UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

The selection of appropriate government assistance measures to encourage the development of a Canadian… Chiykowski, Gregory L. 1980

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Notice for Google Chrome users:
If you are having trouble viewing or searching the PDF with Google Chrome, please download it here instead.

Item Metadata

Download

Media
831-UBC_1980_A4_6 C49.pdf [ 11.48MB ]
Metadata
JSON: 831-1.0094792.json
JSON-LD: 831-1.0094792-ld.json
RDF/XML (Pretty): 831-1.0094792-rdf.xml
RDF/JSON: 831-1.0094792-rdf.json
Turtle: 831-1.0094792-turtle.txt
N-Triples: 831-1.0094792-rdf-ntriples.txt
Original Record: 831-1.0094792-source.json
Full Text
831-1.0094792-fulltext.txt
Citation
831-1.0094792.ris

Full Text

THE SELECTION CF APPBOPBIATE GOVERNMENT ASSISTANCE MEASURES TO ENCOUB AGE THE DEVELOPMENT OF A CANADIAN DEEP-SEA FLEET, by ^ ^ ^ y Gregory L. Chiykowski E.Ccmm., Carleton University, 1979 A THESIS SUBMITTED IN PABTIAI FULFILMENT OF TfiE REQUIREMENTS FOB THE DEGBEE OF MASTER OF SCIENCE (BUSINESS ADMINISTRATION) in THE FACULTY OF GRADUATE STUDIES Faculty of Commerce «e accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September 1980 c Gregory L. Chiykowski In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requ i rement s f o r an a d v a n c e d d e g r e e at the U n i v e r s i t y o f B r i t i s h Co lumb ia , I ag ree that t h e L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s tudy . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may be g r a n t e d by the Head o f my Department o r by h i s r e p r e s e n t a t i v e s . It i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Department o f Cemvrn£SUL&-The U n i v e r s i t y o f B r i t i s h C o l u m b i a 2075 Wesbrook Place Vancouver, Canada V6T 1W5 i i a b s t r a c t The o b j e c t i v e of t h i s paper i s to d i s c u s s "What f e d e r a l gcvei.nns.ent a s s i s t a n c e measures, i f any, might be a p p r o p r i a t e f o r encouraging the development of a Canadian deep-sea f l e e t " ? Appropriate a s s i s t a n c e measures are those t h a t are adeguate, economically e f f i c i e n t , e g u i t a b l e , acceptable and r e l i a b l e . Sources of r e f e r e n c e i n c l u d e d government p u b l i c a t i o n s ; newspaper a r t i c l e s ; j o u r n a l s ; g e n e r a l textbooks on s h i p p i n g , economics, and tax law; personal correspondence with s h i p p i n g o p e r a t o r s and an i n t e r v i e w program of Vancouver-based s h i p p e r s and s h i p - o p e r a t o r s . V i r t u a l l y a l l Canadian exports a'nd imports are c a r r i e d on f o r e i g n - f l a g v e s s e l s . Canadian involvement i n i n t e r n a t i o n a l s h i p p i n g i s mere s u b s t a n t i a l than the f i g u r e s might suggest. The question n e v e r t h e l e s s a r i s e s as t o whether Canada should continue t c depend on f o r e i g n - f l a g s e r v i c e s i n l i g h t of r e c e n t t r e n d s and developments that are o c c u r r i n g in i n t e r n a t i o n a l s h i p p i ng. Assistance measures can be c o n v e n i e n t l y c a t e r g o r i z e d as being e i t h e r f i n a n c i a l a s s i s t a n c e i n the o p e r a t i n g phase, f i n a n c i a l a s s i s t a n c e i n the c a p i t a l phase, or n o n f i s c a l a s s i s t a n c e measures. S p e c i f i c a s s i s t a n c e measures t h a t c o u l d be used to a s s i s t s h i p p i n g i n c l u d e , o p e r a t i n g s u b s i d i e s , government p r o v i s i o n of f a c i l i t i e s and s e r v i c e s , s p e c i a l s u b s i d i e s , tax i n c e n t i v e s , lean guarantees, government l o a n s , c o n s t r u c t i o n s u b s i d i e s , government support, or p r o t e c t e d markets. Examples of each of these measures can be found i n v a r i o u s forms throughout the world. In r e l a t i o n to ether maritime n a t i o n s , Canada's i i i assistance measures can not be considered as being very generous. Sn operating subsidy program i s not an appropriate form of assistance for the federal government to introduce since i t encourages i n e f f i c i e n t usage of resources, i s not adaptable, and i s net acceptable to any major Canadian shipping i n t e r e s t group. It i s estimated that such a program might cost the federal government $4 to 6 m i l l i o n annually. The s o c i a l costs of such a program are represented by the increase i n shipping revenues less the increase in costs, valued at t h e i r s o c i a l opportunity cost. Taxes are ignored i n the analysis , except to the extent that they may a f f e c t the a l l o c a t i o n of resources. That i s because taxes represent a transfer cf resources rather than an actual cost or benefit. Tax incentives are, perhaps, the most appropriate type of assistance measure examined since they are adaptable, r e l i a b l e , and can be easily implemented. Increasing c a p i t a l cost allowances from a 15 percent declining balance to a 33 percent s t r a i g h t - l i n e method could result in present value cash flow savings to a shipowner of $2. 124 mi l l i o n on a $20 m i l l i o n vessel. The permittance of advance depreciation might be valued at 11.17 million and special depreciation at $1.25 m i l l i o n . ,A reduction in tax rates i s only e f f e c t i v e i f s u f f i c i e n t taxable Income i s being earned. A reserve fund i s also an appropriate assistance measure fo r many of the reasons cited above.,Such a program might cost the government $2 to $3 m i l l i o n annually. Government loan guarantees, allowing shipowners to secure l e t t e r c r e d i t terns may also result in substantial benefits to Canadian shipowners and would r e q u i r e a minimal outlay of funds cn the governments behalf. ,A d i r e c t government loan program i s not an appropriate measure because i t i s not adaptable, e g u i t a b l e , or economically e f f i c i e n t unless the government can perform the lending f u n c t i o n more e f f i c i e n t l y than can p r i v a t e i n d u s t r y . Construction s u b s i d i e s b e n e f i t s h i p b u i l d e r s , with the b e n e f i t s accruing to shipowners being minimal and u n r e l i a b l e . N o n f i s c a l a s s i s t a n c e measures such as f l a g d i s c r i m i n a t i o n and cargo preference, are considered economically i n e f f i c i e n t , and unacceptable. Such measures are, at the present time, too harsh a r e p l y to the f l a g d i s c r i m i n a t i o n and cargo preference problems that are developing elsewhere i n the world. The one p o s s i b l e exception to t h i s may be Canadian-flag c a r r i a g e of cargoes to and from the A r t i e regions of Canada. I t i s p o s s i b l e that the i n t a n g i b l e b e n e f i t s associated with such a venture ( i . e . , s e c u r i t y , sovereignty,pride) might j u s t i f y the higher costs i n v o l v e d . V Table of Contents Abstract ........... .............. ... ...................... i i l i s t of Figures .......................................... v i i i l i s t cf Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • x Ackncsledgement ....................................... . . . . x i i I. IFTBOBUCTION ........................................... 1 OUTLINE ......... 3 DEFINITION OF TEBMS ..................................... 4 LIKITATIONS OF THE STODX ................................ 5 II IKTEBNATIONAl SHIPPING ................................ . 7 1. The World Fleet And International Markets ........... 7 2. The Nationality And Registration Of Ships ........... .10 3. Shipping Operations And The Economics Of Sea Transportation ....................... ................ 12 4. Modern Trends And Developments ......................16 A. Technological ....................................... 16 B. The UNCTAD l i n e r Cede 18 C. Flags Of Convenience ................................ 19 D. Flag Discrimination ................................. 20 E. The Bise Of The National Fleets ..................... 23 II I . The Shipping Industry In Canada ...................... 25 1. Brief Beview Of Canadian Shipping History ........... ,25 2. Shipping Operations In Canada ....................... 28 A. Domestic Shipping ................................... 28 B. International: Transtorder ..........................31 C. Canadian Beep-sea Shipping - Non U.S. ............... .32 v i 3. Canadian Shipping I n t e r e s t s ......................... 35 A. Shipowners And Operators ............................ 35 B. Shippers ............................................ 33 C. Government Eodies ................................... 39 D. Union Groups ........................................ 41 E. S h i p b u i l d e r s ........................ ................ 42 IV P o s s i b l e Government A s s i s t a n c e Measures To A i d Shipping 44 1. Measures To A s s i s t N a t i o n a l Deep-sea F l e e t s ......... 44 A. F i n a n c i a l A s s i s t a n c e In The Operating Phase ......... 45 B. F i n a n c i a l A s s i s t a n c e In The C a p i t a l Phase ........... 47 C. N o n f i s c a l A s s i s t a n c e Measures ....................... 49 2. The E f f e c t s Cf The Various Measures ..................49 A. Economic E f f e c t s Of C o n s t r u c t i o n S u b s i d i e s .......... ,50 B. Economic E f f e c t s Of Operating S u b s i d i e s ............. 59 C. Economic E f f e c t s Of F l a g D i s c r i m i n a t i o n ..............61 V. World Shipping A s s i s t a n c e Measures ..................... ,64 1. F i n a n c i a l A s s i s t a n c e In The Operating Phase ......... ..64 A. Operating S u b s i d i e s ................................. 64 B. Government-Provided F a c i l i t i e s ...................... 67 C. S p e c i a l S u b s i d i e s ...................................68 D. Tax S u b s i d i e s ....................................... 70 2. F i n a n c i a l A s s i s t a n c e In The C a p i t a l Phase ............ 74 A loan Guarantees ...................................... 75 B. D i r e c t Loans ........................................ 77 C. C o n s t r u c t i o n S u b s i d i e s .............................. 79 D. Government Ownership ................................81 3. NONFISCAL ASSISTANCE MEASURES 83 A. CARGO PREFERENCE 83 v i i B. FLAG DISCRIMINATION ................................. 85 C. EILATEBAL TBADE AGREEMENTS ................... . . .,. . . . 86 D. CTBEE NONFISCAI MEASURES 88 VI. Shipping P o l i c y In Canada ............................. 90 1. Major Canadian Shipping S t u d i e s Of The Past Decade ,. 90 2. Current Canadian Shipping P o l i c y . ................... 92 3. The Canadian Merchant Marine Issue .................. 96 4. E x i s t i n g Canadian Government A s s i s t a n c e Measures .....99 ft. F i n a n c i a l A s s i s t a n c e In The Operating Phase ......... ,99 B. F i n a n c i a l A s s i s t a n c e In The C a p i t a l Phase ........... 106 C. N o n - f i s c a l A s s i s t a n c e Measures ...................... 107 VII A Canadian Plan Of Action 109 1. F i n a n c i a l A s s i s t a n c e In The Operating Phase .........112 A. Operating S u b s i d i e s .................................112 B. Government-provided F a c i l i t i e s ......................116 C. S p e c i a l S u b s i d i e s ...................................117 D. Tax I n c e n t i v e s ......................................120 2. F i n a n c i a l A s s i s t a n c e In The C a p i t a l Phase ...........131 A. loan Guarantees .....................................131 B. Government l o a n s .................................... 134 C. C o n s t r u c t i o n S u b s i d i e s .............................. 138 D. Government ownership ................................139 3. N c n f i s c a l A s s i s t a n c e ................................ 140 VIII Summary And Conclus i o n s ..............................144 Notes 149 E i b l i c g r a p h y .............................................. 165 Appendices . . ............................................... 169 v i i i L i s t of .Figures F i g u r e 2.1 -Figure 3. 1 -F i g u r e 4.1 -l F i g u r e 4 . 2 -Eigure 4.3 -Fi g u r e 4.4 -F i g u r e 4.5 -Fi g u r e 4.6 -Fi g u r e 4.7 -Figu r e 4.8 -Fi g u r e 4.9 -Figu r e 4.10-Figu r e 4.11-Wcrld Seaborne Trade ...................... 8 Canadian I n t e r n a t i o n a l Shipping - Top Ten Commodities loaded and Unloaded ....... 32 The E f f e c t on Supply and Demand of a C o n s t r u c t i o n Subsidy ...................... 51 The Increase i n Consumer Surplus R e s u l t i n g R e s u l t i n g from a C o n s t r u c t i o n Subsidy ..... 51 The Increase i n Producer Surplus R e s u l t i n g from a C o n s t r u c t i o n Subsidy ..... ,53 C a l c u l a t i o n of the O v e r a l l Net B e n e f i t s to S o c i e t y from a C o n s t r u c t i o n Subsidy .... 53 E f f e c t of a C o n s t r u c t i o n Subsidy I n e l a s t i c Demand .......................... 55 E f f e c t of a C o n s t r u c t i o n Subsidy^ X n e l a s t i c Supply . . . . . . » . . . . . . . . . . . . . . . . . .55 Cost S t r u c t u r e o f an I n d i v i d u a l Ship Operator ............................. 57 E f f e c t of a C o n s t r u c t i o n Subsidy on the Cost S t r u c t u r e of an I n d i v i d u a l Ship Operator .................................. ,58 The E f f e c t on Supply and Demand of an Operating Subsidy ......................... 60 E f f e c t of an Operating Subsidy on the Cost S t r u c t u r e o f an I n d i v i d u a l Ship Operator .................................. 61 The Cost to So c i e t y of F l a g Discrimination Practices X L i s t of appendices Appendix 1 - World Bulk Trade Figures ..................... 170 Appendix 2 - The World Merchant Fleet ..................... 171 Appendix 3 - The Canadian Eegistered Merchant Fleet ....... 172 Appendix 4 - Canadian Great Lakes Dry Bulk Cargo . . . . . . . . 173 Appendix 5 - Section B2I-19 Of The Maritime Code .......... 174 Appendix 6 - Section 6 Of The Canada Shipping Act ......... 