(TIỂU LUẬN) FINAL REPORT DECISION ANALYIS TOPIC SELECTING SHIP REGISTRY CLOSED OR OPEN

There are 2 alternatives which are open registry and closed registry and 8 criteria that wereselected by researching previous studies in the ship registration field, by using Best – Wors

Instructor: PhD Enrio Dagostini

Submission date: 16th June 2022

Ship registration is an official procedure that puts on a flag for the ship and allows it to tradecommercially This study is aimed at figuring out whether a ship owner should register his ship in aclosed registry or an opened registry and which factors are the most important in the deliberationprocess There are 2 alternatives which are open registry and closed registry and 8 criteria that wereselected by researching previous studies in the ship registration field, by using Best – Worst Method(BWM), we have found that ships should be registered in opened registries Shipbuilding standard isthe most important factor to be deliberated followed by taxation

Key words: ship registration, open registry, closed registry, best – worst method.

Table of Contents

ABTRACT 1

LIST OF FIGURE 3

LIST OF TABLE 4

LIST OF ABBREVIATIONS 5

I INTRODUCTION 6

II LITERATURE REVIEW 9

III METHODOLOGY 14

IV DATA COLLECTION 16

V DATA ANALYSIS 17

STEP 1 Formulation of the problem 17

STEP 2 Find the best and the worst criterion 18

STEP 3 Find the preference of the best criterion over all other criteria 20

STEP 4 Find the preference of all other criteria over the worst criterion 21

STEP 5 Estimate optimal weights 21

STEP 6 Final scores of alternatives 23

VI RESULTS 27

VII CONCLUSION 28

REFERENCES 30

LIST OF FIGURE

Figure 1 Top 10 flag States in 2019 8

LIST OF TABLE

Table 1 Overview of respondents 16

Table 2 Other to Most Vector 19

Table 3 Other to Worst Vector 20

Table 4 Optimal weights 22

Table 5 Importance of alternatives under each criterion (respondent 7) 23

Table 6 Normalized Values for respondent 7 24

Table 7 Priority of alternatives (respondent 7) 24

Table 8 Priorities for ship registration 25

Table 9 Priority of alternatives under each criterion (full sample aggregate level) 26

LIST OF ABBREVIATIONS

IMO International Maritime Organization

UNCLOS United Nations Convention on the Law of the Sea, 1982

STCW International Convention on Standards of Training, Certification

and WatchkeepingSOLAS International Convention for the Safety of Life at Sea, 1974

MARPOL Marine Pollution - International Convention for the Prevention of

Pollution from Ships

IOPP International Oil Pollution Prevention Certificate

MCDM Multi-criteria decision-making method

SWOT Strengths, Weaknesses, Opportunities and Threats analysis

5

I INTRODUCTION

The concept of freedom of navigation prevails in the high seas, according to the UNCLOS,which implies that the high seas are accessible to all states There are state-specific issuesaddressing the concept of freedom under this agreement, which involves the development oftopics such as freedom of navigation and overflight Within the high seas, States cannot assertsovereignty or authority This unfettered access to the high seas applies to all vessels However,

in terms of freedom of navigation, the UNCLOS of the Sea and public international law establish

a framework that forbids conditions aboard vessels

That is a reason why every vessel should have a nationality because of its registration under astate, which can allow the vessel to be registered under its regulations and utilize the high seas.Significantly, a national flag is an official signature proving that a country assigns and authorizes

a vessel or vehicle, which is under its jurisdiction and control in the administrative, technical,and social spheres of that country With the increasing demand of economic development, thepurpose of our country's ships flying foreign flags for transportation and circulation purposes hasled to the fact that many goods and exploitation at sea have also become bustling and developed.Therefore, the registration and flying foreign flags is only a form as well as a measure to makecirculation and anchoring much more convenient at international ports

