Memorandum by Trinity House (TT 03)
TONNAGE TAX
AND TRAINING
1. Industry History
In 2000, the year when the enabling legislation
for Tonnage Tax was approved by Parliament the shipping industry
was considered to be in long-term decline at the rate of about
4% a year. Tonnage had fallen from a peak of 50 million dwt in
1975 to 9.7 million dwt in 1998. At that time only 20% of the
UK owned trading fleet was registered in the UK and without a
fundamental change in fiscal law the Chamber of Shipping forecast
an ongoing decline in ship owning in the then current financial
environment.
The situation regarding seafarers was also in
serious decline with officer numbers falling by 78% and those
for ratings by 65% during the period 1980 to 1997. The number
of cadets entering the industry in the late 1990s had fallen below
500 per year which was well below the target of 1,200 which academic
studies had indicated was the number required per annum to meet
the long term needs of both the sea going and shore based sectors
of the shipping industry.
The continuing inexorable decline had been a
concern of successive governments and was the subject of a number
of Select Committees concerned with Employment, Defence, Environment
and Transport. In 1999 a DETR study stated that "the UK shipping
industry is in a parlous condition, and radical measures are required
to arrest and reverse its decline. The case for ensuring that
the UK has a strong shipping industry is overwhelming".
The concerned outlined in the foregoing resulted
in the establishment by Government of a Shipping Working Group
set up in 1997 and comprised representatives from the industry,
trade unions and Government. The conclusions of the Working Group
formed the matrix of a Government White Paper published in late
1998 entitled "British Shipping—Charting a new course"
which set out the Government's policy and objectives for the shipping
industry which can be broadly summed up by the following statement
"The Government does not accept that the long decline in
the British Merchant Navy should simply be allowed to continue.
The future offers substantial opportunities for Britain's shipping
and the Government is committed to working with the shipping and
maritime—related sectors and trade unions to exploit those
opportunities to the full. The paper went on to reject any argument
that the UK should allow the maritime industry to atrophy and
outsource our shipping needs on the grounds that such policy,
which relied heavily on foreign service and supply, was too risky
for our commercial and defence future. The policy paper further
determined that what was required was the sustained requirement
and employment of British sea farers which in turn required the
continued participation and viability of British shipping companies
involved in international trade. This statement of policy was
the essential starting point in the creation of a new fiscal regime
which ultimately led to the establishment of the new Tonnage Tax
which concept had been successfully introduced in some European
and Scandinavian countries and had resulted in benefit to the
growth of their indigenous shipping industries.
2. Tonnage Tax—Training obligations
From the outset Tonnage Tax has always been
linked to a strong training commitment by a participating company.
The Government had confirmed their concern over maritime training
with a number of financial support initiatives for training schemes
to meet demand in key training categories. This policy reflected
DETR concern that unless we started to reverse the decline in
industry training, the long lead time of about a decade of sea
service from new-entry cadet to class one certificate, the UK
would not be in a position to prevent the loss of the maritime
industry. The training proviso associated with Tonnage Tax benefit
reflects this concern as the Government recognised that without
increasing UK ownership there would be insufficient training berths
to absorb the required increase in training capacity. The DETR
recognised from the onset that it could only encourage training
through grants but that the commitment towards training had to
come from within the industry and the best way of stimulating
such commitment was to make it a condition of Tonnage Tax entry.
The training formula that was eventually agreed
was that as a pre-condition of eligibility for Tonnage Tax entry
a company had to declare a minimum training obligation to recruit
each year one UK officer trainee for every 15 existing officer
posts regardless of whether those posts were currently filled
by a UK officer or one of different nationality. After three years
such policy would mean, in broad terms, that there would be one
officer cadet under training for every five officer posts.
With the benefit of hindsight the obvious omission
in the training argument was that training was limited to cadet
status only and there was no requirement for a ship owner to continue
training from first qualifying certificate level to senior certificate
level which omission forms the basis of the present crisis in
junior officer berth availability.
The other outstanding omission in the training
requirement is that there was no need for a Tonnage Tax company
to register its ships in the UK and thereby comply with the direct
jurisdiction of UK maritime law. The "Eligibility" role
required a company to undertake the "strategic and commercial
management" of a vessel within the Tonnage Tax regime from
the UK. Once entered into the tax regime an owner was required
to follow Tonnage Tax regulations for 10 years subject to annual
review.
