GREENPEACE INTRODUCTION

A Ship Recyling Fund, matching corporate responsibility with shipping

practice

Greenpeace commissioned this report The Ship Recyling Fund, Financing

environmentally sound scrapping and recycling of sea-going ships from ECORYS in
2003. The report is part of a wider range of reports from Greenpeace about the impacts
on the environment of shipbreaking and the economics in the shipping- and
shipbreaking industry.

Previous reports from Greenpeace showed that countries in Asia, which break up
hundreds of end-of-life-vessels every year pay a high health- and environmental price
for this. At the same time shipowners make a huge profit by dumping ships containing
hazardous substances on the shores of these countries. In other words the environmental
pollution in shipbreaking countries has its origin in the decision of shipowners to send
their ships to breaking yards without taking any precautionary measures in preparing the
ships for recycling. Economic gains and not the protection of human life and the
environment is the driving force for the shipping industry in the devastating practise of
decommissioning ships.

Economic system
Based on the current economics dominating the shipbreaking practises, Greenpeace has
asked ECORYS to generate ideas for the introduction of an economic system that would
result in a safe and environmentally sound system of shipbreaking. A system that does
justice to the responsibility of shipowners for the way in which ships are broken at the
end of their commercial life. A system that expresses the fact that shipbreaking is a
service to the shipping community and the world instead of a dumping industry. A
service for which the shipping industry should pay instead of being paid for.

The ideas presented in the report not only argue that financial costs for the safe handling
of end-of-life-vessels can be born by the shipping industry, it also argues that the costs
are manageable and a minor fraction (0,5%) in relations to the total turnover generated
by a the shipping industry and small (13-33%) in comparison with a total shipbreaking
market turnover of approx 1.5 billion US$ per annum. It should be noted that ECORYS
figures reflect the situation of the market in 2003 (average scrap price of 170 US$ per
ltd). Shipbreaking prices paid in 2004 and today are much higher (up to 700 US$ per
ltd). It should also be noted that ECORYS has calculated the required size of the fund
on pre-cleaning and other costs in Asia. Pre-cleaning costs in western countries would
have shown different (higher) cost levels.

A ship recycling fund can be financed in a number of different ways. This report
outlines two principle ways in which a Fund can be financed. A first option is through
contributions at the new built phase, a second option is contribution during the lifetime
of vessels. As part of the latter option ideas are presented to include recycling charges in
the insurance premium of ships, as well as the suggestion to levy the recycling
contributions through the Flag State. An alternative and interesting option presented in

More information: Greenpeace Netherlands Veemkade 18- 20 1019 GZ

AMSTERDAM Phone: +31.20.5249562/+31.20.5249595 www.greenpeaceweb.org/shipbreak
the report is to introduce an obligatory life insurance for a ship. Through annual life
insurance premiums funds can be saved for the eventual dismantling.

Incentive for compliance

The establishment of a ship recycling fund goes hand-in-hand with the existence of a
mandatory framework of appropriate regulation. Fund and regulation are
interdependent.
Regulation is necessary, as it obliges the shipping community to really change the
polluting dumping practice. At the same time, the introduction of regulation without the
creation of a parallel financing mechanism could lead to circumvention of the rules, and
increased use of substandard scrapping yards by shipowners to avoid extra costs. The
findings of this report confirm the idea that the responsibility for shipowners to prevent
environmental pollution originating from the dismantling of their end-of-life-ships is
best safeguarded through the introduction of a financial system. It recommends that
abidance by the rules should be promoted by the introduction of an indirect financing
mechanism in which financing is raised at the new built stage or during the lifetime of a
ship.

The report makes clear suggestions as to the way in which the finances can be raised,
and gives indications about the scale, the required size as well as the structure for a Ship
Recyling Fund. As the Fund needs to apply on a global scale to create the necessary
level playing field it appears that the fund is best suited under the auspices of the
United Nations. Last but not least the ideas generated in the report prove that there is a
huge potential for change in the business as usual carried at present by all major
stakeholders.

Greenpeace offers this report to shipowners, shipping federations, insurance companies,

policy makers, politicians and the general public as a further indication that the current
practice of polluting environment and endangering people can be stopped and changed
for the better. A Ship Recycling Fund in combination with mandatory regulations
provides shipbreakers with the means to invest in best practice facilities and working
methods at a yard. A Ship Recycling Fund provides shipowners with the means to
finance responsible disposal of their end-of-life vessels with a simple and relatively
small contribution to the Ship Recycling Fund.

Recommendations based on this study:

The International Maritime Organisation and the Basel Convention needs to adopt
necessary legally binding regulations as a matter of urgency.
A body of the United Nations, for example UNEP in co-operation with the Global
Environmental Facility needs to set up a Terms of reference for the structure and
donations of a Fund. This could be similar to the funds set up to assist states with
the implementation of the Montreal Protocol.
Governments in shipbreaking countries need to set and implement a uniform set of
criteria under which shipbreakers can apply for financial input from the Fund to
upgrade their existing scrap-facilities and finance clean scrapping.
States need to endorse the Fund, for example by making a donation to the fund a
standard requirement for ships to fly the national flag.
 Shipowners need to understand that zero pollution shipbreaking is a service to the
shipping industry for which they should set aside a minimum of 0.5% of their
annual turnover from each of their vessels as an earmarked contribution to the Ship
Recycling Fund.
Insurance companies, like P&I clubs need to consider what role, if any, they can
play in maintaining or establishing the Fund in a similar way to the inclusion of
wreck removal costs in the overall P&I bill.

More information: Greenpeace Netherlands Veemkade 18- 20 1019 GZ

AMSTERDAM Phone: +31.20.5249562/+31.20.5249595 www.greenpeaceweb.org/shipbreak
The Ship Recycling Fund
Financing environmentally sound
scrapping and recycling of sea-going
ships

Final

Client: Greenpeace

ECORYS Transport

Rotterdam, 1 February 2005

Pieter Melissen
Roelof Jan Molemaker

TRANSPORT

P.O. Box 4175

3006 AD Rotterdam
Watermanweg 44
3067 GG Rotterdam
The Netherlands

T +31 10 453 88 00
F +31 10 452 36 80
E transport@ecorys.com
W www.ecorys.com
Registration no. 24316726
Table of contents

Preface 9

Summary 11

1 Background to the study 13

1.1 Introduction 13
1.2 The current ship scrapping market 14
1.3 The rationale to finance environmentally sound scrapping 17

2 Costs of environmentally sound scrapping 19

2.1 Introduction 19
2.2 Cost of environmentally sound scrapping 19
2.3 Demand for scrapping: supply of ships 22
2.4 Total (additional) funding requirements 24

3 Organisation of a ship recycling fund 26

3.1 Selecting the appropriate financing mechanism 26
3.2 Financing a Ship Recycling Fund 27
3.2.1 Contributions at the new built phase 27
3.2.2 Contribution during the lifetime of vessels 30
3.3 Organisation of a Ship Recycling Fund 32
Preface

Scrapping or recycling of ocean going merchant ships has come under increased scrutiny
of international organisations such as IMO, ILO, UNEP (Basel Convention) and
Greenpeace. The main reason for this is that scrapping normally takes place under
difficult conditions, both for the people involved in the actual scrapping process as well
as for the environment which suffers from toxic residues which emerge and escape during
this process.

