Flag Choices of Turkish Shipowners and the Impact on Fleet Structure

Flag Choices of Turkish Shipowners and the Impact on Fleet Structure Ali Cemal Toz Lecturer, Dokuz Eylül University Maritime Faculty, Izmir, Turkey ali.toz@deu.edu.tr A. Güldem Cerit Prof. Dr; Dokuz Eylül University Maritime Faculty, Izmir, Turkey gcerit@tnn.net Abstract Maritime transportation has a great role in sustainability of global trade. Great amount of products are transferred through oceans by ships which fl y fl ags from different states. There is forceful competition between maritime companies. Companies always make their policies for receiving maximum revenues with minimum expenses. They mostly try to choose the way of cost minimization for achieving this policy. In this manner maritime companies try to lower the expenses by minimizing taxes, registration fees and employment wages and this is the reason why these companies register their ships under foreign fl ag. Although some states follow some policies to prevent escape from national fl ag to foreign fl ag, there are still great differences between states of registration and the nationalities of shipowners. Standardization of services and operations is the main issue of global transportation. To meet the high standard levels, more expenses are faced however there is no more toleration to the destruction of environment, lack of safety and poor standards of working conditions in the 21st century. When the maritime industries of the developing countries, such as Turkey, are considered, an expanding market in terms of ship owning, ship managing and also ship building, is gaining back its good reputation gradually. Turkey s recent strategies include developing maritime industry and Turkish shipowners have a great role to support this policy. However due to both fi nancial and administrative reasons shipowners are involved in fl agging out and this affects the structure of the Turkish maritime fl eet. This study aims to analyze the fl ag choice criteria of Turkish shipowners and their impact on the fleet structure. Key words: Turkey, Flag Choice, Shipowner, fl eet 313

314 Subtheme: Shipping Market analysis 1. Introduction The shipping industry is central to world trade, carrying, as it does, some 90% of internationally traded produce. It also has a lengthy experience of both national and international regulation. In recent decades, some shipping companies have moved beyond the reach of regulatory-efficient nations by resorting to Flags of Convenience-FOC (Lane, 1997). Shipping, like all other economic activities and enterprises, has a mechanism for its national and international regulation: the system of vessel registration. The registration requirement is not limited to maritime transport, as it also applies to vehicle registration in the motor transport industry, aircraft registration in the aviation industry, company registration in the service and manufacturing industries, and other forms of administration in other commercial activities (Ademuni-Odeke, 2005). The flag is an enduring symbol of the nationality of a ship but although this nationality is conferred upon a ship under international law as the sovereign right of state, in many cases it has very little relevance, significance, or association from a nationality or patriotic perspective to the owners and crew of the ship (Mansell, 2009). 2. Flag choice and the shipping industry A group of factors that might influence the shipowner s decision, but which have been partly ignored by the existing literature, are the characteristics of the shipping companies and of the ships. It is observed that only some companies of the same nationality decide to flag out, and that the decision to flag out might concern either the entire or only part of the fleet of the same shipping company. In particular, with regard to the characteristics of the ship, factors such as: age, size, type of trade, type of vessel, or geographical area of operation, might influence the flagging out decision. From the preceding analysis it has been seen that until a few year ago, flagging out seemed to be relegated to sectors with low freight rates (i.e. bulk carriers) and low quality standards (Cullinane and Robertshaw, 1996). However shipping companies in different sub-markets exhibit different flagging out behavior (Veenstra and Bergantino, 2000). The concept of vessel registration is simple but its application raises questions about the true nature of ship registers. In its simplest form, registration binds a ship to the flag-state and the merchant ship is an extension of the flag-state s territory and subjected to its laws (Cullinane and Robertshaw, 1996). Ship registers themselves have become a business as some flag-states compete for vessel registration with zero tax regimes, relaxed labor legislation, and even discounted registration fees. One state registers ships, sight unseen, over the internet. Some flag-states have contracted out their registers to private commercial enterprises. 2.1 Flagging Out Flagging out typically is an act by which the national flag registration of a vessel is cancelled/ terminated, and a re-registration is affected under an FOC (Bergantino and Sullivan, 1999). Why? As put by Haralambides (1997): Flagging out is an operational decision of certain shipowners aimed at streamlining operating costs and other conditions to those prevailing in competing third countries. After World War II, in order to avoid government regu lations and supervisions, to reduce operational costs, or to be released from constraints of certain markets, shipowners started to shift their vessels registration to the countries with more comparative advantages (Lee, 1996). Goss argued in 1985 that the cost of crews social security in the national flag induces shipowners to flag out to open registries Yannopoulos (1998) argued that the allocation of resources between national flags and open registries depends on differences existing in the effectiveness of productive activities and on the real cost of crew faced by shipowners.

