CHOOSING A FLAG

In the past the choice of the country of Registration was easy. The owners Registered and crewed their ships in the country where they lived and conducted their business.

This state of affairs lasted until the 1940s when American owners found that the high cost of running ships under the American flag, crew wage levels being particularly high, made it impossible for them to compete in the international shipping market.

They therefore searched for a country which:-

1. Would permit a company owned and controlled by non-nationals to operate ships under its flag (most traditional maritime countries insisted that the owning company is Registered, owned and controlled by its own nationals only).

2. Would permit the beneficial owners to reside and operate elsewhere and to maintain all accounting/banking operations and keep all profits in a different country.

3. Would permit the employment of crew of any nationality and at any wage scale the Owners wished (most countries insist that a significant number of the crew are its own nationals, employed at nationally agreed wage scales).

4. Would demand minimal taxation.

They found the countries they were looking for in Panama and Liberia which had already established "open registers". With ships Registered under either of these flags (known as either "Flags of convenience" or "free flags") the American Owners were able to compete on the international tramp, both dry and tanker, markets and in the non-protected liner runs.

In the same way, over the last two decades the traditional European and Japanese tramp Owners have found it increasingly difficult to participate in an increasingly competitive shipping market. Whereas it is probably true that a Shipowner would, all things being equal, prefer to Register his ship under the flag of his own country and crew it with his own fellow nationals, increasing labour costs have all but priced the traditional Shipowners out of the market. These have been taken over by the Panamanian and Liberian flags and by emerging nations with lower labour costs. (It should be borne in mind that the other elements which make up the total of the daily running costs of a vessel - discussed in detail in a subsequent lesson - will be practically the same for a well run vessel, regardless of flag, the world over). The principal elements of the higher labour costs faced by the traditional owners are:-

1. Higher domestic wage levels.

2. Comprehensive and expensive Social Security payments demanded by the national governments in respect of the personnel employed.

Nevertheless, there are a number of ways in which a national government, if it so wishes, can assist its own national fleet:-

1. Facilitating loans at a low rate of interest.

2. Assistance with Social Security payments for the crews.

3. Preference for the national fleet for Government cargoes and for cargoes controlled by the major industrial concerns in the country (Flag discrimination). Particularly during the 1980/90s an active policing of the 40/40/20 Unctad Rule in the liner trades although this is almost irrelevant today.

4. Exclusive employment of national flags in certain protected trades (such as coasting – ‘cabotage’).

5. Advantageous taxation schemes so that profits gained from shipowning activities bear little or no tax.

If a Shipowner/Shipmanager does operate in a country which:- 1. Actively encourages Shipowning by its nationals;

2. Has a domestic wage range which enables crews to be employed at competitive salary levels;

3. Has a pool of experienced seamen;

it will be attractive to Register ships under that flag. A good example of such a country is India. Greece encourages its highly entrepreneurial shipowners by permitting them to Register the Shipowning companies abroad (usually Panama or Liberia) whilst the ships themselves are Registered in Greece - thus combining the best of both worlds.

Failing any active encouragement from its Government the "traditional" Shipowner has no alternative but to Register his ship abroad. The choice of Register will be influenced by:-

1. Cost - Registration fee and annual tonnage tax.

2. Acceptability - not every flag is welcomed in every country.

In this the Shipowner has two choices. He can either use an "off-shore" Register or a

"flag of convenience"/ "free flag".

"Off-shore" Registers are Registers established with favourable taxation regimes and flexible employment regulations but with close links with a particular established maritime country from which they draw the majority of their tonnage. They also demand some commercial presence from the Shipowner in the territory. Examples of these "off-shore" Registers are:-

Great Britain Isle of Man and Bermuda

Norway Norwegian International Register Netherlands Netherlands Antilles

"Flags of convenience" Registers have already been described. They have no connection with established Maritime Nations and most of them only demand the most cursory presence from Shipowners on their territory. They have no connection with any one particular country; drawing their custom from anywhere and everywhere. As noted, the most famous examples of these "flags of convenience" are Liberia and Panama, both with a large number of ships entered in their Register. There are now a considerable number of other states which offer similar facilities with varying degrees of success.

(The problems involved with crew on a Flag of Convenience vessel will be discussed in a later lesson).

In selecting which flag the vessel will fly the Shipowner/Shipmanager will consider if there are any commercial or political reasons why a particular flagged vessel should be used in a particular trade, or if there are there any reasons, political or commercial, why a particular flagged vessel should not be used. (For example, a Liberian flagged vessel would be refused entry into Syria and difficulties can be experienced with both Liberian and Panamanian flagged vessels in Australia/New Zealand/Scandinavia).

Having selected the country whose flag his vessel will fly and established, if necessary, the shipowning company there, the Owner will apply to have the vessel Registered in that country. This entails the authorities, or more usually an authorised Classification Society acting on behalf of the authorities of that country, inspecting the vessel –

1. To ensure that the vessel complies with both national and international Rules and Regulations.

2. To measure the vessel to ascertain its dimensions and gross and nett tonnages.

On receipt of all relevant information, and a fee, the authorities will issue:-

1. Certificate of Registry, (Appendix 2) confirming that the vessel is Registered in that country. It will also give the vessel's official number and radio call sign.

2. International Tonnage Certificate, (Appendix 3) giving the gross and net tonnage.

3. Licence to operate the vessel's radio station.

The ship is now registered.