The current market organization for disposing of obsolete or damaged vessels does not
favour improvements in both the situation of men and environment. Dismantling the
ships in a responsible way would, under current market conditions, increase the price that
the scrapper needs from the steel industry to levels, which will make ship scrap
uncompetitive, or reduces the price a shipowner gets for his end-of-life ship. The latter
will provide an incentive to avoid clean and safe shipbreaking. Thus the additional costs
of clean and safe operations form the main bottleneck in its introduction.

Greenpeace has asked ECORYS to prepare a study that could serve as a theoretical basis
and support for its ongoing actions to promote safe and environmentally sound scrapping
of ships. The study addresses whether and how changes can be applied to the market
system through the introduction of a financing mechanism that would result in an
acceptable way of disposing of obsolete vessels.

This report presents the results of this study. It reflects the market situation in 2003. Apart
from extensive literature review, information was obtained from a wide range of people
within the shipping community. We would like to express our gratitude in their co-
operation for this study.

9
10
Summary

Scrapping and recycling of ocean going merchant vessels is internationally recognized to

show a large potential for improvements in the environmental, health and safety practices
and standards. Recently, the Basel Convention, regulating the export of waste, adopted a
decision which notes that: a ship may become waste as defined in article 2 of the Basel
convention and that at the same time it may be defined as a ship under other international
rules. Also IMO adopted guidelines on ship recycling.

Although a number of initiatives have been undertaken, current practice reveals that only
a limited number of ships is being recycled according to existing guidelines on clean and
safe shipbreaking. An important bottleneck is formed by the financial costs involved in
adopting new, cleaner and safer, working methods and the introduction of pre-cleaning
services. Therefore, as has been argued earlier, the establishment of a funding facility is
essential in overcoming the present deadlock. It should be noted that the existence of a
fund does not replace the need for regulation with regard to environmentally sound
scrapping.

Since a Ship Recycling Fund should function on a global basis the most logical option is
to set up a fund under the auspices of a UN-organisation, for example IMO in cooperation
with the ILO and UNEP (Basel Convention). The main tasks of the Fund would be:
Collection of fees
Certification of scrapping yards and control of scrapping practices;
Disbursement of funds for environmentally sound scrapping;
Financing R&D on clean and safe scrapping.

An important element in the establishment of a Ship Recycling Fund is the required size
of a fund. Costs evidence is relatively scarce given the limited experience with
environmentally sound shipbreaking. Based on available information the additional costs
related to pre-cleaning (in Asia) have been estimated at 25-50 US$ per ldt. Pre-cleaning
costs in western countries would show different (higher) cost levels. If these costs are set
off against the expected supply of (larger) merchant vessels on the scrapping market total
funding requirements can be estimated at an average of 200-500 million US$ per year,
based on the assumption that ships would be pre-cleaned at Asian breaking yards.

Financing the Ship Recycling Fund could be realised through levying disposal/recycling
fees at the construction phase of new ships or during the lifetime of ships. The main
advantage of the latter would be that all ships contribute to the fund. An interesting,
alternative option to the introduction of recycling fees is the establishment of an
obligatory life insurance which would recover the costs of clean scrapping. Through
annual life insurance premiums funds can be saved for the eventual dismantling.

11
 Contributions at the new built stage of ships can best be realised through a fee on the
registration of the vessel (registration of the IMO number). At current new built levels the
level of the recycling fee would, depending on the type and size of ships, range from less
than 1% to 4% of the new built price. The introduction of a fee during the lifetime of
ships is assessed to be most feasible through the Flag States, since these are the only body
with the power to collect money on the basis of registration. The level of the charge has
been estimated at an average of 42-84 US$ cents per GT annually.

12
 1 Background to the study

1.1 Introduction

Shipbreaking is generally recognized as being an unsafe and environmentally unfriendly

activity. This is caused by the existence of hazardous substances and the current working
practices of demolishing ships in the major shipbreaking countries. In the past decade
various initiatives have been developed by different parties to contribute to a safer and
cleaner shipbreaking practice. The urgency of the matter is even increased by the
expected increase in ships for scrapping as a result of the accelerated phasing out of
single hull tankers in the coming decade.

An important international agreement with respect to the (international) shipbreaking

activities is formed by the Basel Convention, which entered into force in 1992. This
convention regulates the international trade in hazardous waste. This convention forms
the basis for other regulation, e.g. EU regulation1 . In 1995 the Basel Ban Amendment was
added to the Convention prohibiting the export of hazardous waste from developed
(OECD) countries to developing (non-OECD) countries2 . An important point for dispute
has always been, whether a ship, which is being exported for recycling, can be considered
as waste. In October 2004 an important breakthrough has been realised in this respect,
when the Conference Of the Parties (COP7) of the Basel Convention adopted a decision
which notes that: a ship may become waste as defined in article 2 of the Basel
convention and that at the same time it may be defined as a ship under other internationa l
rules.

At the 5th Conference of Parties to the Basel Convention in 1999 it was approved to
develop international guidelines for ship recycling by the Technical Working Group of
the Basel Convention in co-operation with IMO/MEPC3 . Draft IMO Guidelines on Ship
Recycling were presented and approved at the 49th session of the Marine Environment
Protection Committee (MEPC) in July 20034 . These Guidelines were developed in
parallel to some extent and in co-operation with the International Labour Organisation
(ILO)5 and the secretariat of the Basel Convention. The IMO Guidelines expand on the

1
Council regulation 259/93/EEC on the supervision and control of shipments of waste within, into and out of the European
Community
2
This amendment still has to be fully ratified.
3
The Basel Convention Technical Guidelines for the Environmentally Sound Management of the Full and Partial dismantling of
th
Ships have been adopted at the 6 Conference of the Parties of the Basel Convention in December 2002.
4 rd
The IMO Guidelines on Ship Recycling have been adopted at the 23 session of the IMO Assembly in December 2003.
5
See also ILOs own Guidelines on safety and health in shipbreaking (ILO 2003)

13
 Industry Code on Ship Recycling6 and complement the other international guidelines
related to shipbreaking (ILO in relation to working conditions and Basel Convention wit h
respect to environmental considerations at ship recycling facilities).

