There are many complex activities that are associated with managing and operating ships. These duties require precisely separate areas of skills and various skilled people have to be involved.
A shipowner has to decide who to use as a ship manager. The first consideration would be to hire the required employees and create all the necessary departments in the shipowner’s own company. This ‘in-house’ approach is called In-House Ship Management. The apparent advantage is the close control by the shipowner 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 ship’s care such an advantage that the decision seems obvious. However, experienced employees demand high salaries and wish to be employed in positions that are adequately challenging to be satisfying. If the shipowner has very few ships, the costs to be allocated against each ship to cover the management function becomes uneconomical. Moreover, with only a few ships to manage, the senior employees will not have enough work to fill a satisfying day so senior employees will become bored and explore more challenging employment elsewhere. This is not a problem for the shipowners that own large fleets. Ship management costs are spread over more units and therefore costs will be at an acceptable level. Furthermore, the higher income will allow the appointment of top-class staff with adequate support personnel, all of whom will have plenty of work to fill their days.
The solution for the shipowner with a small fleet appoint ‘an independent ship management company’, this approach is called Third-Party Ship Management. There are now many independent ship management companies based in different parts of the world. These independent ship management companies comprise all the different departments required to provide an efficient ship management service for which they charge a fee. Because of their size, these independent ship management companies can attract top-class managers and the large numbers of ships under their management enable them to enjoy economies of scale. Therefore, independent ship management companies’ fees charged to each ship is decreased in proportion to the number of ships they serve.
There is a perplexity for the medium-sized shipowner who will have to estimate the advantages of using his team over which shipowner has direct control and compare this against the economies in using a third party ship-management company to manage his ships. Sometimes this dilemma is solved by sub-contracting only a part of the management function which is possible because of the precise distinction between the different activities in ship management. Furthermore, a medium-sized shipowner may choose to establish in-house ship management and might contract to manage other shipowners’ ships by the same employees and triumphantly overcome the lack of economies of scale.
Ship Management Agreement
Large amounts of money and capital assets are committed in ships, therefore a very clear written agreement is quintessential if disputes and misunderstandings are to be avoided. Every ship management agreement is reasonably unique but the BIMCO (Baltic and International Maritime Council) has compiled a printed Standard Ship Management Agreement known as SHIPMAN 98. Even if SHIPMAN 98 is not used in its entirety, it provides a first-class check-list of all the topics that should be examined in composing such a contract.
Boxes 5 to 14 of Part I of the SHIPMAN 98 agreement identify all the various responsibilities that may be sub-contracted by the shipowner to a ship manager and these topics are a helpful guide to the responsibilities that must be carried out if the management is handled in-house. The clauses in Section 3 of Part II of the SHIPMAN 98 agreement expand on the responsibilities to be carried out under each subject and between each subject offer a fairly comprehensive guide to these duties. Each actual ship management agreement will be individual because the shipowner may choose to command most of the ship management activities in-house and outsource only a one ship management activity such as crew management.
Other clauses in the SHIPMAN 98 agreement relate to how the ship management contract itself will be carried out. SHIPMAN 98 agreement Clause 6.3 is most important as it provides that all insurance policies will be in the names of both shipowners and ship managers, this means that both parties have the benefit of the protection.
SHIPMAN 98 agreement Clause 7 provides for the separation of the shipowners money from that of the ship manager.
SHIPMAN 98 agreement Clause 8 pronounces how the ship manager is paid for its services by way of a Management Fee.
SHIPMAN 98 agreement Clause 9 defines how the ship management shall be budgeted and how the ship manager will report to the shipowner on financial performance.
SHIPMAN 98 agreement Clause 11 comprises extremely important responsibility clauses such as ship managers are not liable for any loss etc. unless ship managers are negligent, that the shipowners will indemnify ship managers against such losses. SHIPMAN 98 agreement Clause 11.4, ‘Himalaya Clause’ provisions that the ship manager is acting as the agent of the shipowner and has the same protection as the shipowner in respect of any applicable avoidance or limitation of liability.
