Maritime Finance Clusters

The Nature of Maritime Finance Clusters: What Busan Needs to do to Become a More Competitive Cluster

FINAL VERSION – December 2015

Z/Yen Partners Limited 90 Basinghall Street London EC2V 5AY United Kingdom Telephone: +44 20 7562 9562 Facsimile: +44 20 7628 5751 Email: [email protected] www.zyen.com

Prepared by Mark Yeandle of Z/Yen Partners

Maritime Finance Clusters

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY ...... 3

1.1 BACKGROUND ...... 3

1.2 METHODOLOGY ...... 3

1.3 MAIN FINDINGS ...... 3

2. INTRODUCTION...... 8

2.1 INTRODUCTION ...... 8

3. THE NATURE OF MARITIME FINANCE CLUSTERS...... 10

3.1 WHAT IS A MARITIME FINANCE CLUSTER – A DEFINITION ...... 10

3.2 THE COMPONENTS AND FEATURES OF COMPETITIVE MARITIME FINANCE CLUSTERS .. 11

3.3 COMPETITIVE MARITIME FINANCE CLUSTERS ...... 17

4. BUSAN AS A MARITIME FINANCE CLUSTER ...... 22

4.1 WILL A MARITIME FINANCE CLUSTER HELP BUSAN ...... 22

4.2 STRENGTHS AND WEAKNESSES OF BUSAN - DEVELOPING A MARITIME FINANCE

CLUSTER ...... 24

4.3 PRIORITIES FOR DEVELOPING A MARITIME FINANCE CLUSTER IN BUSAN ...... 26

5. APPENDIX 1 – PERSONAL INTERVIEWS ...... 30

5.1 INTERVIEWS ...... 30

5.2 PERSONAL INTERVIEW QUESTIONS ...... 31

2 Maritime Finance Clusters

1. EXECUTIVE SUMMARY 1.1 Background BEPA - the Busan Economic Promotion Agency – has a mandate to develop Busan, already a major port city in South Korea, into a maritime finance cluster. BEPA asked Z/Yen to conduct some research to help guide their strategy to develop a maritime finance cluster.

This brief report examines the features of maritime finance clusters, the factors that promote their existence, the importance of a maritime finance cluster to Busan, the strengths and weaknesses of Busan as a host for a maritime finance cluster and measures that Busan might adopt to encourage the development of a cluster.

1.2 Methodology Our research findings are based on extensive desk research, the use of Global Financial Centres Index1 data, twelve structured interviews with maritime finance professionals and some less formal discussions with experts in the field. Details of the interviews can be found in the Appendix.

1.3 Main Findings We define a maritime finance cluster as ‘a geographical grouping of organisations specialising in the financing and management of seagoing activities.’ The activities within a maritime finance cluster include:

1 http://www.longfinance.net/programmes/financial-centre-futures/fcf-gfci.html 3 Maritime Finance Clusters

Features of maritime finance clusters include:  maritime finance clusters are often but not always located near a major port;  successful maritime finance clusters tend to be successful at attracting ship owners or those who exert commercial control of ships;  the main established maritime finance centres have subsidiaries or branch offices of the world’s major global banks present;  some of the most successful maritime finance clusters have become successful by offering advantageous tax environments to certain sectors;  top maritime finance clusters generally have a strong representation of firms in the professional services sector – law firms, accountants, brokers, advisers;  the presence of a ship building industry is not a pre-requisite of a maritime finance cluster but is often present in these clusters;  top maritime finance clusters often have strong educational and training organisations;  top maritime finance clusters often have the same attributes as successful financial centres:

Clusters bring well recognised benefits and these benefits are why developing a maritime finance cluster is important to Busan. The main benefits can be summarised:  clusters increase the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses;  significantly more innovation takes place in communities which have stronger inter- personal networks;  clusters usually reduce costs;  clusters increase the pool of relevantly skilled labour;  clusters generate trust.

Busan’s performance in the key factors of successful maritime finance clusters are summarised below: 4 Maritime Finance Clusters

Factors often Present in Busan’s Performance in these Factors Successful Maritime Finance Clusters A broad range of maritime A strong and broad mix of activities is present activities and a need for people that understand the industry Proximity to a large port (although The existing port facilities and size are a great not a pre-requisite) strength of Busan

Success in attracting ship owners or Very limited number of ship owners at those who exert commercial control present, hence the cluster has no reason to of ships (the support functions of develop in Busan maritime finance follow the business – i.e. the ship owners) A good representation of the large Limited at present – most big banks are global banks represented in Seoul

A strong representation of service Korea has a very limited number of domestic firms - law firms, accountants, professional service firms and few brokers, advisers international ones are present in Busan A presence of a ship building There is ship building and maintenance industry (although not a pre- capability in Busan requisite) Financial centre attributes – Busan has a generally strong business business environment, environment and strong infrastructure. It infrastructure, human capital and rates less well for reputation and financial reputation sector development Strong training and educational Limited at present facilities

Based on the research conducted, we believe that the following seven objectives should be prioritised by Busan’s policy makers:  increase the number of ship owners based in Busan;  increase the number of global banks with representation in Busan;  increase the number of international professional service providers working in Busan;  develop business environment attributes;  develop human capital;  develop Busan as an outward looking and connected city;  develop the Busan city brand.

Other maritime clusters have gone to great lengths to attract ship owners and Busan is advised to do the same. Currently Seoul is a major location of ship owners and yet Busan is

5 Maritime Finance Clusters

a much bigger port. There are a number of strategies that have been pursued by other clusters to attract ship owners. Many of these have relied on offering short to medium cost reductions. Singapore, Hong Kong and Tokyo have all invested significantly in tax incentives or other cost facilitators to attract ship owners. Ship owners are fairly flexible about their locations and will tend to operate from places that offer reasonable costs, are easy places in which to do business and offer a good quality of life.