1.2 The current ship scrapping market

At the end of their economic or technical life ships are offered for scrapping. The steel
content of the ship determines its value and ship scrap has to compete with other sources
of scrap in the international market. Scrap is mostly used for feeding iron furnaces to
produce new steel.

As capital goods, the service life of most vessels is relatively long. Typical periods of use
are 20 to 30 years. During that period frequent changes of ownership are common. The
shipowner who wants to sell a ship for scrap mostly appoints a broker (agent) who will
seek a buyer for the ship. This intermediary buyer will sell the vessel on to the end buyer.
When the ship is at the end of its useful life the end-buyer will be the scrapping and
recycling yard. These vessels are usually offered for sale for dismantling as is to one or
more cash buyers (usually via another broker). This buyer determines the eventual
scrapping yard.

Ship scrapping is an international, global market for large ocean going vessels. Most of
these ships are fully seaworthy and operational, and capable to sail to their scrapping
location, thus saving expensive towing operations. Smaller vessels and vessels used in
inland navigation, as well as offshore structures, are rarely scrapped on the international
market, since transport of these ships is economically not viable and scrapping takes
places locally. This market segment is not considered in this study.

Historically ships were dismantled in shipyards all across the industrialised world. Until
the fifties the UK and US dominated the market, which subsequently shifted to the
Mediterranean. Gradually the market shifted to regions with low labor cost, as the
scrapping process is highly labour intensive, typically requiring 500-1500 employees for
the dismantling and re-use, recycling process7 . In addition, the local demand for scrap
metals is an important factor explaining the specific location of the scrapping industry.
Finally, stringent labour, environment and safety regulation in western countries has
stimulated a geographical shift to the less developed countries. After a period in which
South Korea and Taiwan dominated the market, the market shifted to China, which in
1993 dominated the market with a share of 45% of the worlds scrapping business in
hand 8 . Changes in taxation brought an end to this situation and the lead on the market was
taken over by India and Bangladesh, which have dominated the market for the last
decade. Important countries are also Pakistan and Turkey, the latter one often involved in
the scrapping of smaller ships, operating in the Mediterranean and Black Sea area. Other
countries like the Philippines and Vietnam made occasional forays into the market but
never established a firm position. Industrial scrapping of ships was tried in the early

6
Industry Working Party on Ship Recycling, Industry Code of Practice on Ship Recycling, August 2001
7
Elias, Roschar (1999)
8
Det Norske Veritas (1999)

14
eighties in Japan, whereby idle shipbuilding docks were used for dismantling. This was
done in the context of a scrap and build policy that would restore the demand for
newbuildings, following the glut of deliveries during the seventies. This turned out to be
non-economical and the project was abandoned.

Table 1.1 Market shares (DWT) main shipbreaking nations, 1996-2000

Country 1996 1997 1999 2000

India 50% 51% 37% 47%

Bangladesh 25% 26% 28% 19%

Pakistan 11% 12% 15% 10%

China 1% 1% 14% 22%

Others 14% 11% 5% 2%

Source: Informas Lloyds Inactive Vessels, cited by OECD 2001, Report on ship scrapping

Being a highly competitive international market shipbreaking location may change from
time to time. Supply of and price of vessels for scrapping, demand and prices for scrap
iron and import taxation appear to be major explanatory factors9 .

When a ship is being sold for scrapping all removable parts are being dismantled and
sold. This includes machinery, equipment, lifeboats, buoys, kitchen appliances, furniture,
but also fuel, etc. Generally, the non-removable parts, which remain consist to a large
amount of steel scrap and non-ferrous metals (e.g. brass, copper, aluminium, etc). These
are either being re-used (e.g. steel plates which are cut out of the ship) or are being
recycled in re-rolling mills (for the production of long products, including reinforced bars
for the construction industry) or re-melting furnaces (for new products) nearby. The
typical material composition for a number of ship types is depicted in table 1.2.

Table 1.2 Average material composition by ship-type (%)

Ship type Re-rolling Melting Cast iron Non-ferro Machinery Wood Waste
steel steel scrap metals furniture

General cargo 64,5 11 2,5 0,7-1 6 5 10

Bulk carrier 71 10 2 0,5-1 4 3 9

Tanker 76,5 8 2 0,5-1 3 1,5 8

Source: Estimates by Indian Shipbreakers Association, Bhavnagar

The material composition of the ship also determines its scrapping value. In general,
prices for tankers and bulk carriers are higher than other vessels (e.g. general cargo, or
reefers with their large volume of insulation materials).

9
E.g. import duties in India and Bangladesh range from 5-15%, while in Pakistan 40% is levied on the import of old ships
(source Pakistan Shipbreakers Association, Indian Shipbreakers Organisation). Recent changes of taxation in China put
the country back from a 1% share in 1997 to over 20% in 2000.

15
 Most of the non re-usable or recyclable materials need to be disposed of. These consist in
part of hazardous materials and toxic wastes, including asbestos, heavy metals,
hydrocarbons and ozone-depleting substances. These may be both cargo and operational
residues (sludge, lubricants, etc), but also structural parts of the vessel (e.g. insulation,
asbestos paneling) or items on the ship that potentially contain harmful substances
(electrical equipment, paint etc.)10 . Table 1.3 gives an overview of typical waste materials
left on-board vessels 11 . It should be noted that not all waste materials presented in the
table are classified as hazardous according to the Basel Convention.

Table 1.3 Average waste materials left on-board vessels

Waste material Waste Of which: Of which:

(T/ship/year) recycled or disposed
re-used

Asbestos 10.0 95% 5%

Glass wool 7.1 8% 92%
Rubber 0.1 3% 97%
Thermo-coal 1.9 41% 59%
Fiberglass 0.1 0% 100%
Rexene 0.1 0% 100%
PVC 0.02 0% 100%
Pipeline 0.03 0% 100%
Cable 0.01 0% 100%
Oily sludge 2.9 n.a. n.a.
Cementing material tiles 28.6 n.a. n.a.
Iron scaling 2.6 0% 100%
Card board & packaging 0.1 0% 100%
Glass 0.5 0% 100%
Other toxic chemicals 0.01 0% 100%
Source: Engineers India Ltd (EIL), 2001, Comprehensive Waste Management Plan
for Alang-Sosiya Shipbreaking Yard

The current practice in dismantling ocean-going ships thus poses serious safety and
environmental concerns. In summary these are related to:
The disposal of and contamination of the environment with toxic and hazardous
wastes;
Unfavorable, unsafe working and scrapping conditions for the workers involved in
shipbreaking and exposure to hazardous waste;
Frequent, undocumented technical changes of the ship, in combination with frequent
changes of ownership result in a lack of information on hazards and difficulty in
developing a safe and environmentally friendly shipbreaking plan. This is enhanced
by the fact that mostly there is no direct contact between the last operator and
scrapping yard

10
MEPC (2003) cites two key lists to consider to identify potentially hazardous materials on-board: the list of hazardous wastes
from the Basel Convention, and the inventory of hazardous substances from the Industry Code of Practice.
11
Estimates of waste materials left on-board will depend strongly on ship types and sizes. Therefore estimates might differ
strongly depending on the assumptions used.

