Most notably, the International Shipping Bureau in Shanghai serves as the Far East regional service center for registration under the Panama, St. Kitts and Sierra Leone flags.
The country's spending on offshore flagging is still growing. The country flags 60% of its ships offshore - and provides over 40% of the labour on vessels sailing under Flags of Convenience (FOCs). Scott Bergeron, Chief Operating Officer at Liberian International Ship & Corporate Registry, says Chinese mainland owned vessels are increasingly looking to FOCs but are still learning about the process and benefits of offshore registries.
His calculations show 32 Chinese-owned vessels are flagged to Liberia, compared to 3,878 that fly the Chinese flag. Another 586 are flagged in Hong Kong. The Liberian registry gets two thirds of its business from Europe, with Greek ship owners accounting for 30% of that total, but with China accounting for an increasing majority of the shipping trade the country is making a point of turning that around.
Liberia and others like it are going beyond cost competition and increasingly competing based on the quality of their services. The threat of piracy and the specter of oil spills could shake up the rankings of martime services providers now having to ensure investors that they can provide safety without the backing of a large navy. China is also now asking that states keep more detailed registers to make sure safety and liability on their ships are all set on paper. These venues, which offer shipping services without the hefty taxes or stringent labor laws of larger states are trying, and some succeeding, to show that low costs don't necessarily mean poor service.
Pirates! "Vessels [attacked by Somali pirates] are typically registered in one state, owned by a corporation located in another state, such as the United Arab Emirates, and operated by a crew composed of nationals of several additional states," explains James Kraska, a lecturer in the International Law Department at the (US) Naval War College. This mishmash of flags has made it unclear who exactly is responsible for protecting the cargo, and the crew, on board the ships.
Kraska points for illustration to the bulk carrier the Sirius Star, registered in Liberia but owned by Aramco, a Saudi corporation. "Moreover, a piracy attack may have been interrupted by a warship from yet another state, all of which have different tactics and distinct rules of engagement."
Piracy is an increasing problem for shippers and likewise for shipping services providers. The International Maritime Bureau's Piracy Reporting Centre last year recorded 120 incidents in the Gulf of Aden off the coast of Somalia alone, netting USD 250 million in loot which has been funneled back into purchasing more powerful boats and weaponry. And despite the urgency of the situation governments and private service providers have only just begun to attack the problem head on.
The countries to which the vessels are flagged, he explains, typically lack the resources or willingness to prosecute the pirates - who, some believe are far more likely to target ships that don't carry the flags of major powers like the US. Not providing escort vessels or on-board armed security, FOC ships have depended on international protection. Lack of any international standards for defending commercial ships means that there are no explicit guidelines as to what FOC's should give in return for this protection.
China has taken this as a call to action, and a swipe against the credibility of offshore providers. Beijing sent two destroyers to help fight pirates off Africa's coast - the first deployment of the Chinese navy in those waters for centuries. Beijing has also tried hard to get Chinese-owned ships back under the national flag, offering an amnesty on its 26% tax on foreign-built vessels so that the bulk of its increasing energy and raw materials inputs are carried on Chinese-flagged vessels.
These new uncertainties are providing a competitive advantage for maritime services providers who take a proactive response to the problem. Faced with a new wave of scrutiny, Liberia has acted to offer training and advice for crews of ships bearing its flag. The Liberian Registry's Anti-Piracy Best Management Practices (BMP) is a computer-based course offered to ship owners to "avoid, deter or delay" pirates "and comply with the industry's best management practices".
Liberia, which remains among the top five FOC nations, appears to be setting itself apart from the competition, as has Panama. Still there is a long way to go, most flag of convenience nations "have neither the interest nor the ability" to mount a serious offensive against pirates, says Michael McDaniel, a piracy and marine law expert at US law firm Countryman & McDaniel.
Consumers of offshore maritime services are also paying attention to the problem, with the more reputable service providers like Panama and Liberia seeing an upswing in activity from China and other heavy users of maritime services. But just as a hapless reaction to drug smuggling forced Honduras to close its registry and a sloppy approach by Cambodia to smugglers' use of its registry has ruined the country's maritime services industry, a sloppy approach to this issue could spell big problems for registries in the future.
