House of Commons - Transport

Select Committee on Transport Second Report

3 Effect of tonnage tax on the training and employment of UK seafarers

38. Although shipping companies have a tax incentive to enter tonnage tax, the UK tonnage tax regime carries with it a minimum training obligation on companies entering the scheme. Companies must recruit one cadet (officer trainee) per year for every 15 officer posts in the company's officer complement and give consideration to employment and training opportunities for ratings. To be eligible to count against the training commitment a trainee must be ordinarily resident in the UK and either a UK national, a national of another EEA State or a British citizen from the Channel Islands or the Isle of Man. The UK tonnage tax regime is unusual in imposing a minimum training obligation on companies entering the scheme.

39. The training commitment was adopted to try to ensure an increase in UK-based seafarers to meet both current needs at sea and future jobs onshore in the maritime services sector. Several of our witnesses emphasised the importance of the UK's maritime services sector and the associated demand for skilled former seafarers. NUMAST told us that the turnover of the UK's maritime services generates £1.1 billion in overseas earnings.[54] Former officers fill posts in areas such as classification societies, port services, marine insurance and law and maritime training. NUMAST drew our attention to the most recent report from the University of Wales on the demand for people with seafaring experience in the UK economy. This survey identified 15,700 jobs which employers would prefer to fill with former seafarers and of these, 8,800 jobs where employers consider it to be essential to employ former ships' officers.[55] Of these, some 6,650 are jobs currently filled by former UK merchant officers. The survey identified an annual shortfall of officers to fill shore-based jobs of between 65 and 112. Mr Michael Hassing, Chief Executive of Maersk Company, told us that London was a world-class maritime cluster and therefore needed a source of UK resident officers:

"95 per cent of our trade is going via water and maritime London is actually a world-class maritime cluster employing, I think, 450,000 people in the industry and we really need to have a source of British nationals with residence in Great Britain as officers, that is from the cadet programme to the junior officers and all the way up through the ranks, and that needs to be supported by the state."[56]

The two highest ranked measures, which respondents to the Maritime London survey (see paragraph 1) thought would maintain London's pre-eminence in the maritime services sector, related to skills and training:

Greater attention to competence, skills and knowledge
Promotion of maritime careers to attract young people

40. The shipping sector has in the past shouldered the burden for providing sea-going training, both for its own needs and the future needs of the shore-based maritime sector. This was recognised by the Shipping Working Group which recommended that a Maritime Training Trust (MTT) should be established and sponsored by the shore-based maritime sector (including the ports) to help secure the seafaring skills base on which their organisations depended. Maritime London provided figures for its contributions to the MTT for cadet training over the last five years:

Year £

2000 98,000

2001 104,000

2002 103,000

2003 51,000

2004 83,000

41. Assuming the costs of training a cadet of £24,000 over three years, provided by Trinity House, this contribution will provide training for only around 11 cadets a year. Maritime London said in the introduction to the recent survey (see paragraph 1) that only 100 companies, out of the 1,750 companies estimated to be involved in the maritime services sector, are actually members of Maritime London. It is not surprising therefore that its contribution to the MTT is miserly. The Committee considers that the shore-based maritime sector should do much more to support training for its future manpower requirements.

Number of cadets

42. The number of cadets entering training has increased significantly since the tonnage tax was introduced in 2000. This increase is illustrated by the table below provided by Dr David Glen of the Centre for International Transport Management (CITM) at London Metropolitan University (LMU). Table 3 Summary of UK Seafarer numbers, 1997-2003

Cadets Officers Ratings

Calendar year Total in training Annual intake Actual Total Total active seafarers

1997 1,130 450 17,620 10,860 29,610

1998 1,158 544 17,356 10,795 29,309

1999 1,127 425 15,897 11,409 28,085

2000 1,031 480 16,464 10,331 27,826

2001 1,086 468 14,395 9,707 25,188

2002 1,175 631 15,125 10,360 26,660

2003 1,045 603 17,126 10,037 28,208

Average 514

% change (1997=100) -7.52 -2.80 -7.58 -4.73

Source: Derived from UK Seafarers Analysis, 1997-2003

43. An annual intake of 600 however is however considerably lower than the annual intake of 1,000 which LMU estimates is needed to maintain officer numbers at their current level.[57] The latest projections for officer numbers to 2018, made in UK Seafarers Analysis 2003, were also presented to us by Dr Glen.[58] These assume a cadet entry rate of 600 per year and wastage rates of 8% cent per year during training and 6% per year during the ages of 20-30 as officers. Taking a retirement age of 65 years, UK officers numbers are predicted to decline from 17,126 in 2003 to 9,817 in 2018. With a more realistic retirement age of 57, numbers of UK officers would fall from 14,312 in 2003 to 6,650 in 2018.[59]