175 Appendix 7 - Canadian Ship Construction Subsidy Bates .....176 Appendix 8 - Difference Between Canadian And Foreign Manning Costs ..........................................177 Appendix 9 - Breakdown Of Canadian Shipping Expenses ...... 178 Appendix 10 - Calculations For Change In Operating Margin Associated With An Operating Subsidy 179 Appendix 11 - Proposed Subsidizable Boutes And Vessels ....180 Appendix 12 - Calculation Of Costs Associated With An Operating Subsidy Program ................................181 Appendix 13 - Alternative Method For Calculating The Costs Associated With An Operating Subsidy Program ........... 182 Appendix 14 - Crewing Benefits Associated With The Proposed Fleet ............................. .. ... ........ ,., ..... |83 Appendix 15 - Social Costs Of Labour Associated With An Operating Subsidy Program .............................. 184 Appendix 16 - Vessels Qualifying For A Five Percent Investment Tax Credit ........185 Appendix 17 - Savings Associated With The Customs Exemption Of Imported Ships To Be Dsed In International Trade ....187 Appendix 18 - Capital Cost Allowance Deductions Associated With Various Bates And Methods .....188 appendix 19 - Present Values Of D i f f e r n t i a l Cash Flow Savings ................................................190 appendix 20 - D i f f e r e n t i a l PV Cash Flows For Advance And Special Depreciation Methods ........................... 192 Appendix 21 - Costs Associated With A Zero Tax Bate On Ship Earnings .......................................... .....193 Appendix 22 - Costs Associated Sith A Vessel Beserve Fund .194 Appendix 23 - Benefit To Shipowners Of A Loan Guarantee Pro grain ................................................195 Appendix 24 - The Social Eenefits Associated With A Loan Guarantee Program .............. .................. ...... 196 x i i Acknowledgement The author wishes to thank the f o l l o w i n g people who generously consented to being i n t e r v i e w e d , G . E • Bennett ( C o u n c i l of F o r e s t I n d u s t r i e s ) w.H. McNulty (Weldwocd of Canada, Ltd.) A l i s t a i r P o l l o c k ( C o u n c i l cf Marine C a r r i e r s ) G.A. Adams (Canadian Transport Co.) C L . Jacobs (Seaboard Shipping Co. Ltd.) I . J . Haven (Seaboard Shipping Co. Ltd.), I.E. Sutherland (Empire Shipping Co. Ltd.) John flay (flaple Leaf Shipping) John Pearson (formerly with Seaspan) Thanks i s a l s o extended t o H.E. B e l l (Federal Commerce and n a v i g a t i o n ) , and K . C . , G r i f f i n f o r m a t e r i a l s they provided i n response t c my requests f o r i n f o r m a t i o n . In a d d i t i o n t o thanking the members of the t h e s i s committee the author would a l s o l i k e to extend a s p e c i a l thanks to Dr. Trevor D. Heaver, Chairman c f T r a n s p o r t a t i o n S t u d i e s at the U n i v e r s i t y of B r i t i s h Columbia, f o r the guidance, m a t e r i a l s and t e c h n i c a l e x p e r t i s e he provided during the r e s e a r c h i n g and w r i t i n g of t h i s t h e s i s . .. 1 1 - INTBODUCTION Water .transportation of people and goods has always played a dominant role i n Canadian history. I t was instrumental in the founding and s e t t l i n g of Canada and has also been an important mode cf transportation i n the development of Canada's import and export trade. In f a c t , on several occasions i n the past 100 years, Canada has had a merchant marine that has ranked among the five largest in the world. However, today the Canadian f l e e t ranks as the f o r t y - t h i r d largest i n the world and i s comparable in siae to the national f l e e t s of Iran, Algeria, Libya, and He xi cc. 1 Since the end of the Second World War Canadian shippers have depended upci» the competitive forces that t r a d i t i o n a l l y p r e v a i l i n international shipping. This practice has well served Canadian shippers in the past and could ostensibly continue to do so, providing these competitive forces remain intact. However, recent p o l i t i c a l and economic trends are developing which may seriously jeopardize the degree of competition present i n i n t ernational shipping. I f such events are admonitions of what i s to come then Canada stands i n a most precarious position, vulnerable to the vagaries of foreign governments and shipc*ners. , The following s t a t i s t i c s exemplify t h i s high dependence of Canadian shippers upon foreign-flag ships; 1) Canadian-flag ships <thcse registered i n Canada) carried 29.8 percent of Canada's international waterbourae trade by tonnage. 2 However, i f trade with the United States i s excluded from the data then Canadian-flag ship p a r t i c i p a t i o n i n 2 i n t e r n a t i o n a l cargo trade i s a p a l t r y two-tenths o f one p e r c e n t . 3 2) at the end of 1978 the Canadian merchant f l e e t ( s e l f -p r o p e l l e d s h i p s of 1000 gross tons and over on Canadian r e g i s t r y ) c o n s i s t e d of 263 v e s s e l s only f o u r of which were i n v o l v e d i n deep-sea t r a d e . * 3) I t i s estimated t h a t Canadian s h i p p e r s pay out a n n u a l l y $2.5 M l l i o n i n f r e i g h t b i l l s t o f o r e i g n f l a g v e s s e l s . ? 4 ) F u l l y two-thirds c f the Canadian-owned seagoing merchant f l e e t i n terms of deadweight tonnage i s r e g i s t e r e d i n f o r e i g n c o u n t r i e s . In f a c t , n e i t h e r of Canada's two l a r g e s t shipcwning companies (CP Ships with t h i r t y - e i g h t v e s s e l s , and P a p a c h r i s t i d i s with twenty-one) has any s h i p s under Canadian r e g i s t r y . * The o b j e c t i v e of t h i s t h e s i s , t h e r e f o r e , i s to address the c e n t r a l q u e s t i o n ; " Ih a t f e d e r a l government a s s i s t a n c e measures, i f any, might be a p p r o p r i a t e f o r encouraging the development of a Canadian deep-sea f l e e t " ? T h i s g u e s t i o n g i v e s r i s e to a number of important a n c i l l a r y q u e s t i o n s . What are the i d e n t i f y i n g c h a r a c t e r i s t i c s c f an a p p r o p r i a t e a s s i s t a n c e measure? What are the f e d e r a l government's p o l i c i e s towards i n t e r n a t i o n a l shipping? What i n c e n t i v e s , i f any, e x i s t i n Canada to encourage the development of a Canadian deep-sea f l e e t ? What hinderances t o owning shi p s e x i s t i n Canada? How can these hinderances be removed? What are the arguments f o r and a g a i n s t a Canadian merchant marine? What are the c o s t s and b e n e f i t s to s o c i e t y of such a venture? What measures are c u r r e n t l y being used i n other c o u n t r i e s t o 3 e s t a b l i s h , promote, and protect national f l e e t s ? And how successful would such measures be i f introduced i n Canada? Many of these questions w i l l be discussed during the course of this t h e s i s 1 discussion. This paper consists of four main sections; background information cn shipping (Chapters II and I I I ) , government assistance measures (Chapters IV,V and VI), the selection of the most appropriate measures for Canada to take (Chapter VII) , and f i n a l l y the summary and conclusions (Chapter V I I I ) , Chapter II describes the developments that are occurring i n international shipping and considers the ramifications for Canada. The present state of the world shipping markets w i l l also he discussed in th i s chapter and topics such as the dif f e r e n t kinds of shipping operations, technological advances, and ma jor world tiade routes w i l l also be examined. Chapter III examines the pervasive nature of Canadian shipping; the groups involved, the major shipping areas, and the nature and composition of the cargoes c a r r i e d . F i n a l l y , t h i s chapter investigates the registry of ocean-going vessels that are involved in the carriage of Canadian trade. , The second section, dealing with possible government measures to a s s i s t shipping, commences with Chapter. IV., This chapter e s s e n t i a l l y generates a "shopping l i s t " of alternative measures that could be used to establish , promote, and protect a national deep-sea f l e e t with an emphasis placed upon the economic implications of the various alternatives. Chapter V examines the measures that governments in other 4 countries currently are using to e s t a b l i s h , promote and protect t h e i r national f l e e t s . If the federal government of Canada hopes to encourage Canadian p a r t i c i p a t i o n in international shipping then i t mcst introduce incentives that are comparable to those offered i n ether countries. For t h i s reason, the operating and construction assistance programs of B r a z i l , France, Germany, I t a l y , L i b e r i a , Panama, United Kingdom and the United States are examined The f i n a l background chapter. Chapter VI, reviews the history of Canadian shipping policy and investigates the tax incentives and subsidy programs that exist i n t h i s country with respect to shipping. This chapter also discusses the Canadian merchant marine issue and highlights the arguments f o r and against a Canadian merchant marine. Chapter VII i s the core chapter of t h i s thesis. After presenting and explaining the c r i t e r i a to be used i n judging the appropriateness cf the various assistance measures, the Chapter then goes on to discuss the appropriateness of each i n d i v i d u a l measure. The f i n a l Chapter, Chapter VIII, summarizes the discussion presented i n Chapter VII and makes recommendations as to which shipping assistance measures would be appropriate f o r the federal government to introduce in the hope of encouraging the development of a Canadian deep-sea f l e e t . DEFINITION OF -TEBHS Before commencing with the i n i t i a l chapters of t h i s thesis i t i s best to define a few basic terras that are used throughout t h i s study. 5 An a p p r o p r i a t e a s s i s t a n c e measure i s d e f i n e d as one that i s adequate, economically e f f i c i e n t , a c c e p t a b l e , a d a p t a b l e , and r e l i a b l e , these t r a i t s w i l l be d i s c u s s e d i n g r e a t e r d e t a i l , l a t e r , i n Chapter V I I . "Merchaat marine" can have a number of meanings but f o r the purpose of t h i s paper the d e f i n i t i o n used by T r a n s p o r t Canada w i l l s u f f i c e . Merchant marine w i l l r e f e r to s e l f p r o p e l l e d s h i p s of 1000 gross tons and over on Canadian r e g i s t r y . 7 Another c l o s e l y r e l a t e d term i s "Canadian deep-sea f l e e t . •? T h i s term, as used i n t h i s paper, r e f e r s t o "seagoing v e s s e l s that are osned by Canadian-based shipowners or r e g i s t e r e d i n Canada.'^ Host of the sh i p s o p e r a t i n g i n Canadian i n l a n d waters <ie. Great Lakes and S t . Lawrence Seaway) or f o r c o a s t a l trade are not c o n s i d e r e d as p a r t of the deep-sea f l e e t because they do not possess ocean-going c a p a b i l i t i e s . LIMITATIONS OF THI STUDY M a t e r i a l f o r t h i s t h e s i s was drawn from s e v e r a l sources; j o u r n a l s , newspapers, Transport Canada p u b l i c a t i o n s , a s s o r t e d s h i p p i n g and economics t e s t s , v a r i o u s government documents, and per s o n a l i n t e r v i e w s . The i n t e n t of the i n t e r v i e w s was to c o l l e c t f i r s t - h a n d i n f o r m a t i o n cn shipowners' viewpoints c o n c e r n i n g the s u b j e c t of a Canadian deep-sea f l e e t . Due to time and f i n a n c i a l c o n s t r a i n t s only a l i m i t e d number of i n t e r v i e w s were conducted. F o r t u n a t e l y i t was p o s s i b l e t c augment the i n t e r v i e w program with a d d i t i o n a l i n f o r m a t i o n obtained from a recent T r a n s p o r t Canada pub.licat.icn e n t i t l e d Measures to Encourage the Gradual Development of a Canadian Deep-Sea F l e e t - Industry Submissions. 6 This publication contains briefs submitted by some of the major parties involved with Canadian shipping concerning the subject of a deep-sea f l e e t . Government assistance programs of only the major shipping countries were examined in t h i s thesis. F i n a l l y , as was stated previously, t h i s thesis i s concerned only with vessels possessing ocean-going equipment and c a p a b i l i t i e s . Vessels that operate solely on the Great Lakes and St., Lawrence Seaway, or in coastal trade are not included i n t h i s study's discussion. In spite of these l i m i t a t i o n s i t i s hoped that t h i s thesis w i l l provide timely and relevant information and recommendations on the possible measures that the federal government could take to encourage the development cf a Canadian deep-sea f l e e t . 7 II INTERNATIONAL SHIPPING Shipping i s "the transportation of goods by water" and i s perhaps the world 1s most important mode of t r a v e l . I t has been estimated that "the transportation work done i n ton-miles performed by ships i s twice as great as that carried by a l l the world's roads, railways, and airways put together. n, 1 Since World War II the amount of shipping transportation performed has expanded s i x f o l d , and has increased every year with the exception cf 1975.2 There are many kinds of shipping but this thesis i s concerned primarily with deep-sea shipping; the carriage of seaborne imports and exports. This chapter describes the world of deep-sea shipping and presents much of the background information that i s pertinent to the issues discussed i n subsequent chapters. In t h i s chapter, the nuances of international shipping are examined - how i t works, the cargoes and trade routes involved, and the various types of operations. International shipping i s a dynamic and competitive industry, one that has been ruled by the laws of supply and demand and free of government intervention. ..However, recent events have begun to erode the t r a d i t i o n a l l y competitive base of the world shipping markets. These trends and developments w i l l undoubtedly a f f e c t Canadian i n t e r e s t s i n the future. Because of t h e i r importance, to Canada, the entire f i n a l section of this chapter i s devoted to a discussion of these trends and how they w i l l affect the formulation of Canadian shipping policy. JU TJJ WOEIC FLEET AND INTEBNATIQHAL BASKETS 8 The world f l e e t i n 1978 t o t a l l e d nearly 630 mi l l i o n deadweight tens (d.w.t.). 