The laws of States regarding the registration of ships are divided into two categories includeopen registry and closed registry For the closed registry, it is administered by an individualcountry as a national registry for the registration of their own ships flying their own flag, owned,operated and manned by nationals of that country In this field, the owner of the ship shouldnecessarily be from the country of registration and the place of business should be in the country

of registration This registration also means that these ships may be requisitioned at time of warfor the transportation of goods and people in the service of the nation

On the other hand, it is common for maritime registries to display open registries in certain countries,although the owners of vessels can register their vessels under that country's flag despite the fact thatthere is no genuine relationship between the flag state and the vessel Open registers allow shipowners of other nationalities to flag and operate ships under their flag It is generally the case that the

will generally apply to the vessel and its crew while on the high seas To be specific, a ship could

be traded more easily than the others if it registered with any registry mentioned above Thesecond one is that registering the vessel in a different country than the one where the owner liveshelp them save money and reduce operating costs Moreover, it helps achieving loweradministrative costs; in some cases, it also allows the ship to operate under less stringentregulations of the owner’s country As importantly, the ship owners are beneficial from taxincentives (tonnage tax), certification and security To be clearer, tonnage tax is a special taxregime for shipping companies under which a notional profit is calculated based on the numberand size of ships operating and in which a standard corporate income tax rate is applied It issometimes argued that open registers are associated with comparatively liberal tax regulations,labor rules, and environmental protection legislation, which are often lax and easilycircumvented Panama and Liberia are the most popular open registry countries because they donot require citizenship or residency requirements for ship owners The registration process inthese countries is comparatively simple, largely online based, and offers ship owners tax-freemoney and inexpensive labor Registration providing ownership for a ship is very important for

it to be able to participate in international trade relations, bringing benefits to the nation

However, besides the benefits, there are still disadvantages that need to be mentioned to choose thebest option for ship owners On the contrary, sailing a ship under the flag of convenience could haveserious repercussions for seafarers working on the vessel Initially, ships sailed under open registryhave been claimed to have more catastrophic working conditions than the others since such kinds ofships are operating under less stringent regulation There is a disagreement existing between thejurisdiction and the appropriate regulations of ship operations under the flag of convenience Thenext one is that seafarers are more at risk of being forced to work in severely hazardous situationswith inadequate insurance and compensation in money Moreover, the disastrous drawback of sailing

a ship is that it does not mandate fundamental seafarers' rights, such as the right of free creations ortrade union organizations, the demand of achieving adequate salaries, health and safety workplaceconditions, wage scales and so on The privileges mentioned above are reserved for sailors and maynot be available on ships Finally, seafarers may not be allowed to take a nap between consecutivetransportation duties as per standard guidelines

Figure 1 Top 10 flag States in 2019

This figure above illustrates that this is top 10 flag states in 2019 It is not surprising that Panamaremains at the top of the list by far, with the highest tonnage and boats registered under the flag,followed by Liberia and Marshall Islands According to the (ListLloyd's, 2019) Panama has9,367 vessels flying its flag, some 4,486 ships ahead of China, the next-biggest in terms ofnumber of vessels On the other hand, only 3 countries including China, Hong Kong and Greecestill apply closed registry, the remaining are open registry

Although there have been a lot of research on selecting ship registry ships, our research is one of thefirst to use the best-worst method to find out which criteria are most important and least important It

is highlight that some researchers applied various methodologies, e.g fuzzy, SWOT, and AHP, toinvestigate ship flag choice problems in the past Few used ANP method to study ship flag selectionproblems (Celik & Kandakoglu, 2012) used a fuzzy quantified Strength, Weakness, Opportunity andThreat (SWOT) to analyze the case of the flagging-out dilemma in Turkey Perepelkin, et.al (2010)proposed an improved methodology to measure flag performances for the shipping industries ofvarious maritime countries in the world Kandakoglu, et.al (2009) introduced a multi-methodologicalapproach for shipping registry selection in maritime transportation industry Lua, Fan & Li (2013)used individual ship registration data to analyze flag choice

behavior, used a binary choice model to analyze flagging-out decision, and used a nested logitmodel to analyze final flag choice.

