Вы находитесь на странице: 1из 128

Emerging Challenges of Commercial Management of Shipping Industry

Prepared By:

Ravindra Gharat

MFM-III

CONTENTS
1. Introduction 2. Objective And Methodology 3. Ship Management 4. Seaports 5. Economics of Ship Operation 6. Economics of Ship Manning 7. Economics of Chartering 8. Finance and Economic Appraisal 9. Personal and Administration 10. Maritime Education 11. Liner Services 12. Tanker Carrier 13. LNG Carrier 14. Maritime Safety 15. Fleet Management 16. Shipping Industry in The Internet Era 17. Conclusion 3-3 4-5 6-14 15-24 25-34 35-44 45-49 50-67 68-72 73-77 78-85 86-87 88-88 89-97 98-113 113-121 123-127

Page 1 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

ACKNOWLEDGEMENTS
It is always satisfied to meet someone who is good at a job. It is equally refreshing to deal with people who are well informed, exhibit sound knowledge of their profession and are at the witting edge of new developments in fields to find someone who possesses both these qualities in abundance is something special indeed, particularly when that persons is able to communicate verbally and literally in manner that is convincing yet not patronising comprehensive but not boring and can deliver material in an enthusiastic, motivating style. The preparation of the project would not have been possible without the support and valuable contribution of number of Knowledge Oriented professionals. The preparation of the project would not have been possible without the support and valuable contribution of number of Knowledge Oriented professionals. The project benefited greatly from the support and guidance provided by the Shri. R. Rajendran, AGM, SCI Ltd,. The expertise and critical intellectual advice provided by them helps to consolidate the contents. For Conception to Completion of the project Prof. N. S. Shetty, NMIMS, Mumbai for his continuing support and guidance is giving the project a definite shape. His extremely helpful suggestions and deep knowledge of the industry gave me the necessary insight of the complex subject. The project is never the product of a single individual. Thought my name appears on the cover, I owe a number of people a great debt for helping me along the rocky & wonderous path of writing a report. I have also had some wonderful reviews along the way, individuals who helped me to clarify and refine my thought, who made the text more useful and more engaging. I am especially indebted to Ms. Jyoti Talekar and Mrs. Pretha Nair who were
Page 2 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

extremely helpful with their insights. They provided me with a critical perspective of processes & functionality. They took the time and energy to delve into early versions of this report and provide detailed comments on hot to enhance my ideas. Date 15/12/2001 NMIMS, Mumbai P. Gharat

Ravindra

Introduction
For delivery of goods, the four basic modes of transport are ocean, air, rail and road. Globally, the railway and road networks are largely used for domestic movement of goods while shipping is primarily used for transporting goods in large quantities between nations. The world sea-borne trade, at around 5.5 billion tonnes in 1999, represents nearly 95% of total merchandise trade and has been growing at more than 3% over the past two decades. In terms of value, the global shipping industry is estimated to be more than USD$ 225 billion and constitutes a significant part of the world GDP. As India makes a transition from an "import-substitution" closed economy model to an outward-oriented trade regime, the importance of shipping, as an enabler of trade and economic growth cannot be over emphasized. The country's transport infrastructure is still underdeveloped. Freight costs, measured as percentage of total value of imports (CIF) is around 10.3%, one of the highest in the world. Against this, the global average is around 5.24% and the average for all developing economies is around 8.04%. Massive improvement in transport infrastructure is necessary to enable future trade and economic growth. While, around Rs. 100 billion (USD$ 2.5 billions) of investments have been made in the last 5 years to augment port facilities in the country, and equally massive investments in road and rail networks, the shipping sector has received least attention from both investors and government bodies. This has led to the following scenarios: Sub optimal realization of benefits from investments in ports as domestic shipping infrastructure is unable to keep pace with demand. Sidelining of the domestic industry by foreign players as the government gradually reduces fiscal, regulatory and other support. This would be a natural outcome of demand from shippers for lower costs and greater efficiency as they also face greater competition in both local and international markets. On the brighter side, new opportunities are opening up for the sector. Trade volumes-both overseas and coastal- are rising very fast. Opportunities in specialized sectors like LNG and containers are also rising.

Page 3 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Integrated logistics and multimodal transportation are opening up the new business areas for shipping companies. Against this background, Indian shipping industry report gives an overview of the industry and the changing business environment in which it operates. The study is an outcome of efforts to fulfil the information and research needs of the participants of maritime industry- both global and Indian. We believe that the report would be useful to players in shipping and logistics industry, policy makers, investors and academicians.

Objective And Methodology


Objective of study is, we are all familiar with the term Information Management. This term came about when people realized that information is a resource that can and needs to be managed to be useful in an every organization. From this, the ideas of Information Analysis and Information Planning came about. Organizations are now starting to look at "knowledge" as a resource as well. This means that we need ways for managing the knowledge in an organization. We can use techniques and methods that were developed as part of Knowledge Technology to analyze the knowledge sources in a shipping organization. Using these techniques we can perform Knowledge Analysis and Knowledge Planning. In these model a knowledge source in such a way that we can analyze its usefulness, its weaknesses and its appropriateness within the organization. It is a necessary step for the ability to manage information. Within we can use modeling and acquisition techniques. When knowledge planning an organization has a grip on its knowledge (i.e. has performed Knowledge Analysis), it will be able to plan for the future. An organization will now be able to develop a multi-year knowledge plan that defines how the organization will develop its knowledge resources, either by training its human agents, or by developing knowledge-based systems to support the human agents, or by other means that allow the organization to stay competitive. In Knowledge Technology (KT) this is, as the word already implies, the (application of) techniques and methods from the field of AI, or to be more specific, the field of knowledge-based systems. KT has been around for quite some time, and most people know about the application of KT in the form of expert systems, and decision support systems. Techniques and methods to design these kinds of systems are well known. Computer Supported Work Systems (CSWS): This is a formal and informal (human) activity system, within an organization where the (human) agents are supported by computer systems. The application of Knowledge Technology is very helpful in such work systems, although definitely *not* the only important factor in the analysis and design, nor in the effectiveness of the activity system. Knowledge management is an audit of "intellectual assets" that highlights unique sources, critical functions and potential bottlenecks which hinder knowledge flows to the point of use. It protects intellectual assets from decay, seeks opportunities to enhance decisions, services and products through adding intelligence, increasing value and providing flexibility. To serve customers well and remain in business companies must: reduce their cycle times, operate with minimum fixed assets and overhead (people, inventory and facilities), shorten product development time,

Page 4 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

improve customer service, empower employees, innovate and deliver high quality products, enhance flexibility and adaptation, capture information, create knowledge, share and learn. None of this is possible without a continual focus on the creation, updating, availability, quality and use of knowledge by all employees and teams, at work and in the marketplace.

Meeting the challenges


Being a successful ship management company in the future means meeting two key challenges that are inextricably linked. In doing so we must also deal with the constant changes that occur in the shipping industry, such as market fluctuations changes often produce conflicts that have to be managed. More changes will affect clients in the next few years than they have seen before. Referring to fundamental changes in the commercial position of ship owners that will have a profound impact on their approach to ship management. One such change is a clear trend towards consolidation among charterers, giving them more marketing power in relation to owners.

Role is to enable clients to be as close as possible to the cutting edge of technology, without incurring large development costs.
Charterers will become much more powerful than the owners may need to look at pooling arrangements that work for the benefit of their members. There is a need for some consolidation of owners to match that of charters. His shift in the balance of power in favour of charterers may be reinforced by the trend towards e-business, which could reduce the role of brokers as a moderating force in the market. A key influence on the attitude of owners is the increasing body of legislation affecting ship operations, the growing cost of compliance with all these rules and the more intrusive ship. Inspections that go with them. The ISM Code is just one example. Shipping industry takes ISM Code very seriously and seeks to embrace the spirit of the regulations and not just the letter. There will be greater focus on how the ISM code is complied with. It is becoming increasingly difficult for owners doing the jobs of managing ships property. The real problem of multiple inspections is a practical one, that inspections take place in port when they can interfere with operations. Ship managers can help to meet these requirements. It is difficult to see how small owners can manage these demands effectively. Using a ship manager can help them do this by sharing the burden of the necessary support services. Investment in IT System and e-business across its managed fleet gives the manager further advantages in delivering benefits to client owners. Ship management is now a mature and competitive market. The size of a managed fleet is becoming more critical in order to meet certain requirements and reduce costs. Technology, and e-technology in particular, is providing the tools to do this, but shipping remains essentially a people business. It is inevitable that there will be problems from time to time and the owner/manager relationship. Looking to future, believes that the importance of good client relationship will increase. Ship management will evolve as a service industry. We must look at way of serving industry. We must look at way of serving our clients better and becoming closer to them. The days of a purely technical approach to ship management terms while gaining a fair remain recompense in a competitive market. Ship management will remain a competitive sector with no manager likely to become large enough to exert any control over the market as a whole. Methodology

Page 5 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

While preparing this project much concentration is given on changes appearing in global shipping industry. Shipping industry changes very drastically comparatively olden age. Today global market open for all the sectors, large produced goods import and export from various country. To cope up with this system concentration is required to given on international standards. To gather the valuable information of shipping management numbers of professional in shipping sector were discussed, also to get broad view of subject several shipping related books and magazines referred. Also the websites surfed to get technically and mechanism used by various shipping industry all over the world. To get the information of shipping management is difficult task because very few industries involved in India. Related to this sector limited books and magazines are available. The study concentrates the information useful to Indian shipping industries to run the ship in internationally. It is to understand the major aspect of shipping sector and to sustain in International market. Also the main aspect of shipping management is required to understand the function of shipping to ship manager and owners point of view

Page 6 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat Ship Management

MFM-III

Ship Management is a service industry where good client relationships are essential to provide the best service. Development in the ship management business and its success owes a good deal to being aware of trends in the industry and the evolving needs of shipowners using the services of third-party managers. Owners and managers now have to deal with a large number of other agencies. The traditional role of class societies has increased and they are now much more commercial organisations. They have to deal with these and other industry agencies, such as charterers inspectors, as well as government agencies, such as port state control. This manifests itself in multiple inspections. Role is to operate ships while pushing ahead and implementing new standards, but they must not forgot that the main focus for everything do is for clients and their ships.

The days of a purely technical approach to ship management are over. We must aim to get closer to our clients in management terms while gaining a fair recompense in a competitive market.
It was widely predicted that the introduction of the ISM code in 1998 would lead to a significant increase in business for larger ship managers, as smaller owners and managers would be unable to meet the codes onerous requirements for safety management system. In fact, this did not happen and there remains a wide range of large, medium and small ship managers. In practice, the ISM code has tended to be regarded as another quality standard instead of, as was intended, a new safety culture. They must be get back to that approach if the ISM code is to be properly effective and those managers operating a high safety culture will benefit. It should also roll in new environment standards. Ship management is probably the most maligned service industry in the world. Ship managers perform a pivotal role in the middle of the shipping business. Managers must help owners earn a profit while satisfying the needs of others interest, such as characters, simultaneously operating ships safely and efficiently. Individual ships all have different requirements, with varying combination of flags, class, and crew nationalities, and theses all have to be managed by the ship managers. In general, owners now required a more professional service from managers than in the past and take a closer in the way their ships are managed, as well as the closer interest in the way their ships are managed, as well as the financial aspects. Historical Growth of Indian Fleet The gross Indian tonnage has increased from 0.19 million in 1947 to 7.05 million in 1999 representing an annual growth rate of 7.2 per cent. In the same period world fleet grew from 83.51 million GRT to 532 GRT representing a growth rate of 3.62 per cent. The ninth plan (April 1997 to April 2002) envisages increase in the total Indian fleet strength from 6.9 million GRT to 9 million GRT. This represents total additional acquisition of 2.5 million GRT and replacement of 1.7 million GRT. By April 2000 the total fleet strength stood at around 7.1 million GRT. We believe that meeting the planned targets in the next 2 years is quite difficult. The growth pattern since independence can be divided into three eras:

Page 7 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Era of slow growth (1947 to1960) Era of rapid expansion (1960 to 1985) Era of decline and stagnation (1985 to till date)

GRT ('000s tonnes)


Period 1947 - 60 1960 - 80 1980 - 99 1947 - 99 Beginning 192 844 5,679 192 End 844 5,679 7,053 7,053 Annualised growth (%) 12.1 10.0 1.2 7.2

In the first two decades after independence, the nascent state of industrialism in India, absence of a well settled policy framework and financial & foreign exchange constraints led to slow growth in Indian shipping tonnage. The annualised growth is highest in this period because of a low base i.e., very small shipping tonnage at the time of independence. However, in absolute terms, the period represented low levels of tonnage acquisition and hence classed as an era of slow growth. However, the second era especially the period between 1965 to 1980 represented tremendous achievement for the Indian shipping industry in building up a large merchant fleet. The growth was assisted by liberal financial support by SDFC, buoyancy in global economy, trade and shipping and favourable government support. Crisis at a global level triggered by OPEC oil price hike, a regulatory framework in India that increasingly proved to be restrictive enough, even though it had supported the growth in the earlier era and a natural phenomenon of cyclical boom and bust witnessed in all industrial and business sectors, led to gradual stagnation in the Indian shipping industry since 1980s. Segments The Indian shipping industry with over 100 private and public sector companies has a well diversified merchant fleet of tankers, bulk carriers, container ships, specialized or multipurpose vessels, offshore supply vessels (OSVs) and coastal vessels. The industry is segmented into three segments for our analysis namely: Overseas Coastal Cargo carrying Non-cargo carrying (includes OSVs) Bare Boat Charter cum Demise (BBCD) We have carried out following analysis in this section to assess the strengths and weaknesses of Indian shipping: Vessel size analysis Age analysis Ownership profile analysis Shipyard analysis on the basis of built of vessels

Page 8 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Overseas The biggest chunk of the total Indian fleet tonnage is the overseas segment consisting of 241 vessels of total cargo carrying capacity of 10.7 million DWT and constituting around 90 per cent of total Indian tonnage. The change in the structure of the overseas fleet in the last two decades is reflected in the following table. The most significant change is the fall in dry cargo liners from 170 vessels representing 1.5 million GRT in 1980 to 31 vessels of only 0.38 million GRT in 1999. This number is expected to fall further with SCI, the largest general cargo fleet operator, deciding to gradually exit from the trade due to lower profitability. Factor responsible is the gradual containerisation of general cargo. In the dry bulk cargo fleet there has been stagnation both in terms of the number of vessels as well as the gross tonnage. Tanker tonnage has shown significant growth in the last two decades. Total number of tankers increased from 22 vessels to 77, while in terms of GRT, the increase was from 1.02 million to 2.98 million. During this period, Indian shipping appears to have mainly emphasized on consolidation, modernization and acquisition of specialized ship like acid carriers, timber carriers and edible oil tankers. Massive addition of refining capacity in the country will force a significant change in the oil product trade. The opening up of the sector to private sector operators has seen the commissioning of the 26 million tons Jamnagar refinery of Reliance. The public sector oil companies have also made substantial expansions in their existing capacities. The total refining capacity is set to touch over 100 million tonnes. The total consumption of refined products was around 89 million tonnes in 1999, which, even after increased consumption, is expected to leave a surplus. All this is expected to make India a net exporter of refined products. The increased refining capacity is expected to lead to the following changes. Increased crude oil shipments. However shipments would be in larger sized vessels as oil companies strive to capitalize on the economies of scale. Product imports are expected to become negligible. We expect the product tanker fleet to fall. Container traffic is expected to grow significantly in the future as a result of the following factors. Increasing containerisation of general cargo exports from India. Investments in container handling facilities in the country. In most of the major ports container-handling terminals have been privatised and investments to the tune of Rs. 30 billion have already come in or are expected to in the near future. Public sector giant Concor has made massive investments in inland container depots. The opening of the sector to private players is expected to only improve the dry port network in the country. Indian shipping companies have immense opportunities because of the above trend. Liquefied Natural Gas (LNG) shipping is destined to be one of the most lucrative businesses in the future. India is expected to become a major importer of LNG in the next 2 to 3 years. LNG terminals are being established in various locations like Dahej, Kochi, Dhabol, Ennore, and Pipavav etc. The project for carriage of LNG for Enron's Dhabol power plant has gone to an overseas company in which SCI holds 20 per cent stake. Hence the vessel won't be reflected in Indian shipping fleet. Recent LNG policy by the government calls for a minimum of 26 per cent shareholding by an Indian company for any venture carrying LNG to India. Further it encourages registration of the LNG vessel under the Indian flag.

Page 9 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Coastal The coastal fleet in India consists of 269 vessels of only 0.68 million GRT. The fleet has grown from 0.11 million GRT at the time of independence; an annualised growth rate of 3.57 per cent against a growth rate of 7.20 per cent of the entire Indian fleet. The present condition of the coastal fleet (small and aged fleet) reflects the low level of coastal trade in the country. This is due to competition from roads and railways, and inadequate port infrastructure. The average vessel size of Indian fleet is much below international standards leading to higher transportation costs and hence lowers competitiveness of Indian exports and higher costs of domestic production dependent on imported raw materials. The lower size had been the result of inadequate infrastructure at ports, lower parcel size of imports & exports and overall lack of competition due to restrictive covenants under M. S. Act. All this is expected to change in the near future. Huge investments have been made in augmenting port infrastructure in India. Thus Jawaharlal Nehru Port Trust (JNPT) and Nhava Sheva International Container Terminal (NSICT) can today handle large sized container vessels. Modern equipments are capable of faster loading and unloading of cargo. Similarly, a large number of single buoy mooring (SBM's) installed along the coastline of India has paved the way for import of crude by VLCC's. New upcoming ports in the private sector like Dhamra, can handle very large vessels. The entire process has been expedited as a result of pressure from the exporters and importers demanding lower transportation costs. Regulatory norms have led to reduce cargo support for Indian ship owners. Thus Reliance imports crude through VLCC's hired from foreign ship owners - a lost opportunity for Indian shipping companies. Indian ship-owners have yet to effectively respond to this new challenge. Capital requirement for replacement of smaller tonnage with larger ones is huge and beyond the appetite of domestic equity and debt market.

Cabotage Laws
All countries for such laws is that a well developed national fleet is critical to every nation's security interest by providing essential sealift capability in wartime. The other arguments that are presented in support of this are jobs, safety and environmental protection. Additionally, these laws could place re-flagging restrictions where a vessel that had been flagged in a different registry in the past might not enjoy domestic trading privileges, as in US and Brazil, even after it is re-flagged in the domestic registry. Subsidies could be extended to the shipowners in various direct and indirect forms to encourage participation in the domestic coastal trade. Under the cabotage law, transport of goods between two local ports by foreign ships is allowed only if suitable domestic ships are not available and special licenses are issued to such ships. This practice is prevalent in many countries. In India, it is the responsibility of the Directorate General of Shipping (DG) under the authority vested in him by Section 406 of the M.S.Act, to grant license and to ensure the law is enforced. This policy is entirely on the lines of the Indian National Shipowners Associations (INSA) stand in the matter where, when an application is received for license for operation of a foreign flag vessel on the Indian coast as required under section 407 and section 21 of the M. S. Act, the DG of Shipping decides on it after due enquiry and determination whether suitable Indian owned ship is available for the purpose. Where a suitable Indian ship is available, no permission or license is granted.

Page 10 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

For Container / LASH ships, partial relaxation of cabotage regulations had been granted by the government in respect of operation of foreign flag vessels between Indian ports for a period of 5 years. This has been the point of contention with INSA. Cabotage laws Registered and Flagged in the same country. Manned by crew of the same nationality. Built and repaired in yards belonging to the same state. Ownership by company incorporated and whose shareholders are citizens of the same state. Indian cabotage laws vis--vis other countries: Cabotage laws in India are governed by section 407 and 408 of Merchant Shipping Act, 1958. These regulations place restrictions on vessel flag and crew. While ownership restrictions were there till a few months back, recent foreign investment promotion policy by the government permits 74% foreign direct investment in the shipping sector under the automatic approval route and even 100% on a case-to-case basis has led to the annulment of this clause. No restrictions are placed on place of built of the vessels, in contrast to the cabotage laws in some countries as USA, where only vessels built in US yards are eligible for domestic trade. US-built vessel that is rebuilt overseas also loses its domestic trading privileges. However, implementations of these laws are alleged to be lackadaisical. The S. N. Kakar Committee on Draft Coastal Shipping Act has observed that deployment of foreign vessels in our coasting trade is a regular occurrence and some quarters have alleged that this is taking place even when adequate number of Indian ships are available. This is perceived to deprive Indian vessels of the opportunities of rightful participation in the coastal operations Indian National Shipowners Association has also held similar views. International comparison highlights that cabotage laws in India are in fact not very stringent compared to such countries as USA, Brazil, Greece and Japan. The comparisons made are given in the table below: Cabotage laws in various countries India USA Cabotage yes Crewing Requirements yes Ownership Requirements yes Domestic Construction Provisions no Re-flagging Restrictions no Fleet Subsidies no Japan Greece yes yes yes yes yes no yes yes yes no yes yes Brazil yes yes yes no NA no UK yes yes yes yes yes yes Norway China some yes no no no some no yes no NA France yes yes yes no yes yes yes yes no NA

yes (indirect) yes yes (indirect) yes

Page 11 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

BBCD vessels and domestic coastal trade The cabotage laws in India are presently ambiguous with a large number of grey areas. The recent controversy relating to domestic trading provisions for Bare Boat Charter cum Demise (BBCD) vessels highlighted this. The BBCD scheme was launched in the wake of the balance of payments crisis, primarily to reduce the foreign exchange outgo in outright acquisition of ships and also to help domestic shipping companies acquire vessels through an easier method of financing. From the nations perspective, this method was invaluable in achieving the twin objectives of tonnage enhancement and lower foreign exchange outgo during the foreign exchange crisis in early 90s; since exchange outgo instead of being outright, is through multiple instalments spread over a period of time. Certain development has made the sailing rough for BBCD vessels. First, the government allowed foreign direct investment of upto 51% under the automatic route in the shipping sector, which was later increased to 74 % and even 100% on a case-to-case basis. Subsequently, a few foreign companies established operations in India and purchased vessels under the BBCD route, taking advantage of the clause that allowed such vessels to be treated at par with Indian flag vessels for all purposes including preferences in the shipment of government cargo and cabotage cargo on the Indian coast even when the vessel is not flagged in India. The matter came to a boil in 1999 when Indian Oil Corporation (IOC) invited tenders from domestic shipping companies for transporting petroleum products along the Indian coast. Also, invitation of offers was made by IOC to companies like Amar Shipping and Pratibha Shipping, whose fleet mostly comprises ships acquired under the BBCD route, whose majority shareholding is held outside India, and which was opposed by domestic shipowners. The point of contention - should BBCD vessels be allowed domestic trade? It is in the negative, as far as the recent decision by the Ministry of Surface Transport is concerned. The arguments against BBCD vessels were that they being foreign flagged, do not have to satisfy the stringent norms under the Indian flag. As a result they were in a position to quote a more competitive rate than the Indian-flagged vessels. As a compromise with MOST, Pratibha Shipping would convert all its vessels into Indian flag to qualify for coastal shipping. The National Shipping Policy Committee, after going into the grey areas, has recommended that BBCD vessels in companies where the foreign shareholding is more than 51% should not be eligible for cabotage. This recommendation, however, has become irrelevant now in the light of the fact that 100% FDI has been allowed into the shipping sector on a case-to-case basis under the automatic route. Has cabotage laws led to complacency on the part of the Indian shipowners and hence deployment of BBCD vessels would provide the much needed competition to rejuvenate the sector? Indian coastal fleet has stagnated at 0.7 million tons GRT over the last one decade. The average age of the Indian fleet is almost 20 years. The sector is unable to compete with railways and roads despite having a large number of inherent advantages. Two years back, Tamil Nadu government owned Poompuhar Shipping Corporation responsible for transportation of coal for power plants under Tamil Nadu Electricity Board, filed a request with DG of Shipping for hiring of foreign vessels alleging that Indian shipping lines act in unison and thus do not provide a 'free competition' environment. Further, vessels are unable to meet the target discharge rates and thus operate below desired efficiency level.

Page 12 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Regulation of Indian Shipping Industry In keeping with the strategic importance accorded to the shipping industry, the Indian government has historically on one hand, provided considerable protection to the industry through a scheme of cargo and freight support. And to bring in a measure of equity and control on the other hand, the government had also been following a practice of strictly regulating the industry through restrictive covenants in the Merchant Shipping Act, 1958 especially with regard to acquisition and disposal of ships, as well as the attendant financing mechanisms. A corollary arising from the above is that while the industry depended upon the regulations during its nascent stages of growth, in its mature state, they proved restrictive and hampered growth. The Indian industry was stuck with a relatively old fleet and without access to sufficient funds for expansion. As a result the share of the domestic industry in the country's foreign trade stagnated in late 80's and has never been fully exposed to international competition since. Liberalization in the Indian economy has been accompanied by lower levels of protection for the industry especially in the tanker and bulk cargo segments. In addition, funds from existing institutional sources have been raised in line with prevailing domestic rates. As a result Indian ship owners have been exposed to higher levels of competition. Merchant Shipping Act 1958 provides a basic legal framework for governing the Indian shipping industry. Ministry of Surface Transport Under the Constitution of India, Merchant Shipping is a central subject and is being dealt with by the Ministry of Surface Transport (MOST) of the Government of India. The Ministry deals mainly with the larger issues relating to policy and legislation while the Directorate General of Shipping deals with all executive matters relating to merchant shipping. Directorate General of Shipping Directorate General of Shipping (DG Shipping) comes within the purview of Section 9 of the Merchant Shipping Act, 1958. It functions under MOST and is the main regulating authority of Indian Shipping Industry. However, with increasing deregulation of the industry, its role has also been diluting. DG Shipping is responsible for issuing licenses to vessels for operating on both international and coastal routes, as well as for licensing of vessels, which are chartered by Indian citizens, including vessels flying foreign flags. MS Act also empowers the body to delegate survey work of Indian ships to the Indian Register of Shipping (IRS). The Director General of Shipping has the following allied offices and institutions under his administrative control: Mercantile Marine Department Training Institutes - T. S. Chanakya, Marine Engineering & Research Institute, Lal Bahadur Shastri College of Advance Maritime Studies and Research Rating Training Establishments Shipping Offices Seamen's Employment Offices

Page 13 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Seamens Welfare Offices Regional Offices (Sails) The DG Shipping also has under his administrative control the First Secretary (Shipping), High Commission for India in London, to keep liaison with International Maritime Organization (IMO). The MOST is planning to restructure the DG Shipping and make it into an independent statutory or autonomous body, with powers to regulate and develop the shipping industry. Mercantile Marine Department The functions of MMD include survey of ships, safety measures at sea, registration of ships. Shipping casualties and examinations for grant of certificates of competency to seafarers. In the discharge of their duties, the Principal Officer and the other officers are subject to the administrative control of the Directorate General of Shipping. Mercantile Marine Department (MMD) has offices at Bombay, Calcutta and Madras. The subordinate offices at Jamnagar and Mormugao are under the Principal Officer of Bombay, at Cochin, Visakhapatnam and Tuticorin are under the Principal Officer of Madras and those at Port Blair and Haldia are under the Principal Officer of Calcutta. Indian Register of Shipping Indian Register of Shipping (IRS) has been authorized by the Indian government to carry out surveys such as Assignment of International Load Lines, and for the issue of Cargo Ship Safety Construction and the International Oil Prevention (OPP) certificate. While the certification of the above is mandatory, it is not a stricture on the Indian shipping companies to get their vessels classified under IRS. The objective of IRS is to evaluate, assess and certify quality management systems in the shipping industry. Further, the organization establishes standards and formulates rules for the construction and maintenance of ships, amphibious installations, marine equipment and industrial and general engineering equipment. IRS has classed over 700 ships since the time of its inception, with the gross registered tonnage (GRT) reaching 7.2 million tonnes. The organization has now diversified into various other activities and expanded its scope of services. The DG Shipping also has under his administrative control the First Secretary (Shipping), High Commission for India in London, to keep liaison with International Maritime Organization (IMO). The MOST is planning to restructure the DG Shipping and make it into an independent statutory or autonomous body, with powers to regulate and develop the shipping industry. Previously the International Classification Societies including Lloyds Register of Shipping, NKK of Japan and American Bureau of Shipping could issue International Load Line certificates to Indian flag vessels. The government withdrew this permission in the mid-90's and instead has given exclusive authority to IRS to issue such certificates to Indian ships. In addition to certification, most of the Indian shipping companies get their vessels classified under Indian Register of Shipping simultaneously. However, these ships are also classified under a foreign classification society, the reason being that several of these ships are operating in international waters; if they have to take intermediate surveys, IRS

Page 14 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

would not be able to carry these out at a foreign port. Further, IRS is still not a member of International Association of Classification Societies and hence enjoys lower acceptability. The government feels that Indian Shipowners could get IRS services at a much lower rate than those charged by foreign societies. In any case, we believe that the government must leave the industry free to choose whichever agency it wants to for load line surveys, consistent with its commitment to liberalization and deregulation. It must intensify its effort to market its services to both Indian shippers and others and compete with other classification societies of international repute in respect of both quality and cost of service. In order to maintain acceptable standards and provide worldwide coverage for its services, the IRS has entered into agreements of mutual cooperation with all major International Classification Societies with arrangement of survey all over the world. National Shipping Board National Shipping Board is a statutory body set up under the Merchant Shipping Act, 1958 to advice the central government on matters relating to Indian shipping. The board consists of six members elected by the Parliament, four by the house of the people from amongst its members and the other two by the council of states from amongst its members. The Central Government may appoint to the board other members to represents - central government, ship owners and seaman.

Page 15 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Seaports
Seaports are the interface between maritime and inland modes of transport for movement of goods and passengers. In broader terms, ports are a single organizational unit with multidimensional activities integrated within the logistics chain for providing services to maritime trade. The prime objective of a seaport is to provide fast and safe transit of goods and passengers through its facilities at minimal cost. Globally, sea borne trade is being made through more than 2,000 ports, from single berth locations handling a few hundred tonnes to multipurpose facilities handling up to 300 million tonnes per annum. Seaport traffic through out the world has achieved an average growth of 3 per cent per annum in the past decade and as per 'Clarkson Research Studies' reached to around 5.36 billion tonnes in 1999. Port sector in India, comprises of 11 major ports and around 40 active minor and intermediate ports and handles more than 300 million tonnes of cargo per annum. The sector has witnessed large-scale investment in the past decade with more than Rs 150 billion invested through government and private sector for the modernization programme. In the new era of liberalization and privatisation, functionality of seaports is changing from their traditional role as an organization in charge of all port activities to become a coordinator of these activities. High degree of competition has resulted into reduction of excess labour, aggravated by the trend towards intensive investment of capital at seaports through private sector participation. Free Ports / Free Trade Zones A free trade zone has been defined as a specified area where trade is based upon the unregistered international exchange of goods, with customs tariffs used only as a source of revenue and not as an impediment to trade development. Free ports are thus onshore enclaves treated as customs free zones or technically as foreign territory for tax purposes. They are designed to attract overseas traders and manufacturer to set up business. Duty is payable only when goods move into the host country. Goods which from are imported from abroad are not subjected to any domestic tariffs, duties or regulations until they actually leave the free port. If their destinations until they actually leave the free port. If their destination is another foreign country, they are permitted to leave the free port without the burden of the customs dues which they would have incurred at any point. If the Imported goods leave the free port for a destination in the same country, they are taxed on leaving the free port as if they had just arrived from abroad. The concept of the free port is that of a focus to attract investment, which will stimulate the domestic economy. It is intended to attract foreign goods to receiving centers located with in it, at which inspection, packaging, sorting, labelling and reshipment will take place. The free port thus aims to become an entry pot. Facilities on Ports The facilities available at the Multi-Purpose Berth at present are capable of servicing Conventional Cargo Carriers, Self-sustained Container Carriers, and Ro-Ro Car-Carriers, which usually ply the trade routes in this region. The access to the commercial berth is through a dredged canal 2.6 kilometres long and which could

Page 16 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

accommodate Vessels with a maximum draught of 9.5 metres. The depth alongside is 10 metres, and is capable of accommodating second generation Containerised Vessels. The Berth planning unit provides a scheme whereby Mother/Feeder Vessels are given priority services to meet their critical shipping schedules. The Refrigerated Container facility at Terminal should provide universal plug points to cater for imported as well as transit refrigerated cargo. To assure a very high quality service for this expensive cargo, the Reefer facility will be fully backed up by a Reefer Container monitoring service. This will guarantee the Shipper/Consignee that the cargo is maintained at the required critical temperatures during the full transit period. An independent power supply source is available to ensure continuous power supply for the safety of the cargo. Storage Facility The total terminal facility should cover a container stacking area of maximum square metres. For more versatility in operations, the yard equipment will be backed by a fleet of the latest Reach Stacker Machines, which could meet any unexpected downtime due to breakdown of yard gantries. Warehouse Services The Ports Department should provide Long Term storage Warehousing facilities for use by Importers and Exporters. This facility is situated just outside the Port Premises, and is considered an asset to the major Importers. With the Customs Department situated within the same port complex, it provides easy processing of documents, as well as low transport costs to the operators. Whilst the occupancy levels are at optimum, studies are being carried out to improve on the services and facilities provided. Mechanical Handling Equipment Rubber Tyred Gantry Cranes (Transtainers) Valmet Side Lift Fork Lift Trucks for Empty Container Handling Caterpillar Container Handling Caterpillar Sve Truck Kalmar - Reachstacker Prime-Movers for Container Haulage Mitsubishi-Prime-Mover Prime-Mover-Container Terminal Tractor

Page 17 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Cargo Handling Forklifts Caterpillar Marine Craft Tug Boat Pilot Boat Dredger Security and Safety Fully fenced perimeter and independent Gate House for better security and easy access. The High-mast security lighting should locate at all vantage points, and also backed by a stand-by generator for continuous power supply. The entry of personnel into the Terminal will be strictly controlled by way of approved entry permits. These permits will be issued and checked by the Ports Department Security personnel who will be manning the gates on a 24-hour roster system. The safety and security of the cargo will be further enhanced with the installation of a closed circuit television system (CCTV), within all areas accessible to the public, and the operating staff. The Terminal is also equipped with the latest in Fire detection equipment, and adequate Fire fighting equipment. Additionally, the fully equipped Fire Station should situated just outside the Port, with it's own Fire personnel; will have immediate access in any contingency. Entry to, and exit from the Port premises is subject to documentary and Physical checks. Therefore it is strongly recommended that persons who wish to enter the Port premises should have in their possession a valid entry pass. For Bona-Fide Visitors, these passes could be obtained at the Port Gate-House, on production of a valid identity document. All cargo movements to/from the Port are subject to the normal security procedures, which are carefully but expeditiously carried out by the Ports Department Security Section. Container Terminals Handling Services details Container Terminal has been required to offer container logistics and to assist shipping lines in providing quality services. The terminal should situate near the port. The terminal is fully equipped with the most modern and efficient container handling equipment. Computerized operation allows to offer the unique services of receiving the empty / full containers as well as the storage and delivery facilities to shippers of shipside. Handling and delivery of full containers to the respective consignees, which is shipped on the "door to door" basis.

Page 18 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Providing handling and storage facilities for our clients, both for the import and export containers. Haulage of containers to and from the consignees' warehouses to the Globe. Terminal and ultimate delivery to port for shipment. Stripping and re-stuffing of the containers. Cleaning and repairing of containers. Marine services should offers following comprehensive range of services: Warehousing / storage (long term / short term) & distribution Expert packaging & crating Procurement - local & international Custom clearance for exports & import cargo Container dept / terminal services Bulk transport Special services for projects Removal of household goods/personnel effects on door-to-door basis Insurance General cargo Ambassadorial movements Office re-locations Compound & villa movers

Indian Scenario Indian port sector comprising of 11 major ports and 139 minor and intermediate ports (of which around 40 are currently active), handles more than 300 million tones of cargo annually. Major ports are parastatal bodies formed on the basis of Major Port Trusts Act, 1963 and provide service to an exclusive hinterland. On the other hand minor ports, under the control of State Maritime Boards, were minor in their role until a few years back and never competed either with the major ports or amongst themselves. However, things have changed in recent times with the opening up of the domestic port sector to private operators. Entrusting private operators to manage certain terminals within the ports through concession agreements has led to the gradual privatisation of Indian major ports. With intense competition, the role of Indian ports is changing from a Service port model, where owning of port infrastructure, superstructure and providing of services are borne by port itself to a Landlord port model. Growing demand for handling of large size vessels through out the world has also made significant impacts on the domestic port sector by making it one of the major parameters of competition between existing ports and new ports. While Mundra port in Gujarat has already been commissioned having deep draft to berth large vessels, all the new port projects in the pipeline viz. Dhamra, Orissa; Gangavaram, Andhra Pradesh; Karwar, Karnataka would be deep-water ports. Owing to greater awareness of increased role of the market forces, steps have been taken to provide greater managerial and operational flexibility to the major ports thus leading to corporatization. Government has also moved forward with the plan to corporatize all the major ports gradually thereby leading to increased efficiency, financial and operational autonomy and subsequent privatisation. Ennore Port has already been registered as a company under the Company's Act, 1956 and similar attempts are on for Jawaharlal Nehru Port and Haldia Dock Complex. Keeping with the global trend, nearly Rs. 150 billion investments have been made till date, much of it in the last few years, to modernize facilities in existing ports and build new facilities. Gradual opening up of

Page 19 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

the Indian economy coupled with the regulatory changes in port sector and a considerable gap between demand and supply of port facilities have encouraged and facilitated such massive investments in this sector. Indian port sector has shown substantial improvement in the last one decade by way of port facilities and cargo handling. Trade volume of the country has been growing at an annualised rate of 7% over the past decade and cargo traffic at Indian ports is expected to reach around 537 million tones by 2006-07. To meet this huge demand, massive investment is expected for developing new port facilities through private sector participation with a gradual shift to 'Landlord' type of functioning. The Indian economy has however shown fall in the growth from 6.8% in FY1998-99 to 5.9% in FY19992000. The fall mainly reflects a slow down in agricultural production after previous years bumper harvest. However, activities in the industrial and services sector strengthened during the year, buoyed by a revival of exports and the pick up in domestic demand. Thus, the growth in GDP from the industrial sector accelerated to 6.9% from 4.0% in the previous year, while services grew at last year's level of 8.2%. Both imports and exports measured in USD have grown by 8% in FY1999-2000. In contrast, exports fell by 4% in 1998-99 while imports grew by less than 1%. This trend is reflected in terms of volume of cargo handled by major ports, which grew by 8% in FY1999-2000 against stagnation in the previous year.