SHIPMAN 98 agreement’s remaining clauses relate to administration, termination, law, jurisdiction, and are self-explanatory clauses. Furthermore, SHIPMAN 98 Appendices A to D provides space for recording the ship’s details, crew details, budget information, etc.
Structure of Shipowning and Ship Management Organisation:
Shipowning or managing corporate structure will be overseen by a Board of Directors (BOD) which is headed by a Chairman (President). The Board of Directors (BOD) determines the overall strategy and the future direction of the company such as:
- The philosophy of the company
- The type and size of ships
- Fleet replacement strategy
- Flag policy of the company
- The routes and trades
- In-house ship management or third-party ship management
- The financial performance of the company
After setting up the policy, the Board of Directors (BOD) will delegate the management of these functions to numerous in-house departments or contract these functions out.
Structure of Ship Management:
All ship management activities have to be performed either from within the company or by contracting out to independent ship management companies.
Purchase of Ships
Before a shipping company can operate, a shipping company must have some ships under its control.
1- Outright Acquisition
The conventional way of obtaining ships is to buy them outright. The shipowner will either use its cash resources to buy the ship or get a mortgage secured on the ship.
Large shipowners may employ their naval architects and design team to build the type and size of new buildings they require for the future or this duty may be assigned to independent naval architects. More commonly shipowners may acquire ships built to a pre-existing shipyard design that will be tailored to their needs. Other shipowners may focus on building up their fleet by acquiring second-hand tonnage.
2- Finance Based Long Term Chartered
Frequently shipowners are practicing more innovative ways to secure new ships through intermediaries. Either the shipowner does not have adequate financing 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 ship operating company. It is similar to leasing rather than owning a car. The shipowner may still be deeply involved in the design of the ship and may indeed have the lifetime use of the ship sometimes with an option to purchase after certain years. For example, a common tax-driven strategy is the German KG scheme where German individuals or companies who own ships can obtain advantageous tax treatment, part of the benefit of which they can pass on through competitive charter rates to the liner company. Ships under these agreements can be bareboat chartered or time chartered.
3- Time Charters
Some companies time charter suitable ships from other shipowning companies. Time charters are also used to acquire ships:
- meet short term commitments or fluctuations in the fleet
- replace ships during a dry dock programme
- meet a seasonal high level of demand
Ship Management’s Technical Departments:
Ships require continual supervision of structure and machinery, much of which requires a maintenance programme. A ship that is not maintained in a seaworthy condition will be unemployable. Seaworthiness does not simply mean that there is no danger of the ship sinking. Seaworthiness can be considered as also meaning cargo-worthiness. No matter how sound the hull of the ship is against springing a leak, and how sound the engine is to propel the ship if the hatches leak seawater into the holds, or the ventilation is inadequate so that cargo becomes damaged, then a ship is considered unseaworthy.
Dealing with the physical structure of the ship falls precisely into two distinct subdivisions which are referred to as:
- Deck Department
- Engine-room Department
Engine-room personnel is responsible for the main engine, auxiliary engines, generators, pumps, propeller shaft, propeller, etc. Deck Department personnel is responsible for the rest of the ship.
Traditionally, the engine-room department employs shore-based marine engineers frequently referred to as Engineering Superintendents. Engineering Superintendents supervise the routine operation of the ships’ main engine and auxiliary engines, keep a close watch on regular servicing, maintenance, and replacement of engine parts. Engineering Superintendents ensure that the correct grade and quality of bunker fuels and lubricants are provided. Superintendents should be on board of the ship in the event of engine breakdowns, major repairs, inspections, and overhauls.
Ship Management’s Deck Department is usually staffed by ship’s officers who have selected to work ashore. Deck Department’s employees have the title of Marine Superintendents. Marine Superintendents’ duties are concerned with maintaining the structure of the ship from supervising major surveys and repairs. Marine Superintendents ensure that the paintwork is kept in good condition.
