Written assignments / home exams

SHIP OPERATIONS
MM-SOP4001

Candidate No.: 888099

Bruno Jos Mateus Madaleno

Total number of pages: 8

Submission date: 02.11.2015

a)
The ship registration dates back to Roman Empire and the seventeenth and eighteenth
century in England (Coles & Watt, 2009). To understand how important registration is, we need
to distinguish between flag, registration, nationality and documents.
Since the ship sails in high seas, it requires a nationality in order to prevent a legal vacuum
(Mukherjee & Brownrigg, 2013) that is to say; jurisdiction over a vessel on the high seas resides
solely with the State to which the vessel belongs (Coles & Watt, 2009). The vessel possess a
nationality even if it is unregistered or has no documents evidencing nationality (Coles & Watt,
2009). Nationality and registration are related, nationality is attributed to vessels flying the flag
of a State in which the vessel is publicly registered while registration generally involves the
public recognition and protection of the ship owners title to the vessel as well as the conferment
of nationality (Coles & Watt, 2009). Documentation, on the other hand, is chiefly concerned
with granting and evidencing the entitlement of the ship-owner to fly the national flag.
After the previous explanation, we can understand the importance of registration since
without national character (attained by registration of the ship under the laws of particular
country) is impossible to engage in international trading and enjoy protection under the
international law.
The choice of flag is part of the purchase process and reflects a strategic business decision
with broader consequences for ship management. The main influences in the flag choice are
economic and political factors. In the economic factors, we highlight operational costs like
manning, since the individual flag states may stipulate requirements related to the size of the
crew, professional qualifications and nationality. For instance, open registries have loosen
criteria in what concerns to nationalities compared to traditional maritime countries providing
the ship-owner reduction of costs, lack of investment in training and reduced staff in standby
(Grammenos, 2010). Another influence is the tax system as the countries that operate in open
registry levy no taxes on the profits arising from operation of vessels under their flags and only
require registration fees and annual taxes based on tonnage.
As political factors, we underline the ability to trade worldwide without any restrictions
from the flag state; also important is how the flag is ranked internationally because it could
result in more port state control inspections or in worst cases impossibility to trade. Finally, we
should consider the access to capital markets, which could be difficult for companies based in
some specific countries.
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The ship owner normally takes the last word about the choice of flag. However, this
choice is a strategic decision at the corporate level, meaning that corporate executives and top
managers are expected to give contributions for the final decision (Grammenos, 2010). We also
point out that the process sometimes could be analysed case-by-case depending on the age and
type of vessel.
Ship registration and particularly the choice of flag has an effect in terms of
competitiveness, the wrong decision could lead to problems in the future if we are not aware
about the trends in the sector we are doing business. For instance, the best flag in the dry cargo
market is not the same in the container market and so on. In addition, effects in general
management should be expected such as the location of ship management company.
b)
Nowadays, since the two regimes tend to converge, flags of convenience operate
responsible registries and are able to offer attractive incentives to ship-owners without loosen
criteria on maritime safety and environmental protection standards. In order to choose a flag we
look into the sector where the vessel will operate which is in this case the dry bulk sector. The
choice of flag is part of the strategy implemented, for this bulk shipping company covering the
major trade routes we consider the only viable strategy is the absolute cost advantage
(Theotokas & Katarelos, 2000). This sector is influenced by world economic situation and some
volatility is expected, and the low prices freight rates does not mean low quality of service on
the contrary, it strengthens the competitiveness.
As we trade worldwide, an open registry like Panama seems a good choice. The main
features of the flag are as follows, no minimum tonnage for vessels registrations, no
nationalities restrictions, dual registration accepted, preliminary registration of title / mortgage
globally accepted, major class survey societies accepted, considerable tax advantages and
finally, vessels under construction can obtain provisional registration in Panama (Coles & Watt,
2009). In addition, a non-resident Panamanian company is not liable to pay any income or other
taxes in Panama, apart from the annual Government Corporate Tax of US$350.
Due to the non-schedule nature of the sector, we highlight the facility of short (three
months) or "One Voyage" registration available in Panama flag at special (lower) fees and
requirements (Coles & Watt, 2009) this could be an advantage for this kind of vessel. Even
today, the Panama register offers new incentives in order to increase the tonnage under his flag