Stevedoring and Warehousing


Transy designs and co-ordinates technological schemes for reloading and securing of heavy-lift and out of gauge cargoes on rolling stock. It makes customs confirmation of shipping export cargoes. It lashes, secures and separates cargoes on transport means. provides logistics scheme of transportation organizes the handling/stevedoring and storage of cargo. arranges customs clearance of cargo or registration of cargo according to the procedure of customs transit. arranges weighing of cargo in rail wagons, trucks or tally, sorting out and marking. arranges the examination of cargo quality (Grain State Inspection, veterinarian supervision, phitoquarantine control, etc) issuing certificates provides issuing of the set of cargo documents (B\L, railway bills, cargo reports, general statement of discharging of vessel /outturn report , etc.) states of shortage/surplus and damage to cargo. arranges monitoring and search of railcars arranges insurance of cargo on behalf of the Customer arranges further distribution by sea and river transport, truck and railway

Custom Clearance of Import Consignments


Documentation The documents, which are mainly required for customs clearance, are: a. b. c. d. e. f. Invoice Packing List Bill of lading/Air way Bill Purchase Order Country of origin certificate import of 2nd hand goods) Chemical test certificate

Page 20 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

g. h. i. j.

Insurance Certificate Freight Certificate Technical Write up/Catalogue/Drawing Chartered Engineers Certificate

a. The invoice is the most important document required for customs clearance. It should clearly indicate the item supplied. In case of more than one item, the value should be clearly indicated item wise. If the item comes in completely knocked down condition, it should be mentioned in the invoice. The value should be a single value in this case covering the entire consignment. ITO the extent possible the BTN (Brussels Tariff Nomenclature) heading should be given for easy classification of the item. The invoice should also indicate the electrical rating of the electrical items. b. The packing list is another vital document with the help of which the volume of the consignment and contents per package can be determined. Therefore the details of packing should be proper it can be determined the exact no. Of packages, its volume and weight. c. The Bill of lading/Air waybill is the receipt issued by the carrier. It also gives the details of the consignment. The import clearance document is prepared and submitted to customs on the basis of this document. d. The purchase order is issued by the indenting department and raised on the supplier for sending the materials. In our case the purchase order is raised on M/S Tata Ltd, London, our overseas buying agent who in turn raise another purchase order on the supplier for supplying the materials. e. Country of Origin certificate is another vital document, which is required for customs clearance. It gives the details of the place/country of manufacture of the item imported. f. Chemical test certificate is generally required for import of raw materials from which the chemical properties of the product can be found for customs classification/ duty rate. g. The insurance Certificate gives the details of the insurance of the item and also gives the details of the premium amount paid. This amount is added to the FOB value of the material. h. The freight certificate gives the details of the freight amount paid for the imported material. It is generally issued by the overseas carrier/agent. In case the Bill of lading is issued on Freight Payable basis, then the local Agent collects the freight amount. A Bank certificate is required in this case for remittance purpose. i. The technical write up/catalogue/drawing is required for explaining the function of the item imported. It is also required for correct classification in terms of the Customs Tariff. In case of import of any 2nd hand item, it is compulsory to produce this certificate for proper valuation of the item as per Customs law. Classification of Import Items as per Custom Tariff Customs classification is the main thing by which the duty rate of the import item is determined. Customs classification is mainly done on the basis of the use of the items sought to be import barring few cases where duty rate is determined from the material of construction. Reading together the wording of the relevant section notes, chapter notes and the tariff headings also determine classification. Therefore it is extremely important that the import items are classified properly for the purpose of paying duty correctly. The two main documents required for the same are - 1.Purchase order 2. Invoice. The duty rate is taken from the Customs Tariff book (both Customs & Central Excise). 1. The purchase order should clearly mention the item sought to be imported giving the FOB value. It should also give the details of its function i.e. whether it is a part of machine or it is equipment having individual function. If the item is a part of a machine then it will be classified as a part of that machine and the duty rate will be with reference to the duty rate of that machine. If it is

Page 21 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

individual equipment, then it will be classified, as equipment and the duty rate will be based on its functions. In addition to this the material of construction should also be given. In addition to the above, the following details should be incorporated: a. Name of the indenting Department b. Final destination of the cargo c. The Marks & numbers to be embossed on the packages. A Technical write up should be attached giving the technical details of the item, especially in case of electrical items the electrical parameters i.e. the voltage & ampere should be given. In case of import of multiple items against a purchase order the details should be given item wise also indicating the value item wise. The technical write up should also give the item wise technical details. A copy of the purchase order should be sent well in advance to TKM Division. In case of any amendment, an amendment advice should be given. 2.The supplier should be advised to prepare the invoice with reference to the purchase order only. The supplier should indicate the value clearly. The terms of the payment should also be clearly indicated in the invoice. If multiple items are imported against one invoice, the item wise value should be given. In case of free of charge supply, a nominal value for customs purpose should be given and it should be clearly mentioned in the invoice that the items have been supplied free of charge. In case of replacement, the replacement details should be given in the invoice. Clearance Procedure Import clearance procedure has been computerized by Customs with the incorporation of E.D.I. system (Electronic Data Interchange system). Under this system the entire customs formalities are done through the computerized system. Importers are only required to submit one declaration in a specified format. After completion of the clearance formalities, computer generated duplicate & triplicate copy of the Bill of entry is given to the party. The duplicate copy of the Bill of entry is the importers copy to be kept by the party for future correspondence. The triplicate copy is the exchange control copy, which is required to be submit to RBI for remittance purposes. Duty payment formalities have also changed. Nowadays, the duty payment advice is also generated through the computer. The duty amount is deposited in the bank. The fund is then electronically transferred to Customs account. Manual processing is still done for certain categories of import. Import of goods under DEPB scheme is one of them. In order to expedite clearance of goods, it is permissible now to file the import bill of entry 30 days in advance of the expected date of arrival of the vessel or the aircraft the processing can be completed and the document can be kept on hold for final noting. On arrival of the vessel/aircraft, the B/E has to be submitted for final noting and after final noting duty can be paid. The rate of exchange applicable will be the rate prevailing on the date of filing the advance B/E. If the ship /aircraft does not arrive within 30 days, the advance B/E will cease to be a legal document and a fresh Bill of entry will have to be filed. In that case, the rate of exchange and the rate of duty etc. would have to be regulated by the date of presentation of the new B/E. Import of 2nd hand Goods Import of any 2nd hand item is restricted as per present import-export Policy. It means that Special Import license is required (for 5 times of the CIF value of the item). In addition to this a certificate from a listed Agency is required giving the details of the item including the year of manufacture, the price of the item in the year of manufacture, the condition of the item, details of the reconditioning of the item and the present market value. This value is verified by customs as per their procedure and then the assessments

Page 22 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

done. Normally, the rate of depreciation of value as allowed by customs from the year of manufacture is as follows: a. For the first year 16% b. For the 2nd year 12% c. For the 3rd year 10% For the 4th year & thereafter 8% Valuation - Imported Goods Most of the customs duties are ad-valorem. Therefore the goods are to be valued for the purpose of assessment. The relevant statutory provisions are section 14 of the customs tariff Act 1962 and customs valuation (Determination of price of imported goods) rules 1944 framed under section14 (1a) and brought into force w.e.f. 16.08.1988, commonly referred to as valuation rules. These rules follow the GATT and WTO provisions where under the transaction value or the invoice value is taken for the purpose of assessment. Unless the invoice price already includes ocean freight and insurance, these elements have to be added to make it CIF value: 1. For Air cargo: Actual airfreight, but not exceeding 20% of FOB value. Where actual sea/air freight Is not ascertainable: 20% of FOB value Where actual insurance is not ascertainable: 1.125% of FOB value. Landing charges is to be taken as 1% of CIF value to get the assessable value for the purpose of assessment. In case of collaboration agreement loading of 1% of the assessable value will be done and the customs will resort to provisional assessment till the valuation certificate is obtained. Demands and Refunds If customs duty happens to be short paid or excess paid, there is a provision to demand from, or refund to, the importer the differential amount provided the demand or claim for refund is made within six months from the payment of duty. In case of goods exempted by order under section 25(2) of customs act 1962, the limitation of six months for refund will be computed from the date of issue of such order. In case where the duty is paid provisionally, the limitation for refund shall be computed from the date of adjustment of duty after the final assessment thereof. Refund claims for duty and interest should be filed according to the prescribed format as directed by customs. In case of wilful mis-statement or suppression of facts by the importer or collusion, the time limit for customs demand gets extended to five years. Section 27 is relevant for refund claim & Section 28 is the relevant section for Demand from Customs. Warehousing If the importer does not want to use the entire stock immediately or he is not in a position to pay the full customs duty liveable on the goods, he can file an into bond Bill of entry for warehousing of the goods. Public warehouse run by central ware Housing Corporation or by state warehousing corporation has come up at all centres. In certain case customs allow licensing of private bonded warehouses. In our case customs have given us license to convert a portion of our godown at LGR Jetty as private bonded warehouse. The goods can be cleared for Home consumption on payment of duty by filing Ex-bond Bill of Entry. Except for capital goods intended for 100% export oriented units, warehousing is allowed for a period of one year only suitably reducible for perishable goods and extendable for other goods by Commissioner of Customs for six months and by Chief Commissioner thereafter provided the goods are not likely to deteriorate during the extended period. Interest on warehouse goods at a flat rate of 24% is

Page 23 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

chargeable after completion of six months of warehousing period. Interest is not payable for over-stay if goods at the time of removal from warehouse were duty free. Duty Entitlement Pass Book Scheme (DEPB) This scheme is patterned on the credit- debit system of central excise cenvat scheme is scheduled to phase out by March 31, 2002. Under this scheme, exporters are granted duty credits on the basis of pre-notified entitlement rates, which will allow them to import inputs duty free. The exporter can export any product under the DEPB scheme provided the same is covered by the standard input-output norms. However, pre export DEPB scheme stands abolished. The importer has the option to forego exemption from CVD and pay the CVD in cash so that he or the customer can claim cenvat credit. Goods in the negative list of exim-policy cannot be exported. Passbook credit can also be used for paying duty on (1) SIL imports and (2) import under other schemes like EPCG scheme or project imports, thereby availing the exemption from the special additional duty of 4%. In case the imported goods are eligible for another partial exemption from payment of duty, such exemption would also be applicable to goods imported against a DEPB scrip. In case of goods imported under DEPB scheme found unfit for consumption, the commissioner may allow their re-export and grant a DEPB entitlement certificate equal to 98% of DEPB credit debited at the time of their import. If export proceeds are not realized within six months or such extended period as may be allowed by RBI, or are short realized, the passbook holder should pay in cash an amount equivalent to the amount of credit obtained against such exports or against the value not realized. However post export DEPB is transferable without waiting for realization of export proceeds in respect of shipments against irrevocable letter of credit. DEPB scripts cannot be utilized for import of capital goods. Drawback An alternative option of Duty drawback is also available under which products made out of duty paid inputs are first exported and thereafter refund of duty is claimed. Drawback of 98% customs duty (including anti dumping duty) can be claimed if imported goods are re-exported as such within the specified period as per drawback rules. In respect of claims filed on or after 08.01.99, customs should pay the drawback within two months of export or pay interest thereon for the period of delay. Details are given in Section 74 &75 of Customs Act 1962. EPCG Scheme Import of capital goods at 5% concessional rate under EPCG scheme, subject to export obligation is now applicable to all sectors and to all capital goods without any threshold limit. No payment of additional customs duty and special additional duty applies. The scheme has also been extended to identify service sectors also. There is an across the board stipulation of FOB export obligation of 5 times of CIF value of imports (or 4 times the CIF value of capital goods on a net foreign exchange basis) which is to be fulfilled in a period of eight years. Relocation of imported capital goods in the factory of the supporting manufacturers and service providers is permitted provided their name and address is endorsed on the license. A person holding EPCG license may also source capital goods from a domestic unit instead of importing them, at the same rate of duty. In return the domestic unit would become eligible for import of components for manufacture of capital goods. He can also replenish the components after supply of capital goods to the EPCG license holder. Where drawback is claimed, export does not count for discharge of export obligation under EPCG scheme. Project Imports In exercise of the powers conferred by section 157 of Customs Act 1962 and in suppression of the project import regulation 1965 this regulations have been made. These regulations shall apply for assessment and clearance of the goods falling under heading no.98.01 of the first schedule of the customs tariff Act 1975.

Page 24 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

The assessment under the said heading shall be available only to those goods which are imported against one or more specific contracts, which have been registered with the appropriate custom house in the manner specified in the regulation 5 and such contract or contracts has or have been so registered before any order is made by the proper officer of customs permitting the clearance of the goods for home consumption or in case of the goods cleared for home consumption without payment of duty subject to reexport in respect of fairs, exhibitions etc .duly sponsored or approved by the Govt. of India or Trade Fair Authority of India, as the case may be, before the date of payment of duty. The benefit of import under project is available for new expansion or substantial expansion of an existing plant, which will increase the existing installed capacity by not less than 25%. Under this scheme plant, equipment can be imported with spares (Subject to 10% of the value of the main equipment) under the same customs tariff heading thereby saving Customs duty. Import of Design & Drawings Import of Design & drawing is related to import of drawing related to plant and equipment or for upgradation of an existing plant. As per customs valuation rules, the value of the imported design & drawings have to be included in the value of the imported main equipment if the same is found to be engineering drawings and they are found to be related to the import of main equipment. But erection drawings can be cleared duty free as per CEGAT judgement under Customs tariff heading 49 and the value shall not form a part of the value of the imported equipment. Other drawings can also be cleared duty free provided they are not related to import of any major equipment. Nowadays import of Design & drawing is allowed through the e-mail route but remittance cannot be made unless they are customs cleared. MODVAT / CENVAT Credit Modvat scheme is being replaced by a new Cenvat scheme w.e.f. 1 st April 2000. In the new scheme both inputs and capital goods have been covered in the same set of rules. Under the new scheme, all finished goods except matches would be eligible for Cenvat credit. Similarly the scheme is being extended to all capital goods. Restrictions of 75%, irrespective of capital goods credit on project import heading have been removed. Capital goods will now be eligible for credit of additional duty also. Cenvat credit will be available for duty paid inputs or capital goods received and used in the factory. This credit may be utilized for payment of duty of excise levied under the first schedule on any final product manufactured by the manufacturer. The cenvat credit will not be allowed in respect of that part of the value of capital goods which represents the amount of specified duty on such capital goods, which the manufacturer claims as depreciation under section 32 of the income tax act 1961 or as revenue expenditure under any provisions of the said income tax act. The cenvat credit shall be allowed even if any input or capital goods are sent to a job worker for further processing, testing, repair or any other purpose and it is established from the records produced by the assess that the goods have been received back in the factory. If a manufacturer of a final product shifts his factory to another site or the factory is transferred on account of change of ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provisions for transfer of liabilities of such factory, then the manufacturer shall be allowed to transfer the cenvat credit unutilised in his accounts to such transferred, sold, merged, leased or amalgamated factory. The transfer of the cenvat credit under the above shall be allowed to the extent of credit contained in the stock of inputs as such or in process, or the capital goods also transferred along with the factory.

Page 25 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Economics of Ship Operation


The economics of ship operation today warrant close attention by management to ensure that the service provided is viable, competitive and best suited to the market requirements, having regards to safety, statutory obligation services standards. This entails careful evaluation of a wide range of elements. The constituents of the voyage estimate can vary by some 10 per cent owing to price changes and will differ according to the type and will differ according to the type and age of the ship and the country of registration. For example, a passenger vessel will have a larger crew than a cargo ship, so that crew cost will account for a greater proportion of the total. a) The cost of fuel oil is 25.6 percent of the total. Fuel economy is therefore a crucial consideration in scheduling. In the next few years research will be undertaken to devise more economical ship machinery and hull designs to produce the optimum speed compatible with the most favourable fuel consumption level. Items Percentage of total costs 25.6 0.9 1.2 4.0 25.0 0.4 8.0 30.2

Fule oil Lubricating oil Engine maintenance Hull Maintenance Crew Costs General administration Insurance Capital Cost (depreciation, interest charges, etc.)

(b) In the example, capital charges come to about 30 percent of the total. Ship owners from countries that offer loans it low rates of interest and subsidise for building or operating vessels will not face such a heavy burden; this applies especially to the Eastern bloc and developing Countries. (c) Crew costs represent one quarter of total costs. This important subject is treated at greater length in the following section. It is apparent from this brief analysis of the table that vessels operating in subsidized fleets and/or paying lower wages have significantly lower voyage costs and are therefore at a competitive advantage. Moreover, many of the rapidly expanding fleets that falls into this category - particularly. Those of India and China - have been built up by purchasing second-hand modern tonnage at low prices, a fact that further boosts their competitiveness. Against this back ground it is essential that the fleets of the Western hemisphere operate on, the principle of the commercial freedom of the seas. Ship Operations The vital link between the marketing abilities of a shipping pool's commercial department and the financial records, statistics and guidance provided by an accounting division, is that supplied by operations staff. Like their counterparts in the other sections of a pool's administration, operations

Page 26 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

personnel must behave on the one hand as charterers but also act on behalf of shipowners, or as the representatives of disponent owners. Also like their counterparts, they must understand the relevance of their skills within the general format of a pool's management structure, appreciating the importance of cooperation and teamwork to the success of the Organisation. Particularly in the case of operations staff, however, the need for teamwork and co-operation extends beyond the limited confines of a pool office and its personnel, to include amicable liaison with those responsible for the ship management of members' vessels, and with the officers and crews manning the ships themselves. The background of a pool's operational staff may be as varied as the tasks they undertake, but certainly among their talents should be a thorough knowledge of the ships with which they are involved, supported by seagoing experience on the part of at least one or more staff. Their abilities should also be such that they can assist and provide guidance to commercial personnel in technical aspects of the negotiation of charter parties and contracts, as well as help financial staff prepare freight and hire statements; check port disbursement accounts; and negotiate fiscal transactions with shipowners and charterers alike. There should also be sufficient personnel to allow for the frequent travelling that will be required, not only simply to visit ships and, perhaps, to assist with the handling of particular cargoes, but to meet outside associates such as port agents, and to call regularly on those filling comparable roles in the offices of the husbandry managers of pool members and those companies operating vessels on period time charter to the pool, as well as meeting the staff of Cargo contactors, shippers and receivers. They may well be called upon additionally to accompany commercial representatives of a pool on marketing visits to outside organisations. Obviously, given this substantial travelling workload, there must be sufficient operations staff to ensure that a pool office is always adequately manned by experienced personnel, as to fail in this respect not only opens the pool's operations to the risk of serious problems but creates a poor impression to outside personnel seeking guidance, replies to queries, or whatever. Furthermore, it is vital that operational staff manning the head office of a pool and responsible for the smooth running of its many and varied undertakings, should be, in Constant touch with that office. It is therefore important that a company home telephone arrangement is available, and after-office hours communication details regularly updated and passed around to ships' masters and all those having operational business with a pool. With a computerised office, it is equally essential that, via telephone modems, a link is established between a home computer terminal and Office equipment for certain Operational staff, enabling them to be in easy reach of the information available in a pool's computerised records, as well as being able to utilise the computerised telex system, both to peruse incoming messages and to transmit telex messages when necessary. Mention has already been made of the varied tasks that require the attention of a pool's operational staff, made more complicated than might be the case in a typical ship owners office because of the need for a pool's personnel to consider aspects from the viewpoint of being the representative of shipowners, disponent owner and, perhaps, charterers. It would probably be of benefit to the reader to describe these tasks in greater detail, first studying the importance of good communications. COMMUNICATIONS The importance of effective communications between merchant ships and those responsible for their operations cannot be stressed too highly. Increased efficiency, more effective management and lower operating costs will all result if modern equipment such as satellite communication is installed on board merchant ships, and though this technology is not cheap, its cost compares favourably with current freight levels and its use should be encouraged by a pools management even to the extent that it is mandatory for all pooled vessels to be so equipped, Certainly, potential changers of merchant ships-pools among

Page 27 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

them-should count this facility as a major consideration when comparing beneficial and adverse aspects of ships that may be proposed to them for period employment. Unfortunately, there remain various ports and, indeed, nations around the world where communications via shore personnel and facilities can best be described as inadequate and, in some cases, abysmal. Nevertheless, because of the general unattractiveness of such regions of the world, freights are often high to compensate for port delays and other difficulties, poor communication among them. So an Organisation fixing to such parts can gain a distinct advantage compared with rivals indulging in the same business by at least being able to communicate easily with those on board their own vessel and in this way being alerted to any local problems and, of equal importance, to the readiness of the ship for her next cargo. But modem technology on board merchant ships is only, part of the matter. Enough has already been written in preceding chapters for the reader to note how essential it is for a modem office, providing the facilities required for commercial operations in today's marine environment, to be equipped with the latest in computer and telex technology, combined with an adequate telephone system and telefax services. The saving in time and convenience will far outweigh the cost factor, provided care is taken in the choice of equipment. OPERATIONAL DUTIES The basic operational duties of the staff of a shipping pool will emulate the tasks undertaken by the staff of any 'traditional' shipowners, but in addition will encompass the duties that would be undertaken by operational staff working for an operator (disponent owner) and also for a cargo contractor. As in all shipping organisations records must be maintained and, in the case of a pool and aided by computerisation, these should be comprehensive. Details of ship movements, cargoes loaded, bunkers taken, port agents used and vessel performance must all be entered into the computer system on daily, hour-by-hour basis. Intelligent persons without seagoing experience are quite capable of achieving an excellent standard of accuracy and understanding of the import of the material they are dealing with, but all operation staff must be aware of the innermost working of the computer facilities provided for them, in order to gain the maximum benefit. A proper computer software facility should allow interesting recall variations of this data and lists should be available, virtually at the pressing of a sequence of keys, of, for example, grain cargoes loaded; or fleet vessels visiting the Panama Canal and dates Of transit; or the voyage history of one particular ship; or whatever. Regular information that computerised records can produce would include fleet position lists and port agents' details, again available at the touch of a sequence of terminal keys. Unfortunately, computerised records do not do away with the need to maintain a conventional filing system. Frankly, it seems, the 'paperless office' is as much a myth as is the fabulous wealth of El Dorado! The best division of files depends very much, of course, upon the actual make-up of the business handled by the shipping pool concerned. As far as ships are concerned, however, probably the creation of a voyage file for every vessel would take care of a great deal of operational material, while it is essential also to maintain a port information database, thereby enabling swift and easy access to useful port data that regularly reaches the desks of operational personnel in all shipping groups. For a pool actively involved in contracts of affreightment it will probably be found necessary to have a separate file for each cargo shipped or, in the case of the smaller contract, perhaps one file for the entire venture would suffice. And not to be overlooked are details of the ships themselves. A great deal of vital data can be retained in a computer's memory storage, in a planned, easily extracted format. Additionally, however, it will be necessary for a full set of general arrangement and capacity plans/deadweight scales to be kept conveniently by.

Page 28 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

But record keeping is only a fairly minor part of regular, daily operational duties, albeit an important part. Utilising efficient communications and adequate information from commercial staff, backed by record facilities such as described above, the operations staff will be in a position to properly and fully instruct masters of pooled and chartered-in tonnage as to the prosecution of voyages their vessel is to undertake. With the advent of telefax, if not on board a vessel, then frequently available via a close, local agents' office, even copies of charter parties can nowadays be speedily transmitted, backed up by effective interpretation of important clauses by satellite communication telex. Specific guidance should be given to Masters on cargo-handling matters and the voyage itinerary, deviations for bunkering, pool intentions regarding weather-routeing, pilotage, etc. Each voyage must be followed through on a daily basis, with regular reports from the masters of each ship, supplementing the information gained from port agents, bunker suppliers and all other parties involved with a vessel's progress. Throughout the entire voyage the operational staff will keep a watching brief, by dint of their experience preventing problems here possible and, where problems arise despite their close occurring where possible and, where problems arise despite their close attention, doing their best to ease matters back to normal in an expeditious manner. In a similar capacity, a pool's operational personnel must smooth the path of a particular cargo for which they assume responsibility under either a contract of affreightment or, perhaps, as cargo agents. In such a case they will be more concerned with port operations, dealing maybe with stevedores and local authorities to ensure the prompt and efficient handling of involved, its adequate and proper stowage, and local the commodity involved, its adequate and proper stowage, and local expenses incurred. Finally, in their role as disponent owner, they may well have to use all the diplomacy at their disposal to handle certain difficulties that arise between a vessel's original, real owners-perhaps some distance re moved through a chain of charter parties and the eventual charterers. One of the most common areas of difficulties that a pool's operational staffs have to deal with in such circumstances concerns bills of lading. BILLS OF LADING Bills of lading problems tend to occur at both loading and discharging ports, but usually from wellestablished and commonplace causes. Consequently, operational staff should quickly learn how best to deal with difficulties that arise, being well versed in handling such matters. At loading ports, the problem will probably concern a charterers or shipper's wish to issue 'clean' bills of lading, in other words, bills of lading which contain no remarks about alleged defects in the cargo to be loaded. This will very likely be important to the cargo interests, as letters of credit among the varied documentation required in the transfer of ownership of the goods from one party to another probably specify that only 'clean' bills will be acceptable. It may be that the goods are indeed defective in the sense that they are not being shipped in a condition that, at even this early stage in the chain of transportation is in conforming with the state a cargo receiver has every right to expect. But occasionally an over-zealous master will draw attention to minor defects that in no way affect the marketability of the commodity involved. What is called for is tact and diplomacy, both to discover rapidly the full extent of the disagreement between shipper and master; to properly assess the implications of the dispute; decide on the most appropriate course of action in solving the problem; and then acting accordingly in a matter satisfactory to all parties. Other loading port bills of lading problems could well involve the dating of the bills, or the authority given to local port agents by the master to sign these documents on his behalf. It is at discharging ports that most bills of lading problems seem to arise, however. And in nearly all cases, these

Page 29 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

concern the delivery of cargo without the presentation to the master of the original bills of lading. In such cases there are tried and tested alternatives. In the case of a short sea voyage between loading and discharging port, because of which there is insufficient time to process bills through the normal letter of credit channels, it is frequently the case that an original bill of lading travels with the master. The difficulty then is for the person claiming the bill of lading at the discharge port, and thereafter using that document with which to claim the cargo, to prove adequately his (or her) true identity, and those they are entitled to the bill. But even with long sea voyages, providing more than enough time for bills of lading to process through letter of credit formalities and still be waiting for a ship's arrival at the discharge port, it is frequently the case that the documents have yet to reach the cargo receiver in due time. The by now traditional response to this state of affairs is for the cargo receiver to sign what is known as a pandi club letter of indemnity, holding the vessel and her owners harmless in case of delivery to the wrong party. This letter can be guaranteed by the cargo receiver's bankers, or not, depending upon the wishes of the shipowners involved, or upon advice rendered by his P & I club officials. If the cargo is delivered to the wrong party and, in effect, stolen, the ramifications can be enormous, the eventual cost being down to the shipowners, if it can be shown by the wronged party that the shipowners acted negligently. Both shipowners and P & I clubs are naturally very nervous about delivering cargo other than against an original bill of lading, presented in a normal manner, although often there is nothing sinister about the fact that the bills have not arrived, nor about the character or identity of the party purporting to be entitled to delivery of the cargo. If the shipowners insists on a letter of indemnity this will normally be forthcoming in the manner and wording prescribed by the ship owners P & I club, but if he insists also on a bank guarantee, things may well start to become very difficult. Ships can very easily be unnecessarily delayed, and counterclaims develop from an aggrieved cargo receiver who desperately wants his cargo and sees no reason why he should be involved in obtaining expensive bank support for goods for which he has already paid. Once again, the natural body to clarify the reasons for the dispute identify the actual problem, and then to speedily resolve it, acting diplomatically all the time and without adding fuel to the flames of controversy, is the operations department of the pool. It is not too great an exaggeration to state that a good deal of the time of a pool's operations staff is taken up with handling bills of lading problems and it is therefore vital that the staff dealing with such matters have a thorough understanding of the law relating to bill s of lading, as well as practical knowledge and experience in avoiding disputes in the first place and, when they inevitably arise, in speedily resolving them. CARGO HANDLING Whether they be specialist pools handling a fairly restricted cargo type or pools dealing with a wide range of commodities, masters and shipowners frequently need shore assistance and advice not only on carriage of the goods involved, but also on a multitude of relevant issues, such as the adequate preparation of cargo spaces; cleaning after discharge has been effected; removal of dunnage; repair of stevedore damage; or whatever. A pool's operational staff should include a great deal of readily available 'in-house' expertise on such matters, as well as a comprehensive source of additional supportive material, such as may be found in a well-stocked library and a properly maintained filing system. The same expertise should be made available to the pool's own commercial department, the staff of which should be sensible enough to

Page 30 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

recognise when additional knowledge is needed so that appropriate wording can be inserted into contracts of carriage and similar documentation. Occasionally, however, advice via various communication alternatives is not sufficient to meet the needs of the problems which threaten to arise. In many cases these can be anticipated and ship/port visits arranged to preclude later difficulties. This port captaincy aspect of the tasks facing operational personnel of the quality required by a pool's administration should not be underestimated. Quite apart from difficulties with commodities, problems have a habit of being caused by shore-based personnel given the responsibility of handling cargo at loading or at discharging ports. Stevedores can frequently become militant due to some local dispute, unconnected specifically with either ship or commodity on which they happen to be working at the time. Alternatively, quite genuinely, they have legitimated reservations-perhaps about the commodity, perhaps concerning the ship e.g., her crane wires. There is thus very much a need for a 'trouble-shooter among operational personnel, preferably with extensive seagoing experience, firm but tactful, who can travel instantly to deal with potential problems. It is also necessary to reach an amicable arrangement with the owners of pooled vessels with regard to hold or tank cleaning-both in connection with practicalities and with costs. If a pool's commercial staffs are acting as effectively as possible, there will be frequent occasions when a cargo is scheduled to be loaded close by the place where the previous cargo was discharged. This will provide only a restricted time for hold or tank cleaning, and due allowance must be made for this restriction by the pool's operational staff, taking into consideration all factors involved. Judgement must be exercised on whether, given the commodities involved, the distance between discharge and load ports, the availability of officers and crew for cleaning work, bearing in mind safe navigational requirements, and, of course, weather conditions, whether a reasonable time for preparing cargo compartments has been exceeded. If substantially so, then there may be a case for placing a vessel 'off-hire', so as to treat fellow pool members equitably. Especially would this be so if the major factor contributing to the delay were shortage of officers and crew. In such a case a ship owners operational savings would have indirectly contributed to losses shared by pool colleagues, and this is unacceptable. A firm structure can also be established for payment of cargo preparation expenses. These might include a scale of fees based per cargo compartment to be cleaned and depend upon the degree of work involved following discharge of certain commodities. (In the case of a bulk carrier, for example, it is likely to be easier to clean after discharge of grains than following the removal of cement, and some way should be found to reflect financially the difference in the task set a shipowners and his seagoing staff.) After each discharge, adequate compensation can be calculated, the pool debited, and reimbursement towards expenses made to the shipowners involved, conveniently- by way of the resulting distribution (see Figure 5.4 supra). Any sums a pool may receive from sub-charterers in respect of the cleaning of cargo compartments, -whether a figure higher or lower than the pool compensatory amount, should be for the credit of the pool. PORT AUTHORITY As for any shipping group, a pool must maintain a comprehensive list of reputable port agents, carefully selected and best suited to serve its interest ' s and the interests of its members and clients. Although there is nothing to stop agents being replaced by others, if circumstances so dictate, the aim should be stability and mutual trust and, once selected for inclusion into the list of preferred agents for a pool, this inclusion should be looked upon as semi permanent. In return for this support, local agents can be expected not only to handle efficiently local port matters as would normally be expected of any agent, but also to act as a representative of the pool in the region in

Page 31 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

which they are based, reporting back information which may be of interest or benefit to the pool and being able to deal with delicate matters in a discreet and sensible fashion. SURVEYS AND CLAIMS Whenever a vessel is employed by a pool on a period or trip time charter basis, the pool's operations staff will be required to superintend the delivery to and, eventually, redelivery from the pool, in an efficient manner. The masters of ships so employed will be given full details of the pool structure and the personnel with whom they will need to keep closely in touch, and arrangements will be put in hand to carry out a thorough inspection of the vessel on the occasion of her delivery. It is desirable always to appoint a surveyor for, although there is no doubt that a pool's operational representative acting in the role of a port captain, together with the master of the vessel to be time chartered, can perform a perfectly adequate delivery survey of the vessel's condition in hull and cargo spaces, as well as sound bunker tanker to establish quantities remaining on board, in case of eventual dispute it is better to have an independent third party, in the form of a qualified marine surveyor, ideally mutually appointed on behalf of both parties paying an equal amount towards the cost of his services. From a pool's point of view, the surveyor should be' instructed particularly to inspect cargo spaces and handling equipment, as it is essential the vessel is able to perform in the trade(s) for which she is to be engaged. An immaculate hull is one thing, grain-clean holds perhaps quite another. The same survey process should be performed at the end of the hire period, when the condition of a vessel's hull, cargo spaces and handling equipment can be compared with their 'on-hire' state. Matters of 'fair wear and tear' should be excepted, consistent always with the trade involved, but any damage in excess of what is considered 'normal' could reasonably be put to the pool to repair. In such cases expensive remedial work may be required and, so as to prevent the situation arising in which the pool is given an I unpleasant financial shock, it is imperative that a system be devised so that a ship's condition be monitored during the time the 'vessel is on time charter. Consequently, instructions to a time chartered vessel's master should include a procedure to be followed in case of damage arising, particularly from cargo handling for which the pool may have a liability, but also from any other cause. Even if the pool is not involved in the cause of damage from matters such as storms at sea, it is as well for the pool's operations personnel to be aware of the damage, for then this can be recorded and identified (if unrepaired in the meantime) on the occasion of the eventual redelivery survey, as being nothing for which the pool can be held responsible. This condition monitoring system should be extended to encompass all pooled vessels-, as the pool's liability to the vessels belonging to members of the Organisation may be interpreted as identical to their responsibilities to the owners of time-chartered ships. An aid to assess the extent of shipboard damage caused by whatever reason is by colour photographs and, ideally, a suitable camera should be among the ancillary equipment of every vessel connected with the pool. One beneficial effect of an efficient condition monitoring system devised for a shipping pool is to enable operations staff to identify at an early stage damage caused by stevedores. Where this damage has occurred the stevedores concerned need to be placed on notice, held responsible, and claim proceedings initiated. The true responsibility for claiming recompense for such damage, or for overseeing its repair, is that of the eventual owner of the vessel, or their ship managers acting on the owner's behalf. A shipping pool is in reality- in the middle of a chain of communication from the owner via the disponent owner (the pool), through to the charterers and/or stevedore. Thus, the task of the pool staff is to oversee the

Page 32 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

negotiation either by being closely involved with it, or from a distance if the eventual owner wishes to deal with the stevedore/stevedore directly. SHIP PERFORMANCE MONITORING As we have seen earlier in this book, it is imperative that ships perform in accordance with the description given by their owners, and it is to the operations staff that a pool's management looks to oversee the monitoring of each vessel's speed and bunker consumption. This performance may be incorporated into a pool weighting system but, even when it is, frequent assessment and analysis of each ship's performance will be required, so as to ensure that income is being equitably distributed to those making equal efforts. In tanker time chartering it may be the case that not only is a ship penalised for performing below the standard guaranteed by her owners, the same ship may receive financial reward for performing better than her description. This is not normally the case with dry cargo vessels, whose owners can expect to gain nothing by a good performance, but to be penalised if performance deteriorates more than marginally from that which has been agreed. A shipping pool can provide an equitable system for all its members-'no matter what vessel types are involved. Consequently, a shipping pool, notwithstanding the type of vessels it is concerned with, should be in a position to establish an effective performance assessment system, aided by computerisation, and supported by independent weather analysis from impartial bodies, such as Messrs Ocean routes, who can input information on weather conditions on each voyage of every ship. Thus can it reasonably be decided if weather and sea conditions exceeded those against which a ship's performance may be guaranteed. Additionally, the performance assessment system should reveal not only ships which are performing inadequately or poorly, but also those which are exceeding their description, to the benefit of the pool. If a bunker price factor is added as a vital computer program ingredient it will become possible not only to assess financially those vessels which are performing in accordance with their pool contract or time charter party description, but also those which are under- and over-performing. The extent of the variations from the norm can be costed and, after consultation with staff of the ship managers or shipowners involved, credits and debits passed to the pool's financial department for additions or subtractions to be applied to the resulting distribution. Where a pool's management decides not to include speed and consumption characteristics in their weighting assessment (as in the case of our Panglobal panamax pool), it will be essential for the operations staff to run a comprehensive programme of performance analysis (see figure 7.2 infra). This can be accomplished by averaging the performance of all pooled vessels at standard speeds-say from a minimum of eight knots, and thereafter at one-knot intervals, in both ballast and laden condition-to reach the highest, reasonable speed for the vessel types involved. For each knot there should be a pool 'model performance' established, against which each pooled vessel could be regularly compared (see Figure 7.1 infra, showing a Pool Bunker Fuel Comparison Chart). Those ships performing better or worse than this 'model' can be rewarded or penalised, as the case may be, either voyage by voyage, or over a set period-say, month by month-this latter arrangement tying in nicely with an accounting procedure geared to monthly distributions (see Figure 5.4 supra). Performance assessments affecting distributions could conveniently be arranged monthly in arrears, to allow for any discussion between a pool's operating team and those representing members over performance analysis, providing time in this way for a reconciled assessment to be costed and dealt with in an amicable manner. For added accuracy involving-current market bunker prices, savings or excesses might even be costed at an average bunker charge, based perhaps on an unbiased market yardstick such as is presented by