44. The Government itself agrees that this number of trainees is not enough. Mr Jamieson said:

"We do recognise that we are still short of the number of cadets that has been estimated as necessary to meet the current needs both at sea and on shore."[60]

NUMAST said that cadet recruitment since the launch of the scheme had been disappointing. They told us that it had been recognised at the outset of tonnage tax that 1 in 15 was not a sufficient ratio to produce the number of cadets needed and the Chamber of Shipping had given a "best endeavours" commitment to achieve a total increase in cadet training numbers of 25% year on year.[61]

Capacity for trainees

45. NUMAST suspected that one reason why the annual intake of cadets had not increased to 1,000 or over was that some companies had actually reduced their training levels. They told us that there were many companies new to UK shipping entering the tonnage tax regime and training UK-based cadets for the first time. Simple arithmetic suggested that as the total number of cadets in training had not increased in direct proportion, this meant that other companies must have cut back on their cadet intake.[62] Some companies who previously used to train, for example, in the ratio 1 cadet for 10 officers might have reduced this to 1:15, the minimum required for the tonnage tax training commitment. NUMAST's contention was that they had done this in the belief that they would be able to poach newly qualified officers who had been trained by other tonnage tax companies who had no plans to employ them as junior officers when their training was completed. This contention may be supported by the fact that Trinity House will reduce its cadet scholarship scheme next year because it is finding it increasingly difficult to place newly trained cadets in junior officer berths.

46. If a company is not able to train enough cadets to meets its Core Training Commitment (CTC), it has to make Payments in Lieu of Training (PILOT) to the Maritime Training Trust (MTT). The MTT allocates the money received from PILOT to promote UK-based seafarer training. If a company has failed to achieve 50% of its CTC during a year, any PILOT payments during the next year are subject to a surcharge.[63] The tonnage tax training penalty currently stands at £7,000 per annum or £24,000 per cadet placement.[64]

47. Planned PILOT by tonnage tax companies, who cannot take on cadets, has to be approved by the Department for Transport. This is currently around 1-1½ per cent of the training months which tonnage tax companies should undertake under their training commitment.[65] However NUMAST told us that there was an unplanned PILOT rate of 16 per cent., which it attributes to the tonnage tax companies not replacing wastage.[66] The Chamber of Shipping explained that unplanned PILOT was caused by unexpected developments such as wastage or trainees leaving and the company having to wait for the next college course cycle to begin.[67]

48. It is clear that the shortage of trainees is not due to the shortage of funds. The funds paid into the MTT are supposed to be used for training which cannot be or is not being provided by certain shipping companies. Trinity House told us that there was more than £10 million in the MTT fund and that the trustees of the MTT were finding it difficult to find genuine outlets for the fund under current rules.[68]

49. We are extremely concerned that the level of unplanned payments in lieu of training suggests a high drop out rate among cadets. DfT must establish some hard facts about the training carried out by tonnage tax companies. We need to know:

The effect of tonnage tax on the number of trainees on UK registered vessels;
What proportion of tonnage tax funded cadets really do fail to complete their training;
The reasons why cadets fail to complete training;
How the MTT fund can be used most effectively.

Employment of UK officers

50. Figures submitted by Dr Leggate show that the proportion of UK officers employed on tonnage tax ships has declined since 2001-01 despite a large overall increase in the employment of officers generally.[69]Table 4: Seafarers employed on tonnage tax vessels

Year UK Other EEA Other Total UK Other EEA Other Total

2000-01 896 40 187 1,123 449 19 455 923

2001-02 3,204 212 1,201 4,617 1,681 176 2,909 4,766

2002-03 2,858 533 1,444 4,835 1,977 632 3,578 6,187

2003-04 2,265 490 2,589 5,343 1,870 263 3,858 5,991

The figures in table 4, based on DfT analyses of the crews of tonnage tax ships, do not differentiate between UK-registered and other flag ships and do not break down figures by rank and nationality. The only available data on the nationalities of the officer corps of UK-flagged ships is drawn from the 2002 global survey of crew composition by the Seafarers International Research Centre (SIRC) at Cardiff University.[70] The 2002 analysis found that only 48% of officers aboard UK-flag ships are of British nationality. While some 70% of masters on British-registered ships are UK nationals, the proportion falls to 54% for chief engineer officers, 37% for chief officers and less that 33% for second officers. NUMAST said that the increasing use of foreign nationals as junior officers on ships that used to have 100% UK officer manning was illustrated by the numbers of Certificates of Equivalent Competency (CECs)[71] issued by the MCA. They told us that these rose from 37 in 1997 to more than 2,000 in 2002.[72]

51. The Chamber of Shipping told us that the cost premium represented by the employment of British crews is likely to represent an additional 15-20%. This was supported by the following table of comparative wage costs, which they provided:[73] Comparative wage costs (US$ per month) 2003

Complement US$ per month

British Officers/Filipino Ratings 9/10 78,000

Chinese Officers/Ratings 9/10 37,000

Indian Officers/Ratings 9/9 47,000

Filipino Officers/Ratings 9/9 47,000

Polish Officers/Ratings 9/9 48,000

Source : Precious Associates

Employment of UK junior officers

52. Although there is agreement that the current intake of cadets is not enough to replace the cadre of retiring UK officers, there is some anecdotal evidence that the system cannot cope with the number of junior officers that the tonnage tax regime is producing. The reaction of some shipping companies in reducing their training levels may be a logical reaction to the fact that there are not enough junior officer posts at UK rates of pay for cadets at the end of their training.