Large international banks are becoming increasingly involved in maritime finance. They generally have an established presence in the large maritime centres such as London, New York, Hong Kong, Singapore and Tokyo. The vast majority of these banks also have a presence in Seoul. If Busan is to host a maritime finance cluster it should try to find a way of getting these institutions to have a representation in Busan. A good approach might be to contact the banks with subsidiaries or branches in Seoul and offer them an incentive to open an office in Busan for their maritime division or their maritime specialists.

If owners and banks can be persuaded to have a presence in Busan then specialist marine service providers will want to follow the clients and have a presence in Busan. These service providers are often part of large international law firms and accounting practices. They may already have offices in Seoul and may be attracted to having a presence in Busan in the same way as the banks.

Busan should try to engender an institutional framework as transparent and efficient as possible. If Busan wants to host a maritime finance cluster then it needs to position itself as an international financial centre and a great place in which to do business. Effective and transparent institutions are a necessity in a modern business cluster. Improvements in the city and country institutions to speed up decision making could also be a positive step towards enhancing Busan’s reputation as a business centre. There are certainly other areas in which Busan could claim thought leadership by holding conferences, workshop programmes, sponsoring publications and similar events. These could include:  engine emissions – a present environmental concern;  ballast damage – a present environmental concern;  noise danger to cetaceans;  cyber-crime;  the future of artificial intelligence in shipping and shipping employment.

Busan should attempt to invest in the development of an environment highly attractive for maritime education and innovation. Busan National University is a world class ‘Top 500’ university but is one of many universities in South Korea and many of the leading ones are ranked higher than the Busan National University and are located in Seoul or other cities2.

2 http://www.shanghairanking.com/World-University-Rankings-2013/South-Korea.html 6 Maritime Finance Clusters

As a developed economy with somewhat unfavourable demographics Korea’s economic future lies in upgrading the value that workers can add. We believe that creating a world leading educational establishment specialising in maritime activities and maritime finance with brand, would encourage people to move to Busan to study.

We believe that Busan should continue to lobby national government for more openness to foreign competition. A more open environment is in Busan’s interests as it will raise interest and bring more ship owners, banks and professional service providers to Busan.

Busan should also aim to continuously improve its infrastructure, particularly its ICT and air travel infrastructure. Several of the GFCI instrumental factors agree that South Korea has a very solid business infrastructure and good levels of technological development and IT adoption. This status needs to be maintained and improved upon. An international finance cluster and port necessitates high quality transport, energy and ICT infrastructure. Busan suffers significantly from not having a larger and more modern international airport with many international visitors having to travel to Busan via Seoul.

It is now becoming essential for Busan to raise international awareness of its strengths. Busan is already ranked highly in the number of international conventions it holds. Busan is one of the best endowed cities that people in Europe and North America have never heard of. It should be remembered that it is the fifth largest container port in the world, has a comfortable living environment and is less than an hour’s flight from Seoul. A sustained and comprehensive marketing campaign is now a priority for Busan. The city has been doing a good job at marketing itself but a significant expansion of marketing is needed in order to get Busan recognised as having the successful future that it undoubtedly has. The marketing should take the form of personal visits, meetings and lunches in some of the key centres where financial institutions are currently based. These should include European centres such a London, Paris and Frankfurt but also cities like Zurich, Milan and Madrid. Marketing should also take place in some of the other leading Asia centres.

7 Maritime Finance Clusters

2. INTRODUCTION

2.1 Introduction Z/Yen has substantial expertise in studying the competitiveness of cities, clusters and financial centres. BEPA - the Busan Economic Promotion Agency – has a mandate to develop Busan, already a major port city in South Korea, into a maritime finance cluster. BEPA asked Z/Yen to conduct some research to help guide their strategy to develop a maritime finance cluster.

Busan is located in the southeast tip of the Korean peninsula and is the largest port city in South Korea and has a population of over 3.5 million. The city has long been a gateway for the exchange of people and goods between Korea and other countries. Busan is located in the center of the Northeast Asia logistics hub that connects routes between North America, Europe, the Pacific and Atlantic Oceans, and the American and Asia continents. The position of Busan is significant as the starting point and a destination point of the Transcontinental Railways and the North Pole Route - the so called the ‘21st century silk roads’. Busan currently enjoys the status of world’s fifth busiest container logistics port.

Busan is central to the South East economic bloc of Korea (comprises Busan, Ulsan and Gyeongnam regions) and forms a transnational economic relationship with Fukuoka in Japan. The South East economic bloc is accounted for 17% of the Korean economy, based on GRDP 2013 data, with its industrial share of manufacturing and services at 23% and 13% respectively. Busan offers a generally good quality of urban infrastructure, including transport, education, medical services, housing, leisure and cultural facilities. Busan benefits from an oceanic climate. Sectors including exhibitions and conventions, tourism, video/film production, fashion, and IT industries have all thrived in Busan.

The South Korean government’s efforts to foster the maritime finance cluster have been persistent and resolute. The government seeks complementary development by fostering Seoul as a comprehensive financial hub and Busan as a specialized finance cluster for maritime finance and derivatives. Busan was chosen as a specialized cluster thanks to its natural resources and the city’s industrial development. Port logistics (the world’s 5th busiest), shipbuilding industry (the world’s largest) and fish market (the largest in Northeast Asia) are all factors that led to the selection of Busan as the strategic maritime finance cluster.

The headquarters of the Korea Exchange is located in Busan. This location was the basis for the strategic adoption of Busan as the derivatives trading hub. The city has gathered maritime-related government institutions (in the Dongsam district) and public financial organizations (in the Munhyun district) into Busan, and provides a financial support system, including tax exemption and provision of subsidies, for financial organizations that establish in or move to the Busan’s financial district.

8 Maritime Finance Clusters

Busan now hosts the maritime finance departments of three major policy financial institutions (the Export-Import Bank of Korea, the Korea Development Bank, and the Korea Trade Insurance Corporation), as well as the newly established Korea Maritime Guarantee Insurance. With the relocation of ship management companies into the centre, Busan will be able to create a maritime finance cluster.

