Operating Budget and the STWC Convention for Ship Management

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Table of Contents

Introduction
Factors to Consider and Justifications
Typical Costs Included in a Budget Estimate
Monitoring the Costs During Ship Management
STCW Convention
Effectiveness of the STCW Convention in Achieving its Aim.
Reference List

Introduction

Cash flow projections outlining expected monthly or quarterly expenditures for newly acquired vessels can be generated from the Ship Budget Preparation, which typically spans a full year. As the ship is put into service, expenses are incurred, and invoices must be paid, the process moves into the Ship Budget Processing phase (Lin and Shaw, 2017). The budget estimate for the scenario above will be based on the findings of the comparison between the planned and actual costs (Smart Ship, 2021).

The size, kind, and age of a ship, as well as its desired registration, its intended crew, and, if it is possible, its trading history, must all be known to the ship manager (Demirel and Bayer, 2016). In this first part of the report, we will present a budgetary information concerning main data needed about the ship and why they are important, details of the typical costs to be included in the budget estimate and how to monitor all these costs during the management of the ship.

Factors to Consider and Justifications

When buying in a ship, a buyer must consider different things. The inspection of the ship prior to the purchase is one of the most crucial steps that can aid the buyer in making the best possible selection (Utureanu and Dragomir, 2016). Prior to making a purchase, it is crucial to check the ship’s condition (Cariou and Wolff, 2018). Some of the key factors about the vessel that need to be considered by the budget management team and their reason for consideration have been discussed in detail below:

Cost, Quality and Time Considerations

Most shippers start their research into a vessel by inquiring about costs because it is a key consideration in selecting a vessel. There is no purchase that is not impacted by the cost. Used ships are more affordable than brand-new ones, and their previous owners have invested a lot of money and time into making them better (SinoTech Marine, 2021). However, there are two other factors to consider before settling on the type of vessel to be chosen. As a shipper, it is ones’ responsibility to choose which features of the vessel are essential to the success of their company (Demirel and Bayer, 2016). Shipping with the cheapest provider could mean compromising on durability and transit time, though (SinoTech Marine, 2021). Considering these aspects while you research various carriers will help investors make a more informed decision.

Warranties and Maintenance Agreements

When purchasing the new fleet of ships, it is wise to read up on the manufacturer’s and seller’s warranty. There is always a need to learn exactly what is and is not covered by the manufacturer’s warranty (Cariou and Wolff, 2018). This is also the time to investigate the vessels extended warranty choices and evaluate whether or not the added upfront cost is justified. Comparing the warranties of two potential choices for an item of equipment might be useful when making a final selection (SinoTech Marine, 2021). The cost of maintenance is also a major consideration that need to be given a priority. When compared to the cost of preventative maintenance, the price of an emergency repair calls due to a piece of equipment breaking down is much easier to swallow.

Hull type and age limitations

Only ships with a double hull are permitted to transport commodities listed in MARPOL Annex 1 and 2. The maximum allowable age for any tanker is less than 20 years (NESTE, 2019). According to the Condition Evaluation Programme, all vessels older than 15 years are required to have a valid condition assessment. Hull, engine, and cargo handling equipment CAP ratings must all be at least 2 (NESTE, 2019). The first time a ship needs a CAP inspection is before it turns 15 years old. Before a vessel turns 18 years old, a second CAP must be performed (second CAP requirement will be in force 1.2.2021) (NESTE, 2019).

The maximum allowed age of crew members on gas vessels is 23. According to the Condition Evaluation Programme, ships older than 15 years old must have a current condition assessment. The vessel’s hull, engines, and cargo handling machinery must all have a CAP rating of 2. Every 30 months, CAP must be renewed (CAP renewal requirement will be in force 1.2.2021) (NESTE, 2019). CAP certificates issued by IACS-affiliated classification groups are recognized globally. In order to obtain a CAP certification, a fatigue analysis must be performed.

