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Strategic Management in

Shipping
MA Course Notes

Dr Alkis John Corres

1 06/02/2013
Chapter 1: Theoretical Analysis

Major contributors to todays understanding on how the markets


work are Professors Zannetos, Koopmans and Tinbergen. The
most influencial writer today is probably Dr Martin Stopford.
Shipping theory is still young and cannot explain ripple effects.
Nevertheless, considerable progress has been made in
describing and analysing the maritime sector as a system
following pioneering work by the author in 1976.
It is essential in this type of analysis to distinguish between
stock and flow variables

2 06/02/2013
Chapter 1 : Stock and Flow Variables

Stock variable is the fleet in the same way population is a stock


variable.
Flow variables are the joining newbuildings (corresponding to
births in our example) and the leaving ships (deaths) through
scrapping and casualty.
The level of the fleet can only change trough changes in the
flow rates (deadweight tons per time period) of these two flow
variables.
Ships, once built, are destined to stay and be parts of the world
fleet until scrapped or in any way lost.
Sales of ships from one to another do not alter the world fleet as
they constitute transfers.

3 06/02/2013
Chapter 1: Complex market
mechanisms

Example: Many newbuildings combined


with few leaving ships in the same period
push the level of the fleet up, and vice
versa.
Apart from the traditional Price/Quantity
relationship of classical economic theory,
the shipping markets involve also time
and space parameters.
4 06/02/2013
Chapter 1:Relevant market

As a result the relevant market when it


comes to chartering is always a small
fraction of the market.
Imbalances between the shipping
capacity demanded and offered result in
high or low freight rates.

5 06/02/2013
Chapter 1: Expectations bring new
ship orders

A few periods of high freight rates are


enough to generate new orders for ships
to shipyards.
Zannetos fist talked of shipowners
elastic expectations
High freight rates typically bring pressure
from the banks to place more orders.
6 06/02/2013
Chapter 1: Demand dominant in the
short term

Short term variations in the level of freight rates


are always due to fluctuations in demand for
ships.
The placement of a newbuilding order is a
complex decision.
Dominant factors here are the cost, the delivery
date and the terms of financing.
Shipyards as well as owners play the cycle with
diametrically different interests.

7 06/02/2013
Chapter 1: Shipbreaking checks the
level of the fleet

Shipbreaking is the most powerful tool that


checks the supply of shipping capacity.
The systemic role of shipbreaking has been
ignored in policy.
Freight rates and scrapping rates move in
opposite directions.
This creates the cycle.

8 06/02/2013
Chapter 1: Information from the freight
markets adjusts the level of the fleet

Building a ship takes approx. two years.


Removing a ship through scrapping takes one
week.
Expectations for profitable trading drive the new
orders and also the secondhand ship values.
The flow of cargoes in the markets is exogenous
to the system and cannot be predicted.

9 06/02/2013
Chapter 1: Summary

The fleet level gets adjusted through two mechanisms.


The first one-newbuildings- is subject to a two years time
lag.
The second one scrapping is immediate.
Demand for shipping is exogenous thus unpredictable.
Therefore the capacity adjustment is always imperfect.

END OF CHAPTER 1

10 06/02/2013
Chapter 2: Markets and tools

Agreement between a ship and a cargo takes contractual form


in a charterparty.
On completion of loading the cargo, the ships master issues on
behalf of the owners of the ship a Bill of Lading in three copies
which are subsequently released. The master is not supposed to
release the cargo to any receiver unless he is presented with an
original copy of the Bill of Lading.
The above strict obligation of the master is often bypassed in
the tanker trades through the issuing by the charterer of a
Letter of Indemnity.
The cargo is insured and any loss or damage is covered by the
P+I club of the vessel.

11 06/02/2013
Chapter 2: The main global markets

The crude oil market


The oil products market
The edible liquid cargo markets
The dry cargo market
The reefer market
The container market
The chemicals market
The LPG gas market
The LNG gas market

12 06/02/2013
Chapter 2: The unstable balance of market
forces in freight markets

As we have already seen the demand for transportation


services of a particular good, from a particular port, vary
through time.
The availability and the proximity of suitable ships for such a
transportation also change as ships load and move around.
When a cargo is fixed we have a momentary situation where
Demand equals Supply and at this point we have Price and
Quantity data ( e.g. 10,000 tons of gasoline fixed at USD 22
per ton)
Such data are collected and turned into freight indices.
Time series of freight indices trace the historical development
of successive Demand/Supply equilibrium points.

13 06/02/2013
Chapter 2: Summary

Freight markets have time and space particularities and classic


economic analysis is not directly applicable.
The notion of the relevant market only makes sense when
time/space - defined.
There is continuous instability in the freight markets as both
demand for transportation services and supply of same change
through time.
Business not concluded at a certain point in time can appear in
subsequent time points adding to the demand.

14 06/02/2013
Chapter 3: Marketing of Ship Services

The marketing of transportation services has certain characteristics


which include :
Intangibility of the product (service), the service cannot be
seen/felt/smelt/tasted/heard.
Perishability transportation services cannot be stored.
Inseparability production of service takes place at the same
time as consumption
Heterogeneity which is addressed through strategies of
standardisation and strategies of customisation.
Virtually all trading of shipping services is taking place on a B2B
basis which means fewer players, in depth knowledge of the
business by all players, frequent repetition of orders and certain
geographical concentrations.
15 06/02/2013
Chapter 3: Ship brokers

Brokers play an important part in matching ships with cargoes.


Their services are paid by commission on freight, deadfreight
and demurrage.
Direct relationships with charterers saves money to owners who
do not have to pay commissions.
Greek merchant shipping has historically thrived on cargo ships
trading in the open market. There is evidence recently that this
is changing in favour of tankers and gas carriers.
With the exception of containerlines and passenger shipping
advertising has a small role to play.

16 06/02/2013
Chapter 3: Investment decisions

Ship values change with the shipping cycle. Ships (assets) are
more liquid during the upper section of the cycle and less so
during the lower part of it.
Important decisions in connection with the Liabilities section of
the balance sheet of the company can increase the profitability
of the company.
Traditionally shipping companies borrow large amounts of
money and base their ability to repay on profitable operations
and careful asset playing with timed sales and purchases of
ships.
Ship lending has generally a longterm character and it is secured
by mortgages and other forms of securitisation.