16
1.3 The rationale to finance environmentally sound scrapping

Scrapping or recycling of ocean going merchant ships has come under increased scrutiny
of international organisations (IMO, UNEP (Basel Convention), ILO and Greenpeace),
but also most parties in the shipping community subscribe the necessity to improve
scrapping practices and to improve the environmental, health and safety standards and
practices. Life cycle management is seen as a shared responsibility in which all parties,
including the shipping industry, the shipbuilding industry and the ship recycling industry,
should carry out their responsibilities to solve the problem.

However, dismantling the ships in a responsible way would, under current market
conditions, lead to a reduced price for end-of-life ships or would increase the price that
the scrapper needs from the steel industry to levels, which will make ship scrap
uncompetitive. As a result the scrapper can only survive in the current market with a low
cost operation that gives him a certain margin. For the scrapper the costs of dismantling
ships should be in line with the revenue from recycled parts and components. If the costs
become too high scrapping is no longer a profitable activity and would hence cease to
exist or clean scrapping procedures would not be abided by. Alternatively, he could
charge the shipowner for an additional service delivered (i.c. the cleaning and
environmentally sound treatment of ships), but this would provide ship-owners with an
incentive to circumvent this additional service to seek the highest rewards for their
obsolete ships.

Therefore the development of a financing mechanism is essential in overcoming the

present deadlock in introducing cleaner and safer methods of scrapping. It should allow
that an additional service is entered into the maritime industry, viz. the cleaning and
environmentally sound preparation of ships for recycling. As a result of the current
practice and market mechanisms this service is sooner an exception than a common
phenomena.

It should be noted that the introduction of a financing mechanism does not solve all issues
related to scrapping. Additional improvements should aim at improving the flow of
information about the elements of ships, which might be potentially harmful or toxic and
to allow safer working practices. The introduction of green passports for each new built
ship would certainly improve the information flow. The concept of the green passport
can be found in the Industry Code of Practice on Ship Recycling and in the IMO
guidelines on Shiprecycling. This passport should be maintained during the life of the
ship and will take into account changes made to the ship (conversion/jumboising etc).

Also it is essential that the appropriate regulation is being adopted. Regulation is

necessary with respect to:
Obliging the shipping industry to adopt and follow the guidelines for clean and
environmentally sound ship recycling;
Creating the legal basis for collecting charges to feed the financing mechanism or
fund;
Certification (and auditing) of ship recycling yards with respect to compliance with
the guidelines, norms and standards for safe and clean ship recycling.

17
 The introduction of a financing mechanism itself mainly facilitates the easy and adequate
implementation of the set of regulations.

Before addressing possible financing mechanisms, the next chapter presents an analysis
of the demand for ship scrapping in the coming 10 to 15 years and the costs associated
with clean and environmentally sound scrapping.

18
 2 Costs of environmentally sound scrapping

2.1 Introduction

The purpose of this study is to generate ideas for the development of an economic system
that would result in a safe and environmentally sound system of ship recycling. An
estimation of the costs of environmentally sound scrapping is essential in the introduction
of such a financing mechanism. These costs are determined by two main factors:
The additional costs per ship
The future supply of ships for recycling

This study presents a first estimation of these costs on the basis of available information
and a brief supply-demand analysis of the scrapping market.

2.2 Cost of environmentally sound scrapping

To estimate the additional costs of environmentally sound scrapping the following costs
elements have been distinguished:

The costs for removing structural components related to the construction of the ship,
which require special treatment.
The costs for removing operational waste, that is generated prior to the delivery of the
ship for recycling.
The costs for increasing the capability of the ship recycling yard to carry out the
actual recycling in the requested manner.
The costs for adjustments at the ship recycling yard to deal with the on-board
generated waste.

Note that other possible costs like containerisation of all hazardous wastes, preparation
for shipment and re-export to an OECD country for safe treatment and disposal have not
been included in this study.

Costs of removing structural components

There are a number of reports available that describe in detail the elements, which should
be considered as potential harmful and toxic 12 . The purpose of this proje ct however is not
to go into a detailed analysis of the cost of removing each of these elements. This will be
different for each individual ship and may also vary according to ship type. We will try to
aim at collecting overall cost figures, which will by nature be more generic but could

12
For example see, Det Norkse Veritas (1999), Decommissioning of ships

19
 serve as a basis for establishing the overall required amount of money (annually) that
would have to be generated by the maritime industry.

It is remarkable (and probably exemplary for the current situation) that figures on actual
removal costs are very difficult to obtain. Very few shipowners carry out (or have carried
out) these activities prior to actual recycling and shiprecycling yards are not providing
any indications about their cost structures (assuming that these yards would indeed carry
out environmentally sound recycling). Another element is that it is not always easy to
separate remediation costs (removal and disposal of hazardous materials) from the actual
dismantling costs because quite often the activities take place simultaneously.

A five-year-old report prepared by the US Ship Scrapping Interagency Panel, provides

some figures related to the scrapping of 111 US Navy vessels 13 . The figures show that for
the scrapping of these 111 vessels a total amount of 145 mln US$ would be required to
prepare the ships for safe recycling. Out of this figure 110 mln US$ would be for the
removal and disposal of the structural components (esp. thermal insulation) or 1 mln US$
per vessel.

A more recent figure has been obtained from a shipowner who decided to pre-clean his
vessels before the actual scrapping works starts. Pre-cleaning and waste management
activities have to be carried out to the satisfaction of the shipowner, whose representative
remains in the yard until the ship has been completely dismantled. For these pre-cleaning
activities the yard is paid by the shipowner. For the scrapping itself the yard paid a
normal market price to the shipowner. In this case, pre-cleaning costs were in the order of
magnitude of 20-40 US$ per ldt. This is a total cost figure and does not concern the
removal of structural elements of the ship only. If the same division applies as shown in
the US example removal costs of structural components could be in the order of 15-30
US$ per ldt. The size of the vessels concerned (containerships) varied from 20,000-
29,000 ldt. This would mean a range of removal costs from 300,000 US$ to 870,000 US$
per ship. These cost figures are based on scrapping the vessel in China. It has been by the
same source estimated that carrying out the same activities in Western Europe would be 3
to 4 times as expensive, due to differences in labour costs and stricter labour- and
environmental regulations.