(Labrut, 2014). The medium size (15,000-34,999), can carry cargoes to a large number of ports
and may carry considerable variety and quantity of cargoes.
The main challenge here is to find an equilibrium between competitiveness through
lowering costs and consequently maintain safety and quality standards. The reputation is a key
issue, in one way, to save money in operational costs must comply with self-imposed minimum
safety and quality standards in order to be social and environmentally responsible. For instance,
it would be a better choice for an overaged ship seek the "protection" of a more respectable
register. Most of countries worldwide importing and exporting the dry bulk are rigorous in
terms of safety, thus the flexibility must not be a way to disregard safety and get cheap labour
at any cost. The business world is getting more aware of reputation regarding to safety and
environmental issues in maritime industry. Consequently, we can say today that a company
who seeks good money at any cost will not survive for much longer.
In terms of inspections, the vessels engaged in commercial trade that are over 20 years
old on first registration are subject to a safety inspection by the Directorate of Safety at Sea of
the Panama Maritime Authority ("SEGUMAR") as a precondition of issue of a Certificate of
Permanent Registry. Thereafter an inspection is required on an annual basis. This does not mean
an old fleet for panama register, In January 2014, the average dead-weight ton of the world
fleet was below 10 years old, following its continued rejuvenation over the last years. A younger
fleet is not only good news for lowering operating costs, but it also allows ship-owners to
comply with more stringent safety and security regulations and lower carbon dioxide (CO2)
emissions. (UNCTAD, 2014).
The companies with open registries face some complexities in the HR planning process
but great opportunities because the supply is the whole world. The commercial operation in
Europe allows recruiting from the best business schools and easy communication (same time
zone, easy accessibility, reliability) with the most important banks. The Panama flag also
facilitates the communication with commercial departments in Europe so this fact is
manageable. Most of the dry bulk vessels are built in Asian shipyards, the technical department
location in Singapore permits the superintendent easy access to every aspects related to the ship
itself (inspections, repairs, new building, etc) and the flag registry does not play any influence
on that.

Question number 2
a)
Also referred as a "bankruptcy-remote entity", the single purpose companies are usually
a subsidiary companies with an asset/liability structure and legal status that makes its
obligations secure even if the parent company goes bankrupt (Investopedia, 2015). This is a
common practice in open registries where a vessel is owned by a corporation specially formed
for that purpose and having no assets other than the vessel herself (Coles & Watt, 2009). This
option gives protection against financial risks arising from the ship operation; this is quite
common in tankers due to the environmental risks and the punitive damages associated.
In maritime economics, there are two reasons to use SPC, the first is as a speculative
shipping investment vehicle. Ship funds and Norwegian K/S partnerships are examples of
structures which have been used in the past to allow private investors to invest in shipping. The
structure is set up, the funds invested, and in due course the investment is liquidated. Second,
SPCs are often used for off-balance-sheet financing. This is a form of financing in which
large capital expenditures are kept off of a company's balance sheet through various
classification methods. Companies will often use off-balance-sheet financing to keep their debt
to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would
break negative debt covenants (Investopedia, 2015).This suited bankers because for financing
purposes the ship could be treated as a separate company, secured by a mortgage on its hull and
a time charter.
Limited

company

is

form

of

incorporation

that

limits

the

amount

of liability undertaken by the company's shareholders. The naming convention for this type of
corporate structure is commonly used in the United Kingdom. It is commonly known as
a limited liability company (LLC) in the United States and other parts of the world. In a limited
company, the debts of the company are separate from those of the shareholders. As a result,
should the company experience financial distress because of normal business activity, the
personal assets of shareholders will not be at risk of being seized by creditors. Ownership in the
limited company can be easily transferred, and many of these companies have been passed
down through.
In the book Berlingieri on Arrest of Ships by Francesco Berlingieri the author mention
a case with the vessels "Alpha Star", "Alpha Sun", "Alpha Storm", and "Alpha Sky" under Le

Timon Transport established at 2 Akti Miaouli and Pavieroustreet in Piraeus (Greece) as a

separate companies (Berlingieri, 2011).
b)
Nowadays the ship owning company could perform the commercial and technical
management or in some cases, separated companies provide this service. The term Technical
management involves the duties a shipping company must perform for the technical operation
of a vessel. This involves management related to crew management with related tasks, logistics
related to operations as well as operations, service and maintenance. The Commercial
management has traditionally included marketing and chartering, employment of the ship and
other commercial services like (i) to provide voyage estimates and accounting; (ii) to arrange
insurance; (iii) to subcontract and appoint agents; (iv) to provide budgeting and keep true
accounts (Mandaraka-Sheppard, 2013).
We can identify some driver factors that result in increased outsourcing of technical as
commercial management:

The quest for economies of scale: the need to always keep costs as low as possible

The shortage of work force: turn to ship management firms for the timely supply of
appropriately qualified crew from distant supply centres.

Increased legislation: the alternative to leave a ship management company to cope with
the burden of the vast amount and stringent regulations could be attractive to pass by.