3 This t o t a l consisted of tankers (accounting for f i f t y percent of the t o t a l tonnage), bulk c a r r i e r s (twenty percent), combination o i l / b u l k c a r r i e r s (eight percent), cargo l i n e r s (ten percent), tramp ships (ten percent), and special purpose ships (two percent). The world merchant f l e e t has been growing at a phenomenal rate as can be seen in figure 2.1. 4 During the 1970s shipping ton-miles performed increased by about ten percent per annum. World Seaborne Trade in MMMM ton-miles 18T W o r l d Seaborne T r a d e 1966 67 6 8 6 9 7 0 71 72 73 7 4 7 5 76 77 The increase in growth has been made possible by the technological advances that have recently occurred i n international shipping. As ships became larger, faster and more specialized i t became economically feasible to ship larger loads longer distances, hence, explaining the dramatic increase i n recorded ton-miles. A convenient way of c l a s s i f y i n g the many types of cargo 9 carried in international shipping i s by way of a bulk, tanker, and l i n e r categorization. Bulk cargoes include raw materials, grain and other a g r i c u l t u r a l products, and forest products. The most important raw materials carried are iron ore and coal with the major trade routes being similar for both commodities; the United States and Canada to Japan, Australia to Japan, West A f r i c a and B r a z i l to Europe (ircn ere) and Eastern Europe to the r e s t of Europe (coal). Other raw materials carried are bauxite, phosphates, manganese ore, s a l t , and gypsum. Grain i s another important bulk commodity with most shipments or i g i n a t i n g i n the grain surplus countries cf the United States, Canada, and Australia. These shipments find markets in Japan, Europe, India, China, and the Soviet Union. The t h i r d class of bulk products i s lumber and forest products which account f o r nine percent of a l l seaborne tonnage carr i e d . Half of the forest product tonnage i s loaded i n the United States and Scandanavia, and i s destined for North America, Europe, and Japan. A summary of these major bulk commodities carried i s presented i n appendix 1. , The second general commodity group i s tanker cargo, or l i q u i d bulk products. Ey f a r the most important l i q u i d bulk cemmcdity i s c i l and related petroleum products. In f a c t , o i l tankers comprise over one-half the tonnage of the world f l e e t . During the period 1966-1973 the seaborne transportation of o i l (in ton-miles) increased by 250 percent. Although a s l i g h t declice in o i l tonnage carried was experienced during the recession cf 1973 and 1974, o i l shipments have continued to grow stead i l y , at an average rate of about six percent per annum. The 1 0 major o i l exporting regions are the Middle East, South America and part of Central A f r i c a - F i f t y percent of t h i s cargo i s destined f c r Europe twenty percent to Japan, ten percent to the United States and twenty percent to other regions. 5 The f i n a l general category of goods carr i e d are dry cargo commodities, which includes mainly manufactured and intermediate goods, These dry cargo items are carried on container ships, general cargo ships and small-sized bulk-carriers. , Although these cargoes only account for ten percent of seaborne tonnage they are important because they account for approximately two-thirds cf the value cf a l l international shipments. , i i J J J NATIONALITY AND BECISTBATION OF SHIPS The shipping industry has no single, formal, coherent framework of law and public policy to control i t s operations.* T r a d i t i o n a l l y i t has been the r e s p o n s i b i l i t y of the country i n which the ship i s registered, to determine the rules under which ships w i l l operate. Each country has "the undisputed right . . . t o set up such prerequisites for the assumption of i t s nationality as i t s concept of national welfare d i c t a t e s . " 7 B a s i c a l l y , each sovereign state has. the right to determine who can f l y i t s national f l a g , and what rules s h a l l govern their operations. The laws concerning the r e g i s t r a t i o n of ships are often c l o s e l y related to the economic, p o l i t i c a l , and m i l i t a r y interests of the respective country. 8 and so i t i s not surprising that a large difference i n r e g i s t r a t i o n requirements exists from country to country. At one end of the spectrum are the so-called "open r e g i s t r y " countries, such as Panama, Li b e r i a , and Singapore where the r e g i s t r a t i o n rules are few. In 11 L i b e r i a , almost any vessel i s e l i g i b l e to be registered i n that country; a) seagoing vessels, regardless of tonnage, wherever b u i l t , owned by a c i t i z e n of Liberia or of any foreign country. The terms " c i t i z e n " and "national" s h a l l include corporations, partnerships and association of ind i v i d u a l s . b) any vessel of twenty net tons or over engaged i n trading cn the inland water of L i b e r i a or between ports in L i b e r i a . 9 In Panama ships that are "wholly or partly the property of Panamanian c i t i z e n s or of foreigners domiciled i n the Bepublie with more than f i v e years of residence therein" are e l i g i b l e for r e g i s t r a t i o n in that country.V° Needless to say establishing residence in Panama i s a mere formality. In half cf the world's maritime countries, 100 percent national ownership i s s t i l l a prerequisite for the r e g i s t r a t i o n of ships while in other countries p a r t i a l ownership w i l l s u f f i c e . * 1 In I t a l y , Hexico, Peru, the OSSB, and Poland there i s a r e g i s t r a t i o n reguirement that the crew must be nationals of that country. In some countries there are no such requirements while i n others there i s the s t i p u l a t i o n that a certain percentage of the crew or o f f i c e r s must be nationals. /In only a few countries i s national registry r e s t r i c t e d to domestically constructed v e s s e l s . 1 2 ft closer examination of the world f l e e t emphasizes the importance of the so-called "flags of convenience" countries i n inte r n a t i o n a l shipping. Taken c o l l e c t i v e l y the four open-registry countries of L i b e r i a , Panama, Singapore and Cyprus, constitute approximately t h i r t y percent of the t o t a l tonnage of the world f l e e t and f i f t y - f o u r percent of the t o t a l world tanker f l e e t . Three of these countries, L i b e r i a (1) , Panama (6) and 12 Singapore (13) rank among the top f i f t e e n n a t i o n a l f l e e t s i n the world. F l a g s cf convenience o f f e r many advantages to s h i p o p e r a t o r s c f v a r i o u s n a t i o n a l i t i e s and these advantages are examined i n g r e a t e r d e t a i l i n a subsequent s e c t i o n i n t h i s chapter. The most important n a t i o n a l f l e e t s i n terms of r e g i s t e r e d tonnage are, i n d e c r e a s i n g o r d e r , L i b e r i a , Japan, Greece, the United Kingdom, Norway, Panama, the USSR, the United S t a t e s , France, I t a l y , the F e d e r a t i o n of Germany, Spain, and Singapore. &s can be seen i n Appenix 2, the Canadian f l e e t i s c o n s i d e r a b l y down the l i s t and c u r r e n t l y stands i n f o r t y - t h i r d place. J i SHIPPING OPERATIONS AND THE ECONOMICS OF SEA TRANSPORTATION There are three b a s i c ways t h a t a company may be engaged i n s h i p p i n g , e i t h e r as a s h i p operator, as a shipowner or as an operator-owner. As a s h i p o p e r a t o r , the company earns revenue by t r a n s p o r t i n g s h i p p e r s * goods to market at r a t e s and terms s p e c i f i e d i n the c o n t r a c t between them. Expenses i n c u r r e d may be of three types, d a i l y running c o s t s ( i . e . , crew wages, s o c i a l s e c u r i t y c o n t r i b u t i o n s , p a y r o l l t axes, paid l e a v e , food, o v e r t i m e ) , voyage c o s t s ( i . e . , bunkerage, harbour and c a n a l dues, l o a d i n g / u n l o a d i n g fees) and and l e a s e payments f o r the use of the s h i p . D a i l y c o s t s are of a s e m i - f i x e d nature and are i n c u r r e d whether or not the s h i p s a i l s . Voyage c o s t s , as the name suggests are mostly v a r i a b l e c o s t s and are the d i r e c t r e s u l t of a voyage being undertaken. F i n a l l y , l e a s e payments are of a f i x e d c o s t nature and may extend to f i f t e e n or twenty ye a r s . Operators, i f they hope to be s u c c e s s f u l and earn a 13 pi of i t, must chocse their markets with care since the rates i n many sectors are very v o l a t i l e . Water transportation. l i k e any other mode cf transportation, i s a derived demand, and shipping prof i ts w i l l generally follow a si m i l a r trend to that exhibited by t i e industry i t i s servicing. She second type of involvement i n shipping i s as a shipowner. The shipowner, usually leases or charters out ships, and receives lease payments from the ship operators (lessee)• Depending upon the nature of the lease the only expenses a shipowner may have w i l l be of a c a p i t a l nature ( i . e . , depreciation, i n t e r e s t payments, taxes on p r o f i t s , and possibly insurance premiums). If the lease payments received are greater than the repayments to service the debt then a p r o f i t i s recognized. With ship construction costs ranging from $ 1 2 to $ 1 0 0 m i l l i o n (depending on the siz e and type of vessel) i t i s common practice f o r shipowners to secure ten to f i f t e e n year leases from ship operators even before construction of the ship commences. Shipbuilding prices are very v o l a t i l e and a shipowner who times his purchase well can make tremendous p r o f i t s i n the well-established second-hand market that exists for ships. The t h i r d option for engaging i n shipping i s as a shipowner-operator. In t h i s case the firm owning the ship also operators i t , thus no charter payments ever change hands. The shipping firm earns revenue i n the form of rates charged f o r the carriage of goods and through the sale of any ships i t may possess. , any revenues are off s e t by daily running expenses, voyage expenses, and c a p i t a l expenses. The previous discussion i s only a general description of how shipping operations function* Who actually pays what costs i s determined by the type of charter contract that exists between the two parties, , The three types of charters are; 1) bareboat charters, 2) time charters and 3 ) voyage charters. In the tarebeat charter the shipowner (lessor) leases the vessel to the ship operator (lessee) who i s then responsible for providing the crew, f u e l , supplies, and the supervision of the vessel. The time charter i s an arrangement whereby the lessee i s leasing cargo space for a s p e c i f i e d period of time and pays the f u e l and cargc carrying expenses. The shipowner pays the crew's wages, food, benefits and insurance. The l a s t type of charter agreement i s the voyage charter where the ship operator leases the ship for a s p e c i f i e d voyage between two ports. In these kind of arrangements the operator assumes no r e s p o n s i b i l i t y f o r the operation of the ship. S.A. Lawrence in his book International Sea Transport; The  Years Ahead c i t e s three types of service in which a ship may be engaged.* 3 These classes are by no means mutually exclusive and the demarcation between the classes i s sometimes d i f f i c u l t to determine. The three classes of service are tramp, l i n e r , and i n d u s t r i a l . Tramp services can be defined as "carrying cargoes on a time or voyage charter basis usually catering to one single customer and carrying one or two commodities at a time."* * Tramp services generally "follow the action" and carry whatever cargo needs to be moved at the time. . Tramp services are best d i f f e r e n t i a t e d from l i n e r services by the f a c t that they are i r r e g u l a r i n nature and the routes serviced may frequently 15 change. Liner service i s " t r a f f i c between designated ports to a published schedule with a freguency of a least once a month. 1 , 1 5 Liner services carry the cargo of many shippers and s a i l on a regular basis whether or not the ship i s f u l l y loaded., The third category of services offered i s i n d u s t r i a l i z e d services. This refers to the si t u a t i o n where the shipowner i s also the owner of the cargo being c a r r i e d . This type of service i s most common with large resource companies, e s p e c i a l l y the major o i l companies., To service the many different kinds of markets, there exist many d i f f e r e n t types of ships. These include tankers, bulk-c a r r i e r s , r e f r i g e r a t o r ships, vehicle c a r r i e r s , container ships, combination ships, and other spe c i a l i z e d vessels. .,- Tankers were previously discussed i n some d e t a i l already. , They are the largest type of vessel and can be over 4 8 0 , 0 0 0 d.w. t« , The predominant cargo carried by these kinds of vessels i s o i l , however, other l i g u i d cargoes may also be carried, such as chemicals,liguid nitrogen gas, and even wine. Bulk-carrier ships may fee general purpose, ore c a r r i e r s , c o l l i e r s , car c a r r i e r s , c r e / c i l , and ore/bulk/oil ( O B 0 ) , or other specialized vessel types. F i n a l l y , there exists a myriad of vessel types that make up the freighter c l a s s i f i c a t i o n . These include; general purpose ships, r e f r i g e r a t o r ships, container ships r o l l - o n r o l l - o f f (fio.Bc) vessels, barge c a r r i e r s , and timber and newprint c a r r i e r s . A fourth class might also be added to include non-merchant special purpose ships such as ice-breakers, survey ships and support ships. 