Recklessly Extending a Bulk Carrier's Useful Life - A Ship-Owner's Motives and Panamanian Support

BSc Maritime Studies

International Maritime Regulations

Academic Year 2014 – 2015

AREA: Ship Accidents.

TOPIC: Analyse at least three major ship accidents/incidents that had either occurred in the same sea area or had suffered similar effects in different periods of time. You can choose either 3 tankers or 3 bulk carriers or 3 passenger Ro-Ro ferries or 3 container ships or any other type of merchant vessels, i.e. Reefers, LNG’s, LPG’s etc. You should follow the steps presented below:

Identify the main similarities and differences of the three or more accidents setting as a measure any legal tools.

Present the relative theories and literature reviews. Analyse and develop all arguments involved by using real

case-studies. Evaluate the information assembled. Propose specific alternative solutions.

Submitted to: Dr A. Alexopoulos

Submitted by: Christopher Michalos

Submission Date: 03/04/2015

Abstract

The purpose of this research project is to analyse and interpret a ship owner’s

motives behind the decision to purchase, rename and reflag a bulk carrier over the

age of 17 years (referred to by the author as recklessly extending the vessel’s useful

life), while simultaneously neglecting the structural integrity of the ship. The

controversial matter of ‘flagging-out’ a vessel to a flag of convenience (FOC)

administration, based on the short-term economic benefits rather than investing in

the reduction and/or prevention of future risks to the company’s vessels and its

financial longevity, will be analysed, as will the degree to which Panama, as well as

other FOC states, facilitate the ship-owner in the vessel’s ‘useful life extension

process’. To this effect, three major incidents involving bulk carrier total losses of

vessels over 17 years old, and above 20,000 Dead Weight Tonnes (DWT), caused by

structural hull failure will be analysed in detail. In order to identify all contributory

factors to the three major incidents, as well as to ascertain how the relevant safety

issues can be addressed more effectively in the future, a combination of two risk-

based methodologies – in the form of the Formal Safety Assessment (FSA) and Fault

Tree Analysis (FTA) – will be implemented both quantitatively and qualitatively to one

of the incidents.

In addition to this, the time periods between the three major incidents will be

analysed with the aim of determining what consequential action has been taken by

legal and/or regulatory bodies from within the maritime community such as the

International Maritime Organisation (IMO), to support shipping companies to

improve structural safety, thereby reducing casualties and major incidents at sea.

The International Convention for Safety of Life at Sea 1974 (SOLAS), the Enhanced

Survey Programme 1993 (ESP) and the numerous amendments since their entry into

force, are most relevant to the context of this subject matter, and will therefore be

primarily focused on. The degree to which any such action has been implemented by

the ship-owners to the running and maintenance of their vessels will also be

analysed, so that a better understanding is achieved of which lessons have been

learnt and which may have been missed, either through managerial incompetence

or poor decision making based on maximising profits and minimising costs, and,

whether the IMO has fulfilled its obligations as an international governing body to

effectively combat the issue of bulk carrier structural safety. This project will then

reach conclusions venturing that while the mutually beneficial relationship between

ship-owners and FOC states exist, the unsafe practice of recklessly extending a

vessel’s useful life will continue to occur coextensive with the severe casualties that

such a practice generates.

Table of Contents1.Introduction 12.Literature Review 22.1 FOC and Panamanian Maritime Authority (PMA) 2

2.2 Case of the Alexandre. P 3 2.2.1 Similar Incidents on the Same Route 4 2.3 Case Study of the Leader. L 5 2.3.1 Opposing Investigation Reports and Classification Controversy 5 2.4 Case Study of the MV Smart 6 2.4.1 Immediate Causal Factor 6

3. Research Methodology 74. Data Analysis 8 4.1 Alexandre. P Causal Analysis 8 4.2 Leader. L Causal Analysis 9

4.2.1 Further Analysis 9 4.3 MV Smart Vessel History and Owners Transparency 9 4.3.1 Further Analysis10 FTA Assessment of MV Smart11

Section A: Causal Link Diagram 11 Section B: Causal Link Analysis 12 FSA Assessment of MV Smart13

Section A: Qualitative Implementation – The 7 Step Process 13 Section B: Qualitative Implementation 15 Section C: Interview with Insurance Director 16 Section D: Final Analysis 17

5. Discussion and Results 186. Conclusive Remarks 20Appendix (I) Alexandre. P, Leader. L and MV Smart Vessel Particulars

22References 23Bibliography 27

List of TablesTable 1…………………………………………………...............11

Table 2……………………………………………………………….15

Table 2.1…………………………………………………………….15

Table 2.2…………………………………………………………….16

Table 2.3…………………………………………………………….17

1. Introduction

Since their development in the 1950’s, bulk carriers have

played a major role in the expansive growth of the global sea-

borne trade (IMO 2015a). Running concurrently to this,

however, has been the frequent association between bulk

carrier operation and their susceptibility to structural

failure and foundering, especially those above the age of 17

(Roberts, et al 2013a). The common vulnerabilities shared by

this category of vessel would presumably act as encouragement,

to those who operate them, to significantly reduce the proven

risks as far as feasibly possible. Although incomprehensible

to the ethically minded or risk averse, the majority of those

responsible for these vast machines seem, to the author of

this project, inspired to do quite the opposite. This opinion

is formulated by observing the practices of the three ship-

owning companies chosen for this project’s case studies, the

Alexandre. P, the Leader. L, and the MV Smart, as well as

researching the FOC state of Panama in terms of the benefits

and concessions it offers the ship-owner. Short-term cost

saving benefits, which, by flying a FOC is essentially

guaranteed (Stopford 2006), as well as the sought-after

anonymity for liability avoidance (Coles and Watt 2011a),

represent a specific focus of the project.

