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SPECIAL REPORT SHIPPING: Small island, big industry.

Author:

Patrick Dewhurst

IN SHIPPING circles there is a saying - that if the world's fleets stopped moving, half the world would starve and half the world would freeze in three days.

It is a nod to an industry that, quietly and out of sight of most on dry land, carries out some 90 per cent of world trade, playing a vital role in virtually everything we eat, wear or consume.

Another fact few might be aware of is that within the industry, Cyprus is in several ways a world leader.

For example, at any one time, up to 2,300 of the Cyprus Shipping Chamber's (CSC) ships, totalling 46 million tonnes and belonging to 140 member companies could be on the high seas.

Altogether, these member companies employ around 4,500 (mostly Cypriot) staff on shore and around 55,000 staff on board ships.

In short, Cyprus is a big player in the shipping world.

As communications and public works acting permanent secretary Alecos Michaelides said this week: "The fleet is the tenth largest in the world and the third in the European Union. At the same time, Cyprus is one of the largest ship management centres in the world and the largest in Europe."

And yet it is an industry hindered by politics. Of the 2,300 member ships, only 1,000 ocean going ships, weighing in at around 20 million tonnes, actually sail under the Cypriot flag because Turkey restricts Cyprus-flagged vessels and vessels serving the Cyprus trade, by not allowing them to call at Turkish ports.

Without this "Achilles' heel", as CSC Director-General ThomasKazakos puts it, it is estimated almost all 2,300 would likely sail under the Cyprus flag, in turn making it the third largest in the world.

If all the ships in my association, wholly a trade organisation, were under the Cyprus flag then I'm sure it would have been the third largest flag in the world in terms of tonnage, Kazakos said.

All this makes the CSC an important global player, but it is also a key contributor to the Cypriot economy.

The industry breaks down into two categories: ship owning and ship management, which is further broken down into technological management (i.e. nuts, bolts and engines), crew management, employment and operations, such as cargo loading.

Cyprus has a strong grounding in both. To give a rough idea of its contribution, conservative Central Bank estimates of ship management's contribution to the GDP is 4.8 per cent. When coupled with the Central Bank's imminent assessment of ship owning contributions to the economy, the total is expected to exceed six per cent this year: around $1.5 billion.

"This gives a strong indication of how important it is to have shipping industry residing in the country," said Kazakos.

The CSC doesn't just punch above its weight in terms of fleet size: Cyprus can boast Europe's most advanced shipping tonnage taxation systems and, this weekend, will bring together shipping executives from 35 countries for one of the industry's largest conferences.

The biennial CSC's Maritime Cyprus conference in Limassol, entitled "Q's in Shipping" will be the 12th since 1989 and will focus on three key questions facing the industry this year. The first: Is it safe enough? The second: Is sustainable? The third: Is there enough confidence in the industry?

In attendance during the three days will be some of the industry's 'top guns', including the International Maritime Organisation (IMO) Secretary-General, Efthymios Mitropoulos, EU Commission Maritime Transport Director Fotis Karamitsos and EU transport commissioner Siim Kallas. Forty speakers will attend in all.

The event will even lure out the elusive President Demetris Christofias for the launch.

For Kazakos, the conference is an opportunity to showcase Cyprus' past achievements, present activities and future challenges.

Chief among the achievements is the novel tax system, introduced in March 2010, which allows customers to pay tax based on the tonnage of their ships, instead of the traditional method of taxing the profits, which means that for the lifetime of the ship, the tax rate remains steady.

And while it doesn't sound too exciting, it is likely to be a big draw for many more firms yet, ultimately boosting the chamber's members and GDP contributions, and as one observer said: "is expected to assist in the continuing rise of Cyprus, whose ship registry now ranks 3rd in Europe and 10th internationally as a reputable, reliable and tax-efficient shipping centre."

The history of shipping

By Patrick Dewhurst

IN CYPRUS, shipping is almost as old as time itself but it has taken a while to drag the industry into the shape it is in today

TAKE A look at Cyprus' firmly established shipping owning and management industries, and you could be forgiven for thinking the island has always been at the industry's forefront.