16 The l a s t topic to be examined i n t h i s section on shipping operations, i s that of l i n e r conferences, , A l i n e r conference i s " an organization whereby a number of shipowners o f f e r their services cn a given sea route on conditions agreed by the members."16 Many conferences co-ordinate the s a i l i n g schedules of t h e i r members, assign ports of c a l l , handle complaints, and monitor business practices in that t r a d e . 1 7 Today, there are over three hundred such conferences that act in a c a r t e l - l i k e manner, f i x i n g rates and charging what the cargo w i l l bear. However, these l i n e r conferences cannot behave i n true monopolistic fashion since there exists competition from tramp vessels, other conferences, owner-operators and other modes of transportation. The at t r a c t i v e feature of the conferences i s that they offer regular and e f f i c i e n t services at fixed rates, thereby catering to the trades that require r e l i a b l e transportation. 4. MCEEFN TBENES AND DEVELOPHENTS The Transport Canada publication, A Shipping P o l i c y for  Canada provides an excellent summary of the major trends and developments that are occurring i n shipping. These include; i ) t e c h n o l o g i c a l , i i ) UNCTAD' Liner Code, i i i ) f l a g s of convenience, i v ) f l a g discrimination and v) the r i s e of national f l e e t s . A a Technological Ships today are larger, faster and more specialized than they were ten years ago. During the decade 1962-1971 the average 17 size cf new o i l tankers increased almost f i v e f o l d , from 28,000 d.w.t. to 130,000 d.w.t. ,During the 1960s the largest tankers were around 50,000 d.w.t. Today, the new supertankers are approaching the 500,000 d.w.t.. mark, a tenfold increase. The rapid increase i n ship size i s most apparent with tanker vessels, however, s i m i l a r s t a t i s t i c s show that over the same ten year period, the average dry bulk c a r r i e r increased from 20,000 d.w.t. to 55,000 d.w.t. Today, bulk c a r r i e r s may be as large as 150,000 d.w.t., although the more common size is in the range of 60,000-70,000 d. w.t. Another increase i n carrying capacity has come about i n the form of faster ships. In 1949, the average speed of a tanker was fourteen knots, twenty years later i t had increased to sixteen knots. The increase in speed, has resulted i n f a s t e r voyage times which has increased shipping capacity. Vessels are also more specialized than they used to be in two respects, the nature of work they are designed to perform, and the use of automated equipment. Today, special vessels e x i s t f o r carrying cars, lumber, coal, l i q u i d nitrogen, whereas before these items would have been carried by general cargo vessels. The growth of container t r a f f i c i s another example of the new specialized shipping techniques. Today, a large containership capable of carrying 2,000 containers and costing $50 m i l l i o n , can guicken the loading/unloading operations by a magnitude of f i v e . ,. Shipping operations are also becoming more automated. /The most obvious cases of th i s are the new computer-monitored propulsion systems, mechanized handling equipment, computerized route planning, and advanced sonar and radar systems. 18 The i n c r e a s e i n v e s s e l s i z e , speed and s p e c i a l i z a t i o n w i l l undoubtedly a f f e c t Canadian i n t e r e s t s . The primary q u e s t i o n i s "Can Canadian p o r t s keep pace with the r a p i d development?" I f the answer i s "no" then Canadian ports might be bypassed i n favour of modernized American ports capable of h a n d l i n g the newer, and l a r g e r s h i p s . Such a s c e n a r i o would r e s u l t i n higher r a t e s f o r Canadian s h i p p e r s and u l t i m a t e l y i n higher p r i c e s f o r Canadian consumers. , E, The UNCTAD L i n e r Code The United Nations Conference f o r Trade and Development (UNCTAD) was formed "to con s i d e r means of a c c e l e r a t i n g the economic development of l e s s developed s t a t e s through r e v i s e d i n t e r n a t i o n a l trade p o l i c i e s . " * 8 A s p e c i a l committee was formed to i n v e s t i g a t e the r o l e t h a t s h i p p i n g could play towards the attainment of t h i s o b j e c t i v e . One of the proposals suggested by t h i s committee was the Code of Conduct f o r L i n e r Conferences adopted by UNCTAD i n A p r i l 1974 but not yet r a t i f i e d . * 9 The three main o b j e c t i v e s of the Code a re; 1) to f a c i l i t a t e the o r d e r l y expansion of world seaborne t r a d e . 2) t o s t i m u l a t e the development of r e g u l a r and e f f i c i e n t l i n e r s e r v i c e adequate f o r the reguirements cf the trade concerned and 3) to ensure a balance o f i n t e r e s t s between s u p p l i e r s and users of l i n e r s h i p p i n g s e r v i c e s . ? 0 One of the main f e a t u r e s of the Code i s the proposed 40-40-20 r u l e that would app o r t i o n the c a r r i a g e of l i n e r t r a d e cargo i n the f o l l o w i n g manner; f o r t y percent of the tonnage would be c a r r i e d by the f l a g s h i p s of each of the t r a d i n g c o u n t r i e s and 19 the remaining twenty percent would be l e f t for cross-traders (vessels f l y i n g the f l a g of a country other than the exporting or importing country). If passed, 2 1 the ONCIftD Liner Code would adversely a f f e c t Canadian i n t e r e s t s . The Code would severely r e s t r i c t the operations cf the t r a d i t i o n a l cross-trading nations upon which Canada i s very dependent. Without a national f l e e t , or designated Canadian c a r r i e r s , the implementation of the Liner Code would force Canada to seriously re-evaluate i t s shipping p o l i c i e s and practices. Cr flags Cf Convenience Torty percent of international shipping i s conducted under the flags of so-called "convenience countries" which have been defined as countries where; 1) r e g i s t r y allows ownership and/or control by non-c i t i z e n s 2) access to r e g i s t r y i s easy. 3) receipts from registry constitute a substantial component of the national income and balance of payments H)taxes cn income from shipping are low or non-existent. 5) manning of ships by non-nationals i s f r e e l y permitted. 6) the country has neither the power or the administratve machinery e f f e c t i v e l y to impose any national or international r e g u l a t i o n . 2 2 The nest common f l a g of convenience countries are (international ranking indicated in brackets), L i b e r i a (1), Panama (5), Singapore (13), Cyprus (26), Bermuda (27), Cayman Islands and the Bahamas (88). The majority of the vessels registered i n these countries are o i l tankers, followed next by bulk c a r r i e r s . In the 1960s i t was estimated that approximately seventy-five 20 percent of the f l a g of convenience ve s s e l s were owned by American and Greek i n t e r e s t s . Unfortunately no r e l i a b l e s t a t i s t i c s e x i s t that r e v e a l who today owns the f l a g , of convenience f l e e t s , Rhy are f l a g of convenience c o u n t r i e s so a t t r a c t i v e to f o r e i g n shipowners? The prime a t t r a c t i o n s seem to be; i ) easy r e g i s t r y , i i ) f i n a n c i a l b e n e f i t s a r i s i n g from the d e f e r r a l or avoidance of t a x e s , i i i ) lower crewing c o s t s , iv) easy f o r e i g n currency exchange, and v) lax i n c o r p o r a t i o n procedures. By e s t a b l i s h i n g a head o f f i c e i n an 'open-registry* country, a company can defer t a x a t i o n on p r o f i t s u n t i l they are r e p a t r i a t e d . These tax-deferred p r o f i t s i n the meantime can be re i n v e s t e d i n shipping operations and are, i n a sense, i n t e r e s t -free loans from the government. T r a d i t i o n a l l y , the f l a g of convenience v e s s e l s have provided Canadian shippers with a r e l i a b l e source of low-cost tonnage-, 2 3 However, trends are developing t h a t may je o p a r d i z e t h e i r existence ( i . e . , see previous d i s c u s s i o n of the UNCTAD L i n e r Code).,The guestion a r i s e s , "What i s Canada to do i f measures are passed t h a t i n h i b i t the r e g i s t r a t i o n of f l a g of convenience v e s s e l s ? " p. Flag D i s c r i m i n a t i o n Flag d i s c r i m i n a t i o n r e f e r s to a v a r i e t y of a c t s and pressures exerted by government to d i r e c t cargoes to ships of t h e i r own f l a g , r e g a r d l e s s of the commercial c o n s i d e r a t i o n s which n o r s a l l y govern the r o u t i n g of cargoes. 2* Flag d i s c r i m i n a t i o n p r a c t i c e s can be examined under f i v e . general 21 groupings, those related to the apportionment of trade, those involving access to pert f a c i l i t i e s , those that govern access to cargo, those a f f e c t i n g trade financing and various i n d i r e c t measures that favcur the usuage of national f l a g v e s s e l s , 2 5 Flag discrimination measures that a f f e c t the apportionment of trade include b i l a t e r a l agreements, the u n i l a t e r a l a l l o c a t i o n of cargoes to national-flag c a r r i e r s , and the requirement that government cargoes be carried i n national bottoms. Many of these measures are described i n further d e t a i l i n chapter IV. Practices related to port a c c e s s i b i l i t y include discriminatory port charges, and s p e c i a l foreign-flag taxes and dues. Discriminatory prices may also exist for the use of port f a c i l i t i e s and services such as harbour, lighthouse and pilotage s e r v i c e s . ? 6 National-flags vessels may also enjoy p r e f e r e n t i a l berthing assignments and customs clearance. access to cargo may be r e s t r i c t e d either wholly or i n part to national-flag vessels. One of these measures has already been discussed, that of government cargoes.,, Other countries may exclude foreign ships from competing for certain commodities, through the issuance of import licenses. Other regulation f a l l i n g into t h i s grouping include rules governing the delivery of cargo (there may be d i f f e r e n t i a l rates f o r inland transportation), cargo pooling requirements ( guaranteeing national c a r r i e r s a percentage of the t r a f f i c ) , and the imposition of extra duties on imports not using national-flag c a r r i e r s . , In the fourth grouping, practices concerning trade finance, are provisions that extend insurance concessions to national-22 f l a g v e s s e l s , currency r e s t r i c t i o n s and exchange c o n t r o l s , s p e c i a l tax concessions f o r n a t i o n a l shipping companies, and s p e c i a l tax inducements to use n a t i o n a l - f l a g vessels.,, I n d i r e c t measures i n c l u d e government pressure r a t h e r than d i r e c t r e g u l a t i o n s . In some c o u n t r i e s (Columbia, South Korea, Thailand and Taiwan) exports are supposed to be shipped i n n a t i o n a l vessels on a c . i . f . b a s i s , while imports are handled on an f.o.b. b a s i s . 2 7 This ensures t h a t domestically incorporated businesses c o n t r o l the r o u t i n g of cargo. Another i n d i r e c t measure i s the establishment of a government agency to c o n t r o l cargo routi n g and t r a n s p o r t a t i o n . A study done by P h i l l i p F r a n k l i n , Economic Impact of Flag D i s c r i m i n a t i o n estimated that 20-2 5 percent of the general cargo tonnage, 10-12 percent of the dry bulk tonnage, and 2-3 percent of the world's petroleum products were a l l o c a t e d through cargo a l l o c a t i o n prodeduces favouring the n a t i o n a l f l a g . . I t i s estimated that such p r a c t i c e s have r e s u l t e d i n e x t r a shipping costs of $500 m i l l i o n to $1 b i l l i o n . , Another study done by S.fi. H i l l 2 8 examined the e f f e c t s of f l a g d i s c r i m i n a t i o n upon Canadian i n t e r e s t s . The study makes mention of s e v e r a l i n c i d e n t s where Canadian s h i p operators were precluded from c a r r y i n g c e r t a i n cargoes to or from p a r t i c u l a r c o u n t r i e s . Flag d i s c r i m i n a t i o n i s i n d i r e c t o p p o s i t i o n with c u r r e n t Canadian shipping p o l i c y which advocates free competition, Canada should be concerned with t h i s problem since i t r e s t r i c t s the a v a i l a b i l i t y of c r o s s - t r a d e r s e r v i c e s . The major problem faced by Canada i s how the government can discourage or combat f l a g d i s c r i m i n a t i o n p r a c t i c e s . , In k 23 Shipping P o l i c y f o r C a n a d a 2 9 i t i s s t a t e d that the government i n t e r d s to i n t r o d u c e l e g i s l a t i o n that would p r o t e c t Canadian i n t e r e s t s from such p r a c t i c e s . , J u s t how t h i s i s t o be accomplished remains to be seen. , E8i The Rise Cf The N a t i o n a l F l e e t s In recent years there has been a dramatic expansion i n government-backed n a t i o n a l f l e e t s . T h i s t r e n d i s obvious among two p a r t i c u l a r groups; the C o u n c i l of Mutual Economic A s s i s t a n c e (COMECON) a l l i a n c e c o u n t r i e s and the developing n a t i o n s . _ The CGHECGN c o u n t r i e s are B u l g a r i a , Romania, Hungary, C z e c h o s l o v a k i a , Poland, the USSR and East Germany. Of these the U.S.S.B. has exp e r i e n c e d the f a s t e s t growth. Between 1966 and 1976 the Soviet f l e e t more than doubled i t s tonnage from 9.4 t o 20.6 m i l l i o n g . r . t . 