In attempting to understand the reasons behind this

phenomenon, and to better understand the behaviour of the

ship-owner, it is this project’s primary objective to answer

three questions. Each question has two parts. Firstly, to what

degree do the financial savings in tax, labour, repairs and

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maintenance costs – offered by FOC nations – facilitate the

extension of a vessel’s useful life, and why is it then, that

fleet carriers are choosing to endanger their crew by engaging

in such a high risk strategy? Secondly, to what extent has the

IMO, through the SOLAS convention and the ESP programme,

improved bulk carrier structural safety, and what are the

alternative solutions to the systemic deficiencies which have

seen them fall short of their targets? Finally, what

conclusions can be drawn from the results of the FSA and FTA

studies carried out by this project, and do they prove that a

proportional allocation of available funds, can instead be

better utilised for the prevention of major incidents, while

also representing a sound investment with a high probability

of increased profits?

2. Literature Review

2.1 FOC and the Panamanian Maritime Administration

The consistent increase in the volume of vessels being

registered to open registries, or the so-called FOC nations,

is not a trend based on mere practical convenience (Hwang

2005). There always seems to be a controversial element to

every conversation regarding the moral code of FOC

administrations, but what are the reasons for this (Churchill

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1988a)? While the answer to this question is crucial, in order

to satisfy the objectives of this project, two ‘advantages’

offered by Panama to their registered ship-owners will be

analysed. The first, and arguably most important to the ship-

owner, are the cost saving benefits that Stopford 2006 refers

to as “the deal breaker”.

Despite an initial registration fee and a comparatively low

annual tonnage tax, Panama, along with the vast majority of

the FOC nations, do not levy taxes on the profits arising from

the operation of vessels registered under their flags (Coles

and Watt 2009b). Although registering vessels under the

Panama flag does not exempt a ship-owner from taxation in the

country in which he is domiciled for fiscal purposes, the

common ‘owning structure’ of a maritime administration

(boasting an absence of the ‘genuine link principle’), makes

the process of identifying the legitimate beneficiaries to the

vessel’s profits almost impossible (Churchill 1988b).

Although minimising tax liability is often a priority for

shipping corporations, the costs associated with a vessel’s

operation arguably represent a far more substantial portion of

a firm’s expenses and liabilities. It is not surprising,

therefore, that Panama and its FOC ‘rivals’ offer a variety of

lucrative concessions to the financially prudent ship-owner.

One of the most costly aspects to the running of any bulk

carrier is its crew (Lille 2006). The results from a study

carried out by the Joint Maritime Commission (ILO 2001), found

that the annual crew cost for a 30,000 DWT bulk carrier,

crewed by United Kingdom officers and ratings, was 44.6%

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higher than if the vessel was crewed with officers and ratings

from the Philippines. This can be considered even more common

place in the current maritime landscape than in 2001. Should

the ship-owner intend to either fully or majoritively crew his

vessel with Filipinos, or with individuals from any other

nation for which wages are comparatively lower, the Panamanian

Maritime Administration (PMA) will, as a matter of course,

happily facilitate that decision (Coles and Watt 2009c). The

same report also provided a comparison of costs for the

repairs and maintenance of bulk carriers. The report found

that in order to meet the construction safety criteria of

traditional registries (such as the UK), the vessel’s owners

would incur costs of up to 110% of that which the PMA would

impose to meet their safety standards (ILO 2001b).

The second advantage, as already mentioned, relates to the

level of anonymity available to the ship-owner. Although the

fruition of these benefits will ultimately be realised in

financial terms, the methods by which they are implemented

often constitute escaping liability, which in turn can have

alternative implications (Hwang 2005b). It is therefore

essential that such benefits are considered separately. In

August 2015, Law 47, which was passed by the National Assembly

of Panama nearly two years ago, will come into force (Winner

2013a). Designed and created for a very specific purpose, its

intention is to restrict the use of ‘Bearer Shares’ in the

country (Winner 2013b). Unique in its anonymous ownership, due

to the lack of a name on the share certificate, whoever holds

it – owns it. The share capital of a shipping company

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represented by bearer shares renders the identification of the

shareholders virtually impossible (Coles and Watt 2009d), and

thus greater anonymity is achieved. Such a scenario is very

popular among those intending to mask the existence or the

extent of their income (Churchill 1988c).

As already referenced, if beneficial ownership remains

anonymous, then liability for pollution, property damage, and

even death or personal injury, can be readily avoided

(Churchill 1988c). Not only can this be considered a financial

benefit, but its impact is far greater, as those who escape

liability are at further risk of endangering the lives of

their seafarers as well as the environment within which their

ships are trading. When a disaster occurs, those responsible

must be held to account, otherwise how is it possible for

crucial lessons to be learnt and for similar incidents to be

avoided?

The focus of this project centres upon the amalgamation of

both the advantages discussed above, which come together to

form a tailor-made service for the ship-owner who intends to

minimise costs by utilising the financial concessions of

repairs and maintenance to his ageing vessel, while

simultaneously establishing personal liability barriers that

protect him from the high risk strategy of recklessly

extending his vessel’s useful life. It is for this particular

purpose that the following three case studies have been

chosen, as they depict the consequences of such a strategy.

2.2 Case study of the Alexandre. P

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On March 13th 1990, the vessel departed the port of Dampier,

Western Australia, bound for Gijon Spain, with an intermediate

port of call at Cape Town. At 1400 hours the following day,

the vessel made a daily routine position report to the (FSSC)

Federal Sea Safety Centre (ATSB 1990a). After this point, the

details of the incident and the whereabouts of the vessel

remain unknown to this day. However, there is a plethora of

intriguing data regarding the condition and registration of

the Alexandre. P, which seems inextricably linked to its

disappearance and to the death of all those on board.

Information collected from the post-incident interviews with

Dampier port employees, as well as previous crew members,

maintained a common theme. The following has been assembled

from the official investigation report (ATSB 1990b page 26);

The vessel had clearly been poorly maintained with crew often sleeping

in the alleyways and on deck. There were numerous deep rusty patches

on the floors, and a constant smell of raw sewage. One shift supervisor

gave evidence that he noticed heavy corrosion in the transverse

bulkheads between holds 2 and 3, through which he could “see

daylight”. Another supervisor observing the ship prior to its sailing from

Dampier, commented on “fist sized holes” in the port side of No 5 hatch

cover, while the No 5 hatch coaming was described as “all but rusted

away”, with only the actual corner appearing solid.