From a ship owner’s point of view, they need to understand what factors influence the decision

to register a ship Because when competing in the international shipping market, it is imperativefor ship owners to come up with cost-effective strategies to operate their ships, choosing a flag is

a key step for a shipping operation in success That is a reason why two questions arise here:

“Which registry should the ship owner register their ship in?” and “How important are the factors that affect the ship registration decision?”

Having researched previous studies, our team identified 8 criteria for 2 alternatives of open andclosed registry: ship building standards, standard living and working conditions, crew’s wage,availability of well – trained seafarers, ship’s type, trading routes, tax, and bureaucratic control

This study solves the above problems by applying the Best-Worst Method to find out what are thefactors affecting the ship owner’s decision to register a ship A key advantage of this study is that ituses data from leading professors in the shipping industry with highly specialized knowledge

In the next section, we will first discuss the existing documents on closed registry and openregistry, thereby identifying the factors that influence the decision to register ships as well as thepurpose of the ship Section 3 will introduce our methodology, including an explanation of themethods, who developed them, and the areas in which it has been applied This study designprocess will also be detailed in this section Section 4 describes data processing Section 5reports on the estimated outcome model and data analysis, followed by section 6 is result of theresearch and section 7 concludes this paper

Ship registration is the first step for the ship to be able to trade commercially Without a flaghanging on top of the ship, she is not accepted by any ports around the world So that, choosingthe type of registry is the first and foremost strategy in operating a ship

There are 2 main types of ship registry: closed registry and open registry Closed registration is thefundamental type of ship registration in the maritime industry After that, the open registration

appeared with a new term of “flag – out” which means that ships are registered in anothercountry rather than the national one.

So why do ship owners flag out their ships?

Ship operator’s main goals are to operate vessels as efficiently as possible with the minimumcosts In developed countries, open registry is an option to outsource the cheap labor market and

“circumvent safety regulations” (Gregory, 2012) For example, once an American – owned ship

is registered in Panama, an open registry or to be more specific, a flag of convenience, the shipdoes not constraint on complying with the America’s rules and regulations but that of Panama

Open registry or flag of convenience usually has similar characteristics: low operation cost and cheap labor Ship owner can deliver goods at a much lower cost than registering the ship in

developed countries by decreasing the crew's standard of living and working conditions(ITFseafarers) According to Judith Swan, open registries offer several benefits to ship owners:

“the low or no vessel restrictions; favorable tax environment; low administration and

registration fees; no or easy to meet nationality requirements; quick and efficient registrationprocess; flexible manning requirements” (Swan, 2002) Levy no or low local taxes on income isone of the most significant benefits of open registries

However, there have been several controversial issues surrounding the open registration From theregulation perspective, 2 kinds of registration apply opposite rules: closed registries require high

shipbuilding standards, crew qualification, or proper crew welfare while open registries enforce

maritime laws and regulations rigorously, others do so only infrequently The front one considerssafety as the most important concern for governments that enforce rigorous standards, whereas thelatter cares about revenue from ship registration (Gianni, 2008) However, because of the emphasis

on profit earning, open registries and ship operators in those countries ignore a vital element:

maritime security, which can lead to “sub-standard shipping, poor performance on safety, maltreatment of crew” (Gianni, 2008) According to Bye and Aaberg (2018), flag state can be used

as a risk measurement and ships fly under FOC (Flag of Convenience – a type of open registry) tend

to be involved in maritime accidents “The rise of the flags of convenience created an international,deregulated, and non-unionized segment of merchant shipping, which as a competitor on the globalmarket had far-reaching consequences for the nation-state-based

organization of the maritime transport sector, for the national fleets of the industrial countries,and for central national trade union activities (from economic and wage bargaining policies toorganizational policies)” (Koch-BaumgartenSigrid, 1998) By sailing under open registry’s flag,the ship can avoid the unions which set up basic rules for safety, security, or seafarers’ right andwage so that they can cut down on facility and compensation cost.