3 0 and was expected to expand a f u r t h e r t w e n t y - f i v e percent over the peri o d 1976 t o 1980. In 1977 Soviet s h i p s c a r r i e d over 2.5 m i l l i o n tons of Canadian imports and e x p o r t s . Other COMECON c o u n t r i e s c a r r y i n g over 200,000 t e n s of Canadian cargo were Poland and East Germay. Taken c o l l e c t i v e l y the CCMECON c o u n t r i e s c a r r i e d 1.1 percent of Canadian imports and 2 percent cf i t s exports. The n a t i o n a l l y - b a c k e d f l e e t s of Y u g o s l a v i a and China are a l s o a c t i v e i n the t r a n s p o r t a t i o n of Canadian imports and exports. Eecause the government-backed f l e e t s are not r e q u i r e d t o . cover expenses of a c a p i t a l nature they are o f t e n a b l e to undercut the c o m p e t i t i o n of other t r a d i t i o n a l maritime n a t i o n s . T h i s has enabled these state-backed f l e e t s to secure s i g n i f i c a n t 24 portions of t r a f f i c cn certain routes which has become a source of consternation to other maritime nations,, The major question to be addressed by the Canadian government i s "Should we continue to rely on Soviet and other CCHECON countries' vessels to the extent that we now do?" The guestion i s not an easy one to answer and the trade-off seems to te between naticnal security and a cheap source of shipping. . The development of national f l e e t s i s not confined to those of the Soviet Onion and the Eastern European countries. Host of the South American countries (especially B r a z i l , Peru, and Columbia), India, and some of the Asiatic countries are also attempting to es t a b l i s h national f l e e t s of their own., In some cases these attempts are being fostered by f l a g discrimination practices, government ownership, and subsidies. These assistance measures are examined i n greater d e t a i l i n chapter V, , The implications of the increase i n the state-backed f l e e t s are similar to those discussed e a r l i e r ; Canadian ship operators are beinc excluded from competing in par t i c u l a r markets, and cross-traders are being sgueezed out of these markets. These are the trends and developments that shipping. Undoubtedly they w i l l have a profound future formulation of Canadian shipping policy. are occurring i n af f e c t on the 25 I I I . THE SHIPPING INDOSTBY IN CANADA Canada has one of the world's longest coastlines (36,000 miles) and i s also endowed with perhaps the world's best inland water transportation systems (the Great Lakes and the St. Lawrence Seaway). In terms of seaborne tonnage, Canada ranks tenth in the world.'* And yet despite these rather impressive s t a t i s t i c s , Canada only has the f o r t y - t h i r d largest national f l e e t in the world. What factors can explain the r e l a t i v e l y i n s i g n i f i c a n t size of the Canadian national f l e e t ? Two factors might be cited as explanations.. F i r s t , the small size of the current Canadian f l e e t might be attributed to h i s t o r i c a l events and shipping policy decisions that occurred i n the past. Second, i t i s possible that the s t a t i s t i c s regarding the national f l e e t do no reveal the entire story. Eoth these factors are examined i n t h i s chapter. This chapter also reviews the major types of Canadian shipping, the cargoes c a r r i e d , the markets serviced, and the companies involved. The concluding section to this chapter i s reserved for a general discussion cn the various groups that are involved , in ore aspect or another , with Canadian shipping. As we s h a l l discover, the Canadian presence i n deep-sea shipping i s considerably more s i g n i f i c a n t than the s t a t i s t i c s suggest, ii,BRIEF REVIEW OF CANADIAN SHIPPING HISTORY Back i n the nineteenth century , before the invention of the steamship, Canadian ships were considered among the f i n e s t in the world. Throughout the Haritimes, shipyards were busily constructing vessels to be used for f i s h i n g and commercial 26 t r a d i n g . However, the i n t r o d u c t i o n of the steamship put an end to Canadian s h i p b u i l d i n g supremacy. Without a w e l l e s t a b l i s h e d s t e e l i n d u s t r y , Canadian s h i p y a r d s could not hope to compete against the more i n d u s t r i a l i z e d n a t i o n s . The s hipyards once so busy *ere now q u i e t . I t was the outbreak of World War I that p r o v i d e d the impetus f o r the r e b u i l d i n g of Canadian deep-sea f l e e t . , Orders f o r new sh i p s f l o o d e d i n from many c o u n t r i e s , e s p e c i a l l y from B r i t a i n ; "Within twelve months f o r t y - t w o f r e i g h t e r s between 2,000 and 10,000 tons were d e l i v e r e d to Britain.'» 2 Canadian government o f f i c i a l s , determined t o keep the s h i p y a r d s humming, i n t r o d u c e d i n 19 17, a comprehensive s h i p b u i l d i n g program program. The s h i p s c o n s t r u c t e d under t h i s program were to be run under the a u s p i c e s of the f e d e r a l government through the Canadian Government Merchant Marine Ltd. , (CGMB) . , a f t e r the war the CGMM found i t s e l f unable t o maintain i t s l a r g e wartime f l e e t and a c c o r d i n g l y s o l d many of i t s v e s s e l s before e v e n t u a l l y going out of business i n 1936. By 19 39, the Canadian deep-sea f l e e t c o n s i s t e d of a mere twenty-nine s h i p s . The next s t i m u l u s f o r the Canadian f l e e t was a g a i n provided by the war, t h i s time World War I I . The government once again became i n v o l v e d i n s h i p p i n g and many Great Lakes v e s s e l s were r e g u i s i t i c n e d , modified and put i n t o a c t i v e deep-sea s e r v i c e . The War Time Shipping L i m i t e d was e s t a b l i s h e d to s u p e r v i s e the new s h i p b u i l d i n g e f f o r t , and i n 1942 the Park Steamship Company was formed to a d m i n i s t e r s h i p s under Canadian r e g i s t r y . ,By the end of the war, Park Steamships c o n t r o l l e d 150 s h i p s and Canada was ranked as having the f o u r t h l a r g e s t f l e e t i n the world. 2 7 after the war, the Canadian Maritime Commission was established. Its mandate was to "determine and implement measures by which the f l e e t could best be established on a permanent basis.V 3 After 1948, what remained of the Park Steamship Company was incorporated into the Canadian Maritime Commission. A buoyant shipping market, experienced after the war managed to keep the large Canadian war-time f l e e t f a i r l y a c t i v e , however, a l l gccd things must come to pass, and so i t was with the halycon days of the Canadian national f l e e t . Horld shipping markets went into a slump and the government was pressed to introduce the Replacement Plan (1949) which enabled owners to s e l l t h e i r ships to foreign i n t e r e s t s provided that the proceeds were used to purchase Canadian-built and registered vessels, another neasure, the Transfer Agreement allowed Canadian ships to be transferred to E r i t i s h r e g i s t r y . Both these government programs lasted u n t i l 1961 by which time 211 ships had been sold under the Replacement Plan and 219 had been transferred under the Transfer agreement.* By 1961 the Canadian merchant marine was but a shadow cf i t s former size,. The decline of the merchant marine did not stop there, however. In 1969, the Canadian f l e e t had f a l l e n to twenty-sixth place in terms of national tonnage registered, to f o r t i e t h place in 1975, and as of A p r i l , 1980 the Canadian f l e e t was ranked as the f o r t y - t h i r d largest national f l e e t . 3 At the end of 1978 the Canadian merchant f l e e t numbered 26 3 vessels. A breakdown of the f l e e t shoas that eighty-three of these vessels were operating along the A t l a n t i c Coast, t h i r t y -28 six on the P a c i f i c Coast, and 140 on the inland waters. 6 Only four vessels were engaged i n regular deep-sea trade. The Canadian registered deep-sea f l e e t consisted of three dry-bulk c a r r i e r s (78,500 d.w.t.) and one tanker (37,000 d.w.t.) for a t c t a i tonnage of 125,5000 d.w.t. ,A more detailed breakdown of the Canadian f l e e t i s contained i n Appendix 3. These s t a t i s t i c s give the impression that Canada has l i t t l e , i f any, control over her international seaborne trade, fortunately, the s i t u a t i o n i s not as ominous as the numbers might suggest. Canadians are involved in international shipping in many ways. For example, there are many Canadian shipping companies operating "off-shore" as we s h a l l see i n the ensuing sections. I i SHIPPING OPERATIONS IN CANADA Canadian shipping operations can be c l a s s i f i e d as being either domestic, transfeorder, or deep-sea., Each type of operation i s unique in the type of commodities c a r r i e d , the markets serviced, or the design of vessel used. These three types of operation are examined below 7 JU Domestic Shipping Domestic cargoes are those that are transported between Canadian ports. Last year these cargoes t o t a l l e d 120 m i l l i o n tons,; with ninety-five percent of t h i s t o t a l being c a r r i e d by Canadian-flag ships. The p r i n c i p a l cargoes ca r r i e d were fu e l o i l , legs, gasoline, iron ere, other ores, and grains.,ln f a c t , these commodities l i s t e d accounted for eighty-six percent of 29 t o t a l domestic waterborne tonnage. The f i v e major domestic shipping regions are; the East Coast, the St. Lawrence-Great lakes, the West Ccast, i n t e r c o a s t a l and A r c t i c . . By f a r the most important of these areas i s the St. Lawrence-Great Lakes region which accounts for f i f t y - f i v e percent of the t o t a l domestic tonnage moved. The major commodity routes are; grain from Thunderbay to the St.. Lawrence ports, iron ore from the St. Lawrence ports to the Lakes, and petroleum products from the Lakes and Quebec ports to l o c a l destination.* Host of these cargoes are carried i n specialized b u l k - c a r r i e r s , and small coastal tankers which are generally r e s t r i c t e d to inland operations. However, vessels are now being designed that have both inland and deep-sea c a p a b i l i t i e s . The major operators involved in Great Lakes shipping include Canada Steamship Lines, Upper Lake Shipping, Algoma Central, the H a l l Corporation and Eiserer Transportation (see appendix 4) . . The next i c s t important domestic shipping region i s the East Coast. The cargoes carried consist mainly of f u e l products, l o c a l pulpwcod shipments, and general cargo. The East Coast f l e e t consists of a variety of vessels; small general cargo vessels,, tugs and barges, specialized r o l l - o n / r o l l - o f f vessels and isediuto-sized tankers. P r i n c i p a l ownership of the East Coast operations i s by the Irving Group, Chimo Shipping, Clarke Transport, Imperial O i l , and Branch Lines. The West Coast f l e e t consists mainly of vessels that service small coastal communities, and those that transport resources to r e f i n i n g destinations. , The major commodities carried are logs and pulpwood, sand and gravel, f u e l o i l , lumber 3 0 and coal. Of the t h i r t y - s i x vessels operating on the West Coast, twenty-eight are f e r r i e s , three are general cargo, two are dry-hulk c a r r i e r s , two are tankers and one i s a passenger vessel. The prominent operators i n t h i s region are; Hivtow S t r a i t s , Seabcrd, and Seaspan International. In addition to these t h i r t y -six self-propelled vessels there are 935 non se l f - p r o p e l l e d vessels, consisting mainly of barges and tugs., Intercoastal shipping i s rather i n s i g n i f i c a n t in terms of tonnage. The few shipments that are made are generally from the P a c i f i c to A t l a n t i c Coast and consist of mainly c o a l or petroleum cargoes. Currently, the t o t a l amount of cargo being carried i n the A r c t i c i s small, amounting to 1.5 m i l l i o n tons i n 1976., These cargo shipments consisted of grain shipments from C h u r c h i l l , mineral extraction movements from the Eastern A r c t i c , resupply operations for northern communities and t r a f f i c along the HacKenzie Eiver. Canadian-flag ships carry most of the resupply and HacKenzie Biver t r a f f i c , while foreign-flag vessels dominate the shipments of grain and minerals. Although cargo carried to and from the Ar c t i c regions i s s t i l l rather i n s i g n i f i c a n t in terms of tonnage the region i s , nevertheless, important to Canada for several reasons, . f i r s t , A r c t i c shipping helps to establish and protect Canadian sovereignty i n the north. Second, the area contains huge untapped deposits of o i l , gas and valuable minerals. < Third, there have been recent discussions regarding the usage of the Northvest Passage as an international shipping route. , These factors tend to suggest that A r c t i c shipping w i l l take on an 3 1 increasingly important role to Canada, both i n terms of commercial operations and national sovereignty. , The government, perhaps r e a l i z i n g the future importance of Arctic shipping, has recently become d i r e c t l y involved in Arctic shipping operations. I t i s a f i f t y - o n e percent owner i n Canarctic Shipping Company Ltd. /which owns and operates the M.V. A r c t i c , the world's f i r s t ice-breaking bulk-carrier. ,  J U International: Transborder In 1S78 shipments between Canadian and U.S.. ports amounted to 7 2.6 million tonnes 9 , two-thirds of which was carried by Canadia-flag ships. , A closer examination of the composition of intercational-transborder shipments reveals that 48.3 m i l l i o n tonnes, or two-thirds of the t o t a l transborder tonnage was car r i e d on the Great Lakes. Transborder t r a f f i c between the St. Lawrence-flaritimes to 0. S. . At l a n t i c and Gulf ports accounted for a further twenty-two percent of the the t o t a l . The balance of transborder t r a f f i c , eleven percent, occurred between B r i t i s h Columbia and United States' ports. The major transborder shipments on the Great Lakes were grain and iron ore. Canadian-flag vessels carried an astounding 84.3 percent of the t o t a l transborder Great Lakes tonnage. ,0n the Atlantic coast, shipments consisted primarily of mineral, petroleum and forest products, most of which were ca r r i e d by foreign vessels. F i n a l l y , on the P a c i f i c coast Canadian ships carried approximately two-thirds of the transborder tonnage which consisted cf mainly lumber and coal shipments., 32 C. Canadian Eeep-sea Shipping - Hon U...S. , In 1977, Canada's deep-sea trade was valued at $25 b i l l i o n ; $12,7 in extorts (non U.S.) and $12.3 i n imports ( a l l modes)., Canada's most important trading partners, i n terms of cargo value, were. Western Europe {U0%), Asia {27%), South America (11?), and the Middle East \8%). Figure 3.1 presents a breakdown of the major commodities loaded and unloaded at Canadian ports in 1976. As can be seen, the most important commodities loaded i n Canada i n terms of tonnage were, i r c n ore (39.7%), wheat (10.1?), coal (8.5%), and lumber (3.79?) . , For commodities unloaded the corresponding percentages were crude o i l 30 percent, coal 25 percent, i r o n ore 6.9 percent, and limestone 5.2 percent. The most recent figures for 1979 show that grain shipment represented about sixteen percent of overseas exports and were valued at $2.8 b i l l i o n . 