Economics: Funny flags and Australian shippingby Russell BrennanNews Weekly
, July 1, 2000
A merchant ship may be owned by an individual or by a company of one state, managed by a ship management company of a second state and registered in a third state. The ship may then be sub-chartered, possibly under a bareboat charter agreement, to a company of yet another state and crewed by officers and ratings from a wide variety of different countries. The ship may then sail between states totally unconnected with the ship owners, the ship management company, the state where the ship is registered, or the crew. This web of internationalisation has contributed to the demise of metropolitan merchant fleets. Russell Brennan explains the phenomenon of the “Flag of Convenience” ships (FOCs) and highlights some of their adverse impacts upon national shipping fleets and seafarers — including those of Australia.
One international legal principle which “Flag of Convenience” (FOC) states such as Liberia, Panama, Cyprus and Malta have exploited is that a merchant ship is subject to the operational, taxation, industrial and environmental law of the state under which it is registered.
Although merchant vessels are subject to various international laws and conventions that their respective flag states have signed, and various laws enforced by coastal states, the flag state determines the ship’s ‘nationality’. Therefore, the system extends the law of the states onto merchant ships at sea, irrespective of their physical location. This legislative structure determines the fiscal and operational conditions under which companies operate vessels whilst registered under a certain flag.
It is necessary under the International Law of the Sea for vessels to be registered on either national or FOC shipping registers. The main difference between national registers and FOC registers is that FOC states offer ship registration facilities merely as a means of earning foreign currency. To attract the custom of shipping owners, they often allow companies to operate free of national income tax obligations and with no restrictions on labour conditions. This, according to a number of maritime unions, is where the problem starts.
The extensive use of open ship registration facilities offered by offshore financial centres to shipping companies represents a major step towards the erosion of national sovereignty and national-based influence upon international maritime affairs.
Merchant shipping has always been ‘internationalist’ to some extent and changes from one flag state to another have occurred throughout history. However, the facilities offered by today’s open ship registers or FOCs have had a drastic impact upon national shipping fleets.
Most of the world’s shipping companies have now registered their ships in an FOC state in an attempt to maximise financial profits by minimising fiscal and operational costs. This is done by avoiding the more stringent fiscal and operational conditions stipulated by metropolitan flags, including that of Australia and the United Kingdom.
It is important to note that FOCs seem to have a number of common characteristics. Firstly, the FOC flag states allow total ownership and total operational control of its merchant vessels by non-citizens. The method of registration is very easy. Transfer of registration from one flag state registry to another is also straightforward. Critics of the FOC system, such as national maritime unions, argue that registration is too easy with some FOC offices not verifying vessel ownership adequately, requiring no evidence of a ‘genuine link’ between ship owner and flag state. Secondly, and perhaps most significantly, the taxation of gross income from shipping is very low or practically zero.
Shipping operators are only subject to a registration fee and an annual fee based upon their ships gross registered tonnage. The finance earned from these charges make a significant impact upon GDP and the balance of payments budget of FOC states. These typically small states, such as Malta, Belize and Honduras, have no maritime strategic reserve requirements for shipping enlisted on their registers.
Flags of Convenience have also been termed cheap flags, funny flags, sadflags of shame. They have also been termed flags of necessity by shipping operators concerned about declining freight rates and overcapacity in some shipping sectors. Despite the concerns about profit and loss expressed by shipping companies, many merchant seafarers are working at sea on many FOC ships, without any national industrial policy protection nor any union agreements. They are suffering and suffering badly.
According to the International Transport Workers’ Federation, (ITF) many merchant seafarers of all nationalities are forced to work on substandard vessels often under horrendous working conditions.
The ITF inspectors working in ports around the world, and various charities concerned with seafarer welfare, have documented a large number of instances whereby seafarers have been working under appalling working conditions for incredibly low wages. Accident rates at sea are also unacceptably high. Many seafarers who suffer accidents will never receive any compensation. It has also been indicated that many more seafarers die at sea each year than what official statistics would indicate.
Despite all the problems at sea, there are always seafarers queuing in ports such as Manila, ready to take the place of militant, sick or killed seafarers. The problem of stranded seafarers where companies have just abandoned and not repatriated them after their contract has expired is also a significant problem which deserves much more attention that this article can give.
How the tide can be turned against the FOC system is a very challenging question, given that the political economy of merchant shipping is complex and intrinsically tied to the global political economy. What is apparent, is that many of the FOC flag states must become more accountable for the actions of shipping companies enlisted on their shipping registers. There is insufficient media attention is given to maritime issues. There exists a very fragmented FOC campaign undertaken by the ITF, other national maritime unions, and various bodies concerned with the deregulation of the global political economy.
The FOC issue appears to be an issue which is also practically ignored by apparently unconcerned metropolitan governments. The long term future looks grim for those wanting to maintain national shipping fleets, including concerned Australians wanting to defend the last fragments of a national shipping register.