Page 33 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Cockett's Fuel Index, published regularly in Lloyd's List. The alternative to this would be an average of the prices of bunkers available at ports relevant to the pool's trades. Allowance must also be made for a vessel utilising a bunker quality better or worse than the pool 'model'. Assessment of savings and losses arising from variations in comparison with the model should be built into any performance analysis programme, and this analysis must be extended to cover port consumption where, especially for tankers and geared dry cargo vessels, bunker consumption differences can be considerable. Thus can it be seen that, whether the pool 'reference model' utilised in weighting assessments includes speeds and performance elements or not, the operations performance assessment model can be adapted to remedy any inequities, providing an arrangement that should prove satisfactory to all members. Regrettably, disputes are bound to arise over even the most mundane cases, human nature being what it is. The principle of any ships' performance analysis should be equity, so that owners whose vessels perform well are rewarded, and those where performance is not as per the charter party description should suffer appropriately until either the performance improves or the weighting assessment is revised. A dispute which cannot be reconciled normally should be the subject of a pool device known as a 'board of enquiry', in which a representative of the pool management and another from the members concerned sit down quietly together with all supporting documentation and try to resolve the issue. In an administration-controlled pool, even if this approach fails, the final word is with the pool management, and they must act as they see fit, bearing in mind all they know about the case and, especially, their responsibility to all pool members. In the case of a member-controlled pool, there can be one more attempt to resolve the disagreement by referring it to the following pool members' regular administrative meeting, when the members themselves arc asked to decide and possibly to vote on what is to 'be done. Generally, however, disputes would rarely develop beyond the 'board of enquiry' stage and, hopefully, only very occasionally go as far as that. One reason for poor performance which an owner may quite legitimately claim was beyond his control is that concerned with the supply of defective bunkers. In fact, bunkering forms a major part of a pool's operations department's responsibilities and, as such, deserves a proper review. BUNKERING A major expense of every merchant vessel is the cost of purchasing bunkers. Even though bunker prices have fallen over recent years from previously high levels, dependent as they are on political factors as well as upon the economics of supply and demand, one can never be sure when prices will again increase. But even with a generation of modern, fuel efficient vessels and low bunker prices, there is much for an owner of such a ship to gain from joining a well-established shipping pool, and thereby gaining from the improved price and credit terms that that pool will invariably be able to obtain. In addition, if the pool operates a performance monitoring system along the lines of that described in the above section of this chapter, such an owner can rest assured not only that his vessel will be operating to her maximum potential, but that he will be duly rewarded for a performance better than that described in the pool membership contracts situation extremely rare outside the tanker trades. The officers of the pool entrusted with organising its bunkering activities will very soon discover that they have a wide choice of articulate and effective bunker brokers willing to handle all or part of their potential requirements. Others involved in possible supplies-for example, by a port agent representing a

Page 34 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

local bunker supplier on a particular occasion, will also approach them from time to time. They will probably find it best to select two or three choice brokers (always dependent, of course, upon the size of the pool) and use the services of one at a time, roughly in turn, for every enquiry they have, and where possible utilising the broker they feel offers the strongest service in any particular region of the world. Careful consideration should always be made of price, but there are other factors that should not be overlooked. First, the brokers should provide a 'delivered' price for, apart from the cost of the product, usually described in terms of United States dollars per tonne, there may be 'hidden' items, such as a local sales tax, delivery charges for supplies effected other than from alongside a petroleum jetty (for example, for barging), as well as overtime costs for the bunker supplier's staff delivering during 'unsocial' hours. More important still is the question of credit. On occasions several weeks of credit may be offered, even up to two months or more. The value of this credit arrangement in terms of delaying payment of the funds from the pool's account must be weighed against a possible less expensive price for prompt payment. Unlike many smaller owners who have a restricted cash flow, a pool will in general have the means to pay promptly given the right incentives and, if the pool's staff can assure themselves that prompt payment saves more in real terms than would be gained by the extra interest a credit period would enable the funds to earn, then they have the opportunity to deal accordingly. But supplying bunkers efficiently, causing no delay to a vessel's operations, and at the lowest economic price is still only part of the task. There remains the problem of poor quality bunkers that inevitably, will be supplied on occasion, no matter how careful a pool's administration. Poor quality bunkers can have two effects. They can cause damage to a vessel's main engine and fuel-connected auxiliaries, and they can create performance problems, or both. Protection can be obtained from the risk of engine difficulties to a certain extent by joining one of the international schemes-some operated by reputable bodies such as classification societies-and always carrying out a chemical fuel analysis following every bunker purchase. In practice standard procedures are laid down for the removal of a small sample of the delivered bunkers, and the sample sent urgently to a laboratory for a full test and analysis. Should these tests show any problems an immediate warning is transmitted to the pool's administrators and the shipowners, managers and on-board personnel alerted and given information and advice on how to improve combustion qualities and/or prevent machinery damage. The evidence thus supplied can also be utilised in the process of a claim against the suppliers. Furthermore, it should be possible to provide at least an approximate estimate of the effect of the inferior bunkers on engine performance, and this factor included in the computer ship performance analysis, so that vessels are not unfairly penalised by adverse performance directly resulting from the supply of poor quality bunkers. Fuel analysis should not only be carried out on all bunker supplies conducted by a pool but also for all supplies effected by outside charterers on pooled and relet time chartered vessels, to help ensure that outside charterers are supplying good quality products. It is also important to note that the performance of fuel analysis schemes inexpensively protects shipowners and a pool's administration alike not only against the suppliers of allegedly inferior bunkers; it also protects the pool's administrators against claims which might be forthcoming from the shipowners themselves. A pool's staff has no way of knowing the procedures for the effective handling of bunkers which may be carried out on board a pooled or time chartered ship. For all they know, bunkers of perfectly good quality could be mishandled on board a vessel, or even mixed inadvertently with inferior fuel already on board. The proof of quality at the point of delivery such as is provided by the fuel analysis system has its value in this respect: it is, at the very least, sensible, relatively inexpensive insurance.

Page 35 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Economics Of Ship Manning The crewing of vessels today is a cost element to which ship owners are devoting increasing attention order to achieve the lowest crew complement compatible with statutory requirements, safety and market needs. This entails not only reducing the volume of shipboard work, but also adapting the methods employed. Before examining the factors, which influence crewing levels, it is appropriate to deal briefly with the existing crew structure, shipboard organization, legislation, crewing agreements, the role of the National Maritime Board and the part played by international organizations. The master has overall charge of the ship. Beneath him on vessels with a large crew complement - duties are generally divided among three departments: the deck, the engineer's department and the catering department. The deck department is the responsibility of the chief officer or first mate, who, supervises the handling of cargo and is responsible for the upkeep of the ship and her equipment, excluding the engine room and auxiliary power gear. The deck department includes junior seamen, seamen grades I and II, petty officer (deck) and chief petty officer (deck). Radio officers are specialists either engaged by the ships owner or employed by a company that installs radio apparatus, such as the International Marine Radio Company Ltd, or the Marconi International marine Communication Company Ltd. Statutory provisions require the vessels of between 500 and 1600 grt to have either radio telephony or radio telegraphy. All vessels exceeding l600 grt must have the latter. The number of certificated radio officers aboard ship varies between one and three, depending on the size and type of ship. In some vessels conveying a relatively small number of passengers the radio officer also acts as purser, for which he receives additional remuneration. The operational part of the job of the radio officer will change and the job as at present constructed will disappear when the Future Global Maritime Distress and Safety System comes into operation in the 1990s. The engine room is in the charge of the chief engineer, who is responsible to the master for the main propulsion machinery and tile auxiliaries, comprising the electrical plant, cargo winches, refrigeration plant, steering gear and ventilation system. Today the electrical plant features strongly in the engine room, as is reflected in tile training no", given to engineering officers and ratings. The engineer officers on a typical cargo vessel comprise the chief engineer, the first engineer and second, third and fourth engineers. The ratings of the engine room department include junior motormen, motormen grades I and II, petty officer (motorman) and chief petty officer (motorman). The catering department is under the control of the chief steward or catering officer-, who is responsible for catering, the galley, galley stores and ship's linen. He is assisted by cooks, bakers and assistant stewards. The number of catering personnel is tending to fall with the increased use of ready prepared, foods, and labour-saving devices such as tea making machines and disposable utensils. In the shipping industry the conditions of employment are set out in a crew agreement between the seafarer and the ship owner in accordance with the Merchant Shipping Acts of 1970 and 1979. By 1987 the provisions of the Merchant Shipping Act 1970 in respect of the payment of seamen's wages were under review and new legislation is likely. The agreement may take the form of a contract of service establish under tile Merchant Navy Established Service Scheme initiated by the General council of' British Shipping. The scheme, which is applicable to both officers and ratings, provides for company service contracts with a particular shipping company and general service contracts with the industry as a

Page 36 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

whole. When a seafarer with the latter type of contract is not employed oil a ship he receives establishment benefit and is required to hold himself available for posting to the vessel designated by tile establishment. The scheme is financed by a general levy oil shipowners employing seamen on general service contracts. Seamen holding a company service contract must receive benefit on terms at least equal to those provided under general service contracts. These two forms of agreement are very common and are much preferred to casual employment arrangements. The National Maritime Board (NMB) is a forum for negotiations between shipowners and, seafarers on matters affecting pay, hours of duty, manning, leave and travelling expenses. It is composed of six panels, each representing seagoing department with its own particular problems and requirements, that is to say masters, navigating officers, radio officers, engineer officers, catering staff and finally sailors and motorman. Each panel has twenty-four members drawn equally from shipowners and employees, with a chairman from each side. Negotiations on matters within the Board's field of competence may be conducted by any of the panels, whose decisions are binding. The NMB is administer by the permanent independent staff and is finance by the proportionate levy oil shipowners and seafarers. The organisation and negotiation of seafarers conditions employment are similar in other maritime countries and reflect MO and ILO conventions. In the longer term it is likely there will be a gradual replacement of the NMB agreements on pay and conditions by individual company agreements with consequent wage bargaining at company level. It is considered that company bargaining may be more closely related to the economic circumstances of the company on the one hand and to the real needs of the employers on the other. It could also provide more scope for genuine productivity bargaining than could be achieved in national negotiations. The foregoing trends started to emerge in the early 1980s. In 1986 there was a merger of three of the officers unions, namely the Merchant Navy and Airline Officers Association, the Mercantile Marine Service Association, and the Radio and Electronics Officers' Union a new union was formed, the National Union of Marine, Aviation and Shipping Transport Officers (NUMAST). Consequently the merchant navy officers are now represented by two unions, NUMAST and the Amlgamated Union of Engineering Workers. The Merchant Shipping (Certification of Deck and Marine Engineer Officers) Regulations 1977, which came into effect on 1 September 1981, prescribe the minimum number of deck officers and marine engineer officers to be carried by registered ships. The scale varies according to the tonnage or power of the ship, tile area in which the voyage takes place and whether passengers are Table7.2: Minimum number of deck officer to be carried in ship 80 grt and over, other than passenger vessels and tugs Trading area Description of ship' Class I Cert. Unlimited Middle trade 1600 grt and over 80 grt but under 1600 grt 5000 grt and over 1600 grt but under 1 1 1 Minimum number of certificated deck officers to be carried Class 2 Cert. 1 1 1 Class 3 Cert. 1 1 1 Class 4 Cert. 1 1 Class 5 Cert. -

Page 37 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat
5000 grt Under 1600 gri 10000grt and over 5000 grt but under 1000 grt 1600 grt but under 5000 grt 800 grt but under 1600 grt 200 grt but under 800 grt 80 grt but under 200 grt 1 1 1 1 1 1 1 1 2* 2* -

MFM-III
1 1 1 3* 2* 1*

Near continental

* Subject to special provisions. carried. The regulations make provision for short-handed operation if one officer is absent owing to illness or incapacity. Certain officers in ships carrying bulk cargoes of specified dangerous chemicals or gases have to undergo additional training. Table 7.2 shows the minimum number of deck officers prescribed in the Merchant Shipping (Certification of Deck Officers) Regulations 1977. The near continental area is bounded by a line drawn from a point on the Norwegian coast in latitude 62' North to a point 62' North 02' West; thence to a point 51' North 12' West; thence to Brest, but excluding all waters which lie to the eastward of a line drawn between Kristians and, Norway and Hanstholm lighthouse on the northern Danish coast. The middle trade area is bounded by the northern shore of Vest Fjord (Norway) and embraces the whole of the Mediterranean and Black Seas and North-West Africa and extends northwards as far as the White Sea. The unlimited trading area comprises the rest of the world. Certificates of Competency (Deck Officer) are awarded to deck officers who meet the standards laid down by the Department of Trade which broadly reflect the out come of discussions within IMO. There are five new classes of certificate. Class 1 is the Master Mariner level, equivalent to the Master ForeignGoing Certificate prescribed under the Merchant Shipping Act of 1894; similarly, classes 2 and 3 are equivalent to the First Mate Foreign-Going Certificate and Second Mate Foreign-Going Certificate respectively. The Certificates of Competency required for appointment as ship's master are shown in Table 7.3 Table 7.4 shows the minimum number of marine engineer officers laid down in the Merchant Shipping (Certification of Marine Engineer Officers) Regulations 1977: There are four Certificates of Competency, that of Marine Engineer Officer Class 1 corresponding to the First-Class Engineer Certificate prescribed under the Merchant Shipping Act of 1894, Certificates of Competency of Classes 1, 2 and 4 are issued for motor

Page 38 of 128

Emerging Challenges of Commercial Management of Shipping Industry


Prepared By:

Ravindra Gharat

MFM-III

Table 7.3 Certificate of Competency required for appointment as ship's master Certificate of Competency (Deck Officer) or certificate of valid if), Class 2 or class 3 Command endorsement Master (middle trade) Master (middle trade) Master (near continental) Description of ships and areas

Ships (other than passenger ships) of less than 5000 grt going between locations in the combined near continental and middle trade areas Ships (other that passenger ships) of less than 1600 grt going between locations in the combined near continental and middle trade areas Ships (other than passenger ships) of less than 5000'grt going between locations in the near continental area. Passenger ships of less than 1000 grt going between locations in the near continental area Ships (other than passenger ships) of less than 1600 grt going between locations in the near continental area. Passenger ships of less thin 200 grt going between locations in the near continental area

Class 4

Class 2, 3 or 4

Class 5

Master (near continental)

or steam machinery or a combination of the two; Class 3 certificates are issued for motor machinery only. Table 7.5 shows the certificates required for appointment as chief engineer officer. In tile longer term there is every likelihood of the development of a combined deck and engineer certification. By 1986 shipping companies were developing such cadet schemes. Ultimately this will improve the versatility of ship officer deployment. IMO and the ILO have also had a profound influence on the manning of vessels. The function of these organizations is described in Chapters 16 and 17; a detailed treatment of tile IMO-requirement

Page 39 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Table 7.4: Minimum number of marine engineer officers to be carried in ship of 350 KW and over, icluding sail training ships with a propulsion engine. Area Registered power Minimum number of certificate marine engineer officers to Of ship (kw) be carried. Class I Class 2 Class 3 Class 4 Cert. Cert. Cert. Cert. Unlimited or Middle trade 3000 and over 746 or more but under3OOO 350 or more but under746 6000 and over 3000 or more but under 6000 746 or more but under 3000 350 or more but under 746 1 1 1 1* 1 1* 1 I and 1* 1 2 1 1

Near continental

*Subject to special provisions relating to watch keeping, training, certification and the continued proficiency of seafarers' knowledge and the resolutions adopted at the 1978 International Conference on Training and Certification of Seafarers are to be found in Elements of Shipping. It is stressed that today many vessels worldwide do not operate strictly under the three-department system (deck, engineer and catering). Instead they encourage the merging of officers' and seamen individual duties to permit versatility of shipboard employment and productivity. In addition the master, chief officer and chief engineer tend to take their turn in watch-keeping responsibilities. We are now in a position to consider the factors relevant to the setting of crew levels: (a) (b) Statutory obligations. In the case of vessels registered the relevant legislation comprises the various Merchant Shipping Acts. Regulations lay down by shipping industry bodies. For

Table 7.5: Certificates of Competency required for appointment as chief engineer officer Class ofcertificate of Competency or service Class 2 Description of ships and areas

Ships of 746 kW or more but under 3000 kW registered power going to, from or between any locations Ships of 3000 kW or more but under

Page 40 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


6000 kW registered power going between locations in the near continental area

Class 3

Ships of 350 kW or more but under 746 kW registered power going to, from or between any locations Ships of 746 kW or more but under 3000 kW registered power going between locations in the near continental area Ships of 350 kW or more but under 746 kW registered power going between locations in the near continental area Sail training ships of less than 350 kW registered power going to, from or between any locations

Class 4

Example, the NMB sets a maximum period for continuous duty on board British registered ships and also regulates such matters as overtime rates, leave arrangements, liquidation of leave, consolidation and relief crews. (c) (d) Terms and conditions negotiated between ship owners and trade unions; these may constitute local variants of provisions laid down by bodies such as the NMB. The type age and classification of the vessel. Modern vessels require a smaller crew owing to the reduced workload and the use of more modern equipment. This applies particularly to automation and often the use of computers in the engine room; improved decor, reducing cleaning work; the greater use of ready prepared foods to reduce catering personnel; and improved ship maintenance techniques. The introduction of more multi-purpose vessels has brought

In the 1990s it is likely that there will be a massive ship-rebuilding programme and that shipping companies must become more conscious for the geographical distribution of the world industry. In recent years the merchant fleets of high wage countries have declined and a corresponding growth has been achieved in fleets of low wage countries. It is probable that this trend will be reversed, although one must recognize there will always be an advantage in low labour cost. Moreover, in future low capital cost may be a more important factor in relation to the choice of flags. In particular, the fact that capital tends to earn a lower rate of return in Europe than in newly industrialized countries may give European shipping a capital cost advantage which can easily offset the labour cost disadvantage from European operations. Although in the 1980s there was a substantial cost advantage to Far East maritime fleets, it is likely that by the year 2000 the European fleet will be more favoured. This is due to three reasons: (a) (b) Capital costs becomes more important is the relevant ship price becomes the new building price rather than the current depressed market VLCC Of Ships. The difference between tile equity rate of return requirements of European and Far East capital markets could increase, as further industrialization and access to developed markets raises the opportunity cost of capital in countries like Hong Kong and Singapore.

Page 41 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


Wage rates in the Far East are likely to increase as industrialisation reduces the relative abundance of labour.

(c)

FACTORS TO CONSIDER IN PLANNING SAILING SCHEDULES Sailing through time a small family concern has grown into a worldwide elite-shipping organisation with a fine maritime tradition. It is of the utmost importance that a vessel be fully employed whenever she is available. The very large capital investment she represents' gives rise to heavy financial charges, so that periods in which she is laid up - and thus earning no revenue - must be kept to an absolute minimum. If a ship is in commission only during peak periods, there may be good reason to reduce the size of the fleet by concentrating' cargoes on a smaller number of vessels on lengthening passage times in order to keep the fleet fully employed. The latter short-term solution, which would be appropriate in times of trade depression, may prove cheaper than either laying up a number of vessels or selling them and chartering tonnage when traffic improves. It is a question of examining the economics of the particular situation. The ship owners must also ensure that a profitable load factor is continuously realized. With the development of multipurpose vessels able to take a mixture of traffic, it is most desirable that the actual mix be profitable. For example, on the vehicular deck of a Vessel conveying container and vehicular traffic, preference should be given to the high rated Ro/Ro traffic rather than to trade cars or caravans, which are often regarded as 'filler traffic' in liner cargo services. There are basically two types of service: the regular service and sailings provided to meet a particular demand. The former is usually associated with cargo liner trades and bulk carriers, integrated into' an industrial production flow, whilst the latter is mostly confined to tramp vessels. The sailing frequency, of cargo liners is determined months in advance within the conference. Liner services attract a wide variety of cargoes, including machinery, steel rails, foodstuff,, and motor vehicles. At certain times and in various trades there is naturally a peed for increased sailings to cater for seasonal increases in traffic. The required additional tonnage is sometimes chartered, thereby ensuring that the ship owners was not burdened with excess capacity at other times of the year. Whether practical, surveys and overhauls are undertaken outside peak periods. Many container vessels and specialized bulk carrier are on continuous survey to ensure that the dry-docking and the time spent out of' commission are kept to a minimum. A large number of factors influence the formulation of sailing schedules. The most important are listed below: 1. 2. The overall number of ships and their availability. The types of ship available, in particular their size (length, beam and draught) and any special characteristics, such as the need for special equipment for loading and discharging cargo. Some ships may be suitable for cruising; others, by virtue of their size, may be able to operate only between ports with deep-water berths. Hence in general a large fleet of small vessels has more operational flexibility than a small fleet of large vessels restricted to a limited number

Page 42 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


of ports able to accommodate them. This problem is particularly important in the case of VLCCs and ULCCS. With multi-purpose vessels conveying road haulage vehicles, passengers and accompanied cars, the mix of vehicles shipped can vary according to the season and the time of day. Such variations in demand are accommodated by the use of vehicle decks that can be adjusted hydraulically, so that for one sailing a vessel may accommodate 50 cars and 20 large road haulage vehicles while on another occasion it may carry as many as 300 cars but nothing else. Another aspect of this factor operation of ships of different specifications on the same service. For example, two container ships may have a 20 per cent capacity variation and a service speed difference of 2 knots. Ideally, all the vessels on a particular service should be nearly identical, particularly in terms of speed and capacity.

3.

The plying limits of individual ships and, in the case of liner tonnage, any conditions imposed by liner conference agreements. 11 is the practice for liner conference members to agree the sailing programme and the allocation of sailings per member in accordance with the availability of berths at the ports and ship disposition having regard to surveys and market demand. The volume, type and characteristics of the traffic. This requires very close analysis, and options must be examined to establish whether the service could be improved and capacity utilized more productively if the distribution method were changed. For powered ice-breakers to keep their shipping lanes open as long as example, the development of containerisation has transformed many traditional distribution methods and thereby raised the demand for such services. In the cargo liner trade the situation should be examined in the context of combined transport. Furthermore, an analysis of the origin and destination of cargoes in a liner trade may suggest the rationalization of ports of call and thus promote the use of feeder services centred on key transhipment ports. Seasonal traffic fluctuations. This subject is discussed separately later in this chapter. Maintenance of time margins where services connect. For in., stance, a passenger vessel may be served by a connecting rail service. The schedule must provide adequate time to ensure that connection is maintained and make allowance for delays caused by bad weather, service disruption or other factors. Inland surface transport is generally more flexible than sea transport; with the development of combined transport, this aspect is becoming more important. The availability, of crew and suitable changeover ports. A shortage of key certificated personnel could delay the ship's departure; fortunately, this is a rare occurrence. The ship owner has to decide the most suitable ports for crew changeover, bearing in mind the need for easy access by air and the wishes of the crew. Arrangements for dealing with emergencies. All ship operators must lay down the procedures to be followed in the event of a service disruption, which may be classified is a major or a minor incident. Few shipowners now days have standby vessels, particularly in peak periods, so that in the event of a major incident involving the withdrawal of a vessel, the, may charter a replacement ship, increase the service speed of remaining vessels in the fleet and/or speed up port turn round time, divert traffic to another operator or switch a vessel from elsewhere in

4.

5. 6.

7.

8.

Page 43 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


the fleet. The choice made will depend on cost, service quality, resource availability and, not least, the expected duration of the disruption. If it will last a few days, fairly simple measures can be introduced, such as giving urgent or perishable commodities priority over other traffic; if it will continue longer, some of the more extensive measures will have to be taken.

9.

Climatic conditions. Some ports are ice-bound at certain times of the year, thus preventing the movement of shipping. This is particularly relevant to the St Lawrence Seaway, Arctic regions and the Baltic Sea. In recent years the Russians have developed nuclear powered icebreakers to keep their shipping lines open as long as possible in winter. When a port is closed, ships will obviously sail to the nearest port and the cargo will complete its transit overland usually by rail. Competition. Liner conferences were developed to restrict competition to service quality rather than rates, which were standardized. This has greatly facilitated the elimination of undercutting, although the fierce competition that remains in many trades tends to lead to overcapacity, with the attendant risk that operators will offer unprofitable services. In order to counter competition and generate market goodwill, ship owners may feel obliged to provide additional services and in so doing occupy berths that could otherwise be allocated to competitors in the port. In recent years increasing competition has come from the Eastern bloc and flag of convenience fleets, which have operated on more favourable financial terms than those found in liner conference trades. An operator providing services to match those of his competitor must carefully evaluate, the voyage costs in relation to revenue and consider all the options, including the possibility of a gentleman's agreement with the competitor. General availability of port facilities and dock labour, and any tidal restrictions affecting times of access and departure. This is a critical factor which requires particular attention if a vessel is switched from one service to another involving different ports. In devising any service of a regular nature reliability is a paramount consideration, so that it is important that the port facilities provided are adequate and reliable and that the tides do not seriously impair continuous access. As the cost of fuel continues to rise, increasing attention is being paid to reducing port turn round time in order to allow slower passages. Much can be achieved in this regard through the advance planning of transhipment arrangements and development of the stowage plan. Many major ship operators are using computers to determine shipboard stowage and to produce the cargo documentation. The ship operator or his agent should maintain close liaison with shippers, customs, rail and road operators and port authorities, including dock labour, to ensure maximum co-operation and adherence to schedules. A port liaison committee often helps solve problems rapidly. Time required for terminal duties at the port. This will embrace such activities as discharging, loading, customs procedures, bunkering and victualling and should also leave a margin to allow for reasonable delays. Voyage time. This is primarily a market consideration. Relatively fast schedules are costly in terms of the initial capital expense of the machinery and fuel consumption. An increase of 1 knot above an optimum speed can increase both initial cost and fuel consumption by up to 25 per cent. The trend towards faster schedules in the late 1960s and early 1970s, which reflected the development of containers and VLCCs have not persisted. Slower schedules

10.

11.

12.

13.

Page 44 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


have found acceptance, mainly on account of the escalating cost of fuel. The benefits of faster schedules require very careful consideration in both cost and marketing terms.

14.

Any hostile activities taking place or expected along a vessel's route. Hostilities tend to increase insurance rates and theyre by overall voyage and freight costs. The implications of re-routing the services must be carefully examined; in many cases a diversion will be unavoidable. The use of canals such as the Suez and Panama Canals as alternative routes. There is a growing tendency to route services via maritime canals in order to save passage time and fuel. The canal dues have to be set against the cost of taking the longer route in terms of additional fuel consumption, longer passage time, crew cost and less favourable fleet utilization. Estimated voyage cost and expected traffic receipts. This is a very important item in the increasingly cost-conscious shipping industry. It would not be practicable to cost individual voyages separately on a liner service, but a fairly reliable financial statement of anticipated expenses and revenue on a twelve-monthly or seasonal basis should be drawn up. Within a liner conference variation of the schedules would require agreement with the other members. Such a financial exercise is also relevant when consideration is being given to a chartering tonnage to supplement sailings in peak periods. Imbalance in trade. This factor is examined in greater depth later in this chapter. Bunkering requirements and the location of bunkering ports. Advantage should be taken of favourable bunkering prices and payment terms; consortia of ship owners may be able to negotiate concessionary terms. Any sailing programme should reflect traffic growth and the likelihood of securing new flows of traffic. For example, a new factory may be opening in a particular country that may generate an inward flow of component parts and an outward flow of the finished product. The dates and expected duration of surveys.

15.

16.

17. 18.

19.

20.

To conclude, the formulation of sailing schedules merits considerable management attention to ensure that the optimum service is provided. Costs and revenue should be monitored constantly and a profit and loss statement covering a period of between two and five years should be produced in order to ascertain the most favourable service schedule compatible with market considerations and overall company policy. Schedules should be kept under constant review so that they may be modified to meet changing circumstances.

Page 45 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Economics Of Chartering Chartering is a complex and expanding part of the business of ship management. This chapter deals primarily with the economics of chartering rather than with technicalities or charter party clauses, which are examined in Elements Of Shipping. Opportunity is also taken to describe the role of the Baltic Mercantile and Shipping Exchange, the Baltic International Freight Futures Exchange, the Baltic and International Maritime Conference and World scale THE DETERMINATION OF FIXTURE RATE The fixture or rate of hire of a vessel depends on the following (a) (b) The state of the market for chartered tonnage. When vessels are scarce fixture rates tend to be high, and vice versa. The extent of the fluctuations depends on other factors examined below, in particular the type and terms of the charter party and the vessel's specification. The world economic outlook. If events suggest an upturn in trade, rates will tend to increase; for example, a poor grain harvest in the USSR will give rise to large imports of wheat from the USA and other countries. Conversely, when the price of oil rose sharply in, 1973 many countries were obliged to reduce their merchandise imports in order to fund their oil import bill. The type of vessel sought. The fixture rates for vessels of 2 common specification will tend to fluctuate more widely than those' for specialized or purpose-built ships. The duration of the charter party. The fixture rates for voyage charters tend to be more volatile than those for time charters, primarily owing to the shorter duration of the former. Time charters can extend up to seven years, during which period the economy mal pass through the entire trade cycle of depression and recovery, so that time charter rates tend to be influenced less by economic various areas have noticeably increased, no doubt reflecting the difficulty of obtaining full cargoes for large vessels at a single port.

(c) (d)

Another development seen recent year in tanker movements is the extended use of what World scale refers to as 'trans-shipment areas. These are places, often many miles out at sea, where large ships transfer all or part of their cargo to smaller vessels. World scale includes a supplement of rates involving such places. In addition to the rates of freight, the schedule contains a list of demurrage rates covering vessels of between 10000 and 550000 tons dwt in 120 size ranges. Therefore it is a simple matter to establish the demurrage rate to apply under a charter by agreeing a percentage adjustment to the World scale demurrage rate. Often it will be agreed to use the same percentage for demurrage as used for freight, but to use the same percentage again this is essentially a matter to be negotiated between the parties concerned. Occasionally, a demurrage rate is agreed in US dollar terms. Moreover, the schedule includes a number of standard conditions, the most important of which are probably those specifying which items of port costs are to be paid by owners and which by charterers. It is customary to incorporate these standard conditions, including the specified lay time, into a charter by a simple reference to World scale terms and conditions.

Page 46 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Another advantage of World scale is that comparisons of fixtures in different trades can be readily made. Thus World scale 50 for a fixture in the Arabian Gulf / Japan trade. Two dollar rates would be less meaningful. World scale was originally a dual currency schedule showing two rates for each voyage, one in sterling and the other in US dollars. Today the schedule gives rates only in US dollars. However, one is not obliged to pay freight in dollars; any currency can be used provided a suitable method of conversion is agreed. The rates themselves are calculated on the basis of around voyage from loading port or ports, to discharging port or ports and back t the first loading port, by reference to a vessel of 19 500 dwt (dea weight tonnes) having a speed of 14 knots on a daily bunker consumption of 28 tons of fuel oil (180cst). This is referred to as the 'standard vessel'. The main calculation elements of each rate are as follows: (a) (b) (c) (d) (e) The fixed hire element of $1800 per day. This element does not change and represents the stable continuity factor of the scale. Bunker costs, which are based upon bunker prices over stated period. Port costs. The lay time allowance of 72 hours for loading / discharging purpose. Port time (not counting as lay time) of' 12 hours for each port involved in the voyage.

As already mentioned, the original wartime Schedules were designed to give the same net return per day irrespective of the voyage performed, and subsequent schedules have had a similar aim. The greatly extended range in sizes of vessels which has occurred would appear to suggest that this aim could not possibly be achieved by World scale, based as it is on a vessel of 19 500 dwt. Indeed it might well be thought that the net return per day could only be the same for different voyages when a vessel corresponding to the World scale standard vessel is fixed at World scale 100 and incurs the same expenses as are taken into account in the schedule. Nevertheless, in practice the set of reference rates provided by World scale appears to work reasonably well for a wide range of vessels at varying levels of freight on many voyages, although disparities do occur. Exercises carried out from time to time have shown that the use of a larger standard vessel and different calculation factors would not necessarily bring about an improvement. The bodies responsible for World scale see their role as limited to providing a set of reference rates calculated on a common basis in accordance with the published formula and to revising those rates in line with the announced revision policy. This now involves a complete revision in respect of changes in bunker prices and port costs every six months. As will be appreciated, it is only the use of modern computer techniques that make this possible. A bank of over 80000 rates is maintained on a mainframe facility provided by a computer bureau. An in-house minicomputer is used for calculating additional rates requested daily, and the 6 month updating procedure is carried out directly on the mainframe computer by on-line amendments. The pages of the published book are set direct from a tape drive created from the data held on the mainframe computer. Interim revisions for changes in port costs are made only when a change of such significance occurs that to ignore it would seriously impair the relationship between the rates.

Page 47 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

It is apparent from the foregoing, that although World scale may facilitate the swift negotiation of business is no substitute for proper voyage estimating; nor does it afford any protection against the financial risks normally assumed by an owner under a voyage charter. An owner will need to make his own assessment of the likely costs involved on a voyage and decide whether or not the level of World scale on offer for a particular piece of business has any attraction, bearing in mind the loading/discharging options required by the charterers. If there are particular expenses that an owner feels are not adequately dealt with under World scale, he is free to attempt to negotiate that these expenses should be borne by the charterers. One notable example concerns income tax and taxes on freight. The various and in some cases complicated methods of assessment used, together with the wide range of exemption agreements that apply, make it impossible to formulate a policy of dealing with such taxes within the framework of a freight schedule that would be reasonable and equitable to all users. It is therefore made clear in the schedule that in calculating the rates no allowance is made for any such tax, nor is there any provision as to whether such taxes should be for owners' or charterers' account. This is regarded as a matter that can be settled only by direct negotiation between owners or charterers, preferably by the inclusion of a suitable clause in the charter party. AVERAGE FREIGHT RATE ASSESSMENTS (AFRA) The Average Freight Rate Assessment (AFRA) (prepared by the London Tanker Brokers' Panel Limited) represents the cost of all chartered tonnage actually operating during the calculation period, irrespective of fixture date. In other words fixtures concluded during the period under review will not affect the result unless the vessel concerned is actually performing under that fixture during the period. On the other hand, a charter made years to go would Still be reflected in the result, provided the vessel was actually trading under it during the calculation period. The results of the AFRA ire available on the first business day of each month and trc provided for six different deadweight groups as follows: General purpose Medium range Large range 1 Large range VLCC ULCC 16500- 24 25000- 44 45000- 79 80000-159 60000-319 20000-549 999 dwt 999 dwt 999 dwt 999 dwt 999 dwt 999 dwt

The calculations are made over a monthly period running from the 16th of one month to the 15th of the following month, and the 30th of the months represent the weighted average cost of commercially chartered tonnage as employed in the international transport of oil during the calculation period. For example, the results made available on I May 1988 represent the average cost during the period 16 March to 15 April 1988. Certain categories of vessels are excluded from the assessment, e.g. vessels owned by governments (except those operating on commercial charter), and vessels employed in specialized trades, such as the carriage of clean oils, petrochemicals, luboils and bitumen. Vessels engaged in protected coast wide trades (for example American flag vessels trading between American ports) are also excluded. In each size group, tonnage is divided into the following four categories:

Page 48 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

1. 2. 3. 4.

Company vessels Vessels engaged on long-term charters Vessels engaged on short-term charters Vessels engaged on single voyage charters.

The carrying capacity of each vessel operating during assessment period in each of these categories is calculated on the basis of a standard voyage, taking into account the various characteristics of each vessel, e.g. size, type of propulsion, speed and bunker consumption. Then the weighted average rate in US dollars per ton for carrying a ton of or oil on the basis of that standard voyage is obtained for each of these four categories, time charters being converted to a voyage cost per ton. The result foe each size group is the over-all weighted average obtained by multiplying the total carrying capacity for each of the charter categories by the weighted average rate for that charter category, the rate applicable to company vessels being the weighted, average rate applicable to all chartered vessels. The answer thus arrived at in US dollars per ton is converted to a World scale equivalent (.see above) on the basis of the standard voyage, and this is the published result. FREIGHT FORWARDING This section will describe developments in the freight forwarding industry in broad terms and will leave aside the techniques of such matters as documentation and the processing of export consignments, which are fully treated in Elements of Export Practice. Since the early days of international trade there have been entrepreneurs who have arranged the transport of goods from one country to another. Eventually they came to known as shipping and forwarding agents. Their modern counterparts, now termed freight forwarders, may still work as sole traders as their forebears did, but they are just as likely to be sizable companies with a worldwide network of offices and several thousand employees. In recent years mergers have led to the formation of larger companies able to raise capital more easily and to offer a wide range of services. Some freight forwarding organizations are now owned partly or wholly by major shipping companies, an arrangement which benefits the one through the provision of capital and the other through the direction of cargoes to the company's ships. Since the late sixties the freight forwarding industry has undergone, considerable change in line with innovations the transport field and the growth in world trade, which the industry has helped to foster. The provision of warehousing facilities, along-established part of the freight forwarder's business, has permitted the development of freight consolidation, the practice of combining consignments into standard load units. This has gone hand in hand with the introduction of packaging services and integrated transportation involving several modes of transport. Freight forwarders were in the forefront of the development of Ro/Ro road haulage services in short sea trades and containerisation on deep sea services. Many now own or lease ISO containers and road haulage vehicles. More recently they have begun to promote the carriage of unaccompanied trailers in deep sea multipurpose services. Since 1977 freight forwarders have considerably expanded their business in the consolidation of airfreight. Airlines belonging to IATA had previously marketed most of their cargo space themselves, but they have now practically abandoned the field to the freight forwarders, to whom they allocate space on freight aircraft. Freight forwarders are thus able to offer a complete service covering collection of the goods, documentation, packaging, carriage by air, customs clearance and delivery by their agent or representative abroad.