53. Reports in the media on the difficulties British junior officers had in finding employment had prompted Trinity House to seek information from Clyde Marine, the UK's largest training company and recruiter for the industry.[74] Clyde Marine reported that over a three year period an average of 60 to 80 junior officer positions which they were required to fill had fallen to no junior officer posts today. Trinity House thought that the problem for junior officers would increase as it was only now that the first generation of 'tonnage tax' cadets was obtaining its professional certificates. The extra costs described above seem to contribute to the difficulty. Clyde Marine had told Trinity House that shipping companies could employ a Third Officer from Eastern Europe or the Pacific Rim at a salary of £13,000 per annum compared with a UK rate of £21,000.

54. NUMAST acknowledged that there were examples of 'best practice operators' who were making a commitment to long-term training and employment for UK-based officers. Both Mr Maurice Storey, Chief Executive of Hatsu Marine Limited, and Mr Hassing, said that their companies planned to employ all the cadets they had trained.[75] Mr Parker told us that "some cadets will move of their own volition from one employer to another. One employer may be able to offer all the jobs that he has got cadets for, but others have a deficit."[76] But he admitted to a lack of information on what was happening to cadets:

"We need to measure whether this flow of cadets which is now starting to come through the training system because of tonnage tax, to see if it is actually working out as we think it is. That is why we have agreed in principle with NUMAST to have this study. So we would like some facts before we start planning whether there should be any further changes or modifications."[77]

55. Just as there is a lack of data on training, there is a lack of data on the employment of UK-based junior officers. NUMAST and the Chamber of Shipping have agreed to start a research project on the employment prospects of newly trained cadets. The DfT admitted that although the training commitment of tonnage tax companies is monitored, the employment of cadets after they have completed training is not monitored.[78] They told us in June that the Shipping Task Force would be looking into this over the next few months.. The Government was responsible for introducing the tonnage tax scheme and including a commitment to training. It must now monitor the effectiveness of this link in ensuring that the UK has the skills it needs. It cannot delegate responsibility for commissioning such research to others. The first tonnage tax cadets are just completing their training. The DfT must, as a matter of urgency, put in place mechanisms to find out how they are employed once trained.

An employment link?

56. NUMAST, RMT, Trinity House and Dr Heather Leggate, all favoured the introduction of some kind of employment obligation for companies participating in the tonnage tax regime. Trinity House told us that with the benefit of hindsight there should have been a requirement for a ship owner to continue training from first qualifying certificate level to senior certificate level.[79] Dr Leggate said that:

"If the legislation is seriously aimed at the increase in UK based seafarers, there is clearly a case for establishing a method whereby these cadets are able to secure stable employment within the UK fleet."[80]

NUMAST stressed that this employment obligation should be aimed at those tonnage tax companies that do not employ any UK officers at all.

57. The Chamber of Shipping is strongly opposed to an employment obligation, foreseeing the removal of a substantial number of fleets from the UK flag and companies from the UK as a base: although it is not against trying to find a remedy of a voluntary nature.[81] Mr Jamieson voiced the Government's concern about companies leaving the UK register if any financial penalties for ship owners were introduced when he said that ship owners could move from one flag to another in 15 minutes if they wanted to.[82] The recent Treasury Review states that:

Ministers have agreed that consideration of proposals to improve the employment environment, including the possibility of including a mandatory employment link, should be taken forward by a sub group of the Shipping Task Force and have agreed expanded Terms of Reference for the group to facilitate this.[83]

58. Trinity House contended that it would be difficult for the Government to introduce legislation to introduce an employment link into the tonnage tax three years into the arrangement without the consent of tonnage tax companies.[84] The Committee agrees that the Government should not unilaterally alter the terms of the tonnage tax, which is a ten year contract. Nonetheless, it should be possible to make changes as new companies come into the regime.