Since the global financial crisis, the world’s shipping finance market has been challenged by structural change, such as increase in direct finance through bond and share issuance, alongside a decrease in bank loans. The balance of financial power is slowly moving from Europe towards Asia. Busan needs to see this movement as an opportunity to attract organisations involved in maritime finance to Busan.

Our research findings are based on extensive desk research, a number of structured interviews with maritime finance professionals and some less formal discussions with experts in the field. We would like to thank all those who participated in our research as well as those at BEPA who proved an invaluable source of additional information.

9 Maritime Finance Clusters

3. THE NATURE OF MARITIME FINANCE CLUSTERS

3.1 What is a Maritime Finance Cluster – a Definition There is a considerable amount of academic literature on industrial clusters. There are papers on cluster theory, different types of clusters and the different forms of relationship between different constituents of industrial clusters.

Alfred Marshall, first characterised clusters in his book ‘Principles of Economics’ (1890)3, as a "concentration of specialised industries in particular localities" that he termed industrial districts. A century later in 1990, Michael Porter reintroduced and popularised the term in ‘The Competitive Advantage of Nations’4. The importance of geographical economics was also brought to attention by Paul Krugman in ‘Geography and Trade’ (1991)5.

Porter claimed that clusters potentially affect competition by increasing the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field. Porter argues that a business cluster is a geographical location where enough resources and competences amass and reach a critical threshold, giving the cluster a key position in a given economic branch of activity, with a decisive sustainable competitive advantage over other places (e.g. Silicon Valley and Hollywood).

This report does not set out to contribute to the academic literature. The report aims to be practical in nature and as such does not dwell too long on the definition of a maritime finance cluster. However, something can be learnt by looking at the definition of the constituent parts of the term6:  Maritime: “Connected with the sea, especially in relation to seaborne trade and naval matters” (including transport, shipbuilding, recreation, sports, fishing, energy, equipment, navigation, research, training etc);  Finance: “The monetary resources and affairs of a state, organization, or person”;  Cluster: “A group of similar organisations, things or people positioned or occurring closely together”.

Maritime finance clusters take a number of different forms. Many, but not all, clusters occur in the vicinity of ports and a number occur in financial centres that are not primarily thought of as port cities. We therefore propose a simple and fairly broad definition of a maritime finance cluster as:

‘A geographical grouping of organisations specialising in the financing and management of seagoing activities.’

3 http://www.econlib.org/library/Marshall/marP.html 4 http://www.hbs.edu/faculty/Pages/item.aspx?num=189 5 https://mitpress.mit.edu/books/geography-and-trade 6 Oxford English Dictionary 10 Maritime Finance Clusters

3.2 The Components and Features of Competitive Maritime Finance Clusters Arising from the definition of what a maritime finance cluster is, there are several features that successful maritime finance clusters have.

3.2.1 Generally a maritime finance cluster will have a number of organisations carrying out a number of different but related activities within a geographical area. These activities include:

 ship financing (including trade finance to ship builders);  ship broking;  maritime accounting and financial management;  insurance – hull, cargo, crew etc.;  ship management;  legal and arbitration services;  registration and classification;  training and research;  regulatory and societal work (including the safety and the interests of seafarers);  component manufacturing and supply;  ship building;  ship repair;  naval activities;  maritime sports;  consumer and tourist/leisure maritime activities;  commercial fishing and aquaculture;  marine energy research and operation;  marine research and sciences;  marine training (academies, training and education centres).

Some of these activities are not directly related to finance but they all have an impact on the sustainability of the maritime cluster and add to the critical mass of the cluster. Not many clusters will include all the activities but successful developed maritime finance clusters will be a host to most of the activities listed. This can be viewed diagrammatically:

11 Maritime Finance Clusters

3.2.2 Maritime finance clusters are often but not always located near a major port. It seems logical that a maritime financial cluster would develop close to a centre where a great deal of maritime activity takes place. Alternatively, it can be argued that maritime finance is sufficiently similar to other forms of finance that maritime finance clusters tend to occur where there are financial services clusters.

3.2.3 The top six global financial centres (as listed in Global Financial Centres Index 187 are:

The Top Global Financial Centres London New York Hong Kong Singapore Tokyo Seoul

7 http://www.longfinance.net/programmes/financial-centre-futures/fcf-gfci.html 12 Maritime Finance Clusters

These six centres all have very strong maritime finance activity and contain what can be described as maritime finance clusters. A maritime cluster is clearly not just a port and in terms of shipping volume several of these cities are not the busiest ports in their own country8.

3.2.4 Successful maritime finance clusters tend to have been successful at attracting ship owners or those who exert commercial control of ships. The chart below shows the location of ship owners9 and illustrates that many successful maritime finance clusters have a strong concentration of ship owners:

200

180

160

140

120

100

A recent study by the UK government10 recommends that the UK ‘provides ship owners with a high quality, commercially-oriented UK Ship Register that promotes the UK brand, reinforces our maritime centre status and generates income for the UK taxpayer – the flag of choice for quality owners.”

However, looking at the relationship between the location of maritime finance clusters and the location of ship registrations11, we see a far weaker correlation with six of the top ten locations by registration not being considered as maritime finance clusters:

8 With the exception of Singapore which is a ‘city state’. 9 Gross Tonnage of ships by location of ownership (Clarksons) 10 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/460861/maritime-growth- study-keeping-UK-competitive.pdf 11 Deadweight Tons of ships by location of registrations - Shipping Fleet Statistics 2014 (Dept of Transport) 13 Maritime Finance Clusters

350

300

250

200

150

100

3.2.5 The main established maritime finance centres have subsidiaries or branch offices of the world’s major global banks. The top 20 global banks12 by asset value are:

Bank Name Assets US$ billion Industrial & Commercial Bank of China 3,452 China Construction Bank Corporation 2,819 Agricultural Bank of China 2,716 HSBC Holdings 2,670 JP Morgan Chase & Co. 2,600 BNP Paribas 2,527 Bank of China 2,463 Mitsubishi UFJ Financial Group 2,337 Crédit Agricole Group 2,144 Barclays PLC 2,114 Bank of America 2,105 Deutsche Bank 2,078 Citigroup Inc 1,843 Japan Post Bank 1,736 Wells Fargo 1,687 Mizuho Financial Group 1,641 Royal Bank of Scotland Group 1,636 China Development Bank 1,615 Société Générale 1,591

12 http://www.relbanks.com/worlds-top-banks/assets (September 2015) 14 Maritime Finance Clusters

The top five global financial centres (which are also leading maritime finance clusters) are London, New York, Hong Kong, Singapore and Tokyo. These five centres all have some representation of the largest global banks. The banks are in these centres because that is where the business is and because these centres offer a beneficial business environment in which to operate. Since the financial crisis, the large international and global banks have lost business in their more traditional areas and have sought to enter the maritime finance market. This has created more competition and increased the importance of capital markets as a source of marine finance. Private equity, on the other hand shows signs of declining in importance as a source of maritime funding.