Page 49 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Freight forwarders tend to specialize in a particular trade, such as livestock, dangerous cargoes, art, bullion, household effects or indivisible loads. By acquiring specialized expertise they are able to raised the standard of service and realize economics of service and economics of scale, thus ensuring that goods are covered under conditions of reliability and efficiency. The main services offered by modern freight forwarders are the following: Evaluation of all the factors affecting a proposed international transit, including rates, transit times, schedules, documentation, packing, customs, statutory obligations, finance and insurance. On the basis of this the freight forwarder produces a transport distribution analysis outlining alternative services to enable the shipper to decide which transit to adopt, bearing in mind the terms of export sales contracts and any conditions imposed by the shipper himself. The collection and delivery of consignments, where required. Acceptance of the merchandise and either its conveyance throughout the transit or its sponsorship for carriage by container, air freight or road haulage. The freight forwarder may be responsible for documentation, clearance through customs, financial settlement and transit arrangements, depending on the extent to which the exporter wishes to make use of these services. Packaging. Many large agents offer this facility, which forms an important part of the international forwarding business. Consolidation of consignments for conveyance by container, airfreight, train ferry or road haulage. The inclusive tariffs are lower than the cost of dispatching the goods as break bulk consignments. Moreover, consolidation affords better protection to the goods, permitting lower insurance premiums. The simple booking of individual consignments on specific sailings or flights where consolidation is not desired. The services will include freight forwarding by air, rail, road and sea; reliable distribution networks by all transport modes; through transportation providing door to door service; consolidation services; an effective international communications system to monitor cargo routing / tracking; a high profile, with the expertise to resolve problems in remote areas of' the world with limited transport facilities; quality professional staff; a cost effective and reliable distribution system, project transportation, including preshipment feasibility Studies route logistic planning; packaging services; and so on. Shippers will include growers, manufacturers, producers, international industrial companies, government organizations and international aid agencies. There can be no doubt that freight forwarders are making a very significant contribution to the development of world trade and, in particular, are facilitating the flow of manufactured goods. The complexity of world trade today calls for a high standard of service and a deep understanding of the trade and its associated distribution arrangements to ensure that the flow of goods is subject to no impediment. The recent tendency for freight forwarders to provide their own international transport facilities, such as road haulage vehicles and containers, is to be welcomed as it enables them to have closer control over operations and to achieve greater competitiveness, which itself aids the development of trade.

Page 50 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


Finance and Economic Appraisal

Equity markets in India Equity markets comprise of equity capital markets, venture capital and private equity funds. Equity funding in shipping markets is more popular in the case of high-risk projects where vessel acquisition is not backed by a firm contract for deployment or where vessels are acquired for asset play. In India, an equity route by shipping companies was adopted mainly after the 1980s, owing to factors like phasing out of subsidised debt funding by Shipping Development Fund Committee (SDFC), ease of norms for tapping the equity market and shipowners becoming increasingly aware of the pitfalls of a highly leveraged capital structure. Indian shipping companies have a miniscule market capitalization vis--vis the market capitalization of the Indian stock market. Market capitalization of the largest public sector company namely Shipping Corporation of India (SCI) is around USD 120, whereas that of Great Eastern Shipping, the largest private sector is USD 150. Currently, we have around 8 shipping companies listed in the stock exchange, scripts of whose are trading at a substantial discount to book value or net asset value. Debt markets in India Banks and financial institutions have been the main source of debt finance for shipping companies. The industry can avail of broadly two types of finance viz. fund-based finance and non-fund based finance. Term loan and working capital credits come under fund-based finance. Under non-fund based finance, funds are not actually employed, but a liability is created on the lenders to make payment in case of a default. Letter of Credit, bills discounting and guarantees constitute such facility. Globally, a few banks like Christiana Bank, ABN Amro, Citibank have specialized in providing finance to the shipping industry. As per various estimates, around 200 banks are presently active in this industry worldwide. Very few of the Indian banks and financial institutions have the necessary expertise or infrastructure to appraise shipping projects. Some of the exceptions are ICICI Limited (erstwhile Industrial Credit and Investment Corporation of India) and State Bank of India who have dedicated divisions for shipping. Most other commercial banks show considerable scepticism in taking up exposure in shipping, as the industry through the ages has been considered highly risky and prone to innumerable dangers. In comparison to an immovable property, a ship sails in the high seas outside the protective policies and regulation of the domestic government, where physical viewing and monitoring of the vessel is difficult. Additionally, the sector is cyclical in nature. Broadly banks that are willing to take up shipping proposals can be divided into six groups Financial institutions Public sector commercial banks Private sector banks Co-operative banks Non-banking financial institutions Foreign banks and financial institutions

Page 51 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Financial institutions Financial institutions have wide ranging project appraisal skills and expertise. In the shipping sector, Shipping Credit and Investment Company of India (SCICI), which was formed to cater to the funding requirements of the shipping sector, has been merged with ICICI. This led to the creation of the Marine Division within ICICI in April 1997 to cater to the financing needs of corporate engaged in shipping, shipbuilding, ship repair and other marine related activities. Since 1986 till date SCICI and now ICICI, have been the single largest ship financier in the private sector having funded almost 70% of the total tonnage acquired by the private sector. Others like Industrial Development Bank of India (IDBI) and Industrial Leasing and Financial Services (ILFS) also have sizeable exposure to the shipping sector. However, Industrial Financial Corporation of India (IFCI), Industrial Investment Bank of India (IIBI), and Infrastructure Development Finance Corporation (IDFC) have very limited exposure to the shipping segment. Public sector commercial banks Public sector commercial banks control a major portion of the banking business in the country. These banks through their savings and current account deposits, in addition to other sources, have access to very easy sources of finance. Because of such low cost of funds these banks are in a position to lend at very attractive rates. For example, State Bank of India (SBI) has a PLR (rate at which it lends to its best-rated clients) of 12.0%. In terms of exposure to shipping industries, public sector banks are led by SBI, which has a dedicated Shipping and Overseas division. SBI is the banker to many of the leading shipping companies like Varun Shipping, Essar Shipping, Shipping Corporation of India, Tolani Shipping and Dolphin Offshore. Bank of India, Bank of Baroda and Syndicate Bank are the other banks, which also have sizeable exposure to the shipping industry. Punjab National Bank has wide exposure to the shipbreaking industry in Gujarat. However, these banks do not have a dedicated shipping desk. Public sector banks, which used to concentrate on meeting the working capital needs of their clients, have recently taken up project finance in a big way. They offer better rates over financial institutions that have been the traditional project financiers, because of the extremely low rates at which they raise funds. Further, quantum of funds required is not a constraint with them and they can take up large exposures in any given company. However, public sector banks take up considerable time in evaluating a project (for a new client it can take upto anything between 4 to 5 months). A vessel can be acquired either from secondhand market or newly-built. In the former case, shipowners require quick sanctioning of loans lest the vessel passes over to other competing buyers. Further, public sector banks, having made their foray into project finance only recently, do not have the necessary skills for project appraisal. This leads to a greater demand for security in the form of mortgage and collateral from promoters. Moreover, the sources of funds being short-term in nature, savings and current deposits are very short term in nature, while the duration of loan granted by them is generally medium term in nature (around 3 to 5 years). Private sector banks These banks can be divided into two groups - the old ones and the new ones. Old ones like Lord Krishna Bank, Bank of Rajasthan, Vysaya Banks, Catholic Syrian Bank and others operate more or less like public sector banks. In contrast, most of the newer private sector banks like IDBI, ICICI, HDFC Bank, Global Trust Bank, UTI Bank, Development Credit Bank and others are technology savvy and offer relationship banking to their clients.

Page 52 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Only a few of these banks have taken up exposure to the shipping industry. Most of these banks however, limit their clientele to top rated clients and ignore smaller to medium sized players. Processing of loans is much faster and quality of service far better than public sector banks. However, their cost of funds is much higher as compared to public sector banks and therefore, the rates offered are less competitive. Most of these banks are cautious about taking up long-term exposures. Banks like Development Credit Bank offer working capital facility, while some like Centurion Bank offer term loans for duration of only two years. Most others like IndusInd Bank, Global Trust Bank and others are cautious about the shipping industry. Times Bank is one of the major lenders to various mid-sized shipping companies. However, after its merger with HDFC Bank, its exposure to this sector might reduce. Co-operative banks Co-operative banks are very small and concentrate their operations to a specific geographic region or class of society. Loan amounts can be as small as Rs. 1-2 lacs needed by small fishermen. However, they do not have the resources to take up exposures to shipping projects where funds requirement is larger. Banking is also more relationship oriented (in opposition to being project oriented). Further, in opposition to public sector banks, these banks have always concentrated on term lending rather than working capital lending. Some of the banks like Saraswat Co-operative Bank and Janakalyan Co-operative Bank have sizeable exposure to the shipping industry. However, Saraswat Co-Operative Bank is willing to fund only newly built ships. Other banks who have shown willingness to fund shipping projects include New India Cooperative Bank, Kapol Co-operative Bank and others. But they will lend only to a consortium led by a larger bank or financial institution with considerable expertise in appraising shipping projects. The rates offered by these banks are however, on a higher side and could even be in the range of 19-20%. Non-banking financial institutions Large Non-Banking Financial Institutions like Tata Finance, IIT Investments and others are already involved in equipment (asset) financing. But the appraisal techniques and methodologies followed by these institutions are different from that of conventional banks and financial institutions. These institutions finance ships or dredgers who have a firm long-term charter arrangement. Lending is dependent on the duration of the charter as well the financial strength of the charterers. The institution discounts future receivables from the charterers. Non-Banking Financial Institutions can provide funding to a large proportion of the value of the equipment or vessel. The funding is usually structured in the form of leasing or hire purchase where recourse in case of default by the borrower is easier than in case of term lending. Further, the rates at which financial assistance is provided can be as high as 25 percent. However, loan applications can be processed very fast and quick decisions can be taken. Foreign banks and financial institutions Foreign banks and financial institutions include Development Bank of Singapore, International Finance Corporation (Washington), EXIM Korea and others. These institutions have a greater exposure, in both equity as well as debt markets in companies like Great Eastern Shipping, Chowgule Shipping, Varun Shipping and others. Generally, these institutions look for large sized shipping corporates for taking term lending exposure.

Page 53 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Tax Provisions Governing The Industry Tax Concessions Section 33-AC of IT Act: The government has provided deductions of tax on profits of shipping companies that are appropriated into a special reserve, earmarked for the acquisition of new vessels. Shipping companies can reserve part of their profit (up to twice the paid-up capital) in a special deposit and avail 100 per cent tax deduction. The special deposit can be utilized to buy new ships in a span of 5 years, which has come down from the earlier available 8 years. Enacted in 1989 and brought into effect from 1 st April 1990, Section 33-AC of the Income Tax Act was aimed at giving incentives to the shipping companies to acquire new tonnage. Subsequently, with effect from 1st April 1996, the section was diluted so that no more than 50 percent of the shipping income (in contrast to the total income before) could be deducted from the taxable income. However, in the recent budget, government reverted back to the Act in its original form. This will be effective from April 1 st , 2001 and the deduction can be availed from the assessment year 2001-02. This benefit is still not available for multi-activity companies and Private Limited companies. Over the last few years, many shipping companies have enjoyed the protective umbrella of Section 33 AC of the Income Tax Act. Since the quantum of tax savings was directly linked to the paid up equity, shipping companies were at an advantage to raise their paid-up equity capital. During this period, Great Eastern had two rights issues (at par), a Global Depository Receipt issue (GDR), allotment of shares to International Finance Corporation (IFC) and merger with a subsidiary company GAL offshore. The above issues raised the equity capital of the company by around Rs. 2050 millions. In case of Essar Shipping, between 1991-92 to 1999-2000, the paid up capital of the company has increased by more than Rs. 1,000 million. There are, however, many issues relating to Section 33 AC: Why should the reserves not be considered as equivalent to equity while calculating the upper cap on the ship acquisition reserve? Is the time limit of 5 years fixed for ship acquisition ideal for shipping industry considering its cyclically? Why should shipping income of non-shipping companies not get the benefit of Section 33-AC? Reserves should be considered equivalent to equity Currently any reserve capitalized would not be considered for calculating the upper limit of the ship acquisition reserve. Again the rationale behind this is not very clear. Reserves belong to the shareholders and are a sort of an investment by them in the company. By deciding not to take out the reserves as dividend, the shareholders actually invest in the company. In this light the reserves should also be considered equivalent to the paid up capital of the company. Any revenue ploughed back into the company should be good for the business and should be encouraged. The result of reserves not being part of equity is that companies are forced to pay dividends and then the share holders invest in fresh equity to increase the paid up capital of the company. This is an inefficient

Page 54 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

method as in the process the company has to pay 10 % dividend tax. It has been accepted worldwide that internally generated funds are the cheapest and most efficient source of finance. Another implication of this restriction is that companies will be forced to dilute their equity in order to increase their paid up capital. Is the 5 years time period ideal? The 5 years time limit, reduced from the previous limit of 8 years, given for new acquisition is not ideal for shipping industry considering its cyclical nature. Companies claim that by the time they have accumulated enough in the ship acquisition reserve to buy a ship, the prices would have gone up and in order to save tax they would be forced to acquire tonnage at astronomical prices. The fact is that nobody can really predict the cyclicality of the shipping industry accurately hence even if the time limit is increased companies might face the same problem. In practice companies do prolong the life of the ship acquisition reserve as explained above and hence can avoid acquiring tonnage when prices are high. The timing of asset acquisition is critical to the success of any shipping venture. Companies like Great Eastern have been able to provide higher than average returns largely because of following such a strategy. This particular provision of Section 33-AC would force companies to acquire vessels in inopportune periods, which in turn might lead to results that are quite contrary to the objectives of the Section. Many non-shipping companies like Indian Cements Limited (planning to hive off its shipping division to a separate company), L&T (the company recently sold off its ships), Reliance Industries, SPIC, Gujarat Ambuja etc. have their own shipping fleet which is quite sizeable. The ships are used for in-house purposes, but could also be hired to other companies. The rationale of not allowing non-shipping companies to avail benefits of Section 33-AC seems unjustified. Off course, since the vessels are used for in house purposes the actual income and hence profits from the shipping division are difficult to gauge. This, along with the recent legislative proceedings paving way for demergers, should see a lot of non-shipping companies hiving off their shipping divisions into separate companies. ICL has already declared its intentions of doing so, and we expect more companies to follow suit. The very objectives behind Section 33-AC of the Income Tax Act have to be questioned and it is to be seen whether those objectives are being fulfilled. We believe that various issues within the Act need to be reassessed and changes made, so as to enable achievement of the objective of encouraging various companies to acquire vessels. Minimum Alternate Tax (MAT) A companys profit and loss account is prepared as per the provisions of the Companies Act, 1956. However, for tax purposes, the income of the company is calculated as per provisions of the Income Tax Act. There were lot of cases whereby companies had profits but were not paying any tax, because income computed, as per tax rules was either nil or insignificant. So, although the companies were showing book

Page 55 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

profits and declaring dividends to the shareholders, they were not paying any income tax. In order to bring such companies under the income tax net, Minimum Alternate Tax or MAT, as it is popularly known was introduced. According to MAT, a company is required to pay tax of either 7.5 percent on book profits or the actual tax calculated as per IT rules whichever is higher. In other words, a minimum tax of 7.5 percent has to be paid by the company. Minimum Alternate Tax (MAT) has been reduced in the recent budgetary provisions. It has been brought down to 7.5 percent on total book profits from the existing 10.5 percent. Earlier, the method of calculation was also different. If the taxable income of a company computed under the IT Act was less than 30 percent of its book profits, the total income chargeable to tax would be an amount equal to 30 percent of such book profits. Minimum Alternate Tax (MAT) has to be paid irrespective of company allocating all the profit to special reserve for getting deduction Under Section 33 AC of Income-Tax Act. Even though Minimum Alternate Tax (MAT) has been reduced to 7.5 percent of book profit, it is still higher in relation to the zero tax regimes in many other maritime countries. The major concern of the shipping industry is that it should be provided a level playing field with foreign competitors such as shipping lines from U.K. where tax on shipping profits is as low as 1.5 percent. This is extremely low when compared too much higher taxes paid by the Indian shipping companies. Tonnage tax Tonnage tax or more accurately a tonnage-based corporation tax is a system that charges taxes on the basis of tonnage under control rather than actual profits earned. Since tonnage tax is independent of actual book profits made by the company and is instead dependent on tonnage under control, the company might end up paying taxes even during periods of losses. Tonnage tax is expected to give certainty to ship owners that a major liability will not arise in the future which is the case in present regime where tax liability accrues if reserves under Sec 33-AC are not used within 5 years. It will give companies greater flexibility in planning and financing their capital expenditure. They will also not be restricted by the need to defer tax. Tonnage tax is prevalent in some of the European countries such as Britain, Netherlands, Norway as well as South Korea. In Britain, corporations have the option of either continuing with the present regime or joining the new system (tonnage tax) for a minimum period of 10 years. Indian shipowners have also been asking for the introduction of the concept in India with an annual tonnage tax in the region of Rs. 5 per net registered tonnage (similar to Singapore). Assuming a net registered tonnage of around 7 million tonnes, the total annual tax outgo for the shipping industry would be in the region of Rs. 35 million only against the around Rs. 1,100 million tax outgo in the financial year 1998-99. This implies availability of extra funds of around Rs. 1,000 million or around US $20 million for ship acquisition. In a capitalintensive industry like shipping, this quantum of funds is not expected to make any palpable difference, forget revival of the industry.

Page 56 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

While tonnage tax cannot harbinger the revival of the industry, it will increase the competitiveness of Indian shipping lines operating under stricter and costlier regulations to compete with Flag of convenience vessels. The net tax outgo as a result, would reduce by shifting from the present regime governed under Section 33-AC and Minimum Alternate Tax. However, to usher a boom in the industry, to replicate the golden years of 1970s much more than the introduction of tonnage tax is required. Alternatively, participants in the shipping sector have been asking for the grant of infrastructure status, which would lead to the grant of substantial fiscal and non-fiscal benefits. The National Shipping Policy Committee 1997 has recommended that coastal shipping should be recognized as an infrastructural component along the lines of power, ports and roads, based on the lines that it is an important part of the transport infrastructure and is required for the smooth development of domestic industry and trade. The following benefits will accrue to the shipping industry if it is accorded infrastructure status: Exemption from MAT, Five-year tax holidays on each vessel acquisition, Enhancement of depreciation rate for ships from 20 percent to 40 percent, Income tax exemption for Indian seafarers on Indian ships irrespective of the period and area of the ships operation, Access to lower cost debt funds by issue of tax free securities, Access to the resources of Infrastructure Development Finance Corporation, etc Tax Relief For Merchant Navy Personnel To check the outflow and drift of the trained merchant navy personnel for foreign flag employment, an increase in the wage level was given to these personnel by the shipping industry with effect from April 1, 1998. Wage bills work out to be 35 to 40 percent of the total operational cost of shipping lines. The drift has however not abated and Indian merchant navy personnel continue to seek employment in foreign flag vessels. High tax implications for working in Indian Ships is one of the reasons. Indian ship owners have been asking for amendments to income tax laws in order to retain Indian seafarers. Indian seafarers employed by foreign vessels enjoying NRI status are exempt from payment of income tax. Income tax rules state that for any Indian seafarer who spends 183 days or more at sea (whether inside the territorial waters of India or outside), on a foreign-owned vessel, the dollar income earned by him is tax-free. At the same time, Indian seamen employed on Indian ships are subject to income tax. To qualify for tax exemption, seafarers on foreign-going Indian vessels have to spend at least 183 days outside the territorial waters of India. As per this rule, not even half of the seamen currently employed on Indian ships are eligible for NRI benefits. Whereas, Indian seafarers employed on a foreign ship even when it is trading in Indian waters, pay no taxes. If an Indian seafarer is able to spend more than 183 days outside India's territorial waters on an Indian ship for two consecutive years, he acquires a 'Resident but Not Ordinarily Resident' (NOR) status. This NOR status is available for the next seven years irrespective of the fact whether he spends 183 days or not in foreign waters. During these years, any income earned from a foreign source, in foreign currency, is tax-free. However, if it is from an Indian source, then it is taxable. As the tax element widens the wage disparity between the Indian seafarers on foreign ships and those employed on Indian ships, more and more seafarers are leaving for lucrative foreign jobs creating manpower shortage in the Indian companies. Ship owners are seeking tax exemption for those employed

Page 57 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

on Indian ships, on par with those on foreign vessels. As per various estimates, if full tax exemption is given, the loss of revenue to the exchequer will be around Rs. 300 to 350 million. Assessment Two consequences emerge after the recent changes have been effected in the institutional and regulatory framework governing Indian shipping industry: 1. Greater freedom to Indian companies in such decision are shipbuilding, ship acquisition or sale, chartering, etc. 2. Lower government support - both cargo and financial and hence greater role of market forces in shaping the contours of Indian shipping industry. ACCOUNTING PRACTICES The fundamental financial policy of a shipping pool is that earnings are collected together and then fairly distributed to the owners of vessels entered in the pool. The exact methods of achieving this objective vary between pools to some degree, but the basic intention remains the same for all such organisations. In the following chapter we will explore systems of weighting and distribution in more detail. At this juncture, however, we will examine the accounting practices one might readily expect to encounter in shipping pools. INCOME AND FEES Figure 4.1 shows income and expenditure flows to and from a typical shipping pool. It can be seen that income will be received from all pooled ships, as one might expect and, in addition, further income will the generated from contract of affreightment activities and from freights, demurrages and hires earned by chartered-in vessels, some of which might be employed to service contracts of affreightments, others speculatively, in order to provide a hedge against market movements or, simply, because the pool administration/members considered a profit could be made from that activity. For the sake of simplicity income channels from other profit-making sources have been left out of the illustration, but a pool can raise additional income from acting in the capacity of exclusive broker or as commercial manager for shipowners not wishing to enter their vessel(s) in the pool. Certain pools, utilising the advantages of bringing a large group of ships together under one operating banner, capitalise on this by offering special services covering the entire range of ship-management duties, and funds raised by these activities can also be channelled into the pool. However, it is not necessarily the case that all income raised in this' way will be subject To distribution. Some may be kept for the benefit of the pool administration, either as a profit or as a means of reducing fees to the member shipowners. Consequently, it is important for a ship owner contemplating joining a pool to investigate the pools policy regarding the treatment of income from sources other than pooled vessels.

Page 58 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Figure 4.1: shows income and expenditure flows to and from a typical shipping pool

Most shipping pools will charge a standard fee levied against income in order to fund its management. This fee will be used to pay staff salaries, office rental, communication expenses, stationary costs, the design and printing of brochures in fact it will be utilized to cover all the expenses involved in running the pool. In a member-controlled pool, in which one can anticipate the members will be concerned in maximizing their individual vessel income, this fee will be kept as low as possible. There should be no particular reason why a member-controlled pool will wish to build up pool management profit and their initial aim will be to tailor to approximately match anticipated management expenses. In an administration controlled pool, however, those controlling the pool are doing so with the Published intention of making a profit. The fees levied are an obvious method of contributing to this Profit and will thus be geared to a higher level than might otherwise be the case. Once management expenses have been paid, that remaining forms the basis of the profit to be retained by the pools controllers, Fees can be in the form of lump sum, subject to review say, annually, which has the advantage of providing a stable cash injection, For an established pool, management expenses are not likely to alter very much, or at least substantial increases (e.g., an office relocation) can be predicted and costed. Thus, lump sum fees can be calculated to provide the desired mix of coverage of expenses and if required, a certain profit level. Alternatively, fees may be assessed as a percentage, in the manner of brokerage commission-say, 2.5%, This can he based on gross income received into the pool, or on net income, i.e., pool receipts, less expenses involved in running the pool, for example, less bunker purchases, port costs, etc. Obviously, fees based on net income will need to be assessed at a substantially higher percentage in order to reach the cash amount generated by fees based on gross income. After all, the services rendered will be virtually the same, and pooled owners will have a justifiable complaint if competing vessels are charged less than themselves for almost identical facilities. Whether the fees income arises from exclusive brokerage or from commercial management of non-pooled vessels, however,. it is important to establish just where the benefit will end up. If channelled into the pool, for eventual distribution to the members, they will obviously benefit in full in an equitable manner. In such a

Page 59 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

case, it is reasonable that the pool members should bear in full the expenses incurred in earning the fees, e.g., communication expenses, etc. However, if fees arising, from exclusive brokerage or from commercial management of non-pooled vessels forms part of the profit of the pool management then, although there is nothing wrong in this, it should be made clear to pool members that this is the pool policy. Another pool policy which should be made clear to prospective and existing members is that regarding the speculative chartering of outside tonnage. Unlike the scheme depicted in Figure 4.1, where income and expenditure arising from chartered-in vessels form part of the pool profits and liabilities, it may be that the pool management itself becomes the disponent owner and that profits and losses arising from such activities move directly to the benefit or detriment of the management. Consequently, it can be seen that the pool management can be acting as a profit-making entity in its own right and this can be made perhaps easier to understand by reference to Figure 4.2, depicting the role of a pool management profiting from these activities. It could even be that ships time chartered-in on a long-term basis in this fashion be entered into the pool by the management themselves. As a result, the ships will be given a weighting like any other entered vessels and will be treated in exactly the same way. From the distributions received the management will be responsible for paying hire to the actual owner outside the pool, and any profits or losses resulting will be for the account of the management. Once again, there is nothing inherently wrong with this practice. It should, however, be made clear to pool members. Equally, the true ownership of the pool should be explained to prospective members. It may well be that members who have established their own member-controlled pool set out to attract others to join them by entering vessels into their pool, after which all profits earned by entered vessels and losses sustained by those same ships will be equitably shared in the conventional manner. However, if the original member owners actually own the management company (which will probably be the case), it is only commercial sense to explain both this and the pool policy on the distribution of extra income arising from sources examined in the above paragraphs. Failure to do this Figure 4.2: Income and expenditure flow-chart where pool management is itself a profit centre

Page 60 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

can very well cause later dispute should the pool management engage in chartering activities, the profits of which will be for the ultimate benefit of some of the pool members and not for others. EXPENDITURE Reference to Figure 4.1 supra will show the expenditure flows from the pool itself. This will take the form principally of payments for commercial services rendered to the pooled vessels-for the purchase and supply of bunkers; for port disbursements; insurance premia; canal transit charges, etc. In addition, freights and hires will have to be paid to the owners of ships which have been chartered-in, and distributions made to the pool members. Fees also have to be paid to the pool management to fund that service and the accountant will be instructed to follow certain procedures in this respect depending, of course, upon whether fees are based on gross or net income, or form a regular (say monthly) lump sum. Like so many other management aspects of shipping pools, the checking of port disbursements should be a team effort, in this case the task divided between accounts and operations personnel. The accounts personnel will be aware of advance remittances made to port agents and can establish that those shown in the disbursements are correct, while the operations staff will use their expertise to check that expenses claimed are in accordance with trade practice and with pro forma invoices which may well have been submitted earlier. Care must be taken to extract from the disbursements those vouchers concerned with the shipmanagement or husbandry aspects of the port visit, as these will require the attention of the vessel's owners or ship managers. It may be that, having received appropriate authority, certain owner's expenses will be handled directly by the pool accountant (for example cash to master), deductions being effected in due course from distributions made at regular intervals or when made to the owner involved. Equally, care must be taken on rates of exchange between local currency and that in which the pool operates, and to satisfy the pool accountant that agency fees fairly reflect the division Of work undertaken by the port agent on behalf of the individual owner (for ship husbandry activities); the pool management (for commercial tasks); and, perhaps, for work the agent may have carried out for charterers involved in the port visit. A pool policy must also be established over the subject of commissions, which may be obtained from services provided on behalf of pooled vessels. Will a commission for the supply of bunkers be sought, for example, and if so, will that commission be for the benefit of the pooled vessels and their owners or for the pool management? For the sake of simplicity and equity, if for no other reason, it would be best if the pool management concentrated on obtaining the lowest available prices, avoiding the dubious attractions of commissions where such are offered. Rebates such as these are normally financed by the cost of a higher price for the product concerned and, even if the pooled owners were to benefit from commissions so raised, it makes for a less confused accounts practice to deal only on a lowest-price basis. Once again, however, if the pool management intention is to obtain commissions, this policy should be clearly explained to existing and potential pool members. BANKERS Tile selection of pool bankers must receive careful consideration by all concerned with the well-being of the pool and its members. The final choice must take into consideration the geographical location of the bank (for practical reasons there is a severe disadvantage if the hours that a pool and its bankers are

Page 61 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

operational do not coincide); and any liability there may be for taxation of the income earned by pool members. For this, expert fiscal and legal advice will need to be obtained. But apart from that serious matter, one has to consider also the practicality of the location of a bank; the services it can provide; and the cost of those services. Moreover, much of a pool's fiscal activities will involve transferring funds overseas and efficiently collecting freights and hires, and confirming their safe receipt. Thought must be given as to the likely efficiency and costing of any proposed bank in the performance of these duties. Assuming pool distributions are sufficient funds have been accumulated to make a distribution worthwhile, various interim balances will accrue to the credit of the pool. The task of efficiently investing these funds on short-term deposits or in any other viable manner will be that of the pool's accountant. The services offered by a bank in respect of short-term deposits; the case of dealing with formalities to perform these operations; the interest rates offered; and charges in respect of unforeseen cancellation; all are factors that should be considered when originally selecting a pool's bank. CURRENCY International shipping is usually conducted in United States dollars. Thus, irrespective of where the pool management is located, the flags of ships in the pool, or the nationality of the member shipowners, it is likely that a Pool will emulate this tradition and operate in that currency. Nevertheless, for specialised local pools it may not be convenient to follow international habits, utilising instead a local currency for pool purposes. Whatever the choice, it is another factor which should be borne in mind when selecting the pool's bankers, as the location of the bank or of its principal branches may be important in this context. POOL ACCOUNTING PERIOD There are basically two alternative accounting period choices open to a pool's management and membership. One is for a pool accounting period of 'fixed' length, the other to run continuously for a 'variable' period until either the weighting structure is altered or ships enter or leave. If selecting the latter, once a pool has been closed the accountant must hasten to acquire all input material to enable the accounting staff to finalise the balance sheet covering financial activity during the time the pool has been in operation. This will enable each owner's equity to be established and for final debits and credits to be made. The problem is, of course, that final figures cannot be obtained until all input data has been accurately assessed. Outstanding hires and freights, lay time calculations, un received additional port disbursements, all will play their role in delaying finalisation of a pool's accounts. Accordingly, estimates will have to suffice and an owner leaving a pool may have to wait months for final accounts to be produced and, despite prudent accounting practices being used, it may show that the owner ends up owing the pool rather than the reverse, the risk to the pool being that the ship owner no longer feels the need to settle debts of this nature. Should vessels frequently join or leave a pool, an accountant's tasks can assume monumental proportions in respect of opening and closing pools if following the 'variable length' strategy. The alternative 'fixed length' accounting period choice has much to commend it. Although, depending on when a vessel leaves, a member may have longer to wait for an equity stake to be finally resolved, the

Page 62 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

pool's accountant has only one closure to contend with during a certain period and can plan his workactivities accordingly and more rationally. A reasonable choice for a fixed accounting period would be one year say from I January until 31 December. Despite the fixed nature of the accounting period, there is nothing to stop a vessel leaving during the year. If a vessel was withdrawn on 30 June, for example, she would simply be considered offhire' for the period from I July until 31 December, in the same manner as if the ship had under performed in comparison with her agreed speed and consumption and suffered an 'off-hire' penalty and a for responding reduction in the amount of the distributions paid to her owner. Should a member wish to place a new vessel into a pool operating a fixed accounting period system, though, it will be more problematical than with a 'variable' pool. For a variable system, a vessel can enter at any time. The old pool is simply closed down on an agreed date, and a new pool incorporating the new vessel is set up to start immediately upon the closure of the former pool. It is not possible to open a new pool in the middle of a 'fixed' accounting period. A new member can be accommodated, however, in a variety of ways. The vessel (or several ships) can be time chartered to the pool and paid a 'market' rate of hire, or even hire rate obtained from comparison with the financial returns gained by similar vessels operating inside the pool. Or the vessels can be commercially operated on behalf of the owner until the closing of the existing pool, whereupon the vessel enters the new pool. The final decision on which accounts period system is to be adopted will probably depend on the type of pool. It is to be expected that an administration-controlled pool will favour the undoubted neatness and efficiency offered by a fixed accounting, period system, On the other hand, a member-controlled pool may well favour the potentially quicker route to establishing equity suggested by the variable method. If choosing the latter, however, those responsible for the choice should certainly consider the extra staff hours involved in their decisions to frequently open and close pools, and the disruption this might inevitably create in other parts of the pool administration. AUDITING Shipping pools are founded on the concept of mutual trust. For this reason it is important that accounting practices must be openly discussed and agreed upon by all concerned or, at least, new members to an existing pool should be fully aware of those practices and income from which they will benefit as well as other income from which they will not. It follows that a pool's books of account should be open to any member giving reasonable notice to carry out an inspection of same, to satisfy he or herself that the financial affairs of the pool are as they should be. In practice, if the pool's management is attending to its tasks in a proper manner, and the pool members receive regular and comprehensive financial data, there will be no need to examine the books of account. It is equally important that auditors of international shipping repute conduct a full and thorough audit at regular intervals. A full audit can be carried out as often as required but will normally only be necessary once a year with, perhaps, a provisional audit half-yearly or, depending upon the complexity of the pool's activities, quarterly. No matter the policy adopted by a pool with regard to selecting a 'fixed' or 'variable' accounting period alternative, the auditors can still attend at set intervals, finalising the closures of fixed period pools if need be, or finalising those variable pools to have been closed since their previous audit, and estimating the equity in any variable pools remaining open at the time of their visit. It is irrational to expect to finalise

Page 63 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

an audit in the period immediately following the closure of a fixed pool, or of an agreed audit period. As referred to earlier in this chapter, at any given time selected for an audit to take place or for a pool to be closed, there will be numerous out-standings which, by the very complicated nature of shipping, will take weeks to finalise of course, estimates can be attained, but in several instances these might be wildly inaccurate. The enthusiasm of members eager to establish their equity should be restrained until an appropriate occasion, as it may be several months following the commencement of an audit before a reasonably accurate assessment of final, results can be announced. Frequently, this delay will cause no hardship as estimated results can be utilised and relevant transfers effected in the meantime. Enough will have been written already in this chapter for the reader to recognise the wisdom of incorporating much of a pool's accounting practices into the contract drawn up between the pool management and each member. This is to protect the interests of both parties as, with both approaching the reality of joining a pool in a spirit of frankness, it would be best to leave as little as possible to memory and to record all that has been agreed in written documentation. There is, after all, nothing that should be hidden, and candid reference can only assist auditors and their like acting in the best interests of all parties to the Organisation. Equally, auditors' recommendations to pool managers as to improvements in fiscal techniques should be taken seriously by those controlling a pool, and appropriate alterations to operating standards be implemented as soon as practicable. CASH FLOW The fiscal operation of a pool can be complex in the extreme. It therefore follows that certain information can assist by clearly indicating the financial situation, thereby enabling the pool management to plan forward strategy efficiently. Among the Most important pieces of information the accountant can provide is a cash flow projection programmed, say, some four to six weeks ahead. This chart should show week by week prospective income and expenditure, balances and distributions. Thus, it will have considerable value to all sectors of the administration as well as to individual members. Consequently, it should be updated more or less continuously and reviewed and circulated at regular intervals, at least weekly. As well as all sections of a pool's management relying on the information contained in the forward cash flow projection, equally each division will be required by the accounting, department to provide essential data input. The operations section, for example, must provide forecasts to specified weeks ahead, including estimated amounts that will be required for port disbursements; canal tolls and bunker payments, broken down for each pooled vessel. This information must be as accurate as possible. Every advice that US$100,000, or even US$50,000, is required for a port disbursement which turns out to cost US$75,000 is not good enough. Every effort should be made by an operations department to limit differences to within 10% of actual figures and to be as close as possible to the required dates when funds will need to reach the recipient, erring on the side of an earlier date or a larger amount if in any doubt. The route of the transfer is important and close cooperation will very likely-be called for between accounting and operational staff, both to plan the most effective and economic transfer route and to investigate exactly when the funds need to arrive, as well as the time they will take from leaving the pool's accounts to reaching their destination. Remember, a pool's reputation is important and promised funds should arrive promptly. It is all too easy for operational personnel to concentrate on items of major expense such as a bunker purchase and overlook smaller, but nonetheless substantial, payments that require to be part of the forward cash flow plan. Items such as cargo tallying, towage charges, etc., must

Page 64 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

not be overlooked as, collectively, costs such as these can create a substantial drain on a pool's financial resources. From the chartering department, an accountant must seek accurate information about inward and outward freights and hires, their approximate amount and dates due. An integral part of this task is that concerning brokerages and commissions that are to be collected or paid, as well as substantial chartering incidentals such as freight taxes, and any specific arrangements that may have been made with other owners-for example, hold cleaning and dunnage removal allowances. Where a vessel remains unfixed, nevertheless the cash flow forecast should include an estimate from the chartering department of the probable income that vessel will generate. This is difficult to assess with any accuracy when perhaps the vessel might eventually be engaged on a contract of affreightment fixture, a spot market voyage, or a time charter. Such a situation is not an unusual event in cash flow forecasting, however, and it is perhaps best to establish a pool policy of treating such problems in a methodical manner. A reasonable method is to assume that an 'open' vessel will be fixed on a spot market trip time charter, as this can be estimated by the chartering department some weeks ahead. Such a standard approach will help towards the consistency of forecasts, and this will be aided if undue optimism as to future prospects of the freight market is kept within reasonable limits. The accounts department themselves can also provide cash flow input data. The accountant knows, for example, the status of maturing deposits and short-term investments, as well as the likely interest generated on same, all of which should be included in cash flow forecasts. Additionally, there are demurrages and despatches to be considered, and also balances of hires and freights, as well as other smaller outstanding resulting from the finalisation of hire and freight statements for otherwise completed voyages. Depending on individual pool arrangements, the important task of finalising these items, may be that of the accounts staff, the operations department or even that of the pool manager's team. Whoever is responsible. however, should ensure that balances due to be received or paid during the weeks ahead should, as far as possible, be quantified and the debit or credit sums be included in cash flow forecasting. Finally, another item to be included in any forward cash assessment is that of off-hire for pooled vessels, the amount of which will affect the distributions made. A scheduled dry-docking, for example, or a poor performance assessment by the operations department, are both factors that may be necessary to take into consideration. It might seem to the reader that the production of a reasonably accurate forward cash flow forecast is a mammoth task. This is correct for the first such forecast that is produced. But subsequent weekly forecasts benefit from the previous week's information, and other than adding a week for the distant future, approximate figures are thereby available for up-dating and refinement by the same personnel that entered the earlier data. Consequently, the task is not so daunting as at first it might seem and its value for all concerned is considerable. Not only does a regularly produced-and semi-accurate cash flow forecast provide a perhaps timely reminder to individual members of staff as to matters requiring their attention, it also gives shipowners members essential information as to when they can expect to receive funds into their bank accounts. Thus, they are able to carry out their own cash flow forecasting, covering items such as loan repayments and running-cost expenditure. It is truly an essential fiscal tool.