Increased liability: in case of disastrous accidents ship managements free the owning
firm money and its public image

Wide range of main and value added services

In the Kyriaki Mitroussi article (Mitroussi, 2004) we can find some reasons appointed by
ship owners for turning to third party ship managers: the expertise provided by management
companies, flexibility, access to crew, economies of scale and finally, relief from legislation.
He appoint also reasons for not using third part management: Available in house expertise,
desire to control, keep contact with the market.

Question 3
a)
The standard contract form aim is to save the parties from going to the trouble and
expense of reinventing what may be a relatively complex commercial and legal relationship
(QC, Hannaford, & Turner, 2012). The standard forms do have their limitations. For example,
while a standard form may serve as a useful starting point for a straightforward deal, in many
cases fine tuning (and, occasionally, substantial variation) will be necessary in order to adapt
the general scheme of the standard form to the particular circumstances of the transaction in
question. In some cases, the standard form could not give adequate protection against the risks
when buying a second-hand ship, which can make the parties make one from scratch. The
answer whether use standard form or not relies on the particularities of the purchase. If the
buyer foresee some risk, he could use the standard form and adapt it in order to fulfil the
requirements. One example is the payment procedure that is left open in the standard form,
increasing the risk on the buyers side.
b)
The clause relative to the payment is crucial because it must make clear that payment
includes both release of the deposit and payment of balance of purchase prices plus other
amounts payable. We also highlight the clause relative to documentation and time to provide
the drafts, the condition on delivery according to the previous inspections and what is included
in the sale for instance, bunkers/luboils could be paid as per port prices or sellers last paid prices.
Clauses in case of Buyers or Sellers default should be clear in order to defend their rights. The
option for divers inspection /drydock should be declared by the buyer including the issues
related to NOR. The deposit clause states the amount agreed to be lodge and all the instructions
related. Finally, issues related to the time/place of delivery/notices and Encumbrances.
c)
Considering the today shipping market, we are facing a slowdown in shipbuilding
reflecting the turning point of peak in 2012 (UNCTAD, 2014). Among other vessel types,
offshore vessels (+5.1 per cent) and gas carriers (+4.7 per cent) had the highest growth rates. In
the meantime, as non-bulk cargo has increasingly been containerized, the share of the containership fleet has surged by 677 per cent since 1980, while the general cargo fleet share has dropped
by 73 per cent (Mukherjee & Brownrigg, 2013). In the tankers sector we expect demand for
6

LNG in the next 10 years. We foresee both the container sector and LNG to have an income
potential in the future. Between the two options, the container sector is the least volatile and the
most conservative choice since we still have some uncertainty about the actual oil price policy.
The choice upon LNG tankers should be of a long-term strategy since we have to consider some
losses due to the actual oil prices.
Question 4
a)
The important elements (costs) of a voyage charter are: Bunkers, Heating, Cleaning,
Port/Canal Cost, Cargo Cost, Various other cost, Extra Insurance, Pilot Inspection, Running
Cost and Financial Cost.
b)
The revenue is result of the freight rate minus the commission. Since the owner is
responsible for the expenses pointed in last question, the better he will technically manage the
ship more money he will able to save. It is important also to plan the route in order to avoid
deviation or delays in connection with the transit.

Bibliography
Berlingieri, F. (2011). Berlingieri on Arrest of Ships. London: Informa.
Brodie, P. (2006). Commercial Shipping Handbook. New York: Routledge.
Coles, R., & Watt, E. (2009). Ship Registration: Law and Practice. London: Informa Law.
Grammenos, C. (2010). The Handbook of Maritime Economics and Business. I K. Mitroussi,
& P. Marlow, The Impact of choice of flag on ship management (ss. 579-601). London:
Routledge.
Investopedia. (2015, October 28). Off-Balance-Sheet Financing. Hentet fra Definition of OffBalance-Sheet Financing: http://www.investopedia.com/terms/o/obsf.asp
Labrut, M. (2014, September 29). Panama flag goes on the offensive with incentives. Hentet fra
Seatrade Maritime News: http://www.seatrade-maritime.com/news/americas/panamaflag-goes-on-the-offensive-with-incentives.html
Mandaraka-Sheppard, A. (2013). Modern maritime Law: Managing Risks and Liabilities. New
York: Routledge.
Mitroussi, K. (2004). Ship owners stance on third-party management. Maritime Policy &
Management, 31-45.
Mukherjee, P. K., & Brownrigg, M. (2013). Farthing On International Shipping Vol1. Berlin:
Springer-Verlag Berlin Heidelberg.
QC, I. G., Hannaford, M., & Turner, P. (2012). Ship Sale and Purchase. Oxon: Routledge.
Stopford, M. (2008). Maritime Economics. New York: Routledge.
Theotokas, I. N., & Katarelos, E. D. (2000). Strategic choices for small bulk shipping
companies in the post ISM codeperiod. Korai: University of the Aegean.
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