3.2.6 Some of the most successful maritime finance clusters have become successful by offering advantageous tax environments to certain sectors. In order to attract ship owners, Singapore, Tokyo, Hong Kong and Piraeus have all used tax and cost incentives in order to attract those that own ships or have a commercial interest in ships.

3.2.7 Top maritime finance clusters generally have a strong representation of firms in the service industry – law firms, accountants, brokers, advisers. In the service sector nearly all firms agree that you need to be close to your clients.

3.2.8 Ship building, maintenance and repair are often conducted close to ports. However, a number of ports have been created specifically for these purposes and the presence of a ship building industry is not a pre-requisite of a maritime cluster. Docks are sometimes more associated with maintenance than shipyards, which are associated more with initial construction. Countries with large ship building industries include Singapore, South Korea, Australia, Japan, China, Germany, Romania, Turkey and Poland. The shipbuilding industry tends to be more fragmented in Europe than in Asia. In European countries there are a greater number of small companies, compared to the fewer, larger companies in the shipbuilding countries of Asia.

South Korea is the world's largest shipbuilding country with a global market share of 41% in 2015. South Korea leads in the production of large vessels such as cruise liners, super tankers, LNG carriers, drill ships, and large container ships. Generally, South Korea's shipyards are highly efficient, with the world's largest shipyard in Ulsan operated by Hyundai Heavy Industries capable of slipping a newly built, $80 million vessel into the water every four working days. South Korea's "big three" shipbuilders, Hyundai Heavy Industries, Samsung Heavy Industries, and Daewoo Shipbuilding & Marine Engineering, dominate global shipbuilding, with STX Shipbuilding, Hyundai Samho Heavy Industries, Hanjin Heavy Industries, and Sungdong Shipbuilding & Marine Engineering also ranking among the top ten shipbuilders in the world.

Shipyards are situated near the sea or tidal rivers to allow easy access for their ships. In the UK for example, shipyards were established on the River Thames (King Henry VIII founded yards at Woolwich and Deptford in 1512 and 1513 respectively), River

15 Maritime Finance Clusters

Mersey, River Tees, River Tyne, River Wear and River Clyde – the latter growing to be a pre-eminent shipbuilding centre in the 20th century.

3.2.9 Top maritime finance clusters often have the same attributes as successful financial centres. The Global Financial Centres Index uses a widely accepted taxonomy of the areas of competitiveness:

3.2.10 Top maritime finance clusters often have strong educational and training organisations. The availability of strong and well renowned courses encourages the development of a good pool of capable job candidates for firms in a cluster. The educational establishments are also a strong element in the reputation of a cluster.

16 Maritime Finance Clusters

3.3 Competitive Maritime Finance Clusters The top ten trading cities in the world account for over half of international shipping. Shipping is one of the most global of all industries, with mobile assets that can theoretically operate (almost) anywhere in the world. So why do ship owners choose to locate themselves in a relatively small number of cities?

Many of the top locations are major ports or large cities in key trading nations, and would seem to be natural locations for ship owners. However, not all of the cities are ports or major cargo destinations (or at least have not been for many years).

What these cities often have in common are well developed networks of owners, charterers, sources of finance and other service providers. These can act as magnets for suppliers and clients, which in turn attract competitors leading to the emergence of large maritime finance and service clusters. Most of these cities have a presence across a range of vessel types, though in some cases specialisms emerge, notable examples being Hamburg (container ships) and Oslo (gas and offshore), while some are boosted by the presence of a major owner in a particular sector.

The share of the biggest cities looks like it will be maintained by new ship deliveries over the next few years. The top 20 cities account for 63% of tonnage on order, with four of the top five also possessing the four biggest order books. Further down the list, London, Hamilton and Monte Carlo look set to move up the ranking, each hosting publicly listed ship-owners active in the new-building market over the past few years.

Maritime finance centres often form in places that are global financial centres in their own right and the top six financial centres in the Global Financial Centres Index are also successful maritime clusters:

Selection of Successful The Top Global Financial

Maritime Finance Clusters Centres

London London

New York New York

Hong Kong Hong Kong Singapore Singapore Tokyo Tokyo Seoul Seoul Antwerp Hamburg Houston Many others – the Global Oslo Financial Centres Index currently New Orleans researches over 100 centres Rotterdam Piraeus 17 Maritime Finance Clusters

One of the reasons that maritime finance clusters form in existing financial centres is that many of the important players are already located in these centres. Some of the key competitive issues of successful maritime finance clusters are mentioned below:

London is an interesting example of a maritime cluster and many professionals rate it as the leading maritime finance cluster in the world. London is one of the truly powerful maritime clusters that do not have a meaningful port in terms of overall volumes transported. Its position is partially due to its historical importance. The Port of London was a traditional shipping centre and acted as the hub for a huge trading empire. As a leading maritime cluster London is globally renowned for its expertise. It is estimated to support nearly half a million jobs and generate over £20bn for the UK economy. London acts as a genuine cluster with significant shares of worldwide maritime insurance and legal services. London plays host to key institutions such as the Baltic Exchange, Lloyd’s of London, the Admiralty and Commercial courts and many others. London’s key strengths lie in its continuing ability to attract the big banks and service providers. London is a leading global finance centre with strengths in its regulatory and business environment, the development of its finance offering, it’s relatively strong infrastructure, the flexibility of its labour laws and the availability of strong personnel.