Page 65 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

DAILY BANK STATUS As for any large-scale business enterprise, a shipping pool's management needs to have accurate information regarding the status of various bank accounts that are utilised. Certainly the pool's accountant needs to prepare a daily bank account status report for review by the pool manager. It is only right that the member shipowners of an administration-controlled pool receive regular summaries of the information contained in these daily bank reports but, in the case of a member-controlled pool, it would be better for copies of the daily reports themselves to be passed to each member. From the information contained in these reports, covering not only balances at the start and conclusion of each day's account activities but also details of all transactions during that day, the pool manager and each member can satisfy themselves that all appropriate action has been taken and that nothing untoward has occurred in a pool's fiscal activities. FREIGHT AND HIRE INVOICES The cash flow forecast will reveal freights and hire payments that are due to be received in any particular week and, at the commencement of each such period, personnel from a pool's chartering and accounts departments should produce for the pool manager comprehensive details of anticipated income. It is not sufficient, though, to watch for payments to be made, no matter how reliable the charterers may be. Mistakes do occur and payments are occasionally and quite genuinely overlooked. It is therefore important for a telex or faxed invoice to be despatched to the party involved a day or two before the remittance is expected, showing not only the amount considered by the pool personnel to be due, but the date the funds should be received by the pool's bankers and details of the pool's bank account to which the funds should be sent. It is modem time charter practice to include a clause in the Governing charter party, by which a charterers failing to pay hire into an owner's bank account by the due date can be placed on notice and given a certain number of days (usually specified in the charter party clause) in which to produce the missing funds. By assuming the habit of efficient financial housekeeping, commencing with the despatch of telexed or faxed hire invoices, there is less likelihood of the effects of such a clause being invoked. As a result, delays in the receipt of incoming funds and outstanding pool income will be kept to a minimum. POOL OUTSTANDING Especially in a buoyant freight market in which a vessel's daily values are high, balances of hires outstanding upon the completion of time charter trips and period employment, together with ancillary income such as radio message payments, hold-cleaning costs, etc., can be substantial. Add to this balances of freights; retention by time charterers of certain amounts as cover for potential port disbursements allegedly incurred by pooled vessels time chartered out; overdue settlement of demurrage claims, etc., and very soon the amount owed can reach unacceptable levels. Me very fact that a list of out standings is regularly produced-say, every week-helps to concentrate the minus of the accountant and pool manager on the size of the problem. At a glance they can see if the balance is too high, or if there is a substantial change from balances shown in the previous reports. Identifying problems is not sufficient though. Continuous monitoring of amounts owed to the pool is of vital importance and, if possible, it is best to avoid outstanding occurring in the first place. For example, with a vessel reaching the end of a time charter trip, discreet pressure needs to be maintained on the

Page 66 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

charterers to ensure that small balances of hire are paid up. It is notoriously difficult to judge exactly when a vessel will complete her time charter and redeliver to her owners or (in the case of a pool) to her disponent owners but, in conjunction with the operations department, a close estimate is usually possible and then, together with the chartering team, reminders can be made to the charterers when payments become due. With voyage freights there is often little that can be done ahead of time, other than invoicing at an early stage for freights that are shortly to become owing. It may be that a substantial proportion of freightperhaps the entire freight as in the case of most voyage fixed crude oil tankers-will not be due until arrival at a discharge port and after right and true delivery of the cargo. The assessment of lay time is a specialised and occasionally complicated task. It may be that the person appointed by the pool to calculate lay time will need assistance to tackle some particularly obtuse point. Nevertheless, that assistance should be readily forthcoming in order to expedite lay time calculations, either defending excess despatch claims from outsiders or pressing home claims for demurrages owing. An essential part of the material required to enable assessment of lay time is formed by statements of facts and notices of readiness from port agents. Occasionally the calculations are delayed due to the nonarrival of this documentation. It is therefore vital that a pool's operations department insist that local port agents obtain and submit these items at their very earliest convenience, if necessary by fax machine. RECONCILIATION ACCOUNT There will be numerous financial transactions between a pool and its members in addition to distributions. The contract agreement between member and pool administration will specify how certain factors are to be treated and costed. For example, the amount the pool management will pay for hold cleaning work performed by a ship's crew; for meals supplied to port workers, pilots, etc.; for gratuities to port officials; and the arrangements for reimbursement of radio and satellite communication expenses incurred by owners on behalf of the pool. Amounts a member may owe the pool could arise from poor performance of an entered vessel; for reimbursing time charter deductions paid initially by the pool administration but for which an owner is ultimately liable; for cash advances to masters of entered ships; or for agency fees paid on member's behalf. Larger amounts relevant to off-hires, both provisional and finalised, will need to be assessed by the operations department in conjunction with members, and relevant data passed to the pool accountant for appropriate entries to be made in the pool's books of account. In fact, a considerable amount of debit and credit items can and will arise, requiring conscientious, consistent and detailed attention on the part of the pool accountancy staff. A convenient method of entering these items into the pool's accounts is to establish what may be termed a 'Reconciliation Account'. This account can be used to accumulate all debit and credit items arising from these 'inter-pool' transactions, applying those that accrue to any particular vessel in the next convenient distribution to that vessel, thereby reducing or increasing the amount paid to the member in accordance with the outstanding balance. If the pool applies a system of regular distributions-say, monthly-it would be convenient for all such items arising during the previous month to be included in the following distribution. In this manner, outstanding are kept within reasonable fiscal limits and the reconciliation account regularly cleared.

Page 67 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

STATISTICS In order to satisfy themselves that a pool is operating efficiently, those controlling the Organisation will require regular and substantial information. This is to be expected as, unlike when operating their own fleet, they are that much further away from commercial decisions and appear to need constant reassurance that all is being handled effectively and profitably. Each department in a pool's management structure has its role to play in drawing up statistical data and sending it at regular intervals to pool members and to their management colleagues. The accounts department must play its part in this overall policy and provide whatever statistics are required. Much, of course, will be covered in the flow of information contained in documents described earlier in this chapter. However, one important document-and there may well be others depending on the demands of the parties concerned-that the accountant will be expected to produce is a chart showing real income per vessel compared with its weighted income. This document-let us call it a 'Fleet Income Analysis'--can also compare those figures with actual distributions made for each vessel, all totalled to provide an over all fleet analysis. If the figures were produced on a calendar month basis, reference could also be made to the preceding month for comparison purposes, as well as combined figures for the year, last quarter or whatever. POOL ACCOUNTANT'S RESPONSIBILITIES The accountant entrusted with the task of overseeing. the financial well being of a shipping pool will very soon discover the variety of responsibilities involved. On the one hand, he will be expected to act in the role of a. traditional tramp shipping accountant, collecting a freights and hires and paying vessel voyage expenses, the only saving in workload being that management running costs will be dealt with either by the individual vessel owner or by ship managers acting on behalf of that owner. Having paid outstanding invoices for voyage items the balance remaining of hires and freights received becomes available for distribution to the owners of pooled vessels and, by applying the weighting system agreed upon by all parties, the accountant must supervise the efficient transfer of individual distributions to all owners entitled to a share. Added to the responsibility for the fiscal well being of those engaged in the pool's activities are responsibilities to pay hires and freights to the owners of ships which have been chartered-in by the pool. Additionally, the accountant must collect income from the earnings of these vessels and from contracts of affreighttnent and ensure that available, temporarily unused, funds are placed on deposit or other shortterm investment, so as to maximise income from all sources. While these activities are being dealt with, attention must be given to the efficient financial operation of the pool administration-for example, to see that staff salaries, domestic invoices, and office rentals are promptly paid and, in order to accomplish this with sufficient funds, that appropriate fees are deducted from pool income. Finally, the pool administration and members will be calling for regular statistics, illustrating the financial status of the Organisation; books will require checking and balancing; bank statements will need reconciliation; perhaps auditors or tax officials will be calling in all, a demanding vocation.

Page 68 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III Personal and Administration

Is STCW A Good Business Opportunity? Yes, it creates a business opportunity for some enterprising people for a very short term and strictly not on a continuous basis. IMOS laying emphasis on STCW 95 and insisting on the signatory countries to comply with the requirements by February 2002 witnessed the sudden rush of the training and education activities in many countries. DG shipping, in 1997, took a momentous decision of allowing the private players to set up their own commercial establishments to take care of the training needs which is in excess of the capacity that the existing infrastructure had at that time. This period witnessed a flurry of training institutes in Mumbai area especially. The same business opportunity was not created when IMO came up with STCW 78 guidelines. Its implementation started in 1984 only. The basic difference between 1978 and 1995 is the concept of drawing a white list. Since IMO came up with an implicit threat of not including some intransigent ones in white list, Indian regulatory authorities waked up to the ground reality. As of now, approaching 2001, many such private set-ups have been rendered unviable and they are on the path of close down or diversification, mainly in manning or IT education. So clearly, it was an opportunity for the early entrants. Seeing into the future, the probability of IMOs coming up with another set of STCW guidelines can not be discounted keeping in view the rate at which the industry face and structure changes. But waiting for such an opportunity is tantamount to environments taking control of you. If you dont want to be at mercy of the IMO, then dont wait. One has to look for opportunities in the present to build a solid foundation. IT K(C)ritical Success Factor for future shipping operation Information technology has shrunk the world, increased the efficiency and productivity of different economic activities and hence taken the centre stage in todays world. How is shipping sector going to be shaped up by IT? A question worth asking and the answer is not very far away. Comparing across the industries, shipping sector has the minimum penetration of IT although things are changing very fast. Benefit of IT is intended to come from two streams - one due to employment of software as the controlling mechanisms thereby streamlining various operations and second by the integration of different processes. The whole maritime industry consists of offshore vessels and the onshore official operation which typically consists of shipping companies themselves, maritime insurers, shipping agents, ports authorities, component vendors and scores of other players. The IT requirement of onshore official installations for various operation are not very different from those required in other organizations in different industries. Now focusing on the software requirement in ship operation and its integrated communication with the onshore players, it leaves a lot to be desired as of now. The software required for a ship operation can be divided into technical software and the commercial software. The technical softwares are power plant maintenance software, loading software, navigational software, marine software etc. Commercial softwares are cargo management software, port information software etc. Investment in IT on ships is not witnessing any breakthrough not because it is technologically not feasible, but probably because of the inability and unwillingness on the part of ship owners and the ship managers to focus on the long term benefits of investment in softwares rather than

Page 69 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

the short term benefits; meaning a power plant maintenance software would no doubt increase the operational efficiency of the plant along with the reduction in uncertainty while increasing the useful life cycle of the plant. This explains why the technological development in vessels has been very minimal over the last few decades even while technology in other industries has seen massive jump in the same time period. Todays shipping operation is experience driven and very little information and communication driven, although this is changing very fast. The difference between these two paradigms is glaring to say the least. The latter stresses on the standardization of operation and real time communication to stay away from the future uncertainty or in other words minimizing the probability of failure on various fronts. Say, for example, problem coming up in a power plant in 50% of cases is of recurring nature. In todays time, the personnel cannot be expected to be with same fleet for the entire lifetime. So why not to put up all the knowledge gathered till now in a repository and come back to refer to the database while required? So this gives rise to a database server on the ship itself or the server in the onshore office depending upon the cost of communication. Communication technology would actually dictate the static volume of information and the software agents to carry on one hand and on the other hand the frequency of communication. Right now the communication is being done by the satellites with different observatories, ports etc. Since it is costly, only such communications are carried out which are of exigency nature and require a basis of compulsive attention. The cost of communication will depend upon the number of willing players willing to avail themselves of higher-grade services. It is a chicken and egg phenomenon. Both of them would feed each other instead of one waiting for the other one to act because of different technology exploration and the proactive participation of different players to change themselves under the market forces as well as due to the urge for more intellectual achievement and stimulation. For example, for all management decisions on the board, the deck personnel can communicate to the onshore office for various information. Various navigational parameters like the pressure and temperature conditions, current and a host of other associated parameters of an area in a certain range of the vessel are necessary to be communicated to the vessel on the real time basis for the safest navigation mode. It is easy to see how it could play a paramount role in not only constituting a prewarning system, but a prevention system altogether. The future would witness the integration of all the softwares on board and the continuous communication of this offshore-integrated unit with outside agents. This would require more coordination between the engine side people and the deck side people whose complexity grappling capability has to go up. Though all the involved people would be the end users, they need to be equipped with trouble shooting capability. So what does it spell for the education, training and development requirements of the vessel personnel? A lot, as a matter of fact. Since all of the things described above is not going to happen overnight, the training requirements will be felt in the first lap of development which will be followed by its formalization in the regular course. But before that happens, the training institutes, Government or private have to wake up to the call of the hour, first by understanding its far reaching implication, then proactive learning them selves and finally imparting the knowledge to the bigger body of existing seafarers. This is possible for the experienced sailors who have an eye for the future. They would have understanding of

Page 70 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

both the operational aspects of shipping and its IT potential. Such bodies or private set ups apart from imparting the education only, can go up the value chain and as a part of strategy, implement the full ERP on a vessel. Doubting ITs role in shipping would make one blind sceptic. One needs to both create the opportunities and grab them. A strategy orientation for education business Business opportunities arising out of short-term phenomenon like STCW guidelines cannot be sustained over a long period. Offering a few modular courses may not need a lot of investment. But in order to be able to offer the competency courses as well one needs to put up the minimum necessary infrastructure, which is capital intensive. The infrastructure of Lal Bahadur Shastri Advance Nautical College (LBS) and Maritime Training Institute of SCI provides a hint of that. Though one may argue that both of them are Government funded and the taxpayers have been generous enough in allowing such large expenditure, still it does not diminish the enormity of capital expenditure required on part of a private body to offer similar set of courses. As far as small players are concerned, it would be very difficult for them to survive because of low entry barrier. It is very easy to set up institutes offering modular courses with comparatively lower investment. Anybody can set up such facility within no time. Any such player adopting cost leadership strategy would itself bleed and make others bleed. It has already been witnessed in the market in recent times. For long-term maritime education business, it is only big players who can sustain in the face of market competition effectively. Big players, by offering a host of courses can attract a critical pool of candidates and can make them their repetitive customers, because same people would come back again and again for different familiarization and competency courses. Such set-up requires investment running to several millions of Rupees. For providing nautical science courses even higher investment is required. A strategy could be, coming together of several interested players and putting money into a single venture. This would obviously take slightly more time to get the returns. The success of such a venture would actually require a solid communication strategy, believing that quality of the training would speak for itself. Anyway the message transmission takes place by grapevine. But an active communication to the prospects would build up a loyal customer base over a period. Like, for example targeting the fresh cadets would mean that they would come back to the same institute for different courses. One can of course target by regional segmentation. Mass marketing would help more in this industry. When it comes to competition between such big private players and the Government or Government sponsored institutes, Government would be more willing to outsource all its training needs to the private companies. In the face of competition among the big private players better quality would prove to be a competitive advantage. Value addition in the courses offered and keeping pace with the changing trend, shall pull the crowd in future. Introduction of the IT related courses to make the people more conversant with the changing technology is one part of it. They must be offered along with the normal maritime courses. Indian Institute of Management, Ahmedabad is offering the course in Shipping Management and now collaborating with Indian shipping companies and foreign education bodies for spreading the course. Such type of value addition will widen the scope of the industry itself. The real opportunity could lie in shipping companys willingness to outsource their personnels training requirement from the private bodies in the country. Till now, the shipping companies used to have their own training department where they offered the requisite courses for their personnel. Shipping Corporation of India, Great Eastern Shipping Company Limited have their training facilities. Similarly

Page 71 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

many of the ship management companies and foreign shipping lines agents have their own training institutes. There they train their own personnel as well as the other personnel for a fee. As a matter of fact, in a free market economy, the private bodies / institutes offering the training should be available from where the shipping companies can get their requirements outsourced. Also with changing technology, upgradation courses are increasing. Officers have to be continually trained in one or other. This training arrangement is highly capital intensive because of lot of infrastructure requirement. Small players wont be able to provide all the courses at a single outlet. On this score, the in-house arrangements actually prove superior. Again as far as the training for the operational procedures are concerned, they have the experienced personnel readily available on their payrolls. So shouldnt they allow their experts to teach those who require the training? Again, such trainings are better customized when imparted by in house set up. An assignment on SCIs LPG vessel would require different customized training than LPG vessel in GESCO. This asset specificity factor wont allow the outsourcing to take place on a large scale. As far as the shipping industry is concerned, there are many small players staying along with few big players. Such an industry structure has not added value to any of them. When the consolidation starts in the industry in the near future, the small players would be merged with big ones making the behemoth ones. Government assisted companies like SCI is anyway going to be divested, which will lead to its increasing efficiency and size. So in a future industry structure when there would be handful of big players, they can have their own training set up and fulfil their requirement. Private institutions may not have much business opportunities from this point of view. A futuristic look would clearly reveal that the training requirements are two pronged. One is operational training, which is conventional, and the other one is shipping IT training which is unconventional. While the former training could be imparted by the in house people, the later training has to be imparted by outside people. Entire shipping company set up can be divided into offshore vessels and onshore installation. Penetration of IT is relatively low in shipping industry. The onshore installation IT requirement is just like that in any organization in any other industry. It could be streamlining the operation across various functions like marketing, finance; operation requiring various automated and integrated structure. In case of the offshore vessel functions, normal operational procedures are also getting software control oriented and hence their interface with the user is changing. For example, the demand for radio engineers on the board has fallen substantially. The arrival of GPS has meant the death of sextants. The load distribution on different members of the ship structure and its possible failure scenarios can be very well analysed on loading software. The communication methodology has transformed itself so drastically that predictability and certainty of events have increased. The GPS users dont have any troubleshooting knowledge. In case of its failure they would be really at sea in high seas. Now with the arrival of ship loading software, plant maintenance, cargo management software the control of things have become easier which at the same time requires a different kind of skill. Till now the shipping was thought to be cruising the high seas and entering the ports to load or unload the materials. But now shipping is being treated as a part of whole logistics chain. So not only sailing is important, but also real time communication, management and co-ordination between various players in the logistics chain in port are very important. The education and training requirement of the deck side people may require a revamp.

Page 72 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

From this angle, a private entrepreneur could have an opportunity. A private entrepreneur who could commit a lot of investment into this venture can make the set ups for imparting both the operational and IT training in a single outlet. But the people at the helm of such an affair should not only have vast experience in shipping but also in general management, transportation & logistics and Information technology. It requires the balanced mix up of the operational people and IT people who could come up with customized IT solution for vessel management. IT based vessel management leaves much to be desired. There is a lot of resistance coming from the people who have been quite used to traditional methods. So the future is at best a mixed one. It may not be prudent for someone to put up his investment in expectation.

Page 73 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Maritime Education Maritime education aims to provide safety of seamen and cargo on sea. It includes training in navigation, technicalities and engineering of the vessel. The International Maritime Organisation (IMO) is the apex body guiding and regulating the standards of maritime education worldwide. In India, the Director General of Shipping (DG Shipping) adopts and implements the norms laid down by IMO. The navigational training at the institutes carry out deck side courses, while engineering and maintenance training take care of the engine side courses. Unlike any other industry, the seafaring community has to undergo these trainings and clear the examinations to move up in the hierarchy irrespective of experience. Presently, the minimum standard of education is monitored according to the Convention of Standards for Training, Certification and Watch keeping as amended in 1995 (STCW'95). Till the implementation of STCW'95 in 1997, the Indian maritime education sector was dominated by four Government-owned institutes while private players played a minor role. However, the scenario had changed radically due to the following reasons: Due to dearth in the availability of quality officers, Indian officers were very much in demand. Many shipping lines came to India, resulting in the establishment of more number of Ship Management companies. This increased the global awareness and demand for Indian seafarers leading to the need for more training institutes. The compliance of STCW'95 convention before publishing the white list of the countries with a minimum standard of education by IMO has created fear in the minds of IMO signatories. The regulatory authorities took the step of promoting more training institutes to clear the backlog of seafarers not having the minimum required training. The maritime education sector in India presently consists of a large number of players including DGapproved as well as non DG-approved institutes. While Government-owned institutes are the major source for quality seafarers, many Indian shipowners also have their own training institutes for improving their human assets as well as providing training to others. Foreign shipping lines and their manning agents are also playing an active part in promoting maritime education in India. Maritime education centers also provide career opportunities to retired merchant navy persons whereby they share their offshore knowledge and experience with the learning community. However, the demand in the industry was need based. With the fulfilment of the STCW'95 norms by most of the seafarers, the additional capacity created by the industry is under utilized resulting in the closing down of few institutes or diversification of their businesses. Different types of education provided by the maritime education centers in India are as follows: Deck Side Education Deck side education gives navigational expertise to aspirants in phases from a cadet to a master of the ship. The pre-sea courses are of a duration ranging from three months to three years. The person has to undergo adequate sea-time depending on the course to become eligible for the next level. Three months courses are carried out by many institutes in India that mainly require job sponsorship from a shipping company, which is a member of Indian National Shipowners' Association (INSA), Foreign Shipowners and Management Association (FOSMA) and Maritime Association of Shipowners, Ship managers and Agents (MASSA). After attending the course, the person joins as a cadet on the ship, where he undergoes an onboard training for the next three years. He becomes eligible to undergo the course for the next level of Second Mate.

Page 74 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

At present, three years degree course in nautical science is conducted in only two institutes in India. "Training Ship Chanakya" was the only institute till 1999 to offer this course. It is the first Government institute offering the maritime course in India. The person taking the course joins the ship as a Cadet and after completion of one year sea time becomes eligible for the level of Second Mate. The next level courses and examinations are conducted by the post-sea training institutes. These consist of familiarization, modular and competency courses. After STCW'95 Convention of IMO, these post-sea training institutes started mushrooming, owing to the liberalization policy taken up by DG Shipping. The only Government institute offering this course is Lal Bahadur Shastri Advance Nautical College, Mumbai. The posts of deck side officers were monopolized by OECD nationals because of their leadership quality, experience, good training standards and knowledge of English. They were preferred and got respect across the world and were highly paid for the same. With the loosing of interest in the offshore career by OECD nationals concomitant to the cost reduction strategy taken up by the shipowners worldwide, other nationals also entered the international field. Indian officers have created their own place in the international seafaring market with good training standard, fluency in English and comparatively low wage level. Engine Side Education

Engine side gives support to the deck side for smooth running of the engine and technical parts of the ship. The hierarchy in the ship starts from the level of Junior Engineer leading to the Chief Engineer, who is responsible for the engine side. Engineering graduates in electronics, electrical or mechanical streams can undergo the six months pre-sea training about the ship in an institute like Marine Engineering and Research Institute (MERI), Mumbai to join the ship at the Junior Engineer position. The marine engineering graduation course gives direct eligibility for the person to join the ship. The Government institute offering this course is Marine Engineering and Research Institute (MERI), Calcutta. The post sea courses for the engine side are also conducted in the same institutes where the post-sea courses for deck cadets are offered. Some of these post sea courses are for both deck side as well as engine side candidates. These courses are offered in many colleges mainly after the liberalization of maritime education in 1997. The Government College offering these courses is Lal Bahadur Shastri Advance Nautical College, Mumbai. Ratings Side Education Ratings are the supporting people to the officers of both sides of the ship i.e. deck side as well as engine side. In India, 12 DG shipping approved colleges give the pre-sea rating training. There are very few exclusive rating training institutes in India as that is not a high profit area for the businessmen. Training Ship Rehaman is the first Indian maritime training institute, which is the first institute to provide pre-sea rating training in South-East Asia also. The post-sea certified level rating training is offered in the officers' post-sea training institutes only. The ratings after completion of the requisite sea-time, with the sponsorship from the shipowners can undergo the pre-sea officer level course to enter that cadre. Philippines supplies maximum ratings to the industry. Being a maritime nation, shipping is a preferred career in Philippines, where the community is English speaking, hardworking and ready to work on wages far below the world standards. Comparatively, Indian ratings are not much in demand in the seafaring market.

Page 75 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

A Survey Of Maritime Education In India No man will be sailor, who has contrivance enough to get himself into a jail For being in a ship is being in a jail, with a chance of being drowned. A man in a jail has more room, better food and commonly better company. Samuel Johnson English poet and critic The above words are reflection of the largely physical nature of seafaring, as it existed before the dawn of industrialization. However, as human innovativeness has steadily found its way into shipping, skills required has evolved from being purely physical to being increasingly intellectual in nature. Newer technologies require knowledge about a wide era of subjects in order to become a successful seafarer. They have necessitated a more structured method of knowledge dissemination and selection criteria that examines not only physical capabilities but also mental prowess. Increasing sophistication of vessels and associated equipments as well as rising concern about possible pollution that can be caused by ship accidents, has led to greater importance on a well-designed education system and a structured method of knowledge dissemination. Over the years maritime education has become a large industry, with an identity quite independent of the shipping industry it caters to. The present survey has been carried out to bring into focus various issues concerning maritime education in India. In the process we met many of the industry participants to understand and outline the future shape of maritime education sector in India. Maritime Education A Historical Perspective Going back in time, it will dawn upon us that shipping or sailing never required a lot of equipments or a plethora of knowledge, rather it needed courage and feel of adventure & ecstasy in playing with imminent danger. With time, navigation has changed from an art to a science. Initially it was stars and moon showing the position and time, which latter gave way to sextant and different chronometers. Even vessel making was not a big science till the 18 th century. It was after the Industrial Revolution, when vessel engineering underwent drastic change. Vessel size increased dramatically and the simple rowing was converted to propeller-based rowing and engine-based power. Both the structural side of the ship and the power plant side registered tremendous changeovers in the last century, steam power plant changed to diesel power plant then to gas turbine plant. In the meantime, sextant has given way to Global Positioning System (GPS) or Differential Global Positioning System (DGPS) system. Also the type of cargo carried across the continents has changed very much over the years. It was coal in early part of last century and petroleum in the later part of the century, may be Liquefied Natural Gas (LNG) in this century. These developments have necessitated presence of large number and variety of skills amongst seafarers. Imparting these skills required a formal education system and this led to growth of marine education industry globally. India has been a seafaring nation for centuries. Indias maritime history goes back to Indus Valley Civilisation when an active trade existed with Mesopotamia and Egypt. The Eastern coast, then known as Kalinga, used to trade heavily with East Asian countries. Evidence of active sea borne trade from Western coast to Middle East also exists. The new era started with East India Companys trading between India and Europe. Our first training institute was started by Ismail Yusuf, then proprietor of Bombay Steam Navigation Company in 1910 at Worli, Mumbai, which latter got shifted to Nhava in the outskirts of

Page 76 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Mumbai. It happened to be the first marine training institute in South East Asia. It came to be known as Training Ship Rehman in 1972. The first Government initiative came in 1927, when Royal Indian Marines largest troop ship, after many fittings, was converted to mercantile marine training ship named Training Ship Dufferin. TS Dufferin had trained 2,656 cadets by 1972 when it was decommissioned. It was replaced by Training Ship Rajendra, which was meant for the training for 250 cadets at a time. Later when it was felt that the output needed to be increased, a shore-based structure - Training Ship Chanakya, came up in New Mumbai and TS Rajendra was decommissioned. There have been several efforts to bring the TS Rahaman under the auspices of Government. In 1973 the foundation had received notices from the Government for acquisition of its entire campus for Oil and Natural Gas Corporation. However, it continued to maintain its independent identity by grace of late Prime Minister, Indira Gandhi. Various new courses were introduced with passing time, keeping up with training developments in Europe. Indias maritime training history runs parallel with the rise and fall of TS Rahaman and TS Dufferin. From OECD Countries To Third World Countries The Organisation of Economic Co-operation and Development (OECD) countries have historically been the center of shipping and hence source of seafarers. They have actually explored the whole world. So naturally, prior to colonization of Asian and African lands, both worker and master category of people came from the same European countries. With colonization of Asia, came the Laskars (natives of Asia) who were taken as seamen on the British ships, because of illness or mortality or wastage of British people. Two Laskars were taken as a substitute for one British seaman although together they were earning far less. Since the end of Second World War, concomitant to growth of maritime industry in East Asia and other developing nations, people of various nationalities joined the seafarer community. The shipping industry lost its sheen in the OECD countries due to the emergence of alternative career opportunities, which were equally compensating in a less harsh or even comfortable environment. The wastage of officers of OECD countries at the training level increased drastically and very few people preferred the on vessel assignment after the age of 50, even though they were capable of handling the ship as a Master. The results of BIMCO-ISF 2000 report confirm that the centre of gravity of the manpower industry has continued to move away from most of the traditional maritime countries in Europe, North America, and Japan etc. towards countries in the Far East, the Indian sub-continent and Eastern Europe. The share of OECD countries in total seafarers has come down to 27.5% from 31.5% in last 4 years from 1995. With the developed standard of living such a trend is not expected to reverse. Well, the third world countries constitute more than half of the whole world and education standards in many third world countries have developed only in last 50 years. India in particular has developed a very high standard of education system. Thanks to Lord Macaulay, India is the second largest English-speaking nation only next to United States (US). Indian officers have done very well in ship operation across the world and they have already made a name for themselves. The Far East countries, more or less supply the ratings to the industry. India is in a typical situation, where there is the largest pool of scientific manpower staying along with the largest pool of unemployed youth. India is also fast gaining the recognition as the Information Technology (IT) hub in Asia. Not withstanding the upcoming career opportunities, it is difficult to expect a substantial drop in unemployment in near future. So keeping all these things in view, India can be

Page 77 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

expected to provide a very large number of people both in officer and rating category because of the inherent advantages considered above. What does it mean for an entrepreneur in terms of opportunities? He has to create awareness in the market. Shipping, as a career has so less visibility in the market that the mass of people staying away from the coast have hardly heard about the merchant vessels. Preference for a career in Merchant Navy has gradually declined since 1980s. Previously aspirants were drawn in by prospects of visit to various foreign lands and a handsome salary. Development of the new economy and growth in knowledge based firms made comfortable jobs, which were more rewarding, available offshore. Now the preference of the masses has changed from marine career to new economy jobs. In earlier times, ratings used to come from coastal Gujurat and Tamil Nadu where people were quite accustomed to sea and sailing. The deck side and engine side officers usually came from North India and East India. Since the last two decades, the Gujarati communities have increasingly shied away from a shipping career as proliferation of chemical industries and consequent entrepreneurship has offered better alternatives. In todays times, when the demographic structure of Indian seafarers in the official hierarchy has almost remained same, the ratings are drawn from the states like Orissa, Bihar and Uttar Pradesh. The interested entrepreneurs are typically from North India and West India who are trying to tap the talents in developed areas only. They can act proactively and open the same avenues in Eastern India, which we believe, would surely pay off in the future. So the latent demand in our country itself is very high. One needs to zero on the actual areas in India. It helps to remember that India is far from uniform in nature as far as the economic standards are concerned. It will take all the campaigns and patience to convert the latent demand to the explicit demand. Also such entrepreneurs can expect to attract the potential candidates from other third world countries like Philippines, Bangladesh etc. to study in the institutes here. A competitive analysis would show that the biggest threat to Indian seafarer community, and hence Indian marine education sector, may come from the superfluous pool of Balkan area professionals who have been rendered unemployed after the disintegration of erstwhile United States of Soviet Russia (USSR). They are ready to take up assignments at a very lower level of emolument. They are from the naval background, so their quality is undoubtedly good. That could offer the competition in the officers level. In case of the Chinese pool, their technical qualification is as competitive as Indians, but lack of English knowledge impedes their entry into world market. However, they have developed high level of maritime education with three maritime universities. It is not easy to predict when they would become comfortable with English as communication medium. Steps are already being taken by the Chinese Government itself to promote English in the country. Philippines not only posses a global seafaring experience but also an English speaking populace. However, the seafaring community from the country lacks requisite level of expertise on technical matters, an area of concern for the global shipping industry. Based on the above factors, we believe that it would not be overoptimistic to establish a marine education infrastructure in India that caters to the seafaring community of many of the developing nations.

Page 78 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Liner Services A Container To Fit Every Need Suppliers of bulk containers and associated equipment and services continue to refine and broaden their offerings. Chemical buyers are faced with more and more options, but they can be confident that while the number of choices may be daunting, products and services are available to meet virtually any type of bulk packaging challenge. The biggest trend in recent years has been for buyers to switch from smaller one-way containers to larger or reusable containers. And users have become accustomed to being able to reduce the costs of their shipping and storage, while maintaining safety and environmental security. As one producer put it: The market is always looking for the least expensive way to handle and ship materials. But the packaging market is still evolving. Faced with increased competition from other forms of packaging, and in some cases the globalisation and increased competition within their own industries, container manufacturers are pushing hard to diversify their lines, with more products designed for specific markets or applications. Again, this results in one thing for container users: Better products and more options. Another factor that is evolving is the desire of container suppliers to sell the services. With competition fierce, many container suppliers are getting involved in the most difficult area of the container business-container disposal. As landfill costs continue to rise and the spectre of hazardous materials looms overhead, supplier involvement in managing secure containers for reuse and/or eventual recycling is an important factor. IBCs Intermediate bulk containers (IBCs) continue to show strong demand growth due to key advantages including long-term reuse, secure environmental performance, and as an effective replacement of a larger number of smaller containers. IBCs are rigid or collapsible, and mostly used for the shipping and storage of materials. IBCs usually hold 120 gal to 660 gal of material, and are manufactured from materials such as polyethylene, carbon steel, stainless steel, aluminium, and corrugated paper. Rigid IBC containers are strong multi-trip containers that allow for specific environmental advantages. They are made to be reused and therefore are constructed to prevent accidental leaks. Many are also designed to provide total container drainage through bottom discharge valves and sloped bottoms. Producers say IBC use will continue to grow at a double-digit rate. IBCs have enjoyed tremendous growth over the past five years. While providing ease of handling, effective product discharge, reusability and recyclability, and space savings, IBCs also reduce warehousing and transportation costs for some users. An IBC's length of life depends on how many trips it makes and type of applications. Customers typically ship 20-25 times/yr in an IBC, for 100-500 total trips. Along the way, valves must be replaced, and DOTmandated recertification, inspection, and testing for the container must be performed every 21/2 years. Many Varieties Different IBC designs provide many opportunities for buyers to match an IBC with their own applications. The most common IBC remains the bottle in a cage--a polyethylene bottle surrounded by a steel cage. But different designs also have jumped in popularity. One such container is the all-plastic IBC. These containers resist rust and corrosion, and can be easier to maintain. Plastic IBC suppliers also insist the containers are strong. They are thick-walled containers with significant impact strength.

