Econometric Analysis of Ship Life Cycles – are safety inspections effective?
Introduction
The development of the world economy is closely related and influenced by the commercial shipping industry. Today 90 percent
of global trade is carried by sea. The shipping industry provides the basis for economic growth since it facilitates the distribution of resources and manufactured goods. According to the United Nations Conference on Trade and Development (UNCTAD)
4
, total world seaborne tradereached 7.11 billions of tons (goods unloaded) in 2005, an increase of 284 percentcompared to 1970. In terms of total activity of the sector measured in ton-miles
5
, thisaccounts to 29,045 billion ton miles in 2005 compared to 10,654 billion ton-miles in1970. Besides the contribution of shipping to the global economy, UNCTAD furtherestimates an additional economic contribution to the global economy of USD 380 billion in freight rates deriving from the operation of ships. Most cargo carried by sea iscrude oil and oil products which amount to 65.9 percent of the total cargo carried or11,705 ton miles. Other important cargoes are dry bulk general cargo and containertrade. The latter remains the fastest growing segment within the shipping industry dueto the fast economic development of China. Regardless of this importance of theshipping industry as a prime user of the oceans, not much has changed amongst policymakers of ocean governance since the 1970’s. Wilkinson (1979) already pointed outthat most effort of policy makers is geared towards fisheries and little towards shippingand pollution. Integrated maritime and marine policies on areas related to oceangovernance do not exist.Compared to the total amount of freight or passengers which are carried each year, theshipping industry is a very safe industry. However, ship accidents occur and they mayhave a significant economic impact on the coastal state, the fisheries, the environmentor lead to loss of life. It is very hard to measure the economic cost of incidents
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. Forinstance, consider in the case of oil spills. The cost of such an incident depends on thetype of oil spilled, oceanographic conditions, the regional location and the efficiency ofthe oil response. Notwithstanding the estimation of socio-economic factors (Grigalunaset al, 1988). In the case of passenger vessel incidents the number of people onboard isoften unknown and the value associated with the loss of life varies. For dry bulk carrierincidents, very little is reported in the media and economic loss is mostly associatedwith the value of the vessel and its cargo.This article provides insight into the effectiveness of inspections in preventingaccidents. It builds on the dataset originally used by Knapp and Franses (2007b) andcomplements it with additional data for a extended time period. It exploits a unique,global dataset combining various types of safety inspections of ships over a time periodof 29 years. We also account for the economic shipping cycles to reflect the changes ofthe economic condition of the shipping industry on the ship incident rate.For a comprehensive analysis of the effect of inspections and the economic shippingcycle on ship incidents the full history of this information should be exploited including
3
International Maritime Organization
4
UNCTAD, Review of Maritime Transport, 2006
5
Tonnage of cargo shipped times average distance transported
6
We use the term incidents to cover accidents, casualties as per the definition of the International MaritimeOrganization (IMO) and total loss of a vessel excluding constructive total loss for insurance purposes
3general ship particulars
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and changes thereof during its economic life. One approach forinference could be to apply a logit or probit model on the probability of a ship incident.In such a model, the dynamics are discarded because it only considers whether a shiphad an accident at fixed points in time. The choice of these fixed points has a bigimpact on the estimation results. It is also not straightforward to include time-varyingcovariates into such a model. We have information on daily basis and therefore useduration analysis on the length of the ship’s economic life is the natural approach forthis dynamic framework. It enables us to measure the effect of inspections on theincidence rate of a vessel.Table 1 lists some of the major maritime incidents for oil tankers and passenger vesselsstarting in 1912 with the
Titanic
claiming 1,517 lives to one of the most recent passenger vessel accident claiming 1,000 lives (
Al Salam Boccachio 98,
2006).According to the International Oil Pollution Claim Fund (IOPCF) and the InternationalTanker Owners Pollution Federation (ITOPF), the associated costs can vary from USD9.5 billion (
Exxon Valdez
, 1989) to USD 37 million (
Sea Empress
, 1996) where the sizeof the vessel or oil spill is not directly related with the associated economic costs(ITOPF, 2007). According to Grey (1999), accident costs translated to USD/tons of oilspilled reveals a wide range from as little as USD 667/tons of oil spilled (
Haven
, 1991)to USD 180,000/tons of oil spilled (
Shinryu Maru No 8
, 1995) This furtherdemonstrates the difficulty in estimating the true economic cost associated with an oilspill. For most incidents, an estimated cost figure could not be found, especially forsome of the older incidents.Very often the shipping industry triggers legislative reactions after incidents. For theUS, the
Exxon Valdez
incident triggered the creation of the Oil Pollution Act (OPA90)while for the European Union (EU), the two latest incidents at the coast of France andSpain, the
Erika
(1999) and
Prestige
(2002) triggered a full revision of the EU maritimelegislative framework dealing with all aspects of the shipping industry – the so calledEU Third Maritime Safety Package.Despite the development of a complex legislative framework in the shipping industry, parts of the enforcement remain weak. This is due to the fact that the industry is veryglobal and its regulatory framework is based on international law. The loopholes in theenforcement create a market for substandard ships which is estimated by the OECD tocomprise 5-10 percent
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of the world fleet. These substandard ships distort competitionto prudent ship owners since costs are saved to cut the edges on what would otherwise be acceptable. Following a series of major oil tanker accidents in the 70’s, the conceptof port state control (PSC) evolved which allows port states to conduct safetyinspections on foreign flagged vessels entering its ports. The countries groupedthemselves into PSC regimes based on Memoranda of understanding and today, thereare currently 10 such regimes in force covering most of the port states.From a public perspective, the desired situation is to promote safe, secure andenvironmentally friendly maritime transportation and to decrease the number of
7
Ship particulars is a standard term used in the shipping industry and contain the description of physicalcharacteristics of a vessel such as ship type, hull type, gross tonnage and operational items such as ownership, safetymanagement or the registry of a vessel.