New York is similar to London in that it is a world leading financial centre. More shipping companies are listed on the New York exchanges than any other exchange. New York is also at the centre of private equity, bond trading and alternative financing. These activities all provide capital to the maritime industry. There is a comprehensive maritime community embracing shipping companies, financial institutions, law firms, insurance, brokerage, arbitration, cargo handling and freight forwarding in New York. The ports in New York form the busiest East coast port region in the USA. New York’s key strengths are in many ways similar to those of London. It has a strong business environment, deep development of its finance industry, good infrastructure and a very well trained and competent workforce.

Hong Kong is the world’s eighth largest trading economy and its international trade is facilitated greatly by its maritime cluster which has a strong presence of ship owners, cargo owners and traders. Hong Kong has seen a continual expansion of its maritime services cluster, comprising amongst other elements, ship management, ship broking, ship finance, maritime insurance and law. The Hong Kong Government is establishing a new maritime body to promote Hong Kong's maritime services industry. The government is also enhancing the functions of the Hong Kong Maritime Industry Council to step up its efforts to foster the development of the industry and nurture talent, especially in high-end professional maritime services. In 2016 Hong Kong will join the Trade Development Council (TDC) to launch promotional events overseas and in mainland China to attract more high value-added maritime services companies to cluster in Hong Kong. Hong Kong’s key strengths lie in its commitment to the maritime sector, its strong business culture, its regulatory environment and the wide use of the English language which helps international communication.

18 Maritime Finance Clusters

Singapore is also a significant maritime finance cluster looking to get bigger and stronger. Singapore has had a range of incentives for companies to both register their ships in Singapore and to locate their shipping and marine related businesses there. There are registration fee discounts for each vessel flagged in Singapore. Tax exemption applies to a shipping enterprise’s income derived from the carriage of passengers, mails, livestock or goods and includes income from time charter and bareboat charter.

The Singapore government formed an Approved International Shipping (AIS) scheme aimed at building up a critical mass of ship-owners and managers which has attracted major international ship owners and ship operators to relocate to Singapore. AIS companies enjoy tax exemption (0% tax rate) on qualifying shipping income for ten years. This status is subject to a yearly review and a major review every five years. There is also a Maritime Finance Incentive (MFI) scheme that encourages companies to use Singapore as their capital and funding base to finance both their maritime vessels and sea containers. Eligible ship or container leasing companies, funds, business trusts or partnerships get tax concessions for up to 10 years on their qualifying leasing income. Another scheme managed by IE Singapore is the Internationalisation Finance System that addresses the need for international financing through a system of co-sharing default risks between IE Singapore and participating financial institutions.

There is also a Maritime Cluster Fund aimed at facilitating the growth of the maritime cluster in Singapore. The MCF is available for the development of manpower, local training infrastructure and capabilities within the maritime industry. Singapore’s key strengths lie in strong government support for the sector, incentives to attract ship owners, the presence of international banks and service firms, a good regulatory environment, ease of starting and running a business and the use of English. Singapore suffers from relatively low productivity from its ‘imported’ workforce and a lack of land with waterfront space which hampers development.

The maritime industry in Japan has had a significant influence on the country’s history and economic development. The Japanese maritime clusters remain internationally significant even though Japan is losing its market share to China and South-Korea. Being an island nation with few natural resources, Japan is very dependent on seaborne trade and has established secure sources of raw materials. Close co-operation with the banking system, a great number of players in the related industries, and reliable relationships between them make relationships within the maritime cluster effective. A few decades ago, Japanese ports like Kobe, Tokyo and Yokohama were among the world’s largest. Today these ports are losing out largely due to high costs. Trans-shipment costs in Busan are reportedly 40% cheaper than costs in the main Japanese ports. Japan’s key strengths lie in its reliable and long standing relationships within the international maritime sector, the close co-operation of the maritime cluster with the country’s banking system and the high productivity and domestic production rate in shipbuilding. The industry is held back by high costs and an ageing population.

19 Maritime Finance Clusters

Seoul has a strong maritime finance cluster supporting many ship owners that choose to operate from there. Both Seoul and Busan benefit from being in a strategic geographical position and Seoul’s key strengths lie in strong government support, strong national and international connectivity, the use of world leading technology and a high quality workforce. Recently, the position of Seoul as a maritime finance cluster has weakened largely due to four factors:  the three policy financial institutions (KEXIM, KDB, KSURE) which deal with a large part of Korean maritime finance relocated their maritime finance departments to the Busan Finance Center on November 2014;  the activities of many maritime sectors in Korea are currently slow;  the sustained weakness in the global shipping market has decreased orders of new vessels and the drop in fuel oil prices has decreased demand for offshore plants;  competition from Busan which is gaining strength in maritime finance with the relocation of KEXIM, KDB and KSURE and recent government policies promoting the maritime sector in Busan.

Rotterdam and Antwerp have strong maritime clusters with an extensive history in maritime- related operations. The Netherlands is a country is traditionally a trading nation with around 70% of its GNP being generated by exports. The Netherlands’ location at the centre of Europe has made it an important hub for transport across and beyond Europe. The country once had one of the largest merchant fleets in the world that ensured profitable trade with its colonies and other countries. The shipping industry in the Netherlands has been subject to a number of changes in the past two decades. The costs and rules regarding the nationality of the crew were made easier, and some national rules regarding safety and environment were simplified. Generally the focus in the Netherlands has been on encouraging Dutch ownership rather than vessels under a Dutch flag. The Netherlands was among the first to specialize in container shipping after the oil crisis in the 1970’s. The Netherlands’ key strengths lie in its geographical location, its port infrastructure, a high representation of international banks and service firms, its international networking and its offshore expertise.

