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THEMARITIME Economist Connecting Academia and Professionals Spring 2016 | Issue 5

Editorial: Case Story Begins

FreshMINDS

INPLAIN Economic Narratives and Supercycles in Maritime Transport Okan Duru

Flagging Out: Motivations of the Foreign Flag Choice Byron King Indian Maritime and Port Sector: On the Right Track but Miles to Go Vishal Kashav

Profession & Practice The Challenges and Opportunities Faced by the Port Industry in Southern Italy: The Shipping Agent’s Perspective Luisa Mastellone

CASE Stories Functions, Rights and Remuneration of the Shipbroker Ergun Gunes

Memories Interview with Trevor Heaver Mary R. Brooks IAME Newsletter October 1997

I N T E R N AT I O N A L A S S O C I AT I O N O F M A R I T I M E E C O N O M I S T S Find Us at www.mar-economists.org


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Spring 2016 | Issue 5

Spring 2015 | Issue 5

CONTENTS President’s Message Editorial: Case Story begins Editorial Board & Owner Declaration

Jan Hoffmann, President of IAME Okan Duru, Editor-in-chief

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InPlain Economic Narratives and Supercycles in Maritime Transport Okan Duru 8 Profession & Practice

The Challenges and Opportunities Faced by the Port Industry in Southern Italy: The Shipping Agent’s Perspective Luisa Mastellone 14 FreshMINDS Flagging Out: Motivations of the Foreign Flag Choice Byron King 18 Indian Maritime and Port Sector: On the Right Track but Miles to Go Vishal Kashav 26 CASE Stories Functions, Rights and Remuneration of the Shipbroker Ergun Gunes 32 Memories Interview with Trevor Heaver

Mary R. Brooks

IAME Newsletter October 1997

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Submission Guidelines 45 Cover Design & Photo: Okan Duru Proofreader: Byron King


THEMARITIME Economist

President’s Message

Jan Hoffmann, President president@IAME.info

Time flies. It seems we just started our The Maritime Economist project – and we are already looking for the next editorial team. While Okan and several of the section editors would agree to continue if required, it is also true that we need to spread the work load and provide opportunities for our members to contribute to our Association. In consultation with Council, Secretariat and the current editors, we are now actively seeking a new editorial team. In order to ensure a successful hand-over, we ask interested colleagues to express their interest to us before 30 June (see also the advertisement on the next page). This will allow Council to take a decision on the new editor during our Hamburg conference in August, and during the remaining months of 2016, a systematic hand-over can be arranged, including the composition of the wider editorial team. It is a great opportunity to leave a mark in IAME’s history and lead the production of our Magazine. Please feel encouraged seize this opportunity, or to contact me and the Secretariat if you have any doubts, suggestions or questions.

ME Mag

UNCTAD recently launched more than 200 Maritime Country Profiles, which I hope will also be of interest to the readers of The Maritime Economist.1 In fact, the concept builds upon an article published in our inaugural issue, where we had analyzed “which countries specialize in which maritime businesses”.2 Each Maritime Country Profile consists of six blocks: • Basic Data: The UNCTAD Maritime Country Profile provides core data on each country’s economy, trade and maritime sectors. • Market shares: A key component of the UNCTAD Maritime Country Profile is each country’s share in selected maritime sectors (ship registration, owning, building, demolition and container port traffic) as well as its population, gross domestic product, coastline and merchandize trade. • Merchandize trade: Each profile gives a snapshot of what commodities are traded (all modes of transport), what is the trade balance, and who are the main trading partners. • Trade in transport services: Another component of each country profile is a table on basic trade in services data, including trade in transport services, and the trade balance in these services. • The nationally flagged fleet: The country profile shows trends in the nationally flagged fleet, as well as the composition as regards types of ships. • Liner shipping connectivity: The Maritime Country Profiles also illustrate each country’s position within the global liner shipping network. It includes a time line of the national Liner Shipping Connectivity Index, as well as a list of the countries with the highest bilateral connectivity. Perhaps we can encourage future articles in The Maritime Economist that make use of these country profiles and the underlying statistics. With best wishes from Geneva Jan Hoffmann, president@mar-economists.org

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http://unctadstat.unctad.org/CountryProfile/en-GB/index.html https://issuu.com/themaritimeeconomist/docs/the_maritime_economist_-_spring_201/14


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Spring 2016 | Issue 5

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Editorial

Case Story begins… Okan Duru, Editor-in-Chief memag-editors@mar-economists.org

In 2015, ME Mag decided to initiate a new section titled ‘CASE STORIES’ to improve the link between academia and business practice. Section editor Paul S. Szwed and associate editors, Ergun Gunes, Marcella Croes and Metin U. Aytekin have worked on the design and structure of the section for several months. Finally, the first case story is ready for ME Mag readers. We would like to express our sincere thanks to section editors for bringing this project into life. The subject of the first case story is about the ship broker’s commission for sale of a ship. ***

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These days there are many different views about the shipping market. Maritime media usually highlights the pessimism for the remaining part of 2016. Considering the history of shipping markets, a pessimistic climate before an upturn is very common. However, we cannot easily assume that history always repeats itself. Although the term ‘business cycle’ is frequently mentioned

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in the shipping context, the shape and length of these cycles have huge uncertainty. Pure expectations for an upturn does not make sense without a proper ‘timing’ gauge. Turning points are studied by both academia and professionals for decades, huge funds are spent for finding a crystal ball. Finally, we are at the beginning point again. Uncertainty is massive, and predictability is very low! The current state of the market emphasizes the role of customer loyalty and having strong ties with major charterers which in turn survives a shipping firm in the long term. *** IAME 2016 is going to be organized in Hamburg, and submission of full papers is already closed. However, we would like to remind that the extended abstract submission is an option for authors who could not find a proper time to submit their full papers. You can still join us at IAME 2016 with an abstract of your presentation.


Spring 2016 | Issue 5

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Connecting Academia and Professionals

EDITORIAL BOARD President of IAME

Jan Hoffmann

Editor-in-Chief Associate Editor

Okan Duru Adolf K.Y. Ng

INPLAIN Venus Lun (SE) Adolf K.Y. Ng (SAE) Joan P. Mileski (SAE) Lorena García Alonso (SAE)

Case Stories Paul S. Szwed (SE) Ergun Gunes (SAE) Marcella Croes (SAE) Metin U. Aytekin (SAE)

Memories

Paul Tae Woo Lee (SE) Zaili Yang (SAE)

Profession & Practice Thomas Vitsounis (SE) Pierre Cariou (SAE) Adrian Beharry (SAE) Assunta Di Vaio (SAE) Larissa M. van der Lugt (SAE)

SOCIETY NEWS Michele Acciaro (IAME Newsletter Editor) Verena Flitsch (IAME Newsletter Co-Editor) Indika Sigera (SAE)

FreshMINDS Alessio Tei (SE) Emrah Bulut (SAE) Vicky Kaselimi (SAE)

BOOK REVIEWS Michele Acciaro (SE) Indika Sigera (SAE)

CHALLENGE Jasmine Siu Lee Lam (SE) Okan Duru (SAE) Rosa Guadalupe Gonzalez Ramirez (SAE)

PR & MEDIA DIRECTOR Vicky Kaselimi ART & DESIGN DIRECTOR Mariikka Whiteman

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INTERNATIONAL ASSOCIATION of MARITIME ECONOMISTS Jan Hoffmann Pierre Cariou Thanos Pallis Theo Notteboom

Council Members Michele Acciaro Stephen Cahoon Pierre Cariou Ana Cristina Paixao Casaca Treasurer

Ioannis Lagoudis Jasmine Siu Lee Lam Adolf K.Y. Ng Theo Notteboom Maria Lekakou

Webmaster

Francesco Parola Jean-Paul Rodrigue Dong-Wook Song Gordon Wilmsmeier Ioannis N. Lagoudis

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President Vice President Secretary Emeritus President

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THEMARITIME Economist

INPLAIN Economic Narratives and Supercycles in Maritime Transport

ME Mag

Okan Duru

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scholarly knowledge in plain language

Economic Approaches in the Shipping Business Maritime economics research is broadly based on the neo-classical school of economic thought which is built on the supply-demand framework, rationality assumption and expected utility principles. Shipping markets are driven by the volume of cargo shipments and the size of ‘active’ shipping fleets. However, in terms of the measurement of supply and demand for shipping services, we then have critical problems. Demand is the total volume of the proposed (nominated) shipments (conventionally on a tonmile basis) and supply is the total volume of offerable shipping services (again, on a ton-mile basis) at a particular time. The terms, proposed and offerable, refer to volume which can be fixed if interested parties are available in the market. For instance, seaborne trade volume is fixed and realized shipping services, but excludes postponed, rescheduled or cancelled shipments because of the lack of interested parties. A cargo owner may have a period of flexibility to dispatch its cargo and fix a tonnage price accordingly. The negotiation period and readiness (convenience) of the tonnage will influence the time spent on this particular shipment. Therefore, the conventional approach often ignores a portion of the demand and supply which is quite difficult to observe and determine. In addition to gauging limitations, the decline of the shipping markets based on various technical and commercial aspects raises further questions about the rationale behind the conventional mindset on the pricing dynamics of freight markets. While there is room for other schools of economics in the area of maritime transport, few academics have given attention to alternative interpretations and reasoning for freight market pricing or the market dynamics in general; for e.g., Button (2005)

