New Sulfur Emission Norms A Boon Or Curse?

International Maritime Organization’s ship pollution rules are contained in the “International Convention on the Prevention of Pollution from Ships”, known as MARPOL 73/78. On 27 September 1997, the MARPOL Convention has been amended by the “1997 Protocol” which includes Annex VI titled “Regulations for the Prevention of Air Pollution from Ships”. MARPOL Annex VI sets limits on NOx and SOx emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances.

IMO has stipulated new cap on the sulfur emission (Sox), which is now reduced to 0.5 % from 3.5%,and which is to be enforced by 2020 by all signatories making respective jurisdiction its responsibly for its compliance. Its Compliance with the provisions of Annex VI is determined by periodic inspections and surveys. Upon passing the surveys, the ship is issued an “International Air Pollution Prevention Certificate”, which is valid for up to 5 years.

It is important to note that under the “NOx Technical Code”, the ship operator (not the engine manufacturer) is responsible for its compliance, While it cannot be denied that this emission cap is essential to reduce the air pollution and for safe and clean environment as envisaged under MARPOL, there are certain repercussions, which cannot be ignored as a result of bringing this regulation.

These standards will be implemented on the world merchant fleet of approx 90,000 ships, which in turn will affect the entities associated with it viz. insurance, classification societies etc. Non-compliance with these regulations may lead to suspension of class, which in turn will affect their Insurance cover. Classification societies or class are non-governmental organizations doing periodical inspections, and have the standards for the construction and operation of ships as per the guidelines provided by IMO. The ships have to be class approved in order to get an insurance cover and therefore the retrofitting and upgrading of engines will be important to meet the specified standards.

For any type of insurance, be it P&I or Hull and Machinery, Ships cannot be in breach of regulations for the insurance cover and moreover companies are going to be reluctant in settling claims for ships which are not even eligible for sailing in the post 2020 emissions regime.

The sulfur emissions do not come under the insurance norms but changes made in engines to reduce the sulfur content can lead to damage to the insured H&M. Although at this stage, it is difficult to quantify the insurance-related impact of the new sulfur emission regulations, but can no doubt be a pinch to the insurers, if the claims are of high value. It is highly likely that the technology for reducing the sulfur content will be costly and older ships would be recycled or scrapped, paving the way for a new fleet making it another factor to be considered.

Keeping the above consequences in mind, the insurance industry is already grappling with lower revenues as the insured value of the ships is going down, in part due to a supply overhang. Also the fact that new clubs/companies are entering the insurance industry is also impacting the margins of some of the existing insurance players.

Also surplus supply of ships has already dragged down freight rates, reducing the ability of ship owners to take insurance covers consequently insurance premiums have declined eroding the earnings of underwriters thus under the circumstances can it be implied that new norms are creating a “perfect storm” like situation, as costs for ship-owner is rising among others expenses and risks, along with expenses associated with training and familiarization of crew for handling cleaner marine fuels? The question remains to be answered.

Perception v/s Reality

Rahat Talreja – Vice President – CSS India

You must have been accused of being a Robber (as in: You robbed me) or Lootera (as in: you looted me) or Fleecer (as in: You fleeced me) or Thieves / Thugs (as in : they thugged us or in Hindi: chor hai yeh log)

More so if you are in the business of airline, malls, multiplex, logistics, high end restaurant, airport shops and cafe’s etc. Let me elaborate.

Airlines

Perception:
Every peak season like Diwali, Christmas etc., you see articles in newspapers on how airlines are “looting” passengers with exorbitant sky high fares. Bombay to Delhi ticket at 25000 which normally is 2500.
Then same night, you put on the TV and the TV as always is broken into 6 frames – 5 guests/panellists and 1 host journalist – all arguing on : Are airlines right in looting innocent passengers with sky high fares?
What is the regulator doing? DGCA? Airlines Ministry on this loot? NGO view, political party view, customers view all are unanimous: They are looting.
Just 1 person would be representing the airlines who would also 75% agree to it that they are looting.
This is perception.

Reality:
Open the balance sheet, profit and loss account, sales / purchase registers, cost matrix of the airline.
95% of the time, every year, they fly passengers: Below cost.
Reason: no pricing power and uncontrolled competition.
95% time they lose money on every ticket.
5% time – they have some opportunity to cover up due to demand supply matrix
Yet, they guzzle the capital invested, have poor balance sheets, and have losses on operations.
In India, all airline promoters are billionaires starting from Govt of India run Air India to Tata’s Vistara to Naresh Goyal’s Jet airways to the 5 star ex. airline Kingfishers billionaire promoter Vijay Mallya to the Wadia’s Go air
Because to become a millionaire, you start as a billionaire. After the so called “loot”
This is reality.