Geographically Norway is a natural environment for the development of maritime operations due to its long coastline and large offshore oil and gas reserves. Norwegians control one of the world’s largest merchant fleets. The diverse range of vessels constructed in the country has helped the businesses to adjust to changes in the market. Efficient networks within the cluster have been a key source to success. Maritime-related actors are scattered all over the country, employing around 100,000 people in total. In fact the Norwegian maritime cluster consists of a number of specialised regional sub-clusters located in different parts of the country. The Norwegian maritime cluster develops and produces innovative technologies and specialist products. Foreign maritime companies have also found it beneficial to set up operations in Norway. Norwegian shipping companies are the main customers for the national shipbuilding sector, accounting for 75% of the orders. However, as the salary costs in Norway keep rising along with costs in the oil and gas industry, overall levels of

20 Maritime Finance Clusters

Norwegian shipbuilding have become a problem. Norway’s key strengths lie in a high level of expertise and technology (particularly in offshore, Arctic and LNG operations), it’s geographical proximity to an emerging sea route, a wide variety of operations, a well networked and dynamic cluster and strong political support. Norway is held back by high costs and relatively poor infrastructure in northern Norway.

The port of Piraeus in Athens is home to a tightly clustered group of over 800 ship operators. Greek ship-owners operate the largest fleet in the world, and the industry has a history dating back hundreds of years. The key factors to the cluster’s competitiveness are the high degree of firm rivalry fostered by the large number of small companies, a highly favourable tax regime, strong informal networks and institutions for collaboration, as well as the presence of specialized maritime educational institutions. There is a large concentration of technical offices or small firms specializing in technical consultancy, ship design and surveying in Piraeus. In total, there are nearly 200 marine consulting firms active in the city. Maritime service firms include ship brokers and agents (290 firms), specialized legal services (big firms and individual lawyers – with over 100 lawyers in the core area of Piraeus) and over 210 banks and firms specializing in financial services for the maritime sector in Piraeus.

21 Maritime Finance Clusters

4. BUSAN AS A MARITIME FINANCE CLUSTER

4.1 Will a Maritime Finance Cluster help Busan There are many different forms of cluster and these are often formed in areas that have significant natural dispositions for a certain type of commerce. Michael Porter claims that clusters have the potential to affect competition in three ways: by increasing the productivity of the companies in the cluster, by driving innovation in a particular field, and by stimulating new businesses in that field. According to Porter, comparative advantage - how certain locations have special endowments (i.e., harbours, cheap labour) to overcome heavy input costs - has become less relevant. Today competitive advantage - how companies make productive use of inputs, requiring continual innovation - is more important. Porter argues that economic activities are embedded in social activities; that 'social glue binds clusters together'. This is supported by recent research showing that, particularly in regional and rural areas, significantly more innovation takes place in communities which have stronger inter-personal networks. A business cluster is thus a location where enough resources and competences in a particular field reach a critical mass and create a decisive sustainable competitive advantage over other places in that field (examples include Silicon Valley and the DMC in Seoul). In the mid-to-late 1990s several successful computer technology related companies emerged in Silicon Valley in California. This led anyone who wanted to create a start-up company in this field to do so in Silicon Valley. The surge in the number of Silicon Valley start-ups led to a number of venture capital firms relocating to or expanding their offices in this region. This in turn encouraged more entrepreneurs to locate their start-ups there. In other words venture capitalists (providers of finance) and dot-com start-ups (in need of finance) ‘clustered’ in and around a geographical area. In the late 1990s, the Seoul Metropolitan Government developed the Digital Media City (DMC), a 135 acre complex, four miles outside the city's central business district in the Sangam-dong district. With Seoul's rapidly growing cluster of multi-media, IT, and entertainment industries, the Digital Media City, through its rapid agglomeration, helped to promote these industries and firms whose core business required use of ICT and media technologies. DMC grew and prospered as a global business environment, raising Seoul to become an East Asian commercial hub. The cluster created partnerships which used both human and social capital in the area. DMC fed the innovation of more than 10,000 small- scale internet, game, and telecommunication firms located in Seoul.

Governments and companies often try to use the cluster effect to promote a particular place as good for a certain type of business. Another example is Bangalore that has successfully used the cluster effect in order to convince a number of high-tech companies to set up business there.

22 Maritime Finance Clusters

The cluster effect does not necessarily continue forever. To sustain cluster performance in the long term, clusters need to manage network openness to businesses outside the cluster while facilitating strong inter-organisational relationships within the cluster. The development of the cluster in Silicon Valley increased crowding in the area and led to severe shortage of office and residential space. This in turn forced many companies to move to alternative locations such as Austin in Texas even though they would have liked to stay in Silicon Valley.

Generally however, clusters bring well recognised benefits and these benefits are why developing a maritime finance cluster is important to Busan. The main benefits can be summarised:  clusters increase the productivity of the companies in the cluster, by driving innovation in the field, and by stimulating new businesses in the field;  significantly more innovation takes place in communities which have stronger inter- personal networks;  clusters usually reduce costs;  clusters increase the pool of relevantly skilled labour;  clusters generate trust.

23 Maritime Finance Clusters

4.2 Strengths and Weaknesses of Busan - Developing a Maritime Finance Cluster A summary of the factors that are often present in successful maritime finance clusters is as follows:  a broad range of maritime activities and a body of people who understand the industry;  proximity to a large port (although not a pre-requisite);  success in attracting ship owners or those who exert commercial control of ships;  a good representation of the large global banks;  a strong representation of service firms - law firms, accountants, brokers, advisers;  presence of a ship building industry (although not a pre-requisite);  financial centre attributes – business environment, infrastructure and human capital;  strong training and educational facilities.

How does Busan rate in these eight factors?

