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Competitive provision of salvage and wreck removal services

Arnold Witte, President, International Salvage Union

There’s nothing like depressed margins and reduced rates to kick start a bout of introspection in any industrial sector. And the fall over the edge of the pre-2008 boom-time cliff has been more dramatic and vertiginous in shipping than in many other arenas. The current period of soul searching in the shipping industry is understandable and, indeed, desirable.

All organisations under financial pressure run the slide rule over their cost base. In this environment the more obvious profligacies stand out so much more, attracting themselves to the boardroom’s sharpened knives and being, rightly, cut out. It’s a bold (or foolish) manager who proposes a “team building event” at a luxury hotel in this climate.

An attack on legitimate costs follows as maintenance of margins is pursued. Then, more creative cost cuts are considered and in some cases the opportunity is taken to retrench under the cover of the downturn. Care needs to be taken, however, so that the organisation is not drawn into a vicious downward spiral where it leaves itself unable to invest for growth and unable to take advantage of any upturn.

Questions are often also raised about the whole approach of a company or sector to outsourcing, contracting, facilities management, catering, whatever. The line “but we’ve always done it like that” is not acceptable. There must be robust justification for the model that is being used or change must follow.

In this climate the oil industry, for example, looks to its exploration and well control specialist contractors – should we take it back in house they ask? The motor industry considers its relationship with parts suppliers – should it re-examine vertical integration? Healthcare thinks about its drugs procurement and prescription regimes. And so it goes.

And of course the shipping industry thinks about the provision of its specialist services. Services like salvage. And that is right, for no one should expect the status quo to continue unchallenged. There are, therefore, interesting ideas in circulation today about how vital salvage services are provided.

The International Salvage Union accepts, and has publicly acknowledged, that the costs associated with salvage and in particular with wreck removal have escalated to a level which is causing those who pay, namely the P and I Clubs and the hull and machinery underwriters, serious pain. That is not good for the overall health of the industry: it is certainly not in our interests to see them so squeezed. We favour changes in the regime to help reduce certain costs and to increase transparency.

Our industry is made up of a number of major players with global reach and number of smaller players with local focus who are infrequent salvors concentrating mainly on harbour towage. And there are also a number of most effective companies that fit somewhere in between these two. Companies with a range of owned and operated vessels, quite willing to tender for work away from their home waters and competent to do a good job on major salvage or wreck removal cases. It is not right, in my view, to portray the salvage industry as composed of just a few well-established international companies.

By way of example, the last major wreck removal operation to be tendered, the MV Fedra, wrecked of Gibraltar attracted eight competitive bids from the major international companies but also from Scaldis, T&T Bisso and Donjon Marine.

It is a market with few barriers to entry and if there is an opportunity for significant profit, with an ability to assess risk, then the market will determine its own expansion and contraction accordingly. It is in the long term interests of owners and insurers to provide a fair and competitive process for the provision of services.

The industry does face challenges. One of the most significant is the erosion of the skill base within the seafarers’ community. Expert salvage masters, officers and even deckhands are an ageing population that is not being fully replaced. Collectively we run the risk that our skill pool dries up and the continuity of talent is not maintained. This is something we all need to address. It is not just salvage – it is harder and harder, especially in developed countries, to recruit youngsters into industries that are dangerous, uncomfortable and require them to be away from home for long periods.

It is also hard in the present climate to invest in the complicated and expensive equipment that is increasingly required for salvage and wreck removal operations. The ad hoc nature of our business with its attendant fluctuations in income does not readily lend itself to traditional capital investment analyses.

But one of the key challenges for all interests to face is the way in which the various national, supra-national and international regulatory frameworks and environmental considerations come to bear on salvage and wreck removal and through their requirements drive up costs dramatically.

Added to that, third party interests (and others) seem ever ready to pick what they perceive to be the very deep pockets of the liability insurers. Shameless claims that cannot really be properly inspected and founded on the expectation that “big bad industry” will pay or face reputation-threatening consequences. That is not to say that the increased prominence of environmental concerns is not a good thing, of course it is. Indeed salvors feel they have a particular and essential role to play, and pride themselves on their increased ability, depending on circumstances to keep pollutants in the casualty or to safely remove them.

Some voices call for an entirely new model and yet it is not clearly defined. What seems to attract some people is the notion of clubs and property underwriters assuming responsibility themselves for provision of salvage and wreck removal services, investing in and maintain their own equipment and expertise. Or perhaps supporting commercially a “favoured” few operators with long term arrangements for them to provide dedicated services.

Either way, those approaches are unlikely to be the cure that insurance interests seek for the increased cost of operations. For a start they are not expert at procuring and maintaining heavy equipment and corporate history provides examples of organisations which have un-successfully diversified from their core business in order to make savings on service provision. Will imagined savings really translate into lower premiums for owners once the costs of equipping, maintaining and updating an in-house-quasi-salvage-firm are loaded onto the insurers’ profit and loss accounts? Furthermore, the interests of the liability and property insurers are not always the same.

And if the new model is for insurers to support or subsidise a “preferred” existing provider one questions how value for money will be achieved without competitive forces in play. What would be the nature of those arrangements – a hefty “retainer” plus time and materials spent “on the job?” Again it’s difficult to see that producing real savings.

And it also seems unlikely that such a set up could provide the necessary geographical cover – particularly for attending casualties – that today’s competing salvors offer. We recognise that much expertise – by no means all- rest in Europe but when considering the provision of services globally we must not be Eurocentric in our outlook.

The International Salvage Union has a membership of more than 50 companies. It does want to work cooperatively and it wants to assure its client base, the P and I Clubs, the Hull and Machinery underwriters and ultimately the shipowners that it stands ready successfully to deliver complicated, difficult and dangerous services. It naturally seeks a reasonable return on its own investment to make its participation worthwhile.

For wreck removal, contracts should be awarded after fair tendering on a fixed price basis. Significant risk must remain with the salvor, for example, the weather conditions during the anticipated period of the operation. Both sides to the proposed contract also need to be prepared to compromise with regard to how to deal with governmental and environmental influences that may occur during the course of the proposed operation. Letting such contacts on a time and materials basis is not appropriate for wreck removal. There are not many wise householders, I think, who are prepared to let a domestic construction or “remodelling” contract to a builder on the basis of time and materials for as long as the job takes – no, the suggested approach is a fixed price (with staged payments) for an accurately and unambiguously specified job.

The International Salvage Union does want to work cooperatively with all parties to address issues of serious concern, and there is much that can be done help to reduce costs. But future calamities at sea, with rare exception, should be dealt with on a competitive basis. To have a single responder or a chosen few will not be successful.