59. Trinity House outlined a possible approach by which an employment link could be introduced without a financial penalty for the tonnage tax company.[85] They suggested that the training obligation under tonnage tax rules could be reduced temporarily to say one cadet per 30 officers in a tonnage tax company. This cost saving to a ship owner could be paid into a compensation fund to that ship owner to employ a junior officer at UK rates. Trinity House pointed out that the cost to a ship owner of training a cadet is about £24,000 over three years, when Government assistance towards training costs is taken into account. £24,000 would fund the difference between employing a UK-based junior officer instead of an East European or Pacific Rim national for three years at £8,000 (£21,000 - £13,000) per annum. This would bring junior officers up to Chief Mate or second Engineer certification.

60. At senior officer level UK and EEA nationals are able to compete in the international market place.[86] There is ample evidence of a worldwide shortage of senior officers. NUMAST quoted the most recent interim BIMCO[87]/International Shipping Federation (ISF) survey which estimated a shortfall of 16,000 officers in 2003. In the same survey 83% of ISF members reported serious or moderate shortages in the current supply of officers.[88]

61. Mr Jamieson indicated that the Government was sympathetic to the idea of an employment link:

"Speaking from the heart, if you like, I am attracted to that idea, the idea that we personally put the link in, we have the training there, and then I would like to see those people then employed aboard the ships, but we have to tread extremely carefully."[89]

62. The Committee believes that it should not be beyond the industry and Government to devise an employment link which is acceptable to both sides. If it becomes apparent that tonnage tax companies are not offering positions as junior officers to their cadets we recommend that the Government consider refining the scheme so that participation in the tonnage tax regime is linked to providing employment and training to higher certificate level. The surplus in the training funds suggest that this could be done in a way which imposes no extra costs to the shipping industry, but we should not forget that tonnage tax offers real financial advantages to shipping companies.

Ratings

63. Although the tonnage tax regime includes a Minimum Training Commitment for ratings, it was difficult to establish what precisely this involved. Mr Jamieson told us that "there is the sort of best endeavours the companies have to show to employ ratings and that is checked on a regular basis whether they are taking on those best endeavours".[90] Ms Theresa Crossley, Divisional Manager, Shipping Policy, Department for Transport, explained best endeavours as follows:

"Every year the companies under tonnage tax have to make a return to provide evidence that they have considered at least one of four particular things, which are to employ more British or EEA ratings, to employ more highly trained British or EEA ratings in some technical posts, to recruit British or EEA ratings in a planned stream towards officer qualifications and to assist existing British or EEA ratings to advance towards officer qualifications and posts, and they are obliged to make a return to the Department annually to provide some sort of evidence that they are positively considering those."[91]

64. The Chamber of Shipping told us that £600,000 had been allocated by the Maritime Training Trust to the John Slater fund for the training of ratings on ratings-to-officer conversion courses.[92] The RMT accepts that tonnage tax has generated opportunities for those who wish to train to become officers,[93] but considers that the other three routes towards increasing the employment of ratings have been largely ignored by the companies entering the tonnage tax regime.

65. There is little training taking place to replenish the existing ratings complement. The RMT said that figures disclosed at the Shipping Task Force indicated that some 50 new ratings were currently being trained every year.[94] That is fewer than the 200 which the Chamber of Shipping had told them were being trained annually at the time of discussions on the tonnage tax.

66. There was some disagreement about the effects of tonnage tax on the employment of ratings. RMT told us that the tonnage tax had not produced any jobs at all for ratings.[95] The Chamber of Shipping said that many UK ratings were still employed in the ferry and short sea sectors; but the RMT pointed out that 350 jobs for UK ratings had been lost on the Dover short sea routes and that jobs for UK ratings were being lost in the Irish and North Seas.[96] The number of UK ratings fell by nearly 8% between 1997 and 2003 (see Table 3 in paragraph 42); we conclude that "best endeavours" to increase the number of ratings in employment seems to have been a largely meaningless exercise.

67. The RMT also complained about the lack of information on ratings' employment arising from the tonnage tax and the fact that it was never reported at meetings of the Shipping Task Force.[97] We welcome the decision by the DfT to publish a comprehensive annual list of the number of active UK seafarers.[98]

68. We welcome the Government's decision to include the consideration of proposals for a training commitment for ratings in the expanded Terms of Reference of the Shipping Task Force.[99] The Committee considers that there is a pressing need for information on what companies in the tonnage tax regime are doing to honour their commitment to ratings. Without this it is difficult to disagree with the RMT conclusion that "the vague commitments to review the numbers of ratings employed and employ more highly trained ratings in technical posts has unfortunately amounted to virtually nothing in terms of industry commitment."

54 Ev 29 Back

55 The UK economy's requirements for people with experience of working at sea Back

56 Q 35 Back

57 Q 98 Back

58 Ev 40 Back

59 These projections are for all certificated officers. An estimate of 9% was to allow for numbers of shore-based workers with STCW'95 certificates of competency Back

60 Q 145 Back

61 Ev 26 Back

62 Q 130 Back

63 Ev 59 Back

64 Ev 38 Back

65 Ev 43 Back