AJOT Insights

Quality service vital to prudent cost management as agency clause drives ‘race to the bottom’

Aug 07, 2018

It is time to halt the race to the bottom on ship agency fees.

By Stuart Bowie, Group Vice President, Commercial, GAC Group

There’s a new air of cautious optimism among vessel owners and supply chains as bulker, container, ro-ro and cruise markets recalibrate, signalling a switch from survival mode to recovery for the shipping sector.

But significant financial pressures remain. In particular, ship owners and operators must bear the cost of preparation to comply with new regulations coming into force in 2020 – less than two years from now – to limit the sulphur content of bunker fuels that power their vessels. According to Clarksons, achieving compliance could nearly double bunker costs, with owners and operators facing tough questions on how to foot the bill. And even those for whom fuel bills are less of a concern face increasing pressure to harness new technologies, and adopt digital and automation solutions to optimise their vessels’ efficiency. All that comes at a substantial cost.

The impact of overcapacity that dominated the shipping market in recent years is still being felt. In such a “buyers’ market”, owners and operators don’t have the luxury of being able to pass compliance costs on to customers. Instead, they have to find other ways to cut back by creating efficiencies, including reducing supply chain costs.

As a result, we are seeing a ‘race to the bottom’ for ship agencies, driven by a ‘lowest price’ mentality when tendering for new business, and facilitated by the ‘competitive’ clause many charter party agreements now include.

‘Agency’ Clause

Most charter party agreements include an ‘Agency’ clause that indicates whether the ship owner or charterer has the right to nominate a port agent. If this clause is ‘competitive’, the ship owner may seek quotations from agents other than the one nominated by the charterer. And if they identify a competitive quote, they can override the charterer’s nominee.

The clause was first introduced in the tanker sector to promote service reliability by appointing an agent able to ensure smooth loading and discharge operations. Current interpretations, however, focus on the lowest price rather than the lowest reasonable cost of a quality ship agent. It’s based on the perception that agency fees are the only negotiable element of the total port call costs as port dues, pilotage, tug fees, government taxes and mooring, etc. are fixed tariffs.

That is a problem – and not just for agents. The increasingly aggressive, price-driven approach it has created can also expose ship owners to increased financial, legal and safety risks.

Impact on ship agents

With significant financial burdens, likely to persist for the foreseeable future, agency fees are being forced down. But it is simply not sustainable for quality ship agents to deliver a high standard of services at current low prices. While they may generate short-term savings, lifecycle costs could be substantially higher if the appointed ship agent cannot sustain prudent and professional service. Despite the fact that GAC is one of the world’s largest ship agencies with a long-standing reputation for quality service, we often find ourselves haggling over as little as $50 to seal deals where the total port costs run into six figures.

Experience, local knowledge and global resources do not feature in anyone’s ‘bargain basement’. But they are vital to maintaining quality ship agent’s service, so smart owners and operators must take them into account. In today’s increasingly-regulated shipping environment, failure to comply with statutory measures or environmental and safety regulations can result in hefty fines and costly delays for ship owners and operators. That’s why GAC has always given priority to ensuring high standards of service delivery, as well as health and safety compliance. Our Group applies strict policies governing compliance, ethics, health and safety to ensure it provides a global, quality ‘GAC standard’ for all. And we shall continue to do so.

Clause revisions

Industry bodies have added their voice to the concerns of ship agents about the current interpretation of the competitive agency clause. Among them is industry forum Intertanko, which has proposed a revision to the clause requiring charterers who nominate agents to exercise due diligence and ensure those selected are ‘reliable, competent, reasonable in price and have ISO 9001 or substantially equivalent certification’.

GAC strongly supports the adoption of Intertanko’s revised wording, or similar, across the industry. Owners must consider the big picture, not just the bottom line on an invoice, by also factoring in experience, global resources, quality of service and certification when nominating an agent. If the ‘race to the bottom’ mindset erodes sustainable quality service it will have serious negative implications for the entire shipping industry.