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Cyprus shipping emerges competitive despite the economic crisis

By Costas Apostolides, Economist

THE Cyprus shipping sector, broadly defined to include shipping, ship management and associated sectors, has had to cope both with the international economic crisis since 2007, and with the particularly serious economic problems of Cyprus over the past three years, and yet is coming through in good form and more competitive than ever.
The reason for this strength and resilience is the diversified structure of the shipping fleet, the upgrading and modernisation of the merchant fleet, the approval of the tax regime for shipping by the European Union, the maintenance of an attractive corporate tax regime despite changes imposed by the European Union and IMF, the position of ship management as the most important subsector and the country’s status as a significant player in shipping while being an EU member state.
Within the context of worldwide shipping Cyprus has the tenth largest fleet with over 1,800 ships on the register, with gross tonnage exceeding 22 million. Moreover in 2011 the fleet had a majority of its tonnage (66 per cent) under 10 years old, reflecting the effort to improve standards and upgrade the Cyprus register.
Though the emphasis has generally been on the size of the merchant fleet under the Cyprus flag, in terms of influence on international shipping and revenue for Cyprus it is ship management which is much more significant. There are around 60 ship management companies operating in Cyprus, and the Department of Merchant Shipping estimates that they manage about 2,000 ships. That is about 20 per cent of the worldwide ship management market. These ships are estimated to employ over 40,000 “seafarers”, over and above those on ships under the Cyprus flag. Rather surprisingly, Cyprus flagged ships account for less than 10 per cent of those under ship management in Cyprus.
The Cyprus fleet grew rapidly from 1981 until it peaked at around 27 million tons in 2000, but it then declined reaching its lowest point of 20 million tons in 2007, the start of the world financial crisis. This decline appears to have arisen from the development of competition from other shipping centres, the upgrading of the register, but also from the prohibition of Cyprus-flagged ships entering Turkish ports. Remarkably in the middle of the world recession registered tonnage increased to about 22 million by 2009 and stabilised since then.
One of the reasons for this recovery has been the tax structure in Cyprus which is based on a highly predictable tonnage tax, and which has recently been approved by the European Commission. Another encouraging development in the current economic and financial crisis affecting Cyprus is that though the European Commission, European Central Bank and IMF have called for changes in the Cyprus tax system, they have not requested changes in the shipping tax structure. Corporate tax was raised slightly from 10 per cent to 12.5 per cent of profits.
Ship management has fared much better during the recession. To quote from the website “Manu’s script” the ship management companies “may actually do Okay, although margins will be squeezed. Banks may acquire ships by default or otherwise, but they are not qualified to run ships and will have little choice except to place them with these firms. And small firms will be forced, thanks to the increasingly complex regulatory regime, to hand over their ships to outside management.” Ship management companies have the advantage of “know-how” and economies of scale.
It is estimated that revenues from shipping and ship management in terms of turnover in 2012 was €1.25 billion, representing seven per cent of Cyprus GDP, most of this coming from ship management. The 2012 ship management surveys of the Central Bank of Cyprus show that revenues in terms of inflows to Cyprus were €859 million, unchanged from 2011. It is significant to note that with over half the ship management companies being German-owned and 59 per cent of these revenues were from Germany.
These revenues are used, mainly, to finance the management of ships and pay the wages and bills arising from ship operation, however, it is estimated that 19 per cent of the costs involve administrative costs in Cyprus. The services provided are crew management, technical management, and full management (generally including marketing, commercial operations and accounting). The ship ownership is mainly from Germany (63 per cent), Netherlands, Curacao, Singapore, Norway, Marshall Islands and Russia.
Thomas Kazakos, Director General of the Cyprus Shipping Chamber, said Chamber members had come through the economic crisis in competitive shape, no members had left Cyprus and the sector was emerging strongly from the crisis owing to the competitive tax structure and the fact that the negative effects on ship management had been manageable. Interestingly, additional business had been created by the crisis itself.
He stated that as the industry emerged from the crisis and Cyprus banking and commerce returned to normalcy, the shipping sector, both in terms of ship registration and ownership and well as ship management would gain a competitive advantage. The main competitive strengths of Cyprus as a shipping centre arise from recent approval by the EU of the tonnage tax, the favourable corporate tax system, Cyprus’ position as the only EU-approved open registry, the quality of the services offered and the EU flag.
Kazakos said that in consultations the Cyprus Shipping Chamber had with the government, and according to announcements by officials, the shipping sector in Cyprus would be strengthened by the following:

1. The improvement and upgrading of administration as a result of government plans to appoint an under-secretary for shipping, who would improve policy-making and deal directly with problems facing the sector.
2. The stronger promotion of Cyprus as a shipping sector abroad.
3. The efforts to link the resettlement by Greek Cypriot displaced persons in the fenced area of Famagusta and its opening to direct trade under EU administration; this is expected to lead to reciprocal changes in Turkish policy, allowing Cyprus flagged ships to enter Turkish ports.

These developments are expected to greatly increase the competitiveness of Cyprus as a shipping sector. The reports that new registrations are proceeding despite the business climate offer encouragement that further progress will be made in both shipping and ship management.

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