2.2.1 Similar incidents on the same route

One of the very few benefits to a major incident at sea is the

opportunity to prevent the disaster from reoccurring by

ensuring that important lessons have been learnt (Alexopoulos

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2015). In July 1991, the 115,000 DWT bulk carrier, the Manila

Transporter, was preparing to depart the port of Dampier on

the identical route to that of the Alexandre. P, travelled

only sixteen months earlier (GISIS 2009). Because the two

vessels were of a similar size, carrying the same cargo, and

navigating the same sea area, a telex was sent by two

experienced surveyors from the vessel’s manning agents to the

Master of the Manila Transporter, specifically drawing

attention to the Alexandre. P, and stating the relevant

comparisons and concerns (ATSB 1991a).

The telex also contained strong recommendations regarding the

cargo loading procedure, asserting that “all hold loading is strongly

advisable to minimise stress and bending moments”, and concluded by

expressing a “deep concern” over the safety of the vessel and the

crew on-board (ATSB 1991b page 5). These concerns, along with

the loading recommendation, was supported by the vessel’s

charterers (Hamersley Mining Corp), who had sought advice from

the Lloyds and ABS classification societies, stating that they

had both “echoed his concerns” (ATSB 1991c page 6). Despite the

forewarning, the Master chose to disregard the recommendations

and fully loaded alternate holds. Five days later, a ten meter

fracture appeared in the side hull plating of hold No 3, and,

after a short period of water ingress, the ship began to list

heavily. At this point the Master gave an abandon order. All

crew members were fortunate to be rescued, but, despite

several salvage attempts, the vessel became a total loss (ATSB

1991d).

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The sinking of the Manila Transporter raises further questions

about the negligence of the Master, who disregarded the strong

recommendations from experienced professionals who had clearly

learnt the lessons from the Alexandre. P. Although such a

discussion is beyond the scope of this project, it must be

mentioned that despite the vessel suffering total loss, the

lessons from the Alexandre. P had indeed been learnt and

effectively communicated to the one individual who could have

used that information to avoid the ensuing disaster. The fact

he chose not to, is a matter for a separate investigation.

2.3 Case Study of the Leader. L

During a voyage from Egypt, to the United States, while loaded

with 57,000 tons of salt, the vessel Leader. L encountered

rough weather in the Atlantic Ocean. At 1400 hours local time

on March 23rd 2000, problems with the steel plating on the

starboard side on hold No 4 led to water ingress, causing the

hatch cover to come off. Other steel plates within the

vicinity of hold No 4 below the waterline also came off, which

caused hold No’s 3, 2 and 1 to subsequently flood. The vessel

finally went down at 1949 hours approximately 360 nautical

miles off the coast of Bermuda. Only 13 of the 31 crew

survived (GISIS 2005a).

2.3.1 Opposing Investigation Reports and Classification

Controversy

The limited portion of the official investigation report made

available to the public, containing the most likely causal

factors that lead to the flooding and rapid sinking of the

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Leader. L, holds numerous inconsistencies when compared with

another report produced by the Polish Registry of Shipping

(PRS). Whereas the official report makes clear reference to

the structural degradation of the ship as the probable cause

of the flooding (GISIS 2005b), PRS denies that the vessel was

in poor condition, claiming its monitoring and supervision of

the vessel was sufficient. A possible explanation for these

inconsistencies is that the vessel’s registry was changed in

1997 from Lloyds to PRS (Intertanko 2000a). This transfer

occurred during the process of a special survey that was

initiated by Lloyds, and completed by PRS (Marine Log 2000a).

According to PRS, “all recommendations by Lloyds were addressed and class

was granted for five years” (Marine Log 2000b).

Although the Polish class society has always maintained that

the vessel was in good condition, an unscheduled survey

carried out by a PRS surveyor revealed “serious irregularities with the

vessel” (Marine log 2000c). The results of this survey were not

approved by PRS head office, and the surveyor was immediately

dismissed (CTX 2001a). Following the review of results from a

post-incident special audit carried out by IACS, its council

decided to terminate PRS’s membership, based on substandard

management, which had also seen PRS temporarily suspended two

years previously (Intertanko 2000b). The report also condemned

the “poor maintenance of the vessel”, claiming it had been in that

condition for some time (Intertanko 2000c). Considering the

IACS report, questions must be raised regarding the motives of

Leader. L’s owners to change class during a special survey to

a society which had a history of suspension and mismanagement,

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with clearly no reservations about dismissing an employee who

raised what was most likely to be legitimate concerns. IACS

decision to hold PRS proportionally accountable for a serious

breach of duty can therefore be considered a justifiable one.

2.4 Case study of the MV Smart

In the breakwaters at Richards Bay, South Africa, on August

19th 2013, the Panamanian flagged MV Smart ran aground while

manoeuvring out of the port area into the open sea (GISIS

2014a). Cracks then developed on the main deck between cargo

hold No’s 7 and 8. Despite the large swells and high winds,

the crew were safely airlifted to shore (Wrecksite 2013). The

vessel, however, subsequently broke its back, taking the

148,000MT of coal down to the bottom of the breakwaters

(Schuler 2013). There are two controversial elements to this

case that require analysis in order to ascertain cause and

liability. The first relates to the hours immediately prior to

the incident occurring.

2.4.1 Immediate Casual Factor

Questions have been raised as to why the vessel was allowed to

leave the harbour in the first place (Lancaster 2013a).

According to the Chair of ‘Coastal Watch’ (an affiliate of the

Wildlife and Environmental Society of South Africa), “The ship

should never have been let out of the harbour, it was a bad call by the ship’s

captain”. She continued by suggesting that the decision was made

primarily due to the costs that the vessel would have incurred

by not sending the ship out (Lancaster 2013b). The South

African Maritime Safety Authority (SAMSA) manager, Captain

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Saroor Ali, echoed Dold’s comments, adding that in his

extensive experience vessels will often try to avoid harbour

charges, despite the high risk factors that can be involved

(BunkerWorld 2013).