This latter figure appears to be confirmed by a shipyard in the US, which has actively
been working on ideas and proposals for dismantling ships in an environmentally friendly
manner. They have mainly looked at warships and military support vessels, but have
some experience with commercial vessels too. Warships are relatively more expensive to
dismantle than for example a large tanker because there are more spaces and less access.
They estimated the following price ranges for different types of vessels:
warships 900-1300 US$ per ldt
military support vessels 300-700 US$ per ldt
commercial vessels 100-500 US$ per ldt.
These costs include both remediation and dismantling. Remediation (removal and
disposal of hazardous waste) only is estimated at onethird to half the total costs
(including labor, materials and disposal).

13
Source: Report of the Interagency Panel on Ship Scrapping, April 1998

20
The same source estimated that recently 4 Chevron tankers have been pre-cleaned in
China at approximately 10 US$ per ldt.

The costs of removing operational waste

The removal of operational waste is relatively more straightforward and as already shown
above is less costly than the removal of structural components. Cost figures are obtained
for preparing ships for normal (hot) repair works, which may require gas-freeing and tank
cleaning. These provide an indication of cost levels concerned for pre-cleaning a vessel
for recycling, but costs for the removal of engine room waste, hydraulics etc will have to
be added. Estimates for the containerships above showed that those figures could be in
the order of 5-10 US$ per ldt (approx. onethird of total pre-cleaning costs). This figure
appears to be confirmed by the US Interagency Panel on Ship scrapping which adopts a
share of roughly 25% related to the costs of removing operational waste. It is likely that
these figures are valid for a large number of ship types, but that vessels involved in liquid
trades will incur higher costs.

Costs of adjustments at the scrapping yard

The major scrapyards that are currently in operation will in general not be able to meet
the requirements of safe recycling. The yards normally operate on beaches rather than on
fixed grounds or platforms and therefore pollution is more difficult to control. Currently
no major scrapyard area is equipped with a slops/waste reception facility, which may
need to be erected as a consequence of a countrys responsibility as a port state in IMO
context. Fixed costs are largely labour oriented and there are only few yards that have any
physical infrastructure. Furthermore the yards need to have the know-how to deal with
hazardous materials. Therefore before environmentally sound scrapping practices are
introduced investments in the scrapyard industry will be necessary.

Some authors have argued that these investments might also increase the yards
productivity and efficiency14 , but at the current labour wage rates it is not expected that
these efficiency gains will make a large difference.

Costs for waste management

The safe removal of hazardous materials is one thing, dealing with these in an appropriate
way is yet another issue. As already mentioned scrapyards rarely have appropriate waste
reception facilities available, which means that residuals will be dealt with in ad-hoc
manner, and sold off to any one who is willing to pay a price. The same applies to the
structural components such as asbestos and other materials. These have to be dealt with in
a responsible and controlled manner, and in such a way that these pose no further danger
to the environment. This requires that in the vicinity of the scrapyard area companies are
active that can deal with further treatment of these hazardous materials, preventing them
from entering into the environment.

At this moment one can only make guesses about the capability and the physical capacity
to deal with the materials. The case of the shipowner, who had his vessels pre-cleaned
before scrapping, used his own inspectors to verify that the materials originating from his

14
E.g. Technical University Delft (1997), Influencing Life Cycle Management of Ships

21
 vessels are dealt with in an appropriate way. But even in this case the shipowner was not
able to fully guarantee that all necessary measures and precautions were taken.

Total costs of environmentally sound scrapping

The available information on the basis of historic figures indicates that environmentally
sound scrapping leads to a conservative estimation of the additional costs per ship
between 10 to 40 US$ per ldt. These costs are based on scrapping containerships and
tankers in a yard in China. It is expected that these costs might show some upward
potential, since certain vessels might show higher removal costs (e.g. liquid bulk carriers,
reefers), and possibly not all investment costs in the yard have been taken into account.
Therefore in making an estimate of the required size of funding environmentally sound
scrapping a range of 25-50 US$ per ldt will be used15 .

Future trends
Current costs estimations are linked to ships on the scrapping market which have been
built 20 to 30 years ago. Ships becoming available for scrapping in the future might show
a different cost pattern as technical developments have progressed. Market information
indicates that cost reductions are not expected to be large at the short term. However,
current initiatives aimed at building cleaner ships and introducing green passports
might lead to substantially lower costs for environmentally sound scrapping. These costs
reductions are realised on the long term only (some thirty years from now).

2.3 Demand for scrapping: supply of ships

Ships are being sold for scrapping when they no longer meet the requirements of the
shipowner. At the end of their technical or economic lifetime ships are scrapped.
The service life for most vessels is around 25 years, although this might somewhat differ
per ship type. In general, tankers are scrapped between 20-25 years, while bulk carriers
and other dry cargo ships are taking out of service after 25-30 years. This is also related
to development on the freight market. When demand for sea-going freight is low, ships
are earlier offered for scrapping to reduce the overcapacity at the market. Also new
regulation might influence the lifetime of ships. The regulation with respect to single hull
tankers is a fine example is this respect16 .

The current (1-1-2001) merchant fleet comprises about 36,600 ships (over 300 GT). This
excludes fishing vessels and other relatively small ships. These small ships fall outside
the scope of this study. The average age of the fleet is 19 years. Almost 80% of the fleet
consists of tankers (oil, gas and chemical tankers), bulk carriers and general cargo ships.

15
This is based on the assumption that the pre-cleaning would take place at breaking yard in Asia. Pre-cleaning costs in
western countries would show higher cost levels.

16
For example, in 2001 IMO (MEPC) decided to accelerate the phase out most single hull tankers by 2015 or earlier through
its amendment of the MARPOL regulation 13G. In addition, the EU has introduced a new regulation not allowing entry to
single hull tankers over 23 years of age (category 1) as from 2003 and a complete ban in its ports on single hull tankers from
2010 onwards.

22
Figure 2.1 Composition of world merchant fleet (>300 GT), per 1-1-2001

Tankers
Bulk carriers
General cargo
Container
Reefer
Ro-Ro
Passenger
Other

Source: ISL, Shipping statistics 2001

Based on the age distribution of the current fleet, the size of the vessels and the
assumption that tankers will be scrapped after 20-25 years and dry cargo ships after 25-30
years the supply of ships (per type) for scrapping can be estimated. The resulting supply
of ships (in dwt) for scrapping is shown in figure 2.2.