Ship Management’s Technical Departments’ performance failure will swiftly run the ships into problems from classification being temporarily withdrawn to a catastrophe. As a result of International Maritime Organization’s (IMO) international conventions, most of the worlds maritime nations have enacted laws which permit Port State Control (PSC) which can detain a ship, until sub-standard articles are fixed
The International Ship Management Code of Practice (ISM code) is another international convention set by the International Maritime Organization (IMO) which sets out the minimum levels of training, administration, and management of ships.
Ship Management’s Storing Department:
Ship’s crew members have to be fed and world-wide purchasing requires professional skills particularly to achieve maximum economy without skimping. In a ship, food can be a remarkable problem because diverse citizens have various eating habits. Stores Department employees have to be aware of various crew members and religions. Ship Management’s Storing Department must be sure that sufficient stocks of special foods are bought especially if the ship is trading to ports where such items are unobtainable.
Ship Management’s Insurance Department:
After bunkers, insurance is a shipowner’s second-biggest item. Insurance for ships falls into two different categories:
- Hull and Machinery Insurance (H&M)
- Third-Party Insurance – Protection and Indemnity (P&I)
Hull and Machinery Insurance (H&M) is the insurance against loss or damage to the ship itself. The most famous provider of this type of Hull and Machinery Insurance (H&M) is Lloyds of London which is an organization that began in London in 1687. Insurance with Lloyds of London is provided by individuals known as underwriters who get their name from the way each person accepted a part of the risk by writing his name, one under the other. This system of individual risk exists to this day but the individuals tend to join together into syndicates. Access to the underwriters is only possible through a Lloyds Insurance Broker who acts on behalf of the shipowner in investigating the most suitable cover possible at the lowest premium. Insurance Premium is the money paid by the shipowner to secure the insurance cover. When the insurance broker has obtained sufficient cover the contract can be drawn up which is referred to as the Insurance Policy. The insurance broker’s income is a small percentage of this premium the rest is shared among the underwriters in proportion to the amount of the risk each one has accepted. Marine insurance is by no means the monopoly of Lloyds of London, many of the more significant insurance companies include this type of cover among their activities. Such insurance companies may cover the entire risk although it is by no means unusual for marine insurance brokers to arrange a policy which is partly covered by Lloyd’s Underwriters and partly by other insurance companies. When there is a ship casualty, a claim will be made against the insurance underwriters who, once again, have to be approached via the insurance broker through whom the insurance cover was arranged.
Another type of marine insurance is Third-Party Insurance. Third-Party Insurance covers such claims against the ship by a port authority for damage done by the ship hitting the jetty. Third-Party Insurance covers such claims by crew members for personal injury when negligence is alleged against the shipowner. Third-Party Insurance covers such claims by cargo owners when the cargo is not delivered in the same “apparent good order and condition” as it was when it was loaded. Third-Party Insurance covers any claim that is made against the ship by another person or company.
Historically, the underwriters were reluctant to offer this sort of Third-Party Insurance cover and so the shipowners joined together into groups and formed associations which to this day are still referred to as Protection and Indemnity Clubs (P & I Clubs). Protection and Indemnity Clubs’ (P & I Clubs) more formal title is Protection and Indemnity Associations. Protection covers the legal guidance that the P & I Clubs contribute to struggling against unfair claims. Indemnity covers the compensation to shipowners for any third party claims that have been legitimately made and settled.
Both Hull and Machinery Insurance (H&M) and Third-Party Insurance – Protection and Indemnity (P&I) need continuous concentration and inspection. Necessarily, most shipowners have several third-party claims outstanding, Ship Management’s Insurance Department is constantly working on these claims.
Ship Management’s Operations Department:
After performing the fundamental tasks of maintaining the ship in a seaworthy and commercially sound condition, the ship management’s operations department can assist the organization to ensure the ship carries out the duties to which it has been committed by the commercial department.