17 06/02/2013
Chapter 3: Bareboat charter

Bareboat chartering is an option to buying a ship and allows


owners of cargoes to extend operations vertically without having
to pay large amounts of money.
Bareboat allows for Sell and Lease Back and also for Hire
Purchase arrangements.
There are presently 22 registries which allow bareboat
arrangements, some of which are members of the EU.
Bareboat is a powerful boost to enterpreneurship as it allows for
rapid fleet expansion. With the right arrangements (e.g.
purchase options) bareboat charterers can use it to the best of
their interests without having to buy ships.

18 06/02/2013
Chapter 3: Ship investment financing

Shipping is a big borrower and more than 90% of the funds


come from specialist banks providing mortgage based loans.
Other forms of financing are those of Leasing, where the lessor
remains the owner of the vessel, and bond issuing in the big
capital markets.
Bonds are the form of financing for states and is unsuitable for
borrowing of less than USD100 million.
An increasing number of Greek companies have turned to the
last method of financing during the last 15 years with varying
degrees of success. Funds raised from the american money
market are under the supervision of the Securities and Exchange
Commission.

19 06/02/2013
Chapter 3: Summary

Ship services are marketed on a B2B basis and marketing


strategies should take account of certain particularities.
A significant amount of business is concluded via brokers who
work on a commission basis.
Investment decisions can have a bearing on future profitability
of shipping companies.
Classic mortgage financing accounts for the vast majority of
financing deals, other forms include leasing and bond issue.
Bareboat chartering allows for obtaining control of a ship
without having to borrow.
END OF CHAPTER 3

20 06/02/2013
Chapter 4: The Changing Regulatory
Framework
Shipping is highly regulated.
There are specific Producers of rules. These are: International
and Regional.
International: the United Nations and its agencies,
International Maritime Organization (IMO) and International
Labour Organization (ILO), Comite Maritime International,
Organization for Economic Development and Cooperation
(OECD) and so on.

21 06/02/2013
Chapter 4: Regional Producers of
Regulations

The European Union


The American Coastguard
The flags (nations)
The institutional bodies of shipping (which can also have
international role).
The charterers and their bodies which also may play at the
international level.

22 06/02/2013
Chapter 4: Enforcers of Regulations

There are also those who enforce the rules on ships and
management companies. These are:
The nations (flags) singly, or jointly as members of regional
groups (e.g, the EU).
The regional Memoranda on Port State Control.
The coastal states.
The classification societies acting on behalf of flag states.

23 06/02/2013
Chapter 4: Summary

Shipping is highly regulated and the trend continues unabated.


There are distinct producers and enforcers of rules and
regulations, the end receiver of which is the ship and the
management company.
Attempts to control the flux of regulations following complaints
of the shipping community have so far failed.
In parallel with the tremendous volume of regulations there are
worrying signs of growing regionalism which makes the job of
international traders more difficult.

24 06/02/2013
Chapter 5: Regional Memoranda on Port
State Control

Paris MoU for the EU region


Tokyo MoU for Asia/Pacific region
Mediterranean MoU for N.Africa
Black Sea MoU for Black Sea region
Vinha del Mar MoU for Carribean
The US Coastguard is the authority for PSC in
USA but is not a member of any regional MoU.

25 06/02/2013
Chapter 5: ISM Code and Port State
Control

Under the ISM Code all ship management


companies are obliged to maintain a Safety
Management System (SMS).
The SMS is supervised by the Designated Person
Ashore (DPA) and its proper functioning is of
prime interest to the PSC inspectors.
Maintenance of machineries and procurement of
spare parts are object of checks along with
emergency preparedness and critical equipment.

26 06/02/2013
Chapter 5: Critical Equipment in Port State
Control

The discovery of deficiencies lead to rectification


orders and, in more serious cases, to detention.
Fire pumps, electricity generators, steering
mechanism, fuel lines, watertight doors and
lifesaving appliances receive priority in
inspections.
In the EU there is a third level of punishment,
the exclusion from all EU ports.

27 06/02/2013
Chapter 5: International Conventions
Compliance in PSC

SOLAS 1974 as amended


MARPOL 1973/78
Loadline 1966
COLREG 1972
STCW 78/95
Tonnage Measurement 1969
Regulation 147 (ILO)
28 06/02/2013
Chapter 5: PSC in the EU

At least 25% of all arriving ships in each port should be


inspected.
Unified rules for ship detentions.
Repeated detentions result in banning from all EU ports.
All EU ports are online with SIRENAC, the main PSC
database in France.
Certain types of vessel are subject to expanded
inspections (Chemicals and gas carriers more than 10
years, Bulk Carriers more than 12 years, Oil Tankers and
Passenger Vessels over 15 years).

29 06/02/2013
Chapter5: Criteria for ship detention and
banning

If the vessel cannot sail in safety after


completion of the first inspection.
If the inspector needs to return to the ship to
ascertain rectification of deficiencies found.
A ship is banned from calling at EU ports if
detained more than twice in 24 months, or in
high and very high risk flags- once in 36
months.

30 06/02/2013
Chapter 5: Summary

IMO cannot oblige its member states to ratify


international conventions or to take proper care of their
obligations as flags.
This fact has led in the recent past in a proliferation of
substandard ships in ports which were a menace to safety
and a risk to the environment.
PSC has proven to be the only effective method for the
elimination of substandard ships.
The EU is leading in tougher PSC provisions which are
applied uniformly.
END OF CHAPTER 5

31 06/02/2013
Chapter 6: Basic Tools for Quality
Management

This Chapter deals with basic concepts of


a number of tools used in shipping to
ensure that this activity is executed with
the requisite reliability and continuity.
Without these tools shipping would be an
unsupportable activity.

32 06/02/2013
Chapter 6: Elements of Marine Insurance

Shipping Insurance today is available


under the general provisions of the
Marine Insurance Act (1906) of UK.
Under this Act, insurance is provided on
assumption that all deals are concluded
in good faith.
Absence of good faith renders insurance
contracts worthless.
33 06/02/2013
Chapter 6: Ensuring the existence of good
faith.
Disclosures:All material circumstance (events, the knowledge of
which might influence his judgment about the premium, or his
decision to proceed to cover) must be disclosed to the insurer,
or else he may deny compensation to the insured.
Representations: All representations in connection with the
contract must be true I.e. the difference between representation
and reality must not be relative when judged by a prudent
insurer.
Warranties: These have the character of a promise and have to
be kept to the letter, regardless of being relative, or not. If not
kept, the insurer can deny compensation from the date of the
breach (but not earlier). Warranties can be explicit or implied.