Figure 2.1 Indicative supply of ships for scrapping based on present age class distribution (5 yr totals)

180.000
160.000
140.000
1000 dwt

120.000
100.000
80.000
60.000
40.000
20.000
0
2000- 2005- 2010- 2015- 2020-
2005 2010 2015 2020 2025

Source: ECORYS based on ISL, Shipping Statistics

In deviation from the above graph, it should be noted that especially in the period up to
2010 the supply of ships for scrapping might increase as a result of the accelerated
phasing out of single hull tankers17 . Also other developments, such as the developments
at the world freight market (leading to under-, c.q. overcapacity of the world fleet) might
have a direct influence on the supply pattern.

To estimate the funding requirements related to the demand for scrapping the supply of
ships (in dwt; deadweight) 18 has to be transformed in the actual weight of a ship with

17
See also footnote 16. In addition the EU Parliament has clearly requested that the phase-out of single hull tankers will be
done in a way that will not endanger the environment or the health of people working in shipbreaking yards.
18
Deadweight indicates the volume of cargo plus stores and bunkers a ship can carry. Cubic measurements gross, or net
register tons (grt/nrt) represent the cubic space of the whole ship, respectively the cargo space only.

23
 stowage space and storage tanks empty (expressed in ldt light displacement tonnage),
which is the main determining factor for scrapping. The ldt/dwt factor depends on the
type of ship and its size (the larger the ship, the lower the ratio). Based on the size
distribution of the current fleet an average per main ship type can be derived. This is
shown in table 2.1.

Table 2.1 Average ldt/dwt factor by ship type

Tanker Bulk carrier General cargo, Other

container, RoRo,
reefer

0,30 0,33 0,44 0,34

Source: ECORYS based on Lloyds List Seabrief and ISL Shipping Statistics

2.4 Total (additional) funding requirements

To calculate the total funding requirement to finance environmentally sound scrapping

practices the demand for scrapping has been matched with the additional costs related to
the introduction of clean and safe scrapping. A high and low cost estimate has been
applied reflecting the estimated range of costs from 25 to 50 US$ per ldt. This results in
the following cost estimates per five-year period (see table 2.2).

Table 2.2 Financing requirements for ship recycling fund

2000-2005 2005-2010 2010-2015 2015-2020 2020-2025

Ldt volume for 44,100 35,400 46,200 43,800 51,000

scrapping (x1000)
Funding requirement (mln US$)
Low (25 US$/ldt) 1,100 880 1,160 1,090 1,280
High (50 US$/ldt) 2,200 1,770 2,310 2,190 2,550

This would lead to annual funding requirements between roughly 200-500 million US$
depending on the period. For the first 5-year period this would amount to 220-440 million
US$19 . This refers to the additional costs involved in the dismantling. In addition to these
actual costs of environmentally sound scrapping there are costs related to the monitoring
and managing of a green scrapping fund. The costs will depend on the eventual form of
the fund, which should be established to finance the cleaning of ships before being
dismantled and recycled.

The funding requirements are based on the assumption that the investment costs are borne
by the breaking yards themselves and that they are recovered through the price asked for
pre-cleaning the vessel20 . The prices used in estimating the funding requirements in table
2.2. follow this mechanism. This mechanism spreads the funding requirements more
evenly over time. If actual costs patterns at the scrapping yards would be followed

19
This compares to a total market turnover of approx 1.5 billion US$ per annum (average scrap volume of 9 mln ldt/yr against
an average scrap price of 170US$ per ldt).
20
If the yards are not able to finance these investments themselves pre-financing arrangements (concessional loans) could be
considered through international financing institutions (e.g. World Bank, AsDB) or bilateral donor support to create an even
spread of the financing requirements for the yards themselves.

24
obviously a more peaked pattern would result since most adjustments at the yards would
have to take place at the start.

It is inevitable that this fund needs to be managed in a thorough way, as the amounts of
money involved will be considerable. A second aspect of the organisation of fund should
be its capability to monitor whether any funding given to interested parties (shipowner,
scrapyard, government) is applied in an appropriate way. The fund (or its representing
body) may also have power to approve the eligibility of scrapyards to accept vessels for
recycling. In other words scrapping yards need to be certified and controlled before
funding is released from the fund to finance pre-cleaning activities. Another consideration
would be to use the fund to finance research and development into clean and safe
scrapping practices. At this moment in time it is difficult to establish the exact size and
manpower requirement of such an organisation, since it depends strongly on the
organisational structure and the amount of funds put aside for research and development
activities.

25
 3 Organisation of a ship recycling fund

3.1 Selecting the appropriate financing mechanism

The issue of financing environmentally sound scrapping practices has been raised at
various occasions, as being essential in its successful introduction. This should go hand in
hand with the development of regulations and guidelines on clean and safe scrapping21 .

However, the introduction of regulation without the creation of a parallel financing

mechanism could lead to circumvention of the rules and increased use of substandard
scrapping yards. In this situation shipowners would have to pay directly for the pre-
cleaning service when the ships are offered for scrapping. This would lead to a reduction
of the price (15-30% at current scrapping prices22 ), which in turn would create an
incentive to avoid these extra costs. If shipowners would try to transfer the additional
costs to the yards, abidance of the rules at the yards themselves might be strained as the
scrapping yards have to compete with other sources of scrap metal and the yards
profitability would be put under pressure.

This provides an incentive for the introduction of more indirect financing mechanisms in
which financing is raised at the new built stage or during the lifetime of ships. The
revenues raised would be allocated to a Ship Recycling Fund, which would take care of
the financing of environmentally sound scrapping practices.

Funds can be structured financially in three ways:

Endowments which invest their capital and use only income from those investments
to finance activities;
Sinking funds which are designed to disburse their entire principal and investment
income over a fixed period of time, or
Revolving funds that receive resources on a regular basis e.g. proceeds of special
taxes, levies, charges which replenish or augment the original capital of the fund
and provide a continuing source of money for specific activities.

In light of the large initial capital investment related to the first two types of funds (sound
and safe recycling should be financed from the interest and depreciation of the fund) a
revolving fund would be the most appropriate financing structure. A fund can always be
combined with other sources of financing. For example, the investments that should take
place at the shipbreaking yards can also be (co-)financed through donor assistance both

21
See also section 1.3.
22
Based on an average scrap price of US$ 170 per ldt , the additional costs related to clean and safe scrapping (25-50 US$/ldt)
would lead to a reduction of 15-30% on the price for the shipowner.

26
 bilaterally or multilaterally (e.g. World Bank). Also the Fund could be pre-financed
(through loans) by states to facilitate an early start.

Financing clean and safe recycling of ships should always be coupled to the introduction
of a regulation, which requires that these practices are being followed and the
certification of yards which are capable of clean scrapping and recycling. The creation of
a fund has the main aim to lower the threshold for clean recycling to avoid circumvention
of the regulation.