Based on this information alone, and without investigating

any further into the structural integrity and management

history of the vessel, it seems that, barring a fundamentally

flawed management decision, the incident could quite simply

have been avoided. In a situation such as this, the FTA risk-

assessment lends itself as a proactive tool with which to help

pinpoint the direct causal factor, as well as to prevent a

similar incident reoccurring. Although the FTA will assist in

providing a degree of insight, the lack of access to a full

investigative report requires a greater research emphasis to

be placed on the history of the vessel, so that a better

understanding of the links between the attempts to recklessly

extend the vessel’s useful life and the incident itself can be

established. The analysis of that research is contained in the

Data Analysis section.

3. Research Methodology

The methods of research carried out by this project were

chosen to enhance, as much as possible, the accuracy and

reliability of the data collected. For the case studies of the

Alexandre. P and Leader. L incidents, a ‘desk study approach’

was adopted in order to gather information not only from the

official reports, but from a variety of sources, in order to

establish a complete and thorough understanding of the events

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which took place. The case study of the MV Smart, however,

required a more tailored approach. Given that the incident had

taken place fairly recently, coupled with the fact that the

owners of the vessel had established a degree of anonymity

(with the assistance of vessel’s flag state Panama), two

techniques of research were applied. Initially, several

attempts were made by the author to obtain primary research in

the form of an interview requested directly with the vessel-

owning company NGM Energy, SA. Two separate requests over the

phone, and one made in person at the company’s head office,

were all rejected. As a result, a desk study approach of an

investigative nature was utilised in order to formulate fact-

based conclusions within an academic context, as was primary

research in the form of an interview with the insurance and

claims director of Company X, who was able to shed further

light on the post-incident insurance implications for NGM

Energy. The MV Smart incident was also subject to two forms of

a risk-based methodology. The first was the FTA, which

established both the direct and contributory factors to the

incident. The FTA provides a framework for a thorough

qualitative and quantitative evaluation of the undesirable

event (NASA 2010).

In addition to this, the FSA was applied both quantitatively

and qualitatively, so that alternative measures and solutions

could be proposed with the aim of assisting those who wish to

evaluate the potential returns on an investment in safety

enhancement and risk avoidance. Both risk assessments were

carried out based on the use of primary and secondary data.

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This project, in arriving at its conclusions, encountered

significant limitations associated with the author’s

investigation of the incidents and the subsequent collection

of the data. The limitations exist in the depth and

accessibility of the relevant incident material, which is

assumed to be a consequence of the sensitive nature of the

material and the potential implications it may have on the

interested parties who could be deemed liable for their

negligent actions.

4. Data Analysis

4.1 Alexandre. P Causal Analysis

The investigative report is an unequivocal illustration of the

severity of the vessel’s poor condition. Potentially more

significant, however, is the fact that three weeks prior to

the incident, the vessel was purchased and the flag state was

changed from South Korean to Panamanian (ATSB 1990c). Where

changes of class and changes of flag differ, is that the

former scenario allows for the hull and machinery insurer to

request that current conditions of class be provided, to

ensure the vessel meets relevant requirements (Coles and Watt

2011e). One of the conclusions reached by the official report

(ATSB 1990d page 26) was that, “had the same requirement existed for a

change in flag, the incident may well have been prevented”.

This statement highlights the frustration associated with FOC

nations in general. By not wishing to drive away their

registered ship-owners, with which the states maintain a

lucrative business relationship, simple requirements such as

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satisfying conditions of class will cease to be mandatory. As

lucrative as the relationship may be, such unethical practices

will undoubtedly continue to cause major incidents similar to

that of the Alexandre. P. However, while commentators berate

the FOC states for the services they provide, it should be

borne in mind that these services exist due to the fact that

there is a demand for them.

The evidence that the vessel was purchased only three weeks

prior to its sinking, and in such poor condition, clearly

shows the ship-owner’s intention to commence trading while

disregarding the risks posed by the ageing vessel. From the

perspective of the new owners, having just purchased a twenty-

three year old vessel with serious structural deficiencies,

the decision to adopt the Panama flag was arguably a strategic

one, thereby making the FOC state complicit in the ensuing

incident, but perhaps not as culpable as the reckless owners

of the Alexandre. P who actively sought the services which

Panama were prepared to deliver.

4.2 Leader. L Causal Analysis

Once again, as in the Alexandre. P case, a specific piece of

evidence would seem to provide an insight into the motives of

the ship-owner. When the class society was changed in 1997,

the vessel was twenty years old (ATSB 1990e). The ‘new’ class

society (PRS) – that had a proven track record of suspension

from IACS – were handed the responsibility of ensuring the

standards of the ship were maintained. It seems self-evident

that PRS’s expulsion by IACS for “serious managerial shortcomings”

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(Intertanko 2000d) is a strong indication that they failed in

their responsibilities. It would be reasonable, therefore, to

question whether the ship-owner’s intentions, by changing

class during the vessel’s ‘twilight years’, were associated

with boosting the safety of an ageing ship, or maximising

profits through the reckless extension of the vessel’s useful

life to the detriment of those on board.

4.2.1 Further Analysis

The case of the Leader. L is arguably an example of extending

a vessel’s useful life in a flagrantly reckless manner. In

attempting to better understand the behaviour of the ship-

owner, the facts of the case provide us with the following

interesting picture. The vessel is purchased at the

structurally vulnerable age of 20 (CTX 2001b). The first order

of business by the new owner is to ‘flag-out’ the ship to

Panama (CTX 2001c). This action ensures that the upcoming

change of class (to a clearly sub-standard society) will go

smoothly. It is at this point that the new owners have

acquired an asset from which their liabilities can be

minimised and controlled, and short-term revenues

substantially increased. Unfortunately for the 18 who

perished, the high risk factor involved as a result of this

process, was not handled with the same care and attention to

detail. This case provides an intriguing insight into the

mind-set and behaviour of Leader. L’s owners, whose clear

intention was to recklessly extend their vessel’s useful life.