Page 79 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

But as demand for IBCs grows, container suppliers are moving toward more specialized designs. Only a few years ago, suppliers offered at most a couple of different IBC types. Now IBCs are becoming more customized, and suppliers are pursuing niche markets. The industry is evolving, and a lot of growth is coming from new products targeted at specific market segments. But while all-plastic IBCs continue to become more common, the bottle in a cage still appeals to a large part of the market for both safety considerations and cost. In general, the more specialized a design, the higher the cost. All-plastic IBC manufacturers already have a big market in the chemical processing, food and beverage, and paints and coatings industries. Clawson Container, for example, has introduced the Poly-Viscodrum, an IBC for viscous materials used heavily in the grease and ink industries. As another option, Clawson recently introduced the SpiderTank, a cylindrical container for high vapor pressure products. Another area some producers see with big growth potential is electronics. Electronic chemicals often require very high purity, which has products suited to these requirements. They may need purity down to parts per billion. Now that there are IBCs that can meet these requirements, electronics will likely follow other industries and move away from use of drums. Other companies are building new designs to pursue new areas of the market, too. Snyder Industries, for example, recently introduced the Ultratainer, an all-HDPE IBC with a wide-mouth 20-inch lid opening and a replaceable liner system. This allows customers to save on the cost of cleaning and creates an oxygen barrier, which is needed with some products. Plastic Tags Stable Raw materials are the biggest factor in plastic IBC prices. Prices tend to rise if resin prices (HDPE) rise. Prices for higher-impact grades of resin tend to be a few cents per pound higher, but usually follow similar trends. But competition is a significant factor as well. There is far more competition in the market than even two years ago, so prices should hold fast. Several producers say IBC prices should be stable over the next year. It expect raw materials prices should stay in the same area, so IBC prices should be level,. PURCHASING's forecast is for high-density high-impact grade polyethylene prices on the spot market to decline slightly throughout the rest of this year. Effects Of Regulations The Department of Transportation's rule for hazardous materials containers adopted by country standards for containers used to ship hazardous materials. All packaging must still be tested and certified, but adoption did allow for increased hazmat packaging options. In 1994, DOT amended regulations, allowing the use of IBCs. The rule (HM181E) created categories and test requirements for IBCs. DOT puts chemicals into three packing groups for transportation. In general, packing Group II and III are approved for rigid plastic containers. Usually, packing Group I chemicals, which are flammable, have to be in metal containers. Chemical container storage is covered under different National Fire Protection Association (NFPA) regulations. Looking For Service The biggest change in packaging is customers' requirements for service. Across all types of packaging, end users are looking for easy disposal. At any point, customers want to be able to have the container picked up and taken away. Suppliers are also very aware of concerns over packaging disposal. Customers are concerned with the environmental impact and potential liability if empty containers should be improperly disposed of.

Page 80 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Van Leer has a program called Container Net that provides a range of reconditioning and recycling services that customers can buy with their container. These services can be bought in advance, or customers' end users can purchase it for a Van Leer container down the line. Van Leer has offered this service on their steel IBCs before, and has now just started it for their plastic IBCs. A number of suppliers have emerged whose main business is the service. As part of their container management services, TNT Container Logistics, for example, provides the IBC, delivers it, picks up the empty container and returns it, and handles the cleaning/reconditioning/recycling of the container at the end. Because TNT is an international logistics company can offer this service domestically or internationally. TNT's collapsible, reusable IBCs consist of steel pallets and frames with polypropylene sidewalls. Fitted with food-grade recyclable liners, they are also available fro Group II and III products. Many customers want to have reusable containers, but don't want to keep track of a fleet of reusable. As disposal issues continue to become more complicated, they expect more and more people to be leasing containers and using container management services. While a number of IBC suppliers offer some sort of container management services, Materials Handling Group has recently reintroduced the Tuff Tote, an IBC with a hard plastic shell and an inner replaceable poly-bottle, which is part of the company's managed program. Called Closed Loop Packaging, the program includes rental and leasing services, cleaning, tracking and disposal services. Customers no longer just want a container, they want a package of services and someone to handle the whole program for them. A Need For Steel Users transporting or storing flammable materials or those with high purity applications generally don't use plastic IBCs. Carbon steel and stainless steel IBCs are available for these applications. Although expensive, steel IBCs have significant benefits including safety, durability, and long life. The preferred containers for high-purity applications, stainless steel IBCs already are used in food processing and pharmaceuticals, and in such chemicals applications as high purity solvents. Stainless steel, which is non corrosive and can be easier to maintain than carbon steel, is more compatible with a range of chemicals. When considering reusable containers, many buyers find that a strong long-lasting container will save money in the long run. With disposal costs rising all the time, a container that will last many trips becomes increasingly important. Stainless steel IBCs are especially suited to customers shipping highvalue products, or in a closed-loop system to a dedicated customer. Some customers are sticking to steel IBCs, and see no reason to change. Many simply are comfortable with them, or are concerned over a hazardous issue. To some customers, stainless or carbon steel seems indestructible. It appears that the basic reason that stainless steel IBCs haven't suffered at the hands of plastic is simple: For some applications, a steel IBC performs better. Corrugated Has Uses For buyers who want to ship in bulk, but don't want to invest the capital that a steel or plastic IBC requires, there is yet another option. Corrugated IBCs are constructed of multiply corrugated paper, and can be used to store or transport some liquids or solids. While not appropriate for all materials, corrugated IBCs do offer benefits including light weight and disposability. Typically, corrugated IBCs are used to ship non-hazardous chemicals and food products, but unlike other IBCs, they are one-way shipping containers. While this would not suit customers who want a reusable

Page 81 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

package, some users still find advantages with a disposable product. Since the container is for nonhazardous materials, both the bag liners inside and the box can be recycled. Also, using corrugated IBCs for hazmat shipping may be becoming easier. Earlier this year, MacMillian Blodel gained certification of its Spacekraft II corrugated IBC for Group II hazardous solids. Transportation costs are lowered for lighter containers. In the coming years, customers will need to examine costs to remain competitive while offering a secure package. The need for alternative packaging will be compounded by pressure to change to lightweight, environmentally responsible packaging. As one-trip containers, the disposability of corrugated IBCs is a significant benefit. If the box and bags inside are used for non-hazardous materials, they are recyclable. The boxes can be put into the corrugated recycling stream. Corrugated IBCs can provide cost advantages, especially in freight and warehousing applications, due to their light weight and compact size. But again, they are not for every material, and are not suitable for long-term storage, as many will bulge over time. Designs Expand The types of IBCs available continues to expand. Collapsible rigid IBCs, mostly for dry applications, are designed to replace bins or bulk boxes. Perstorp Xytec, for example, makes a collapsible plastic IBC. The main advantage is savings in shipping costs. Plastic IBC Benefits

Light weight. Good chemical compatibility. Won't rust or corrode. Allow shipping/storage in large volumes. Easy handling and dispensing. Reusable and returnable with a long lifespan. Can store flammable materials. Stainless steel for high- purity applications. Long-term strength and security. Reusable/returnable.

Steel IBC Benefits

FIBCs Although not providing the same safety or reusability as their rigid counterparts, flexible intermediate bulk containers (FIBCs) have many advantages of their own. The most common FIBCs are known as bulk-bags and are made from woven polypropylene with polyethylene liners that are tabbed, sown, or glued in. They are collapsible, self-contained units used primarily for dry, flowable products. HM181E propelled the growth of the bulk bag. Bulk bags can hold corrosives and oxidizers, and packaging groups II and III. They can't hold flammables. Bulk bags are accepted by people now; there is far less reluctance to use them. They help buyers get out of a package they're paying too much for and into something else.

Page 82 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

The basic types of bulk bags are the seamless or circular bag (which comes off the loom in tube form, and eventually has a square top and bottom) and the seamed or baffle bags (which feature a one piece panel under two square sides). Bulk bags hold 2,500 lb to 3,000 lb of dry-flowable products. DOT regulations say Group I materials can't go in a bulk bag, and groups II and III require that the bags meet lift, topple, and drop-test criteria. Demand for bulk bags sees no signs of abating. There are still several industries that have failed to realize the benefits of FIBCs. Bulk bags have continued to evolve, and with commodity-type bags under severe pressure from imports, buyers can expect quick product evolution as producers push toward more specialized bags for specific applications. Import Impact Despite annual growth rates in double digits, the domestic bulk-bag market has been hit by an influx of imported commodity bags. Many U.S. producers claim these bags are inferior. There are some very inexpensive import bags available, and they are usually bad. But there are also some very good imported bags which are much cheaper in price. Bulk bag manufacturing is labour intensive, and low labour costs in places such as Turkey and India keep manufacturing costs down. Many U.S. producers are opening facilities in Mexico to augment their U.S. plants and try to help lower their price tags. One way U.S. producers intend to keep customers is by stressing service. B.A.G., for example, offers a dedicated bag testing facility to test the design of their bags with customers' products inside. The assure customers that they're getting a safe bag that also meets their needs. Some domestic producers also are starting to import bags, which they'll sell in addition to their own product line. But the main direction producers are moving is towards specialization. Semi-Bulk Systems, for example, offers an FIBC hybrid--a DOT-approved container designed to be reused and refilled. The Air-Pallet has an HDPE base for a forklift, with PVC (polyvinyl chloride) or urethane sidewalls. A PP membrane sits inside for fluidised or powder contents. The container collapses down to pallet size when not in use, and is durable enough to get up to 200 uses. The container is approved for hazardous materials, and has isolation valves for complete isolation during filling and unloading. It can be loaded and unloaded in a dust free fashion. The continuing trend toward this type of FIBC is partially a response to landfill issues and the disposal of bulk bags and boxes. Another area for bulk bags is liquid viscous materials such as greases and pastes. Custom Packaging Systems offers the Rhino Liquid Squeeze Bag, which is shipped in a stabilizing container. The bag is removed, and hung up at the end user and squeezed by machinery or hand rollers. The recovery rate is tremendous, virtually everything is squeezed out. Once empty, a new liner can be inserted and the bag can be used again. The company guarantees this bag for reuse. Even importers understand the specialization trend. Panda Bag, for example, has a potato bag with fabric woven so that air can circulate around food products that would otherwise spoil. Every company is going to be pursuing the market for specialized bags. But the real fate of bulk bags may be a globalisation of supply. A few years ago, people either used imports or domestic bags, says producer. But now they're using both for different applications. Reuse Or Recycle Many FIBC producers say you can get around six uses out of a bag, but most will guarantee the bag only for the first use. An important consideration: What to do with the bags when they've been used. Some

Page 83 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

producers offer closed-loop refurbishing services that clean and test bags to be sure they're safe for reuse. But customers should be careful to know what they're getting and insist that the bag is fully documented. Customers reusing bags should only get back their own bags. Although they don't recommend it, producers know many bags actually are reused. We try to shoot for a performance testing factor of 5:1 for safety. Most manufacturers stress that bags are only guaranteed for one trip use, but there are bag refurbishing options for customers who want them. Recycling may be a better option. Our bags are 100% polypropylene (PP) for recycling purposes. Disposal of bags is becoming a problem, and customer are looking for more creative ways to handle them. The PP in bags can be ground up into post-consumer resin. A significant part of bulk bags that are not 100% PP can also be recycled. Even Liners Advance There are even some advances in the liners that are used in bulk bags and Gaylord boxes. Grayling Industries, for example, manufactures both form-fitted and baffled liners. The form fitted liners take on the same shape as the bulk bag which increases capacity as well as fill and discharge efficiency. Grayling also recently introduced the Guardian baffle liner which forms and holds dry, flowable materials into a square shape, maximizing the amount of product that can be stored in a pallet location. Both products can add up to 30% more holding space to the typical bulk bag. Custom Packaging Systems, another company supplying liners for bags and other containers, offers formfit liners on a roll, which makes them easier to use. Liners make a difference, because the wrong liner can waste space. The correct liner is essential. Storage and freight costs are so high, need to be able to fit as much product as possible into a package's footprint. Price Outlook Very Good Prices of bulk bags are tied directly to the price of their major component--polypropylene resin. But the market has become so competitive that increases in bulk bag tags are extremely unlikely, even if PP prices rise. The influx of imported bags and increased domestic competition has kept bulk bag prices low for some time, and will likely continue to do so. The area where prices may see a jump is in specialized bags. Already selling for higher prices than commodities, the specialized bags should not see much price competition for some time, and they'll be affected more by PP resin prices. According to PURCHASING's monthly transaction price survey, PP (homopolymer) spot market prices fell from 40/lb in the fourth quarter of 1996 to 39/lb in the first quarter of this year. Tags are forecast to decline to 38/lb in the second quarter, and 37/lb by the year's end. Prices early next year should hover near 39/lb. Bulk bags also have a lot of room to grow. Some markets haven't been convinced yet. A lot of markets are just starting to wake up to the idea. Areas the industry seems to be targeting include petrochemicals, agricultural and seeds, and the food industry. FIBC Benefits Collapsible, self contained units. Mostly for dry flowable products. Hold 2,500 lb to 3,000 lb of material. Easy filling and emptying. Recyclable.

Page 84 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Drums Contrary to ongoing reports of its demise, and despite inroads made by IBCs and FIBCs, the 55-gallon drum continues to be a major player in bulk handling. Many customers might like to transport product in larger containers, but just don't use enough to justify it. Producers are quick to point out, like other forms of packaging, drums have some distinct benefits. Steel Remains Tough Steel drum manufacturers point out that drums allow for easy transportation, provide resistance against heat and fire, and can be moved by one person. They are approved for use with flammable materials. Steel drums provide strength and durability, and are easily reused and recycled. Steel is 100% returnable and reusable. Steel drums are not usually returned to the original shipper, but often are reused after reconditioning. A strong network of steel container reconditioners already exists. Producers say steel drums can be reconditioned and reused five or six times, and 40 million drums are reconditioned for reuse each year. Also, manufacturers and fillers offer assistance in locating collection services, and some distributors provide drum collection themselves. One such company is Van Leer, which has a program called Container Net for Van Leer drums and IBCs. This program tracks and collects containers from closed-loop systems and takes them for reconditioning and reuse or recycling. Van Leer calls this process trip leasing, where the customer leases the container, and never owns it. The customer doesn't have to buy the container, and the end user doesn't have to dispose the container. Instead, we track the package, pick it up from the end user, and bring it back to their location. Easy Recyclability And what happens with steel drums when their useful life is over? They head for the steel recyclers. There is a strong after market for steel scrap to be melted down and remade into new steel. Only a small percentage of steel drums manufactured is not collected and reused or recycled. With so many more options, container buyers have slowed the growth of steel drums, but have not yet reduced demand. IBCs have made an impact. But we're seeing customers switch back to steel drums because of the costs of cleaning IBCs and paying return freight. Despite the recycling benefits, most buyers choose steel for strength and versatility. Standardization of the steel drum is a major asset. The steel drum is universal. Almost all types of materials can be put into a steel drum. Some, such as materials corrosive to steel or those with sanitary concerns, need plastic liners. Some buyers could benefit from using a composite drum, which is a blow-molded polyethylene bottle inside a steel drum. Despite the strength of a standard product, drum companies are providing new drum designs. Trilla has an ISO design tight-head drum that is crafted so shippers can put more in an ISO-container for export, and allows for drums to fit on a pallet more easily. Trilla also offers an 0.8mm lightweight drum which is finding good response in the petroleum industries. Watch the price of cold-rolled steel to see where steel drum prices will be headed. The price of steel is a very significant factor of drums' manufacturing costs. According to PURCHASING's transaction price survey, cold-rolled steel sheet prices held steady at $502/ton into the first quarter of this year. Tags are forecast to decline to $492/ton in the second quarter, but then rise to $512/ton by year-end. Prices in the first half of next year next year are expected to hover near $503/ton.

Page 85 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Plastic Looking Better Plastic drums still make up a fraction of the overall drum market, but have been making some key inroads. Lightweight and noncorrosive, plastic provides good impact resistance and strength from a onepiece construction. Plastic drums provide good general chemical resistance and won't rust or flake. In addition, they meet many DOT criteria for transporting hazardous materials. Right now, plastic drums are most commonly used in the food and beverage industries; producers expect use to grow significantly for applications in plastics, resins, pigments, and those with purity and sanitary concerns. There are a few drawbacks to plastic--they're not good for concentrated chemical solvents, and cannot be used to store many flammable materials. The answer to the question of steel drums versus plastic really depends on the application. Long Life Expected Some buyers are concerned about plastic drums' recyclability and reusability; producers say they can make five to ten trips. After that, plastic reconditioners can wash and recertify the drums, then direct them toward more forgiving applications. If a drum won't pass certification it can be recycled. And the reconditioning process for plastic is getting better. Polyethylene reconditioners have now become far more sophisticated in their cleaning systems. People are now seeing that they really can get multiple trips out of a poly-container. Because of purity concerns, plastic drums were most often not made out of recycled materials. However, U.N. rulemaking last year eased the restrictions on use of recycled resins in new drums as well as allowing the use of reconditioned plastic drums. The Plastic Drum Institute prepared a new standard of identifying batches of recycled resins for use in new drums, which should help ease buyers concerns over recycled resins. One company, US Coexcell developed a program in which recycled plastics are used in new drums. Recycled materials are used in the center layer of their three-layer drum construction process. Recycled content inside the drum never touches the product inside the drum, and is not exposed to elements outside. It is in-between two virgin layers of HDPE. The price of plastic drums is strongly influenced by the price of polyethylene. According to PURCHASING's transaction price survey, HDPE (high impact grade) spot market prices rose to 44/lb in the first quarter of this year. But tags are forecast to decline to 42/lb in the second, and 39/lb by year's end. Buyers expect prices in the first part of 1998 to hover near 40/lb. Fiber Looks To New Areas This spring, the National Academies of Sciences and Engineering (NAS) recommended that the DOT not extend an exemption under HM-181 to allow shipment of hazardous chemicals in open-head fiber drums that do not pass current DOT performance tests. Previously, the DOT has found that the drums don't meet the drop, leakproofness, and hydrostatic tests required. If fiber drums are indeed pushed out of the hazardous area, for other applications they remain an economical choice. New applications await fiber drums , such as holding paints, and other non-hazardous liquid applications using drums and integrated or inserted liners. Yet fiber drums face an even tougher challenge: They are essentially one-way containers. Growing disposal costs continue to push industry toward multiple-use packaging. But there are advantages. Fiber drums are lightweight (around half the weight of a typical 55-gallon steel drum), and provide easy handling. Drums can be safely stacked three-high when filled, and can be water- and weather-resistant.

Page 86 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

They also are the cheapest type of bulk packaging for dry materials, and continue to be a choice for customers switching away from smaller bags or sacks. Producers also are quick to point out that all parts of the fiber drum are made from materials that can be recycled. Steel Drum Benefits Easily transported, moved, warehoused. Resist heat and fire. Strong and durable. Returnable, reusable, recyclable. Many reconditioning options. Plastic Drum Benefits Can be reused and recycled. Lighter than steel. Don't flake, rust, corrode. One-piece construction. Can hold most hazardous materials. Fiber Drum Benefits Economical packaging. Lightweight. Can be recycled. Won't rust or corrode. Tanker Carrier World Oil Scenarios: 2020 Vision Does the start of the new millennium mark a fundamental change for the oil industry? Severe oil price volatility, mergers, the Internet, and the environmental movement are dramatically challenging the industrys notions of business as usual. How will these pressures develop over the next two decades and how is the industry likely to respond in order to continue to attract investment? The extensive global energy expertise to provide an evaluation of the critical factors that are reshaping the industry. At the center of this analysis is the oil market and how these forces are converging to alter the strategic landscape. It is likely that corporate strategies that were successful in the 1990s may no longer work. What is unclear is whether adaptation of companies existing strategies will be enough, or whether companies will have to consider entirely new strategies. Scope

Page 87 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

In this study identifying the key factors that will determine the industrys future. We evaluate how economic, political, and environmental drivers might interact and evolve by creating three internally consistent, global visions of the future to 2020. The three geopolitical scenarios are,

GLOBALITY. Globality scenario entails a deepening and broadening of trends that have taken root since the end of the Cold War. This is a world of robust wealth creation, but one that is highly competitive and subject to rapid changes in market and industry conditions that could result in unsettling social structuresparticularly in emerging markets. LEVIATHAN. The Leviathan scenario examines a recalibration and readjustment in the boundary between state and marketplace that expands the role and responsibilities of government. In this scenario, growing international consensus and scientific evidence regarding environmental challengesespecially surrounding the issue of global warmingresults in a greater and more coordinated role for government. FRAGMENTATION. In this scenario, fragmented national interests and their ramifications expand around the world. Political action groups with sharply divergent views on global security and economic policies immobilize governments and obstruct progress toward further global, market-based economic integration.

In developing and applying these scenarios, it assess the following factors and develop the qualitative and quantitative analyses to represent and support our conclusions.

Oil prices and energy markets. Prices for three different oil market scenarios to 2020 are projected. Market dynamics and supply and demand fundamentals are analysed. The outlook for liquid productive capacity and the future of oil demand are explored in detail. Oil demandDemand projections on a regional and product-by-product basis. Oil supplySupply outlook by region. Regional energy demandRegional primary energy demand projections including those for coal, natural gas, nuclear, hydro, and renewable. Changes in demand mixChanges in the global and regional shares of primary energy demand by fuel type. Energy intensityEnergy consumption per unit of GDP for each source of primary energy demand. Per capita consumptionPer capita energy consumption for each source of primary energy demand, on both a global and regional basis.

Politics. A framework for global and regional political trends characterizes each scenario. Key issues such as a globalisation, regional instability, the trend toward privatisation of state resources, the environment, and information technology are addressed. Economics. Economic factors, including the outlook for GDP, international trade, and inflation are evaluated. Economic growthGDP growth outlooks for the worlds 10 major energy markets. Energy demand and the global economyProjected changes in the relationship between economic growth and energy consumption.

Page 88 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

The environmental factor. Alternative visions of environmental drivers for each of our three scenarios are presented, including projections of carbon emissions by each type of primary energy under Globality and Leviathan. Signposts for the future. Key events are identified that will lead to specific scenarios, such as the implications of developing technologies, the Kyoto Accords, and OPEC politics. LNG Carrier

Global LNG in the 21st Century: The New Wave An authoritative multi client study that provides independent, timely insight into the future of the global LNG market and the strategic implications for the gas and power industry. Overview The global liquefied natural gas (LNG) market is entering a new phase. Originally founded through the resource development aspirations of a handful of gas-long producers and the energy security concerns of Europe and the United States following the 1973 Arab oil embargo, the LNG business rapidly became non-competitive in these markets as oil prices relented and pipeline gas supplies became more plentiful. Since that time the mainstays of the LNG business have been Japan, Korea, and Taiwan, where energy security, reliability of supply, and environmental concerns have been the driving forces for LNG development. Today, however, technological, institutional, and political change is driving the LNG industry toward a third phase of market development. Technological advances in the upstream area, combined with the political opening of new areas to exploration and development over the past decade, have resulted in stranded gas supplies that are growing rapidly and far exceed market requirements in those three Asian mainstay markets. Along with these factors, advances in liquefaction technology have driven significant cost out of the LNG chain to improve the prospects for monetizing these stranded gas reserves. The pendulum is swinging back again. European and North American natural gas markets are being reevaluated for both short-term cargo placement and longer-term investment. The balance of supply is shifting as well, with the entry of four new LNG producers (Nigeria LNG, Atlantic LNG, Ras Laffan Gas, and Oman LNG) all located west of the Urals, a traditional divide between East and West. Indeed, worldwide gas demand is climbinglargely because of the combined impacts of deregulation and the development of high-efficiency combined-cycle gas turbine technology that makes natural gas increasingly the fuel source of choice in power generation. And finally, the potential opening up of new markets for LNGin India, China, and the Caribbeanpromises to reshape the structure of the market, as environmental priorities and competitive pricing, rather than energy security, increasingly drive new market development. This study is one of the key pillars of CERA Global Gas expertise. Through this study explore whether LNG will be a vehicle leading to the creation of a genuine "global gas" business with price arbitrage between regional markets; what the necessary size, scale, and liquidity will be to create such a business; and what degree and scope of infrastructure development are needed to make such a global business happen. The New Wave: Global LNG in the 21st Century will provide a framework for evaluating investment decisions throughout the global LNG value chain and serve as a guide for monitoring and enhancing strategic planning for near- and long-term developments.

Page 89 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

The study's analysis will lead to the development of strategic implications for key industry segments including capital allocation, investment attractiveness, barriers to entry, transportation requirements, and the impact on the gas and power marketing and financial communities. Overview The vision for the future of the western gas and power markets is complicated by the evolving competition among fuels and technologies to generate electricity and by shifting institutional structures. New entrants and current participants in this market must understand the linkages between natural gas and power markets to be able to succeed in either sector. The West will test the limits to which markets in other regions of North America can become integrated across diverse geography, fuels, and market structures. These developments will form the foundation for opportunities and challenges in the market and will determine the level of risk faced over the long term. MARITIME SAFETY 1. 2. 3. 4. Safety and Risk Assessment Marine Safety & Antipollution Item Inspection Maritime Hazard & Pollution Maritime Health

The life of industrial workers is full of risks and hazards. Injury may caused acute ailments or permanent handicaps. Unsafe Conditions (Work related causes) Improper guarded equipment. Defective equipment. Hazardous arrangement or procedure in and or around, machines or equipment. Unsafe storage; congestion; overloading. Inadequate safety devices. Wrong and faulty lay out, and bad location. Improper illumination glare, insufficient light. Improper ventilation Poor house keeping.

UNSAFE ACT Operating without authority. Failing to secure equipment. Failing to use safe attire. Throwing materials on the floor carelessly. Working at unsafe speeds.

Page 90 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Making safety devices in operative by removing, adjusting disconnecting. Using unsafe equipment. Using unsafe procedures in loading, placing, mixing, combining. Taking unsafe positions under suspended loads. Lifting improperly. Cleaning, adjusting, oiling, repairing, etc. moving dangerous equipment. Distracting teasing, abusing, startling, quarrelling, day-dreaming, horseplay. Personal characteristic also influence accident behaviours of individuals.

Industrial Accident May Be Defined As: An occurrence which interrupts or interferes with the orderly progress of work in an industrial establishment. According to the Factories Act of 1948, an occurrence in an industrial establishment causing bodily injury to a person which makes him unfit to resume his duties in the next 48 hours An industrial injury has been defined as a personal injury to an employee which has been caused by an accident or an occupational disease, and which arises out of, or in the course of, employment, and which would entitle such employee to compensation under the Workmens Compensation Act, 1923. SAFETY COUNCIL Preserving human life is an objective which requires no explanation. Educating employers in regarding to the hidden and indirect costs of accident. CAUSES OF ACCIDENT TECHNICAL deficiencies in plant, equipment, tools materials, improper lighting, poor machine and excessive noise and the general work environment HUMAN deficiencies in the individual, such as improper attitudes, carelessness, recklessness, inability to perform the job, day dreaming alcoholism, and the use of drugs ACCIDENT COSTS Costs of damage to equipment, materials, and plant. Costs of wages paid for time lost by workers. Cost of wages paid to the injured employee:

Page 91 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

The cost of replacing the injured employe Miscellaneous costs. SOLUTION TO THIS PROBLEM Working Environment. Training. Safety Awareness. Transferring to safer jobs. Effective selection procedure. who is concerned with safety must be fully aware of the nature and importance of the human factor in the causing of accidents. Comprehensive safety Program ASPECT AND RELATIONSHIPS OF SAFETY AND HEALTH IN ORGANISATION Marine Safetys Mandate and Responsibilities Marine Safetys mandate encompasses the full spectrum of responsibilities related to ship safety and environmental protection, including: the administration of national and international laws designed to ensure the safe operation, navigation, design and maintenance of ships, protection of life and property and prevention of ship-source pollution. Marine Safety derives its authority from numerous pieces of legislation, including the Shipping Act, Waters Pollution Prevention Act, Transportation of Dangerous Goods Act, Safe Containers Act, Pilotage Act, Labour Act, Coasting Trade Act and the Marine Act. In addition, a variety of international conventions provide Marine Safety with powers and responsibilities as they relate to the marine transportation system, including foreign and domestic shipping. With these, Marine Safety develops, applies and enforces legislation, regulations and safety standards for the design, construction, operation and maintenance of commercial ships, mobile offshore drilling units, air cushion vehicles, and other special purpose vessels. Marine Safety is also responsible for the qualification, training programs and examination of officers and crews of commercial vessels, as well as prevention of ship-source pollution; marine occupational health and safety issues; maintaining a ship registry; licensing small commercial vessels; and overseeing pilotage matters. Clients, Partners and Stakeholders Marine Safety provides direct services to all segments of both the domestic and foreign marine industries. In addition, Marine Safety collaborates with a variety of partner organizations to provide services,

Page 92 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

including industry associations, labour unions, special interest groups, government, and other areas of Transport, among others. Although not always Marine Safetys direct client, the general public ultimately receives the benefits of its services. The most important aspect of Marine Safetys mandate is to protect the public interest, ensuring safety for the travelling public by supporting, promoting and regulating marine practices, which protect human life and the environment. Major Challenges Marine Safety has faced a number of key challenges in carrying out its roles and responsibilities over the past few years, including completing the structural reengineering of Marine Safety; revising the Shipping Act to reflect the realities of todays safety and commercial transportation requirements; and continuing to provide support to the marine transportation system. In meeting these challenges, Marine Safety made the most of its internal strengths, including the groups good record on program delivery, technical competence, credibility, flexibility, responsiveness, sustained international presence, and decision-making capabilities nationally. At the same time, Marine Safety has taken steps to improve in other areas, such as: consistency in serving clients and applying rules; coping with change and adapting regulations to meet new requirements; follow up; training; feedback mechanisms, staff consultation and career development opportunities; and delegation skills. To address needs in these areas, Marine Safety has set up the National Training Program to design technical training courses; is creating an Enforcement/Compliance Manual and an Orientation Guide for new employees; and is increasing consultations with stakeholders. Some branches have also held team building retreats with their staff. In addition, although external factors are often beyond an organizations control, monitoring a variety of political, economic, social, technological and physical environmental trends helps identify potential shortand medium-term changes that could affect Marine Safetys roles and responsibilities. Changes include orientation towards client service and measuring client satisfaction via feedback; decentralization; the changing role of government caused by increased self-regulation and self-inspection by industry; international and national harmonization; and increased autonomy, changing work methods and new trends in working relationships. Other areas for change include those related to technological innovations, increased complexity of work, the pressures and effects of downsizing, the aging workforce, recruitment, and a shifting of clients needs and demands. Looking Forward

Page 93 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Identifying strengths, weaknesses, opportunities and threats is an important component of the strategic planning process. This step in the process provides critical information on strategic issues and priorities for the organization. It provides the organization with an opportunity to compare what is with what should be. FIRE DRILLS AND ON-BOARD TRAINING 1. The Organization has been informed that in a number of recent passenger ship fires, some of which have resulted in a high number of fatalities, the crew's performance during fire emergencies has been inadequate. 2. On-board personnel should receive periodic training and drills to become well versed in firefighting and fire safety measures. Resolution A.437(XI) "Training of crews in fire-fighting" contains information on land-based fire-fighting training for marine personnel. Land training is essential, but by itself insufficient. The crew should know how to deal with fires on their ship because even the location of fire-fighting equipment on "sister" ships may vary from ship to ship. The common practice of transferring crew members from one ship to another at frequent intervals means that without on-board training and drills they may not become sufficiently familiar with the fire safety features of the ship on which they are serving. 1. Current regulations in chapter II-2 of the 1974 560;120s SOLAS Convention, as amended, do not require on-board training or drills for fire emergencies and although chapter III requires that fire drills be held at "monthly intervals in cargo ships, at weekly intervals in passenger ships, and lays down various other requirements regarding the conduct and recording of fire drills (see regulations 18, 25, 51 and 52), its detailed requirements for fire drills are not considered sufficient. 2. The Maritime Safety Committee, at its fifty-eighth session, agreed that the SOLAS Convention, as amended, should-be-.further amended to contain a new regulation covering on-board training and fire drills. 3. Further, the Maritime Safety Committee, recognizing the need to increase the state of awareness on board ships, instructed the Sub-Committee to prepare appropriate guidance for Governments and owners and operators in the conduct of on-board fire training and fire drills. 4. Annex I shows amendments to the Convention concerning fire drills and on-board training approved by the Committee, at its fifty-eighth session. Annex 2 provides guidance for incorporating these requirements into the crew's routine through minimum standards for on-board fire training and drills. 5. Member Governments are invited to give effect, as early as possible, to the draft new regulation to the 1974 SOLAS Convention, as amended, as contained in annex 1, pending the adoption of an amendment to the Convention, and additionally to encourage shipowners, ships' crews and port fire brigades to co-operate in practicing fire drills in port locations to ensure more efficient fire-fighting arrangements at such locations.

Page 94 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Fire drills and on-board training 1 Fire drills 1.1. Each member of the crew shall-participate in at least one fire drill every month. A drill shall take place within 24 h of the ship leaving port if more than 25% of the crew have not participated in a fire drill on board that particular ship during the previous month. The Administration may accept other arrangements that are at least equivalent for those classes of ships for which this is impracticable. 1.2. In passenger ships, a fire drill with the participation of the crew shall take place weekly. Each fire drill shall include: a) reporting to stations and preparing for the duties described in the fire muster list required by regulation III/8; b) starting of a fire pump, using at least the two required jets of water to show that the system is in proper working order; c) checking fireman's outfit and other personal rescue equipment; d) checking the relevant communication equipment; e) checking the operation of watertight doors, fire doors and fire dampers; f) checking the necessary arrangements for subsequent abandoning of the ship. 1.4 Fire drills shall, as far as practicable, be conducted as if there were an actual emergency. 1.2 Fire drills should be planned in such a way that due consideration is given to regular practice in the various emergencies that may occur depending on the type of ships and the cargo.

2 On-board training and instructions On-board training and instruction in the use of the ship's fire-extinguishing appliances shall be given at the same intervals as the drills. Individual instruction may cover different parts of the ship's fireextinguishing appliances, but all the ship's fire-extinguishing appliances shall be covered within a period of two months. Each member of the crew shall be given the necessary instructions for their assigned duty. 3 Availability of fire-extinguishing appliances Fire-extinguishing appliances shall be kept in good order and be available for immediate use at all times.

3.2 The equipment used during drills shall immediately be brought back to fully operational condition and any faults and defects discovered during the drills shall be remedied As soon as possible. 4 Records The date and details of the fire drills shall be recorded as prescribed in regulation III/18.5.

Page 95 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

MINIMUM STANDARDS FOR ON-BOARD FIRE TRAINING AND DRILLS 1 Owners and operators are urged to take measures to improve crew performance during shipboard emergencies. The human factor is very important. Each member of the crew should be instructed to recognize the importance of the emergency organization procedure and should take their role in this organization procedure seriously. Guidance should be given to each employee crew member to highlight the importance of this philosophy. Fire drills 2 An emergency organization procedure should be established to fight fires and deal with abandon ship emergencies, which should include all members of the crew and there should be one organizational structure for both fire and abandon ship situations, since both may occur during the same incident. This procedure should include; .1 conduct of fire drills as if an actual emergency existed, all hands reporting to their respective stations prepared to perform the duties specified in the station bill; .2 starting the fire pumps using a sufficient number of outlets to show that the system is in proper working order; .3 bringing all rescue and safety equipment from the emergency equipment lockers and designated crew members demonstrating their ability to use the equipment; .4 operating all watertight doors and all fire doors; and .5 making an entry into the log for each drill, including the date and hour, length of time of the drill, the number of lengths of hose used and a statement of the condition of all fire equipment, watertight door mechanisms and valves. If at any time the required fire drills are not held, or only partial drills are held, an entry should be made stating the circumstances and extent of the drills held. On-board training 3 On-board training should include: .1 instruction on: 1.1 the purpose and meaning of the ship's station bill, fire control plans and muster stations; 1.2 each individual's assigned duties and the equipment issued; 1.3 the meaning of the ship's many alarms; .2 on-board refresher training, including lectures, training books and equipment demonstrations, including warnings on ways to prevent fires (good housekeeping, smoking, etc.), fire hazards from common shipboard supplies (paints, cooking oil, lubricants, etc.) and first aid techniques (burns, broken bones, cardiopulmonary resuscitation);

Page 96 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

.3 learning to work within the emergency organization/procedure, including working with individual's superiors, his co-workers and his subordinates, as applicable, and for those in charge exercising leadership; .4 instruction on the purpose of the ship's passive fire protection design features and the purpose and requirements of the shipboard fire patrol; .5 location and operation of shut-downs for ventilation fans, fuel and lubricants; the manual fire alarm boxes and the ship's fire-fighting equipment; and the fire doors and ventilation dampers; .6 instruction and drills on extinguishing fires including: .6.1 how a single crew member can extinguish small fires; .6.2 special measures needed to combat fires involving dangerous goods, electrical installations and liquid hydrocarbons; .6.3 use of the ship's fire-fighting equipment (e.g. fire hoses, fire nozzles, portable and semi-portable fire extinguishers and fire axes) including any post-drill clean-up and equipment stowage; .6.4 dangers from fire-fighting systems, e.g. carbon dioxide system discharges; .

.6.5 use of breathing apparatus, fireman's outfits and personal equipment, including lifeline and harness; .7 instruction on: .7.1 means of escape from any-location in the ship, including all stairways, ladders and emergency exits; .7.2 procedures covering the search and evacuation of passengers from all locations in the ship; .7.3 the importance of closing doors after searching staterooms, not leaving fire hoses in doorways and not using elevators; .8 location of first-aid equipment and of medical facilities; .9 how to transport injured individuals; . 10 first-aid techniques, including treatment for burns, bleeding and broken bones and cardiopulmonary resuscitation. Availability of fire-extinguishing appliances 4 The following equipment should be tested periodically: 1 detection systems, alarm systems, walkie-talkies, public address and other communications systems; .2 fixed fire-extinguishing connections (e.g. fire hydrants);

Page 97 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

.3 watertight doors and self-closing fire doors; .4 pressure of portable and semi-portable fire extinguishers and shut-downs for ventilation, fuel and lubrication systems; .5 fire pumps, emergency fire pump, emergency Generator and the pressurized water tank, as appropriate; .6 international shore connections; .7 fire main system, hoses and nozzles; .8 inventory and condition of the contents of repair lockers However, only a portion of each type of fire-fighting and fire-detection equipment, e.g. some and not all of the fire hoses, need to be tested during each drill. A plan for periodically exercising each piece of equipment should be developed. Records 5 The date and details of the fire drills should be recorded, as prescribed in SOLAS regulation III/18.5. 6 Records of crew members who participated in the training sessions and drills should be kept by date. An assessment of new crew members should be made prior to departure and the main office notified of their training status. 7 Records of the equipment tested at each drill should be kept by date.