1 0 Most grain was sold on an f.o.b. b a s i s . 1 1 Lumber exports products were valued at $1.1 b i l l i o n in 1979 and were sold mainly on c . i . f . terms (cost, insurance and f r e i g h t ) . 1 2 Coal exports for 1979 were valued at $731 million and were sold primarily on an f.o.b. basis. The nature of Canadian deep-sea trade patterns r e s u l t s i n an imbalance of export/import shipping operations. For example, most Canadian dry-bulk exports are destined f o r Japan and the United Kingdom, however, most of our dry-bulk imports originate from the Carribean area. This makes i t d i f f i c u l t to procure backhaul cargoes, and many ships must make the return voyage home in b a l l a s t . 1 3 In the l i q u i d bulk trade, most Canadian imports originate in the Middle East and South America, while 33 UJ H D-O (0 0> Q D 3 C/> UJ H i a o o o 2 UJ H Qu O H (9 o 0) a. D UJ Q < 3 Z ID (/) UJ E Q o o o .2 o o (£> t o CO si J p j j ina/ ite E x 3. (0 < 0 Q u a. C0 (A O © IH™ H e C o o ( 0 <o W 6) (0 0) * § . E E X3 O s ° 75 ^ P o (/) (/) c e h- H C C O O CO "<? t\i oj ( 0 10 (A & (ft 3* c i '•6 E S o 2 o = c E & •is a Source: A Shipping P o l i c y for .Canada. Transport Canada, TP-1676 Minister of Supply S Services Canada, 1979, p.5. 34 < anadian l i q u i d exports to these areas are very s m a l l . , Neo-bulk p r o d u c t s 1 * ( f o r e s t products, i r o n ore, asbestos, and aluminum) are exported from Canada te major markets i n Western Europe and the United States while Canadian neo-bulk imports come mainly from Japan and Western Europe. Unfortunately, i t i s a l s o d i f f i c u l t to secure backhaul cargo, even on these r o u t e s , since each d i f f e r e n t commodity transported r e q u i r e s s p e c i a l i z e d eguipment and ships. C o n t a i n e r i zed cargo i s p r i m a r i l y r e s t r i c t e d to East coast operations and enjoys a r e l a t i v e l y balanced trade flow. However, imbalances s t i l l e x i s t on some routes such as found on the Canada-Britain container route, on t h i s p a r t i c u l a r r o u t e , Only 11 percent of the tonnage moved from the A t l a n t i c Eegion to B r i t a i n was c o n t a i n e r i z e d . On the other hand, more than 90% of the tonnage unloaded i n the region from ships coming from B r i t a i n was c o n t a i n e r i z e d . V 1 5 The nature cf Canadian ocean-trade routes prompted the f o l l o w i n g c o n c l u s i o n i n Jk Shipping P o l i c y f o r Canada; In summary, Canadian deep-sea trade i s c h a r a c t e r i z e d by imbalances i n the d i r e c t i o n and nature of cargo flows as w e l l as a d i f f i c u l t y i n securing compatible and economical backhaul c a r g o e s . 1 6 Canadian-flag p a r t i c i p a t i o n i n the movement of non-U.S. deep-sea trade i s n e g l i g i b l e , t o t a l l i n g only 200,000 tons or two-tenths cf one percent of t o t a l tonnage c a r r i e d . A large p r o p o r t i o n of Canadian ocean-going trade i s c a r r i e d i n vessels r e g i s t e r e d i n the s o - c a l l e d f l a g of convenience c o u n t r i e s . I n f a c t , over one-half of the petroleum products imported i n t o Canada are c a r r i e d i n flag-of-convenience vessels. The major flag-cf-convenience vessels i n v o l v e d i n Canadian trade are from L i b e r i a , Panama, and Singapore. Japanese v e s s e l s are a l s o a c t i v e 35 i n Canadian waters and account f o r almost fourteeen percent of Canadian ncn-U.S. seaborne export tonnage. The c o u n t r i e s of Western Europe (West Germany, Belgium, and France) and Great B r i t a i n also c a r r y s i g n i f i c a n t Canadian i n t e r n a t i o n a l tonnage. In 1977, l i n e r t r a f f i c accounted f o r only e i g h t percent of t c t a l Canadian deep-sea cargo tonnage. , However, the value of t h i s cargo c a r r i e d surpassed t h a t of tramp v e s s e l s which accounted f o r e i g h t y - s i x percent of the deep-sea Canadian tonnage 1 7 Most cf the l i n e r t r a f f i c i s c a r r i e d by the f i f t y conferences which operate i n t o and out of Canada. ,„ These conferences c a r r i e d general cargo valued at f o r t y percent of the value of Canadian deep-sea e x p o r t s . l f i Recent Canadian l e g i s l a t i o n has exempted these l i n e r conferences from the Combines I n v e s t i g a t i o n act and allows them to regul a t e r a t e s and membership. This same l e g i s l a t i o n a l s o p r o h i b i t s conferences from undercutting competition outside the conference and forces them to meet and discuss r a t e s with the Canadian Shipping C o u n c i l . J x . - £ 1 M S I 1 S SHIPPING INTERESTS There are many groups that are involved i n Canadian s h i p p i n g , and a study of the i n d u s t r y would not be complete without mention c f these groups, t h e i r o b j e c t i v e s and t h e i r concerns. The o r g a n i z a t i o n s examined can be divided i n t o f i v e general groups; shipowners and operators, s h i p p e r s , government agencies, labour unions, and s h i p b u i l d e r s . JU Shipowners and Operators 36 Ihere i s a large number of Canadian-based shipowners who are operating vessels under foreign-flag r e g i s t r y . Interviews with shippers, conducted by the author, revealed that foreign re g i s t r y may be a t t r a c t i v e for several reasons; avoidance and deferral of taxes, cheaper labour, a t t r a c t i v e loan or credit arrangements, or to get around r e s t r i c t i v e flag discrimination practices. I f the federal government hopes to coax these foreign-flags back to Canadian r e g i s t r y then i t must be prepared tc introduce incentives that are comparable to those offered i n these foreign countries. A recent a r t i c l e by K.C. G r i f f i n , 1 9 Marketing Director of Overseas Trade 6 Petrochemicals for Canadian P a c i f i c Ltd. estimates that the Canadian-owned seagoing merchant f l e e t , as of the end of 197.9, consisted of 185 vessels. ,0f t h i s t o t a l , 107 of these vessels were registered offshore (in ether countries) while only 78 were registered i n Canada. The t o t a l size of the Canadian-owned deep-sea f l e e t was 6.3 m i l l i o n d.w.t. which would today put Canada into fourteenth place in terms of national tonnage. The most recent figures available (March 30, 1980) indicate that the largest percentage of the f l e e t was registered under the E r i t i s h f l a g (including Bermuda). In a l l , sixty-one vessels were under E r i t i s h r e g i s t r y which constituted a l i t t l e over one-half the f l e e t ' s t c t a l registered tennage., The next most favoured f l a g was the l i b e r i a n flag which was flown by t h i r t y ships accounting for 26. 1 percent of the t o t a l tonnage. Canadian-registered vessels were t h i r d most common, and, although numbering seventy-seven ships, accounted f o r only 13.2 37 percent of the tonnage- Other tonnage was registered i n Singapore (3.5% cf t o t a l tonnage), Greece ( 2 , 6 % ) , and New Zealand (1.3$) . Data for 1978 reveals that two-thirds of the Canadian-owned tonnage was cf Japanese construction. Canadian-built ships were next most popular however, they accounted for only ten percent cf the t o t a l tonnage. Canada's largest shipowning company as of December 31, 1979 was Canadian P a c i f i c (Bermuda) l t d . which owned t h i r t y - f i v e ships, a l l of which were under B r i t i s h r e g i s t r y . The Canadian P a c i f i c f l e e t accounted for one-third of the t o t a l Canadian f l e e t by tonnage. The second largest ship owner was Papachristidis of Montreal which owned twenty-four percent of the t o t a l Canadian tonnage, or twenty-one ships. .Again, as was the case with Canadian P a c i f i c , not a single one of these ships was cf Canadian re g i s t r y . Cast Shipping Services Canada Ltd. was the third largest owner i n Canada 12.6 percent of the tonnage and fourth was Federal Navigation & Commerce with 6.5 percent of the tonnage. Other companies owning at l e a s t 2 percent of the t o t a l tonnage were Upper Lakes Shipping, Kent Lines, Jason Steamship Co., Eeyship Canada Ltd., and Canada Steamship Lines., The major concern of the ship operators that were interviewed was the desire to be put on "equal footing" with foreign operators. They argued that other countries had much more attractive shipping incentives than Canada had and, as a r e s u l t , Canadian operators were put at a disadvantage.,&11 the operators interviewed f e l t that Canadian operators could be competive with foreign companies i f they were given s i m i l a r 38 incentives. The major complaints of t h i s group were the custom duties on imported ships, lack of a government loan program, high taxes, low c a p i t a l cost allowance rates, labour problems, and r e s t r i c t i v e l e g i s l a t i o n regarding leasing, and foreign charter arrangements. This group, generally supported the idea of a Canadian merchant marine and suggested measures to encourage i t s development. 2 0 In Canada, there are also several shipowner associations. These associations f u l f i l l a variety of r e s p o n s i b i l i t i e s including the promotion of the general welfare of the marine transport industry; the formulation of p o l i c i e s , l e g i s l a t i o n and regulations b e n e f i c i a l to the marine transport industry; the c o l l e c t i o n and dissemination of s t a t i s t i c a l information, the implementation cf training programs, and the promotion of safety i n operations. 2 1 The major shipowner associations are the Dominion Marine association (representing the Great Lakes shippers), the Council of Marine C a r r i e r s (representing mainly tow and barge operators on the P a c i f i c coast), the St.Lawrence Shipowner association (consisting of thirty-one member companies and f i f t y - e i g h t ships) and the Newfoundland Shipowners association (twenty members and thirty-one ships). J . Shippers Shippers are the actual users of shipping services and as such they are primarily concerned with getting t h e i r goods to market as cheaply and as e f f i c i e n t l y as possible. In addition to the numerous i n d i v i d u a l users of shipping services there are also several important user associations that arrange shipping 39 services and negotiate rates for their members. A few examples of such associations are the Council of Forest Industries (representing the lumber and forest suppliers in B r i t i s h Columbia), the Canadian Exporters Association, the Canadian Hanufacturers Association and the A t l a n t i c "Transport Users Association. In Canada, there i s also a group known as the Canadian Shipper's Council which consists of thirteen trading groups and associations..Listed among the membership are the Canadian Exporters Association, the Canadian Hanufacturers Association and various associations representing lumbermen, packers, pulp and paper producers, h o r t i c u l t u r i s t s , asbestos shippers, and makers of chemical and forest products. 2 2 The key concern of the shipper associations i s that, «... Canadian manufacturers must have available an e f f i c i e n t marine transportation system capable of both delivering t h e i r products to offshore markets and moving to Canada materials e s s e n t i a l to support Manufacturing processes. These functions must be performed at the lowest possible p r i c e s . 2 3 Shippers were generally opposed to the establishment of a Canadian deep-sea f l e e t claiming that the current system of reliance on foreign-flag ships i s the most e f f i c i e n t system. Shippers oppose government subsidies to ship owners because they fear that such subsidies w i l l i n time lead to cargo a l l o c a t i o n measures which would res u l t in higher transportation costs. Cjt Government Bodies The shipping major government department associated with Canadian i s Transport Canada, in p a r t i c u l a r the Harine Branch. , 40 This body i s responsible for administering the Earine Transportation Program, the objective of which i s ; -to foster the optimal development of marine transportation consistent with national economic and s o c i a l goals, through the provision of marine f a c i l i t i e s and services on a cost-recoverable basis wherever p r a c t i c a l , 2 4 Also within the department are the programs for the A t l a n t i c Pilotage Authority, the Great Lakes Pilotage Authority Ltd., the National Harbours Board, the St.Lawrence Seaway Authority and the Canadian Transport Commission (CTC). , The administrative work of the CTC i s organized under f i v e committees, one cf these being the Water Transport Committee which administers a section of the Transport Act of 193 8, This section gives the Water Transport Committee j u r i s d i c t i o n over passenger t r a f f i c on the Great Lakes and MacKenzie l i v e r , package freight on the Great Lakes, and both package f r e i g h t and goods in bulk cn the MacKenzie l i v e r . The Water Transport Commission i s also i n charge of the l i c e n s i n g of domestic vessels i n the above areas and f o r l i c e n s i n g foreign vessels wishing to engage i n the Canadian coastal trade. Under section 22 of the Act the Commission ; is reguired to inquire into and recommend to the Rinister from time to time such economic p o l i c i e s and measures as i t considers necessary and desirable rel a t i n g to the operation of the Canadian merchant marine commensurate with Canadian maritime needs 2 5 Another department with an i n t e r e s t in Canadian shipping matters i s the Department of Industry Trade and Commerce (ITSC) which administers the shipbuilding construction subsidy program ^discussed i n greater d e t a i l i n chapter VI) . The Department of Public Works i s also involved to a certain degree with shipping u 1 through i t s Marine program which i s concerned with providing and maintaining marir<? f a c i l i t i e s as required by federal programs. F i n a l l y , the Department of the Environment i s also involved i n shippinq by way c£ i t s construction subsidy program for f i s h i n g vesseIs. a very important government department involved in the Canadian deep-sea f l e e t issue i s the Department of Finance. This powerful gcverraent department controls the strings cf the public purse and a l l budgets and a l l o c a t i o n s must receive the approval of th i s department . Thus i f Transport Canada were to decide that Carada needs a program to encourage the development of a deep-sea f l e e t then such a program would require the Department cf Finance's support. Judging from past behaviour i t seems that Finance i s generally opposed to any measures that might decrease i t s tax revenue base. EJI Onion Groups S t a t i s t i c s Canada data for the year 1977 shows that there were 19,285 people employed as crew members aboard v e s s e l s . 