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4.3 MV Smart Vessel History and Owners

Transparency

According to the limited information released into the public

domain regarding the full investigation report, the registered

owners at the time of the incident were Alpha Marine

Corporation, Panama (GISIS 2014b). Upon further personal

enquiry, however, Alpha Marine Corp are in fact a small

subsidiary company registered in Panama for the purpose of

establishing a corporate entity, separate to that of the

vessel’s ‘true’ owners. Although such practice is commonplace

in the shipping world (West 1999), FOC states such as Panama

facilitate an absence of transparency, which allows for each

vessel to be registered to a company set up specifically for

that purpose, effectively enabling the ship-owner to isolate

or ring-fence liability to one asset, while preserving

anonymity and reputation (Coles and Watt 2011f). Panama has

often been heavily criticised for permitting its registered

ship-owners to disguise their true seat of management, thus

rendering their business practices virtually opaque (Gianni

2008).

The ‘true’ owners of the MV Smart are NGM Energy, SA. This

information was established after searching the address of the

vessel’s operating firm (Unimar Success), which is identical

to that of NGM. NGM, a large Greek shipping corporation owned

by the Moundreas family (Clarkson’s Research 2015), control 22

vessels with a further 2 bulk carriers under the Unimar name.

These 2 bulk carriers are both over 17 years old, as was the

MV Smart at the time of its demise. It is this project’s

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assertion, therefore, that the primary incentive behind the

purchase of the MV Smart under Unimar in 2012, and its

subsequent ‘flagging-out’ to Panama, was the reckless

extension to its useful life, which contributed to the

vessel’s catastrophic hull failure less than a year later.

4.3.1 Further Analysis

While the immediate causal factor may be considered more

pertinently linked to the incident, it is highly probable that

this poor management decision was directly influenced by the

owner’s intentions for the MV Smart. A ship-owner, who has

gone to great lengths to reduce the costs of an ageing vessel,

would be unlikely to allow it to remain in the harbour unless

ordered to do so by the authorities. This opinion was clearly

shared by SAMSA. The vessel may not have been in the same poor

condition as that of the Alexandre. P, but extending the MV

Smart’s useful life also meant widening parameters of

acceptable risk, which could only increase the possibility of

a major incident occurring. Consequently, these factors not

only represent strong links between the incident itself and

all those responsible for it – i.e. the Master, owners and

flag-state – but also demonstrate the careless manner in which

ship-owners attempt to maximise revenues from an asset, thus

posing a great risk to those on-board, as well as to the

environment.

Although access to the investigation report by the public is

not permitted, the limited but precise information covering

the moments leading up to the incident, appropriately lends

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itself to the FTA and FSA risk-based methodologies. To this

effect, both risk-assessments are implemented below.

Fault Tree Analysisfor MV Smart

Section A: Causal link diagram

Table 1

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Structural hull

Cargo hold

MV Smart total

Port side-shell plating

&

Shifting of

Vessel not properl

Navigational

Water

Tearing of vessel’s

Port Capta

Severe cost-cutting by owners: 5

Master

Incurring port expenses

Received instructions Free-

up

Contact with

Decision to leave

Key: Quantifying failure data probability of the presence ofeach critical component 1 to 6.

1. (1)2. (1)3. (0.3)4. (0.08)5. (0.09)6. (0.09)

(1 x 1) = 1

(2 x 1) = 2

(3 x 0.3) = 0.3

(4 x 0.08) = 0.32

Bad weather

Section B: Causal link analysis

As indicated by the FTA diagram, the primary cause of the

incident was water ingress brought about by structural hull

failure which occurred in the port side-shell plating and

within the cargo holds. The events antecedent to these,

connected by the logical gates to their relative component

failures, represent both the intermediate and basic causes of

the incident. The component failures highlighted in red

(occurring below the ‘And gate’) are considered to have

directly contributed to the final incident and have therefore

been assigned a probability in % terms, signifying their

occurrence likelihood. These probabilities have each been

multiplied by their FV importance (contribution importance 1-

6) and divided by the number of red component failures. These

calculations produce a % figure determining the overall hazard

criticality of the direct component failures – in other words,

the collective degree of contribution to the incident by the

six red component failures, given in % terms.

Intermediate component failures 1 and 2 are both matters of

fact and have therefore been attributed with a 100%

probability. Basic component failures 3, 4, 5 and 6 are based

on the limited information available to the author and are

therefore based primarily on conservative estimates. The

Page | 19

Extending vessel’s useful life:

Vessel purchased in 2012 and ‘flagged-out’ to Panama

Key: Quantifying failure data probability of the presence ofeach critical component 1 to 6.

1. (1)2. (1)3. (0.3)4. (0.08)5. (0.09)6. (0.09)

(1 x 1) = 1

(2 x 1) = 2

(3 x 0.3) = 0.3

(4 x 0.08) = 0.32

results of the analysis indicate that the direct component

failures collectively influenced the incident to the degree of

77%. Achieving this result assists this project in quantifying

the impact made by the poor decisions that ultimately failed

to prevent the incident. Conclusions can then be reached,

which assert that intermediate factor 2 was the only component

failure with a 100% probability that could have been

influenced by the Master. Therefore, had the Master made the

correct decision regardless of the owner’s instructions – the

Master having ultimate authority – the incident could have

been avoided. As he did not make that choice, component

failures 3, 4, 5 and 6 thereby play a significant role in

contributing to the incident, as individually quantified in

the above ‘Key’ (Table 1).

It can be argued that their contribution manifested itself in

the form of the vessel’s owners exerting pressure on the

Master to make the decision he did. Pressure of this nature is

often wielded over a period of time and is unlikely to have

been limited to the hours leading up to the incident. In terms

of future preventability, therefore, the clearest appropriate

measure is the deterrence of practices associated with

recklessly extending a vessel’s useful life.