The lack of any requirement to register the
vessel in the UK leads to all sorts of complications in implementing
a national training standard. Without UK registration there is
no control requirement over the qualification or nationality of
the officers on the vessel which in turn leads to problems in
their appointment as "Training Officers" for cadets
serving on board those vessels or indeed for the effective training
of junior officers serving on the vessel where all senior officers
are of a different nationality and culture and have been trained
under quite different regimes to that established in the UK.
3. Current situation—Tonnage Tax introduction
plus four years
In the course of a Maritime Policy debate in
the House on 17 December 2003 the success or otherwise of the
Tonnage Tax regime was confirmed by Government with the following
statistics:
(i) In the three years during which Tonnage
Tax has been operating 62 shipping groups representing 200 companies
and 720 vessels have been entered into Tonnage Tax.
(ii) The UK based shipping fleet now comprises
590 vessels representing 12.3 million tons which have recorded
overseas earnings in 2001 of £5.1 billion.
(iii) The UK registered fleet now stands
at 8.9 million tons which places it 15th in the World league table
or 2% of the World trading fleet.
(iv) The maritime training scheme associated
with Tonnage Tax saw a cadet entry in the year 2002-03 of 557
cadets which represented a 16% increase over the previous year
(480 cadets).
What is not declared in the debate report is
the value to a ship owner of Tonnage Tax compared to his existing
fiscal regime According to industry sources there can be no common
figure associated with that benefit as the tax circumstances of
participating companies vary considerably and in the case of multi-national
companies are probably spread over a number of countries.
It can be assumed, however, that in view of
the impressive number of vessels which have been entered into
the Tonnage Tax regime there must be significant financial benefit
to the ship owner which should have a bearing on his ability to
undertake training over and above that required at Cadet level.
It is a great pity that with the benefit of hindsight no consideration
was given to offsetting the tax advantage to the ship owner with
an extended training requirement for officers up to Class 1 certificate
level.
4. Trinity House Scholarship Cadets
When we established the Scholarship Cadet Training
Scheme in 1989 we declared it to be something of a catalyst for
the industry which was then in severe training decline as in 1987
the training problem had reached a nadir when cadet intake into
the industry had reduced to 160 entries which was considered to
be only 15% of the number required to maintain the then current
officer pool.
At that time the UK managed fleet was in rapid
decline for a number of reasons both fiscal and technical—the
container revolution was well established where a first generation
containers ship replaced seven conventional break—bulk cargo
ships while the development of North Sea oil had reduced the need
for long haul tanker tonnage engaged in Crude oil supply from
the Middle East to UK refineries. This reduction in fleet size
had produced a significant officer surplus and shipping companies
saw no immediate need to train a cadet to junior officer level
when there was the ready availability of senior officers prepared
to sail in junior officer positions. Trinity House recognised
that this situation, if allowed, to persist, would result in a
severe officer shortage sometime in the future when the displaced
senior officers sailing in junior capacity transferred to overseas
employment when they could expect to regain their original rank
or decided to seek a career change in view of their somewhat reduced
financial circumstances.
It has to be recognised that our scholarship
scheme is operated in partnership with major players within the
industry who co-operate by providing us with training berths.
In this connection we differ significantly from the Tonnage Tax
companies who cynically train cadets to meet a fiscal requirement
with no consideration for their ongoing employment. In the case
of the Trinity House cadet, training has involved four or five
established UK based companies whose generosity in providing training
berths disguises the fact that they have also reduced their own
training requirement to accommodate our cadet for sound financial
reason—why pay to train a cadet if Trinity House will do
it for you!—all these companies almost certainly hope that
the cadet, on qualifying at first certificate level, will select
their company as his career employer.
The Trinity House scheme is unique in that the
policy of deliberating appointed cadets to different companies
in different trade sectors involving different types of ships
produces a very broad practical training base and our cadets certainly
have a reputation of being trained in the majority of industry
sectors which ensures a special skill base over and above that
required by any particular shipping company. The second benefit
of our multi company training programme is that a company considering
employing our cadet at junior officer level recognises that the
candidate has experience of at least four other shipping companies
and has approached his selected company on the basis of first
hand experience of other prospective employers. This fact encourages
the employing company to believe that the Trinity House cadet
is worthy of further training investment necessary to allow him
to qualify to senior certificate level and, indeed , our track
record shows that our cadets do show a strong loyalty by remaining
with their company of first choice whom they joined at the completion
of their cadetship with Training House.
From the foregoing it will be recognised that
the principle beneficiary of our scholarship is not the cadet
but rather the shipping industry which has received a multi skilled
officer trained at Trinity House expense which skill base is seen
as a foundation for his ongoing career with a selected shipping
company. In this connection the industry has to date received
the gift of approximately 100 multi-skilled officers trained at
Trinity House expense. That record should refute any charge that
our training policy is little different of that of the Tonnage
Tax company.