Typical Costs Included in a Budget Estimate

Purchase of a vessel is accompanied by fixed expenses, and these expenses are generally accepted to fall in the ship owner’s sole discretion. Pre-delivery costs, principal and interest payments, leasing fees, new vessel registration, and taxes are all examples of what can be categorized as ship fixed costs. On the other hand, the ship manager is primarily responsible for ship daily operating costs (Utureanu and Dragomir, 2016). Costs to operate a ship are viewed as potentially both fixed and variable (Lin and Shaw, 2017). Some of the typical costs that need to be included in the budget estimate of the fixed and daily operating cost have been discussed below:

Ship Crew Cost

The ship’s budget estimate details the underlying assumptions that went into calculating the expected crew costs, including the total number of crew members and their respective nationalities. The essential details of the crew’s expense can be budgeted with remarkable accuracy by a ship manager’s office with an expert personnel department (HandyBulk, n.d). Therefore, crew wage costs should be increased to account for both leave entitlement and any overlap time between departing and arriving crew members. Crew start-up costs may be partially covered by any number of national government aid programs.

Ship managers can negotiate a fixed sum contribution from the ship owners or spread the cost of crew establishment over the entire managed fleet as a direct charge (HandyBulk, n.d). Unless the ship is on a regular liner route, it can be difficult to accurately estimate the cost of crew members’ travel and repatriation (Utureanu and Dragomir, 2016). The P&I Club (Protection and Indemnity Club) registration does not cover all medical expenses incurred by the crew.

Ship Store Cost

Provisioning and victualing the ship are the primary categories of ship store costs. Provisioning is often handled through a catering contract at a set rate per person per day of service. Rope, Soap, and Dope is the common name for the second major section of the ship’s store (HandyBulk, n.d). Wires, ropes, lashing material, packing material, gases, chemicals used in refrigeration plant, boiler or tank cleaning treatments, etc. are all examples of the kinds of things that fall under the purview of the ship management when it comes to stocking the ship. The term “stores” can also refer to things like cabin stores, ship stationery, laundry supplies, and potable water (HandyBulk, n.d).

Lubricants and greases are the third largest category of supplies costs. Depending on the size and type of engine and the annual number of operating days, the amount of lubricating oil needed can be easily calculated (Smart Ship, 2021).

Ship Maintenance Cost

Any necessary repairs to the deck or engines, as well as the cost of ordering and receiving any necessary replacement parts, are included in the maintenance budget (HandyBulk, n.d). Both the expense of hiring riding crews to make repairs while the ships are out at sea and the cost of using shore workers when the vessels are in port are included in. The cost of maintenance of automated systems, electronic components, and navigational aids can represent a significant outlay of funds (HandyBulk, n.d). The costs associated with maintaining a ship also include those required for a ship survey or classification. Ship managers also accrue the expense of regular dry-dockings over the course of several years.

Ship Insurance Cost

The premium and P&I call estimates are based on quotes or renewal negotiations for the insurance scheme (HandyBulk, n.d). The P&I allocation should realistically reflect expected annual total calls. This will allow the ship owner to accrue for the actual cost of P&I insurance during the relevant year. However, it may cause minor adjustments to the actual cash position. Ship owners have the final decision on how insurance deductibles should be handled (HandyBulk, n.d). Costs that are not recoupable due to the deductible are sometimes left where they fall, usually as unbudgeted maintenance or repairs.

Administration Cost

Administrative Costs cover things like agency fees for ship owners’ goods and communications expenditures, as well as recurring dues and subscriptions for things like a newsletter (HandyBulk, n.d). If a third party ship manager is hired to oversee daily operations, an additional fee known as a “Ship Management Fee” must be paid as part of the ship’s administrative expenses (Smart Ship, 2021). When ship management is handled in-house, a responsible owner will figure out how much it costs overall and divide that cost across all of the vessels in the fleet based on that figure.

Monitoring the Costs During Ship Management

By monitoring machine and equipment data, shipping organizations may boost productivity and reduce the above costs. They can also foresee and solve problems before they occur, establish key performance indicators, and lessen or eliminate unplanned downtime. Some of the ways that can be used to monitor the costs during ship management entails using spot trends and predictive analysis.

With the right data to back up every choice, predictive analytics can help our company organize a wide range of management cost, daily operational cost, and other costs (Smart Ship, 2021). This facilitates supply chain planning and maintenance by the offshore team. Ship owners can monitor their vessels, plan for the eventual need for maintenance, and set up preventative repair programs (Jeon et al., 2016). Insight into vessel performance, machine and engine wear and tear, greater transparency, and, most importantly, the ability to monitor every piece of equipment are all possible thanks to predictive analysis (Jeon et al., 2016). The fleet’s senior management can utilize the data to make strategic and fiscal decisions as far as the costs are concerned.