2 * Best cf these held memberships in one of the following three unions; the Seafarers International Union (SIU), the Canadian Brotherhood cf Bailway Transport S General Workers (CBRTGS) or the Merchant Service Guild. The f i r s t two of these unions represent seamen cn board vessels while the l a t t e r represents ship o f f i c e r s and engineers. The SIU dominates the labour a c t i v i t y i n the Great Lakes region and has ever 4000 members (6100 during peak season). The CEET operates mainly on the inland waters and the B r i t i s h 42 Columbia Coast, c l a i m i n g approximately 4500 members. 2 7 The three unions g e n e r a l l y support the concept of a Canadian deep-sea f l e e t , however, they f e e l t h a t the r e g i s t r y o f s h i p s i n Canada should be l i n k e d t o a Canadian crew requirement. The l e v e l c f Canadian seamen's wages i n r e l a t i o n t o those cf other c o u n t r i e s i s a h o t l y debated g u e s t i o n . I t appears that Canadian seamen's wages are higher than those i n the A s i a t i c c o u n t r i e s ( i . e . , Hong Kong, P h i l i p i n e s , China) and about on par with those cf Northern Europe. One g e n e r a l manager of a Vanccover-based s h i p p i n g company put i t t h i s way; "Canadian wage r a t e s are not something you cannot l i v e with but, you must s e l e c t your trades c a r e f u l l y . " C o n s i d e r a b l e care must a l s o be taken when comparing the c o s t d i f f e r e n c e s between the crews of v a r i o u s c o u n t r i e s s i n c e p r o d u c t i v i t y , m o t i v a t i o n , and r e l i a b i l i t y may vary from n a t i o n a l i t y to n a t i o n a l i t y . , 1. S h i p b u i l d e r s The s h i p b u i l d i n g i n d u s t r y employs about 11,200 people and accounts f o r about one percent of the world's t o t a l p r o d u c t i o n 2 8 . T h i s percentage i s up from the 0.5 percent share recorded i n 1974. In 1979 , the Canadian s h i p b u i l d i n g production i n c r e a s e d by a healthy 17.4 p e r c e n t . 2 9 New c o n s t r u c t i o n s were valued at $398.2 m i l l i o n and i n c l u d e d i c e - b r e a k e r s , f e r r i e s , s e l f - l o a d i n g b u l k - c a r r i e r s , t a n k e r s , tugs, f i s h i n g v e s s e l s , and o f f s h o r e d r i l l i n g r i g s . B e p a i r s and c o n v e r s i o n work t o t a l l e d $181 m i l l i o n . Government c o n t r a c t s accounted f o r $11.6 m i l l i o n of t o t a l new c o n s t r u c t i o n s (approximately 3%) and $46.5 m i l l i o n cf t o t a l r e p a i r s and conve r s i o n s (or 26%), , 43 The cutlcck for Canadian shipyards i s encouraging with one notable exception; the twenty percent construction subsidy that Canadian shipyards had been enjoying was lowered to nine percent as of July 1, 1980. However, other than t h i s , Canadian shipyards can be optimistic for the following reasons; 1) prospects are good for increased federal defence orders, 2) the new and continuing demand f c r new f i s h i n g c r a f t , 3) offshore requirements f c r supply and d r i l l i n g vessels, and 4) projected vessel requirements for the Beaufort sea and the A r c t i c . , The major shipyards i n Canada and more than f i f t y marine-related companies are represented by the Canadian Shipbuilding and Ship Bepair Association (CSSBA). The o f f i c i a l position of the CSSBA on the issue cf a Canadian deep-sea f l e e t i s that i t should be encouraged and that measures should also be introduced to encourage Canadian shipowners to place orders with Canadian shipyards. As can be seen from the foregoing discussion the i n s i g n i f i c a n t size and tonnage of the Canadian registered deep-sea f l e e t are net accurate indications of Canada's involvement in deep-sea shipping. Supplementing the Canadian-registered f l e e t i s a sizable offshore f l e e t that i s owned and operated by Canadians. The Canadian presence i s further reinforced by the e f f o r t s cf Canadian shippers, unions, government bodies, and shipbuilders. Each of these groups has i t s own position on the Canadian deep-sea issue and, naturally, each group i s lobbying to protect i t s own s e l f - i n t e r e s t . 44 IV POSSIBLE GOVERNMENT ASSISTANCE MEASURES TO AID SHIPPING Governments, when investigating the appropriateness of pa r t i c u l a r assistance measures to aid shipping, must be aware of the international and Canadian shipping environment. This material was presented i n chapters II and I I I . But governments must be more than just aware of the inte r n a t i o n a l shipping environment. They must also have stated objectives and alternative measures that can be used to achieve these objectives. This chapter examines the alternative measures that could be used to establish, promote or protect a national deep-sea f l e e t . It also examines the economic effects that each assistance measure has on the behaviour of the i n d i v i d u a l firm and upon the o v e r a l l welfare of society. Ix MEASURES TO ASSIST NATIONAL DEEP-SEA FLEETS Assistance measures may be c l a s s i f i e d into three general groups, f i n a n c i a l assistance in the operating phase, f i n a n c i a l assistance in the c a p i t a l phase and nonfiscal assistance measures. The f i r s t two groups are considered " f i n a n c i a l " assistance because they are "forms of assistance rendered through the government's taxing and spending powers".1 The third group, n c n f i s c a l assistance measures, are provided by the government's power to regulate and do not involve any direct transfer of cash or c r e d i t . Using these three classes i t i s possible tc categorize the various assistance measures i n the following manner:2 1. Financial Assistance in the Operating Phase a) operating d i f f e r e n t i a l subsidy 45 0) special subsidies c) tax incentives d) government-provided f a c i l i t i e s 2 . Financial Assistance i n the Capital Phase a) loan guarantees b) dire c t loans c) construction subsidies d) Government Ownership 3. . Vonfiscal Assistance Measures a) cargo preference b) f l a g discrimination c) b i l a t e r a l agreements The following sections describe each of these three classes: A, Financial Assistance In The Operating Phase Most cf the measures included in t h i s section are intended to assist national f l a g operators by decreasing t h e i r daily running or voyage costs (explained i n chapter II) or by increasing t h e i r revenue. The f i r s t of these assistance measures i s the operating d i f f e r e n t i a l subsidy. , Direct payments, either grants or allowances are made to national operators. These payments are intended to of f s e t the difference between the high costs that national operators must pay for the factors of production (i.e. , ships, labour) and the lower costs confronting t h e i r foreign competitors . Such subsidies could be u t i l i z e d to o f f s e t higher domestic costs that might exi s t i n the following areas; 46 insurance, swages, r e p a i r s , maintenance, and subsistence of crew and o f f i c e r s . 3 The actual operating subsidy paid can be calculated in many di f f e r e n t ways and usually has conditions attached to i t that an operator must agree to before the subsidy i s granted (e.g., maintenance of a schedule of p a r t i c u l a r service level) . Special subsidies include p r e f e r e n t i a l treatment at ports such as lower port dues and harbour charges for national flag ships. Also included among special subsidies are easier licensing and documentation for domestic c a r r i e r s , lower duties,' p r i o r i t y in berth assignments, and lower docking fees. These measures reduce the operating costs of domestic operators and improves their a b i l i t y to compete against foreign-flag vessels. Perhaps the most common form of f i n a n c i a l assistance in the operating phase i s extended through the tax system . The government Eight encourage national ownership or r e g i s t r y by increasing depreciation allowances , by sanctioning the establishment of tax-deferred replacement reserves, or the government might e n t i r e l y exempt from tax, income earned i n international shipping. Other tax subsidy measures include s p e c i a l investment tax credits f o r the purchase of vessels or marine eguipment, the permitting of consolidated tax returns, and at t r a c t i v e rules governing leasing and chartering arrangements, a tax subsidy program w i l l only be e f f e c t i v e i n at t r a c t i n g ship owners and operators i f : i) there exists income against which these c r e d i t s can be charged; i i ) the program i s at least as favourable as those that exist in other countries . Gerald Jantscher, in his book Bread Upon the Haters describes tax subsidies in the following manner: "The program of tax subsidies functions as a loan program, in which the federal government forgoes c o l l e c t i n g taxes on a part of shipowners* earnings and grants the owners the use of these taxes on the condition that they invest t h e i r earnings i n new ships and eguipment."* The f i n a l category of operating phase assistance measures i s that cf goverment-provided f a c i l i t i e s without' compensatory user charges. This might include government investment i n marine research, pert f a c i l i t i e s and navigational aids or the providing of special services such as t r a f f i c control, dredging, and i c e -breaking. These goods and services are considered as subsidy measures since the shipping industry receives "a special advantage i n t e n t i o n a l l y provided by government."5 Sjt Financial Assistance In The C a p i t a l Phase Loan guarantees are one measure that the government may use to a s s i s t ship owners. A loan guarantee i s simply a promise by a p a r t i c u l a r l e v e l of government to the issuing f i n a n c i a l i n s t i t u t i o n that the goverment w i l l pay the unpaid portion of the loan i f the shipowner i s unable to meet his debt obligations. These government guarantees enable prospective shipowners to obtain c r e d i t more e a s i l y and at lower rates than would otherwise be possible. , Since shipping i s a c a p i t a l intensive industry, the advantage afforded by these government guarantees can be sizeable. Another very popular c a p i t a l phase assistance measure i s the direct government loan whereby cash or c r e d i t i s extended to shipowners to cover a portion of a ship's construction costs. 48 Usually the c r e d i t terms of these government loans are considerably mere at t r a c t i v e than those e x i s t i n g i n the open market. To q u a l i f y for these loans an investor must usually agree to f u l f i l l cer tain r e s p o n s i b i l i t i e s . A t h i r d mea sure found i n some countries, i s the constr uction subsid y. With the construction subsidy the govern ment pledges to pay the shipbuilder or the purch aser a specif ied percentage of the contracted or actual constr uction costs of a vessel. A di f f e r e n t i a l construction subsidy i s where the go vernment agree s to pay the cost difference betseen a ship b u i l t in domestic y ards and the price that would have bee n paid i f the ship had been constructed i n a foreign yard. Undoubtedly t h i s measure benefits shipbuilders; however, i t i s a contentious item as to whether shipowners also benefit from such a program. This is b r i e f l y examined later i n t h i s chapter. , F i n a l l y , the government can become a part owner in a shipping company by subscribing to c a p i t a l stock that i s issued by the firm. The intent of such assistance i s not necessarily to ensure the shipowner a reasonable return on h i s investment but may also be: 6 1. To ensure that there i s d i r e c t public representation in those cases where operations are c l a s s i f i e d as i n the national i n t e r e s t . 2. To protect substantial debt p a r t i c i p a t i o n by government i n the enterprise. 3. To o f f s e t any imperfections in the c a p i t a l market where, f c r example, risks of the venture might be weighted higher than by either the entrepreneur or the coverment. 