Procurement of ship agency services is changing. Low freight rates and the costs associated with regulatory compliance, are increasing financial pressure on ship owners, meaning many are looking to make savings by adopting a ‘lowest price’ mentality when sourcing a ship agent. This ‘race to the bottom’ is enabled by a ‘competitive’ clause within many charter party agreements.
An ‘Agency clause’ indicates whether the ship owner or charterer has the right to nominate a port agent. If this clause is ‘competitive’ it means the ship owner is entitled to ask ship agents, other than the one the charterer has nominated, for quotations. It was originally introduced in the tanker sector with a view to promoting service reliability. In the 1980s, oil companies started to spot charter tonnage, rather than use their own vessels. But these oil companies also still wanted to use port agents who were familiar with their business and would be in a position to ensure smooth cargo operations and ensure the charterer was continuously informed on the port call status.
But things have changed. In today’s operating climate, it is common for ship owners to use the competitive clause to override the charterer’s nominated ship agent if, they find a different supplier at a “competitive” price. Most commonly, “competitive” comes down to the numbers and makes little reference to any other aspect of the ship agent’s function.
The key result of this is that the criteria of cost overshadows quality, and it is sometimes a false economy. Ship owners use the competitive clause to secure an agent for the lowest price, rather than the lowest reasonable price for quality. For example, GAC often has to negotiate over as little as $50 to secure ship agency services that make up a small part of wider port costs that can run into six figures for larger vessels.
The issue is compounded by the fact that ship agency fees are invariably the only negotiable element of the total port costs. All other expenses, such as port dues, pilotage, tug fees, government taxes and mooring, are fixed by tariffs.
It is simply not sustainable for quality ship agents to deliver high standards of services at current prices. And the problem looks set to get worse, as market prices continue to drop. And whilst the current approach to selecting a ship agent may generate short-term savings, ultimately overall voyage expenses could prove to be substantially higher if the appointed ship agent does not or cannot deliver its services in a prudent manner. For example, delays due to a lack of attention from the agent, will often lead to additional costs
Another aspect that cannot be sidelined in the drive for lower costs is regulatory compliance. Failure to comply with statutory measures, sanctions, or environmental and safety regulations, can result in heavy fines even if no incident occurs, and if there is an accident, the potential financial and legal cost to a ship owner could be substantial. The GAC Group’s stringent Compliance, Ethics and HSSE policies ensure GAC companies worldwide adhere to the highest standards in these areas.
Increasingly, industry bodies have joined ship agents in calling for a rethink around the current status of the competitive clause. Intertanko recently developed a revision to the competitive agency clause that required charterers to exercise due diligence when nominating ship agents, ensuring those selected are ‘reliable, competent, reasonable in price and have ISO 9001 or substantially equivalent certification’.
GAC would argue that this proposed revision should be adopted by the wider shipping industry. We believe ‘competitive’ should not mean lowest price at any cost. Experience, global resources, quality of service, training and certification, are all essential elements that should not be sacrificed on the altar of price advantage.