By using spot trends, ship owners and operators may monitor how their machinery and propulsion systems are behaving. In the global maritime sector, companies maintain strict schedules and deadlines, and any number of unanticipated actions, such as subtle shifts in weather patterns that impede ETA or create resistance that leads engine to add power to boost speed, can halt the entire sailing body (Jeon et al., 2016).

This can reduce engine efficiency, increase fuel consumption, and force the ship to undergo maintenance or a change of spare parts sooner than necessary thereby increasing the costs (Du et al., 2019). Operators can save time and money by distributing funds to where they are needed most based on the results of sophisticated monitoring systems’ analyses of operational data presented in an understandable manner.

STCW Convention

The acronym STCW refers to the Standards of Training, Certification, and Watchkeeping, which were established in a convention in 1978 (Nautical Campus, 2020). One of the reasons for them is to ensure ones’ own safety as a seafarer out on the open sea. These regulations became effective after being accepted by 25 countries representing at least 25% of the world’s gross tonnage of ships of 100 gross tons or more (Nautical Campus, 2020). When that precondition was fulfilled in April of 1984, the regulations went into effect (Federation, 2010). In 1995, amendments were made that would not take effect until February 1997. New amendments were approved in 2010 and implemented the following year, in January 2012. Since its inception in 1978, the STCW has been ratified by 164 countries, accounting for 99.2% of total maritime tonnage as of 2018 (Viking Crew, 2022).

The International Maritime Organization (IMO) was founded in 1948 and officially came into effect in 1958, and it is responsible for enforcing these regulations (IMO, 2020). The IMO is responsible for enforcing the STCW as well as a number of other international agreements pertaining to the seas (IMO, 2020). This includes the International Convention for the Prevention of Pollution from Ships (MARPOL), the International Convention for the Safety of Life at Sea (SOLAS) and the International Mobile Satellite Organization (IMSO) (Federation, 2010).

Key Requirements of the STCW Convention

The standards under the STCW include those for masters, chief mates, officers in charge of navigational watches (OICNW), electro-technical ratings (ETR), electro-technical officers (ETO), able seafarer engine ratings (AB Engine), ratings forming part of engineering watches (RFPEW), officers in charge of engineering watches (OICEW), chief engineers, second engineers, radio operators who are tasked with demonstrating efficiency in the Global Maritime Distress and Safety System (GMDSS), able seafarer deckhands (AB Deck), ratings forming part of navigational watches (RFPNW) and other more general standards (Nautical Campus, 2020).

The STCW Convention requires that all seafarers get mandatory basic training in firefighting, basic first aid, personal survival, personal safety, social responsibility, and security awareness. The training ensures that crew members are aware of the dangers they face on the job and are equipped to handle any situation that may arise (Safety4Sea, 2019). The STCW Convention mandates that all officers have certificates of competence verifying that they are qualified to serve in their positions, have sufficient seagoing experience, are physically healthy, and are of legal age (Safety4Sea, 2019). Additional credentials, such as those for radar or ARPA, GMDSS, and safety-related tasks on board, may also be necessary.

Some of the other key requirements have been outlined below:

Medical Fitness;
Environmental awareness;
Training and Security awareness;
Social and personal responsibilities;
Ship specific familiarisation and training;
Launching and handling rescue craft;
Safety training including more advanced medical training, first aid, fire prevention and fighting
Endorsement of the certification by the ship’s flag state;
Training in and certification from the country of citizenship for the particular position.

All crew members, including, for instance, cooks on large yachts involved in trade, must comply with the regulations if the vessel is longer than 24 meters (Safety4Sea, 2019). Refresher courses and revalidation may be necessary if training and certification were completed more than five years ago. Masters, chief mates, and chief engineers, among others, must have extensive experience at sea before they may be hired.