Flagging out may be the cause also of the relocation of management activities of vessels flagged out. The term flagging out has been used in the past mainly in connection with FOCs, but of course second registers should be excluded (Kiriazidis and Tzanidakis 1995). Shipowners have for economic or political convenience used the device of flying flag of another country of centuries. British ships improperly flew the Spanish flag to avoid trade restrictions in the west indies in the 16 th century and flew the French flag in the 17 th century on ships fishing on the Grand banks to avoid restrictions on fishing imposed by Britain (Llacer, 2003; 2) The practice became wide spread in the Mediterranean in the 18 th century due to a myriad of trade and political restrictions. For example Genoese ships carrying goods to France registered under the French flag and when France increased the taxes and fees, transferred to Austrian flag. Neapolitan ships trading to Greek ports also registered under the Austrian flag (Llacer, 2003; 3). Hoffman et al have determined that operators of younger vessels are more likely to choose a foreign flag. This apparently counter intuitive conclusion is borne out by the statistics analyzed in this thesis for International flags (Hoffman et al 2004; 5) but is a marked point of difference for Pseudo-National flags where the average age of vessels is considerably higher than both National and International flags. It is also demonstrated in this thesis that the average tonnage of ships under International flags is greater than National flags, (Hoffman et al 2004; 5) and considerably greater than ships under Pseudo-National flags. One of the most significant factors in the decision to flag out; crewing costs are also proportional to the vessel s size. There is less likelihood, by a small margin, that vessels with a large dwt tonnage will be flagged out, due to the proportionately smaller number of crew required per ton of cargo carried (Knifner, 1977) Crew costs in general, regardless of the size of the vessel, have always been a major driver in the decision to flag out. The Seafarers Manpower Update has been issued in 2005 through a cooperation between BIMCO and ISF (The Baltic International Maritime Council/ International Shipping Federation) and Warwick University reveals the following items of significance: The shortage in the world for qualified officers being 10 000 which corresponds to 2 % of all the officers employed; the redundancy in the crew being recorded as 135 000. As far as the wages are concerned, considering the monthly pay for an Indian Chief Officer 100 as a basis; a Norwegian Chief Officer s being 191, a Chinese Chief Officer s 68. Likewise a Norwegian able seamen s monthly pay is 269 whereas a Chinese able seamen s is 81, considering the monthly pay for an Indian able seamen, 100 as a basis (BIMCO and ISF, 2005). As the report reveals, there exist considerable differences in the wages based on the nationalities Figure 1 shows the reasons of flagging choices of shipowners. 315

316 Figure 1: Shipowners Flag Choice Criterias Source: Veenstra and Bergantino, 2000. 2.2 Not to Flag Out The flag State has freedom to determine the conditions for grant of its nationality to ships but this is not an absolute freedom and is fettered by the very clear responsibilities placed upon flag States. The administrative, technical and social responsibilities of the flag State are clearly enunciated in Article 94 of the Convention on the Law of the Sea-LOSC. It is the delivery, oversight and enforcement of these responsibilities that can vary greatly between different types of flag State; some of the factors relevant in the decision of shipowners whether or not to flag out (Lane, 1997). 2.3 Beneficial Ownership Most open and international registries specialize in certain countries of ownership (Fig. 2). The registry of Panama caters mainly for owners from China, Greece, Japan and the Republic of Korea. The flag of Liberia is used mostly for ships owned by German and Greek owners. The clients of the Marshall Islands registry are principally from Germany, Greece and the United States. The client base of the Bahamas is relatively broadly spread. The largest group of owners for the Maltese registry is from Greece (UNCTAD, 2010). From the country-of-ownership perspective, a mirror image is obtained (Fig. 3).

