Shipping Industry in the UK - Assignment Example

Running Head: Shipping Industry Shipping Industry in the UK of The UK shipping industry is currently thefourth or fifth largest service sector exporter in the UK, larger than telecommunications, computer services or film and television. It claims to be one of the most varied and competent shipping fleets of the world and with statistics like "It takes over 4% of the world's shipping business with only 1.7% of the fleet" it comes as no surprise. Not only does it provide great business for the shipping industry itself but it also "provides essential skills and core business for marine related business ashore and for over half the business of British shipbuilders and marine equipment suppliers". http://www.british-shipping.org/british/delivering.html. Ninety-five per cent of Britain's external trade by weight, (77% by value) moves by water. "The World Bank estimates that seaborne trade in Britain will increase by 4% a year over the next decade, yet UK ship ownership and registration have fallen substantially over the past 30 years and there seems to be a maritime staff crisis, with a decline in the number of qualified seafarers". http://www.kmcinternational.com/about_us/sector_profile.cfmid=14 The numbers of the UK seafarers are declining at a rate which is not only hazardous to the shipping industry itself, but this in turn will also affect the many other industries which employ the trained seafarers when they come ashore. There are about 17,000 such jobs available, these jobs range from surveying to shipbuilding and from marine equipment services to insurance - for many of these jobs the experience which seafarers have is essential. The moribund sea industry would leave the maritime related economy faltering. Recently, the British government has issued new taxation laws and these laws will not only indefinitely affect the shipping businesses in the UK but also the shipping mercantile which do business with Britain. Trade and shipping have been interconnected through the ages. Initially there was a 25% capital allowance and the "roll-over relief" resulted that the collectively speaking, the UK shipping industry paid around 1.5% corporation tax. However tax liabilities which kept being postponed and the momentum towards tax-driven investment were highly undesired. It is obvious that those tax- breaks were not cost-effective. In the July of 2000, the tonnage tax was introduced into the British shipping industry. Instead of charging ships to be taxed by the profits they made, ships started to be charged by their tonnage. It was of the collective opinion that this taxation was gravely needed by this particular industry to reverse the downward trend it was facing for the past 25 years. There were many suggestions to overturn this development but none actually came through. Then the head of Department of Environment, Transport and the Regions is a former seafarer by the name of John Prescott, who founded the Shipping Working Group. This group was supposed to help design a taxation policy in accordance with employers and unions - the Chamber with officers and ratings and the Government. They started working together on the campaign to reverse the decline and when everyone joined forces they managed to achieve speedy progress. In the March of 1998 the group reported to the Secretary of State and in December of 1998 John Prescott introduced what is known as "British Shipping: - charting a new course". http://www.british-shipping.org/british/delivering.htm The problem with the White Paper however was that there was no mention and no didn't have any solutions to the financial and economical problems of the British shipping industry - the industry couldn't compete with other nations, such as Norway, Germany, Greece and the Netherlands, who already had such policies in place. It merely suggested that the tonnage based tax system be reviewed. It was up to the Treasury and the Chancellor of the Exchequer to step up and solve the dilemma. In the March of 1999, in the Chancellor's budget statement, he mentioned the need for a 'tonnage-based tax' and indicated that an independent enquiry should be made so that it could be ensured that it had genuine tax avoidance potential and it's viability and practicality could be ascertained. There was a through investigation made by Lord Alexander of Weedon QC for three months. After his approval, the proposal was accepted in August 1999. This marked a new beginning for the UK's shipping industry. "The main features of a tonnage based tax are are: It may apply to seagoing merchant ships above 100 gross tonnes, except for a few specialist categories. Companies must be operators of ships and have strategic and commercial management in the UK. The regime is optional, but existing companies must elect for it by the end of July 2001 and remain in the scheme for at least 10 years. Flexibility may be allowed in timing of implementation, depending on company's circumstances. Groups must elect the same way for all of their qualifying shipping companies. Tonnage tax profits are strictly ring-fenced from non-tonnage profits or losses, particularly finance costs. Special rules apply to capital allowances for leasing companies which own ships and lease them to tonnage tax companies. Qualifying profits may include taxed dividends remitted from overseas shipping subsidiaries. A pre-clearance facility is available for companies. Companies must accept a minimum training obligation." http://www.british-shipping.org/british/delivering.htm The tax seems to be fair as it everybody is thought of in this system. For instance companies which leave the leave before the ten year period ends because of reason such as it may leave the UK or goes out of businesss will have special exit provisions. As a result of the taxation, in the past six years the size of the British-flagged fleet has nearly quadrupled and the owned fleet has practically doubled. In comparison to the cooperate tax that most sectors employed, this system of taxation has fiscal advantages for all companies based in Britain. Over seventy companies have entered the tonnage tax system and their fleets include over seven hundred ships, it provided greater reassurance about things such as tax liabilities and such related costs. The new taxation system completely abolishes the 25% capital allowances which was in place earlier because this would understandably be unsuitable in a practically tax free system. Thus any capital allowance for those who have elected to be in the regime will be limited. But to ensure that international shipping comapnies aren't turned-off by this, the tonnage tax regime would include foreign profits, however they will be subject to particular ring-fencing and anti-avoidance provisions. Not only are there fiscal benefits but the new package also addresses the problem of seafarers, so included is essential seafarer training and plans to get more vessels sailing under the British