpose and functions of the registering ship to the flag state, etc. (Ship registration, 2011). 4. Magnitude of change in the shipping industry While open registry existed during the Roman and Greek period, it re-emerged in 1920s and later in 1950s when American ships realized the advantage of flagging out to Panamanian and Liberian flags to avoid restrictions on tonnage operations (Flag State Responsibilities and Seafarers’ Rights, 2011). Further, more and more shipping companies are outsourcing vessel management with Lloyd’s Register Fairplay identifying the key factors for outsourcing to influenced by the characteristics of both the ship and the ship owner where the age, type and size of the ship and nationality and extent of fleet of the ship owner are becoming important to take advantage of FOC (Cariou and Wolff, 2011). However, it is seen that the choice of flag state has many consequences for the ship owner in terms of fiscal, legal and administrative liabilities other than the positive influences on the business (Rose, 1998). 5. Conclusions 1. Affects on the business Opting for open registry in shipping has been found to be influenced by economic, legal and political advantages being offered by flag states with the advantages to ship operators in terms of tax regimes, freedom to employ crew from different nationalities, avail cheap labour, avoid legal bindings of some of the international regulations, etc. However, the decision to opt for FOC by ship owners is not free from disadvantages to both the ship owner and the flag state along with the state of the ship owner’s nationality. There are stringent international regulations that require FOC flag states to comply with the need to identify the purpose and nationality of the FOC registered ship to have a genuine link to the state of the ship owner’s nationality to enable implementation of relevant regulations in case of high profile oil tanker accidents and environmental incidents (Goodman, 2009). States of the ship owner’s nationality are set to lose in terms of tax revenue, local employment of crew, tourism, etc. when vessels are registered under FOC. Also, shipping standards are found to be falling in flag states as against the traditional closed registry countries (Flag State Responsibilities and Seafarers’ Rights, 2011). FOC also require quality open registry to ensure there is continuous improvement in safety, security, environmental protection and welfare of seafarers, which is a costly preposition for many open registries (Bergeron, 2005). Further, policy competition and government interventions are needed by national registries to compete in the global market with the additional requirement that the national registries provide tax sops to the vessel management companies Haralambides and Yang, 2001). National and flag states are required to differentiate policies based on trade areas and ship types that makes regulatory requirements more complex for shipping. And traditional flag states are required to relax their fiscal and crewing restrictions to allow for more national registries (Xu et al, 2009). 2. Requests of action Increased port state control to inspect foreign-flagged ships or open registry ships for compliance to international laws is recommended to combat inadequate flag state performance. Also, establishment of minimum standard guidelines for flag state responsibilities along with assessment of implementation of regulatory framework of the various shipping conventions is recommended to successfully implement open registry (Goodman, 2009). Evaluation of the performance of shipping industry using factor analysis, correlation analysis, grey relation, etc. help improve the quality of open registries and standards of the shipping industry as a whole is also noted to be of importance (Chung and Hwang, 2005). Further, a relative importance of the factors influencing the ship owner’s decision to opt for open registry can be determined to enable them in decision making in the future which is set to help regulatory bodies to frame policies for standardization and effectiveness (Ship registration, 2011). 6. Recommendations Based on the relative importance of factors influencing the ship owner’s decisions to opt for open registry, regulatory bodies like International Marine Organization (IMO) and International Labour Organization (ILO) can enable the respective national flag states to ratify their policies to compete in the global market. A range of performance evaluation methods can be implemented to improve standards of shipping industry and the quality of flag state regulatory mechanism under open registry. Regulatory bodies can recommend implementation of relevant standard policies to boost collaboration between flag states and port states along with national flag states in high risk incidents too. Regulatory mechanism to include best practices implemented by outsourcing providers to standardize the shipping industry. References Bergeron, S. 2005. News from the Liberian registry. Flagship. Issue 14. Cariou, P and Wolff, C.F. 2011. Ship-owners’ decisions to outsource vessel management. Working paper, Lemna EA 4272 and Euromed Management and World Maritime University. Chung, C.C and Hwang, C.C. 2005. Analysis on vessel registration and operational performance of bulk-shipping firms. Proceedings of the Eastern Asia Society for Transportation Studies, Vol. 5. Effective flag state control. 2011. Available at: http://www.fao.org/docrep/005/y3824e/y3824e07.htm Accessed on: 01st December 2011. Flag State Responsibilities and Seafarers’ Rights. 2011. Seafarer’s rights. Seafarer’s Rights International (SRI). Goodman. C. 2009. The regime for flag state responsibility in international fisheries law – effective fact, creative fiction, or further work required? A&NZ Mar LJ. Haralambides, E.H and Yang, J. 2001. A fuzzy set theory approach to flagging out: towards a new Chinese shipping policy. Marine Policy. Elsevier Science Ltd. Open Vs Closed Registry. 2011. Available at: http://www.offshoregate.com/foc.html Accessed on: 01st December 2011. Rationale for the operation of open registers. 2011. Available at: http://www.fao.org/docrep/005/y3824e/y3824e06.htm Accessed on: 01st December 2011. Rose, N. 1998. United Kingdom: What A Difference A Flag Makes - Choice Of Flag By Shipowner. Mondaq. Available at: http://www.mondaq.com/article.asp?articleid=5975 Accessed on: 01st December 2011. Ship Registration. 2011. Available at: http://www.unescap.org/ttdw/Publications/TFS_pubs/Pub_1988/Pub_1988_Ch6.pdf Accessed on: 01st December 2011. Toz, C.A and Cerit, G.A. 2011. Flag Choices of Turkish Shipowners and the Impact on Fleet Structure. International Conference IMLA 19, Opatija. Xu, J.J., Fan, L and Yip, L.T. 2009. Foreign Flag Registration of Ships. Department of Logistics and Maritime Studies. IAME Copenhagen. Read More