Box 3.1 Examples of funds for recycling and scrapping

Car recycling fund

The Dutch automobile sector has introduced a system to increase the re-use and recycling of cars. The system
is based on revenue that in principle is levied on the importers and producers of cars in Holland, but which is
passed on directly to the client. The system has been fully accepted by the consumer. A fee (disposal
contribution) has to be paid on the purchase of the car (on average 0.5% of the car value) which goes directly to
a foundation established to manage the fund, control and certify the car recycling industry, subsidise this
industry for the removal on non-recyclable materials, and finance R&D on recycling methods. Cars are taken in
at no charge. The fund has generated substantial reserves, as the current ratio new car/disposed car is 2:1. It
appears that the system is successful, with about 85% of car deletions accounted for (the remainder concerns
to a large extent exports to third countries). Similar systems have been introduced for batteries and electrical
appliances. In addition, this system serves as the prime example for European regulation with respect to the
disposal of car wrecks.
Inland navigation scrapping fund
To restructure the inland navigation sector that was facing an overcapacity situation the European Commission
introduced a special scrapping fund to finance a restructuring programme in Germany, Belgium, France, The
Netherlands, Switzerland and Austria. The fund was active in the period 1989-2003. The fund applied the so-
called old for new regulation: anyone commissioning a new vessel must either pay an old for new special
contribution or scrap the old tonnage. In addition the fund could finance international measures to promote
inland navigation (e.g. measures in the social and educational areas). The Fund was pre-financed through
advance payments from the participating member states, in the form of loans, to enable an immediate start of
scrapping operations.

3.2 Financing a Ship Recycling Fund

Financing of a Ship Recycling Fund could be realised by raising disposal/recycling

contributions at the construction phase of the vessel or contributions during the lifetime of
ships.

3.2.1 Contributions at the new built phase

The levying of a contribution at the construction phase of the vessel is comparable to the
system introduced in the Netherlands for the disposal and recycling of cars. Other than for
cars differentiated disposal/recycling contributions should be charged according to
shiptype and size. This could either be done by:
A surcharge on the selling price of vessels;
A fee on registration of the vessel (registration of the IMO number).

27
 The second option appears to be the most feasible option since a central (read IMO)
organisation could introduce charges for the registration. However, the system of
assigning IMO number is controlled by a private company Lloyds Register Fairplay,
which according to IMO is the sole authority for identifying and assigning an IMO
number. Nevertheless it could be considered whether a direct link could be established,
as the IMO number also has to appear on flag state issued certification for the vessel.
Control could be carried out by the classification societies or IMO itself. The first option
has the main disadvantage that the number of shipbuilding yards involved is large and
control over these yards is missing.

The main drawback of introducing such a system in an on-going market is that it will put
the owners of new ships that paid the contribution in a competitive disadvantage
compared to owners of existing ships. Another disadvantage is that contributions are only
obtained from new built ships instead of the whole shipping fleet. Since the number of
new built ships is much lower than the total number of ships in operation the (average)
level of the charge will be much higher.

Level of the contribution

To estimate the required level of the contribution per new built ship one first has to assess
the size of the new building market.

Shipbuilding output is normally measured in CGT 23 , which is the result of multiplying the
GT value of a ship with a specific factor that reflects the complexity of the ship, mostly in
terms of share of labour input versus steel inputs24 . In theory, the price quoted by a
specific yard of one CGT should be the same for all different shiptypes. In practice this
still varies a lot, of course because of price differences in various shipbuilding countries,
but all because of the flaws in the CGT system, which cannot always take into account
specific design aspects of ships.

For the purpose of this study the use of CGT is actually less relevant, as it tends to give
smaller ships a higher tonnage, and larger ships a smaller tonnage value. This bears
however no relation to the content level of toxic/hazardous material that needs to be
removed once the ship is destined for the scrapyard. From this viewpoint, it is a better
option to use GT as a yardstick for applying a tonnage fee at the newbuilding stage. This
will reflect the occurrence of hazardous/dangerous material in a much better way. It can
further be discussed whether liquid cargo ships should have an additional fee to pay for
the final cleaning of the cargo sections before scrapping. The same goes for reefers and
gas tankers where the insulated material may still contain a sizable amount of hazardous
materials.

23
Compensated gross tons
24
For instance to get the CGT value of a dredging ship you need to multiply the GT dimension with a factor 2.0 and to arrive at
the CGT value for a VLCC the factor 0.3. The standard factor 1 has been developed in the seventies, based on a standard
15000 DWT general cargo vessel, and based on that factor all other shiptypes have subsequently been assessed. The
factor is the highest for smaller ships and the gets lower with increase in size

28
Figure 3.1 World shipbuilding output (in million GT)

40
35
30
25
20
15
10
5
0
1975 1988 1994 1995 1996 1997 1998 1999 2000

The annual output varies considerably over time, depending on the demand from
shipowning companies. It is obvious that calculating a factor based on the highest output
might not cover all requirements while a factor based on the lowest output (1988) will
generate much more than actually required.

To calculate an average fee per GT the level of output is an essential factor. Since output
can vary strongly the contribution level under various scenarios has been calculated. The
costs of an environmentally friendly scrapping system (220-440 mln US$ per annum)
have been set off against different levels of GT output. This results in a series of possible
values per GT to be levied on future newbuilding activities and/or prices.

Table 3.1 Level of disposal contribution (US$ per GT) under various shipbuilding output scenarios

Output (mln GT) 15 20 25 30

Funding requirement

Low (220 mln US$/yr) 14.7 11.0 8.8 7.3

High (440 mln US$/yr) 29.3 22.0 17.6 14.7

The effect of this contribution on newbuilding prices is shown below for some specific
shiptypes. The table present both the lowest (7.3 US$/GT) and the highest (29.3 US$/GT)
impact. This result in price increase of less then 1-7% depending on the ship size and
type. At current new built levels (25 mln GT per year) the introduction of a
disposal/recycling contribution would result in price increases from less than 1% to 4%
per ship. The highest impact of this fee is noticed at shiptypes with a relatively low price
per GT.

29
 Table 3.2 Current newbuilding prices per shiptype, with and without disposal contribution

Ship type Typical GT Average price % increase % increase

(mln US$) low fee level high fee level
VLCC 160000 66 2% 7%
Capesize Bulker 75000 36 2% 6%
Container 8000 TEU 80000 65 1% 4%
Panamax bulker 40000 21 1% 6%
Container 4000 TEU 50000 45 1% 3%
Suezmax tanker 85000 45 1% 6%
Aframax Tanker 60000 36 1% 5%
Product tanker 45000 29 1% 5%
Reefer 8000 25 <1% 1%
LNG tanker 110000 160 1% 2%
Cruise ship 110000 400 <1% 1%

3.2.2 Contribution during the lifetime of vessels

Next to a recycling contribution at the commissioning of vessels, fees could be levied

during the lifetime of vessels. This fee should be levied based on the tonnage of the ship.
The main advantage of this regime is that is affects both new and existing ships and thus
diminishes market distortions. Another advantage is that the fee is being levied on a
larger number of vessels. This also introduces a disadvantage, viz. more complicated
control mechanisms. Closely linked to current mechanisms and possible transaction
moment two options exist:
Include charging in the insurance premiums of the ship;
Levying by Flag States.