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Shipping business cycles are frequently discussed in books and academic papers, and most in the industry agree with the principles of the cyclical nature of shipping. The literature on the industry implicitly assumes that business cycles exist, and further interpretations usually focus on their oscillations in which upturns and downturns follow each other. One of the first quantitative proofs of shipping business cycles was presented in Angelopoulos et al. (2015) by using the spectral analysis approach. They found that short to long term cycles are very consistent in the last half century. A long term cycle is usually thought to be 40-50 years in length which was first named and discussed by a Russian economist called Nikolai D. Kondratiev. However, recent studies have found potential for a much longer cycle of centuries based on the data of the last three centuries. This supercycle was first noted between the mid-1700s and the beginning of 1900s, then another supercycle began soon after that, and currently, we are seeing another up cycle in our time. In this article, we will discuss supercycles and their implications for the following century but will always proceed with caution due to the uncertainties associated with such a long period. Through this fundamental work, we will also examine the economic approaches and the history of economic views in the shipping business. With the rise of the historical school and institutional economics in the last few decades (as a natural outlet of painful market collapses), reconsideration of conventional perspectives and fundamental returns are some of the commonly examined topics in economics. It is therefore not surprising that the American Economic Association which is considered to be the leading academic ‘institution’ on economic research of our time has been established by institutional thinkers of economics. The role of our approach to the data and cyclical nature of shipping markets is another item of interest in this article.

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THEMARITIME Economist

INPLAIN exceptionally emphasized the institutional economics of the shipping industry. Another interesting coincidence is that Douglass Cecil North, who is known as the father of institutional economics (Nobel Laureate, Economics, 1993), investigated the freight market during 1730-1913 (the first phase of the shipping supercycle) (Fig. 1). According to North (1958), ship and cargo technology played a major role in the decline of freight rates during the 19th century. Innovations in ship building (metal and steel hull), ship propulsion (e.g. from sail to steam), and the geography of trade (backhaul trade from North America to Europe) are some examples of institutional changes during that period of time. Duru and Yoshida (2011) raised questions about market competition and the transition from the monopolization of the British Navigation Acts to the free market economy at the beginning of the 1800s. In his inquiry and historical proposal for a free market regime, Adam Smith was still supporting the British Navigation Acts and their functions.

Most of our fundamental textbooks in maritime economics directly or indirectly assume shipping business cycles. In a recent study by Greenwood and Hanson (2015), the cobweb theory is used to estimate ship prices. The cobweb theory is based on adaptive expectations (investors are backward looking), and its concept is very similar to the bullwhip effect which is a common topic in supply chain management. Similar to traditional manufacturers, shipyards sometimes need time (usually years) to fix a ship building slot and finally deliver ships. In market upturns, huge volumes of order book data means several years are required to complete a project from contract signing to the final delivery. Since deliveries are realized several years later, the impact of the order book volume is ignored or undervalued. A time lag between experiencing an upturn and having orders completed causes collective blindness to future market collapse. Since supply is rigid (late response to price changes), current upturn is amplified with a price bubble while the order book grows with an asset bubble to be delivered at an uncertain future state of the industry. Therefore, 8-15 years in a cycle generate high volatility in freight rates and asset prices. Another look at three centuries of freight rate data

Fig.1: Douglass Cecil North, Nobel Laureate, Economics, 1993. In one of his seminar studies, “Ocean Freight Rates and Economics Development 1730–1913”, he investigated the great decline of freight rates in the 19th century

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With regard to the rise and fall of shipping freights, the business cycle theory is another outlet or additional reasoning which has broadly originated from the Austrian School of Economics (i.e. Schumpeterian business cycles). The business cycle narrative is based on the theory of historic recurrence, and the market 10 is seen to have oscillations caused by several factors.

The business cycle theory is relatively easier to observe and illustrate through quantitative instruments and empirical rationalization. However, there may be longer term oscillations with relative uncertainty. A Kondratiev cycle of 40-60 years is an example which is difficult to prove with conventional instruments (e.g. econometrics). As a theoretical and conceptual narrative, it is thought to be an essential component of economics. The supercycles found in the shipping markets are another example of this circumstance. Duru and Yoshida (2011) investigated the freight market for a very lengthy time span and generated a long term freight market index (LFI) that consists of several kinds of freight rate data (tramp rates, period charter rates, etc.) (Fig. 2).


Spring 2016 | Issue 5

scholarly knowledge in plain language

In the study of Duru and Yoshida (2011), the long term drivers of the freight market (particularly dry cargo shipping) were discussed through several aspects of maritime transport, society and demographics. There are several aspects of maritime transport in terms of institutional economics that changed the ways of the shipping business. Technology is one of the major drivers of the great change throughout the 19th century. Steam power, metal hull, new navigational instruments and methods, backhaul cargo volume from North America to Europe (previously ballast voyages), introduction of tug boats for larger ships, communication technology (i.e. transatlantic cable) and many other innovations made shipping bigger, safer and more efďŹ cient. Another critical element of supercycles is demographic changes. Robert Fogel (Nobel Laureate, Economics, 1993 with Douglass C. North) developed an institutional perspective with population dynamics. By

using the life expectancy data produced by Fogel of the U.S. population with modern statistics, Duru and Yoshida (2011) compared the LFI with life expectancy data and found a long term co-trend between the two series (Fig. 3). The theory behind the role of life expectancy is based on the relationship between quality of life and life expectancy. High GDP countries may have larger populations, and the quality of life may be much worse than many other countries. However, life expectancy is usually thought to be a proper predictor of quality of life and how the GDP contributes to the population. Increasing quality of life improves trade and consumption. Although the data from Fogel comprise the U.S. population, they broadly reect world averages. In examining the current predictions for many developed countries (therefore the major consumers), life expectancy is thus expected to decline in a few decades.

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Fig.2: Long term freight market index (Duru and Yoshida, 2011).

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THEMARITIME Economist

INPLAIN

Fig.3: Long term freight market index (left axis) and life expectancy at age 10 for U.S. population (Duru and Yoshida, 2011). and even starvation in some periods of time (e.g. Dalton Minimum). It is not surprising that the French Revolution was sparked in a period of fewer sunspot cycles, fewer crops (thus starvation) and low average temperatures. The period of the French Revolution (also the Napoleonic Wars) is called ‘Dalton Minimum’ since the number of sunspot cycles dropped for a few decades. Low temperatures and less solar energy caused fewer and less fertile crops in most of the northern

ME Mag

In addition to the above interpretation, climate may also be a driver behind many of these variables. Tol (2009) and Waldinger (2014) emphasized the effects of the climate on agricultural products and crops, and its impact on economic circumstances. Sunspot cycles are one of the well-known phenomena behind agricultural productivity. An increasing number of sunspots (explosions on the surface of sun) improve the solar energy radiated from the sun, and agricultural crops are expected to increase. In contrast, a declining number of sunspots will result in fewer crops

12 Fig.4: Figure 4. Number of sunspots (dark area), 8-year moving average of sunspot data (red line) and LFI (yellow line, right axis). Source: Sunspot number data from the National Geophysical Data Center in Boulder, CO. LFI data from Duru and Yoshida (2011).


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*** It is obvious that there are many interacting agents and systems which have come to define the state of people, societies, nations and markets. Technology, demographics, politics, climate and even astronomy may lie behind the great changes in the history of humankind and economics as a product of human behavior. Lincoln Paine (2014), in his seminal works, provided a stunning definition: “history is maritime history”. Maritime transport is an essential part of world history and also the history of economic thought. However, the historical and institutional economics of maritime transport have an existing gap, and there are many unanswered questions left which need to be addressed and in doing so, may enlighten the future of the industry. References Angelopoulos J., Chlomoudis C. and Duru O. (2015). Spectral Dynamics of Dry Cargo Shipping Markets Theory of Long Waves – Fact or Artifact?. The Conference of International Association of Maritime Economists, Kuala Lumpur. Button, K. (2005). Shipping economics: where we are and looking ahead from an institutional economics perspective. Maritime Policy & Management, 32(1), 39-58. Duru, O., & Yoshida, S. (2011). Long Term Freight Market Index and Inferences. The Asian Journal of Shipping and Logistics, 27(3), 405421. Greenwood, R., & Hanson, S. G. (2015). Waves in Ship Prices and Investment. The Quarterly Journal of Economics, 130(1), 55-109. Paine, L. (2014). The sea and civilization: a maritime history of the world. Atlantic Books Ltd.

scholarly knowledge in plain language

North, D. (1958). Ocean Freight Rates and Economic Development 1730-1913. The Journal of Economic History, 18(04), 537555. Tol, R. S. (2009). The economic effects of climate change. The Journal of Economic Perspectives, 29-51. Waldinger, M. (2014). The economic effects of long-term climate change: evidence from the little ice age. London School of Economics.