Page 98 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III


Fleet Management

Commercial Activities The obvious aim of any shipping pool is to enhance the earnings of its members. In the simplest terms, this can be identified as employing, pooled vessels at their maximum level of income at all times. Taken literally, therefore, it would follow that at times of high freight rates all pooled vessels would be engaged on spot market business, for it is in this activity that the highest daily rates are then to be found. As even the novice market practitioner knows, however, spot markets are highly vulnerable to wild swings in the fortunes of shipowners and charterers alike and, as for any sensible market venture, it is important to spread risks. Thus, in shipping terms, it is desirable to employ controlled tonnage in a mix of short, medium and long-term employment there by creating a solid financial basis to a pool. Thus, if the spot market swings suddenly upwards vessels will be available to take maximum advantage. If freight rates fall sharply, those ships on medium and long term employment provide a safety net for the fortunes of their sister vessels braving the fiscal storm. Thus a well-organised shipping pool should attract members through its sensible mix of pooled vessels' employment, enhancing long-term financial solidity. But this is no more than would be expected in any large ship owning organisation. The difference between progressive, modern pools and most larger ship owning groups is that, in the case of the former, the administration is not content merely to find ship employment cover sensibly in a financially prudent manner. There are other means open to a shipping pool to raise extra income and it is in the successful exploitation of these financial opportunities that real progress can be achieved, and individual ship earnings raised above those of their competitors. It is the purpose of this chapter to examine these 'other means' and to investigate the range of commercial activities in which a pool can and should become involved. BUSINESS PLAN Members take part in shipping pools for one or more of a variety of reasons. Most join to reduce their market risks and, at the same time, to enhance their profits. A giant step to achieving both these aims is taken the moment a member joins and obtains the benefits and opportunities of being part of a larger market force. But to turn intentions into reality, as in any business, it helps to define the objectives of the enterprise, to plan a strategy to accomplish those objectives, to devise a framework within which the strategy can succeed, and to embark on the strategy. Shipping pools themselves provide a framework and an initial point of embarkation, but as with any collection of individuals, the members and staff forming a pool need motivation and guidance. Even more than this, they need to understand the strategy desired by those controlling the destiny of a pool be they the administration or its members. In other words, they need the business targets of the enterprise to be clearly defined. This can best be achieved by the development of a business plan, reviewed and updated at regular intervals, at which stages it should be circulated to and studied by all involved in the pool's activities. Furthermore, a pool's general philosophy should also be explained to all staff and members, and can be converted from an abstract ideal into reality when planning strategy and drafting and/or updating the business plan. Part of this conversion should centre around fleet planning. FLEET PLANNING

Page 99 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

It could be said that there are two major aspects of merchant fleet planning, that concerned with short term expediency and that connected with a longer term overview. The two together may be likened to a gigantic commercial chess contest, the board being the world's ports, oceans, rivers and seaways, while the pieces are the ships at the disposal of the fleet planners. In an administration controlled pool the roles of fleet planners will be undertaken by the commercial department staff acting together with the pool manager. In a member controlled Organisation the members themselves will probably handle the longer term overview, providing the pool manager and staff with guidance as to the general strategy the members wish to adopt Members may even become closely involved in short term activities, although it could well be that the general strategy agreed upon between the members allows a pool's administration considerable flexibility in that area. A major longer term aspect of strategy is to reduce market risks by engaging a pool's fleet in a variety of employment, covering the spectrum from spot trading, through medium term employment say long time charter trips or voyages of three to four months' duration up to period time charters of up to one year's cover and, for a small element of the vessels at the disposal of the Organisation, engagement of period charters in excess of one ear, the aim being, to lock in the security of what should be a steady profit. This objective, neatly explained in a single paragraph of text, may take months or even years to achieve, dependent as it is in obtaining appropriate cover at an opportune moment. There is little commercial prudence displayed in fixing long term employment at the very bottom of a freight market decline, any more than there is in missing such an opportunity at the very top of what turns out (in retrospect!) to have been the height of the market, because avarice precluded fixing what was, nonetheless, the cover the pool required. No one should fight shy of securing the very best rates the freight market has to offer should the opportunity arise. But it is the purpose of a pool's management to establish the correct strategy, review it constantly in an effort to keep it both current and correct and then to see that it is put into effect. It is the strategy that is of prime importance not a cent or two on the rate! A pool operating philosophy defined in a business plan should also cover short-term fleet deployment activities. It should be the conscious aim of those managing the pooled vessels to reduce commercial risks and, to support that objective, the pool management should insist that, as far as possible (1) no ship is idle for lack of cargo; (2) ballast voyages are kept to the minimum; (3) waiting time for cargoes is reduced or eliminated altogether; (4) that a vessel's next cargo is usually fixed prior to completion of discharge of her previous cargo; and (5) that full and not part cargoes are arranged. Providing these objectives are made clear and are diligently acted upon there is no reason why they should not normally be accomplished, and only in extremely rare situations should the commercial department fail to achieve any of these aims. Yet in so many shipping enterprises not only is application to such ideals erratic at best, there seems little conception of their value to operating profits. It is equally vital not to overlook the opportunities provided by forward business planning in a spot market context. Admittedly, by running a vessel free of commitment close to her date of availability, the very highest freight rate might be achieved. But, just as frequently, a vessel is left in an exposed position, unable to capitalise on her availability because of shortage of spot cargo stems, and at the mercy of charterers seeking an inexpensive ship from a choice of several suitable candidates. Not only, that, but a commercial manager beset with difficulties of all kinds posed by the conflicting demands of several spot vessels at the same time is usually unable to think clearly or to make rational decisions especially is it

Page 100 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

difficult for anyone in those circumstances to tear their attention away from immediate pressures to consider logically and calmly longer term fleet planning objectives. On the other hand, by covering forward cargoes ahead of time, it will be found that as frequently as market rates improve thereafter, they are as liable to decrease. Whichever proves to be the case, however, not only will a vessel gain secure employment from a rational decision taken to fix forward, but her operators will also benefit from firm knowledge of her future itinerary, enabling economies to be made in bunker planning, and other commercial activities. And by fixing ahead, a commercial manager will discover he has a choice of cargoes from which to select. Consequently, a vessel can be programmed towards a region of the global chessboard that it is considered will offer maximum advantage when the ship is next open, based on not only her future geographic position but, by dint of careful estimating, her forward dates. In other words, market odds have been narrowed in the vessel's favour, a distinct advantage compared with sacrificing a degree of control over one's future market destiny by staking all on sudden spool market advantage to be gained from having an available vessel at the right time and in the right place. And even if all the risk factors fall neatly into place and, after spurning opportunities to fix ahead and by running a tramp vessel spot, even ballasting the expensive investment a modern merchant ship represents in the general direction of where it was hoped a cargo would become available, even if after all that an attractive fixture resulted, the likelihood is that the ship will finish at the end of the voyage where fortune dictates, not where it was planned she would be next available. The spot approach may seem romantic at first sight, even, erroneously, what is to be expected with tramp ships, but it appears hardly rational upon close, clinical reflection. That is not to deny that on occasions a spot vessel can achieve Substantially higher freight rates than by conservatively fixing ahead. It can also be the case that a commercial manager feels confident that freight rates are about to improve and wishes, in such circumstances, to delay fixing so as to take maximum advantage. A pool's operating philosophy should provide freedom for such deviations from their normal policies although, in practice, it will be found to be a relatively infrequent exercise. While on the subject of fleet planning, let us study the suggestion that ballast voyages are kept to a minimum. It is, in fact, easy to suggest that unremunerative ballast voyages be minimised, far less simple to achieve this objective unless the entire chartering philosophy of a shipping Group is defined and made clear to those engaged in day to day chartering activities. A shipping pool is no exception. Nevertheless, with careful planning, ships can be positioned voyage by voyage to complete discharge close to a potential loading market. Equally, if fixing to an area distant from follow on cargoes, it should be clearly recognised as such and costed to allow for the substantial ballast run to follow. However, if adopting the principle of reducing ballast runs to the minimum, two factors must be borne in mind one operational, the other commercial. First, appropriate allowance of time must be made for a ship's sea borne staff to clean up debris resulting from one cargo just discharged in preparation for the loading nearby of another commodity. Secondly, ships need to be positioned carefully so as to obtain the financial benefit arising from maximising loaded runs and minimising ballast legs. Seeking a cargo only when a ship is close to finishing discharge or even unemployed and in ballast is scarcely conducive to careful planning. Additionally, appreciation of the positioning techniques available from 'backhaul' cargoes should be encouraged.

Page 101 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Backhaul cargoes help to position merchant ships from what may be termed a 'discharge area', where there are few available cargoes to be loaded, to a more promising loading region, saving the alternative of a non-revenue earning, ballast leg in the same direction. As a result, backhaul cargo freight rates are normally low paying and unattractive, especially in an otherwise strong freight market. However, by acting in the capacity of fill in cargoes, or if estimated together with the eventual higher paying cargo which follows, or even if used tactically to delay to advantage a ship's forward availability in a loading market, there may be more value to a backhaul cargo than at first seems apparent. But most valuable of all, backhaul cargoes reduce non-revenue earning ballast voyages and, for that reason alone, they should not be curtly dismissed, and should be carefully estimated and evaluated. Freight rates notwithstanding, it cannot be denied that a ship laden more often than empty is likely to be profitable, whereas a vessel ballasting more frequently than laden will probably achieve the reverse result. FORWARD FLEET DEPLOYMENT There are two governing factors involved in forward fleet planning: geography and the calendar. A commercial manager needs to have a good grasp of both for a variety of reasons. He must keep a keen eye on the ever changing pattern of the ships at his disposal on short, medium and long-term employment. As one particular vessel nears the end of a long term commitment, for example, he may well decide to fix a sister ship on similar business about one or two months ahead, or negotiate direct continuation with the original charterers, thereby minimising the fleet's exposure to market whims. If he senses a worsening market in the months ahead, he might seek to cover more spot trading vessels on medium term employment, or the reverse if he feels the spot market is about to gain in strength. Always he will strive to achieve the best overall balance of fleet exposure versus freedom to respond to commercial opportunity. Thus he will closely observe the forward calendar, using this vital tool of the fleet planner also to avoid having ships open at potentially difficult times of the maritime year and, at the same time, to take maximum advantage of vessels being available on financially promising occasions. Although the shipping market is fickle and unpredictable, beneath the maelstrom of commercial activity there run currents of tradition, many of which can be anticipated. These can only be learned by example and from experience but an astute planner can use his ability in this direction to further narrow the odds in favour of his fleet. But ability in planning to have vessels fixed or open at certain times of the year, dependent on the market and overall fleet market coverage, is of little consequence if no account is taken of maritime geography. Not only 'when' but 'where' is equally vital. The importance of a comprehensive knowledge of maritime geography by a fleet planner cannot be overstressed. It is necessary not only to be aware of port and sea conditions involving the market in which the fleet is engaged, but this must include knowledge of tides, prevailing winds and currents; available draughts and physical restrictions; the nature of river beds where ships might take the bottom; and the character of certain commodities and their carriage requirements. All this must aid chartering negotiations and adequate protection may be embodied into eventual charter parties and contracts, but without this knowledge forward fleet planning will become a nightmare instead of the scientific activity to which practitioners should aspire. Supported by a dedicated team, fully aware of the pool's employment objectives and confident in their market knowledge and ability, the overall, aim of a pool's commercial manager in reducing risks and maximising, opportunities will be that much easier to achieve. He will also have the freedom, able as he

Page 102 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

is to rely on skilled and competent colleagues around him, to fix on either a voyage or time charter basis, secure in the knowledge that any form of ship employment can be efficiently handled and that adequate funds are available in the pool's reserves, so as to handle the short term debt of, say, a freight upon delivery of cargo voyage charter, if that business proves to be the most profitable opportunity the pool can obtain. A shipowners of a small fleet may not have such freedom of action as may be taken for granted by successful larger groups. ADVERTISING It is difficult to fix if potential charterers are unaware of the availability of a pool's vessels. Thus, they must be advertised and the dates and position of their availability circulated to charterers and brokers alike who may have prospective employment opportunities to suggest. But advertising must be selective. It is commercial weakness to be seen to have two or more similar vessels open in the same position at the same time. On occasions it is unavoidable and, try as one might to prevent such an occurrence, fate seems determined that two sister vessels will be open virtually side by side or certainly too close for commercial comfort. In such circumstances every effort should be made to disguise the availability of one of the ships until her consort is covered and it can be seen that, even more than usual, the ability to fix ahead is of paramount importance. Having one spot ship may be difficult enough if the freight market is poor. Having, two could create serious problems. It is much more difficult to disguise a ship's availability on the open market if it is a pool policy to advise a wide audience of the activities of each vessel in the fleet. It is a good habit, therefore, to be selective with information, and for spot ships to 'disappear' from market notice from time to time. In this manner awkward questions can be avoided, and ships can reappear' on an occasion convenient to a pool's commercial staff. Thus, for example, a fleet position telex message dispatched to brokers and charterers once a week should include only those vessels the commercial manager wishes to advertise, selected carefully so as to gain a full market coverage of potential cargoes, yet maintaining discretion where information released in an unguarded moment could cause discomfort. It is also a bad policy, and one that should be resisted at all times, to disclose the preferred cargo or destination of an available ship. Obviously, such information can be used against the best interests of vessel or chartering group, and a pool's marketing tactics and objectives should remain firmly 'in- house'. It is also important to respect confidentiality. Certain charterers need secrecy in order to conclude cargo transactions. Accordingly, they do not wish their commercial activities to become widely known by potential competitors. To them it is vital to be able to conduct business with organisations that will respect their desire for confidentiality, and may be expected in many cases to pay a premium for this security. Suffice to say that the reader can observe the advantages to a commercial grouping which can be trusted in this way, and it will be found that a commercial manager able to keep quiet about certain chartering successes will attract valuable, off the market' proposals from valued clients all to the benefit of the fleet of ships at his disposal. VOYAGE ESTIMATING Every potential cargo and piece of business proposed to a pool should be evaluated and costed. It is easy to write this but frequently daily pressures prevent proper consideration of all alternatives. In a busy market, lack of time means that many proposed cargoes will be costed by a process of mental arithmetic and experience. Usually this will suffice to assess adequately the value of the proposal. But every now

Page 103 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

and again, a relatively unusual cargo is proposed which needs careful and thorough estimation, even to the extent of contacting port agents for advice, requiring attention to detail, application and, moreover, time to establish its true value. A computerised shipping pool, with the willing support of port agents abroad, should be able to respond quickly to the challenge of accurately estimating such proposals and of providing an indication of the terms, rates an conditions on which a pooled vessel would undertake the business. If a broker or charterers does not quote business to a pool because o previous lack of interest or response to enquiries of this nature, the person controlling that pool's commercial management activities run the risk o missing potentially valuable opportunities, Thus must all proposals b taken seriously and responded to. Effort should be made to perfect voyage, estimating, so that these indications of the potential worth of proposed cargoes can be refined and become as accurate as possible One way in which this can be achieved is to learn from past experience and so having fixed business, the commercial department of a pool should follow events I and compare voyage results with the original estimate. A wide difference at the end of this exercise calls for investigation and corrective procedures in future. MARKET INTELLIGENCE AND REPORTING One reason given by those reluctant to join a pool is that by doing so they stand to lose their knowledge of market activities. The counter argument to this is that by uniting with other owners in a larger Organisation, the opportunity exists to increase market knowledge from diverse sources many of which would not be available to the small, independent owner. This is undoubtedly true with widely active and prominent pools. The task the commercial manager must then undertake is to collate this information and apart from using it to the advantage of the pool's commercial operations, pass an interesting, relevant and edited version on to the pool members. Thus, a vital commercial activity in any shipping pool is the Organisation of an effective market reporting procedure to its members. The best reporting procedure to be adopted depends on the needs and market involvement of any particular shipping pool. With some a weekly or less frequent report will suffice. With others this should be a summary of short daily messages, divided between a report on significant freight market events of the day and the activities of the commercial team, e.g. data about fixtures and negotiations. A weekly report can be more comprehensive, including also forecasts and, perhaps, a resume of important fixtures and/or tables of rates for particular time and voyage charters relevant to the pool's activities. CARGO CONTRACTING We have studied the deployment of ships and how, if this is turned more into a science than, as is so often the case in the tramp shipping sector, a lottery, adverse influences can be contained and beneficial aspects enhanced. We have seen that if a variety of what, on their own, may appear fairly minor innovations are dealt with collectively in a systematic and organised fashion, these alone can substantially improve a vessel's daily returns. When this approach is maintained in a large fleet operation such as that offered by a shipping pool, thereby providing opportunities that do not exist for the smaller, individual shipowners, the results can be a transformation of daily income from the mundane to above average. The major difference between traditional ship owning fleets and their attitude to merchant ship employment and the shipping pool system, however, centres around cargo contracting. Just as there are

Page 104 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

individual shipowners seeking ways to benefit from modern operating techniques and efficiency, thereby improving income returns, so there are charterers, cargo shippers and receivers looking for a less expensive but more effective manner of moving their cargoes around the oceans of the world. These cargo operators are prepared to provide cargo and realistic revenue in return for stable, reliable transport services. A shipping pool can offer such services and, by a sensible mixture of cargo contracts of affreightment voyages combined with spot market availability of the pools own and outside chartered-in tonnage, can enhance its own earnings potential substantially. Of course, an overburden of cargo commitments can have an adverse effect on the fiscal fortunes of any shipping Organisation, and pools are no exception. Long-term commitments at unattractive rates compared to a fast-improving freight market can create serious financial difficulties that are worse even than being committed to a low-paying long-term time charter. In the latter case, the- financial return from a fleet vessel is temporarily under-utilised, but at least the financial return is stable. In the case of uncovered forward cargo commitments, an operator is left not only with having a fixed income but having to face potentially increasing market freight rates in order either to charter-in outside tonnage or to programming a controlled ship either way, the operator is financially exposed and there is no limit to the amount which this liability can cost. So the order of the day in cargo contracting, as in all other aspects of freight market trading, is to be carefully selective and to avoid taking on dubious commitments for the sake of what some term as 'market image'. Furthermore, every group of merchant ships have one or more available markets suited to their individual characteristics, which potentially can be exploited to its financial benefit. It is the task of the operators of those vessels to identify the markets and to use all means of maximising their available potential. With a fleet of such vessels cargo contracts of affreightment have a definite role to play, underpinned, as they are, by controlled, in-house tonnage. MARKET HEDGING In certain business quarters the word 'speculation' has unpleasant connotations. This is unfortunate in a shipping context, as it describes accurately the way in which freight market practitioners (let us call them 'operators') some it seems gifted with second sight can use their forecasting skills to the extent that they can hire ships on period time charter in the anticipation of profit-making if the freight market rates rise and the ship can be relate at a higher level. Frequently they interpret trends correctly. Occasionally they get it wrong. However, to succeed at the task not only must they have forecasting skills and a slice of good fortune, they must also have recourse to reasonably substantial financial reserves to fall back on, both to cover themselves when in error, and to provide funds to bridge the fiscal gaps that occur when liability to pay hires (say, every 15 days), to purchase bunkers or to pay port or canal costs is temporarily unsupported by freight/hire income that is awaited. A shipping pool is in an excellent position to succeed at a limited amount of speculation. Not only are its commercial staff able both to think and to act as charterers as well as commercial shipowners (an ability which should not be undervalued), a pool has the substantial reserve funds required, and the skilled operational staff to manage effectively hired vessels. Moreover, the basic pool concept of identifying sustainable commercial odds should mean that unreasonable risks are spurned and that only sensible opportunities will be followed up. And if the pool has developed a market reputation for integrity and financial respectability it will have the major advantage of being automatically accepted as a charterers

Page 105 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

of repute, enabling the pool's commercial staff to charter-in tonnage as and when they recognise the opportunity. But as important to securing tonnage in this way is to recognise the right time to release a committed ship to a reputable third party, who may be trusted to perform properly in the months ahead-in other words to 'lockin' a profit. Sven then, the pool's staff should keep a close operational hold on the arrangement to ensure that all is done to help the deal through to a successful conclusion, while turning their commercial attention to other possible speculative arrangements. Avarice is again a danger. Hold on too long to maximise a profit and one runs the risk of missing the chance altogether. When the freight market appears to be about to harden is the time to investigate potential profit making ships for speculative ventures. But that does not mean that nothing can be achieved at other stages of a freight market. There will always be possible ventures. For example, when freight rates are considered about to fall it may be found useful to investigate opportunities of fixing forward cargoes at existing rate levels. Here again, a small ship owner will probably not be given the opportunity by a charterers, perhaps nervous about that owner's ability satisfactorily to perform a contract for which he is unable to name a definite vessel on the right position-not surprising if this is some time away. However, a pool with a reputation of successfully trading in contracts of affreightment and of having both vessels at its disposal and the ability to charter-in outside tonnage when Required will probably be given the benefit of the doubt and, accordingly, an opportunity to fix cargoes without naming a ship. So, contrary to the popular understanding of the word 'speculation', a limited degree of sensible speculation, or 'risk hedging' if in polite company, can provide a considerable financial boost to a pool's overall income, thereby benefiting the eventual 'per capita' returns awarded to pooled vessels But succeeding financially in trading need not be limited to the comparison of one rate against another, either to the hire rate a pool is committed to paying out on a ship compared with that which it earns from successful relating; or to a profit made on fixing in a cargo at a high voyage rate and then sub-contracting it to another owner at a lower rate. If one or more of a pool's commercial staff is an efficient charter party draftsman, much can be achieved in financial benefit from the re-drafting of charter parties. Perhaps the most overplayed term in modern freight market activity-particularly in that sector concerned with cargo and ship operating as described in the above paragraphs is that of 'back-to-back charter parties briefly, this term means that a cargo or a ship fixed by a trader or speculator will be passed to the next party on exactly the same terms and conditions as fixed inwards. Quite often this may be a sensible policy, as charter party clauses can constitute a legal minefield for the unwary and inexperienced. At least, so the theory goes, one cannot make unfortunate and costly mistakes if the terms of both inward and outward charters are identical. Occasionally, also, a charterers will specify in the initial contract with a ship owner that the terms must be the same if a cargo is relate-perhaps for commercial reasons unknown to the speculator. But equally there are numerous occasions when charter party wording can be substantially improved to the benefit of the party indulging in the speculating-or 'operating', if one wishes-in the capacity of a middle man'. And this can also be the case when time chartering-in a vessel from the market, and then relating it out to a third party. Time charter terms can also be re-drafted to the distinct advantage of the so-called 'middle man'. It calls for competent staff, but then a pool should be well supplied with such characters. STANDARD POOL TIME CHARTER PARTY

Page 106 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

One charter party a pool must have ready and available is their own carefully designed and drafted charter party for use when time chartering outsiders' ships into their Organisation. To draft a carefully constructed document such as this, however, is a matter of no little consequence. It not only requires knowledge and skill to put together a comprehensive draft copy in the first place, it must be recognised by those responsible that all senior staff members of the pool, working in all capacities, have an important role to play in suggesting data which should be included in the text. Furthermore, it must be based on a charter party form readily accepted in the market in which it will be utilised, and must be written in a manner in which it can be regularly reviewed in the light of experience and updated without losing important cross-references or the inference of its text. Fortunately, and since a great deal of a modem time charter party text is contained in 'side' or 'rider' clauses, most of the wording of such a charter party can be produced on a computer's word-processing facility-a great time saving device enabling alterations and amendments to be speedily effected. COMMERCIAL OPERATING Despite all the advantages a well-managed pool should be in a position to provide, there are owners who, although wishing to avail themselves of the expertise of pool staff, and perhaps recognising the economies to be made in their own running expenses by sub-contracting commercial operations in this way, nevertheless do not want to take part in pooling their income with shipowners colleagues or indulge in the other financial activities a pool may become involved with. Providing a pool's management agrees, it is possible to accommodate the vessel(s) of such a shipowners on a commercial operations basis. In this case, the vessel(s) would be operated in the same manner as pooled ships, and cargo opportunities would be sought for both voyage and for time charter trips, perhaps even for period time charter employment. Furthermore, it might even be practicable for such vessels to be utilised in servicing a pool's cargo contract commitments, in which case the pool itself may play the role of either a voyage or a time charterers for the occasion, at a rate of freight or hire, and on terms to be negotiated between the pool staff and the shipowners involved. Charges for commercial operating services would normally match at least those charged to full pool members, as the benefits and services received would in many ways be identical. But commercial operating opportunities need not stop with tonnage. The services provided by a pool's management could equally be extended to cargo operators, seeking effective outside assistance for the scheduling of their cargoes and the management of their shipping business. With the support of their own tonnage and their expertise in chartering, a pool's abilities in this connection can be an attractive proposition to cargo interests, intent on obtaining an efficient means of covering cargoes; calculating lay time; arranging port agency; stevedoring and/or tallying; in fact, whatever shipping services might be needed. EXCLUSIVE CHARTERING The services provided by a shipping pool could be offered also to an owner seeking merely to obtain charter employment for his vessel. However, a pool is not a competitive broking house and it is not designed to compete with rivals to seek and recommend cargoes to a shipowners in competition with others providing the same service. Providing those controlling the pool agree, though, there is no reason why a pool's staff should not assume exclusive responsibility for arranging cargo employment for a

Page 107 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

vessel, in return for a commission sizeable enough to cover expenses involved and to generate a reasonable commission. As for the owners of a non-pooled vessel commercially operated by a pool, there are distinct advantages to a shipowners in retaining the exclusive services of a shipping pool, daily and expertly involved in an appropriate sector of the market. FREIGHT FUTURES One of the various financial tools open to shipping market practitioners on either a speculative basis or with the intention of hedging risks is that afforded by freight futures. Many shipowners lack either the expertise, the time or the will-power to study this market, gain experience and indulge accordingly. Indeed, there remain many who are deeply sceptical about its value or its use. There is little doubt, however, that a larger Organisation has more scope at their disposal to employ the required expertise, and can use this market in either a speculative manner or with the intention of hedging risks. If those controlling a shipping pool so decide, and providing specific credit limits are preset, this facility can be added to the tasks and responsibilities of a pool's commercial department, blending in quite naturally with their everyday activities. Quality Assurance For Ship management A quality assurance system is a framework of diagnostics, procedural discipline and measurement that support the logical steer of processes. There are three different quality and safety standards namely, The International Ship Managers Association (ISMA) Code, the ISO 9002 and the conventions of International Maritime Organization (IMO) the ISM Code mandatory for all ships, shipowners and ship operators and STCW95 convention for seafarers capability and skills. The ISM code is the major and mandatory regulation for the ship management firms. It enables ships to trade worldwide under a single set of safety regulation, pollution control and generate quality management. It comprises of the improvement of the product ship, its environmental safety and the compliance of standards with regard to organisational procedures within the entire shipping company onboard as well as offshore. The ISM code gives importance to the formalisation of the existing management practices. The external factors affecting qualitative management to fulfil the role are social, political, economic, technical and legal. The new safety case approach is based on the use of risk assessment techniques within an overall methodology of formal safety assessments pertaining to risk of accident, pollution, and environmental damage. IMO has begin to address the effective enforcement of regulated interventions for safety and environmental measures. Future Our discussions with various ship managers in the country revealed a trace of pessimism. Factors for competitive advantages of Indian seafarers like technical expertise, remuneration expectations and command over English are getting increasingly diluted. Today, other countries like China, Russia and Ukraine are able to provide an alternative source for shipowners. In Russia and Ukraine, unemployed combat navy officials, who bring with them high level of technical expertise, are looking for opportunities in merchant navy. The command of the English language is gradually picking up in all the three countries.

Page 108 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

However, one cannot forget the basic causes of growth of the ship management industry in India. The quality of the training in India is one of them. Further, operations in India are cheaper as compared to other parts of the world, mainly developed countries. The quality of Indians is proven in the market, not only in terms of technical qualification or communication but also considering the responsibility and sincerity shown by them while performing the job. In the long run this quality will certainly be of significant importance bearing in mind increasing accidents and pollution of the sea. As per the BIMCO / ISF Manpower Update 2000, the estimated shortfall in the officers is 16,000 or 4 per cent of the total workforce and the supply is going to be reduced in the future also. Even in the management cadre, the Indians are in great demand. In the present knowledge and servicebased industries, Indians are occupying high positions in organisations like McKinsey, United Airlines, Bell Labs and Sun Microsystem. The story is same in many of the leading ship management firms like Wallem Ship management, Univan Ship management and Barber Ship management where Indians are holding various top management positions. These management skills can be leveraged to grow into new areas like technical and commercial management of ships. PROCUREMENT & INTEGRATED LOGISTICS The term logistics is defined as "the process of planning, implementing and controlling of the efficient, cost effective flow and storage of raw material, in-process inventory and finished products and related information from the point of origin to point of consumption as per customer demand". The entire process involves a large number of activities to be done in accordance with user requirement and requires proper integration of different activities, which would lead to the smooth flow of operations through out the value chain. Integrated logistics co-ordinates all the logistical activities taking place in a value chain to provide optimum benefit to the user. Amongst the international shipping companies, APL is the pioneer to enter into the field of integrated logistics services way back in 1979. Looking at the success of APL concomitant to growing industry demand, other shipping companies follow the suit. Major companies like Maersk, P&O and others have started providing integrated logistics service by extending their service chain through land and air and making an optimal co-ordination of all the services. The concept of integrated logistics service is new to the context of Indian industry. In India, traditional transport companies, courier companies and freight forwarders have emerged as integrated logistics service provider by leveraging on their existing infrastructure and experience. They not only provide the prime functions like transportation, warehousing, packaging, clearing and forwarding job but also handle other activities like order processing, sales tax and excise duty documentation, invoicing, collection of bills, inventory management, and others. In India, the market of logistics service provider is highly fragmented. While most of the existing players are performing various functions of logistics, providing integrated logistics service for any kind of commodity has become the industry demand. Chennai-based South India Corporation Agency Limited (Sical) has established itself as the integrated logistics service provider for TNEB by coordinating all the logistical functions involved in the transport of thermal coal from coal rich states of Orissa, Bihar and West Bengal to Chennai through multimodal transport.

Page 109 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

With the strategies taken up by traditional industrial firms to reduce operational cost and enhance value addition through out the value chain, importance of integrated logistics has got a new dimension. Outsourcing of logistics service to specialised service provider having considerable expertise over the industry becomes the trend. This has led to a flow of European logistics service providers to India having significant domain knowledge and technology resulting into a high degree of competition in the domestic market. Overall the role of integrated logistics service is expected to increase in the new economy leading to betterment of value chain. Container Lines

'Containerisation', the term very familiar to present day shipping industry was a completely unknown concept a few decades back. It was Malcom McLean, the huge trucking company owner in USA, who first conceived the idea of containerisation by transporting containers through 'Ideal - X' in 1956 and initiated a revolution in the history of shipping industry. Over the years, the industry has created a separate identity within the shipping world through continuous development and Maersk Lines, P&O Ned Lloyd, Sea land Services (CSX), APL and others have come up as international major serving customers all over the globe. The growth of containerisation in India has been slow and steady. The formation of Container Corporation of India (Concor) as an autonomous body under the Ministry of Railways in 1988 boosted the efforts at increasing containerised traffic in the country. Over the years, volume of container traffic has experienced continuous growth and crossed the 2.0 million mark in last fiscal by registering a volume of 2.22 million TEUs in 1999-2000 at the major ports of India. A significant number of international container lines are active in India making business through their own office or by selected agents. Amongst the Indian shipping companies, only 'The Shipping Corporation of India' is active in the international liner business. It has tied up with Zim Navigation of Israel and Yang Ming Line of Taiwan to provide services on international routes. Of the 11 major ports of the country, Jawaharlal Nehru Port (JNP) and Mumbai Port have established as the gateway ports for container traffic to India having a combined market share of around 60% of the total container traffic. Lack of adequate infrastructure in form of container handling equipment, CFS network and rail network in other ports have led to concentration of container traffic at Mumbai and JNP. However, substantial investments have been made in recent times by private sector in the ports of Tuticorin and Cochin to overcome the backlog. Liberalization and privatisation policy taken up by the Government has resulted into the commissioning of new ports like Adani and Pipavav. While PSA Corporation of Singapore is active in Pipavav and Tuticorin port, Chennai and Cochin ports are planning to rope in P&O Ports for development and management of their container terminals. International liner major Maesrk-Sealand is also considering to take stake in Adani Port to develop a container terminal. Reviewing the development of liner business since its inception across the world, it has been observed that container shipping would be the most imperative choice for movement of dry cargo in the coming years and liner business is likely to take a crucial role in promoting the prospect of shipping industry. Following the global trend, Indian ports are also geared up to take the role of a hub port by developing necessary infrastructure to attract large size mother vessels. Taking the advantage of long coastline of India, Concor is contemplating to start coastal movement of container vessels. Looking at the overall aspect of the industry, it can be concluded that future of container liner business would be bright enough. ICD / CFS

Page 110 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Container Freight Station (CFS) or Inland Container Depot (ICD) also referred to as dry ports, provide various services for handling containers outside the port. The terms ICD and CFS are used interchangeably as there is not much of difference in their functioning. Generally, a dry port located in the hinterland is called ICD; while if located in the port city, it is known as CFS. Dry ports are the hubs, which facilitate the aggregation and transportation of export containers from hinterland to the gateway ports. Similarly, they act as receiving hubs for the import containers meant for hinterland. Other associated functions include cargo consolidation, stuffing and destuffing, warehousing, custom clearance and duty collection, processing of custom documents, cargo and container handling and others. In India, the concept of dry port was envisaged initially by the Indian Railways and subsequently by Container Corporation of India (Concor) to avoid congestion in the gateway port. Gradual containerisation has at an annualised rate of 13 percent over the last decade boosted the industry. Substantial investments in container port terminals concomitant to greater awareness about the advantages of containerisation has enhanced development of the sector. Most of the CFS and ICD in India are owned by public sector undertakings like Concor, Central Warehousing Corporation (CWC), Punjab State Container and Warehousing Corporation (Conware), Balmer Lawrie and others. The port trusts also manage the CFS to facilitate the customers. Jawaharlal Nehru Port has its own CFS, while Mumbai Port owns and manages five CFS for handling its container traffic. Liberalization of the Indian economy has paved the path for privately controlled CFS and ICDs. Major shipping companies, transport and stevedoring companies, shipping agents are entering into the sector by owning and managing CFS and ICD networks. Both global shipping majors Maersk-Sealand and P&O have set up their CFS in India. Foreign logistics and warehousing companies also have entered into the field by starting joint ventures with Indian partners. One such company is Gateway Distripark, a CFS owned by three Singapore-based companies - Thakaral Group, Windmills Inc. and Parmeshwar Holdings and Delhi-based National Print Traders. Competition in the industry has intensified in the last couple of years owing to the liberalization policy. Market leaders like Concor and CWC, who were enjoying the advantage of an oligopolistic market situation, are presently facing serious competition from private operators both in CFS and ICD operations. Since the operations of CFS and ICD require specialized understanding of shipping, logistics, and other related information, shipping and logistics majors are likely to be most suitable for the industry. With the increasing interest from private sector through investments and operations, service quality related to CFS and ICD operations is expected to improve, thereby leading to further boost to containerisation. Integrated Logistic The term logistics is defined as "the process of planning, implementing and controlling of the efficient, cost effective flow and storage of raw material, in-process inventory and finished products and related information from the point of origin to point of consumption as per customer demand". The entire process involves a large number of activities to be done in accordance with user requirement and requires proper integration of different activities, which would lead to the smooth flow of operations through out the value chain. Integrated logistics co-ordinates all the logistical activities taking place in a value chain to provide optimum benefit to the user. Amongst the international shipping companies, APL is the pioneer to enter into the field of integrated logistics services way back in 1979. Looking at the success of APL concomitant to growing industry

Page 111 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

demand, other shipping companies follow the suit. Major companies like Maersk, P&O and others have started providing integrated logistics service by extending their service chain through land and air and making an optimal co-ordination of all the services. The concept of integrated logistics service is new to the context of Indian industry. In India, traditional transport companies, courier companies and freight forwarders have emerged as integrated logistics service provider by leveraging on their existing infrastructure and experience. They not only provide the prime functions like transportation, warehousing, packaging, clearing and forwarding job but also handle other activities like order processing, sales tax and excise duty documentation, invoicing, collection of bills, inventory management, and others. In India, the market of logistics service provider is highly fragmented. While most of the existing players are performing various functions of logistics, providing integrated logistics service for any kind of commodity has become the industry demand. Chennai-based South India Corporation Agency Limited (Sical) has established itself as the integrated logistics service provider for TNEB by coordinating all the logistical functions involved in the transport of thermal coal from coal rich states of Orissa, Bihar and West Bengal to Chennai through multimodal transport. With the strategies taken up by traditional industrial firms to reduce operational cost and enhance value addition through out the value chain, importance of integrated logistics has got a new dimension. Outsourcing of logistics service to specialised service provider having considerable expertise over the industry becomes the trend. This has led to a flow of European logistics service providers to India having significant domain knowledge and technology resulting into a high degree of competition in the domestic market. Overall the role of integrated logistics service is expected to increase in the new economy leading to betterment of value chain. Transportation

Transportation, an indispensable component to economic progress, is an essential and major sub-function of logistics creating time and place utility in goods. It serves as the backbone of supply chain management. Though traditionally, transportation involves physical movement of goods, however, in the new economy era, it is largely influenced by information and communication technologies with the focus being on knowledge of customer needs and value added services in order provide maximum benefit to user. Globally, transportation sector accounts for around 3 - 5 percent of GDP. The demand for transportation industry is directly proportional to the growth of the economy, mobility of population and other related factors. As per the World Bank's estimate, a unit increase in GNP in India generates an increase of 1.5 times in freight transport demand. The rapid economic growth on the onset of the liberalization in the decade of 1990s has substantially increased the potentiality of transport in India. To cope with the expected rise in demand, huge investments have been made in the last few years. Opening up of Indian economy and has also opened the door for private sector participation; however, the response level is not at par with expectation. Estimated increase in output of the basic industries is likely to create substantial demand for bulk transportation. With the expected annual growth of Indian economy likely to cross 6 percent mark in near future, transportation demand is also likely to rise substantially and estimated to become double in next ten-year time frame.