And while the island's shipping industry is no doubt millennia old (with French wines appearing in Roman wrecks, and Kyrenia port even cropping up in a Shakespeare play) it was not until relatively recent times that it emerged as a world leader.

The current shipping industry could be said to have started in 1963, after the island's independence, when the ships registry came under the ports authority and three key pieces of legislation paved the way for the industry.

By 1978, this had grown to such a degree that the government established a separate shipping department, and from that point on, according to the current shipping department head Serghios Serghiou, "there was a tremendous increase in both numbers and tonnage (of ships registered in Cyprus)."

Cyprus, however, had begun to develop a reputation as flag of convenience, meaning that it registers ships and companies other than of its own nationality - attracting several less scrupulous ship owners.

Conscious that it was developing a bad reputation, the authorities began to shift their focus from increasing numbers to improving safety and quality of ships that were registering.

By the late 1970s, under the watch of President Spyros Kyprianou, the shipping department began to establish the island as a centre for operations, not just ownership.

According to Arthur McWhinnie of ship management firm Bernhard Schulte, the first offshore ship management firm on the island in 1972: "We chose Cyprus because of the high level of education among the population, the efficient communication systems already in place and its strategic geographic location."

He added: "Our Cyprus Service Delivery Centre initially offered crew management services, which soon evolved and upscaled into providing both full service and technical management to our clients."

According to Serghiou, the transition into offering the extra services "was the result of conscientious and hard effort, and the secret of our success was the close cooperation between the shipping department, government, industry and lawyers."

The next great leap forward would come with the election of AKEL backed George Vassiliou to President in 1988, who put Cyprus on the world shipping stage by developing the ship management side of the business.

Eager to boost the industry, Vassiliou would never refuse to give a speech on shipping. He told the Sunday Mail: "Cyprus, as an island, has a history of being a shipping centre in the known world... but (by the 1980s) it had fallen back and so we took initiatives to (develop it)"

His initial bids to attract ship managing firms were successful and, as he puts it: "(The Cyprus shipping industry) changed dramatically and (ship management) was instrumental in putting it on the map.

"The secret was that it was open to all, and I was pleased that the ideas and policies I proposed were followed."

Vassiliou would continue to play a role in the development of shipping, and as chief negotiator for Cyprus' EU accession at the turn of the millennium, took various corrective measures to improve the Cyprus flag's reputation and close the EU's transportation chapter.

These included, for example, hiring 38 inspectors in 20 ports around the world and identifying 100 ships in need of safety inspections. Several of these were later deleted from the registry.

A decade on and the fleet went from being the sixth largest in the world to third, after Singapore and Hong Kong.

In those intervening years, Cyprus' reputation received a boost when it was moved from the Paris Memorandum of Understanding (MOU) on port state control's black list to the grey list, and two years later to the white list. The Paris MOU, a coalition of 22 maritime nations, monitors ship detention rates through port state control and compiles a black, grey and white list each year detailing the number of detentions for various countries flags around the world.

The aim of the Paris MOU is to at eliminate the operation of sub-standard ships through a harmonised system of port State control.

Entry to the EU in 2004 was also a major boost. On accession, Cyprus, with Malta and Greece, accounted for more than 75 per cent of Europe's shipping fleet and the island's 25 per cent stake hoisted the EU's global share to 15 per cent.

The Cyprus Shipping Chamber's efforts to improve the flag are still continuing however, with pending legislation to tackle the scourge of maritime piracy: something not seen in Vassiliou's day.

"In life, you can never rest on your laurels," Vassiliou said. "You always have to adapt to change."

What is required now is convergence among the international community, and the deployment of modern technologies to tackle piracy.

Onboard armed guards to fight against piracy

By Patrick Dewhurst

ONE OF the largest issues currently facing merchant shipping - and the main theme of the first day of this weekend's maritime conference in Limassol - is piracy, an issue the Cyprus flag hopes to combat with the possibility of introducing armed guards on its vessels.

"Piracy, for shipping, is like an infection. It is a plague" said Cyprus Shipping Council Director-General Thomas Kazakos "...and so the first day focuses on how we counter piracy, and the second issue, linked to that, is the human element because the ones affected the most are the captured seafarers... As we speak 30 ships are under capture and 600, more or less, crew are being held hostage."