red ensign. It puts in place an active move for the revival of properly trained officers- for every fifteen officers a company employs it is required to train at least one more. The company will have certified training program and these will be conducted by ship operators. The ship operators will not only to evaluate the training but will also be responisble for the recruitment of ratings and they will review the quanitity of wastage. While this will maintain the present level of trained officers, it will not solve the problem of shortages in other interconnected sectors. "The Department of Environment, Transport and the Regions is willing to take responsibility for overseeing the Maritime Training Trust's monitoring of the training programmes aimed at meeting this obligation. The industry has also made a "commitment" to use its best efforts to increase the numbers in training by 25% a year over several years which if achieved would redress the wider shortfall." http://www.hm-treasury.gov.uk/documents/enterprise_and_productivity/encouraging_enterprise/ent_ee_tonnage.cfm#timing When the White Paper, "British Shipping: - charting a new course" was introduced Mr. Prescott said: "Shipping is a growth industry. It offers enormous trading opportunities and environmental benefits and I want to make sure that Britain takes full advantage of them." http://news.bbc.co.uk/1/hi/uk/418378.stm The shipping market can be divided into four sections, the freight market, the sale and purchase market, the newbuilding market and the demolition market. The freight market deals in transport by sea, the sale and purchase market deals in the selling and purchasing of used ships, the newbuilding market deals in new ships and the demolition market deals in those ships which cannot be used an more and are regarded as scrap. The new building market doesn't just deal with brand new ships. In reality it deals with ships which haven't even been built as yet but need to be built to suit exact specifications. The key players in the newbuilding market are the ship builders and the ship buyers. The majority of ships are built this way as the few "off-the-shelf" ships which are available, don't suit the ship merchants' requirements. Ships are usually bought in this tailor made fashion when the market is solid or if there aren't any second hand ships available which suit the requirements or if the price of the second-hand ship surpasses the price of building a ship. Once the order for the ship has been placed under a fitting contract, typically, the buyer has to wait for up to two to three years before he can receive his order. Major problem that sometime arises with this set-up is that the long time period could also result in the requirements changing. The demolition market is the complete opposite of the newbuilding market. It is the final stage of a ship - it is the market where the ships go when they can no longer be used for transfer or bought and sold. The key players in this market are the ship owners, the cash speculators and the demolition merchants. The demolition market employs a broker company. These companies have departments which specialize in demolition and they're always on the top of they're game (they always know who is buying what and what who is selling). The brokers initiate the whole process by spreading the word and letting everyone know the things like the ship's light weight, availability and location. The broker sells the ship to cash speculators who then in turn sell the ships off to the demolition yards. The price the ship goes for depends on the demand of scrap metal and suitability and availability of the ship for scrapping. For example construction and mini-mills in Asia, use the scrap from the demolished ships, so if there is steel locally available then the prices are low and if steel is available easily locally then the prices rise. (Stopford, 1997) The freight market deals with the buying and selling of sea transport. Freight rates are established by ship owners who decide on rates which mirror the balance of ships and cargoes available in the market. These rates are greatly influenced, among other things, by the supply that newbuilding market and the demolition market have to offer. If a vast quantity of ships flood the market, it is obvious that the demand will go down and thus so will the rates. Ship owners will have no choice but to draw on reserves to pay fixed costs such as repairs and interest and loans, some might even have to sell their ships if things get too hard monetary wise. The low price of ships will also create a situation in the freight market where the older the ship, the better the price. This would result in a decrease in the supply, these "Changes in freight rates may also trigger a change in the performance of the fleet, through adjustments to speed and layup". (Stopford, 1997) This fragile link which connects the market balance and freight rates is within the power of ship owners who decide how to react and it is thought of as one of the most essential economic relationships in the shipping industry. If the shipping market is in a perfect state of competitiveness then any ship owner's profits will be exploited by "operating his ship at the speed at which marginal cost (i.e. the cost of providing an additional ton mile of transport) equals the freight rate." This would be the supply curve. References BBC News Online Network (1999, August 12). UK Shipping industry hails government boost. Retrieved on the 19th of November 2006, from the BBC News Website: http://news.bbc.co.uk/1/hi/uk/418378.stm Department of Transport. British Shipping: Charting a new course. Retrieved on the 19th of November 2006 from: http://www.dft.gov.uk/stellent/groups/dft_shipping/documents/page/dft_shipping_505251-01.hcsp#P22_608 HM Treasury (1999 July). Encouraging Enterprise,Independent Enquiry Into A Tonnage Tax: A Report by The Lord Alexander of Weedon QC . Retrieved on the 19th of Neovember 2006 from the Website: http://www.hm-treasury.gov.uk/documents/enterprise_and_productivity/encouraging_enterprise/ent_ee_tonnage.cfm#conclusion HM Treasury (1999 July). Encouraging Enterprise,Independent Enquiry Into A Tonnage Tax: A Report by The Lord Alexander of Weedon QC . Retrieved on the 19th of Neovember 2006 from the Website: http://www.hm-treasury.gov.uk/documents/enterprise_and_productivity/encouraging_enterprise/ent_ee_tonnage.cfm#timing kmc international Sector Profile - Transport & Distribution. Retrieved on the 19th of November 2006, from the website: http://www.kmcinternational.com/about_us/sector_profile.cfmid=14 Martin Stopford. (1997). Maritime Economics. Routledge, London. Moore, G. Thomas. China in the World Market: Chinese Industry and International Sources of Reform in the Post-Mao Era.Cambridge University Press, 2002 . Cambridge The Chamber of Shipping. Delivering for Britain. Retrieved on the 19th of November 2006, from the website: http://www.british-shipping.org/british/delivering.html Read More