Selecting between two types of registries is similar to scaling the benefits and drawbacks of them

in terms of costs, compulsory regulations, and maritime security

We looked at some previous studies which share the same topic in order to identify the criteria ofselecting ship registry

In 2009, Celik, Er and Ozok sorted the factors considered in shipping registry selection into 3 maincategories: economic, social, and political By using the methodology of Fuzzy AHP, they found thatbank finance and tax related expenses in the economic considerations are the most importantelements in the decision-making process (Application of fuzzy extended AHP methodology onshipping, 2008) Kyriaki and Michael (2016) have a similar result in category of economic that

“country’s tax system, the ease of starting new business and the country’s corruption/ transparency

level” can affect the flag-out ratio Flags must not only have an investor-friendly tax structure inplace, but also demonstrate skill in running it smoothly and efficiently, resulting in a well-organizedand accommodating tax environment for ship owners The study indicates that ship owner can decide

whether to flag – out by considering 5 factors of quantitative: “age of the vessel, the trade on which

it is engaged, basic wage costs, national insurance payments, and training costs” To be more

specific, although basic wage expenses may have a negative impact on the choice, it is the overall

employment costs that are important In qualitative part, crew salaries, “availability of skilled labor, and fiscal reasons” are among the qualitative variables influencing the usage of a foreign flag

(1998) In Angela and Peter’ point of view, crew expenses were cited as the most prevalent reasongiven by firms that elected not to select national flag Other elements that had impacted the choices

were: the desire to avoid bureaucratic supervision; the high expenses of complying with national flag regulations; the unavailability of competent labor and fiscal considerations Those firms who

decided to fly under closed registry indicated that

their decision was influenced by a variety of factors, including ship’s type, trading routes,

public relations concerns, marketing, and historical considerations

Overall, main factors that influence ship registration can be listed as follows: crew’s wage,seafarers’ living and working conditions, availability of well – trained seafarers, ship’s type, shipbuilding standards, trading routes, tax, and bureaucratic control

Crew’s wage relates to the salary of the seafarers that is calculated by the days staying on board

of the ship Generally, there is a huge gap between the salaries of developed - country seafarersand developing – country seafarers For instance, the average salary of a seaman ordinary inPhilippines is about $5,258 while that in Japan is $32,544 ( ERI's Salary Expert Database) Sothat ship owners that base in Japan must carefully consider whether to register their ships inJapan, a closed registry, or an open registry which allow them to outsource the seafarers

Standard living and working conditions refer to the quality of life on board of the ship: food,drink, working and resting hour, medical treatment, accommodation, etc

Those two criteria, which related to seafarers, are protected by International Labour Organization(ILO) by Maritime Labour Convention (2006) so that “the world's seafarers will be given thefreedom of movement necessary for their well-being and for their professional activities and, ingeneral, to facilitate international commerce” (ILO)

There are two main kinds of seafarers: national and non – national seafarers Availability of well– trained seafarers can affect the decision of out – sourcing the crew Nowadays, most seafarers arerequired to have some conventions in other to work on board of the ships, one of the basicconventions is STCW - International Convention on Standards of Training, Certification andWatchkeeping for Seafarers (STCW) The goal of STCW is to maintain safe working environmentfor the seafarers and enhance their professional performance in the duties on – board STCWincludes several certificates for master, chief mate, radio operator and other positions in terms ofbasic safety training, medical fitness, firefighting, etc (International Transport Workers’

Federation)

Depend on the type of the ship, the ship owner can register in national or opened registry thatbrings them the most practical benefit For instance, if the ship is a fishing vessel which mostlytrades within that national trade water, closed registry is a more appropriate choice.

