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NIMA POLICY PAPER Series # 003 March 2019 Research Paper EVOLUTION OF FLAG OF CONVENIENCE: SUGGESTIONS TO IMPROVE PAKISTAN’S SHIP REGISTER Authors: Syed Khawar Ali Shah Kanwar Muhammad Javed Iqbal First Edition National Institute of Maritime Affairs (NIMA) Bahria University, Pakistan Category: Policy Paper Title: Evolution of Flag of Convenience: Suggestions to Improve Pakistan’s Ship Register Authors: Syed Khawar Ali Shah* Kanwar Muhammad Javed Iqbal** Reviewed by: Muhammad Akhtar, Deputy Director, NIMA Karachi Muhammad Nadeem, Deputy Director, NIMA Islamabad First Edition: March 2019 Property Rights: National Institute of Maritime Affairs, Islamabad * Vice Admiral (R) and Director General at National Institute of Maritime Affairs (NIMA) reachable at [email protected] ** Senior Researcher at National Institute of Maritime Affairs (NIMA) reachable at [email protected] All rights reserved. No part of this Policy Paper may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or information storage and retrieval system, without prior written permission of the publisher. A publication of the National Institute of Maritime Affairs (NIMA) - an independent and non-profit think tank. In the Policy Paper / Brief series, the NIMA publishes solicited / unsolicited policy advice on practical policy issues in the sphere of maritime affairs and sustainable development. The papers are written by NIMA’s regular or affiliated staff and are meant to provide clear-cut policy outlines which would promote peace, prosperity and sustainable development. National Institute of Maritime Affairs (NIMA) is a constituent unit of Bahria University. The establishment of NIMA under the aegis of Bahria University was conceived in order to meet the objectives of National Maritime Policy. The NIMA is envisioned to serve as a focal point in Pakistan, as well as in the region for the promotion of maritime sector by defining and translating the debates of the region into peace, prosperity and sustainable development. Contact Information: NIMA – National Institute of Maritime Affairs Bahria University, Head Office, Islamabad - Pakistan Tel: +92 51 9261968 Fax: +92 51 9261968 Email: [email protected] URL: https://www.bahria.edu.pk/nima Contents ACRONYMS ......................................................................................................................................... ii 1. INTRODUCTION .......................................................................................................................... 1 2. HISTORICAL EVOLUTION OF FOC ........................................................................................ 2 3. INTERNATIONAL OBLIGATIONS AND FOC ......................................................................... 3 4. NATIONAL LINES VS FOC ........................................................................................................ 4 5. STRENGTHS OF FOC ................................................................................................................ 5 6. THE CASE OF PAKISTAN ......................................................................................................... 7 7. CONCLUSION AND RECOMMENDATION............................................................................. 7 i ACRONYMS EU European Union FBR Federal Board of Revenue FOC Flag of Convenience ICS International Chamber of Shipping ILO International Labour Organization IMO International Maritime Organization IUU Illegal, Un-reported and Un-regulated MARPOL Marine Pollution Convention MLC Maritime Labour Convention MMD Mercantile Marine Department in Pakistan MoU Memorandum of Understanding NOC No Objection Certificate OECD The Organisation for Economic Co-operation and Development PSC Port State Control SOLAS Safety of Life at Sea STCW Standards of Training, Certification and Watch-keeping for Seafarers UNCLOS The United Nations Convention on the Law of the Sea UNCTAD The United Nations Conference on Trade and Development ii 1. INTRODUCTION The modern era of global Shipping sector has witnessed shifting trends in ship registration processes from traditional to open registries, provides alternate choice to the owner for flag of convenience over the business as usual practices. A Flag of Convenience (FOC) or open registry is a distinctive phenomenon in the global shipping industry. FOC is a specific business practice in which a trader's vessel is registered in a country other than that of owner’s own country. This ship flies that country’s flag. The most relevant term used for FOC is an open registry to define a firm that will allow ship owned by foreign nationals1. In the past 30 years, the Flag of Convenience (FOC) tonnage has been rising