Flag of Convenience : can Sri Lanka nurture this ‘golden goose’ ? | Sunday Observer

Flag of Convenience : can Sri Lanka nurture this ‘golden goose’ ?

23 April, 2017

In the last 2 years Sri Lanka has taken considerable efforts and is slowly moving towards her desire to be the next Maritime Hub.The government and other maritime stakeholders are trying their best to put their heads together in realizing this dream.

I too would like to contribute towards this initiative and feel that so much can be achieved if we can nurture this “golden goose” called Flag of Convenience. I hope with this article I am able to make you realize the great opportunity that lies ahead.

To give readers a platform to judge this opportunity, I would like to do a bit of history walk so that we are on the same page.

Customarily, how a bus, car or a bike needs to be registered before putting it into service - a ship too needs to be registered, in the country where her owner lives. The ships that sail the high seas are considered as an island of that country where she is registered. The Captain of the ship is empowered by the registering country (Flagstate) to act on their behalf and enforce national law and order. This has been the practice for generations.

Forbidden law

However, in 1922, two USA registered passenger ships wanted to serve alcohol on board to its passengers. But, those days it was a period of prohibition in the US, as WW1 was just over. The ships’ owner found it hard to convince the passengers and found this law as a huge loss to the cruise business. But, very soon the ship’s owner realized that their neighbouring country, ‘Panama’ had no such forbidden law and also was open to a foreigner registering his ship in Panama.

Though this ship owner was an American national, he went ahead and registered both his passenger ships in Panama for the sake of CONVENIENCE.

From this day onwards the term “FLAG OF CONVENIENCE (FOC)” was born. Now, there was a happy ship owner / happy passenger / happy FOC country.

Very soon Panama found this as a good opportunity to bring home foreign exchange and went all out in attracting ship owners from various countries, to come and register their ships in Panama. Ship owners were happy and found the registration cost much cheaper than their own country.

Panama was soon followed by other countries like, Liberia, Monrovia, Marshal Is, the Bahamas, Malta, Cyprus, Antigua, Bermuda, St. Vincent, Cayman Is. and many more. Today, there are about 35 FOC countries, with Panama holding a lion’s share.

Rochdale’s criteria

If statistics are to be believed, there are about 50,000 merchant ships in the world, of which almost 75% are registered with Flag of Convenience countries!!! I am sure you will agree with me that these figures justify, that ship owners indeed prefer FOC - than their own country registration, due to lesser registration cost, less annual tax, ease of crewing and a few other criteria, described under Rochdale’s criteria.

The flip side is that these FOC countries after registering these ships and baptizing them as an island of their country, forgot a very important point. They forgot, that they are also supposed to periodically inspect the island and ensure that the island was safe and operated as per International Maritime Organization (IMO) standards.

They merely pocketed the foreign exchange and let the ship owners do what they wished with their ships. As we all know the ship owner is basically a businessman, with a tendency to cut cost and save money by avoiding supplies, maintenance, etc. Eventually, the so called Flag of Convenience ships slowly became like a time bomb – ready to explode.

Global outrage

After a series of accidents on board, such ships resulting in the loss of human lives, eyebrows were raised and it became a global concern. Fearing this global outrage and a threat to their future business, the ship owners decided to get the ships further inspected / surveyed by a 3rd party organization.

That brings in the Classification Societies registered under IACS. Thereafter, a classification society was deputed by the FOC countries to inspect and certify ships on their behalf. Nevertheless, a few ship owners continued to find loopholes in the system and to cut corners and save money. As a result FOCs also earned the name “Flag of Shame”. IMO further requested the Port State Control of each country to be vigilant and inspect ships calling their port and ensure that sub-standard / unseaworthy ships are not allowed to leave until shortcomings are mended. Below is a list of FOCs that are being targeted.

It is understood that the annual revenue collected from all ship owners towards registration, ship’s annual taxation, certification, Classification Society surveys, crew certifications and other ancillary services run to the tune of 5 billion US dollars every year!!!

My observations:

Survey all the FOC countries and locate them on the world map. It is evident that they are situated in one corner of the world, where many ships don’t even trade. Also, most of them are island nations in the Pacific / Atlantic or situated in the African Continent. Most importantly, they hardly have any maritime infrastructure!!! I am sure you will agree that these guys are earning a lot of money by doing absolutely nothing!!!

I feel, Sri Lanka, situated in the middle of the International East West shipping route can be the answer to all the above problems. It is also true that any sea borne cargo from the Far East to Europe or US, has to pass via Sri Lanka.

Sri Lanka has a robust maritime infrastructure, with Director General of Merchant Shipping (DGMS) at the helm. If backed by Navy and Coast Guard, together they can form a perfect Flag Of Convenience country. With the civil war over, economy looking brighter and Sri Lanka aspiring to be the next Maritime Hub should definitely take this FOC business seriously. Besides, there is no capital investment in this business. Sri Lanka already has a fully operational DGMS. So, as and when the number of ships increase, Sri Lanka can improve the infrastructure accordingly.

It is a fact that an average Sri Lankan has better awareness, IQ levels, skills; and most of all the Sri Lankan speaks good English, than many in developed countries. So if the government, authorities and people of Sri Lanka come together, I am sure we can do a better job than all other FOC countries put together. Our quality of work will be recognized as we will be competing with countries that are called “Flag of Shame”.

If my prediction is right, Sri Lanka should be eyeing 25% of the market share by 2025, an earning to the tune of 1.25 billion USD per year without any capital investment. And this is just the beginning.

Apart from the revenue generated through vessel registration, this adventure will also generate more business to our ports by increased vessel calls for inspection, dry docks and workshops through ship repairs, airline industry, ship spares / stores supply from manufacturer / training and academics, and other ancillary services. It will also generate employment to the youth.

Prima-facie reason

Sri Lanka has already obtained the FOC status many years ago, which means the launch pad is already there!!! Unfortunately however, we have not been successful in attracting many ship owners to register their ships here.

The prima-facie reason being, shipping in the country is still not open to 100% foreign direct investment. Sri Lanka still requires the foreign investor to engage a local partner, who will command 60% of biz. And Sri Lanka was lagging behind in ratifying some important IMO conventions, mandatory for a Flag of Convenience State.

However I am glad to note that the new government has recently taken steps to ratify important IMO conventions and are exploring the possibilities of liberalizing the Shipping industry in the near future. I personally feel it would be a right move and the government should not delay any further. At least, the government could make an interim arrangement and allow 100% FDI for ship registrations only.

So, we have a golden goose, ready to lay golden eggs for us. I am sure if we nurture her with love and care, she will lay sufficient golden eggs every year and slowly wipe away our tears. Also, I feel, if we do not capitalize on this golden opportunity today, someday our next generation will read this paper clip and ask the question – “Why did we miss this golden opportunity?, the golden goose was at our door step!!!”.