34 06/02/2013
Chapter 6: Damage and Compensation

The insurer will only compensate for damages arising from risks
covered, not otherwise.
Usual risks which are not covered include the following:
Damage from inappropriate behaviour, or willful misconduct of
the insured.
Damage from delays.
Normal wear and tear.
Usual leaks and breakages.
Inherent vice
Rats and bugs
Machinery damage not consequent to maritime peril.

35 06/02/2013
Chapter 6: Forms of Loss

A loss can be total or partial.


A total loss can be actual, or constructive.
Mention of cover for total loss in an insurance contract provides
cover for both.
In case of constructive total loss the insured can either consider
the loss as partial, or abandon the ship as though it were an
actual total loss. In this case, he must issue a Notice of
Abandonment.
The acceptance of the notice of abandonment by the insurer can
be explicit or implied, but silence on his part cannot be
interpreted as acceptance.
Once accepted, there is no possibility of refusal as the insurer
has already become owner of the object of insurance and owner
of any freight owed. 36 06/02/2013
Chapter 6: General Average

General average exists when-and only when- there is:


1. Unusual sacrifice or expense
2. Intentional act and not unavoidable
3. Real and substantial danger
4. Aiming at the common (ship&cargo) interest.

Average adjustment is performed by specialists (Average


Adjusters) and only after the conclusion of the adventure. The
logic of average adjustment is quite different from the logic
found in the Marine Insurance Act (1906) and the two should
be treated as different matter.

37 06/02/2013
Chapter 6: Marine Pollution

Marine pollution has become the object of international


legislation the last three decades as a follow up of major marine
accidents.
MARPOL and its Annexes is the international convention which
addresses the problems of sea, river and air pollution by the
various pollutants.
The international community through IMO has concentrated
attention on Prevention,Management of Incidents and
Compensation of victims.
The international instruments through which compensation is
handled are the CLC/Fund Conventions whose management is
taking place inside the IMO.

38 06/02/2013
Chapter 6: MARPOL Annexes

Annex I deals with oil pollution (1983)


Annex II Chemicals pollution (1987)
Annex III packaged dangerous goods (1992)
Annex IV pollution from sewage (2003)
Annex V garbage (1988)
Annex VI atmospheric pollution (2005)
Pollution prevention is effected via issuance of certificates to
vessels, search for violations and fines against polluting
ships,reporting of incidents,measures against operational
pollution by ships. MARPOL also provides geographical
limitations in oil discharge, design specifications for oil tankers,
oil record book keeping and preparedness

39 06/02/2013
Chapter 6: Management of international
pollution incidents

OPRC(90) which entered into force in 1995 mandates the


existence of Oil Pollution Emergency Plans for ships, oil
installations, states and ports which are coordinated at national
level
Such national plans should provide for a plan, determination of
the coordinating authority, determination of a contact point for
the submission of reports and determination of the authority
which will request and/or provide assistance.
Apart from the above, anti pollution equipment should be
located at strategic positions, drills and coordination
mechanisms must be in place.
At the moment OPRC covers all types of oil products including
light products. HNS Protocol for chemicals is shortly expected.
40 06/02/2013
Chapter 6: Victims Compensation

CLC(69) and Fund(71) are the instruments.


Compensation requests are submitted to the International Oil
Pollution Compensation Fund (IOPC Fund) which deals directly
with the P+I Clubs.
Protocols in 1976 and 1992 have seen their limits reviewed.
In the US oil pollution compensation is regulated by the Oil
Pollution Act 1990 (OPA-90).
Clean oil products and chemicals are not covered by CLC/Fund,
only dirty oil products and crude oil.This is a big omission which
has lasted for thirty years.
Compensation for victims of oil pollution has not arrived yet
although big changes are forthcoming after the implementation
of the Kyoto Protocol in 2005.
41 06/02/2013
Chapter 6: Limitation of owners liability.

The current instrument is the London Limitation of Liability


Convention, LLMC(76), which links the right to limit with the size
of the ship involved.
This right is not limited to the owners, but it extends to the
vessel, the insurers, the charterers, the managers and personnel
acting on their behalf.
The limits for injury and death are generally double those for
property damage.
The right to limit is conditional. The damage should not be
the result of intentional act or omission, or recklessness with
knowledge that damage might occur.
The limits have been revised in 1996 but have yet to be put into
force.
42 06/02/2013
Chapter 6: Ship Arrest

Ships can only be arrested following a court order.


Ships can only be released from arrest following another court
order.
The international instrument currently in use is the Arrest
Convention (1952). A new arrest convention has been agreed in
1999 but it still has to be put into force.
In both arrest conventions the side seeking the arrest of a
vessel needs to prove two things:First, that the claim comes
under one of the definitions of a maritime lien and , second,
that the ship in question has sufficient relationship with the lien.
The new arrest convention significantly extends the scope of the
1952 convention.

43 06/02/2013
Chapter 6: Hague Visby Rules

These rules describe the rights and obligations of shippers and


carriers and cover areas such as loading, unloading, stowage,
shipment, storage, and so on.
The three principal obligations of the carrier are to provide a
seaworthy vessel at the commencement of the voyage, to have
it properly manned, equipped and stored, and, to provide safe
space for the reception, transportation and storage of the cargo.
Upon completion of the loading procedure the master , or the
agent, issues a Bill of Lading which is a type of receipt for the
cargo. The BoL cannot be disputed if transferred to a third party
in good faith.
The delivery of the cargo is deemed to have been completed
satisfactorily unless there is written protest in writing.
44 06/02/2013
Chapter 6: HVR continued..

The carrier remains liable for claims in connection with the cargo
for one year following completion of discharge.
The vessel and the carrier are exempt of any liability in case the
vessel becomes unseaworthy, on provision of having complied
with the three principal obligations and not having willfully done
so. The burden of proof for this rests with the shipper.
The shipper has no obligation in connection with damage caused
to the carrier or to the vessel without error or omission of
himself or his staff.
Any deviation from the right course aiming at saving lives or
property at sea, or any other reasonable deviation for other
reason is not considered in violation of the rules.

