The Impact on Maritime Transportation Management - Essay Example

International Trade and Investment The impact on maritime transportation management Foreign Direct Investment (FDI) has become an increasingly important part of the international economy. Due to the high mobility of the factors of production in the shipping industry, shipping investments in foreign subsidiaries do not necessarily imply strong links between the investment and the home and host countries. It is thus debatable whether the term Foreign Direct Investment should be utilised in the same manner as for other sectors. The first part of this paper is the short analysis of the cited articles impact of maritime transportation management in the sea freighting business and counter measures that may be taken to reduce volatility in financial position of shipowning companies. The second part is the discusion about the possible privatization of ports and its effect in port charges and other pricing. The last part is the evaluation of two methods of depreciation used by these shipping companies. Keywords: maritime transportaion, ports, sea freighting business Content Page Abstract ---------------------------------------------------------------------- 1 Introduction ---------------------------------------------------------------------- 3 Sea freighting business ---------------------------------------------------- 3 Financial position ------------------------------------------------------------ 3 Newly Privatized Ports --------------------------------------------------- 4 Port Charges --------------------------------------------------------------------- 5 Depreciation -------------------------------------------------------------------- 7 Complexity of the Supply Chain ----------------------------------------- 8 References -------------------------------------------------------------------- 10 International Trade and Investment : The impact on maritime transportation management Foreign Direct Investment (FDI) has become an increasingly important part of the international economy. Due to the high mobility of the factors of production in the shipping industry, shipping investments in foreign subsidiaries do not necessarily imply strong links between the investment and the home and host countries. It is thus debatable whether the term Foreign Direct Investment should be utilised in the same manner as for other sectors. In a recent article last May 4th in South Africa, a current law implemented has a great impact in the sea freighting business, especially in the issue of massive maritime claims. A lot of shippers are foregoing their deposits due to the redelivery of hand back ships on charter. This critical situation that they are in can affect the acquisition of supply and meeting their foreign demands. The increasing inability in making use of the popular New York Rule B attachment procedure is helping South Africa regain its reputation as a jurisdiction in which shippers can seek assistance in obtaining security for their claims, or having obtained a judgment or arbitration award in their favour. This tangible mechanism in the shipping industry is making an advantage to shippers in their returns of investments due to substantial freight costs set from this procedure. This situation is a prelude of the sea port's privatization which greatly affects costs in shipping companies. Thus, increasing port charges for these companies. More than 50 countries privatised their port systems between 1991 and 1998. The common privatisation program includes the transfer of stevedoring, yard handling, pilotage, line handling and gate security to private port operators, while ownership and control of basic infrastructure remains with a public or quasi-public port authority. Also in a recent article last May 06, 2009, the Cape Town port terminals have performed well in the annual NOSA (National Occupational Safety Association) audits conducted in facilities operated by Transnet Port Terminals, taking their place alongside the sterling efforts of other state-owned port terminals across the country. Both the Cape Town container terminal and the Cape Town multipurpose terminal achieved a four star rating in the audit, which examines safety, health, environment and risk management systems. The NOSA process from the very beginning and was instrumental in the compliance of all terminals. Their goal next year would be to secure a five star rating for the Cape Town terminals, which - if sustained for three years - leads to NOSA's most coveted accolade, the NOSCAR status. They want all employees to not only strive to improve their safety standards continuously, but eventually have a total understanding of what adherence to these standards mean. This way they become an everyday ethos even outside of the work environment." This would heighten awareness of the safety standards encouraged at all port terminals, particularly in TPT's dealings with international companies that regard safety as an important requirement for both the employees' well-being and cargo handling. These newly awarded and privatised ports had to develop new pricing systems, taking into consideration their own new institutional and operational structure, along with the competitive market environment created by their own and other regional ports' privatisation programs. Port pricing was recently studied in over 20 container ports in the Caribbean Basin, which encompasses the US Gulf Coast, Caribbean Islands, east and west coasts of Central America and the north coast of South America (NPWI, 1997; LBI, 1996). Based on the study and other support materials on pricing, this author developed a methodology for strategic pricing that was presented in the Seminar on Port Pricing and Financing for Latin America (OAS, 1998). Thre are a lot factors that affect port pricing in the pre-privatisation which refers to the traditional port system consisting of three principal parties: a public operating port (the provider of port services) and two groups of private users (clients): shipping lines, and shippers. A convenient device to illustrate this institutional structure is a node-link network, whereby the parties involved appear as nodes and the services and charges that they exchange among themselves as arrows. Figure 1 presents in its upper portion the system of charges of a traditional, public port in the pre-privatisation era. Newly privatised ports are distinguished by a more complex institutional structure, which includes intermediary parties along with the above-mentioned principal parties. The intermediary parties are private operators that provide port services using a combination of their own and port-owned facilities and equipment. Figure 1 presents in its lower portion the system of charges in a newly-privatised port. The pricing system here includes six principal charges (arrows): 1. The port charges stevedores for berth and yard wharfage6 (P-O arrow in Figure 1); 2. The port charges lines for vessel dockage and cargo wharfage for empty boxes (P-L); 3. The port charges shippers for cargo wharfage for full boxes (P-S); 4. Stevedores charge lines for vessel stevedoring (O-L); 5. Stevedores (not necessarily the same ones that handle vessels) charge shippers for yard handling (O-S); and 6. Lines charge shippers for port handling to cover their port costs and those charged to them by other parties (L-S). The last charge (6) is frequently included in the ocean freight bill as a separate