Okan Duru Assistant Professor, Texas A&M University in Galveston

Dr. Okan Duru is Assistant Professor of Maritime Finance and Logistics, the Department of Maritime Administration at the Texas A&M University in Galveston. He received his Ph.D. from Kobe University in Japan on the Economic analysis on the long term assessment of dry bulk shipping. His research interests are in shipping asset management, behavioral economics of shipping business, forecasting, judgment and decision making. In 2012, he received outstanding young researcher award (EAGLE Prize) from the International Association of Maritime Economists.

ME Mag

hemisphere, including Europe. Maritime transport was essential for the food supply but mostly under the monopoly of the British Navigation Acts. Therefore, the monopoly of maritime transport is thought to be among the reasons for the Napoleonic Wars. After the French Revolution, the British Navigation Acts lost its legitimacy in practice (officially repealed in 1849). Therefore, the French Revolution was not only a great turning point for political history, but also a milestone for the shipping business.

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THEMARITIME Economist

Profession & Practice

The Challenges and Opportunities Faced by the Port Industry in Southern Italy: the Shipping Agent’s Perspective Luisa Mastellone


Spring 2016 | Issue 5

voice of professionals

Container ships continue to grow in volume. According to the latest studies, the global order book of container ships has reached 1.3 million TEUs. The “Ultra Large Container Vessels Fleet”, composed by vessels with capacity higher than 12.000 TEUs, numbers 198 ships operating in the market and notes an overall capacity of about 2,78 million of TEUs. This is amounts to15% of the global container fleet. “Lloyd’s List” forecasts that the size of container vessels will continue to increase and predicts that vessels with a capacity of 24.000 TEUs will reach the market. Such a development will without a doubt raise issues relating to their accessibility in many ports and will challenge the ability of terminals to manage increasing container volumes per call. Soren Skou, CEO of Maersk Line, highlighted these challenges and noted that this twofold increase in vessel capacity has not been matched by an equivalent increase in port terminal productivity. This so called “ship gigantism”, together with strategic alliances between different carriers, will alter the selection criteria of ports and create many challenges for terminal operators. In the European context, Northern European (NE) Seaports continue to offer the most efficient route for moving containers in the European mainland. A combination of economic and geographic factors contributes to the success of these seaports:

• First, North Europe represents 70% of the continent’s economic activity. • Second, Europe’s geography strengthens the position of the Northern ports. The Alps and the Rhine waterways form a natural barrier and a natural corridor, respectively, extending the catchment area of the Northern ports to Switzerland and Austria. • Third, Northern European ports largely exploit economies of scale since they facilitate the development of large clusters of economic activity, while efficient terminal infrastructures and sufficient depth enables servicing vessels with low unit costs. • Fourth, North European ports combine both trans-shipment and gateway functions further contributing to economies of scale. Hamburg and Rotterdam are the most attractive transshipment hubs in Northern Europe, with Antwerp and Bremerhaven closely behind. A more limited bureaucracy also characterizes these Northern European ports, which allows them to quickly adapt their seabeds and infrastructures to larger ships. Their ability to expeditiously intervene on seabeds –through dredging – and infrastructures – through the acquisition of new cranes or the modernization of those already in existence – depends in large part by the financial autonomy of the relevant port authorities, which are completely unrelated from the state government. In comparison, the Italian port industry differs significantly. It suffers from a slow bureaucracy and is regulated by a very old law (Law 84/94 on Reorganization of the seaport sector). Currently there are 24 port authorities in Italy enjoying administrative, financial and fiscal autonomy in accordance with the law 84/94. Each port authority is supervised by the Minister for Infrastructure and Transport (in consultation with the Minister of Economy and

ME Mag

Over the last thirty years, container trade expanded and continues to expand rapidly, especially compared to the bulk trade. Only from 1973 to 1998 has container trade registered an average growth rate of 8% per year, compared with 2% per year for bulk trade. In this way, types of goods traditionally carried by bulk vessels have started to be carried by full container ships. In this way, the growth of vessel traffic mirrors the growth of vessel size.

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THEMARITIME Economist

Profession & Practice

Finance) with regards to the approval of the estimated budget and variations of the final financial statements. The cash flow statement is, instead, under the control of Court of Auditors. For this reason, we can say that the Italian port authorities are not fully autonomous entities but that they carry out their activities under control of the state entity. The poor organization of the Italian seaport system is mainly due to many port authorities spread throughout Italian territory, although some of them are in close proximity. Furthermore, there is no diversification of activities between the different ports. Every seaport wants to engage in every activity of the shipping industry. For instance, most recently the overwhelming growth of the container cargo prompted ports to invest in projects aimed to accommodate container vessels. This leads to increased competition between all the ports. Although for the ports of the European northern area this competitive tension is positive, in the Italian territory competition creates only negative effects on ports’ performance. These negative effects are amplified by the geographical location of ports, sometimes located in a short distance from each other. A significant example is represented by the port of Naples and the port of Salerno. The two ports are within 60 km, yet they offer the same services and they are both focused on container traffic. The industrial and manufacturing sector present in the Campania region does not justify the existence of two ports.

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A reform of the port facilities and logistics, proposed by the Ministry for Infrastructure and Transport Graziano Delrio and approved by the government in last January 2016, introduces a new regulatory regime to the entire Italian seaport system. This new reform will replace the law 84/94. The Italian ports will be reorganized into 15 port authorities. Further, some of the 24 port authorities will be consolidated; for example, Naples and Salerno will form a single port authority. In this way, the much 16 desirable diversification among the activities carried out by each port will be realized.

The new reform will also simplify the current 113 administrative proceedings, carried out by 24 port authorities. Indeed, they will be replaced by a “Single Administrative Window” and one authority called “Customs Facilities and Controls” and operated by the Agency of the Customs. The “Single Administrative Window” is the front office for all the administrative and authorization proceedings unrelated to commercial and industrial activities. These developments will reduce red-tape and increase the responsiveness of the public sector. Furthermore, the law ensures uniformity of multiple proceedings, currently conducted in different ways by the respective port authorities. The shipping operators are everyday involved with several changes in the shipping industry. These changes represent for them a challenge to pass the economic crisis affecting the shipping sector during the the upcoming years. Luisa Mastellone

Luisa Mastellone has achieved the degree in Business Administration at University of Naples “Parthenope (Italy). In 2013, in the same University, she has been speaker at the seminar held by Professor Assunta Di Vaio on performances and control in the shipping agencies network. She is a shipping agent working at the “Marinter Shipping Agency Srl”, a family firm in Naples. She is a member of the board of directors of Marinter. Luisa is also member of Young Italian Ship Agents Association’s board, and she has been involved in setting up of “Young Ship Italy”, becoming then member of the board of directors. In 2015 she submitted to “Fonasba Young Ship Agent and Broker Award” an article entitled “Strategic choices in the maritime field: the role of the shipping agency”. This manuscript was inspired to topic that Luisa has developed in her graduation thesis under the supervisor by A. Di Vaio.


Spring 2016 | Issue 5

voice of professionals

Migration by Sea Symposium 26-27 April 2016 MalmĂś, Sweden

Registration open

The sea is one of the most dangerous routes for migration. The WMU Symposium on Migration by Sea will provide an international forum for an exchange of information and for advancing knowledge on migration and, in particular, on migration by sea, with a view to exploring the complex issues and challenges that arise, and the lessons learnt.

Topics Covered

wmu.se/migrationbysea conferences@wmu.se #migrationbysea photo: Jason Florio, courtesy of MOAS

In Partnership with

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Migration Trends and Data Human Rights Human Trafficking and Migrant Smuggling Maritime Safety and Security, Search and Rescue Shipowner’s Liability and Insurance Salvage

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FreshMINDS

Flagging Out: Motivations of the Foreign Flag Choice

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Byron King

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voice of young generation

“Flagging Out” The decision to register a vessel in a foreign country— known as “flagging out,” or flying under a foreign flag— is of the highest priority for the modern ship operator. Under international maritime law, every merchant vessel must register in a single country called its “flag state.” The laws of the flag state then apply to that vessel and define the regulatory framework with which the vessel must comply. International maritime agreements require the flag state to inspect the vessel, certify the vessel’s crew and equipment, and issue official documentation for environmental and safety compliance1. Traditionally, ship owners registered their vessels in the same nation as the company location. However, in the 1950s open registries emerged to meet the demand of ship owners primarily in developed countries to drive down freight rates. Open registries are nations that are traditionally “not involved in waterborne trade,” which above all use their national maritime registry as a source of national revenue. 2 Nations with open registries allowed ship operators around the world to outsource labor and circumvent burdensome safety and environmental

regulations. With the growing popularity of open registries, the term “flag of convenience” entered the maritime vernacular, which refers to when a vessel flies a country’s flag different from the ship owner’s.3 “Positive and Negative Consequences” Supporters of the flagging out process claim that lower registration fees for shipping companies lower freight rates, which benefits not only the end consumer but global trade in general. However, critics argue that open registries provide substandard environmental and safety inspection services, which can lead to greater environmental pollution and a higher likelihood of an accident at sea.4 The controversy also touches labor concerns. The shipping industry is extremely competitive and fixedasset intensive. Operators reduce freight rates mainly by reducing operating costs, and thus have the incentive to outsource labor to foreign countries. For instance, an American ship operator who registers vessels in a foreign registry is not bound to national laws that require vessels to hire American seafarers. American seafarers must then compete primarily with comparatively low Eastern European and South Asian wage rates.5

International Maritime Organization, United Nations Convention on the Law of the Sea, 2008. James J. Buckley, The Business of Shipping, 8th ed. (Centreville: Cornell Maritime Press, 2008), 28. 3 William R. Gregory, Flags of Convenience: The Development of Open Registries in the Global Maritime Business and the Implications for Modern Seafarers, Georgetown University, 2012. 4 Shipping Industry Flag State Performance, International Chamber of Shipping, 2014/2015. Nonetheless, according to a 2014/2015 report by the International Chamber of Shipping, the most popular open registries are among the highest rated of all registering nations in terms of their standing with international safety regulations, while some of the worst ratings belong to small national registries. 5 William R. Gregory, ibid. 2

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FreshMINDS “Research Contribution”

“The Global Fleet”

Previous research on the topic of flags of convenience focuses mainly on the benefits and costs of flagging out for the ship operator, the end consumer, and the environment. However, this research models the ship owner’s decision directly using logistic regression. In evaluating the model’s results, one can determine precisely what factors most contribute to the probability that an operator chooses a foreign flag.