Factors often Present in Successful Busan’s Performance in these Factors Maritime Finance Clusters A broad range of maritime activities A strong and broad mix of activities is and a need for people that understand present the industry Proximity to a large port (although not The port facilities and size are a great a pre-requisite) strength of Busan

Success in attracting ship owners or Very limited number of ship owners at those who exert commercial control of present, hence the cluster has no reason to ships, since Maritime Finance be develop in Busan

Clusters (of support functions) follow the business – i.e. the ship owners A good representation of the large Limited at present – most big banks are global banks represented in Seoul

A strong representation of service Korea has a very limited number of firms - law firms, accountants, brokers domestic professional service firms and and advisers few international ones feature in Busan A presence of a ship building industry There is ship building and maintenance (although not a pre-requisite) capability in Busan

Financial centre attributes – business Busan has a generally strong business environment, infrastructure, human environment and strong infrastructure, but capital and reputation it rates less well for reputation and financial sector development Strong training and educational Limited at present facilities

24 Maritime Finance Clusters

In addition to these factors there are a number of other elements that need consideration: Other Relevant Strengths of Busan Other Relevant Weaknesses of Busan Technology Direct air links outside Asia General cost levels Lack of Korean professional service firms Robust financial institutions Difficulty in attracting foreigners to live Korean work ethic International recognition

25 Maritime Finance Clusters

4.3 Priorities for Developing a Maritime Finance Cluster in Busan Based on the research outlined above, we believe that the following seven objectives should be prioritised by Busan’s policy makers:  Increase the number of ship owners based in Busan;  Increase the number of global banks with representation in Busan;  Increase the number of maritime professional service providers working in Busan;  Develop business environment attributes;  Develop human capital;  Develop Busan as an outward looking and connected city;  Develop Busan city brand.

4.3.1 Increasing the Number of Ship Owners It is clear from our research that maritime finance clusters rely on ship owners. Ship owners are the clients that attract banks, professional services providers and the other elements of a maritime finance cluster. Without ship owners it is very difficult indeed to attract the other players in a maritime cluster. Of the most important clusters, London is an exception in that it is not a major volume shipping venue.

Other maritime clusters have gone to great lengths to attract ship owners and Busan must now do the same. Currently Seoul is a major location of ship owners and yet Busan is a much bigger port. There are a number of strategies that have been pursued by other clusters to attract ship owners. Many of these have relied on offering short to medium cost reductions. Singapore, Hong Kong and Tokyo have all invested significantly in tax incentives or other cost facilitators to attract ship owners. Ship owners are fairly flexible about their locations and will tend to operate from places that offer reasonable costs, are easy places in which to do business and offer a good quality of life. We would certainly advise that Busan examines cost incentives. These incentives usually take the form of corporate and personal tax relief. Busan is however, already a lower cost location than Seoul or other competitors in the region.

Several of the other policy objectives outlined below will automatically make Busan a more attractive location for ship owners.

4.3.2 Increasing the Number of Global Banks in Busan Large international banks are becoming increasingly involved in maritime finance. They generally have an established presence in the large maritime centres such as London, New York, Hong Kong, Singapore and Tokyo. These banks also have a presence in Seoul. If Busan is to host a maritime finance cluster it must find a way of getting these institutions to form a presence in Busan. A good approach would be to contact the banks with subsidiaries or branches in Seoul and offer them an incentive to open an office in Busan for their maritime division or their maritime specialists.

4.3.3 Increase the Number of Maritime Service Providers in Busan

26 Maritime Finance Clusters

If the first two priorities are achieved then the specialist marine service providers will want to follow the clients and have a presence in Busan. These service providers are often part of large international law firms and accounting practices. They may already have offices in Seoul and may be attracted to having a presence in Busan in the same way as the banks.

4.3.4 Developing Busan’s Business Environment Attributes Busan needs to engender an institutional framework as transparent and efficient as possible. If Busan wants to host a maritime finance cluster then it needs to position itself as an international financial centre and a great place in which to do business. Effective and transparent institutions are a necessity in a modern business cluster. Improvements in the city and country institutions to speed up decision making would be a positive step towards enhancing Busan’s reputation as a business centre. Another step worth of consideration would be to set up a ‘community’ open to members of the cluster. This could be web-based with regular events and would aim to get professionals from the cluster to communicate with each other and feel part of a networked community that they could benefit from in terms of knowledge and social contacts.

4.3.5 Developing Busan’s Human Capital Busan needs to invest in the development of an environment highly attractive for maritime education and innovation. Busan National University is a world class Top 500 university, but it is only one of many such universities in Korea. Many of the leading Korean universities are ranked higher than the Busan National University and are located in Seoul or other cities13. Developing human capital is important for four reasons:  as a developed economy with somewhat unfavourable demographics Korea’s economic future lies in upgrading the value that workers can create by harnessing greater knowledge and innovation;  as a strategic port and a city looking to develop its share of business and financial services, Busan needs to develop its human capital base sufficiently to accommodate this growth;  combining financial and innovative prowess can engender entrepreneurship, which would in turn create a positive spiral of job creation, higher awareness and attractiveness and higher appeal to financial and human capital;  becoming an education hub is a great form of differentiation for the brand Busan. From an outsider’s point of view Seoul is a symbol of most things Korean – politics, business and industry. A second national city, such as Busan, can usefully differentiate and raise awareness of itself by focusing on a particular trait. Becoming a centre of maritime education (as well as innovation) would be a useful goal for which Busan is ideally suited.

We believe that creating a world leading educational establishment specialising in maritime activities and maritime finance with the brand, would encourage people to move to Busan to

13 http://www.shanghairanking.com/World-University-Rankings-2013/South-Korea.html 27 Maritime Finance Clusters

study. The students would tell others about the city and the educational opportunities. In time this would increase the availability of skilled personnel and encourage businesses to move to Busan.

4.3.6 Developing Busan as an Outward Looking and Connected City Busan should continue to lobby national government for more openness to foreign competition. A more open environment is in Busan’s interests as it will raise interest and bring more ship owners, banks and professional service providers to Busan. Is it also likely to reduce Seoul’s dominance as more marine businesses would explore the potential to open an office in South Korea. If they are in the marine business then Busan would be an obvious location.