The International Maritime Organisation set piracy as the theme of this year's World Maritime Day, celebrated on Thursday, to highlight the efforts it has made over recent years to meet the challenges of modern-day piracy and, in so doing, generate a broader, global response to eradicate it.

The IMO Action Plan aims to increase the pressure at a political level, to secure the release of all hostages taken by pirates, review and improve the guidelines for maritime administration and seafarers and to promote compliance of the maritime industry with the measures that ships needs to take.

And piracy is a problem that is getting worse. During the first six months of 2011, the International Maritime Bureau's Piracy Reporting Centre (PRC) reported 266 pirate attacks worldwide, up from 196 incidents during the same period last year.

Two Cyprus flagged ships have been hijacked this year. The first, the MV Eagle was hijacked in the Gulf of Oman on January 17 and the second, the Mattheos 1, was hijacked off the coast of Benin on September 14.

The report showed more than 60 per cent of the attacks, the majority of which were in the Arabian Sea, were carried out by Somali pirates, who currently hold 16 ships and 301 hostages.

According to President of the Cyprus Shipping Chamber Captain Eugen Adami piracy is estimated to cost the global economy US$12 billion per year, although Kazakos believes it is significantly higher. Excluding ransoms, he puts the cost at $20 billion annually.

The ships themselves range from $20 million to several hundred million dollars.

The situation has now reached such a critical stage that even loyal and well-trained sailors are reluctant to venture into the piracy hot spots for fear of pirates.

Kazakos says piracy can be resolved in three steps: firstly, there needs to be an international convention that legislates for nations to deal with piracy.

But, given the timeframe for achieving this and the urgent need to address the problem now, legislators should instead aim for a medium term strategy that allows countries to amend their law and due process, for example by fast tracking piracy prosecutions of pirates arrested and brought into Cyprus.

"This is also something that is going to take time," he says, "and so in the short, immediate, term -- and this is what we have just done -- the aim is is to introduce the controlled and proper use of armed guards on board ships."

Until now, Cyprus flagged ships have legally been considered an extension of Cypriot territory and so follow the laws of the land - and with no law on non hunting or military/police guns, they have so far been illegal on board ships.

Under the terms of a new law, which is pending approval by the House, Cyprus flagged ships will be able to deploy, legally, private security firms to deter pirates, adding a level of security over and above some other shipping chambers and potentially rallying more shipping firms around the flag.

"We kept it very quiet for several months... but now (a Cyprus flag shipped) can hire professional and properly certified armed guards, under strict state of the art legislation, to prevent a ship being attacked and boarded by pirates."

Beyond this, according to website maritime-executive.com, the Joint Cyprus Shipping Association (JCSA) is now working closely with the Cyprus government to produce a legal framework to regulate the use of private armed guards, as well as to allow for the arrest, prosecution and sentencing of captured pirates in "fast?track" procedure.

Cyprus' ship management industry is tied to Germany's export industry

By Kypros Melas

THERE are no exact statistical figures available about the contribution of the shipping industry to Cyprus' overall economic output, a Central Bank of Cyprus official said. But, the ship management survey prepared by the central bank, which is based on revenue flows, provides insight about the industry's role in the economy.

The Cypriot ship management industry revenues last year accounted for 4.8 per cent of gross domestic product, according to the Central Bank of Cyprus website. This figure is equivalent to e1/4838 million, making it one of the largest single contributors to the balance of payments which records the transactions between Cyprus and the rest of the world. Inflows from transport, which include ship management, were e1/41.5 billion in 2010, and were just behind inflows from other business services and travel, which were e1/41.8 billion and e1/41.6 billion respectively. While inflows from transport in the balance of payments also include revenue from ship ownership, there are no exact figures available, the central bank official said.

Cyprus is one of the largest ship management centres in the world according to the Department of Merchant Shipping. It manages 20 per cent of the world's merchant fleet and employees more than 40,000 sailors.

This makes the Cypriot ship management industry one of the most globalised industries of the economy, with its vast revenue deriving from managing ships under foreign flags, which account 95 per cent. Two in three euros in revenues for the ship management industry, or 63 per cent, came from Germany last year, followed by a large number of other countries such as Latvia, Switzerland, Vietnam, Russia, the Netherlands to name a few, according to the central banks' ship management survey.