In 2015, 56% of vessels larger than 1000 gross tonnage were flagged out to a foreign nation. To understand the extent to which flagging out is prevalent in the global maritime community, refer to the following charts.

ME Mag

The model uses the latest available data on the global fleet as of January 1st, 2015, and posits the ship operator’s decision to choose a foreign flag as a function of vessel characteristics, such as gross weight tonnage, and national indicators of the ship operators’ ownership location, such as per capita GDP. Ultimately, this research establishes what factors are most important in determining a ship operator’s decision to “flag out” their vessels to a foreign nation.

Of the top 30 operator countries, Germany (85%), the Chinese Province of Taiwan (73%), and Greece (71%) have the highest proportion of foreign flagged vessels. However, larger vessels, which are often cargo ships designed for global travel, are more commonly flagged out than smaller vessels designed for domestic use. Consequently, the proportion of foreign flagged tonnage is typically larger than the proportion of individual ships that fly a foreign flag. In fact, in 2015 69% of the world’s total tonnage is flagged out to a foreign nation.

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Source: Clarksons PLC Fig. 1: Top 30 Operator Countries by Number of Vessels


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voice of young generation

Source: Clarksons PLC Fig. 2: Top 30 Operator Countries by Gross Tonnage

Of all the world’s registries, Panama registers the most vessels and is by far the biggest flag state in terms of gross tonnage. Indonesia and Japan register the second and third most vessels, but do not rank among the most important flag states in regards to gross tonnage. This phenomenon reflects the sizeable fleet of smaller

cargo and passenger vessels essential for these two island nations. Liberia and the Marshall Islands, two of the most well-known open registries, rank higher amongst flag states in terms of gross tonnage than number of vessels. This underscores the fact that larger vessels tend to flag out to open registries more frequently than smaller vessels. “Determinants of Flagging Out” Vessel Characteristics

The research results reveal a positive relationship between a vessel’s age and the likelihood of flagging out. In fact, older vessels are about 1.51 times more likely to be flagged out than average size vessels, while the youngest vessels below 5 years of age are the least likely to be flagged out. This trend may have to do with the changing makeup of vessel fleets between

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As one can see, the proportion of flagged out gross tonnage is most often greater than the proportion of nationally flagged gross tonnage for each nation. Of the top 30 operator countries, Monaco (100%), Bermuda (99%) and United Arab Emirates (95%) have the highest percentage of foreign flagged gross tonnage, while Indonesia (20%), Italy (26%), and Hong Kong (27%) have the smallest percentage of gross tonnage under a foreign flag. Figure 3 reveals the top fifteen flag states by number of vessels, while Figure 4 exhibits the top fifteen flag states by gross tonnage.

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Source: Clarksons PLC

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Fig. 3: Top 15 Flag States by Number of Vessels

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Source: Clarksons PLC Fig. 4: Top 15 Flag States by Gross Tonnage


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Further, vessels built in the same country as the operator’s beneficial location are far less likely to be flagged out than are vessels built in a country different from the operator’s location. In fact, vessels built in a country that differs from the one in which the owner is located are almost three times more likely to flag out a vessel. An explanation for this phenomenon involves national maritime law of countries that flag a significant portion of the global fleet. For example, some of the largest nationally-flagged fleets are in countries such as China, Indonesia and Vietnam, where markets are less liberalized than in western nations. In these nations, state-owned shipping companies are still prevalent and often there exist laws that prohibit the use of a foreign flag. Government-owned vessels are also more likely to be constructed in national shipyards, which increases the likelihood that a vessel flies a national flag.8 The research also reveals that when the ultimate ship owner’s nationality is the same as the country in which the operator company is located, that operator is 1.381 times more likely to flag out its vessel when compared to a vessel whose ultimate owner’s nationality differs from the operator country. On the surface, this result contradicts economic logic. The largest shipping 6

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companies in the world, such as Maersk Group and the Mediterranean Shipping Company, often are multinational conglomerates characterized by distributed ownership and intercontinental location. Ostensibly, these shipping companies would seem to be the most likely candidates to have the ultimate owner nationality of the company differ from the country in which the company operates. Of all world shipping companies, these goliath shipping companies have the largest fleets, the greatest financial resources, and the strongest incentive to flag out their vessels to cut costs for crewing and registration. However, this statistically significant finding casts suspicion on such reasoning, and merits further research into the discrepancy between the operator’s beneficial ownership location and the nationality of the ultimate vessel owner. National Indicators The results reveal that operators in developed countries are more likely to flag out their vessels than operators in developing or under-developed countries. An explanation for this may be that wages are higher in developed countries, which might spur operators to reduce the cost of crewing their vessels by flagging out. Further, maritime reports by UNCTAD note that safety and environmental regulations are laxer outside of developed nations, which might reduce the incentive for operators in developing nations to search for registries with even less strict regulations. Given the results that operators in nations with a large GDP have an increased likelihood of flagging out their vessels, it is interesting to note that countries with a higher human development index— which is often associated with greater economic

2014 Review of Maritime Transport. Publication. N.p.: United Nations Conference on Trade and Development, 2014. William R. Gregory, ibid. 8 Hoffmann, Jan, Ricardo J. Sanchez, and Wayne K. Talley. “Determinants Of Vessel Flag.” Research in Transportation Economics 12 (2004): 173-219. 7

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developed and developing countries. Recent research points to the fact that fleets in developed countries are aging rapidly, and that because of the recent global financial crisis and the relative economic slowdown across developed countries, ship building is slowing down in these nations.6 However, the opposite is true for less developed countries like India and the Philippines that are increasingly building new vessels for their growing national fleets.7 Since operators in developed countries are more likely to flag out their vessels than operators in developing countries, these findings may arise because operators in developed countries increasingly flag out their older vessels while operators in developing countries choose a national register for their new, younger vessels.

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FreshMINDS development indicative of high GDP—are also more likely to flag out than are nations with a lower human development index. Finally, the research results also reveal a negative relationship in regards to the likelihood a vessel flags out and the level of inequality in the vessel operator country. As the Gini coefficient of an operator country rises, the likelihood a vessel will be flagged out falls. Operators in countries with low inequality are nearly four times more likely to flag out than operators in countries with high inequality. An explanation for this may be the fact that poorer countries tend to have a higher degree of inequality, while wealthier countries tend to have a lower degree of inequality. This result appears to affirm the notion that operators in more developed nations are more likely to flag out than operators in less developed nations.

References Buckley, James J. The Business of Shipping. Centreville, MD: Cornell Maritime, 2008 Print. Gregory, William R. “Flags of Convenience: The Development of Open Registries in the Global Maritime Business and the Implications for Modern Seafarers.” Georgetown University, 2012. Web. Hoffmann, Jan, Ricardo J. Sanchez, and Wayne K. Talley. “Determinants Of Vessel Flag.” Research in Transportation Economics 12 (2004): 173-219. Print. International Maritime Organization, Implication of the United Nations Convention on the Law of the Sea for the International Maritime Organization, 2008. Web. “Shipping Industry Flag State Performance.” International Chamber of Shipping, 2015. Web. 2014 Review of Maritime Transport. Publication. N.p.: United Nations Conference on Trade and Development, 2014. Print.

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“Importance and Future Research”

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This research is of interest to policy makers who create the regulations ship operators must heed when deciding the nation in which to register their vessel. Further, ship owners, national governments, and other stakeholders also have a vested interest in adjusting to the fast changing ship registration environment. Future analysis can build off the research by linking the decision to flag out to the topic of maritime safety. With data on maritime accidents, researchers can quantitatively demonstrate the effect of flagging out on the likelihood of a vessel’s involvement in an accident at sea. Researchers can also examine to a greater extent what regulations or requirements most encourage operators to choose a foreign nation’s registry as opposed to a national registry. Such research could empirically identify what national or international maritime laws are most likely to incentivize operators to choose a foreign flag.