No accidents Fast-growing registries like Liberia claim to have the edge in quality over Panama which, while it remains the largest open registery in terms of ship numbers, has been blacklisted by nations signed up to the Paris MOU, the 1982 agreement addressing accidents and oil spills at sea. The Panama Maritime Administration (PMA) last year said it cancelled the registration of 73 vessels and would scrutinize hundreds of others to cut the number of detentions of Panama-flagged vessels in ports signed up to the Paris MOU.
As proof of its success, the PMA said the average detention rate fell from 9% (of all Panama-flagged vessels) in 2007 to 6% in 2009. Panama requires ships older than 20 years to be inspected before calling at a Paris MOU port.
The new seriousness could be reflected too by the price of a Panama flag in China. The Shanghai-based ISB, which represents the Panama registry in China, charges twice as much for a Panama flagging as it does for the Sierra Leone register - a Panama flag is also 50% more expensive than the St Kitts flag explains an ISB service agent, promising next-day processing of the application, provided there is no "sad history of your ship." Standards kept by offshore registeries like Panama have been an issue for China. Panama's main registry, known as SEGUMAR (which also oversees inspections of Panamanian flag vessels) had to explain to Chinese authorities why the refrigerated cargo carrier the Hengda 1 went down off the Fujian coast in 2006.
The Panama register appears to have tightened its relationship with Beijing, signing mutual recognition agreements with the China Classification Society and the China Corporation Register of Shipping. Chinese ship owners who wish to transfer their ships to the Panamanian flag will not be required to have them re-surveyed if the ships possess valid safety certificates from China.
Unfriendly environment Even with pirates, accidents, and active attempts by the Chinese government to get ships back under the home flag, the cost savings involved with flags of convenience far out weigh any risks. Freight firm Sea Land for example has said it saves USD 3.5 million a year on each of the 28 of its 63 vessels which it flags offshore.
Some things could disrupt this calculation though: having to pay for private sector security however could make the offshore option less economically attractive. Legal actions taken in the EU could also potentially cause troubles. EU legislators have gone after FOCs on the grounds that certain fishing operators were reflagging their trawlers to get around fishing quota laws. It's also not been lost on observers that the Deepwater Horizon oil rig is registered in the Marshall Islands, just as the MV Prestige was flagged in the Bahamas - both states are leaders in the field and thus ready targets.
The 1982 Paris Memorandum of Understanding allows international ships to be inspected and impounded by authorities at overseas ports. Similarly, an OECD report in 2003 called for more transparency on the beneficial owners of ships sailing under FOCs.
No quick get aways Yet FOCs have usually beat the heat, partly because international legislation aimed at FOCs has thus far been poorly enforced. Numerous UN agreements such as the UN Convention for the Regulation of Ships suffer from shoddy implimentation. International Maritime Organisation and International Labour Organisation rules targeting FOCs on labor and environmental grounds such as SOLAS and MARPOL have been ignored without consequence by offshore registers.
The difficulty implementing strong protections at FOCs could be less a matter of will and more a matter of means. Anthony Rogers, director of the LLM Maritime Law course in Piraeus, Greece says FOC states in many cases simply lack the real competence that is necessary to implement the conventions they have signed. Ships flying their flags may operate without any proper supervision or guidance on security or other issues. Some FOC states, like Mongolia, have little expertise in shipping and usually have more pressing economic issues to deal with. The current climate is thus strengthening of the better offshore providers who can contribute to solving the problems faced by shippers, without racking up costs.
Local solutions The problems facing international shippers requires local responsibility for protecting your cargo, which starts with picking quality crews and service providers. With better training of crews, some ships have been successful in beating off pirates - counter measures by the Panama-flagged MV Nada container ship helped beat off pirate attack near Yemen-Somalia border according to the European Union Naval Force. The ship made its way to safety by increasing speed and conducted other counter maneuvers like releasing water guns and sounding horns.
No matter what the problem, flags of convenience are here to stay. Supporters of the open registry system claim it boosts international trade and the world economy by reducing shipping costs and increasing efficiency in the industry. They criticize the monopolistic nature of national registries and point to competition between the registries as improving service for shipowners, while also waiving taxes.
The American Enterprise Institute notes the open registry system has brought huge efficiencies compared to the slow, bureaucratic approach of national registries like the US or China. And the consequence of the OECD and the International Transport Workers Federation using increased political muscle on national registries will just be to keep work practices expensive and unwieldy.