45 06/02/2013
Chapter 6: Calculation of the value of
the cargo.
In case the value of the cargo is not mentioned in the Bill of Lading, and
there is need to determine same for compensation in case of cargo
damage, the liability of the carrier is limited.
The amount of compensation is determined after comparing two values,
of which the highest is taken.
The value is approximated either through the Exchange value of the
cargo, or failing this - on basis of its marker price, or by taking the
usual price of a commodity of this nature taking account also of the
quantity.The above value is taken to apply at the port of destination.
The highest between any of the above three values and 666.67 SDR
parcel, unit of measurement, or kilo of weight (inclusive of packaging) is
the value of the cargo.

46 06/02/2013
Chapter 6: Out of court settlement of
disputes .
The high cost of litigation in UK courts has made necessary the
development of complementary mechanisms of settling
differences.
Arbitration has been the object of UK legislation since 1950
and it is a formal procedure which necessitates the presence of
both sides in the proceedings. Arbitration has become expensive
in recent years and the winning party is given an award .The
award can be challenged or appealed.
Parties often come to agreement in order to avoid publication of
the arbitration outcome for commercial reasons.
Mediation (ADR) is a simpler, cheaper and much faster
method of seeking out of court settlements

47 06/02/2013
Chapter 6: Out of court
settlements..continued
It has been introduced in 1997 and it lasts only one day.
Presence of the parties is not necessary.
It is quite cheap and not antagonistic, it confers no reward, it
has confidential character and all suggestions for settlement are
not obligatory for the participants, unless there is a signed
agreement.
Mediation is already popular in insurance disputes, charterparty
differences etc and it has shown significant growth also in the
Netherlands, Germany and the United States.

END OF CHAPTER 6

48 06/02/2013
Chapter 7: International Shipping
Codes and Corporate Governance
Traditionally shipping legislation has followed big accidents.
International shipping has seen three major codes introduced in
the last ten years.
These are the ISM Code, STCW 95 and the ISPS Code. These
codes have a normative character they tell you how to do
things and therefore they form an integral part of the ethical
background of ship management.
The ISM code has been hailed as a success by the P+I Clubs,
but its introduction has coincided with other major impact
developments I.e. the introduction of the Enhanced Survey
Programme, the strengthening of existing bulk carriers and the
worldwide adoption of the Port State Control.

49 06/02/2013
Chapter 7: ISM Code ..continued

The ISM code licenses ship managers and ships towards safety
management of ships. The office and the ships are obliged to run
according to the Safety Management System that themselves have
developed.
The philosophy of the ISM Code is based on the written reporting of
nonconformities in the application of the SMS.The system works well
when nonconformities are promptly identified, are reported in writing,
become object of corrective action and, do not happen again.
In addition to nonconformities and accidents, near misses also need to
be reported.
The proper application of the ISM code is supervised by the Designated
Person Ashore who provides a direct link of the vessels to the highest
level of authority within the management company.

50 06/02/2013
Chapter 7: Legal implications from the
compliance with ISM
Through the code there are is evidence on a number of very
important aspects of ship ownership and management including
seaworthiness, civil and criminal liability, due diligence in the
context of Hague Visby rules disputes, insurance cover and
compliance with international rules and regulations.
So far insurance companies have been limiting themselves in
asking as proof of compliance with the Code copies of the
Document of Compliance and the Safety Management
Certificate.Deeper investigations of the paper trail generated by
the Code may hold surprises if applied in future as the proof of
matters such as privity and lack of due diligence becomes
easier.

51 06/02/2013
Chapter 7: International Ship and Port
Facility Security Code
Spinoff from the September 11 events the Code aims at making
ships and ports less easy victims of potential terrorist activity.
The philosophy of this Code is similar to that of the ISM Code
and a Security Management System is put into place and
managed in a similar manner.
The legal implications of this Code are by far less severe in
comparison to those of the ISM, but there may be instances of
clashing requirements between ISPS and SOLAS, despite the
former being part of the latter.

52 06/02/2013
Chapter 7: STCW(95) Standards of
Training, Certification and Watch keeping.
As the title suggests this international Code describes the
minimum standards to be observed for training watch keeping
officers and the corresponding certification.
Training institutions are vetted and the various seamen
supplying nations are entered into lists, the highest of which is
the white list.
This international instrument has helped tremendously in
reducing the circulation of fraudulent seamen certificates and
thereby increasing the safety onboard.

53 06/02/2013
Chapter 7: Business Environment and
Business Culture
Three principal factors influence the formation of what is
commonly called Business Culture. These are:
Business objectives which lead to the formation of strategic
plans,
Corporate governance , which includes building tactical plans,
and
Ethical business codes, which directly determine how
functional plans will be made.
The above in combination will shape the philosophy under which
operation manuals are drafted.

54 06/02/2013
Chapter 7: Respecting the Human
Element in Shipping
There are certain rights and obligations for those who work in
shipping.
The rights include fair remuneration, safe work environment,
lack of discrimination and lawful handling of the employees
rights.
The obligations which can also be seen as rights of the
employer include respect of the working hours, cooperation
with other members of the staff, respect of business secrets,
respect of safety regulations and avoidance of doing things
which are against his obligations to the employer (conflict of
interest).
Human error has been identified by the P+I Clubs as accounting
for up to 80% of the accidents.
55 06/02/2013
Chapter 7: Vertical and Horizontal
Business Structure
The traditional model of managing a shipping company comes
straight from the way naval ships used to be run two hundred
years ago and it is characterised by the philosophy of command
and control. It is laid out vertically and vertical also is the flow
of authority.
This pyramidic type of management has certain important
drawbacks and is no longer used in other industries.
Modern management uses horizontal flow of authority and
instead of relying on endless reports to the head of the
organisation, it focuses on reporting of nonconformities only.
The ISM code has introduced important elements of horizontal
management.

56 06/02/2013
Chapter 7: The use of Teams in
Shipping
Training teams has become very important and includes the
following:
Listening
Providing feedback
Creating relations of trust
Analyzing and composing arguments
Resolving disputes
Presentation of own case in short
Be able to attend to solution of technical problems.
The leader of the team assumes the role of the local manager and
is responsible for the good performance of his team.