Formal Safety Assessment

for MV Smart

Page | 20

Section A: FSA implementation – the 7 step process

1. Problem definition and system description:

Safety of the vessel and her cargo during heavy weather while

exiting the port area at Richards Bay.

2. Hazard/Incident identification (HAZID) – Development of hypothetical

scenarios:

There is a strong expectation that the vessel will encounter

heavy weather conditions, possessing a high risk regarding;

a. Loss of life

b. Flooding of the vessel

c. Damage to and/or total loss of the vessel and/or cargo

3. Existing control measures :

Safety Management System (SMS) procedures for navigation

during heavy weather conditions, and relevant checklist.

4. Risk estimation – Evaluation of probability and consequence under existing

control measures:

Probability (based on

existing control

measures)

X(multip

lied)

Consequence (based on

existing control

measures)

Final Risk

Score

Initial probability

derived from

Frequency Assessment:

4

X

Initial consequence

derived from Category

Assessment: 5

20

5. Level of risk based on existing control measures :

Page | 21

LOW MEDIUM HIGH1-8 6-13 14>

6. Additional / New control measures :

Description of

Additional/Alternative Measures

Department / Person

in Charge

Target

Completion

DateAll deck and accommodation openings

to be cross-checked for water

tightness

Chief Officer and

Bosun

Bridge and engine watchers to be

enhanced accordingly

Master

Additional training to be conducted

on emergency procedures – regarding

excessive listing and jettisoning

of cargo

Chief Officer

Plan B for vessel’s navigation plan

to be considered prior to sailing

and ready to implement

Master and

Navigational Officer

Stop all ventilation and secure

relevant covers in ‘close-position’

to prevent water ingress

Chief Officer and

Bosun

Ensure the proper operation of the

water ingress detection and de-

watering systems

Master, Chief

Officer, Chief

Engineer and BosunMain engine’s RPM may need to be

reduced to avoid heavy impact with

the waves

Master and Chief

Engineer

Extra considerations to be made in Master, chief

Page | 22

X

shallow or breakwater areas to

prevent contact with sea-bed

Officer and Chief

Engineer

Re-evaluation of ‘Risk-Score’ after implementation of additional control measures:

Probability (after

prevention and

mitigation measures)

X(multip

lied)

Consequence (after

prevention and

mitigation measures)

Final Risk

Score

Probability from

Frequency Assessment:

2 X

Consequence from

Category Assessment: 4

8

LOW MEDIUM HIGH1-8 6-13 14>

If the additional control measures have not reduced the level

of risk to an acceptable level (LOW-MEDIUM), then the

assessment must be repeated and further control measures

added.

7. Follow-up procedure

The table in Step 6 is to be reviewed, to ensure that all

additional control measures have been achieved by their target

completion date. If any measure has yet to be implemented,

this must be rectified immediately followed by an

investigation into the cause of delay.

Page | 23

X

Section B: Quantitative analysis in financial terms – To

further assist in the prevention of the MV Smart incident re-

occurring

Below are the monetary data relevant to the MV Smart. The consequential analysis is

provided to serve as an ‘investment appraisal’, illustrating the financial

considerations which should be made prior to sailing in risky conditions:

Table 2: Value of the vessel, its cargo and fuel stores on

board

Vessel’s Value ($) Millions Cargo Value ($) Millions IFO 380 Value ($) Thousands

Purchased in 2012 for

13.5

8.612 118.04

Average cost of second-

hand vessels of above

150k DWT over 15 years

old for 2012: $10.42m

Price of coal on August

19th 2013 (day of

loading) $58.2 per MT

Price of IFO 380 on

August 19th 2013 in

Richards Bay $645 per

MT

Sources: Clarkson’s Research 2015, Info Mine 2015 and Ship Bunker 2015

Table 2.1: Projected Costs in USD for MV Smart to remain in

Richards Bay for the 19th, 20th & 21st August 2013

DAY 1 DAY 2 DAY 3

Daily Total 14,181 16,459 18,737Cumulative Total 14,181 30,640 49,377

(All figures include VAT 14%)

One-off Basic Rate: 11,903 (figure includes $ per GRT and use of local tug services)

Daily Rate: 2,278 (figure includes $ per GRT only)

1 USD = 10.17 ZAR (Based on historical exchange rate collected from XE 2015)

Page | 24

All rates expressed above – other than the exchange rate – are

calculated from the Richards Bay Port historical tariffs

(Trans Net National Ports Authority 2015).

Table 2.2: Projected off-hire rate for the MV Smart – Based on

the relevant charter party of 31/07/2013

Charterers Destination Price $ per day

Min Metals China 10,400

Source: Clarkson’s Research 2015

According to the historical weather data for Richards Bay on

August 19th (Buoy Weather 2015), the high winds were expected

to last between 18 to 36 hours. This is not an abnormal

forecast for the area during the height of their winter (Met-

Office 2014). Based on the data in Tables 2.1 and 2.2, the

maximum charges which the MV Smart would have incurred, were

$80,577 (an off-hire period and additional port stay of 72

hours), while the minimum charges potentially incurred would

have been $45,381 (an off-hire period and additional port stay

of 24 hours). In order to maintain a conservative approach to

the financial projections, this project will overestimate the

period of high winds forecasted in Richards Bay, and assume

that the vessel remained in the port for a 72-hour period.

The data from Table 2.2 expresses the value of the three most

costly elements to the vessel. The vessel itself at $13.5m,

the value of the coal cargo at $8.612m and the value of the

IFO 380 bunkers at $118.04k. This forms a total of

Page | 25

$22,230,040. Once again, this project will undertake all

estimations and assumptions in a conservative manner, and as

such, will assume that the MV Smart was fully covered for hull

and machinery insurance (H&M), as well as protection and

indemnity (P&I). Under these terms, the best possible outcome

for the MV Smart’s owners is that both insurance policies

would pay out in full for all losses incurred. However, this

would have a number of consequences both in public relations

and financial terms. Although the reputation of the shipping

company would undoubtedly be negatively affected if it were to

be established that owners had insisted on leaving the port

area in bad weather, it is the objective of this risk-

assessment to determine the financial consequences of the

incident.