Byron King

Byron will graduate The George Washington University this Spring with a Bachelor of Science degree in Economics and Statistics. Byron submitted his thesis on flagging out to complete his Economics degree. He plans to expand on his past research into flagging out, and will continue his research into other matters touching the maritime industry. For those interested in reading a more in-depth analysis of the flagging out decision, please contact Byron at byronkking@gmail.com.


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Indian Maritime and Port Sector: On the Right Track, but Miles to Go Vishal Kashav


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voice of young generation

India has a long coastline of 7,517 km and is ranked the sixteenth largest maritime nation in the world as stated by Ministry of Overseas Indian Affairs and Confederation of Indian Industry1. Its vast coastline has accommodated 13 major ports and 200 notified non-major and intermediate ports. Around 95% of the country’s trade by volume is carried out from major, non-major and intermediate ports. Over the past couple of decades, the Indian government has tried to uplift its ports and maritime sector by permitting 100% FDI, thus motivating private players to invest in the growth of the economy, leading to growth of ports, especially in container ports and terminal segments. Even though international port operators such as PSA, DP World and APM Terminals have invested big amounts in Indian ports and terminal projects, more funds are needed for port development and modernization as state-of-the-art, modern ports strengthen the economy by speeding up the handling of cargo, providing better storage space with minimum cargo damage or pilferage and minimizing the turnaround time. However, port infrastructure bottlenecks along with differences in tax structures across the country have been impacting the competitiveness of Indian ports in the global market. Major ports in India have implemented the Build Operate Transfer (BOT) concept of the Public Private Partnership (PPP) model, which has enabled their development and capacity expansion. Recently, Adani group (India’s multinational conglomerate) won the bid for developing the Vizhinjam deep-water multipurpose seaport project. The group is the largest port developer and operator in India, with its Mundra port being the country’s largest commercial port.

While the country’s ports have improved, its shipping sector has lagged behind. Indian tonnage stands 11 million GT, of which Indian-flagged vessels carry only 8.4%, with the balance being carried by foreign shipping companies.The poor state of the Indian shipping industry can also be gauged from its overaged vessels – more than 39 per cent of the fleet is above 20 years old. Shipping Corporation of India (SCI), the largest shipping company of the country (owned by the central government), operates a fleet of 69 vessels totaling 5.89 million dwt. Even though the government has allowed 100% FDI in the shipping sector, not a single foreign player has been able to invest actively because of the unfriendly tax and duty structures. The article covers an overview of the maritime and logistics sector and that of the Indian economy in addition to Indian maritime trade statistics, inland national waterways and various programmes initiated by the government in the ports and maritime sector. It also draws the readers’ attention to various problems faced by the freight transport segment in the country as well as the programmes launched by the government to develop the maritime and logistics sector. Outlook for the Indian economy The Indian economy has emerged as one of the strongest in the past decade, having the seventh largest GDP in the world. It is driven by agriculture, manufacturing and services. The country is likely to transform into a new industrial hub, as it has been relatively successful enough in controlling poverty, inflation and corruption, thus increasing investments and speeding up the process of reforms. The GDP increased to 7.3% in 2014-15 from 6.9% in 201314, and is expected to remain well above 7% for the next two years as stated by the World Bank2.

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Introduction

27 1 India connect newsletter, Feb. 2015 issue 2 Economic times, 30 Oct. 2015 issue


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FreshMINDS The present union government launched the Make in India campaign on 25 September 2014, which aims to transform the country into a manufacturing hub by attracting FDI in the manufacturing sector. A Make in India event was held in Mumbai from 13 to 20 of February 2016 that garnered over USD 220 billion worth of investment commitments and generated investment enquiries worth USD 22 billion. The Indian government is all set to promote its less-developed Northeastern region by improving connectivity to the region as well as setting up manufacturing units there. Indian maritime trade statistics Indian maritime trade has increased in the past couple of decades, and its economy, which has grown by 7% Year-on-Year (YoY), is one of the fastest growing economies in the world. This is expected to lead to long-term, sustainable growth in the country’s international trade. Container traffic handled at Indian ports crossed 11.5 million TEU in calendar year 2015,

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Fig 1: Comparison of trade deficit of India in FY14 and FY15 Source: Maritime Gateway Journal, Oct. 2015 edition

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with Jawahar Lal Nehru Port (ranked 31stacross the globe in terms of size3) handling most of the container traffic at 4.5 million teu. On 10 October 2015, JNPT laid the foundation stone for the fourth container terminals, which will more than double the total throughput to 10 million teu. Since LNG is essential to run the country’s power plants, indian LNG imports (long-term and spot) surged to 13.99 million tonnes in 2014-15 from 13.38 million tonnes in 2013-14 according to PPAC. Dahej (owner: Petronet LNG) in Gujarat state is the largest LNG terminal (nominal capacity: 1,313 mmcfd) of the country. Meanwhile LPG imports trend remained firm with 8.3 million tonnes in 2014-15 an increase of 26%, compared to 6.6 million tonnes in 2013-14. This steep rise in imports is due to the government decision to provide every household in the country with LPG connection by 2020 which will require higher imports in the near future as uncertainty prevails in the domestic LPG production. Rapid growth in steel production has led to India being ranked the third largest producer of crude steel (pig and sponge iron) in the world. Steel production in the country surged 4.5% to 83,244 tonnes in 2014 from 79,675 tonnes in 2013.


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As shown in Figure 1, slowdown in global trade has affected India’s exports as well. In 2015, India exported goods worth USD 310.5 billion, 1.2% less than USD 314.4 billion in 2014 and much lower than the government’s target to achieve USD 340 billion Ports and maritime development programme in India In 2010, Government of India came up with a 10year action plan – National Maritime Development Programme (NMDP)– to develop the maritime sector of the country. The government planned to invest USD 14.75 billion over a period of 10 years, which constituted USD 8.21 billion for enhancing the capacity of major ports with the remainder being used to develop hinterland connectivity and inland waterways. So far, the work done in this context is at a very low pace with no satisfactory results. On 31 July 2015, the union government launched its ambitious Sagar Mala (ocean necklace) project aiming to uplift the maritime sector and lead to portled direct and indirect development. A National Sagar Mala Apex Committee has been set up for policy guidance and coordination as well as to supervise the planning and implementation of the project. The committee is headed by the Minister of Shipping, with other cabinet ministers and chiefs of respective states as its members. The primary objective of the project is to develop ports and terminals of the country and enhance the efficiency of the transport network to improve hinterland connectivity, establish logistics hubs; facilitating the environment to set up industries and manufacturing units in order to improve the EXIM trade. Sagar Mala will emphasize more on improving the basic infrastructure so that cargo can be evacuated and transported quickly, efficiently and cost-effectively to and from ports by setting up Special Purpose Vehicles to install efficient rail evacuation system at major ports. The project aims to develop the undeveloped regions of the country such as the Northeastern states by encouraging Public Private Partnership (PPP) models to inject investment in the

voice of young generation transport sector of the region. The target is exports worth $900 billion by 2020 under the Sagar Mala project. Inland national waterways of India Apart from ports, India has a substantial network of water bodies, around 14,500 km, consisting of rivers, lakes, canals and backwaters etc., among others. The six inland national waterways can potentially provide reliable, sustainable and cheaper connectivity across villages, towns and cities. The inland national waterways of India are listed below: • National Waterway 1 (NW1) from Haldia to Allahabad on Ganges-Bhagirathi-Hooghly river system • National Waterway 2 (NW2) from Dhubri to Sadiya stretch of Brahmaputra River • National Waterway 3 (NW3) from Kollam to Kottapuram on Champakara and Udyogamandal canal • National Waterway 4 (NW4) from Kakinada to Puducherry • National Waterway 5 (NW5)from Goenkhali to Talcher on Brahmani River • National Waterway 6 (NW6) from Lakhipur to Bhanga on Barak River (Proposed) Although these waterways have not yet been developed for commercial application, they provide tremendous scope for economic growth and trade facilitation. For instance, National Waterway 2 of 890 km from Sadia to Dhubri (on the Brahmaputra River) is just one meter deep at some areas. The area can be dredged and used for transporting raw material for construction projects since rail connectivity is poor in the region. The government could look into the network of Europe that connects hundreds of cities and industrial regions through 37,000 kilometres of waterways. On top of the six Inland National Waterways, the union government has decided to declare 101 inland waterways as national waterways for facilitating maritime transport to inland locations.

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Moreover, bad quality of its domestic coal has led it to become one of the major coal importers in the world, with imports rising by 18.5% to 220 million tonnes in 2014 from 180 million tonnes in 2013. Apart from hydro power, the major chunk of electricity produced in the country is generated by thermal power plants.

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FreshMINDS Fig 2: Structure of inland national waterways Source: Inland Waterways Authority of India

Once operational, the waterways will relieve congestion on roads and provide clean, green transportation at cheaper rates.