8
Peijs, K. (2003). Ménage a trois. Speech at
Mare Forum
(November 2003: Amsterdam)
4substandard vessels in order to prevent the likelihood of a maritime incident bearingsubstantial economic costs.
Table 1: Major Shipping Incidents of Oil Tankers and Passenger Ships
Ship Name Year LocationSpill Size(tonnes)Economic Costs
Titanic 1912 North Atlantic 1,517 livesTorrey Canyon 1968 Scilly Isles, UK 119,000 No estimateSea Star 1972 Gulf of Oman 115,000 No estimateMetula 1974 Magellan Street, Chile 47,000 No estimateJakob Maersk 1975 Oporto, Portugal 88,000 No estimateUrquiola 1976 La Coruna, Spain 100,000 No estimateArgo Merchant 1976 Nantucket Sound, USA 28,000 No estimateHawaiian Patriot 1977 300 nautical miles off Honolulu 95,000 No estimateAmoco Cadiz 1978 Off Brittany, France 223,000 US$ 282 millionIndependenta 1979 Bosphorus, Turkey 95,000 No estimateAtlantic Empress 1979 Off Tobago, West Indies 287,000 No estimateIrenes Serenade 1980 Navarino Bay, Greece 100,000 No estimateCastillo de Bellver 1983 Off Saldanha Bay, South Africa 252,000 No estimate Nova 1985 Off Kharg Island, Gulf of Iran 70,000 No estimateHerald of Free Enterpr. 1987 Off coast of Belgium 193 livesDona Pax 1987 Philippines 4,000 livesOdyssey 1988 Off Nova Scotia, Canada 132,000 No estimateKhark 5 1989 Off Atlantic coast of Morocco 80,000 No estimateExxon Valdez 1989 Prince William Sound, USA 37,000 US$ 9.5 billionScandinavian Star 1990 Baltic Sea 158 livesABT Summer 1991 700 nautical miles off Angola 260,000 No estimateHaven 1991 Genoa, Italy 144,000 US$ 96 millionAegean Sea 1992 La Coruna, Spain 74,000 US$ 60 millionKatina P 1992 Off Maputo, Mozambique 72,000 No estimateBraer 1993 Shetland Islands, UK 84,700 US$ 83 millionEstonia 1994 Baltic Sea 852 livesSea Empress 1996 Milford Haven, UK 72,000 US$ 62 million Nakhodkha 1997 Japan 17,500 US$ 219 millionErika 1999 Off Coast of France 20,000 US$ 180 millionMV Joola 2002 West Africa 1,863 livesPrestige 2002 Off the Spanish coast 77,000 Euro 778 millionTasman Spirit 2003 Pakistan 30,000 US$ 291 millionAl Salam Boccachio 98 2006 Red Sea 1,000 lives
Source: compiled by authors from various sources, (spill size is in tonnes of oil spilled)
On a regional scale and based on data from one country, Cariou et all (2007a,b) touchupon the topic of effectiveness of PSC inspections and concludes that some of the shipcharacteristics appear to be significant predictors for risk. Talley et al (2005) look at the probability of a vessel being inspected by the United State Coast Guard for a safetyinspection versus a pollution inspection. They recommend a revision of the targeting ofships for inspection in order to enhance their effectiveness. Knapp and Franses(2007a,b,c) look at various aspects of safety inspections using binary logistic regressionon combined datasets. They estimate that a port state control inspection leads to a 5 to10 percent decrease in the probability of a very serious casualty. They recommend thattargeting of ships for inspections can be enhanced by using data from various port state
