SHIP OPERATIONS & MANAGEMENT _________________________________________ LESSON ONE SHIP OWNERS, OPERATORS AND MANAGERS THE SHIP MANAGER There is much more to ship owning than simply buying a ship, finding the right cargoes and carrying them. In this course it will be seen how many different activities are involved in managing and operating ships and that the tasks require distinctly separate areas of skills; so separate that several experienced individuals have to be involved. The first decision that a shipowner has to make, therefore, is who to use for this work. The first thought would be to hire the necessary personnel and create all the requisite departments in one’s own company. This ‘in-house’ approach has much to commend it. The obvious one is close control by the owner of all aspects of the management activity. The amount of money tied up in the owning of a ship makes the idea of having day-to-day contact with all those involved in its care such an advantage that the decision seems obvious. Obvious that is until the question of cost is considered. Skilled managers quite rightly command high salaries and wish to be employed in positions which are sufficiently challenging to be satisfying. If, therefore, the owner has very few ships, the costs to be allocated against each ship to cover the management function becomes uneconomical. Furthermore, with only a few ships to manage, the senior personnel will not have enough work to fill a satisfying day so they will become bored and seek more challenging employment elsewhere. This is not a problem for the owners of large fleets. The management costs are spread over more units and thus will be at an acceptable level. Moreover, the higher income will permit the engagement of top-class staff with adequate support staff, all of whom will have plenty of work to fill their days. What, then, is the solution for the owner with a small fleet apart from the obvious one of buying more ships? The answer lies in the employment of the services of an independent ship management company. There are now many such companies based in different parts of the world. These companies contain all the different departments needed to provide an efficient service for which they charge a fee. Because of their size they are able to attract top-class executives and the large numbers of ships under their management enable them to enjoy economies of scale. This is another way of saying that their fees charged to each individual ship is reduced in proportion to the number of ships they serve. There is, of course a dilemma for the medium sized shipowner who will have to consider the benefits of using his own staff over which he has direct control and balance this against the economies in using a third party to manage his ships. Sometimes that problem is solved by sub-contracting only a part of the management function which is possible in view of the clear demarcation between the different activities in ship management. A particular aspect of this partial sub-contracting will be covered later. Another device that has successfully overcome the lack of economies of scale for the medium sized shipowner has been contracting to manage other owners’ ships by the same personnel as are employed in caring for the owner’s own vessels. The management agreement In view of the large amounts of money and capital assets involved, a very clear written agreement is essential if disputes and misunderstandings are to be avoided. Each management agreement is probably unique but the Baltic & International Maritime Council (BIMCO) has compiled a printed Standard Ship Management Agreement known as ‘ SHIPMAN 98’ which, even if it is not used in its entirety, provides a first class check-list of all the matters that should be considered in making such a contract. (See Appendix 1). Boxes 5 to 14 of Part I of this agreement identify all the different duties that may be sub-contracted by the ship owner to a ship manager and these headings are a useful index to the duties that must be carried out if the management is handled in-house. The clauses in Section 3 of Part II of the agreement expand on the duties to be carried out under each heading and between them offer a reasonably comprehensive guide to these functions. Students should familiarise themselves with these. Each actual management agreement will be individual because the ship owner may choose to handle some of the activities itself or use a different manager for example to handle crewing (3.1). The other clauses in the agreement relate to the way in which the management contract itself will be carried out. For example Clause 6.3 is most important as it provides that all insurance policies will be in the names of both owners and managers, this means that both parties have the benefit of the protection, in the Lesson on insurance it will become clear how important this is. Clause 7 provides for the separation of the ship owners money from that of the Manager. The manager is paid for its services by way of a Management Fee (Clause 8.) Clause 9 describes how the management of the vessels shall be budgeted and how the Manager will report to the owner on financial performance. Clause 11 contains some very important responsibility clauses. These should be studied but in brief, they provide that the managers are not liable for any loss etc. unless they were negligent, that the owners will indemnify them against such losses. The ‘Himalaya’ clause (11.4) provides that the manager is acting as the agent of the shipowner and has the same protection as the owner in respect of any applicable avoidance or limitation of liability. The remaining clauses relate to administration, termination, law and jurisdiction and are self explanatory. There is provision for a series of Appendices A to D which are not reproduced but which provide space for recording the vessels’ details, crew details, budget information etc. STRUCTURE OF SHIPOWNING & MANAGEMENT ORGANISATIONS A number of the issues dealt with in this introductory lesson will be dealt with later in the course in much greater depth. The purpose at this stage is to give a general overview of all those matters that fall within the overall responsibility of the ship manager. At the top of any ship owning or operating corporate structure will be a Board of Directors headed by a Chairman or President and a Managing Director. It is their task to determine the overall policy of the business and future direction that the company will take. Policy areas which will be decided the by top management might include: • The philosophy of the company's strategy. • The type and size of vessels used. • Fleet replacement policy (owning and chartering options). • Flag policy • The trades or routes that the company will serve. • In-house ship management or contracted out. • Financial performance. Having established the policy the board will delegate the management of these functions to various in-house departments or contract them out as appropriate The structure of ship management The way in which these practical services are dealt with and especially how the various functions are grouped together will differ, however all these different activities will need to be provided either from within the company or by contracting out to independent ship management or crewing companies. Acquisition of vessels Before the company can operate it must have some vessels under its control. 1. Outright purchase The traditional way of procuring ships is to buy them outright. The company will either use its own cash resources to buy the vessel or more likely obtain a loan or mortgage secured on the vessel. The very largest companies may employ their own naval architects and design staff to create the type and size of new buildings they want for the future or this function may be delegated to independent naval architects. More commonly companies may buy vessels built to a pre-existing shipyard design that will be ‘tailored’ to its needs. Other companies may concentrate on building up their fleet by buying second hand tonnage and for this purpose will use the services of a Sale and Purchase Broker. 2. “Finance based” long term chartered Increasingly shipowning companies are using more ‘innovative’ ways to procure new ships through intermediaries. This is because either the company does not have sufficient borrowing capability for all the ships it wants to operate, or an intermediary is in a better position to obtain tax benefits from purchasing ships than the operating company. In concept, the approach can be seen as analogous to leasing rather than owning a car. The ship owner may still be heavily involved in the design of the ship and may indeed have the ‘lifetime’ use of the vessel sometimes with an option to purchase after (say) 25 years for a nominal sum. A typical ‘tax driven’ approach is the German “KG” scheme where German individuals or companies who own vessels can secure favourable tax treatment, part of the benefit of which they can pass on through competitive charter rates to the liner company. Ships under these arrangements can be bareboat chartered (where the charterer is responsible for crewing, maintenance, etc.) or time chartered where the actual owner performs these functions. 3. Time charters Other companies will time charter suitable tonnage from other shipowning companies. Time charters are also used to acquire tonnage to meet short term commitments or fluctuations in the fleet, perhaps to replace tonnage during a dry dock programme or to meet a seasonal high level of demand.