It should also be recorded that in view of the
current concerns over the availability of junior officer positions
within the UK based shipping industry we have no knowledge of
any Trinity House cadet who has had difficulty in obtaining employment
with a shipping company of his choice on completion of his cadet
training with us. If there are problems in the industry, and all
reports indicate that there certainly are, our cadet is better
placed than most in being seen as a prime candidate for employment
with a major shipping company.
5. Junior Officer training opportunities
In view of the correspondence and articles appearing
in both the technical and national media concerning the difficult
situation regarding the employment of junior British officers
we approached Clyde Marine to comment on this situation in their
capacity as the UK's largest training company. Clyde currently
train on behalf of 45 owners and over recent years have consistently
recruited in the order of 300 cadets for the industry representing
43% of last year's UK national cadet intake. Clyde confirmed that
the current situation is extremely serious as part of their business
is involved with officer recruitment and placement in addition
to their work in cadet training. On that side of the business
they report that over a three year period an average of 60 to
80 junior officer positions which they were required to fill has
reduced to zero positions today and they currently record no industry
requirements for junior officers. Of even more concern is that
the number of senior officer positions also seems to be in decline
as a result of major changes in company manning policy. At the
time of our contact they reported that a major Scandinavian owner,
who had traditionally employed senior and junior British officers
on a sophisticated gas tanker fleet operating world wide, had
changed its manning policy and had made 87 British officers redundant
to be replaced by East European or Pacific Rim nationals.
6. Breaking the Berth Barrier
In view of the ship owners reluctance to sacrifice
part of the saving they enjoy through entry into Tonnage Tax combined
with the fact that the Tonnage Tax "contract" is essentially
a 10 year commitment it would seem to be quite difficult for the
Government to introduce legislation three years into the mission
which would change the Tonnage Tax rules other than with the consent
of Tonnage Tax companies. The remedy, if one can be found, will
therefore need to protect the ship owners current financial position
and seek his co-operation in preventing the current situation
from deteriorating further in the sense that the present berth
problem reflects the early stage of the Tonnage Tax problem and
it is only now that the first generation of Tonnage Tax cadets
are obtaining their first professional certificate. In order to
reduce the number of cadets being employed for Tonnage Tax reasons
two remedies would seem to be possible:
(a) Increase the cadet to officer ratio to
say 1:30 which would have the immediate effect to halving the
number of cadets a Tonnage Tax company is required to employ under
Tonnage Tax rules.
(b) Review the tonnage Tax training penalty
which presently stands at just over £7,000 per annum or approximately
£24,000 per cadet placement. The £24,000 is approximately
equal to the cost of training a cadet once Government assistance
against training cost is taken into consideration. If the penalty
was significantly reduced and the cheaper option for the ship
owner to engage a cadet was to pay a reduced penalty the effect
on cadet recruitment should be dramatic. At the present time,
with training costs and penalty in approximate balance, the ship
owner enjoys the marginal benefit of a young English speaking
officer cadet supplementing his manning numbers. If the penalty
for not engaging that cadet was to, say, halve the amount paid
into the Maritime Training Trust from £24,000 to £12,000
it is unlikely that Tonnage Tax owners would persist in recruiting
cadets other than those which they genuinely intend to retain
as part of their future officer pool. The effect on the training
fund would be significant but as that fund presently stands in
excess of £10 million—and the trustees are finding
it very difficult to find genuine outlets for the fund under current
Trust rules—a reduction of income should not be an embarrassment.
The secondary benefit of changing the ratio
between cadets and officers employed would also show a significant
cost saving to the ship owners which might be redirected to form
a compensation fund for that ship owner to employ a junior officer
at UK rates.
Clyde Marine advise that the East European/Pacific
Rim annual salary differential of a Third Officer is approximately
£8,000 (£21,000-£13,000) against that paid for
a UK alternative. It is therefore possible, by adjusting the training
ratio rules for a ship owner to receive indirect compensation
via saving on cadet training expenditure to cover the cost of
employing a UK junior officer and by doing so he would not suffer
any cost penalty over that which he presently enjoys under Tonnage
Tax Regulation.
There is no doubt that the listed figures would
need to be fine tuned and better investigated but it does seem
to form the matrix for a proposal to change the Tonnage Tax regulations
which would:
(b) encourage ship owners to employ UK nationals;
and
(c) protect the ship owner from any additional
cost as a result of employing a UK national at UK rates.
June 2004
| 