Trading routes is the shipping networks on the sea between continents, countries, or ports It is amatter in ship registration when vessels only transport goods from one port to another port in thesame country

Tax is one of the most important factors as it directly effects on the ship owner’s profits Tax ratesalso depend on the conditions of the vessels such as age or type Each country has a different taxsystem for ship registration For instance, when a new built or a secondhand ship is registered inPanama, the ship owner must pay for 3 basic fees: consular fee, registration fee and annual tonnagetax for the first year With each type of ship, the formula for tax calculations is different but overall,there are 5 basic fees: annual tax, annual consular tax, annual inspection fee, annual investigation feeand 3% per Net Tonnage Vessels which make efforts to environmental preservation is offeredannual tax discounted up to 50% for 3 years (Services Merchant Marine)

Shipbuilding standards refer to the required equipment or technology of the ship For someregistries, like Hong Kong, complying with an IMO’s convention is deemed to have met thecountries’ standards (Mayer Brown, 2008) “The main objective of the SOLAS Convention is tospecify minimum standards for the construction, equipment and operation of ships, compatiblewith their safety” (IMO, 1974) Here some SOLAS’s certificates relate to shipbuilding standards:

Navigation License

Passenger Ship Safety Certificate

Cargo Ship Safety Construction Certificate

Cargo Ship Safety Equipment Certificate

Cargo Ship Safety Radio Certificate

Cargo Ship Safety Certificate

Class Certificates (Ports and Maritime Affairs, 2016).

Complying with the International Convention for the Prevention of Pollution from Ships(MARPOL) is another requirement, when a new built vessel follows MARPOL, it is then issued

a certificate called IOPP (Wartsila)

“Bureaucratic control which is defined as an approach that emphasizes organizational authorityand relies on administrative rules, regulations, procedures, policies, standardization of activities,well-defined job descriptions, and other administrative mechanisms to ensure that employeesexhibit appropriate behaviors and meet performance standards Parties in maritime industry areexpected to adhere closely to the international conventions and stay within the guidelines”(Asyali, 2005) An example of bureaucratic control is Port State Control Port State Control “theinspection of foreign ships in national ports to verify that the condition of the ship and itsequipment comply with the requirements of international regulations and that the ship is mannedand operated in compliance with these rules” (IMO, Port State Control)

By using Best – worst method, this study aims to identify the importance level of each criterionwhich affect the ship registration choice between open and closed registries Our team planned

on collecting data on a survey using Google form and sending the questionnaire to 10correspondents who are professors or having maritime related academic knowledge in 2countries Vietnam and Korea

The results can be used by ship owner, ship operator or any other stakeholders in maritime industrythat are still wondering about ship registration, especially the two mentioned ship registries

Review studies from a long time ago so some criteria might not be such a matter for shipregistration nowadays For example, availability of well – trained seafarers are no longer aproblem as all seafarers are required to have basic certificates to work on board of the ship such

as STCW (basic training) and other kinds of certification for each position

When a problem is so complicated that it can only be modeled as a hierarchy or network, most

concept, therefore a multi-criteria decision-making method (MCDM) could be used to assess therelevance of the various criteria Specifically, MCDM methods have been applied to solve manyproblems in various fields including sustainable supply chain management, green port and so on.

In this study we use the phrase “BWM” which is known as “best worst method” This kind ofmethod brings unique advantages for this paper, which has not been used in this area before Themethod’s description is elaborated in the next section

With regards to decision-making, this is generally defined as the cognitive process of selecting analternative from a set of alternatives Besides, A MCDM problem is a problem where a decision-maker has to find one of the most suitable alternatives from a set of those considering a set ofcriteria In order to address this problem, the BWM which means “Best worst method” has beenapplied To be more clearly, this is a multi-criteria decision-making method which was developed by

Dr Jafar Rezaei from Delft University of Technology in 2015 This kind of method is based on asystematic pairwise comparison of the decision criteria used to evaluate a set of alternatives

The most significantly unique of BMW is that it requires less data than other MCDM methods

To be more specific, BMW requires less pairwise comparisons than AHP, with 2n3 and n(n1)/2comparisons, respectively “The pairwise comparison method works by each alternative beingcompared against every other alternative in Typically, all possible pairs of alternatives arepairwise compared and pairwise ranked against each other” (Pairwise Comparison)