Importance of STCW Convection

Before the IMO standardized the original requirements in 1978, countries had varying laws on the minimum amount of training a seafarer was required to obtain before being hired aboard a merchant ship (Viking Crew, 2022). Now that uniform minimum training standards have been set through STCW, marine officers can go to sea with more confidence that they and their colleagues have at least a working knowledge of basic safety measures. Everyone on board is safer as a result of the greatly reduced chance of accidents and the increased efficiency with which they can respond to any issue that may occur (Viking Crew, 2022).

The importance of STCW is to ensure the safety of mariners and the marine environment around the world. The STCW is enforced by the IMO, an organization whose Article 1(a) declares that its mission is “to provide machinery for cooperation among countries in the field of governmental regulation and procedures related to technical concerns of all types affecting shipping engaged in international trade; to encourage and enable the widespread adoption of the highest practical standards in subjects touching maritime safety, the efficiency of navigation, and the protection of the marine environment (Viking Crew, 2022)”.

Effectiveness of the STCW Convention in Achieving its Aim.

The STCW Convention was the first worldwide agreement to set standards for training, certification, and watch-keeping of seafarers. Officers’ and ratings’ training, certification, and oversight used to be decided on a country-by-country basis, with little to no consideration given to international best practices (Safety4Sea, 2019). Even though shipping is the most worldwide industry, standards and methods varied greatly. In terms of training, certification, and watch-keeping, the Convention sets minimum requirements that all countries are required to reach or exceed. Some of the key strength of STCW include:

Provides training guidance for personnel operating DPS
Provides certification requirements for able seafarers
Stipulates requirements related to training in modern technology such as ECDIS
Sets mandates for marine environment awareness training
Provides competence requirements for people working on board on all types of tankers
Provides new training guidance for people working in polar waters.

On the other hand, the weakness of the STCW include unfulfilled objectives and implementation issue. The new STCW white list now includes 118 countries, after extensive work by numerous authorities and MET institutions across the world. According to MSC circular (MSC/Circ.) 1092, most sailors around the world have credentials that are in accordance with the convention’s requirements (Federation, 2010).

The topic of whether or not the abilities and skills of mariners with such credentials have been developed arises now. After quality standard reports are submitted to the IMO in accordance with STCW 95, an accurate assessment of the convention’s efficacy and success can be made (IMO, 2020). While the convention’s stated goals of guaranteeing marine safety and protecting the environment by enhancing the global professional standard of seafarers are admirable, it has a lot of weaknesses such as unfulfilled aims, and implementation flaws that call for more work and amendment.

Reference List

Cariou, P. and Wolff, F.C., 2018. Ship-owners’ decisions to outsource vessel management. Transport Reviews, 31(6), pp.709-724.

Demirel, E. and Bayer, D., 2016. A study on cost optimization in the ship management. Proceedings Book, p.67.

Du, Y., Meng, Q. and Wang, Y., 2019. Budgeting fuel consumption of container ship over round-trip voyage through robust optimization. Transportation Research Record, 2477(1), pp.68-75. Web.

Federation, I.T.W., 2010. STCW a guide for Seafarers-taking into account the 2010 Manila amendments.

HandyBulk (n.d). Ship Management Costs. Web.

IMO (2020). International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW). Web.

Jeon, J.W., Yeo, G.T., Thai, V.V. and Yip, T.L., 2016. An evaluation of the success factors for ship management companies using fuzzy evaluation method. International Journal of Shipping and Transport Logistics, 8(4), pp.389-405. Web.

Lin, C.K. and Shaw, H.J., 2017. Feature-based estimation of preliminary costs in shipbuilding. Ocean Engineering, 144, pp.305-319. Web.

Nautical Campus (2020). STCW – Standards of Training, Certification and Watchkeeping for Seafarers. Web.

NESTE., 2019. Vetting Criteria in Force. Public Version. Web.

Safety4Sea (2019). STCW Convention: General requirements for officers. Web.

SinoTech Marine (2021). Factors to Consider in the Process of Ship Sales and Purchases. Web.

Smart Ship (2021). Ship Owners using data to reduce operational costs. Web.

Utureanu, S. and Dragomir, C., 2016. Ship Management Benchmarking. Ovidius University Annals, Series Economic Sciences, 16(2), pp.397-401. Web.

Viking Crew (2022). What is the STCW Convention, and why is it so important? Web.

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