Busan should continuously improve its infrastructure, particularly its ICT and air travel infrastructure. Several of the GFCI instrumental factors agree that South Korea has a very solid business infrastructure and good levels of technological development and IT adoption. This status needs to be maintained and improved upon. An international finance cluster and port necessitates high quality transport, energy and ICT infrastructure. Busan suffers significantly from not having a larger and more modern international airport with many international visitors having to travel to Busan via Seoul. Investing in the development of an attractive environment the clients, in this case ship owners, will help Busan become more cosmopolitan and significantly more welcoming to an international community. Fintech could also have significant competitive significance for Busan. There is currently a proliferation of new applications delivering financial services directly to devices. Fintech applications all need ledgers, and it is easy to conclude that there will be a proliferation of mutual distributed ledgers (MDLs, also known as “blockchain technology”). Ledgers track ‘chain of custody’ of assets. For example, shipping companies could use an MDL for all sorts of documentation tracking, bills of lading, letters of credit, load line exemptions, etc. The payment information, which might be going through SWIFT transactions, would be recorded in an MDL when it was relevant. SWIFT stays as it is, but the shipping industry gets new services. Busan has the potential to be a leader in this field and MDLs could revolutionise port community systems. There are certainly other areas in which Busan could claim thought leadership by holding conferences, workshop programmes, sponsoring publications and similar events. These could include:  engine emissions – a present environmental concern;  ballast damage – a present environmental concern;  noise danger to cetaceans;  cyber-crime;  the future of AI in shipping and shipping employment.

28 Maritime Finance Clusters

4.3.7 Developing the Busan City Brand It is now becoming essential for Busan to raise international awareness of its strengths. Busan is already ranked highly in the number of international conventions it holds. Busan is one of the best endowed cities that people in Europe and North America have never heard off. It should be remembered that it is the fifth largest container port in the world, has a comfortable living environment, and is less than an hour’s flight from Seoul. A sustained and comprehensive marketing campaign is now a priority for Busan. The city has been doing a good job at marketing itself but a significant expansion of marketing is needed in order to get Busan recognised as having the successful future that it undoubtedly deserves. The marketing should take the form of personal visits, meetings and lunches in some of the key centres where financial institutions are currently based. These should include European centres such a London, Paris and Frankfurt but also cities like Zurich, Milan and Madrid. Marketing should also take place in some of the other leading Asia centres.

Busan needs to publicise its identified strengths. When looking to enhance the reputation of the city, Busan should also aim to differentiate itself from other financial centres such as Seoul, Singapore and Tokyo.

Another form of marketing that is equally important is to engage with the organisations that provide international rankings (such as the instrumental factors used in GFCI) with the aim of getting Busan more greatly recognised. Contact with these organisations can yield good results. The factors in GFCI fall into two categories for Busan – those where Busan is included (but could be ranked higher) and those from which Busan is currently excluded. Policy makers in Busan also need to remember some of the basic rules of building a successful business city:  work with other cities internationally;  act for the long term and in the long term interests of the international financial community;  increase business and institutional transparency wherever possible;  continue to demonstrate skill levels and specialisations;  continue to publicise benefits and functions in Seoul, the rest of South Korea and internationally;  continue to specialise in what Busan is good at, and especially in maritime finance;  remember at all times that a city cannot host an international business cluster without international players;  remember that successful people want to work (and live) in successful places;  remember that the image and reputation of a city is vital.

We believe that efforts to implement the strategic priorities suggested will bring great benefits to Busan and help the city to achieve its objectives of hosting a successful, meaningful and thriving maritime finance cluster.

29 Maritime Finance Clusters

5. APPENDIX 1 – PERSONAL INTERVIEWS

5.1 Interviews We approached a number of very well-travelled financial and maritime professionals and managed to obtain interviews from ten of them. Interviews typically lasted between 20 and 25 minutes and covered the points shown below. The people we interviewed are:

Date of Name Position Organisation Interview

David Nordell Expert Maritime Security CSCSS 13 October 2015

Lambros Varnavedes Global Head of Shipping RBS 13 October 2015 Professor of International Heather McLaughlin Christchurch University 13 October 2015 Transport Director of Legal and Bolero (Trade/Shipping Paul Mallon 19 October 2015 Regulatory Affairs Finance)

Richard Saddler Chief Executive Officer Lloyds Register 20 October 2015

Tony Rice Partner (Maritime Law) Holman Fenwick Willan LLP 20 October 2015

Panos Pourgourides Partner (Maritime Law) Hill Dickenson LLP 21 October 2015 Director (Ex CEO of Doug Barrow CityUK 21 October 2015 Maritime London)

Jean Richards Director (Shipping) Quantum Shipping Services 22 October 2015

Nicholas Adams Director Olympic Shipping 28 October 2015

Ella Adams Shipping Expert Britannia Insurance 28 October 2015

We also conducted informal discussions with senior representatives from Maersk, Bolero, Thomas Miller, Charles Taylor, Lloyd’s of London, UK Port Advisors, JLT, BIMCO, Allianz, FdC, Hatlapa, and Liesz.

30 Maritime Finance Clusters

5.2 Personal Interview Questions The notes below served as an aide memoir for the interviewer. The interviews were allowed to flow freely and the exact order of questions varied.

Introduction: “Z/Yen has substantial expertise in studying the competitiveness of cities, clusters and financial centres. BEPA - the Busan Economic Promotion Agency – has a mandate to develop Busan, already a major port city in South Korea, into a maritime finance cluster. BEPA asked Z/Yen to conduct some research to help guide their strategy to develop a maritime finance cluster. This and other interviews form a vital part of this research.”

Your name?

Your title/responsibility?

Your company?

Where are you based?

What is the main area of business you are involved in?

What are the features of a competitive maritime finance cluster?

Can you give brief profiles of any developed marine finance clusters?

What are the factors that promote the clustering of maritime finance?

How important is it for Busan to develop a maritime finance cluster?

What are the current strengths and weaknesses of Busan relevant to developing a maritime finance cluster?

How should Busan aim to develop these strengths and improve on the weaknesses?

What measures are needed to develop a maritime finance cluster in Busan?

Are there any incentives, facilitators, organisations or networks that would be needed?