57 06/02/2013
Chapter 7: Business Ethics

It is very rare that companies start with a clearly stated ethical


framework. This evolves with time.
Corporate culture starts developing at the top and can only be
effective if continuously supported by the highest levels of
company authority.
In 1994 were first put the foundations of what we today call
Corporate Social Responsibility through the Caux Round
Table principles of business.
Any code of business ethics must give broad directions and not
specific actions.
Corporate governance and business ethics principles come
together in recent legislation in the US under the name
Sarbanes Oxley Act.
58 06/02/2013
Chapter 7: Summary

Ethical codes play an increasingly important role in ship


management.
By far the most important is the ISM Code
The human element has already assumed top position on
matters related to management and safety.
All ethical codes rely on continuous support from top
management.
Corporate Social Responsibility is with us since 1994 when the
Caux Round Table put down the principles of business.
Ethical texts are by definition normative in character as they are
telling us how to do things, and what to avoid.
END OF CHAPTER 7

59 06/02/2013
Chapter 8: Strategy and
competitiveness
Shipping is heterogenous and different weights are attributed to
ship characteristics when viewed from different perspectives.
Tankers are assessed differently from bulk carriers, and each
one of these ship types is assigned different priorities is its
assessment from different parties.
Competitiveness is perceived differently from charterers and
owners since the former wants his cargo to be transported
safely and cheaply, whereas the latter wants to make a profit.
Examples are given in the following slides:

60 06/02/2013
Chapter 8: Characteristics of a competitive
bulk carrier as seen from the charterer

Age, as it affects cargo insurance and precludes calling at some


ports.
Freight level which determines the profit margin of the
commercial transaction.
IACS classification/ International Group P+I which ensure
reasonable condition and reliable recovery of claims (if any).
Draft/Cubic capacity of holds/Other dimensions determine intake
of cargo and access to shallow ports/berths.
Cargo gear determines the time spent in port and other charges.
Speed/Consumption.

61 06/02/2013
Chapter 8: Characteristics of a competitive
bulk carrier as seen from the owner

Purchase price is important in determining together with the


sale price the attractiveness of the investment.
Ease to charter is of paramount importance as it gives the vessel
priority in fixing compared to other ships.
Daily running costs are of paramount importance in determining
the profitability of the vessel while under ownership and its
ability to operate during periods of low freight rates.
Freight income- see above.
Ease of resale is important as it determines the ease with which
the investment can be liquidated.

62 06/02/2013
Chapter 8: Charterers view of what makes
a tanker competitive.

Number of approvals by oil majors. A high number is a clear sign of


good vessel quality and proper management.
Clean track record from groundings/collisions/pollution incidents is
paramount in assessing the possibility of chartering it.
IACS classification/International Group P+I, as before.
Last three cargoes suitable, especially in clean petroleum products,
chemicals and edible cargoes.
Age for access to ports and cargo insurance
Freight rate for commercial reasons
Cubic capacity of cargo tanks/Draft/Other dimensions
Flag as proxy to quality and Port State Control targeting
Discharging rate for reasons of berth occupancy and terminal planning.

63 06/02/2013
Chapter 8: Tanker competitiveness as seen
from the owner

The owner of a tanker is interested in aspects as laid out in the


context of a bulk carriers owner as regards the profitability of
the investment.
However, due to the oligopsonistic character of the tanker
markets the owner is also keen to see that his vessel is
acceptable by the few and well informed charterers, therefore
aware that certain aspects of interest to charterers are non
negotiable e.g. vetting approvals.
Nevertheless, purchase and resale prices are by far the most
important considerations.

64 06/02/2013
Chapter 8: Flag competitiveness

The proof of a competitive flag is to maintain its vessels and


grow in number of ships over time.
Uncompetitive flags lose ships as it has happened with most
traditional flags in Europe and Japan.
Open registries have been a lot more successful than traditional
flags in attracting owners.
The commercial fleet of the EU has been declining steadily
during the last fifteen years and it remains an open question if
this trend will be reversed with the entry of Cyprus and Malta.
Flag strategies in the Far East have tended to reflect
international trade strategies of the countries with Japan being a
case in point.

65 06/02/2013
Chapter 8: Flag competitiveness
..continued
In the past matters such the abundance of officers and seamen,
the access to banks and freight markets used to be prime
criteria of a competitive registry.
Modern telecommunications and the globalised environment of
international shipping have changed all that.
What seems to matter today is whether a flag is in the White
List of Paris MOU, how profits and personal income are taxed,
how liberalised the flow of funds in and out of the country is,
and so on.
In recent years there has been a big effort to reverse the
fortunes of EU national flags with the introduction of tonnage
tax and relaxation of manning rules.

66 06/02/2013
Chapter 8: Competitiveness of Management
Company

The advent of computers and specialised software has removed


the fear of diseconomies of scale which was a real threat in the
past. As a result management companies can now grow to
several hundred ships anr remain competitive.
The increased regulatory burden of modern ethical codes has
made the survival of the small management companies
considerably more difficult.
As a result the numbers of small companies in Greece show a
clear decline (from 679 in 1998 down to 466 in 2004) while the
number of large ones, with 16 ships or more, has jumped from
30 to 67 in the same period.
The worst combination is that of a small company running small
sized ships. SIZE MATTERS.
67 06/02/2013
Chapter 8: Longterm survival strategies

There is no hard and fast rule of survival in shipping.


Having said that, there are some factors which cannot be
ignored:
Good commercial management is of paramount importance, as
is good technical management.
Purchasing efficiency and manning costs are important in
keeping overall running costs low.
Timing of buying and selling ships is critical.
Successful passing of Port State Control inspections and
charterers inspections are today integral parts of success
stories.
Ability to borrow with good terms underpins low running costs
and helps future growth.
68 06/02/2013
Chapter 8: Good business practices in
shipping

Priority in payments to staff, lending banks and social security


contributions.
No vessel should be allowed to run without P+I cover.
Particular attention to seaworthiness and third party controls.
Technical matters and emergency response should be high in
the priorities list .
Speed/consumption should be under continuous scrutiny for
good results.
The roles of the owner and the manager should be kept apart.
Care should be given to matters of liability limitation
considerations, due diligence and privity.