surcharge called Terminal Handling Charge (THC). Port system cost, direct and transferred charges For example, the total port charges are the summation of arrows emanating from P (P-L, P-O, P-S). The allocation relates to relative shares (%). The port's charge to the operator (P-O) may be fully or partially transferred by it to the line (O-L) and/or the shipper (O-S). The transfer process of charges may also involve two (or more) stages. For example, port charges to the operator may first be transferred by it to the line; then, the line may forward it to the shipper (P-O L-S). The promulgation of the Admiralty Jurisdiction Regulation Act (AJRA) in 1983 until about three years ago South Africa was a leader in this field as the Act enabled the arrest of ships, and in particular associated or sister ships, to obtain security for claims to be pursued in arbitration abroad. These claims have benefited the shippers in the countering measures to avoid or reduce volatility of the financial status of these shipping companies. Due to the common direct or indirect control of the shares in the different companies, in law or in fact, it was stated that one can arrest one of the other ships, owned by such a commonly controlled company which is not itself the debtor, to secure ones claim. One can then proceed against the 'associated' ship in South Africa or litigate elsewhere. Is this is the case, then their will lower calculation of depreciation. Factors that may affect this kind of depreciation are common signatures on financing documents and other important agreements, cross collateralization of ships under mortgages, common corporate guarantors for loans, similar or related ship names, common funnel or fleet markings, public statements about ownership or group financial results, public data-base information, common operators and a single manager. Depreciation plays a vital role in representing the expense in the shipping business. The business' fixed assets are decreased by a certain value each year and because the accounting equation must always remain in balance, this decrease must be accounted for somehow. Even though the dollar amount of depreciation is not paid for in cash, the loss in value of the fixed asset must be balanced out and this is done by using two accounts: 1. Depreciation Expense 2. Accumulated Depreciation The Depreciation Expense account is used to capture the dollar value of depreciation for an accounting period. Accumulated Depreciation is used to show a running total of how much a fixed asset has depreciated. This account is called a contra account because it relates to an asset account. In the case of accumulated deprecation, the account is called a contra-asset account and it always has a credit value. The balance in the accumulated depreciation account is the amount of the fixed asset that has already expired. Rather than simply decrease the value of the original asset account, the accumulated depreciation account is used. When a company purchases a fixed asset, the purchase amount is posted to the fixed asset account and that original purchase price is recorded on the balance sheet. When a reader looks at the financial statements, he/she wants to know both the original purchase price and the amount of depreciation that has been accounted for. The reason for this is that the amount for a fixed asset shown on the Balance Sheet is not the market price or the amount that asset is worth. It is the amount, which was originally paid less the accumulated deprecation. The introduction of the container and the consequent development of intermodality have allowed the dramatic reduction in transportation costs and the increase of intercontinental cargo flows. The movement of each container is the result of a number of separate operations (loading, unloading, yard movements, hinterland transportation, gate clearance and so on) often entrusted to the expertise of different agents. More than 20 components can be identified in the container supply chain for a standard intercontinental move, and high levels of coordination are required to ensure the flow of millions of boxes every year. Increasingly, the responsibility of ensuring the seamless, efficient and low-cost movement of containers is entrusted by cargo owners and transport providers to logistics operators, freight forwarders or third-party logistics providers, who are expected to optimise the chain for the benefit of their customers. The complexity of the supply chain and the necessity to customise it for every shipment and every shipper makes the job of logistics providers more of an art than a science. For this reason, attempting to formalise all decision parameters of the various agents involved in the container supply chain in a single Operation Research model is far from realistic (and probably also of limited practical use) and this type of problems have been analysed through the use of economic models1 or more general decision support systems. Thus the formalisation of the optimisation of the overall container supply chain entails such a high level of complexity that discourages the use of Operation Research techniques. The independent optimisation of individual supply chain components, however, has become increasingly common and a popular tool for the managers and operations officers. Although again this may not be equivalent to a joint optimisation, and may even generate results and recommendations that might be conflicting with each other, the value of these applications for operators and for the industry as a whole is immense. We could ideally identify three major components of the (maritime) supply chain: the terminal component, the maritime component and the hinterland component. The terminal, in particular, is the crucial node in the maritime supply chain, as it acts as a buffer for the shipping line, being also the point. The economic meltdown and Rule B becoming increasingly contentious (with defendants being more prepared to contest proceedings or lodge counter-claims) has seen the number of enquiries regarding ship arrests in South Africa escalate tenfold in the past few months. References: www.palgrave-journals.com/ijme www.capetown.com Bjrndalen, Jrgen, "Hvorfor vil rederier flytte fra Norge" [Why do shipowning companies want to move from Norway], SNF-Working Paper No. 38/1995, Foundation for Research in Economics and Business Administration, Bergen, 1995. Breistein, Gisle Stray, Valutaregulering og skipsfart [Currency control and shipping], Institute for Shipping Research, Norwegian School of Economics and Business Administration, Bergen, 1984. Cashman, John P., "Shipping Statistics - Who Owns the Fleet", in Strandenes, Siri Pettersen, Svendsen, Arnljot Strmme and Wergeland, Tor (eds.), Shipping Strategies and Bulk Shipping in the 1990s, Center for International Business, Bergen, 1989, pp. 73-85. Committee of Inquiry into Shipping, Report presented to Parliament by the President of the Board of Trade by Command of Her Majesty, London, 1970. Dunning, John H., International Production and the Multinational Enterprise, George Allen and Unwin, London, 1981. Fearnleys, Review 1983, Oslo, 1984. Forsyth, Craig J., "Transnational corporations: problems for study in the new international order of maritime shipping", Maritime Policy and Management, Volume 20, No. 3, 1981, pp. 207-214. Gombrii, Karl Johan et.al., Nordisk skipsfart under fremmed flagg [Nordic shipping flying foreign flags], Nordic Read More