Challenges faced by the maritime port and logistics sector in India

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• The main challenges and problems of the sector are recorded below: • As ship sizes have been increasing with time, 22,000 teu capacity ships will soon start sailing. Indian ports are not geared to handle such big vessels (that is, if the country generates volumes that require 22,000 teu ships to transport the cargo economically) due to insufficient waterfront and onshore infrastructure. • According to the CAG4, the cranes at major ports of India are either obsolete or will soon be obsolete, which has reduced the efficiency and working of the ports. This has affected the turnaround time of vessels and has made the ports incompatible with global standards. • Lack of subsides and incentives in the maritime

30 4 Report No. 3, 2009-10

sector has stalled growth of this sector which is in urgent need of reforms. Labour disputes and the local mafia have impacted port operations, especially in communist-ruled states such as West Bengal and Kerala. Performance of most ports in India has not been up to the mark because of poor hinterland connectivity. Roads are not feasible for long haulage (transporting freight up to 500 km) whereas congestion on rail tracks leads to delays because same rail tracks are used by both passenger and freight rakes simultaneously. Hilly states such as Jammu and Kashmir, Himachal Pradesh, Uttrakhand and Arunachal Pradesh are not properly connected via the national railway network. The existing road and rail infrastructure does not enable double stack movement of containerized freight due to insufficient height of flyovers and electric power lines.


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Conclusions In the past three years, Prime Minister has marketed the country very well across the globe. Experts are positive about India being one of the largest manufacturing hubs of the world by 2020. However, trade can be facilitated only when there are efficient ports and good hinterland connectivity. While many promises and big budget allocations have been made for the development of this sector, what matters is work on the ground level. No doubt the economy is growing (announcement of the bullet train project is one such example), but serving the demand of the country’s 1.3 billion population is not an easy task. Although India has picked up the momentum, there are still many segments in the economy which are not yet properly focussed; for example better rail and road connectivity in the North eastern region that will lead to better trade prospects with Southeast Asian countries. Also, FDI in the ports and maritime sector was permitted a couple of decades ago and is expected to increase in the near future. A result of the above is expected to be the setting up of more ports on the Eastern and Western coast of the country and more investments by foreign players.

Vishal Kashav

Vishal is pursuing Diploma in Transport Economics and Management from Ministry of Railways (Government of India). He holds a bachelor’s degree in Shipping, with specialization in multimodal transportation, and master’s in business administration, with specialization in Port and Shipping. He has interned in the railway logistics sector, having trained at Adani Mundra port for three months in port operations and management. At present, he is working as a Research Analyst (Ports and Container research) with Drewry Maritime Services Pvt Ltd, a maritime research and consultancy firm. Vishal is also planning to pursue his doctorate in the field of logistics and hinterland development.

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References CAG, Report No. 3, 2009-2010 ENS Economic Bureau (The Indian Express), Port infrastructure mars port users, says CAG, 2010 Anil Devli – CEO INSA, Overview of the Shipping sector in India, 2011 Arvind Jayaram, Indian shipping industry losing steam, 2014 India connect newsletter, Feb. 2015 issue Business Line newspaper, 11 Oct. 2015 Maritime Gateway Journal, Oct. 2015 edition Economic times, 30 Oct. 2015 issue

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CASE Stories

Functions, Rights and Remuneration of the Shipbroker Ergun Gunes Introduction

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The physical shipping business is generally regarded as a highly complicated industry, so shipbroking and chartering are consequently similarly considered.

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Most publications define a broker11 as a person or organization trying to make a connection between two other parties (the charterer and owner, of course) however this definition is only partially true. Besides this basic function, another essential ability is effective communication 2 with the people behind the ships and the cargoes, and this requires skillsets beyond pure shipping knowledge. In order to attract and retain his charterer’s and owner’s attentions, the effective shipbroker might need to demonstrate an interest in, and understanding of, amongst other things, cultural, geopolitical, and international trading matters. In fact all and any knowledge supporting the perception that he or she is not simply focused on commissions, but is abreast of global developments (both in and out of their own market) can provide useful reassurance that they are dealing with a true professional.

Nonetheless, English law describes brokers as agents, and it is clearly laid out as to whom is authorized, or considered by law as authorized, to represent another person (their Principal), in such a way as to be able to affect the Principal’s legal position. So although the shipbroker is acting as an agent on behalf of his principal, he is not mentioned in the body of the contract and so it is not a party to it, thus complying with the “Doctrine of Privity”1. In order to protect the right of third parties (in this instance the rights of the shipbroker), new legislation came into the force in 1999; known as the Contracts (Rights of Third Parties) Act 1999 3,4 . Its main goal was to remove the unfair prevention of third parties’ abilities to enforce adherence to, or obtain remedy for legally binding contracts from which they should have rightfully benefitted, but didn’t. Background Speaking as an independent shipbroker, it is all too common to be cut out of a deal, so it was gratifying to

1 The general rule under the Doctrine of Privity is that someone not a party to a contract cannot be liable under it nor benefit from it.


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We chartering shipbrokers are all too familiar with the gut-wrenching feeling of seeing what you thought was your cargo widely reported as fixed by somebody else, so imagine his consternation at seeing two of the fleet reported in the trade press as having been sold! Having spent a considerable amount of time and effort advising the owner on the value and potential of his fleet, the broker was comfortable in the fact that he had an exclusive agreement for his commission for any ships from this fleet subsequently sold – by him or anyone else - so off he went back to the owner to let him know his ships were being misreported as sold. Only they weren’t, and this is where our case begins. Our broker (hereinafter called “John”) signed an exclusive commission agreement with his ship owner (hereinafter called “Michael”), so as per the agreement Michael was obliged to pay brokerage of 5%. Ultimately, having discovered that his owner had in fact sold ships through another broker, John decided he had no recourse other than pursuing his proper remuneration through his lawyers. The critical moment and result Once John had verified that two of the owner’s ships had been sold through another broker for EUR 30,300,000 each, he asked Michael for his agreed commission; unfortunately Michael refused to pay the EUR 303,000, so the lawyers were appointed and the commission claim was put before the First Instance Court in January 2013. As we would have hoped, in due course this court was happy with the legally binding nature of the contract and so found for the broker, awarding the commission of EUR 303,000, plus interest and costs.

Having already effectively paid the second broker’s commission, Michael was now unwilling to pay again, so eventually he appealed the decision of the First Instance Court to the Supreme Court, believing he had a case to fight on the basis of his allegation that the prosecuting broker (John) had been incompetent and “not fit and proper to perform this duty”. He even went so far as to involve his local shipbrokers’ association in an attempt to provide evidence that the broking house’s employee had fallen short of industry standards. Fortunately, the response of the local association to the question of competence posed by Michael was to find in the John’s favour, thus properly protecting his legal rights and reputation. It had taken some months for Michael to reach the conclusion that he was unlikely to get too much further, and finally had to accede to the fact that he was mistaken; it was clear that the John’s rights had been “unfairly suspended” by himself, so in April 2014, just before the considerable expense of a trial in the Supreme Court, he decided to approach John with an offer of settlement of the original commission amount of EUR 303,000, but without interest and without the payment of costs. What this demonstrated was the due justice earned by a truly professional broker, showing that having the proper knowledge of your trade and applying it ethically in your markets can actually result in the protection of your rights. The costs in taking the matter to trial at the Supreme Court were estimated at a further US$45,000, but International Transport Intermediaries Club (hereinafter called ITIC5) was informed that this particular Supreme Court had a record of reticence in awarding costs, and was unlikely to award more than US$10,000. As taking the matter to the Supreme Court would likely result in additional unrecoverable costs, and John was willing to forego the interest, ITIC agreed settlement at the commission amount of EUR303,000

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learn recently that one of my fellow brokers was able to successfully defend his hard-earned percentage in the courts.

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CASE Stories plus the costs awarded by the First Instance Court of US$32,300. The costs incurred in the Supreme Court proceedings were waived. The legislation allows the possibility of a third party to enforce terms of a contract, where the contract expressly provides that he or she has that right. In addition, a third party will be able to enforce a term where that term purports to confer a benefit on him or her (although this further provision will not apply if, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party). The Act does not amend the rule that contracting parties cannot impose obligations on third parties. It ensures that in certain circumstances the Principal of Contract rule might not be applicable, or may sometimes have very limited application. The Act made a significant change to the ways third parties could enforce contracts. By applying the Act in force, the basic principle of the “Doctrine of Privity” has been extended, allowing third parties to sue in two circumstances; 1. When it is stated in the contract that they are allowed to do so, 2. When a benefit has been professed in the contract which could be claimed by third parties Questions for Further Consideration: • Does Michael have right to ignore his exclusive appointed broker “John” and go for a deal using another channel? • Do brokers, as intermediary service suppliers have right on concluded charter party?