69 06/02/2013
Chapter 8: Management of
Entrepreneurship

The traditional role of states in driving business development


has today receded and there is emphasis in the private sector
which is expected to lead in the race for economic development.
This calls for entrepreneurs who will be organising production,
distribution and marketing of goods and services using resources
and providing employment and income.
This enhanced role of entrepreneurs needs to be supported by
legislation that, not only will encourage entrepreneurial
undertakings, but will refrain from treating them harshly when
market conditions have led to business failure.
To this end, the state needs to find ways to support
entrepreneurship in a variety of ways.

70 06/02/2013
Chapter 8: Summary

Competitiveness is a subjective term and thus there can be


more aspects of it at the same time. Different ship types should
be examined differently.
Flags and companies also need to be competitive in order to
survive in the long term.
Longterm survival of management companies calls for particular
skills and ability to adapt in changing environments.
Entrepreneurship needs to be continuously supported through
incentives and business-friendly legislation.
Understanding the needs of the markets, while also
understanding the interest of the companies, dictate the need
for balanced decisions and flexibility.
END OF CHAPTER 8
71 06/02/2013
Chapter 9: Shipowners considerations -
Things to consider before setting up a
shipping company
The best phase is after the lowest turn of the cycle when the
worst is over and companies have good prospects.
Location is less of a problem with modern
telecommunications.Local legislation is important, especially tax
and money movement arrangements by the local banks.
Proximity to sources of officers and crews makes cost of travel
lower.
The existence of a maritime cluster allows for easier
outsourcing.

72 06/02/2013
Chapter 9: Outsourcing

Outsourcing is a must for small companies which cannot


afford permanent staff for all functions.Among other
things, outsourcing allows for:
Smaller office
Fewer organisational problems
Improved flexibility in growing or contracting
Reduced need for layoffs and compensation
Flexibility and choice of new collaborators upon ending of the
contract period.

73 06/02/2013
Chapter 9: Finding capital

Shipping companies require large amounts of money and thus


entry in the business is not easy.
Specialist banks are prepared to discuss lending on condition
that there will be cash participation from the lender and that the
vessel will not be old.
Alternatively, ships can be acquired without incurring huge
capital expense through Bareboat arrangements, leasing
contracts and time chartering.
KG funds in Germany can be persuaded to provide 100%
lending for newbuildings provided there is back to back time
charter or equivalent security for the employment of the vessel.

74 06/02/2013
Chapter 9: Income and expense flows

From the moment of its acquisition a ship incurs expenses,


therefore there is a continuous flow of costs which needs to be
covered.
The best method of covering same for the lender is the
existence of a time charter with a first class charterer.
Second best to this is vessel employment in Contracts of
Affreightment on consecutive voyages basis.
Vessels working in the spot market are in risk of experiencing
periods of no employment between spot charters. The damage
done to their cashflow by these stoppages in earnings can be
extremely serious and it takes a long time to recover.
Fast vessels are a better deal in times of good freight rates as
they are able to do more voyages per year.
75 06/02/2013
Chapter 9: Vessel Maintenance
Policies
Ship maintenance is key to good vessel performance and safety.
Maintenance bills are expensive and not flexible in
postponement. Cutting down on maintenance can result in
breakdowns, detentions and refusal of claims payments due to
unseaworthiness and/or privity.
Proper ship maintenance is an obligation under the ISM Code
and comes under the scrutiny of Port State Control, Flag
Administration, Insurers and Charterers.
Unscheduled repairs in ports are very expensive and the time
lost is longer than if performed during surveys.
What often appears as expensive in shipping, is the cheapest
option in reality, all things considered.

76 06/02/2013
Chapter 9: Survival during freight slumps

In an operating loss-making environment exposure decreases


with the number of ships operated.
This fosters accordeon practices which say that management
offices and owners should have many ships in high freight
periods and few ships in low.
This practice has become more difficult in our days of Quality
Shipping, yet still possible with operators in the spot market.
Operators with time commitments or contract commitments are
less flexible.
Common practices in the past have included lower sailing
speeds, layups, non renewals of class and accelerated
scrapping.
Of these, only scrapping offers permanent correction.
77 06/02/2013
Chapter 9: Company growth modes

There are two ways that a management company can grow.


Through acquiring more ships, or through the possession of
larger ships. A combination of the two modes is also possible.
Larger ships have generally better operating margins, but are
more expensive to buy and significantly more expensive to
repair.
Historically, the ownership of small ships has been associated
with short company life due to their high cost and restricted
earnings.
Company growth should never be considered as tantamount to
ship buying as there are more ways to acquire possession of
tonnage and enter the freight market.

78 06/02/2013
Chapter 9: Summary

Outsourcing is important to small companies in particular..


Before rushing to seek borrowed capital, options should be
considered.
Ship maintenance should not be considered suitable for
economies as it may well prove the opposite.
Ship scrapping offers permanent correction to the level of supply
of ship services.
Fewer and larger ships may be a better bet than more and
smaller ship sizes.

END OF CHAPTER 9

79 06/02/2013
Case Study Number 1

Fleet Replacement in Europe

80 06/02/2013
Replacing the EU Short Sea Fleet

To replace the aged ( 27 years on


average) Short Sea fleet of the EU. Their
present number of vessels over 25 years
of age are 4,500 dw.
To substitute all single hull tankers with
double hull designs which offer superior
pollution protection .

81 06/02/2013
Fundamental requirements of our model

The model must simultaneously satisfy the requirements of


five groups:

1. Short sea shipowners (who can be rich or less rich)


2. Investors in stock of the mother company
3. Financing banks or institutions
4. Contracting shipyards
5. The safety and environmental aspirations of the EU

82 06/02/2013
A model with two variants

VARIANT 1: One joint stock mother company, with


subsidiaries, is set up in Greece. This company raises
bank finance and orders the vessels. Alternatively,
VARIANT 2 : One or more leasing companies provide
funds for the project .
Modular ships of different type are built in sections in
series on the Corres/Psaraftis principle of semi
standardisation designed by ICEPRONAV.
Bareboat charter hire and vessel sale income finance the
repayment and help cover company overheads.

83 06/02/2013
VARIANT 1
Bank financing for the mother company

The mother company can be a joint stock limited liability


company registered in the EU and officially established in
Piraeus.
It can be designed in a way to have access to the Athens
Stock Exchange at a later stage.
Its shares can be sold in a initial private offering. There is
already expression of interest by major investors.
Its main tasks will be to coordinate the project, i.e. to
raise finance, place orders, supervise the construction of
the ships and be responsible for the repayment of debt.
The drafting of a detailed business plan is under way.