317 Figure 2: Major Countries of Ownership and their Flags of Registration-January 2010 Source: UNCTAD, 2010 Carriers from China, Japan and the Republic of Korea rely mostly on the flag of Panama; German owners register their ships mainly in Liberia; and owners from the United States often choose the flag of the Marshall Islands, which used to be a United States dependent territory. Greek owners, on the other hand, use a wider portfolio of different flags of registration, including their own national flag. Figure 3: Major Open and International Registries and the Countries of Ownership- January 2010 Source: UNCTAD, 2010.

318 3. Flag chices of Turkish shipowners 3.1 Turkish Fleet Structure The critical decision made by the Turkish government on January 24, 1980 to restructure the Turkish economy introduced liberalization to the foreign trade, which increased the Turkish foreign trade volume, and this increase was reflected to the tonnage of the Turkish merchant fleet (Arslan, 2007). According to an extensive study conducted by the Turkish Undersecreatariat for Maritime Affairs, Turkish fleet is set to grow in general. However report also reveals that Turkish owners nowadays favor foreign flags rather than the national register. Statistics in the book issued by the undersecretariat suggest that as per 1 January 2010 Turkish owned fleet over 100 GT totals 2, 222 vessels accounting for 18.9 million dwt. Taking 1, 000 GT and over into consideration, Turkish flagged fleet capacity is 6.7 million dwt while capacity outside the flag amounts to 8.6 million dwt. The report also reveals that from 2003 and onward, Turkish owners opted for FOC s to register their new acquisitions. National tonnage has been steady for the past 7 years whilst foreign flagged Turkish fleet has increased from 2 million dwt to some 10 million dwt (Chamber of Shipping, 2010). 3.2 Flags Chosen by Turkish Shipowners Turkish controlled 2, 222 vessels are scattered across 42 country flags, which include European countries like Sweden and Italy as well as Tanzania, Togo and Dominican Republic which are less prominent. Malta tops the chart in terms of tonnage with 228 vessels representing 4.7 million dwt. Second most favored flag appears to be Marshall Islands who gained much in popularity lately. 70 vessels with an aggregate tonnage of 2.7 million dwt fly Marshall Islands flag while the age profile is 6.1. Maltese flagged fleet seems to be older and average age profile is 11.5. However Turkish national fleet with 1, 136 vessels average 24 years, only to be surpassed by the age profile of Panama flagged Turkish vessels that score an average of 25 (Chamber of Shipping, 2010). The majority of the fleet registered in International Ship Registry (7.099.864 dwt) is composed of bulk carriers (47.2 %), dry cargo ships (17.6 %), oil tankers (15.8 %), chemical tankers (8.3 %) and other types of ships (11.1 %) (Chamber of Shipping, 2010). 44.2 % of the National Ship Registry (70 ships) has been acquired by import and 55.4 % has been acquired by construction in Turkey. 39 % of the International Ship Registry (585 ships) has been acquired by import and 61 % has been acquired by construction in Turkey (Chamber of Shipping, 2010) 76.4 % of the National Ship Registry (464.577 dwt) has been acquired by import and 23.6 % has been acquired by construction in Turkey. 68 % of the International Ship Registry (7, 099, 864 dwt) has been acquired by import and 32% has been acquired by construction in Turkey (Chamber of Shipping, 2010). 427, 936 grt of the fleet registered in National Ship Registry 260, 437 grt has been acquired by import, 167, 499 grt of the fleet has been acquired by domestic built. 4, 984, 473 grt of the fleet registered in International Ship Registry 3, 260, 757 grt has been acquired by import, 1.723.716 grt of the fleet has been acquired by domestic built (Chamber of Shipping, 2010). In 2009 Turkish tonnage under foreign flags has reached up to 8.5 billion dwt, as of 1st January 2010, concerning the ships of 1000 grt and above, the total tonnage of the Turkish shipowners, both under Turkish flag and foreign flags reached 17.2 million dwt (Chamber of Shipping, 2010). As of the beginning of 2010, regarding the Turkish shipowners ships of 1000 grt and above, 42.1 % percent of these ships are registered under Turkish flag and 57.9 % are registered under foreign flags (Chamber of Shipping, 2010).