According to the International Transport Workers’ Federation (ITF), London, 5.5% of the global shipping fleet registered ‘offshore’ under FOCs in 1950. By 1960, 21.6% had done so. By the late 1990s, over 50% of the global merchant fleet (which consists in total of some 80,000 vessels) had ‘flagged out’ (Seafarer’s Bulletin, No.11, 1997, p.3). The British register has suffered a constant decline during the past three decades. In 1980, 1143 ships were listed in the UK. By December 1997, only 226 remained. There is the occasional registration back to the UK register, such as P & 0’s recent statement that they plan to register 50 vessels in the UK. However, despite this positive move, one would argue the move is too little too late.
The decline in UK shipping registration, as in other metropolitan shipping registers, has caused a maritime skills crisis. ‘Flagging out’ has resulted in the redundancies and the sacking of metropolitan seafarers and an increased use of non-unionised labour, predominantly from underdeveloped states.
For example, the total number employed at sea from European Union states during the mid 1980s was approximately 200,000. This number had been reduced to 100,000 by 1996. During this time, the total number of vessels flying the flag of EU member states was reduced by half. The total number of British seafarers enlisted with the British Merchant Navy Establishment in 1980 was approximately 80,000. This total was reduced to 26,500 by 1993.
The post war growth in FOCs and the subsequent decline of metropolitan shipping has also had an adverse impact upon the strategic capability of core states. Traditionally, some merchant navies have supported naval operations during time of conflict. The UK merchant navy officers union NUMAST, has expressed concerns about the UK’s inability to access merchant shipping and the availability of UK seafarers during national emergency. The reliance upon merchant navy ships and the Royal Fleet Auxiliary during the Falklands conflict highlighted the extent to which the UK Royal Navy depended upon civilian assistance.
The UK government also placed significant reliance upon civilian shipping during the Persian Gulf war. During this conflict, only 5 of the 162 ships chartered by the UK MoD were British registered. Shortages of suitable ships worried Allied military staff as it caused the delay of certain military units. It has been suggested that the UK government paid over 3 times the market rate to charter Ro-Ro ships for the Gulf war and that the MoD spent £38 million over budget to charter non-UK registered vessels. Many foreign seafarers refused to sail to the Persian Gulf under wartime conditions and this created a sudden serious demand for UK officers.
Despite these serious problems, the decline of the UK merchant register continued. For example, only one third of the 53 vessels used in the Falklands conflict remained on the UK register by 1994.
Australia also experienced declines in its national merchant shipping fleet over recent years. According to The Weekend Australian Magazine (October 9-10, 1999), Australia is the fifth largest shipping nation based on the tonnage transported and distance sailed. However, 90% of Australia’s imports and exports transported by sea are now transported on foreign registered ships.
The question of maintaining Australian cabotage will become an increasingly high profile issue. Australian trade legislation nearly always guaranteed that the system of cabotage — freight transported from one Australian port to another was transported by Australian registered shipping crewed by Australians. The abolition of cabotage could see 100% of Australian goods carried by foreign ships.
Some sources indicate that the current governments and bulk commodity shipping companies aim to abolish Australian cabotage, which would allow foreign national and FOC ships to compete for domestic maritime trade. Some argue that it is already underway, with some foreign ships being issued ‘single voyage’ permits to trade between Australian ports.
The implications of this are huge. What may happen is that foreign companies and seafarers will successfully compete for Australian trade and transport Australian goods between Australian ports via Australian territorial waters. Those foreign shipping companies will be possibly paying no tax to the Australian government. The abolition of cabotage could cause the collapse of the Australian shipping register.
If cabotage is abolished, foreign ship owners will take over domestic coastal trade as well as international trade. The profits gained from this trade will very probably move offshore. Australian seafarers will be forced to chance their luck and work on FOC ships or leave the industry altogether, never to return.
This is a drastic state of affairs. Once seafarers leave the industry and take their skills and experience with them, that national skills base could be difficult to rebuild in latter years.
How the trend of using FOC facilities can be reversed is a challenging question, especially against the trend and acceptance of laissez-faire economics. What is needed is a decisive, nationally oriented maritime policy geared not only to environmental and fisheries protection, customs and immigration, but oriented toward protecting Australian shipping fleets and employing Australian seafarers who will operate ships to a world class standard.
The retention of cabotage and the availability of suitable fiscal subsidies to Australian shipping companies to maintain trading is common sense.
Unfortunately, the supporters of the new right do not see it that way. The day may come when we can no longer call Australia a maritime nation. Only after skilled seafarers are gone will it be widely realised that high yacht ownership per capita does not make a country a maritime nation.
What makes a country a maritime nation is the possession of a capable merchant fleet, crewed by seafarers who possess a skills base necessary to meet the varied demands of working at sea aboard ships competing in various shipping markets.
The economic rationalists would argue that my concerns are too simplistic. But abolishing cabotage, which would cause the total demise of the Australian merchant fleet, forms yet another example of the potential destructiveness of economic rationalism.