Section C: Interview with Insurance Director

In order to accurately comprehend the extent that the vessel’s

total loss would have on the annual H&M insurance premium, an

interview with the insurance and claims director of Company X

was carried out. The fact that the director had prior

knowledge of the MV Smart incident, which he was willing to

disclose, meant that information previously unobtainable by

the author was now accessible. Based on the interview, the

following data has been tabulated.

Table 2.3

No of Vessels Owning Company Total H&M annual Premium

24 NGM Energy $1,800,000 (+/–

250,000)

Page | 26

Source: Data collated from a senior representative of “Nasco Karoglan”, the H&M

brokerage firm used by both Company X and NGM Energy.

The insurance and claims director maintained that NGM had a

fairly “clean” claims record for at least five years prior to

the incident in 2013 which, he said, “would minimise the % increase to

the annual premium”. Nevertheless, he then added, “it would be

reasonable to expect an increase of between 7% and 10% to the annual premium”.

While continuing to observe a conservative approach to these

calculations, this project will assume that the annual premium

in Table 2.3 is at the lowest end of the scale, at $1,550,000,

and that the increase to the annual premium is 7%. Therefore;

Table 2.4

Initial Annual Premium Post-Incident Annual Premium

Renewal

% Difference $ Difference

$1,550,000 $1,658,500 7% $108,500 Source: Data collected in ‘primary form’

from the interview with Company X’s Insurance Director

Section D: Final Analysis

Based on the calculated figures so far, had the MV Smart

remained in the port for 72 hours, its owners would have

realised a saving of $27,923. Additional to the information

provided during the interview concerning the H&M insurance,

the director was able to disclose certain facts regarding the

vessel’s P&I cover. A discussion between himself and an

underwriting executive at the North of England P&I (another

institution of which Company X and NGM are clients), revealed

that the MV Smart was facing the largest cargo claim the P&I

club had dealt with in over 24 months. Without the relevant

Page | 27

data, it is not possible to quantify the extent to which a

third-party claim of this size would affect the annual P&I

premium. Suffice to say, according to Company X’s insurance

director, “Such an increase would be both substantial and unavoidable,

regardless of the company’s claims record”. It is clear, therefore, that

by implementing an ultra-conservative approach, and without

taking in to account the P&I costs (as well as the unavoidable

and often excessive legal fees), a saving of almost $28,000 is

effectively guaranteed. In reality, however, it would be

reasonable to expect this modest figure to triple in value.

5. Discussion and Results

The principal benefit to the FTA and FSA risk-assessments, is

the assistance it provides towards preventing the reoccurrence

of similar incidents. Understanding which action or decision

was the primary catalyst leading to the undesirable event,

allows shipping companies to isolate the problem, thus making

addressing it more effective. The qualitative assessments

carried out for the MV Smart have shown that the control

measures in place prior to the incident were not sufficient,

since several basic additional measures had to be advised. The

results of the FTA show that the entire incident could easily

have been avoided had the Master used his authority

effectively. However, this does not vindicate the vessel’s

owners who undoubtedly applied the pressure which led to the

Master’s decision. Quantitative implementation is another

crucial element, as it incorporates a retrospective financial

analysis, enabling better judgement of financially driven

decisions for the future. Once again, the MV Smart assessment

Page | 28

has shown that choosing not to sail in bad weather would have

been financially prudent, returning a saving of at least

$27,923. This proves that it can be more cost effective for a

ship-owner to appropriate and re-direct funds for the safety

and security of his vessel.

The guidelines on the Enhanced Survey Programme, adopted by

the IMO in 1993, were intended to ensure greater attention was

paid to the structural vulnerabilities of bulk carriers, by

making the guidelines mandatory under Regulation XI of SOLAS

(Hoppe 2002a). When considering the Alexandre. P case, it

could be argued that, had such a programme existed prior to

1990, then perhaps the incident would have been avoided. With

a more rigorous survey procedure, it would surely have been

virtually impossible for a vessel in such poor condition to be

allowed to continue operating. Although a seemingly valid

argument, surely by now it is simply a moot point. The major

disasters of the Albion Two and the MV Flare four years later

(IMO 2015b) have shown that vessels in their ‘twilight years’

can quite easily be deemed safe to trade. Perhaps further

regulation would make a substantially more positive impact.

In November 1997, and in response to the major losses

experienced at the beginning of the decade, the IMO initiated

and adopted new regulations designed for the improvement to

the structural safety of bulk carriers (IMO 2015c). Chapter

XII of the SOLAS convention (relating to additional safety for

bulk carriers), and the BLU Code (concerning their safe

loading and unloading), were both adopted in the same month

(Roberts et al 2013b). Four years on from the introduction of

Page | 29

the ESP, therefore, the IMO – in a bid to tackle a problem

which they had yet to competently address – had ostensibly

begun to flex their regulatory muscle by re-organising and re-

focusing the methods with which they were to improve the

safety of bulk carriers (Hoppe 2002b). How is it, then, that

the Leader. L disaster (one year after the new regulations

came into force) was not prevented?

Could the reasons behind the systemic failings of IMO’s

attempt to address these issues be that the results of, and

adherence to, the ESP and SOLAS regulations are ultimately

incumbent on the registered maritime administration? An

acceptance of such a hypothesis, as described by Hoppe 2002,

drastically alters the way in which members of the maritime

community and the public perceive the regulatory system to

function. Has it been naïve to assume that the relationship

between those who govern and the companies who observe that

governance, is a simple and straightforward dynamic? The

primary objective remains to establish the degree to which FOC

states can facilitate ship-owners’ strategies to recklessly

extend their vessel’s useful life. It is this project’s view,

therefore, that by empowering the flag administration with

such influence, the IMO’s ‘mandatory regulations’ are

effectively rendered inconsequential. This opinion would also

provide reasonable justification for the argument that the

‘flagging-out’ of the three vessels considered in this

project, and all those which fit the criteria of an ageing

bulk carrier, were initiated to provide the ship-owner with

the assistance he required to maximise the useful life of his

Page | 30

vessel, whilst simultaneously putting all those in operation

of, and in close proximity to, the vessel at great risk.