84 06/02/2013
VARIANT 1
The subsidiaries

Each vessel ordered can belong to one subsidiary


company. The mother company will always retain
upwards of 51% of its shares for loan security reasons,
unless sold.
There will be a formal relationship between mother
company and subsidiary.
Participating owners will be buying shares of the
subsidiaries. Sale of vessels take the form of sale of
(mother company owned) shares.
Participating owners can also purchase shares of the
mother company up to a certain percentage.

85 06/02/2013
VARIANT 1
The bareboat charterers

Each new ship delivered will be given to bareboat charter


to one participating operator on pre agreed terms.
The duration of the bareboat charter will be negotiable
and renewable.
The bareboat charterer will have an option to buy the
vessel at the end of each charter period, or earlier.
The owners(mother company) will have the right of
auditing the bareboat charterer and the right of inspection
of the vessel at regular intervals.

86 06/02/2013
VARIANT 1
Financial Plan

All finance will be arranged by the mother


company.
Loans will be out for long periods of up to 15
years to allow for low level of installment.
The mother company will provide the equity
required by the lending bank. Equity
participation from operators will be invited.
Majority shareholding of all new vessels will
belong to the mother company until sold.

87 06/02/2013
VARIANT 2
Leasing Company Financing

The leasing company finances the entire building


operation and remains the owner of the vessels.
The building program is supervised by a lessee company
which satisfies the minimum invested capital requirement,
the credit standard requirement and signs the irrevocable
lease commitments.
The lessee company has extension and purchase options,
as well as early buyout options.

88 06/02/2013
VARIANT 2
More on the lessee company

The lessee company also :


1. Issues consolidated financial statements.
2. Maintains regularly audited accounts.
3. Bears all the transaction expenses.
4. Pays all upfront arrangement fees or forward
commitments.
5. Remains legally responsible for the leases to
the lessor.

89 06/02/2013
VARIANT 2
Income sources

The lessee company charters out the new ships


to selected operators on bareboat basis.
Charter hire covers the lease obligations and
includes a charge in way of lessees overheads.
The bareboat charterer can have purchase
options on terms to be negotiated.

90 06/02/2013
IN BOTH VARIANTS

A central coordination (mother or lessee) company is


needed to raise capital and at the same time satisfy
different fundamental requirements of the lenders.
Operators acquire the use or the property of modern,
serially produced ships without high capital expense to
improve the quality of their services thereby retaining
clients and being able to penetrate other markets.
The two variants are not mutually exclusive.
The scheme can accommodate varying levels of capital
strength Med operators.

91 06/02/2013
The way ahead

Ordering can be organised in 150 million euro tranches of


approximately twelve ships each.
Operators will be requested to indicate interest for one, or
more, of the semi-standard ship types available and the
extent of their equity participation.
ICEPRONAV will be producing designs and construction
plans to suit the exact requirements mix.
The scheme can operate with, or without direct
involvement on the part of operators at the initial stage.

92 06/02/2013
Why these ships have stayed around for so
long ?
One reason is the shipbuilding Directives which have disallowed
shipbuilding aids.
Another reason is that dozens of EU shipyards specialising in small
ships have vanished (maybe as a result of the above).
A third reason is that the profit margins of coastal ships are less
than fat.
A fourth reason is that the construction cost of these ships on a per
ton basis is four times the cost of building a panamax sized
ship.
There may be other reasons too.

93 06/02/2013
Has financing played a part in this
situation?

The truth of the matter is that banks do not go


overboard when you start talking about building
small ships.
Financing, rumor has it, is allergic to small
loans, small ships, small companies.

94 06/02/2013
Stop here to count what we have in hand
so far..

We have too many old Short Sea Ships in Europe.The


situation worsens every year.
We have too few shipyards left.
These ships are not cheap to build.
Operating margins are comparatively thin, financing is
imperative,
Financial institutions are less than keen to become
involved.

95 06/02/2013
It is evident that if we decide to deal with
the problem, we need to attack it on
several fronts simultaneously.
Ships must be built quickly and cheaply. This calls for
serial/modular construction arrangements using standard
parts.
Construction can be concentrated to fewer yards which
will benefit from scale economies.
Banks must be made to feel comfortable financing their
construction.
Scrapping should assist building.
Charterers should step in to help, or else they will have to
build their own ships (as it has recently happened with a
big oil company in Greece).

96 06/02/2013
How do we build quickly and cheaply?

Standard parts (bows, sterns, accommodation quarters,


enginerooms) for similar size ships irrespective of type
can bring cost down by 18%.
Standard sizes will allow this. E.g. serially produced hulls
at :
3,000 5,000 -7,500 12,000 16,000 dw which
become tankers, freighters, containerships. All double
skinned, with M/E redundancy arrangements and double
skinned fuel tanks.
Model testing in ICEPRONAV has proven that this concept
works fine.

97 06/02/2013
Standard sterns, for example, including
engineroom arrangements and shafting ..

98 06/02/2013
or common bows, which can be built and
assembled without the need for a slipway.

99 06/02/2013
A standard hull fitted as containership here, if we change
the cargo carrying section we can have a different type of
ship, suitable to carry dry or liquid cargo in bulk.

100 06/02/2013
How do we cope with narrow profit
margins?

By using automation as far as possible.


By making loan repayment longer to keep daily financial
cost down.
By introducing umbrella arrangements for multiple
newbuilding orders.
By benefiting from joint purchasing of ship equipment
(engines, shafting, bridge equipment etc)
By encouraging organised procurement during operation.

101 06/02/2013
Finally, how do we keep financiers happy?

By offering them additional security to the first


preferred mortgage.
By building ships in tranches of 12, each one of
which costing roughly 150 million euros.
By enhancing financial certainty through
partnerships.
By ensuring high standards of quality operation
throughout.

102 06/02/2013
more specifically..

The key instrument is the mother company which


has the following tasks:
1. To participate as majority shareholder in the
capital of the 12 daughter companies, each
one of which will be the owner of one ship.
2. To negotiate the terms of the 12 newbuilding
loans with the financial institution.
3. To guarantee the good performance of each
one of the loans to the financial institution.

103 06/02/2013
The Short Sea operator who wants to see his ship replaced,
sells his old ship and invests in shares of one daughter
company which builds a standard ship of his choice.