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P.S. The inspiration for this case story is based upon a press release from the International Transport Intermediaries Club dated 23 April 2015.6 Place of legal hearing was at Danish Court in Copenhagen and mentioned vessels were Passenger Ferries. Any other 34 details such as name of the parties or any speech from the hearing is not disclosed, thus, names have been

fictional. References: 1. Steve Douglas (ITS 2010). Shipbrokers in the 21st Century – A snapshot of the profession and are they really needed? Paper No 6 2. Krishna Prasad. A study of the impact of modern communication in practical ship-broking. http://www.he-alert.org/filemanager/root/ site_assets/standalone_article_pdfs_0905-/ he00915.pdf 3. The first case under Contracts (Rights of 3rd Parties) Act 1999], [Nisshin Shipping v Cleaves & Ors (2003)]. 4. http://www.legislation.gov.u 5. http://www.itic-insure.com - ITIC provides indemnity insurance to those who offer services to the transport industry. 6. http://www.itic-insure.com/knowledge-zone/ article/press-release-may-2015-shipbrokerloses-interest-but-secures-commission-onsale-by-rival-broker-132492/

Ergun Gunes

Ergun Gunes is a Chartered Shipbroker working for Essex Shipping Services Ltd., and a PhD candidate at N.Y. Vaptsarov Naval Academy. He graduated from the Technical University of Varna, Faculty of Marine Science. Following the graduation, he was admitted to the same Faculty as a master’s student. He started his professional life in a ship owning company and became a chartering and commercial manager. Simultaneously he completed courses in Tanker Chartering at The Cambridge Academy of Transport and a course for International Trade at the Central College of London. He also completed his Institute of Chartered Shipbroker’s exams, achieving his MICS and in 2010 has accredited as a Tutor. He became one of the founding members of the Turkish Shipbrokers Association in 2010.


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Memories Interview with Trevor Heaver Mary R. Brooks

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Trevor Heaver, Professor Emeritus at the Sauder School of Business, University of British Columbia, Vancouver, Canada served as IAME President from 1994 to 1998, two terms of two years. At the time, the IAME Constitution limited Presidents to no more than four years of service as President and the roles of Past-President or President Emeritus did not exist. It was a challenging time as Richard Goss had served for two years and the organization, while up and running, was still finding its way. Dr. Heaver became President at the 1994 conference in Seoul, Korea, the first IAME Conference to be held under the new association banner. He was interviewed by Dr. Mary R. Brooks on November 17th, 2015.

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Mary R. Brooks (MRB): While Richard Goss was IAME’s first and founding President, you were a key leader in the World Conference on Transport Research Society, and organizer of the WCTR conference in Vancouver in 1986. You had a significant opportunity to assist in the founding of IAME in 1992 after the lead-

in conferences in London and Rotterdam were held in 1991. What can you tell us about the WCTR in Lyon and the formation of IAME at the WCTR conference. After all, those interested in maritime transport could have been served by the Special Interest Group (A2) of WCTR. What do you see as the critical factors in IAME’s formation? Trevor Heaver (TH): The need for greater communication among academic and non-academic maritime economists was recognised long before the resources and commitment enabled IAME to be formed. I had the pleasure of presenting and being rapporteur at the first International Maritime Economists Conference held in Piraeus, September 1976.1 This had 42 attendees from 13 countries. As I note in my chapter on the Evolution of Maritime Economics in Wayne Talley’s edited volume Maritime Economics, a committee was established to help organise an international group. In the absence of resources, meetings remained ad hoc, such as the

1 In my career, I have successfully combined a business trip with other business meetings or a vacation. This trip was a terrible exception: Vancouver – Athens return, two and a half days in Athens for my first visit there, all so that I could finish on time a book on railways in Canada!


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the story of IAME

When I became Chairman of the WCTR in Hamburg in 1983, the organisation did not have special interest groups. These became a part of the WCTR structure at the 1986 Vancouver conference when the organisation became a society (WCTRS). The maritime SIG did not develop a momentum like the air transport SIG. It really just organised papers for the triennial conference. It did not fill the need for an ongoing maritime initiative and was never conceived as such. The 1991 Rotterdam conference (resulting in the book, Current Issues in Maritime Economics edited by Ken Gwilliam) was organised to honour the retirement of Professor Henk Molenaar and to move the formation of IAME a step closer. It did both well and had a celebrative party at Henk’s house close to a dyke. (Where else in Holland?) As I recall a ‘consent process’ led to the easy nomination of Richard Goss to be president and the nomination of a founding council. The inaugural meeting of IAME was scheduled to coincide with the Lyon WCTRS simply to take advantage of a meeting with an existing administrative structure attended by many maritime economists. Subsequently, the decision was made that IAME meetings should be held at a separate, even if proximate, time even if in the same or near-by city. This worked well for 1992 (Lyon) and 1998 (Antwerp); the 2001 conference was in Hong Kong with WCTR in Seoul the next week and the 2004 combination was Izmir for IAME, the week before the WCTR conference in Istanbul. It did not work in 2007

when nine time zones and one day separated the two conferences but the relationship was a factor in the choice of Portugal for 2010 by the IAME Council in 2008. The IAME Council did not consider the WCTR location in making decisions about 2013 or 2016. The level of global connectivity in the world was not foreseen by the IAME founders; they did not anticipate falling air fare levels. It was expected that there would be an international conference and business meeting every other year, with regional conferences in the intervening years. This is consistent with the 1995 meeting held in Boston in December, attended by 4060 people, whose travel was an adventure because of a snow storm. Since 1995, IAME has held a truly international meeting every year. MRB: What can you tell us about IAME’s first conference in Korea? TH: The location of IAME meetings was driven, particularly in the early years, by the anticipated level of local financial support. As I recall, the Korea Maritime Institute played an important role in enabling and managing this first conference. The conference was well supported by industry and was a successful first meeting. Towards the end of the conference, delegates had the opportunity to attend a cultural festival or ascend a peak. I chose the latter, which I still remember well. Our hosts on that hike participated in a mountain hike after the Vancouver conference in 1996. Continuity in academic dialogue can be about more than exchanging and discussing papers. The social aspects of conferences are important to building friendships and more lasting relationships.

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meeting on ships’ costs organised by Richard Goss in 1984 at Cardiff University. (Richard had joined the university in 1980.)

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Memories MRB: What I recall, not having attended the conference, was that I was elected to serve as Membership Secretary and Treasurer of an organization I belonged to but had not agreed to serve. Was there a bit of western Canadian cowboy strategy at work? That is, should I blame you, Richard or Paul Tae-Woo Lee? TH: I strongly endorsed the proposal (laughter). At that time, it seemed advantageous to have President, Membership Secretary and Treasurer proximate. (MB: Still a four hour time difference!) Being closer personally and culturally made a lot of sense. MRB: You were charged with becoming IAME’s President from 1994-1996 after the Korean conference; what are your recollections of the two years before becoming president and your major challenges in taking over the presidency from Richard Goss? TH: The transition as President of IAME was quite easy as Richard and I shared similar views on the importance of global membership and the value of non-academic members. The main challenges were associated with the international transfer of administrative arrangements and, therefore, fell on you, Mary.

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There was a need for a more business like administration; I and IAME were fortunate that you, Mary, took on the Treasurer and Secretariat roles and served extraordinarily well in spite of the burdens of a growing international organisation with a transitory administration. From a Member standpoint, the establishment of the Secretariat in Australia in the early 2000s was an important step forward for the long-term stability of IAME.

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MRB: What goals did you have for IAME in these early years of organization? What challenges did you see for the organization and what did you hope to accomplish?

TH: Membership and corporate support were the main challenges. A successful main conference in 1996 was an essential objective to strengthen the foundation of an effective global organisation. I think the conference achieved that. I am better at planning than record-keeping so I do not know the number that attended. However, there were 25 sessions, three of them roundtables, with almost 50 papers given (50 printed abstracts but a few noshows), so sessions had 2-3 speakers. Sixteen of the sessions were chaired by non-academics. Within the conference structure, involvement of managers from industry and government was successful. However, with conferences moving around the world annually continuity in non-academic involvement is hard to achieve. The other key to solidifying membership was an ongoing communication with them. In this and the old mail days, we were fortunate to have Alexandros Goulielmos produce a Newsletter. (Alexandros had edited the proceedings of the 1976 conference!) MRB: You were also the organizer of the IAME 1996 conference in Vancouver. Taking on so much in the beginning must have been difficult. Could you please explain why you volunteered to lead both the conference and the presidency in those two years? TH: Many organisations expect that the head of the organisation will host the next meeting. This was the case for the WCTR. Having hosted a successful WCTR(S) conference in 1986, I was keen to show off Vancouver for the 1996 meeting. It is a city that people like to visit so that a conference early in an organisation’s history has a good chance of attracting a solid number of delegates.


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the story of IAME

I contemplated ‘a conference a decade’ for 2006, but was pleased to learn that there were many new places eager to host so I was off the hook! MRB: By 1996, IAME was a stable and growing organization with a Secretariat that answered the phone, email and fax machine. While I remember the numerous trips to the local bank with credit card slips from around the globe and lots of paperwork to ensure that we were not viewed as a ‘for-profit’ organization, what do you recall as the key challenges you faced entering your second term as President in 1996. TH: The key issue for IAME was to resolve the challenge of the administrative structure moving internationally every two or four years. While I did not put a new structure in place, I did leave the new president with an option in the Netherlands. MRB: Now 1994-1996 is 20 years ago. What do you consider to be your legacy? TH: I do not have a legacy, I have pleasure: Pleasure in having worked with others to develop a stable organisation of enthusiastic, open-minded academics who enjoy the challenge of economic research in the dynamic, vital maritime industry.