3.3 Turkish Shipping Legislation Structure The legal basis for maritime activities in Turkey is the Turkish Code of Commerce of 1959. The revision studies of the Turkish Code of Commerce have been launched under the coordination of the Turkey 121 Ministry of Justice by considering the related laws of the Member States of the EU. The provisions of the Turkish Code of Commerce related to maritime affairs will be harmonized with the arrangements of the EU in the broad sense Another legal arrangement related to the maritime sector in Turkey is Law No: 815 on Cabotage. Auxiliary services rendered in Turkish ports and waters, except for transport, are subject to the Law on Cabotage. In accordance with Cabotage Act, all commercial shipping and related activities between the ports of Turkey s and at Turkish ports are granted to Turkish citizens. Briefly this means that trading in the coastal lines is reserved for Turkish-flag vessels. In this framework supply of services at Turkish ports can be given only Turkish citizens and Turkish companies. But ports and auxiliary services available on non-discriminatory bases to users at the ports in Turkey. The Law on Turkish International Vessel Registration was enacted in 1999 to increase the international competition capacity of the Turkish maritime sector and to prevent avoidance from flying the Turkish flag. It is anticipated that this Law will encourage new investment for the establishment of a young new fleet that will increase waterway security Turkey has two-register system. National ship register and international ship register. According to the National Ship register the right to flying the Turkish flag reserved to vessels that are owned by Turkish citizens and companies that are majority owned by Turkish nationals and in addition General Manager of company should be Turkish. On the other hand company shares should be registered on the related persons possession 3.3.1 The Act on the Turkish International Ship Registry Act no 4490 was issued in the Official Gazette dated December 21, 1999 and was put into effect onward the same day (Republic of Turkey Official Gazette, 1999; 29913)The contents of significance are as follows (Arslan, 2007): The individuals resident in Turkey, regardless of their nationality, and the companies established in Turkey in compliance with the relevant Turkish regulations can register their ships under the Turkish International Ship Registry (TISR). During the registry of ships, a total fee of USD 10 000 and USD 1 for each net ton is charged. USD 1 per each net ton shall be charged annually. The ships registered under the Turkish Lloyd shall pay the registry fee and the annual charges at a 50 % reduction. The revenues gained from the operation, sale, or transfer of the ships registered under TISR are exempted from all sorts of taxes and fees. The earnings of the crew employed on board the ships being operated under the TISR are exempted from any means of taxes or fees On board a ship whose owner is a foreigner the master is to be Turkish. On board a ship whose owner is a Turkish the master and 51 % of the crew is also to be Turkish. The social insurance premium deduction for the Turkish crew is to be met by shipowner. If the foreign crew is under the umbrella of any social insurance organization in their states, no premium deduction for their social insurance is in question. 3.3.2 The Turkish Corporate Income Tax Act According to the most recent act put into effect in June 2006 (Republic of Turkey Official Gazette, 2007; 25205) Article 5 shall involve those Turkish shipowners whose ships fly foreign flags as the head office of their companies are legally reported to be located abroad while the ship management 319