He can participate in the capital of the daughter company


up to 49%.
His interests are duly represented in the Board of
Directors of the daughter.
He is free to buy shares of the mother company, if he so
wishes.
When the ship is ready he has a first refusal to charter
the ship on bareboat basis.
The hire is paid to the daughter company which repays
the building loan.

104 06/02/2013
The same arrangement is followed in all
daughter companies.

If the operator does not want to bareboat charter the ship, he


simply declares so and the vessel is given to someone else who
is experienced in running short sea ships.
If the operator wants to purchase the remainder 51% owned by
the mother company, he is free to make an offer to it.
If the operator wishes to be a partner in other daughters too, he
is free to do so.
If he wants to sell his shares, he can make an offer to the
mother company, or anybody else.
IN ALL CASES, THE NEW SHIPS ARE BUILT, THE OLD SHIPS
ARE REMOVED FROM THE EU COASTS AND THIS
ARRANGEMENTS BENEFITS ALL.

105 06/02/2013
Where does the mother company get its
funds from?

Each mother company gathers capital by selling its shares


to the public. Consider this:
Its shares offer real value as they represent majority
shareholdings in brand new ships.
These ships are already 18% cheaper than any other ship
of the same size /quality built by a single owner.
These ships can also be sold to the market at a premium
if the market rises.
The shares of the mother company are good value and
sound investment.

106 06/02/2013
In practice

Mr XYZ will be contributing to the capital of a subsidiary


company with the sale product of his old vessel.
The mother company will provide the balance of the
owners participation.
Subsidiary and mother company get finance and sign a
shipbuilding contract.
After delivery, the new ship is bareboat chartered.
XYZ can buy higher percentage (up to 100%) of the
vessel.

107 06/02/2013
Benefits for all..

The Shortsea fleet gets a 1st class opportunity


to renew.
New ships are built in an economical way.
Operators can renew their ships without
committing large amounts of money.
Bareboat hires allow for profitable operation
until full repayment.

END OF CASE STUDY


108 06/02/2013
Case Study Number 2

Strategic Planning for the


Motorways of the Seas

109 06/02/2013
The Motorways of the Seas as an
Exercise in Strategic
Management
By Professor Alkis John Corres
European Short Sea Network
Greek Office

110 06/02/2013
The Short Sea Initiative

Has been suffering in many ways:


1. No specific budget
2. No Short and Medium Term goals
3. No investment in ships
4. No progress on Customs procedures
5. No support for the ESN
6. Artificially cheap road transport.

111 06/02/2013
The concept of the MoS..
is still under development. We cannot talk of a
complete concept yet, nor can we afford
repetition of the same mistakes in SSS.
Firstly: We need to develop it so it does not remain
an empty concept.
Secondly: We need to define the goals
Thirdly: We need to prioritise actions
Fourthly: We must proceed in stages
Fifthly: We must be able to measure progress
112 06/02/2013
Let us further examine these..

The Budget
Nothing moves without a budget. The best way to
fail a project is deny it a budget.
That has been the case in the SSS so far. The
result is slow growth and an average age of EU
SSS cargo vessels in excess of 27 years.
This is the number one requirement for any
serious discussion about MoS.

113 06/02/2013
The lack of goals
While the objective shifting cargoes from roads
to the sea has been clear and with us from
the outset, there have been no short and
medium term goals.
I am seeing this as a consequence of the lack of a
budget.
If there was a budget, there would be a time
frame and control mechanisms.
Goals setting must be part of the early
design of the Motorways of the Seas.
114 06/02/2013
The Shipbuilding Directives..
Not only have wrecked the EU shipbuilding
industry, but
Have left the EU short sea fleet seriously
overaged and commercially weakened at the
mercy of international competition.
The effect of these Directives must be
waved for vessels operating in the EU
Short Sea trades including the Motorways
of the Seas.

115 06/02/2013
Customs procedures for SSS..
..vessels has been a longstanding joke. Another joke has
been the preferential rates for short sea ships in EU ports.
Consider the TIR truck for a moment in the EU carrying
transit cargo, and the EU short sea vessel also carrying
cargo.
The documents needed are tenfold of those for the truck per
box carried. SHIPS SHOULD MOVE IN PORTS AS FREELY
AS TRUCKS IN EUROPE DO.
Zero tolerance on this matter.

116 06/02/2013
As for the ESN

Some ESN members had to close for lack of


funds.
Others have been having a hard time surviving.
Support funds have been few and far apart.
Questionable future, after a hopeful start.
ESN Bureaus working along MoS should
become intergrated in regional networks
and funded accordingly..
117 06/02/2013
Last, but not least..

Road transport has deliberately been kept


cheap and SSS has been kept expensive.
This is in full contradiction to the EU Short
Sea initiative.
Any corrective measures to this
paradoxical behaviour of the EU will
assist the promotion of the MoS.
118 06/02/2013
Let us now turn to planning..

Developing the MoS concept.


Cargo movement along the MoS must be:
Fast and safe
Cheap with frequent sailings
Employing top software applications
Linked to road, inland and trains.
WE NEED TO DEFINE THE ABOVE.

119 06/02/2013
We need performance goals..

So many tons of cargo shifted from the


roads after, say, three years of MoS
operation.
Maximum transit times norms.
Minimum number of movements in ports
per hour.
Minimum number of sailings per week.
120 06/02/2013
And we need to prioritise..

Each MoS must be planned individually.


Financing must be in place first.
Entities participating in the MoS must enter their
commitments into their own budgets.
There must be overall MoS management which
will also disclose information, maintain statistics,
provide calamity abatement services and review
charges and dues in participating ports.

121 06/02/2013
..and proceed in stages.
Stage 1: Identification of participating members,
MOUs, agreements, etc.
Stage 2: Business Plan and funding
arrangements.
Stage 3: Approval of Stage 2 and formation of
the MoS management unit
Most of all however we need an EU
Commission approved model of a MoS
management company

122 06/02/2013
The MoS can yield results..

If designed properly
If funded properly
If managed properly
If they offer good services to cargo
If they offer profitable operation to ships

123 06/02/2013

124 06/02/2013

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129 06/02/2013
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130 06/02/2013



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132 06/02/2013
Case Study Number 3

Re engineering the Greek Ferry


Boat sector

133 06/02/2013

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