TH: An academic career in the area of shipping and ports, as distinct from a paper or two, has to be based on the vision of being able to contribute directly or indirectly to actual challenges in shipping and ports and their relationships with trade and shippers. It is up to the individual to find exciting areas to investigate and write about. There is lots of scope!

Mary R. Brooks, Professor Emerita Rowe School of Business Dalhousie University PO BOX 15000 Halifax, NS, B3H 4R2 Canada e-mail: m.brooks@dal.ca

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MRB: What advice do you have for young scholars looking to make a career in the area of shipping and ports today?

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Memories

ME Mag IAME Newsletter, October 1997 (Courtesy of Alexander M. Goulielmos)

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Memories

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the story of IAME

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Spring 2016 | Issue 5

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Submission Guidelines

Contribute to The Maritime Economist The Maritime Economist (henceforth ME Mag) is a magazine edited by the International Association of Maritime Economists. The aim of ME Mag is to combine both theoretical and practical knowledge and promote collaborations among scholars and professionals in the maritime industry. ME Mag is interested in the following topics with maritime focus: • Economics of maritime transportation (theory, models, practical controversies, etc.); • Port governance, port competition, port utilization and other port related issues; • Finance, asset management and investments; • Management and leadership in the shipping business; • Operations research, optimization and industrial engineering for maritime problems; • Maritime policy and governance; • Maritime business strategy; • Maritime geography and spatial analysis; • Behavioral science and human factor; • Marketing; • Cruise and ferry industries; • Short sea shipping; • Environmental issues and sustainability; • Risk management; • Intermodal transport; • Other related topics. ME Mag has a particular focus on Maritime Economics and Business while covering many related fields.

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ME Mag has five fundamental functions: 1. Encouraging scholars to present their research in plain language for wider audiences of the maritime industry; 2. Promoting and encouraging R&D partnerships with non-academic institutions (firms, governmental offices, among others) of the maritime industry; 3. Encouraging young scholars to conduct research in maritime topics; 4. Encouraging provocative and critical research; 44 5. Support collaboration among academia and professionals.

Authors should keep in mind that, ME Mag is NOT only published for scholars, but it is also circulated to large society of the maritime industry and policy makers. Readers of ME Mag may not have a background on the presented topic, and authors are responsible for presenting the content of their article in a language that is clear to business and policy makers. ME Mag does not publish articles with many mathematical functions, long theoretical discussions and/or lack of practical value. Authors should always consider the perspective of professionals, business practitioners and policy makers and any other people who have general knowledge of maritime while have limited knowledge on the intended specific topic. ME Mag encourages narrative style, story-telling, metaphorical expressions and other methods of non-fiction authorship. On the other hand, each article should ensure at least one of the following dimensions: • Presenting a new topic, method, theory, perspective or model; • Presenting an existing academic research (already published in a scholarly-refereed journal); • Analyzing data, models, systems or a market with novel interpretations; • Criticizing an existing approach, system or thought; • Challenging the conventional wisdom on a particular topic of maritime; • Presenting a knowledge created in the business/ industry practice; • Introducing an innovative solution to a common problem; • Presenting a policy or strategy; • Sharing information about available data and tools of interest to maritime professionals. Four major sections are established to perform some of functions of ME Mag, and each has its own concept. Authors should first review the concept of sections below and define which section fits for their (proposed) article.


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Submission Guidelines

Section Specific Notes Section 1: INPLAIN

InPlain section is dedicated to academic research performed by both scholars and professionals in the maritime economics and business research. Scholars can briefly present a research which will be published shortly in an academic journal or an already published one. In such case, author should refrain using same text and should rewrite in ME Mag’s concept of easyto-read and concise style. Therefore, it should be a kind of executive summary of the upcoming/published academic paper.

Section 2: PROFESSION & PRACTICE

Profession and Practice section is dedicated to industry professionals for presenting innovative solutions, created knowledge and R&D results in the practice. Authors should refrain from telling success stories and focus on the drivers and requirements for successful results. This section promotes research activities at non-academic institutions and encourages to present research achievements as well as core concepts and created knowledge. Authors should present some evidences for supporting arguments. Articles in this section should be written in plain language excluding jargons and using limited number of technical terms with brief and simple descriptions.

Articles in this section should be written in plain language excluding jargons and using limited number of technical terms with brief and simple descriptions. Technical requirements on articles for submitting to this section are as follows: • Article should not exceed 2000 words plus a number of figures or tables; • A bionote of 80 to maximum 100 words length should be inserted at the end of the article. Each article submitted to InPlain will be reviewed in terms of its intellectual value, writing style and accordance with the policy and concept of ME Mag by the section editors.

Technical requirements on articles for submitting to this section are as follows: • Article should not exceed 2000 words plus a number of figures or tables; • A bionote of 80 to maximum 100 words length should be inserted at the end of the article; • Author’s affiliation (e.g. name of company) will normally be indicated in bionote. However, using brand names and/or company logo in the article may cause an advertisement conflict. In such case, author will be contacted about using these components by sales office if the article is accepted for publication. Each article submitted to Profession & Practice will be reviewed in terms of its intellectual value, writing style and accordance with the policy and concept of ME Mag by section editors.

A proposal for consideration can be sent to editors instead of full article. Proposals should address briefly the objective, motivation and background, main idea and major results.

A proposal for consideration can be sent to editors instead of full article. Proposals should address briefly the objective, motivation and background, main idea and major results.

Please submit your full article or a proposal electronically to inplain@mar-economists.org

Please submit your full article or a proposal electronically to profession@mar-economists.org

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Note: Authors who are not sure about the selection of proper section may send an e-mail to either a section editor which is thought to be closer to the topic and purpose of article or Editor-in-Chief for consultation.

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Submission Guidelines

Section 3: FRESHMINDS

FreshMINDS section is dedicated to young scholars and professionals (early in their [research] career) for presenting their research results, novel concepts and innovative findings or thoughts. This section promotes young scholars and professionals to express their opinions and/or criticism about the conventional concepts with proper theoretical and/or practical evidences to support their arguments. Articles in this section should be written in plain language excluding jargons and using limited number of technical terms with brief and simple descriptions. Technical requirements on articles for submitting to this section are as follows: • Article should not exceed 2000 words plus a number of figures or tables; • A bionote of 80 to maximum 100 words length should be inserted at the end of the article; Each article submitted to FreshMINDS will be reviewed in terms of its intellectual value, writing style and accordance with the policy and concept of ME Mag by section editors. A proposal for consideration can be sent to editors instead of full article. Proposals should address briefly the objective, motivation and background, main idea and major results. Please submit your full article or a proposal electronically to freshminds@mar-economists.org

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Section 4: CHALLENGE

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CHALLENGE section is dedicated to draw attention to critical problems in the maritime industry as well as academic research. Both scholars and professionals can submit a short article dealing with the problem and draw attention of readers to that challenging topic. Articles in this section should be written in plain

language excluding jargons and using limited number of technical terms with brief and simple descriptions. Technical requirements on articles for submitting to this section are as follows: • Article should not exceed 1000 words plus a number of figures or tables; • A bionote of 80 to maximum 100 words length should be inserted at the end of the article; Each article submitted to CHALLENGE will be reviewed in terms of its intellectual value, writing style and accordance with the policy and concept of ME Mag by section editors. A proposal for consideration can be sent to editors instead of full article. Proposals should address briefly the objective, motivation and background, main idea and major results. Please submit your full article or a proposal electronically to challenge@mar-economists.org Section 5: CASE STORIES

CASE STORIES section is dedicated to both maritime professionals and practice-oriented scholars for presenting case stories that draw readers’ attention to real world challenges and thought provoking situations and ideas. What is a case story? Without overly-specifying the content or the format, a good case story usually: • addresses a relevant topic that arouses the readers’ interest, • is about an actual event or situation that has recently happened, • includes real characters, quotations, dilemmas, and decisions, and • can be generalized to most organizations or individuals, helping to learn from others experiences. Case stories should be written in plain language excluding jargon and using a limited number of


Spring 2016 | Issue 5

Submission Guidelines

technical terms with brief and simple descriptions. Technical requirements on case stories for submitting to this section are as follows: • Case stories should not exceed 2000 words plus illustrative images; • A bionote for each author of 80 to maximum 100 words length should be inserted at the end of the case story. If the case story focuses on specific organizations or individuals, the names may be disguised to maintain anonymity. However, any information and quotations should be factually accurate and permission should be granted to the authors for using information that is not publically available. Each article submitted to CASE STORY will be reviewed in terms of its practical value, storytelling effectiveness, writing style, and accordance with the policy and concept of ME Mag by the section editors. A proposal for consideration can be sent to editors instead of full article. Proposals should address briefly the objective, motivation and background, main idea, and the story line. BOOK REVIEWS

If you would like a book to be considered for review in the magazine, please send two copies to: Michele Acciaro, Grosser Grassbrook 17, 20459 Hamburg, Germany. For further information, please do not hesitate to write to books@mar-economists.org

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ME Mag will review recently published books and article collections related broadly to maritime transport, maritime economics, ports, logistics and shipping that can appeal not only to an academic audience but also to industry.

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