Multiplex and Malls

Perception:
How can they ask 400 bucks for a popcorn,
200 bucks for corn and 600 bucks to see this useless movie which is like semi porn (remember I am a poet at heart)
150 bucks for the parking? 100 bucks for a bottle of water?
On TV, the argument goes again: where is the regulator? Why allow them to fleece customers?
Hushed comments: these guys make HUGE money

Reality:
Most malls shut down eventually. Most multiplex chains get sold or shut down. In India, it’s almost a monopoly with PVR. Space for none but one. But are they making that kind of money you think? The answer is: read their finances, that’s the truth and you will realise how the real estate and municipal taxes are what you pay for and not the popcorn, water, wafers etc.
And we are not even bringing in parameters like return on investment which are prime to businesses.

Logistics

Perception:
Your rates are very high
Your THC is high
No one is charging VGM
Your destination charges are high
Then, it gets more personal
You guys are looting
You are like thugs
Don’t take advantage
You guys are making huge money from us

Reality:
(applicable to most except the few top companies in the listed space)
No logistics company promoter lives on the expensive Mumbai Island City / South Mumbai, all live in the suburbs and farther than that. That itself is a sign of the high charges and loot.
None is in the millionaire list
Most are highly leveraged
Most started from scratch and are still scratching something to remain in business
Negative freight & Rebate are words and concepts holier than God himself for them
Most are poor enough to see travelling to a foreign country and sometimes by business class as a sign of “I have arrived“
A lot many “buy THAT car or THAT phone” and think they have arrived and many such poor think tales.
So the real money always eludes the glamorous businesses.

The Improvements In Salvage Law: Is The 1989 Salvage Convention Environmentally Dynamic?

The preamble of the 1989 salvage convention begins by elucidating recognition of increased concern for protecting the environment and the need to create a regime to incentivize salvage operations that incorporate environmental considerations. The convention enumerates duties and responsibilities owed by the salvage parties to the environment, but it is principally in two provisions, Article 13 and Article 14 that the regime to incentivize the undertaking of salvage operations for environmental protection purposes is found.

Article 13 provides that the salvage award shall be fixed with a view to encouraging salvage operations, taking into account the following criteria “without regard to the order in which they are presented below…” (b) the skill and efforts of the salvors in preventing or minimizing damage to the environment;

Article 14 provides for a form of special compensation for salvage efforts where there is a threat of damage to the environment in order to address the irreconcilability of the principle of no cure, no pay with incentivizing environmentally motivated salvage operations.

Though these articles were enacted to provide a responsive regime to incentivize environmentally motivated salvage operations, the force of the provisions is weak. A salvage reward under Article 13(b) is will always be qualified by provision 13(3) of the Convention, “The rewards, exclusive of any interest and recoverable legal costs that may be payable thereon, shall not exceed the salved value of the vessel and other property.” Environmental threats can have devastating consequences to a region. A large oil spill for example has the potential to significantly damage marine habitats, biodiversity, and local livelihoods. By limiting a salvage reward in this manner, no matter how devastating the environmental impact of a damaged ship may be, the salvage crew must engage in a balancing exercise to determine if it is profitable. Notably, this limitation was recognized by the International Salvage Union at the 2011 Comité Maritime International (CMI) colloquium; “…all too often the tribunal is unable to give full effect to this provision because of the low value of the salved property.”



Article 14 allows for special compensation claims as an exception to the general no cure no pay principle of salvage law. One of the most significant issues with Article 14 is that the ambiguous wording has created legal uncertainty for when the provision applies as there must be a ‘threat of damage to the environment’. The meaning of the phrase ‘threat of damage to the environment’ is unclear and requires significant interpretation. To give effect to the phrase, a decision maker must consider what constitutes a threat, whether the threat must be real or may be a reasonably perceived threat, what is the meaning of coastal waters found in the definition of damage to the environment, how is the word substantial as found in the definition to be defined, and how substantial must the threat be.

Joy Thattil

Maritime Lawyer & Partner @ Callidus Corporate & Maritime Consulting ( CCMC) Dubai & India

joy@calliduscmc.com