Ship management’s operations department will know from the technical departments that the ship is ready to carry out revenue-earning work and the commercial department will have explained what the commercial commitment is. Now, it is up to the operations personnel to carry out all the various duties required to fulfill this commitment.
Ship management’s operations department’s fundamental duty is to ensure that the ship is sent to the right place at the right time and then told where to go next. Ship management’s operations department determines how much bunker fuel will be the ideal quantity and at which port the ship should get bunkers.
Ship management’s operations department ensures that the port agents at all ports of call are advised and their responses acted upon.
Ship management’s operations department organizes crew changes at suitable intervals. Ship management’s operations department harmonizes the ship’s dry-docking with commercial commitments. In sum, ship management’s operations department co-ordinates all.
Ship Management’s Commercial Department:
Numerous shipowners sub-contract all the ship management duties except for the ship’s commercial activities. Therefore, fixing the ship with charterers, negotiating charter-parties with shipbrokers, or in the case of liners the marketing and documentation, are under the control of shipowners. In a ship management office, there should be an extremely close liaison between the commercial department and the operations department. When ship management encompasses the commercial management of the ship as well, this close liaison between the operations department and the commercial department is far simpler.
In some ship management companies, this close liaison between the operations department and the commercial department has advanced into such a close tie that it is hard to perceive where the exact divisions lie. The commercial department has the responsibility of ensuring that the business is as profitable as possible. Hence, the commercial department has to follow the prevailing shipping market conditions, much of the aforementioned information is received from the shipbrokers. Ship Management’s Commercial Department has to make voyage estimates to compare with other potential businesses. The Commercial Department should keep an eye on the following business after the discharging port. Commercial Department might ignore a cargo nearby and order to ballast to a further port for better business opportunities. In a ship management’s office, all the departments are important, however, the responsibility for the ultimate success of the enterprise rests with the commercial department.
Ship Management’s Crewing Department:
Despite all the technological improvements made in this century, a ship’s inevitable success or failure will depend upon its crew members. Therefore, ship managers must have a well-run crewing department.
Safety is not risking the lives of the people on board of a ship. Furthermore, safety is not risking a tremendous financial outlay in the hands of inexperienced crew members. Safety is also dictated from external regulatory bodies in the form of statutory manning levels where the well-defined number and competency of the crew members will be laid down according to the size and type of ship and will be enforced by the law of the country of registration. The flag of registration of the ship is crucial because the exact number and competency of the crew members will be laid down according to the size and type of ship and will be enforced by the law of the country of registration.
Crew members from some countries are much cheaper than others. Some countries insist on the employment of nationals of the flag of registry. On the other hand, some countries are more relaxed about the nationality of the crew. Crewing companies undertake to provide entire crews, many such crewing contractors directly supervise the training of the vital employees and ensure that crew members are replaced at the appropriate times.
In some countries where trades unions can negotiate required standards, ship manning levels also form part of a labor agreement. Certain standards are mainly dictated with the safety of the union’s members.
ITF (International Transport Workers Federation) is an organization to which many of the world’s transport unions are affiliated. ITF (International Transport Workers Federation) secures that shipowners do not misuse seafarers by paying them low wages and embarking seafarers in sub-standard ships. Particularly, ITF (International Transport Workers Federation) targets ships that are registered under flags of convenience. Some flags of convenience countries exert very loose control upon the manning levels or other matters of crewing competency. Flags of convenience countries attract the shipowners to due to lack of regulation of crew members and with little or no taxation demands upon the earnings of the shipowners. Flags of convenience countries’ attractions have to be checked against the risk of attracting the disapproval of such organizations as ITF (International Transport Workers Federation). ITF (International Transport Workers Federation) can immobilize a ship by the withdrawal of all shore labor.