One option is to include the recycling charges in the insurance premium of ships. This
should be related to P&I (protection & indemnity) insurance, as insurance for Hull and
Machinery is a highly international and rather diffuse market. Also the coverage of the
Hull and Machinery insurance is lower than P&I. P&I insurance is arranged through a
limited number of P&I clubs worldwide. This type of insurance is obligatory when sailing
in certain waters. Outside these waters there is no obligation. According to a P&I insurer
this means that in practice some 15% of the world fleet is not P&I insured.

The next option is to levy the recycling contribution through the Flag States. This
appears to be the most reasonable option since the Flag State is the only body that has
power to collect money on the basis of registration. If all Flag States cooperate coverage
would be complete. The flag state would then have to pass this contribution on to Fund
organisation. In the case of the involvement of flag states it appears logical that IMO
would have a leading role in the Fund organisation. This clearly requires new
requirements and regulations with respect of the flag states.

Introduction of a scrapping life insurance

An alternative and interesting option would be to create a new type of instrument through
the introduction of an obligatory life insurance which would recover the costs of

30
scrapping in an environmentally sound manner. Through annual life insurance premiums
funds can be saved for the eventual dismantling. Per ship type an estimate would be made
of the required funds (and annual premiums to be paid) on the basis of the estimated
scrapping costs involved. The pre-cleaning and shipbreaking should be paid by the
shipowner, but could be refunded on submission of proof (e.g. a certificate) of clean
scrapping. One could even consider to insure a higher amount than actually required to
create a mechanism to stimulate clean shipbreaking. In this case the owner would be
refunded at a premium after submitting a clean scrapping certificate.

The insurance premiums would be collected and transferred to a centrally managed fund.
Since this type of mechanism is closely related to the insurance market, the most logical
option would be to involve insurance companies in this process. This might even lead to a
decentralised fund system in which insurance companies directly compensate shipowners
for clean scrapping costs (and not through a central fund).

This funding mechanism would require new regulation, making this type of insurance
obligatory for all ships. The main disadvantage of this instrument is that it might be fraud
sensitive (e.g. false certificates) and that the dismantling of the current ships has to be
financed from the total of all premiums. Especially in case of decentralised funds at the
insurance companies this would require an appropriate balance of old and new ships to
keep the system feasible. If this is not realised old ships might be refused to be insured or
only at very high insurance premiums 25 . This could lead to having a central fund as the
preferred option, especially at the start.

Level of the contribution

To calculate the average annual level of the disposal/recycling fee per GT first the total
GT of the merchant fleet has to be determined. At 1-7-2001 total GT (ships over 1000
GT) stood at 521 million GT. On the basis of a straightforward and undifferentiated
calculation each GT should produce 42-84 US cents per annum to meet the requirements
of the fund. Of course this could be broken down into various ship types, with different
weights attached taking into account differing pollution contributions.

The resulting fee level per ship type is shown in table 3.3.

25
Old ships might become difficult or expensive to be insured since they have only a short period left contribute to the funds
required for clean scrapping.

31
 Table 3.3 World fleet and average annual recycling fee per ship type

Ship type Total number Average GT Fee (US$/ship) Fee (US$/ship)

per ship Low fee level High fee level
Oil tanker 7227 22960 9700 19400
Chemical tankers 1307 4120 1740 3480
Gas tankers 1088 17970 7590 15180
Bulk carriers 5779 25760 10880 21760
Combined carriers 205 42030 17750 35500
Container ships 2564 23340 9860 19710
General cargo 13528 3910 1650 3300
Reefer 1305 5250 2220 4440
Special ships 1140 17630 7450 14890
Ro-ro cargo 1142 9100 3840 7690
Passenger ships 3725 6040 2550 5100
Source: ECORYS based on ISL

It is good to put these amounts in perspective of the income generated by the shipping
sector. In the absence of more recent figures we have used an analysis that was made in
1995, where ECORYS calculated the total production value of the shipping, based on
time charter equivalents, which is the best proxy for the shipowners income 26 . For 1994
this total figure was estimated to be more than 84 bln US$, based on the rates available at
that time. These charter rates can of course fluctuate, but it is obvious that even a total
requirement funding of 440 mln US$, although in itself a very significant amount, is just
about 0.5% of total turnover.

3.3 Organisation of a Ship Recycling Fund

Since the Ship Recycling Fund should function on a worldwide basis the most logical
option is to set up the fund under the auspices of the IMO. The tasks of the Fund are
basically:
Collection of fees
Certification of scrapping yards and control of scrapping practices;
Disbursement of funds for environmentally sound scrapping;
Financing R&D on clean and safe scrapping.

Collection of fees
Collection of the recycling fees depends on the eventual set up of the funding mechanism.
Funding could be established in connection with the assignment of the unique IMO
number, which however is the monopoly of Lloyds Register-Fairplay. When fees are
being levied by the Flag States, the flag states should transfer the funds to the Fund
organisation. Alternatively, life insurance premiums could be collected through ship
insurance companies.

26
ECORYS (MERC/Logion), Shipping market; sustainable and safe development (in Dutch), 1995

32
Certification and control
All scrapping yards that want to apply for funding from the Ship Recycling Fund should
be certified that they are capable (both in technical and human infrastructure) of
environmentally sound and safe shipbreaking practices. They should for example follow
the developed guidelines on ship recycling under the Basel Convention and ILO. This
corresponds to similar certification practices in for example quality assurance (ISO)
systems. Audits and control should take place at regular intervals by certified,
independent auditors (possible classification societies or separate auditors). This could
require co-operation with the national authorities, since shipbreaking is a shore-based
industry (thus requirements & supervision lie within the competence of national
authorities).

Disbursement of funds
Funds will be disbursed by the Fund when ships are being taken in for environmentally
sound scrapping. In general, it is expected that this will take the form of pre-cleaning the
ship according to guidelines on clean and safe dismantling. These activities will be
charged to the Fund either by the last shipowner who has to pre-finance the activities or
directly to the yard itself.

Research and development on clean scrapping practices

In addition to financing the clean scrapping practice itself the Fund could finance R&D
which results in further improvement in recycling or re-use methods. These new methods
could than be applied and incorporated in new, updated guidelines.

33
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35