It is indeed necessary for Maritime Administration of Pakistan to study the administrative systems of other countries who are successfully conducting their maritime affairs and learn from them the modern trends of regulating shipping and analysing the merits and de-merits of Flag of Convenience.
Unfortunately the private sector of Pakistan has shied away since nationalisation of 1970s. Although as a result of continued efforts, the Ministry of Ports and Shipping has been successful in registering one container vessel under Pakistan flag in private sector, all the same more efforts are required to attract many other local and foreign investors to register their vessels under Pakistan flag.
However, it must be appreciated that it is not only the concessions, which would attract the ship-owners but at the same time the essential perquisite vis-a-vis political stability, continuation of policy, tax concessions, economic free zones, no regulatory control on manning of vessels and relief for shipping operation need to be appropriately addressed so as to create conductive environment for vibrant shipping owning industry in the country.
The incentives offered by two important countries ie Panama and Liberia, have resulted in their successfully inducing investors world-wide. Panama has 13,000 vessels registered under its flag followed by Liberia, Cyprus, Bahamas, Malta and Marshall Island.
However, in order to deliberate further on this issue, the term "flagging out" must be understood properly as it has commanded considerable attention since the process was first used in 1950s. In simple terms flagging out is the process through which the ship-owners seek to reduce the cost of operating a ship by switching from a high cost, national flag to a lower cost open or second registry.
SHIPPING REGISTRY BY FLAGS
(a) TRADITIONAL:
Pakistan is a typical case of traditional registry which is strictly regulated national flag registry where vessels are crewed solely or largely by national seafarers. Vessels operating costs are higher as ship-owners must ensure full compliance with all maritime conventions and pay higher wages to seafarers. Traditional registers are associated with cargo protection vessels are subject to military requisition of government at times of hostilities.
The size of traditional registry has diminished over the past 30 years, as more and more ship-owners have flagged ships out to open, dependant and second registry. However, efforts have been made to improve the competitiveness of traditional registry through granting of limited concessions of payments of employment subsidies, example, USA, UK, Japan, Greece and Norway.
(b) DEPENDANT:
This registry is mainly associated with the former British Colony, where British ship-owners were allowed to change the flag to a dependant territory offering greater freedom in terms of crew nationality and taxes but such registries are subject to the proviso of British Merchant Shipping Act.
(c) OPEN:
Flag of Convenience (FoC) registers which grant freedom to ship-owners in terms of crew nationality and terms/conditions of employment, taxes, exemption, regulatory control and company disclosure requirement. The standard of surveillance by the different FoC, flag state administration vary substantially from those which regularly inspect ships bearing their flag to ensure compliance with the major maritime statutory requirements to those which pay little attention to such matters. Example, Liberia, Panama, Cyprus, Bahamas.
(d) SECOND OR PARALLEL:
This registry was set up in 1980 by governments granting certain national flag ship-owners access to less stringent crew employment registry via a second or parallel registry. These registries were set up to arrest the flight of national ship-owners to the open registry and to encourage ship-owners who had already made these move to flag in. For example, NIS (Norwegian International Ship-Registry), DIS (Danish), GIS (German), Kergulen (France) Madeira (Portugal), Netherlands Antilles (The Netherlands).
While ship-owners flag out ships for a number of reasons, the principal reason is to reduce crew cost. I quote here a report published by Bergantino Marlow in Year 2000, the Shipping Research Group which made a review of 26 quantitative research projects conducted for the last 36 years and they have concluded as under:
"We share the belief that crew cost can be considered as the main financial reason behind the ship-owners decision to flag out. The cost of manning a ship can be considered the easiest variable to influence when compared to other cost which appear to be mostly fixed internationally specially in the short term. Moreover, flagging out satisfies the ship-owners attempt to lower operating outlay and to bypass rigid labour market regulations and harassment by sea-farers unions."
I would like to quote here the example of various countries and I quote the Industrial Bank of Japan Quarterly Report based on figures produced by Japan Ship-owners Association in year 2000 reflecting the fact that a vessel manned with 22 Japanese crew cost USD 2.75 million per annum or USD 7534 per day. This is nearly 80% higher than comparable vessels manned with a mixed crew of South Asian nationality, their cost run down to only USD 1452 per day (USD 530,000 per annum). Similarly, German International Federation, Finnish Ship-owners Association, Swedish Ship-owners (B&N) and British Ship-owners and particularly Shell save millions of pounds by employing multi-national crews from South Asia and saving sizeable money to the National Insurance Contribution.
Will ship-owners continue to flagging out? The final question relating to the flagging out process is the hardest one to answer. The reason for this is that shipping is a dynamic industry influenced by many social and economic and political factors which can create an uncertain environment for decision making. All that can be done, therefore, at any particular point any time, is to study the case for and against continued flagging out and indicate which argument is holding the upper hand.
The case against flagging out in Germany and the use of certain open flag (FOCs) have been studied and now ship-owners on flag of convenience are feeling the pinch of the stringent regulatory control by Port State Control, revised STCW requirements and ship-owners to comply IMO, ISM Codes and other Conventions. The trend of flagging out had been checked due to strict requirement of Port State Control and IMO world-wide and according to statistics some 1000 vessels around 50 million tons were registered under NIS ie second or parallel registry. Nevertheless the pressure on ship-owners to use FoC persists.
In spite of stringent requirement, the outlook in year 2000 was that open registry would continue to hold its appeal compared with national and second registry as evidenced by leading chemical tankers owners. Please refer to Drewry's Report of year 2000 which predict 16.5% rise in operating cost in year 2000 including crew cost, if the supply sources are not expanded and training practices do not increase.
CONCLUSION:
I am of the considered opinion that instead of Pakistan opting the open registry FoC, we must seriously consider now opting for second and parallel registry on the pattern of Norway, Germany, France, Portugal and Netherlands offering the same facility as offered by these countries on second or parallel registry so that crew cost which constitutes 33% to 50% of operating cost can be considerably reduced and ship-owners are free from labour market regulations and harassment by the trade unions.
In case we choose to go for the second registry or parallel registry than a Pakistani delegation may visit Norway, Germany, France, Portugal, Netherlands instead of Panama and Liberia which are open registry ie Flag of Convenience. It is not at all difficult to have a second or parallel registry in Pakistan by giving the second registry same concessions as European countries are using off-shore island for second registry we can also use the Astola Island for second or parallel registry, provided that due legislative cover and provisions are made in MSO-2001.
The government may opt for second or parallel registry which in my opinion is a better option than to go for open registry ie Flag of Convenience as with the present day regulations, the Port State Control, IMO and other regulations are putting a lot of pressure on Flag of Convenience, including restrictions placed by hull and machinery underwriters, P&I Club etc.
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