Some Flags of Convenience countries have earned a poor reputation. On the other hand, several maritime nations have noticed that the strictness of their maritime laws might stimulate local shipowners to register their ships abroad. Consequently, these maritime nations have developed Second Registers called Open Registers. Norway, UK, Germany, Belgium, Denmark, France, and Spain have developed Second Registers (Open Registers). Many of Second Registers (Open Registers) particularly developed as a political decision. For example, the United Kingdom developed the Isle of Man as a Second Register (Open Register) as a result of the unique semi-independence of certain off-shore islands around the British Isles. The numerous UK registered ships have re-registered in the Isle of Man to avoid the obligation to deduct and collect Income Tax and Social Security payments on behalf of the government has remarkably reduced. Consequently, the shipowner’s decision as to where to register ships will have a notable outcome upon the performance of the crewing department. Second Registers (Open Registers) are more relaxed about the nationality of the crew members. The Philippines have built up a strong tradition of crew contracting. ISM Code sets out the minimum levels of training and administration. ISM Code has been adopted by the majority of the maritime nations.
Ship Management’s Accounting Department:
Prudent shipowners and ship managers should sign a clearly defined agreement on accounting procedures. Shipowners are entrusting to ship managers the management of capital assets presumably worth tens of millions of dollars but also allowing that third party ship manager to commit significant sums of money daily in the running of the ships.
Shipowners have to know if ships are making a profit or loss. The commercial department makes a voyage estimate when a new business is being analyzed.
To make a voyage estimate, three (3) costs have to be combined:
1- Fixed costs: occur whatever the ship is doing, whether it is sailing on a voyage, working in the port, or simply laying idle waiting for some business. A major item here would be amortization (or depreciation) which is the term used to cover the need during the working life of the ship constantly to write off the initial cost of the ship. Usually, a ship is paid for with money borrowed from a bank or other financial institution and the cost of the installments repaying the loan plus the interest charged by the lender is also essentially a fixed cost.
2- Operating costs: occur if the ship is active but has to be paid whether the ship is earning money or not; such as crew members’ wages is a typical operating cost. Fixed costs and operating costs are provided to the commercial people by the managers so that they have to be able to supply very accurate budgets of all anticipated expenses which they, or the owners themselves, break down to a cost per day.
3- Voyage costs: during the calculation of the voyage estimate which in turn will calculate the voyage costs which will be those expenses directly resulting from undertaking that voyage such as bunker fuel and port expenses. The voyage estimate will also provide an estimate of how many days the voyage will occupy and the ballast leg to reach the first loading place. The distance involved divided by the ship’s average speed will tell how many days at sea and the ship’s fuel consumption will indicate how much fuel will be used at sea. Loading and discharging rates will present an idea of the number of days in port. Now, we have a total daily cost figure and an estimated number of days which, multiplied by each other, gives the total estimated expenses for that particular voyage. The anticipated rate of freight times the number of tonnes (deduct commissions and loading/discharging costs) will provide a total income for the voyage which one always hopes will exceed the costs by a substantial amount as this is the gross profit.
Numerous voyage estimates are carried out to compare one piece of business with another before starting serious negotiations. During voyage estimation, one should also consider the discharging port where the nearby following business is available or whether a long ballast will be required.
Furthermore, the actual financial result of the voyage has to be presented to be compared with the original voyage estimate so that future voyage estimates are more accurate. So, there is a continuous accounting dialogue between ship managers and shipowners.
Ship Manager is an Agent
The shipowner is the principal and the ship manager is his agent. It is common for shipowners with several ships to register each ship in an individual ship owning company, probably even in various flag states for accounting or legal reasons. The ship manager, who may be part of that shipowner’s organization or maybe an independent organization, will look after the whole fleet. Infrequently, the ship manager can plead agency relationship with the shipowner to avoid responsibility for the shipowner’s debts, when the ship manager is part of the same business. The test must always be whether or not the ship management company has a reliable reputation in the shipping business.