Moreover, the results of the data analysis using BMW are more reliable than that using AHP as itprovides more consistent comparisons Consistent ratio refers to the reliability of the data According to Chu and Kuang (2002), the consistency in research should be <0.1, especially when analytic hierarchy process is used as the results might be different if the consistency ratio is

>0.1 The creator of BWM stated that consistency ratio in this method is used to measure the level of reliability because results from BMW are always consistent (Rezaei, 2015) Similar to other BWM studies, the method develops in the six steps:

(1) Formulation of the problem;

(2) Find the best and the worst criterion;

(3) Find the preference of the best criterion over all other criteria;

(4) Find the preference of all other criteria over the worst criterion;

(5) Estimate optimal weights;

(6) Final scores of alternatives

In order to find out what is the best or the worst criteria by using this kind of method, this hasbeen already utilized in several real situation problems For instance, (Kusi-Sarpong, Rezaei,Ahmadi, 2017) have used BWM to determine the most important social sustainability criterion insupply chains management (Wankhele & SVinodh, 2021) developed a framework for theautomotive sector and analyzed the identified challenges to derive rank for systematicimplementation in Indian automotive industries Another example of BWM application includeidentifying the appropriate governance model for green port management to ports in the IndianOcean Rim relyingon social systems engineering principles (Ziaul, Henrik, Mariia, 2020)

We collect data by sending questionnaires in Google Form via email, Zalo.vn or Facebook forour professors, teachers and people who are working in relation to Maritime and ShippingIndustry There are 20 questionnaires that were sent but we only received 10 responses 1 ofthem was rejected as the respondent rated only 1 for the question how much he knows aboutmaritime industry or ship registration The data was collected in 3 weeks from 1st May to 20thMay 2022 and here is an overview of respondents:

Table 1 Overview of respondents

Experience

Logistics and supply chain

Shipping industry and Master’s

Master’s

Finance & Port

Master’s

Shipping and Port

Overall, respondents from Vietnam and Korea share nearly equal proportions with 5 and 4,respectively So, we expect if there is any different in the result between people from the twocountries Most of them are from Port and Shipping industries and have the affiliation inAcademic Only 1 respondent is from the industrial – commercial with a bachelor’s degree inChartering Department All respondents have the year of experience more than 11 years

V DATA ANALYSIS Empirical application of the BWM

The topic of our group is to evaluate the appropriate kind of ship registry There are 2 main types ofship registry: close registry and open registry Close registration the fundamental type of shipregistration in the maritime industry After that, the open registration appeared with a new term of

"flag-out" which means that ships are registered in another country rather than the national one

STEP 1 Formulation of the problem

In this first step, our group identified a set of criteria to describe the subject matter This sectionthrows more light on the developmental and refinement processes of the framework proposed in

17

this assignment The criteria were identified through a combination of a literature review and previous studies, we identified 8 criteria which are important in ship registry selection They are:

(1) Ship building standards: refer to the required equipment or technology of the ship

(2) Standard of living and working conditions: refer to the quality of life on board of the ship: food, drink, working and resting hour, medical treatment, accommodation, etc

(3) Bureaucratic control: Control of an organization and the individuals that make up the

organization through systems of standardized rules, methods, and verification procedures

(4) Crew's wage: relates to the salary of the seafarers that is calculated by the days staying on board of the ship

(5) Tax: the amount to be paid to the country of registration of the ship

(6) Trading routes: routes are the shipping networks on the sea between continents, countries, or ports

(7) Availability of well – trained seafarers: affect the decision of out – sourcing the crew

(8) Ship's type: Type of the ship which is registered

STEP 2 Find the best and the worst criterion

In step 2, respondents were asked to identify best and worst criteria for ship registration Inparticular, respondents were asked to answer the following: “which of the eight criteria is themost important for ship registration?” and “which of the eight criteria is the least important for

The most important means best and the least important means worst