320 offices are reported to be in Turkey, and as they are declared to be organizations operating one single ship each. This Article clarifies the terms that are used to exempt the revenues of certain companies from being taxed. According to the specifications of this Article, the following companies are exempted from being taxed: The corporates or limited companies whose officially declared offices are not in Turkey provided that; The capital of the Turkish partners amount to at least 10 % of the capital of the company abroad, The profits of the companies with head offices abroad are taxed at least 15 % in their home states, The profits of the Turkish partner, gained through the sales of the stocks abroad, provided that such profits are kept in hand for at least two years. Nevertheless, Stopford s viewpoint running as in general the only companies that pay taxes are those who have some specific reasons for doing so is still true all over the world including Turkey as well (Arslan, 2007). 4. Conclusion This study aimed to examine the reasons how the Turkish shipowners prefer to have their ships fly foreign flags, which has been in an increase in the last decade. Turkish shipowners choose registering a ship in an FOC country typically involves much less paperwork than in countries with national registers. Sometimes the registration can be completed in as little as a few hours in Panama s case, by fax. Registering a ship makes it subject to the laws and the country of its flag state, regardless of the nationality of the ship s owner. In FOC states, those laws can be substantially weaker than those in Canada, the U.S. or Europe. The Bahamas, for instance, does not require oil tankers to have a double hull. Popular sources of cheap labor include the Philippines, India, Indonesia, and Eastern Europe. In some FOC countries, working conditions aboard ships are seldom monitored and international maritime conventions are rarely enforced. The ITF has documented cases where workers on board some FOC-flagged ships haven t been paid for a year, or lived in substandard conditions aboard ship with no shore leave. There is meaningful correlation between type of ship and registry of Turkish fleet. Statistics reveal that tanker owners prefer national registries other than F.O.C. countries. The main reason is that there are many inspections only for tankers which are performed strictfully by major oil companies. The best way to meet the requirement is establishing the high level working standards and many frequent self assessments. For example although intervals of port state control are six months for any vessel, Turkish government reduced the intervals to one month to catch the higher working standards to meet the requirements. An overall analysis of the foreign flags mainly preferred, all these flags are recorded in the white list of the Paris MOU port state control organization. The overall picture also reveals that the shipowners who prefer to operate their ships under foreign flags are inclined to choose the flags of those nations who meet the requirements of the relevant international requirements, at the minimum rates at least, as well as the requirements favoring the environmental protection and safety and who also provide them with certain bureaucratic and financial ease enabling them to carry out their shipping activities as smoothly as possible.

321 References 1. Ademuni-Odeke (2005). Bareboat Charter (Ship) Registration. Martinus Nijhoff Publishers, The Netherlves. 2. Arslan, Tevfik (2007). Basic Motives for Escapes from Turkish Merchant Fleet to Foreign Flags. Journal of Institutes of Social Sciences 9 (2), 2007 pp. 40-60. 3. Bergantino, A. S. and O Sullivan, P. (1999). Flagging Out and International Registries: Main 4. Developments and Policy Issues. Journal of International Transport Economics, 26(3), pp. 5. 447-472. 6. BIMCO and ISF (2005). Seafarers Manpower Update. 7. Chamber of Shipping (2010). Maritime Sector Report 2010. 8. Cullinane, K.P.B. and Robertshaw, M. (1996). The Influence of Qualitative Factors in Isle of Man Ship Registration Decisions, Maritime Policy and Management, 23(4), 321-336. 9. Haralambides, H. E. (1997). The Shipping Policy of the European Union. Volume in Honour of Late Professor B.N. Metaxas (pp. 433-460). Eptalofos Publishing. 10. Hoffman, J, Sanchez, R, and Talley, W. (2003). Determinants of Vessel Flag. http://www.oduport.org/ PaperCullinaneBookForeignFlagDRAFT2003 10 31.htm 11. Kiriazidis, T and Tzanidakis, G. (1995). Recent Aspects of the EU Maritime Transport Policy. Maritime Policy & Management, 22 (2), pp. 179 186. 12. Knifner, J. (1977). Liberia: A Phantom Maritime Power Whose Fleet is Steered by Big Businesses, New York Times, February 14, p.14c. 13. Knudsen, K. (1997). The Economics of Zero Taxation of the World Shipping Industry. Maritime Policy and Management, 24(1), pp. 45-54. 14. Lane, T. (1997). Globalisation, de-regulation and Crew Competence in World Shipping. In: McConville J, editor. Transport Regulation Matters. London: Francis Pinter. 15. Llace, FJM (2003). Open registers: past, present and future, Marine Policy, vol 27, 6. 16. Lee, T. W. (1996). Flagging Options for the Future: A Turning Point in Korean Shipping Policy? Maritime Policy and Management, 23(2), pp. 177-186. 17. Mansell, John N.K. (2009). Flag State Responsibility. 18. Republic of Turkey Official Gazette (1999). The act on the Turkish International Ship Registry, no 29913. 19. Republic of Turkey Official Gazette (2006). Corporate income tax act, no 25205. 20. Veenstra, A. W. and Bergantino, A. S. (2000). Changing Ownership Structures in the Dutch Fleet. Maritime Policy and Management, 27(2), pp. 175-189. 21. Yannopoulos, G.N. (1998). The Economics of Flagging out. Journal of Transport Economics and Policy 22 (1998) 197_208.