The risks associated with ‘flagging-out’ are not restricted to

those mentioned so far by this project. There is an additional

threat that, if realised, could only be described as

situational irony. As we have seen, choosing to recklessly

extend the vessel’s useful life also entails prioritising

financial gains over the safety of the vessel and the crew.

Should vessel and crew safety be compromised, however, the

ramifications of such a scenario could result in financial

ruin for the ship-owner. Considering that the pursuit of

financial gain is at the crux of extending a vessel’s useful

life, such a strategy would seem, in reality, to be ethically

repugnant and financially self-defeating. By following the

‘reckless extension process’, the ship-owner is capitalising

on short-term revenues, while simultaneously increasing the

chances of his company being phased-out. Such an irresponsible

choice may be deemed acceptable if it were only the ship-owner

at risk. As shown in the Alexandre. P and Leader. L cases,

however, it was the innocent employees who lost their lives,

thus falling victim to that choice.

6. Concluding Remarks

The questions this project set out to answer are clearly of a

sensitive nature since they are associated with senior members

of the maritime community, who place their employees at great

Page | 31

risk by pursuing a strategy for which they expect a

profitable, virtually instant return. Although the business

practices of the three vessel owners in this project are all

deplorable, it should be noted that, as time passes and as an

awareness of the consequences of such practices grows, those

who continue to take such high-risk decisions – by recklessly

endangering the lives of their seafarers – can only be

considered scandalously culpable. This project has shown that

by offering their ‘tailored’ financial and liability benefits,

the PMA serves as an exceptionally effective facilitator to

the less scrupulous ship-owners’ goals. Without the presence

of FOC administrations, extending a vessel’s useful life (in

its current high-risk format), would simply not be possible.

In attempting to comprehend why certain ship-owners brazenly

employ such ruthless strategies, and in such a seemingly

unconcerned manner, this project argues that those who are put

at risk are merely considered, by their employers, as a means

to an end: the maximisation of profits.

The results of the risk-assessments implemented by this

project serve as a clear and concise justification that,

should the maximisation of profits be the ship-owners’

ultimate aim (matched by the capacity to achieve that aim by

all means necessary), a cautious and considered approach to

risk management can be of great benefit to the ship-owner who

values profitable longevity. The MV Smart incident exemplifies

that concept and should continue to serve as an example for

all ship-owners, intent on extending their bulk carriers’

useful life, while illustrating that exercising patience and

Page | 32

conservatism rather than self-imposing such narrow margins of

error, can yield a higher financial return.

Although the amendments to SOLAS Chapter XII, the introduction

of the BLU Code, and the ESP Programme, were all specifically

designed to tackle a significant problem within the maritime

community, it is evident that their failure to achieve their

objectives lies not in their initial remit – the prescribed

methods of supervision, or in the legal effectiveness of their

conventions – but rather, the very existence of the FOC

administrations that have substantially impeded the

achievement of a global consensus of ageing bulk carrier

safety. It is for this reason that, when potential solutions

to this phenomenon are theorised and discussed, the only

unequivocal response must be a globally recognised and

unanimously upheld standard of safety. The current ‘safety

lottery’, whereby a seafarer’s life is considered more or less

valuable depending on which nation his employer’s vessel is

registered to, is an abhorrent reality and a stain on the

maritime community. Regulations on tax, income and employee

diversity are all important steps, but a solution to the

problem highlighted by this project must be prioritised and

considered separately if success is to be achieved. A major

weakness to the de-centralised system of the IMO governance

is, that ship-owners’ compliance to safety regulations falls

under the remit of the individual flag administrations. Such a

system gives rise to those nations who are willing to lower

their standards below an acceptable level. This project

considers this to be the root of the problem and therefore the

Page | 33

only place from which to build a solution. The IMO may be far

more effective by simplifying and streamlining its many

guidelines, while also focusing on playing a far more active

role in the implementation of their conventions. It is this

projects’ conclusion that, with each new guideline, the IMO’s

position becomes weaker, since their ability to monitor so

many aspects of safety grows increasingly unmanageable. It

should therefore be incumbent on the IMO to coordinate their

influence with greater innovation, based on the concept of

enhanced and direct involvement in the regulation of ageing

bulk carrier safety, and to prioritise the deterrence and

ultimate phasing-out of the practice of recklessly extending a

bulk carrier’s useful life.

Page | 34

Appendix (I)

Alexandre. P Vessel Particulars:

Name: Alexandre PType: Ore Bulk CarrierYear Built: 1967Flag: PanamanianClassificationSociety:

Korean Register of Shipping

Owners: Acacia Maritime Corporation,Monrovia, Liberia

Total Number ofCrew:

24 (22 Korean & 2 Greek)

Gross Tonnage: 54,566Dead WeightTonnage:

94,532

Overall Length: 249.99 MetersBeam: 38.56 MetersMoulded Depth: 20.58 MetersSummer Draft: 14.483 Meters

Source: ATSB 1990

Leader. L Vessel Particulars:

Name: Leader LType: Bulk (general ore) CarrierYear Built: 1977Flag: PanamanianClassificationSociety:

Polish Register (changed from LloydsRegister in 1997)

Owners: Leoninus Shipping, Athens, GreeceNumber of Crew: 31Gross Tonnage: 38,975Dead Weight 62,322;

Page | 35

Tonnage: Source: Maritime-Connector 2014

MV Smart Vessel Particulars:

Name: MV SmartType: Bulk CarrierYear Built: 1996Flag: PanamaClassificationSociety:

NKK

Owners: Unimar Success SA (N.G. Mounndreas)Number of Crew: 24Gross Tonnage 77240Dead WeightTonnage:

151279

Length (m): 273 Source: GSIS 2014

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