"Germany plays a dominant role for Cyprus' ship industry and this does not have to do only with the relocation of German owned companies to Cyprus in the seventies and eighties," the central bank official said. "As Germany happens to be an export oriented economy, transporting its products to overseas markets is essential for its industry".

As a result, the revenues of Cyprus' ship management industry depends on factors affecting demand for goods made in Germany, such as the exchange rate of euro vis-a-vis the US dollar or economic growth in major economies, he said.

Still, even as Germany continues to play a dominant role for Cyprus' ship management industry, other countries with a comparably low market share such as Norway and the UK are showing growth in revenues which indicate the existence of market opportunities, according to the central bank's ship management survey.

The services which ship management companies offer include crew management, which accounted for almost half of total revenue for Cypriot companies last year, and technical management which made one in ten euros earned. Four in ten euros in revenue came from full management services, according to the ship management survey.

Can shipping activities be sustained?

By Patrick Dewhurst

WITH THE new tonnage tax system, armed guard legislation and pending amendment to piracy convictions, the Cyprus Shipping Council's future looks bright.

Yet the industry also faces some choppy waters ahead, in the form of volatile energy prices, economic crises, dwindling supplies and looming climate change.

The second day of this weekend's conference in Limassol will therefore focus on the medium and long term future of the industry, asking whether current shipping activities are sustainable.

Despite being the cheapest and most eco-friendly form of goods transport, CSC Director-General Thomas Kazakos feels that the industry can take more steps to ensure its - and the environment's - long term viability.

To this end, conference organisers have gathered a host of experts to discuss two themes: Energy and Long term sustainability.

The energy panel will include a Houston University engineering professor and a Norwegian risk management firm CEO, while the sustainability panel is set to include International Chamber of Shipping secretary-general Peter Hinchliffe and IMO marine environment protection committee chairman Andreas Chrysostomou.

"In the medium to long term we are looking at energy markets and the environment. (CSC ships) also carry oil gas so we need to look at what are energy market trends, and environmentally - never mind that we are least polluting, we want to makes sure we cause as little environmental damage as possible" Kazakos said.

Asked about the environmental issues, he said the CSC does care for the environment and consciously cares for it in terms of construction and fuel usage, but said environmental regulations were decided at an international level.

Finally, on the third day, panellists will turn their attention to the more general topic of confidence in the industry starting with a debate on forecasting and moving on to recovery from the crisis.

"We try to have a nice mish-mash of speakers, such as Michael Sarris, not in his capacity as former finance minister, but as a director at the World Bank." Kazakos said.

"As a fully globalised industry, shipping is very much influenced by the economy and during 2008 and 2009 the CSC saw an 80 per cent drop in freight rates."

Thankfully this is now recovering but it has taught a valuable lesson. As Kazakos explains: when an economic crisis hits, states will halt imports, use up their own supply, and then inevitably resume importing after a time.

This is why since 2010 a partial stabilisation and upward trend has been seen. "It has been slowly and steadily positive, and we are not out of danger but freight rates have improved. We went through a bad time worldwide and now we have steady expectations of returns.

Beyond the conference, CSC will resume its lobbying of the government in a bid to further promote the chamber abroad and eventually, Kazakos hopes, see the establishment of a shipping minister or permanent under secretary.

"Having dealt with taxation, what we are now saying to the government is to focus on bringing in higher quality ships, and spreading the gospel."

Kazakos likens the process of attracting customers to the baseball park in the Kevin Costner movie, Field of Dreams.

" 'If you build it they will come' This is what we are telling the government. In order to come you have to preach the gospel a bit".

The biggest leap forward for Cypriot shipping, however, will undoubtedly come with Turkey's lifting of the trade ban, which continues to affect development of Cyprus flag.

Kazakos is nevertheless optimistic about this, given Turkey's apparent commitment to EU accession.

"Unless Turkey lifts the ban, it cannot complete negotiations... this is a crucial year for Turkey because there are no other (accession) chapters left.

Copyright Cyprus Mail 2011

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Publication:Cyprus Mail (Cyprus)
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Date:Oct 2, 2011
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