Page 112 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Though traditionally, transportation industry is classified on the basis of the involvement of different modes viz. road, rail, sea, air; here we are concentrating on inland movement, which includes Road, Rail, Inland water and Pipeline transportation. Warehousing

Traditionally, warehousing involves the storage of raw material, work-in-process inventory or finished goods in a covered space in the most suitable way for a specific time period. It also adds temporal and spatial significance to the value of the commodity. With the growing importance of logistics and supply chain management through out the world, warehousing has emerged as one of the vital component of the supply chain. It has changed its role from a simple repository of goods to perform a pivotal role in traditional supply chains as well as in e-business operations. Globally, the USD100 billion warehousing industry has undergone significant changes in the last one decade owing to the growth in world trade and expansion of international markets as well as increasing application of new technology. Internationally, warehousing industry is classified into three different types viz. Public warehousing, Private warehousing and Contract warehousing. Of these, contract warehousing, which has dedicated customers with long-term agreement, is the fastest growing segment of the industry internationally and is expected to grow at a rate of 12-15 percent over the next couple of years. In India, warehousing industry is mostly dominated by State Warehousing Corporations and public sector undertakings viz. Central Warehousing Corporation (CWC), Punjab State Warehousing Corporations (Conware) and others. CWC, the largest warehouse operator in India, operates across the country through 444 warehouses and provides storage capacity of 7.3 million tonnes for a wide range of products. Warehousing activities of CWC include food grain warehouses, custom bonded warehouses, container freight stations, inland clearance depots and air cargo complexes. Since ports act as the interface for sea borne trade movement, most of the major ports of the country provide warehousing facilities to users through its own warehouses and also by privately-owned warehouses located within or outside the port arena. Increased liberalization of the economy has boosted private sector participation within ports. Looking at the future of the warehousing industry, it has been observed that technology is likely to play a major role through the increasing application of Internet. Information technology is likely to play a key role in determining the competitiveness of the industry. Warehousing would not be a mere storage of goods but will involve increased value addition in providing facilities. Ocean Container Shipping: Impacts of a Technological Improvement Containerisation, a technological improvement in shipping, has revolutionized the ocean transportation of general cargo. Its impacts are numerous. Containerisation led to the formation of ocean shipping lines specializing in the transport of containers. The container shipping line industry has become more concentrated but its financial condition has deteriorated. The lines have sought to improve their financial position by forming alliances, merging, and investing in larger and more cost-efficient ships. For the shipper, containerisation meant less cargo pilferage and damage, faster and more reliable transportation service, and reduced freight rates, especially for transportation of high-valued cargo. As a consequence, international containerised sea borne trade (in TEUs) increased 433% between 1980 and 1996. Containerisation has also affected ship design; modern containerships are nonself-sustaining, i.e. without on-board cargo cranes (unlike break-bulk ships), which allows for greater cargo utilization of the ship.

Page 113 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

World trade flow networks have changed under containerisation. Networks that were once all-water in the transport of break-bulk cargo may now consist of land bridging networks utilizing double-stack container train service. Container shipping lines have adopted such new service strategies as load-cantering and round-the-world services. Competition among container ports is intense, unlike that experienced by their break-bulk predecessors. Cargo to and from regions via the closest port can no longer be guaranteed. Container ports are but one of many links in a supply chain and are becoming pawns in a game of global commerce. Modern container ports are more capital intensive (than break-bulk ports) requiring enormous infrastructure investments, which are often undertaken without assurance that cargo will be forthcoming. The huge debts incurred to finance these investments have resulted in declines in credit ratings for some ports. Many break-bulk ports have been redesigned to create container ports: Finger piers have been eliminated so that containerships can be docked parallel to berths for easier loading/unloading by dockside cranes. Hugh losses in dock worker jobs have occurred under containerisation; the supply of dock workers that remains is expensive and tends to be inflexible when demand conditions change. As larger and larger containerships call at fewer and fewer ports, railroads are being asked to distribute containerised cargo to and from ports over wider inland areas, placing an enormous strain on their infrastructure. U.S. container cargo is projected to more than double in the next 12 years and to increase sevenfold over the next 50 years, severely stressing the nation's port, rail and highway infrastructures. Whether the capacity of the U.S. transportation infrastructure will be sufficient to handle these projected increases and if not, what the impact on international trade will be, are current concerns. Shipping Industry In The Internet Era E-Commerce is an exciting new business tool which many companies are learning how to use. Internet technology is fostering new ways in which business is done. The force it has brought into business and trade is very powerful. The shipping industry is being influenced strongly as it is closely related to the economy and the business environment. Use of the Internet to conduct day-to-day business is fast becoming a norm, as the advantages of using the same are enormous. New business mantra for the firms is networking among the enabling partners. In today's competitive environment, firms don't compete; it is the networks and their efficiency that compete to win. The Internet is fast providing the infrastructure to achieve this. The whole issue is how best to give value to the final consumer. In order to achieve this, different firms come together to streamline their processes of value addition so as to provide a superior offering to the consumer. Shipping being a part of the logistics business provides a strong link between the producer and the consumer. The goods are of a certain value only when they are in the right place at the right time in the desired quality and cost. This is one of the very basic needs that shipping companies have to meet for its consumers. Those who are able to provide it better can compete in an open market. All the activities of the shipping companies need to revolve around this. The shipping companies have to integrate themselves with the other entities in the value chain. Given the necessity of developing core competencies and the diverse locations of the sources and

Page 114 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

destinations of the goods, it is very difficult for a single company to execute the whole process. It is in this context that different participants need to form a seamless network along the value chain. This can provide a very good value proposition to the consumers. Given the good networking, the information flow of goods will also become seamless, thus giving the shipper of goods real time information about the booked cargo. Earlier most of the business firms had developed strong Extranets between their partners. This was done in order to share the information amongst themselves so as to optimise their objective. Given the diverse locations of the manufacturing units and the market for their products, it was very important for the business firms to share information easily among the partners. Supply chain management is being implemented across various industries in order to have a good distribution system. This helps in achieving better inventory management, especially for the businesses with a very high number of product mixes. By and large the shipping industry worldwide has not integrated the new technology well. The service levels provided by the shipping industry have not been up to the expectations of the shippers, and much needs to be done. Some of the major concerns for the shippers are to have access to transparent information on the cargo, transaction costs, compliance of the different regulations and rules. An enhanced use of information technology can provide solutions to these issues The Internet gives a possibility beyond this. It integrates the firms, suppliers, and distributors with the end consumer. The key features of the Internet are that it has open access, low cost, low entry barrier and can be used for various purposes. All these features of the Internet gives tremendous benefits to the Internet and shipping have, since nearly a decade, one fundamental commonality. Navigation is necessary to visit and tour the cyber world in case of Internet, and real world in case of shipping. Now they have a second commonality, if not as fundamental, in Bill Gates. Bill Gates, Microsoft Chairman and the worlds richest person, has taken up an 8% stake in Newport News Shipbuilding through his investment firm Cascade LLC, the US$ 1.8 billion company, employing more than 17,000 people and involved in building defence vessels since 1886. Bill Gates is now one of the largest shareholders in the firm. So are we seeing a development of interest in the old economy from players in the new one? Does it mean that it would be not very ludicrous to suggest that Azim Premji could be interested in taking up a stake in say Great Eastern? Or say, Narayan Murthy as a prospective buyer of the governments stake in Shipping Corporation of India? Over the last two years, stock markets worldwide are witnessing a sharp split in the two economies. While tech stocks like Microsoft, Yahoo, Amazon, Intel & Wipro, Satyam, NIIT, HCL in India, are reaching new heights, older companies are seeing their stock prices languishing. Are we witnessing a reversal in this trend? Navigate through cyber or real world? Internet and shipping have, since nearly a decade, one fundamental commonality. Navigation is necessary to visit and tour the cyber world in case of Internet, and real world in case of shipping. Now they have a second commonality, if not as fundamental, in Bill Gates. Bill Gates, Microsoft Chairman and the worlds richest person, has taken up an 8% stake in Newport News Shipbuilding through his investment firm Cascade LLC, the US$ 1.8 billion company, employing more than 17,000 people and involved in building defence vessels since 1886. Bill Gates is now one of the largest shareholders in the firm. So are we seeing a development of interest in the

Page 115 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

old economy from players in the new one? Does it mean that it would be not very ludicrous to suggest that Azim Premji could be interested in taking up a stake in say Great Eastern? Or say, Narayan Murthy as a prospective buyer of the governments stake in Shipping Corporation of India? Over the last two years, stock markets worldwide are witnessing a sharp split in the two economies. While tech stocks like Microsoft, Yahoo, Amazon, Intel & Wipro, Satyam, NIIT, HCL in India, are reaching new heights, older companies are seeing their stock prices languishing. Are we witnessing a reversal in this trend? Supply chain management is being implemented across various industries in order to have a good distribution system. This helps in achieving better inventory management, especially for the businesses with a very high number of product mixes. By and large the shipping industry worldwide has not integrated the new technology well. The service levels provided by the shipping industry have not been up to the expectations of the shippers, and much needs to be done. Some of the major concerns for the shippers are to have access to transparent information on the cargo, transaction costs, compliance of the different regulations and rules. An enhanced use of information technology can provide solutions to these issues The Internet gives a possibility beyond this. It integrates the firms, suppliers, and distributors with the end consumer. The key features of the Internet are that it has open access, low cost, low entry barrier and can be used for various purposes. All these features of the Internet gives tremendous benefits to the firms. Low cost gives the firm a vast reach to the consumers. A single website can be used to reach the consumers in any part of the globe. Information on the customer is now one of the most important asset of the companies. The ability of companies to capture information about their consumers is a distinctive strength. In the new economy, the participant with information about the consumer will play a dominating role in any industry. Shipping companies need to know when the consumers are going to book cargo, how much cargo, the type of cargo and from where to where. These are the most valuable pieces of information to a shipping company and the access to these will make it easier for them to take the right decisions. We study the impact of Internet and various web-based companies called portals, which aid various business transactions over the net (referred to as ebusiness), on various sections of the maritime sector. Ship broking and Internet Two activities of shipbrokers are considered in this section: Sale & purchase of ships in the second-hand market - intermediary between a buyer and seller of ship. Tramp shipping / vessel chartering - intermediary between a tramp shipowners and a shipper Ship broking activity is concentrated around certain maritime centers like London and Singapore. The community has always communicated with each other and with clients via traditional and expensive modes of communications like telex and telephone. Success has depended upon the building up of a large network with other shipbrokers, ship owners and shipper communities.

Page 116 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Years of operation and well-established infrastructure across various locations in the world were necessary prerequisites for successful operations in a highly competitive environment. Internet is now challenging these established traditional structures. The coming up of exchanges Over the Internet like www.netshipbroking.com, www.shipchartering.com.sg and www.shippingauction.com has provided shipowners and shippers an opportunity to circumvent these intermediaries and lower their cost of transactions. All this, without the necessity on the part of such exchanges, to build the kind of network and infrastructure that were so essential to succeed in ship broking in yesteryears. The above mentioned portals allow the shipping community to advertise their open positions and post sale & purchase requirements for a fraction of the cost. Shippers can similarly post their requirements for vessel chartering. Such exchanges offering different kinds of services and targeting different segments, have one thing in common - they consolidate buyers and sellers in a market that is fragmented due to geographical dispersion as well as the absence of any dominant player. They are referred to as "infomediaries" in the cyber world who disseminate information about a market and create a platform on which ship owners, shippers and other players can do business. Greek based Internet Shipbrokers' site www.netshipbrokers.com has created a platform for receiving open cargoes, vessel open positions and S&P requirements submitted by brokers, owners and charterers which are subsequently circulated amongst the subscribers via email. The circulated information also contains contact numbers and addresses so that interested subscribers can make contact directly. Participants can also browse through the database in the website directly and perform searches on various fields on an online database. Additionally, the exchange would match complimentary requirements of the participants. If a match is found, the concerned members are notified who in turn can contact each other directly for further negotiations. Similar exchanges are being built by Maritime Global Net's www.mglobal.com, Miami based www.maritimelink.com and India based www.maritimei.com (not related to I-Maritime). These sites follow different business models. Maritime Global provides its services free while Internet Shipbrokers ask for a "minimal fee". Maritime Links has gone for a combination of subscription to reports and advertisements. With improvements in technology an even greater portion of offline negotiations, vessel inspection etc. could be conducted online. A prospective buyer of a ship can survey a vessel and hold negotiations on a real time basis with other people by use of videoconferencing technologies. How have the brick-and-mortar shipbrokers geared themselves up to this new competition? Will they survive the new age? London-based Clarkson has launched www.clarkson.co.uk, an Internetbased delivery system for research products and market information, but do not offer shipbroking services. Other firms like Manhattan based Poten & Partners have launched www.poten.com, similarly offering information and research, although on a limited scale. Certain market sources claim that these shipbrokers are using the internet exchanges as a source of information in addition to their

Page 117 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

existing networks. Beyond this, none of the shipbrokers have shown much ingenuity in embracing the new technology. Success in ship broking is largely dependent upon client/broker relationship and build-up of trust and confidence between the two. This entails a greater degree of face to face interaction, a feature that the internet might not be able to provide that the brick-and-mortar exchanges can claim as a competitive advantage. Further, free access to the internet portals without verification of identity of participants means possibility of manipulation and rigging. Many companies would like to have advice on such issues as market movements, formulation of contract agreement, etc. an area which the newer exchanges might not be able to take up, at least in the short term. Some people see an enhanced role of traditional shipbrokers, as a deluge of data and information due to the internet necessitates the expertise to analyse them. What impact would these infomediaries have on chartering rates offered by shipping companies or buy & sale prices of second hand vessels? With a global reach achieved at a fraction of the cost and a more transparent setup vis--vis existing structures, a greater number of participants are expected to join in offering their quotes leading to an increase in liquidity. In such a scenario a more efficient "price discovery" would result. Will ship broking continue to concentrate around such traditional maritime centers as London and Singapore? In matching of ships and bulk cargoes, market share of London based brokers, numbering around 2000, is close to around 50% in case of tankers and 30-40% of dry bulk chartering business worldwide. Over half of world's new and second hand tonnage is bought and sold by Baltic members in a market worth US$ 10 billion annually. However future maritime centers need not be cities where brick-and-mortar brokers operate, but the websites which are most user friendly and comprehensive. Liner Shipping and Internet Liner shipping, especially container trade, was the first to use Information Technology extensively initially in the form of proprietary systems and later via internet. Various container lines including American President Lines, Maersk-Sealand, etc. are offering services like tariff enquiry, cargo booking and container tracking as well as information on sailing schedules via the net. A large number of portals have sprung up in the recent past to aid shippers and shipping companies to enter into spot market contracts which account for around 30% of the transactions and which are dominated by freight forwarders and Non-vessel owning container companies (NVOCCs). These exchanges aim to reduce the delay and brokering costs associated with identifying and contracting ocean carriers through an auction. Shippers, often small scale ones, suffer from lack of transparency & information and are forced to accept unreasonable prices. And in the process the exchanges are threatening to divert business from the brick-and-mortar NVOCCs. Even more threatening to the NVOCC is the intention of some infomediaries to manage all of the information that accompanies the physical flow of goods. Some of the exchanges are aiming to capture the traditional customs compliance, shipment tracking and other information intensive tasks that NVOCCs once managed. www.eraterequest.com and

Page 118 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

www.gocargo.com operate online exchanges where shippers post information about their requirements and shipowners bid. The former is focused on providing the lowest rates for shippers through an auction. A shipper specifies information regarding his cargo, loading / unloading points, date of shipment etc. The exchange then delivers, within 24 hours, the contact information of the lowest-cost carrier (bids made by other carriers are not disclosed to the shipper). The latter enables the shipper to choose not only on the basis of price but also to select a particular carrier (and hence quality). www.freightgate.com follows a different strategy where instead of shippers submitting bids to which carriers respond, Freight Gate requires that shippers enter their requests at a preferred price, and then allows carriers to review the bids. All the three exchanges are provided free access to the shipper, but the carrier must pay a certain portion of the bid amount. A similar model is followed by www.freight-on-line.com, however here the service is free for the carrier while the shipper pays a fee. www.celarix.com is both similar and radically different from the aforementioned players. Celarix, like the above players, provides a marketplace on which carriers and shippers can link. Shippers can submit requests for container space at a given price and then review several offers proposed by carriers. The site however discloses the names of the carriers, so that shippers can choose on both price and quality and carriers can also compete on both the parameters. Celarix also allows shippers to request bids only from certain preferred carriers as opposed to making their request accessible to all relevant carriers. www.oceanexchange.com and www.shipping-auction.com follow a different model that the above exchanges. Here the carriers post unused vessel space and then shippers bid for these spaces. In the latter, the auction is open from 1 hour to 21 days. Shippers view each auction and decide whether to bid or not. If they do submit a bid, they are e-mailed each time they are out-bid during the auction period by. In oceanexchange.com, both shippers and carriers have to pay a fee while in the latter only the shipper is required to pay a fee. Some of the sites like eraterequest.com and gocargo.com have a very poor (or none at all) check on authenticity of information provided by shippers and carriers. This leaves room for price manipulation and rigging. However some like celarix.com and oceanexchange.com carry out sufficient checks on the information provided by the participants. Some of these exchanges could act as price deflators; by bringing in more transparency in operations and by carrying out auction amongst the carriers, freight rates are expected to decrease something witnessed even in other industries. A recent study Marine shipping in transition: the rise of infomediary by three students from Harvard Business School finds that the traditional intermediaries are now threatened by the new infomediaries. However, existing intermediaries are unable to take advantage of the net. First, they lack the technical personnel and Internet-savvy to populate such a business in the short term. Second, they risk cannibalizing their existing analog systems, which, in the words of one industry expert, are so disorganized and cryptic as to justify the rates theyve charged shippers for years. Finally, it is not clear that the management within the intermediaries necessarily acknowledges the infomediary threat These portals, in addition to other things, help in minimizing repositioning. A study by Drewry Consultants of London last year containers moved by ships were empty, accounting for around unwanted shipping costs. Some of the waste is inevitable; there costs involved in container estimated that one-fifth of all US$ 11 billion a year in is more container movement

Page 119 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

from Asia to Europe and America than there is going back. However, this difference in trade volume in either direction does not account for the entire empty container movement. Part of the movement is because of the lack of an efficient mechanism to look up for potential shippers a problem that many websites are aiming to solve. Shipyards and internet The shipyard industry has is to make any brave strides to embrace the internet. Many shipyards have their own corporate websites giving information about the company, but do not facilitate any form of transaction over the net. However, the sector also holds tremendous opportunities for internet and e-commerce. An exchange where a shipowners wanting to build a new ship could post his broad specifications in terms of type (liquid, ore carrier, dry bulk, etc), size, desired date of delivery, expected financing terms, etc. and invite various shipyards to provide their quotations. On selection of a certain yard, the specifications (as offered by the selected yard) could be resubmitted for getting competitive offers from other shipyards. Subsequent due diligence and detailed negotiations could be carried out in the traditional manner. This exchange would enhance the reach of the shipowners and help him get better quotes and negotiate with larger number of yards even while saving on time and costs. Take the barging industry in India. There are large number barge builders at different geographic locations - a fact that deters a shipowners to approach and negotiate with each of them because of time and cost factors. Adoption of e-commerce E-commerce as defined by WTO is the distribution, marketing, sale or delivery of goods and services by electronic means. Using the electronic means, companies have been doing business for a long period of time by using Intranets and EDI (Electronic Data Interchange). But with the advent of the Internet the whole way of communicating electronically has changed in business and trade. The reach and low cost of the Internet makes it one of the most popular mediums for ecommerce. Security of transactions has been one of the major concerns in the Internet. But with the improvements in the technology and protocols, this threat has been minimised to a large extent. Advantages far outweigh the risks involved in the e-commerce platform. The sheer growth in the number of Internet users worldwide is a proof of this. It has also become clear now that more than the Business to Consumers (B2C) segment, the real potential of e-commerce on the Internet is in the Business to Business (B2B) segment. This will affect all the transactions that are economic in nature. In the developed country, e-commerce has crossed the stage of early adopters. It is now set to jump to the next level of early majority. This stage in the adoption of new technology is the largest segment and during this phase it is going to experience the most rapid growth. In the

Page 120 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Indian context the adoption process is still in the early adopters stage. But given the predominance of information technology in the country and its awareness it is expected that Internet, as a concept will be rapidly accepted. More and more companies are realising the opportunities that open up by adopting it. The advantages of Internet can be in aspects of shipping, like cargo booking, chartering, sourcing spare parts, manning requirements, tracking of containers and cargo. All these activities are going to benefit as the parties on each side can have easy and cheap access of information. They can meet and exchange information on the web quite unmindful of the physical distance between them. The Shipping industry has been a laggard in the adoption of information technology. Some of the major ports in the world have long embraced information technology to reap the benefits. Singapore and Rotterdam are some key examples, which prove how the efficiency increases with adoption of information technology. This adoption has been very slow in the shipping industry. But it is expected that in the near future the shipping industry will also take on the advantages of the new technology. The world majors like Maersk-Sealand have started booking cargo through the Internet. This reduces the overall cost associated with the documentation. The transparency associated with the process is very much valued by the shipper. The trend in the other industries has been the shift of power from the service provider to the consumer and shipping won't be left untouched by this force. The adoption of the Internet by the shipping companies is a matter of time. Those who are late in adopting it, will be forced to do so by the larger business environment around them. The shipping industry exists to fulfil the transport needs of the other industries. In order to provide seamless service to the consumers, shipping companies have to integrate with the larger business environment and this is best enabled by the Internet. Cartels have long ruled the shipping industry, especially in the liner trade. This has led to very high entry barriers for new shipping companies, the result being the inefficiency that has crept into the service. The Internet with its powerful ability to disseminate information is set to change all this. The resistance to the use of Internet in the shipping industry is expected to come from the players like large existing conferences and intermediaries. Role played by each member will be redefined and the balance of power is expected to shift to the consumer, the shipper of goods. History is witness to the fact that no industry has been able to resist the change brought in by new technology. The shipping industry will also not remain unaffected by the happenings in the overall economic environment. For a portal to develop as an e-commerce platform for the shipping industry, the active participation of big shipping companies and shippers is necessary. Shippers with large volumes of cargo will be an attractive business for the shipping companies. This will enable the portal to sustain itself. The benefits will accrue to the shipper of the company through their enhanced abilities to sell in the Indian shipping industry. www.indiaports.com and www.shippingstop.com goods through lower prices and to the shipping their empty spaces. A few portals have emerged www.shippingonthenet.com, www.maritimei.com, are trying to transfer many of the business

Page 121 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

processes in shipping from present offline mode to online mode. However, these portals have yet to make their presence felt.

Conclusion
Ship management is now a mature and competitive market. The size of a managed fleet is becoming more critical in order to meet certain requirements and reduce costs.

Meeting the day-to-day needs


Technical management is one of Ship Management's core activities and encompasses all facets of the dayto-day operations of the ships including maintenance and repair. In keeping with underlying philosophy, the structure of its management system is designed to ensure that each client's needs are met, while a fleet management approach secures the optimum cost benefits. Ships are split into smaller groups managed by dedicated teams; owner largely splits them according to ship type but also. This means that ships of a particular type and owner will normally be managed by one team, which results in a better understanding of the clients needs and the particular trade. For standard types, each team will normally manage up to about seven ships. But for specialised tonnage, such as gas carriers, the number of ships may be smaller. Each fleet is the responsibility of a fleet manager. With in these fleets each management team comprises a ship manager, usually with a deck officer background, technical superintendents, usually ex-engineer officers, and a group assistant. These teams are supported by the back-office services such as accounting, purchasing and insurance. The ship manager is the main point of day-to-day contact with the client owner in relation to the ship's operations and liaison with the ship and the onboard management team. The superintendent is responsible for managing all technical aspects of the ship within an agreed budget, including maintenance, repairs, dry-docking and supply of spares and equipment, as well as meeting statutory and class requirements. Every superintendent visits each of his ships at regular intervals. A technical report, tailored to each client's needs, is submitted from the ship, often accompanied by photographs showing the condition of specified areas or pieces of equipment. Although the exact degree of autonomy depends on the trading patterns of each ship the general principles apply across the whole managed fleet. An annual budget for each ship is discussed and agreed with the owner. This figure is based on the manager's knowledge of operating different types of ships, their operating costs and those of complying with any new regulations. Any specific requirements from an individual owner will be added to the calculation. The shift towards closer relationships with owners has implications for technical management. The manager is expected to be fully accountable to the owner with regards to operational costs and this means providing full accessibility for owners to the vessel's account. There is a trend for more owners to require statistical analysis of vessels operational performance and costs and comparisons with industry norms. 'Some owners have a more relaxed approach, while others want to see every invoice, but we can provide whatever an owner requires.

Page 122 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

"Ship managers often face a problem in that when they take ships under management they can inherit a variety of systems. Introducing a common system generates benefits in terms of management and costs, and also produces a better database of information that will be available to owners and the ships." The systems are integrated between ships and shore-based management offices so that information can be shared between shipboard staff, superintendents and managers. Although this represents a substantial investment. The of the systems is very small compared to the benefits gained. Apart from the cost of the system and installation it is also necessary to train shore-based and shipboard staff. "There is a need for a gradual approach to implementing the new system to ensure it works effectively and all staff are confident in using it.' Planning for dry-dockings is a continuous process. Dates are normally planned up to two or three years in advance, depending on the ship's trading pattern. Subject to where the ship is expected to be, tenders are invited from at least three ship repair yards. A new software system is also being introduced across the fleet to simplify this process and make it more transparent. It provides a standardise format for work to be undertaken, specifications, costings and so on, enabling both the manager and the yard to work from the same product. The superitendent will draw up a shortlist and offer advice and comments on the options, but the final decision is up to the owner. "It normally offer owners advice based on our own experience of the type of work being carried out, price and the reliability and standard of work of the yards in question. For any unplanned dry-dockings the timescale is obviously much shorter and the options inevitably more limited. Application of new technology in supporting technical management is the use of digital photography. 'Photographs of work underway in dry-dock, for example, can be provided to an owner on the other side of the world almost immediately. Digital images can speed up problem solving and allow input from shore-based expertise. Ship management teams need to be aware of, and adapt to, these changes and opportunities. As new IT systems are introduced, processes may need to be realigned to obtain the best use of them and to meet customer needs. In due course the system will allow clients direct access to view their own accounts and the status of their ships. Introducing such systems to meet client needs has becomaessential,for any manager that wants t remain a leading player. Along with most other ship managers faces the challenge of recruiting ship managers and superintendents with the necessary experience and management skills from a dwindling supply of former seafarer. The real need is for good managers who can adapt their skills to manage ships. The company recognise that our systems must also reflect the diversity of nationalities and cultures among ships' crews. Introduction of the ISM Code has caused significant problems or necessitated any big changes in the way it manages its ships. Shipping management has applied a quality management system for a number of years and adapting these systems to the specific requirements of the ISM Code was not a major problem. It requires seeking to maintain standards well in excess of the minimum required by ISM. Quality Assurance and the International Ship Managers Association (ISMA) code. Extremely able seamen Manning is a vital component in the shipping mix as a good crew means smooth and efficient running.

Page 123 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

In spite of the significant reductions in crew sizes and costs in recent years, manning remains by far the largest single operating cost of running a ship. Crew management is, therefore, a vital component of ship management. Crew costs can be a sensitive area with active union involve in many countries. The importance of maintaining high onboard standards means that there are dangers in simply employing cheaper crews without thought to the implications for the ship's operations. The solution is to use good flag states that permit the use of well trained crews who are fairly remunerated for their country of domicile, therefore providing a quality operation at cost effective levels. This is the case for every other industry, why should shipping be any different? Such is the importance of crew management in the efficient operation of a ship. Shipping has moved a long way from the situation where ships' crews were generally the same nationality as the ship's flag or owner. In most cases, the choice of crew nationality is extremely wide and therefore the decision on what nationality crew to employ is crucial. As in other aspects of management some, client owners will specify fairly precisely what crews they want, while others will leave it largely to the discretion of the manager subject to meeting operational requirements. In all cases, supplying crew management is subject to commercial bidding and each case requires an individual approach and is subject to negotiations. Contracts are normally concluded on a cost-plus basis.

Shipping management is set up in recognition of the importance of manpower. You can decide any strategy you like for managing ships, but without manpower you can't do anything
As always, the guiding principle is meeting the needs of each client and establishing a level of trust in what the manager is doing. The main differentiation between crew managers is on the level of service provided. You can decide any strategy you like for managing ships, but without manpower you are unable to do anything.

Crewing
It is not good to swap around from one nationality to another on a short-term basis. Aim to develop a long-term commitment to major crew sources The owners are often far more willing to contract out manning services than technical management because providing a manpower resource across a number of nationalities can stretch management capability. Separating crew management into a dedicated company also provides an opportunity to attract crewing business that would not be possible if it remained an integral part of a ship management company without an individual identity. One of these is the cruise sector where there is considerable growth and demand for large numbers of crew to be supplied to ships. But manager should stress that only interested in companies of sufficient quality and value to add to its existing resource and performance. Recruitment and training are essential components of any crew management strategy. It is easier to train people at younger ages than trying to recruit older officers. Assessing recruitment and training needs is a continuous process, but the company will continue to recruit cadets from these major sources.

Page 124 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Trend will be towards recruiting more graduates and other higher ability people and train them for a longterm career in the shipping industry as a whole, rather than just seafaring. This requires a more broadly based approach to recruitment and training, looking at a wider career structure within the industry. "We need to make the career more stimulating and structured to allow people to make better use of their abilities and knowledge. Crew managers must take full control of training so that it is approached on a business-like footing and meets the needs of the industry. Although introduction of STCW should make training standards more equal, there will continue to be differences in the level of training provided in various countries beyond the basic requirements. 'We have to supplement that basic training by providing other courses, including technical courses and computer training but it is the human resource and management courses that make the real difference in officer training. How to manage different nationalities onboard is a vital skill." ITs Cutting edge High quality IT systems have become an indispensable part of the best ship managers' service to their clients. Deployment of excellent information systems is necessary both to improve operational efficiency and to provide the levels of access and information that owners are increasingly demanding for their managed ships. The review of its IT strategy is required to add client value through implementing new software and systems. Priorities for investment are operational and client-based, rather than just introducing new technology for its own sake. The investment strategy takes in hardware software and communications technology and encompasses all shore-based offices and ships under management. A basic aspect of this was to standardise systems throughout the company's offices, leading to the decision to adopt a common environment. Selection process for software applications focused on the delivery of systems to ensure the highest quality of operational and management services to clients. A number of modules covering basic ship management functions are being introduced in a systematic way and this process is continuing as further modules are added

A concerted programme of installing the latest IT systems is keeping the forefront of technology
Communications between ship and shore, as well as between offices and with customers and suppliers, is an integral of any IT network for managing ships. Carrying out business efficiently in the maritime environment depends heavily on reliable communications. While maintaining a telex capability is still required, fax, email and internet communications are the main methods of maintaining ship-shore links. The strategy is to develop communications systems that are fully integrated with new applications software to ensure the maximum benefit from the investment. Providing internet access onboard ships is one of the options being considered so that it must be costeffective for clients. It is a great opportunity, but need to protect confidentiality and security and avoid putting clients at any risk. We must also monitor new legislation as it affects the internet need to give clients a choice. If clients prefer not to use internet can offer alternative means of communication, such as fixed links or even supplying disk.

Supply on Demand Page 125 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Purchasing the supplies necessary for the daily operation of a vessel is a skill that is reliant on quality.
Quality assurance and quality supplier partnerships are the cornerstones of an efficient purchasing operation. List of key suppliers is subject to a bi-annual assess ment and if we get too many noncompliances they are taken off the list. This is one way of ensuring supplier efficiency. The bigger you are, the more muscle you have in the purchasing market, but, above all, we need continuity of supply. We need to get the supplies to the vessel, but at a level where we are happy with the goods and the ship's master accepts them. Strategic purchasing alliances are important because they give the company certain assurances that standards will be maintained. When ordering from a key supplier, we specify exactly what we want. Vessel purchasing is never a straight forward operation and often has to react to the vagaries of the industry, such as vessels diverting at short notice to either pick-up or deliver sold-on cargoes. When you are trying to store a vessel in these conditions, it makes it very difficult. That is what makes marine purchasing so special. If a ship is diverted it will then transship essential items to the vessel's next port of call. Whether just-in-time delivery and complete e-commerce purchasing will be a part of the marine industry in the short-term. "At this moment in time, there is no company offering a fully blown e-commerce system suitable for all the requirements of the marine industry. It-is not only the day-to-day operations that change, but also the whole philosophy of ordering that has been forced to adapt to the changing face of shipping. Many manufacturers do not manufacture for stock purposes anymore. Traditionally, sea borne staff ran their ships with one item on the shelf, one working and one on order. Now they tend to work with one in operation and one item on the shelf. These days, up to 95% of orders originate from the ships via email. They are input into in-house electronic purchasing system and scrutinised by the company's purchasing team. The items are subject to agreements, such as paints or lube oils, the orders will be priced up and sent to the accounts and operations departments for checking against budgets and the orders placed. If competitive tendering is required, the relevant companies will be contacted. The purchasing department assesses a number of criteria, such as price, delivery, quality and location of ship, before sending the order to operations for confirmation. Efficient interaction between purchasing, operations and accounts is vital to a good service, with purchasing feeding into vessel operation.

Dedicated to Insurance Protection from liability is in house team takes a vital aspect of shipping that extremely seriously.
Insurance represents a significant proportion of a ships operating costs, but it provides vital protection against exposure to what could be huge claims, especially in the present climate where there is an increasing readiness to make claims against ships and, in particular, the large sums involved where there is any sort of pollutions.

Page 126 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Insurance is a vital ingredient of ship operations; the values and potential liabilities involved can be enormous. It is wrong to outsource insurance or delegate such an important function. It is vital to have a high level of insurance and claims processing ability and experience and need dedicated and expert knowledge of insurance 'and markets and related matters. The specialist staff covering hull and machinery and P&I matters. This approach means we can get involved very early on in a claim and deal with it efficiently. This involves processing and, where necessary, defending and settling claims. It is difficult to quantify the benefits of this policy 'but the high priority should be given to insurance produces a more positive response and, therefore, better results. Running a dedicated insurance department is a cost, but convinced it is justified. This expertise is recognised in the wider industry. In common with other aspects of ship management, the placement of insurance is ultimately dependent on clients' wishes. While some owners will give responsibility to the manager, others prefer to do it themselves as they may have fleet wide insurance covering ships managed by other companies. It would not necessarily recommend choosing the cheapest insurance premiums, especially with the rock bottom rates prevailing in the hull and machinery market at present. It is also important to consider other aspects such as security and reliability in settling claims. The largest area of exposure is not the ship itself, but other liabilities such as pollution. There is concern, for example, that cover in the fixed premium market may be insufficient for the potential liabilities.

Pool of expertise A centralised accounts system ensures a quality service from a team of experts
Accounts may appear to be an unglamorous activity, but it is accorded high priority as it is a function that involves close interface with clients. It is one of the core back-office activities. Centralised back-office accounting concept is important in servicing a global ship management operation. Among the benefits derived from this approach is that it creates a pool of expertise that clients can readily access. It also provides consistency of service backed-up by internal reviews and quality assurance. Centralising accounts in one office produces economies of scale and a bank of knowledge and experence. The accounts staff are independent of both clients and in-house operations, so are able to offer an impartial service. All technical management offices have real-time access to accounting system and so are able to use current information for their decision making. As well as providing technical accounting services that directly support the technical operation, also offer clients commercial accounting and financial management services. It can also assist owners by providing a range of ownership solutions to compliment a client's individual financial requirements. Developments of the accounting systems are intended to improve the service to clients, as well as produce efficiency gains the system is based on offthe-shelf software package. The process of developing a web-based financial reporting system that will provide secure access, enabling clients to view their accounts in real-time to minimise the flow of paper and offer a flexible reporting structure that will meet clients are needs. Mostly reports to clients are provided on paper or in electronic format, according to their individual preferences. The finance believes that the centralised back office accounting system will proved effective in providing a high level of efficient service to clients while maintaining flexibility. Any new developments, such as web-based applications, will follow that principle.

Page 127 of 128

Prepared By:

Emerging Challenges of Commercial Management of Shipping Industry Ravindra Gharat MFM-III

Page 128 of 128