steadily. The FOC fleet will go on increasing as long as the FOC device contributes a significant cost reducing and revenue maximizing factors to the maritime sector. There is enough historical evidence for supporting the change of flag to another in different countries for economic or regulatory purposes2. After the mid of 20th century, flags of convenience have produced large economic footprint and benefited the economic operators and the open registries worldwide. The business trends under open registries have influenced the traditional registries for a convergence between the two processes3. There are different arguments regarding various check and balances to be part of open registries such as safety and labour related regulations. The open registries have realized the importance of the outstanding issues, such as Panama (ratified the ILO’s Maritime Labour Convention 2006 on 6 February 2009), by addressing the needs for upgradation in the safety standards and were successful in advocating and improving their image by ratification of the conventions4. Thus, the convergence is the need to adhere to the international conventions by the FOCs and requirement of the national flag to be more commercially competitive.5 The Pakistan’s Shipping sector has not lived up to the potential which can support the national economy on a large scale. Though, ship registration procedure of Pakistan is in compliance with international obligations, but, it is a reality that Pakistan’s global share in the shipping market has shrunk over period of time and private sector has negligible contribution due to several reasons for which ship registration is an important issue. In the context, this policy paper aims to examine in depth the topic of importance i.e., FOC practices and compare them for policy options for Pakistan, firstly by taking into account a range of relevant analyses and opinions generated by experts, relevant national / international documents, and academicians in peer reviewed publications. Secondly, the paper identifies and lists key issues raised by way of thematic and content analysis. Thirdly, the policy paper deduces inferences and generates recommendations for practical actions including policy measures proposed for Pakistan’s ship register. 1 Jihong Chen et.al. "The development of ship registration policy in China: response to flags of convenience." Marine Policy 83 (2017): 22-28. 2 Basil N. Metaxas. "Flags of convenience." Marine Policy 5, no. 1 (1981): 52-66. 3 Mitroussi, Kyriaki, and Peter Marlow. "The impact of choice of flag on ship management." In The Handbook of Maritime Economics and Business, pp. 609-632. Informa Law from Routledge, 2013. 4 Francisco Piniella et al. "The Panama ship registry: 1917–2017." Marine Policy 77 (2017): 13-22. 5 Kyriaki Mitroussi & Michael G. Arghyrou,” Institutional performance and ship registration”, Transp. Res. E 85 (2016) 90–106. 1 Based on analysis, this paper argues that Pakistan needs to revamp its registry and other legal/institutional/policy framework in order to harness the actual potential of this sector. The policies can be revised in light of best contemporary practices of FOCs and National registers and at same time address the needs to meet its international obligations like the case of Panama for the ratification of ILO’s MLC. 2. HISTORICAL EVOLUTION OF FOC Historically, ships have sailed under a Flag which became formalized in early eighteenth century. As per International Law a ship of above a certain tonnage must be under a flag of a State where the ship is registered. States have given their flag to their owned ships, which was an endorsement of the authority over these ships and signified that Ship was under the law and jurisdiction of that State; Countries give nationality to their Ships6 and a State where a ship of a non-national is registered is said to have an open register or the ship is said to have a Flag of Convenience (FOC). In the early 1900’s the US congress recognized that US Ships could not compete with Shipping Line conference members who acted like a cartel and had the collective strength to engage in predatory wars in order to eliminate outsiders from shipping trade. Realising this in 1920, US congress enacted Merchant Marine Act, also known as Jones Act, which stipulated that goods between two ports of US may only be carried out by American Flagged vessels; which are crewed by American Nationals and built in US Shipyards. Consequently American Ship owners grew frustrated by increased regulations and rising labour costs, began registering ships in Panama7. First ship under Flag of Convenience was registered in Panama in 1922. Initially the lure of Flag of Convenience was due to relaxed rules of ship’s age and its state,