Ship’s Port Agents
Every port of call, a ship requires an agent to make the necessary arrangements for the ship to enter and leave that port. A ship has to comply with the local regulations. A ship has pay for services provided, taxes, dues payable. In theory, the master can handle all such matters, however, except for some small coasters trading on regular routes, it is not practical. Therefore, it is the ship manager’s responsibility to choose and appoint the port agent. However, many charterers want to nominate the agent to be used by the shipowner, because, charterer wants an agent who has particular experience of the cargo or terminal used or to protect its commercial confidentiality. Whatever the reason it is a negotiated clause in the charter-party but it must be remembered that the nominated port agent is the agent of the ship, not the charterer. It is the agent’s responsibility to act at all times in the best interest of the ship. The shipowner has to keep the agent advised as to a ship’s movements and inform the agent about the ETA (Expected Time of Arrival). The port agent has to know when the next ship is due at the port. The shipowner and port agent will be in constant communication regarding crew changes to schedule and all the other expected requirements for the ship. Furthermore, the ship’s master contact the port agent to advise the ship’s requirements. It is important to give the port agent as much information as possible such as damage or illness etc.
The port agent contacts the ship with any information of which the master should be aware of. Correspondingly, as a ship leaves the port, the port agent contacts the agents at the next port of call, to advise the agent thereof any requirements about which there is not the time or the need to contact the principal.
Port Agents’ Duties:
1- Before Ship Arrival
- The Port Agent arranges a berth and discusses the cargo handling details with the terminal operator and stevedores
- The Port Agent books pilot and tug boats
- The Port Agent arranges customs and immigration officers
- The Port Agent arranges a doctor to attend for routine matters or in respect of illness
- The Port Agent arranges the delivery of supplies of food, water, bunkers, and stores of all kinds.
- The Port Agent prepares the required ship’s documents, eg inward and outward clearance, light and port dues, etc.
- The Port Agent collects mail for the ship
- The Port Agent arranges a government official or consular officer to be present if a crew member is going to be embarked or disembarked
- The Port Agent arranges the transportation to and from airports and railways stations for crew members arriving and leaving.
2- On Ship Arrival
- The Port Agent boards the ship promptly on arrival of the ship
- The Port Agent meets with the Master, Chief Officer, and Chief Engineer Officer to discuss their various requirements of the ship
- The Port Agent arranges cash to be brought on board for disbursement to the crew
- The Port Agent arranges to visit a doctor or dentist for crew members
- The Port Agent arranges well-defined details of loading/discharging of cargo such as mobile cranes for heavy lifts, space for hazardous goods, etc.
- The Port Agent reports insurance and General Average (GA) claims, if any, to the Principal
- The Port Agent arranges the attendance of surveyors for either cargo or ship damage, or both
3- During Ship Call
- The Port Agent communicates periodically with the crew members and cargo superintendent on proceeding cargo work
- The Port Agent arranges the signing of Mate’s Receipts (MR) and Bills of Lading (B/L) towards the end of cargo works
- The Port Agent arranges payments of bills and invoices for goods and services provided to the ship
- The Port Agent communicates regularly with the principal regarding the cargo progress and sailing prospects.
4- On Ship Departure
- The Port Agent obtains from the Master the ETA (Expected Time of Arrival) at the next port, informs the next port agent about the ship’s requirements
5- After Ship Departure
- The Port Agent advises the Agent at the next port of the ETA (Expected Time of Arrival) and notifies the requirements of the ship on arrivals such as water and bunkers. The ship may have to wait at anchor for a berth, and bunkers, stores, and provisions must be delivered by boat.
- The Port Agent advises the Agent at the next port about special medical requirements of the crew members so that there is sufficient time to make the essential arrangements
It is the responsibility of the Ship Manager to instruct the port agent in respect of all these matters promptly. The Ship Manager must set out and instruct the port agent regarding CTM (Cash To Master), stores, bunkers, etc on time.