4. To ensure that the merchant marine meets guidelines as to national ownership and control, where the only additional equity funds available (other than government) are from foreign c a p i t a l . , 4 9 C_. Hon f i s c a l assistance Measures Cargc preference refers to l e g i s l a t i o n , regulation or informal i n s t r u c t i o n aimed at ensuring that national-flag ships carry a percentage of sp e c i f i e d cargoes. Cargo preference laws are nest commonly applied to cargoes in which the government has property i n t e r e s t (e.g., m i l i t a r y cargoes) or that are being moved as a result of government intervention (e.g., foreign aid cargoes). The u n i l a t e r a l assignment of commercial cargoes to national-flag ships, through either formal or informal methods, i s another form cf cargo preference. A u n i l a t e r a l assignment i s when the government either l e g i s l a t e s or pressures shippers to use national-flag vessels when importing or exporting certain commodities. Flag discrimination i s a more general term and refer s to "a variety of p o l i c i e s , laws, regulations, or trading practices that some countries employ to favour their own nation f l e e t s . " 7 Defined in such a manner f l a g discrimination encompasses practices related to the apportionment of trade ( i . e . , b i l a t e r a l agreements), practices related to treatment i n ports (higher dues or port taxes), practices concerning trade financing (requirements tc use certain currencies, special exchange rates) and cabotage r e s t r i c t i o n s . ^ 2m , THE EFFECTS OF THJ VARIOUS MEASURES This secticn examines the economic e f f e c t s associated with construction subsidies, operating subsidies, and flag discrimination p r a c t i c e s . 9 Each i s examined f i r s t from a . s o c i a l welfare perspective and then from the perspective of the 50 i n d i v i d u a l firm* A. Economic Effects Of Construction Subsidies two d i s t i n c t groups may benefit from a construction subsidy, shipowners and shipbuilders, flow the benefits are eventually distributed among these two groups depends upon the e l a s t i c i t i e s cf the supply and demand for new ships. Shipowners w i l l experience a larger portion of the benefits i f the demand curve for new ships i s i n e l a s t i c or supply i s e l a s t i c . Conversely, shipbuilders benefit the most i n a s i t u a t i o n where the supply of new ships i s i n e l a s t i c or the demand e l a s t i c . , The benefits accruing to these two groups i s i l l u s t r a t e d i n Figures 4.1 to 4.6 below. The following analysis assumes that perfect competition exists i n the shipbuilding market, that the shipbuilding market experiences decreasing returns to scale,—a-n-tr tha-t -the e-o-n^st-r-ue-t-i-on—subs-idy—is—pa-id—to—shirp owners—rather-—t-ha-n t-e—s4rit*fe*M-de-r-s-. Upon the introduction of a construction subsidy the demand for new ships increases from DD to D *D * representing a ver-fii cal hK>ri-2-ofrt-a-l s h i f t i n the demand curve equivalent to the per vessel subsidy amount. , This i s shown in figure 4.1 below. Shipowners w i l l now be w i l l i n g to pay more for a domestically-b u i l t vessel, knowing that they w i l l be e l i g i b l e for a construction subsidy. Before the subsidy was introduced the equilibrium point was pq. After the introduction of the subsidy program both price and quantity increase, and a new equilibrium point i s established at p1q1. The guestion to be answered i s , "Have either the shipowners or the shipbuilders benefitted from 51 F i g u r e s 4.1 and 4 . 2 Fi<j. M - l : The E f fecf on Supply a n d ! Demand of a Construct ion Subsief) Price of n e w ship 0 « ql Guan+ i fy of n<e*/ 0 0 Ship constructions PWce oi hew %hip Conifrucfions t f ThS J/1 c r e a s e in Consumes-Surplus %&<5ul't'in<j from 3 Construction Subsidy If*crease in Qu*n+i4y of neon Shfp cons+ruU-ions 52 the construction subsidy, and i f so, to what extent"? To determine whether the shipowners are better off than before, one merely has to compare the consumer surplus that existed before the construction subsidy and the consumer surplus that exists afterwards. 1 0 This i s done i n Figure 4.2. ( The consumer surplus before the subsidy was equal to the triangle pBI, and the consumer surplus afterwards i s the area p l B ' l * . The difference in the two areas represents the change i n the consumer surplus. If the change i n consumer surplus i s positive then a net benefit has accrued to shipowners, i f negative a cost has been incurred. As can be seen from Figure 4.2, the introduction cf the construction subsidy has resulted i n a net benefit to shipowners, egual to the area plB'Fp3. The calculations to determine the benefits that accrue to shipbuilders from a construction subsidy are even easier and are shown in Figure 4.3. The net benefits accruing to t h i s group i s simply the increase in p r o f i t s , p r o f i t s being defined as revenues less costs. Before the subsidy shipowners*s revenues t o t a l l e d pg and t o t a l costs were represented by the area OMBq. Profit s were therefore egual to the area pBM. After the subsidy, revenue increases tc p1g1, costs to 0MB*g1, and p r o f i t s are now equal to the t r i a n g e l MB' pi.. As can be seen from Figure 4.3 p r o f i t s have increase by the amount pBB'pl. This area represents the net benefits that accrue to shipowners as a resu l t cf the introduction of the construction subsidy. , To calculate the net benefits to society one merely has to sum up the benefits accruing to shipowners and shipbuilders and subtract from that t o t a l the cost of the subsidy. This i s 53 F i g u r e s 4.3 a n d 4.4 T V i c e o f n e w s k i p Construct! ana F i ' ^ . 4 . 3 : The. Increase I'M Producer Surp lus ftcsul+in^ from a Construction Subsidy H I n c r e a s e i n t h e P r o d u c e r S u r p l u s Quantity °f n**o sWip cons r r u c t i cms P r i c e o$ new s h i p Constructions F i ^ 4 . 4 I Calculation, of tKe overall N e t benefits to Society fcesul+incj from a. C o n s t r u c t i o n Subsi c!y B e n e f i t s i c t r t i i K ^ + o S h i jjovJrvers. [IM] 8ene$i+3 atcruirvj to Shipb ui Mers, DeaJweiqWt Loss +o S o c i e t y Quantity °* n e M J SV\*p constructions 54 i l l u s t r a t e d in Figure 4.4. Net benefits accruing to shipowners were determined above and found to be egual to the area plB'Fp3 which i s egual tc the area pBCp2 in Figure 4.4. The net benefits to shipbuilders were represented by the area pBB*p1.,Total benefits to society are thus equal to the shaded area p1B*BCp2. The cost cf the construction subsidy program i s equal to the subsidy payment CS times the t o t a l number of ships constructed that qualify for the subsidy. The t o t a l cost of the program can thus be represented by the rectangle p1B*Cp2. As can be seen from the diagram the to t a l costs of the program outweigh the benefits by the amount B'BC This area i s sometimes known as the deadweight loss tc society, since society was better o f f before the introduction of the construction subsidy than i t i s now. ; The introduction of a construction subsidy need not always resu l t i n a deadweight loss to society, i t could under certain condition r e s u l t i n a net gain to society. Under what conditions might this be true? F i r s t , i t i s possible that private costs are not egual to s o c i a l costs,^ An wSw* case the introduction cf a construction subsidy may result in net benefits accruinq to society. The second situation where t h i s might also occur i s i f the shipbuilding industry was a natural monopoly industry, one faced with a diminishing c a p i t a l cost structure., As was mentioned previously, the portion of the benefits accruing to shipowners, and the portion accruing to shipbuilders depends on the e l a s t i c i t i e s of the supply and demand curves. This i s i l l u s t r a t e d i n Figures 4,5 and 4.6. In Figure 4.5, the demand curve i s drawn as being i n e l a s t i c , and as can be seen from that diagram, the portion of the subsidy's benefits 55 Figures 4 .5 and 4 .6 ^ / c c o f /!<?*»» Shift construction Subsidy . ZneUv+fc 0e*anc/ ~to $hr'pouJHers Bene ft+t accruing ro ship but rlci&n beadcvei^hi /oss to Society 5flip con5-fruc.fiofi$ fteu> ship Com+ruetiorrs * 1 o f * Coni+ncction Subsidy- T„e{a«,c Supply. 8e«e/W« 9ccruiy Benefits decru/n t o * h < r l > u i / c l e r f to Society Quantify of heco ship Cons+rtAt-f-ions 56 accruing to the shipowners i s greater than that accruing to the shipbuilders, In Figure 4,6, i t i s the supply curve that i s i n e l a s t i c , which re s u l t s i n benefits to shipbuilders being greater than benefits to shipowners. The policy implications are cl e a r , i f the supply of new ships i s i n e l a s t i c (perhaps representing a situ a t i o n where shipyards are working to f u l l capacity) a construction subsidy could be used to as s i s t shipbuilders. If supply i s e l a s t i c , such an assistance measure could be used to a s s i s t shipowners rather than shipbuilders. , How w i l l a construction subsidy affect the behaviour cf the i n d i v i d u a l firm? To answer t h i s guestion we assume that the ind i v i d u a l shipowner faces a cost structure s i m i l a r to that i l l u s t r a t e d in Figure 4.7 below . The v e r t i c a l axis represents the cost per voyage, while the horizontal axis the number of voyages that w i l l be made, ft private firm faced with such a cost function w i l l not provide services below a rate pi since at this rate price just equals the variable costs of making a journey. The point g1, known as the production threshold, i s the minimal amount of shipping service that w i l l be offered by the indi v i d u a l ship operator i n the short run. At shipping rates above p2 the firm w i l l begin to earn a p r o f i t (the point g2 i s thus referred to as the p r o f i t threshhold), How suppose a construction subsidy i s introduced, This has the e f f e c t of s h i f t i n g down the average t o t a l cost curve from AC to A C , since average costs include c a p i t a l costs. Neither the marginal or variable cost curves are affected by the introduction of the subsidy (see Figure 4,8). The new intersection points reveal that the production threshhold remains unchanged. Bates must Figure 4 . 7 Cost of individual voyage p i % - *•? .* Cos/ S+ruc.Ur-e o f Indioidu&l Ship Op<£ra~h Quaniity of 5 A/, J 5 8 Fi ^ .4.8'- Effez* of a Construd-fior* Cos+ o* p* Subsidy on Me of an Individual . me AC j «c' ^ Vc % j x Quantity of SKippiA^ Services s t i l l be above p1 i f the shipping firm i s to undertake the voyage. . However, the shipping company i s now able to earn a p r o f i t at lower rates than before (p* as opposed to p2) at a lower service l e v e l g*. The policy implications are that i f shipping rates are low, say below p i , 1 1 then a construction subsidy w i l l be i n e f f e c t i v e i n increasing the amount of shipping services that are offered. Instead some other subsidy form may be more e f f e c t i v e , ft construction subsidy w i l l not a f f e c t the amount of shipping services supplied by the i n d i v i d u a l operator at any given rate since the marginal cost curve has remained uncharged. 1 2 One caveat concerning construction subsidy policy should be mentioned. I t i s possible that the cost of a domestically b u i l t ship i s considerably more expensive than a similar ship b u i l t i n 59 foreign yards. Unless the subsidy i s large enough to compensate for this cost difference shipowners w i l l continue to purchase ships from abroad and no benefit w i l l accrue to either domestic shipbuilders or owners. MJL Economic Effects Of Operating Subsidies The analysis of the benefits res u l t i n g from an operating subsidy can be conducted following the same reasoning that was used before shen calculating the benefits of a construction subsidy.However, th i s time the benefits of the subsidy w i l l be divided between shippers and shipowners ( r e c a l l that with a construction subsidy the two benefitting groups were shipowners and shipbuilders). The e f f e c t of the new operating subsidy i s to s h i f t the supply curve from SS to S'S* as shown in Figure 4 . 9 . Ship operators are new w i l l i n g to offer the same quantity of services at lower prices than before since they can recoup any losses from the government through the operating subsidy. The benefit accruing to shipoperators i s egual to the area p2B*BP, representing the increase in p r o f i t s . The benefits accruing to shippers i s egual to the trapezoid pBCp1. ;&s was the case with the construction subsidy, a deadweight loss w i l l result (triangle B'BC) unless there e x i s t s a market i n e f f i c i e n c y , private costs are not equal to s o c i a l costs, or the industry i s a natural monopoly industry. The apportionment of the benefits between the two groups i s once again dependent upon the e l a s t i c i t i e s exhibited by the supply and demand curves. The effects of an operating subsidy upon an i n d i v i d u a l 60 Price of Ship/at Ay Services Fij. 4-9The Eff&c-ton. Supply D em aW of fin Operating Subsidy |Jll)Hi dznefite accruing •to Ship operators Banefits accruing to shippers t>e&dtuteif fit /oss to Soc/ery Quantify of S hi/of in f Services operator are somewhat different than those r e s u l t i n g from a construction subsidy. With an operating subsidy, the marginal cost curve i s lowered, hence so are the VC and &C curves as shown i n figure 4. 10. The shipping firm i s now w i l l i n g to provide services at a lower rate, but s t i l l at the same production threshhold q1. With the subsidy the firm can now earn a p r o f i t at lower f r i e g h t rates than before, but unlike the construction subsidy example , presented e a r l i e r , the p r o f i t threshhold remains unchanged. F i n a l l y , because the MC curve represents the i n d i v i d u a l firm's supply curve in competitive markets, mere shipping services than before w i l l be offered at any rate since the MC curve has been lowered, The implications are that i f shipping rates are low, perhaps due to depressed markets, an operating subsidy could be used to a s s i s t ship 61 Fty. 4.to: Effect of an Ofoe.r>aHnp> Substety on the C W Structure of An Inotfuictitkt $h//o P/aer-'afor ices operators i n the short run, at least u n t i l rates returned to breakeven le v e l s . C. Economic Effects Of Flag Discrimination The effects of f l a g discrimination upon otherwise competitive shipping markets i s f a i r l y straightforward. Flag discrimination eliminates seme cheaper sources of shipping services which r e s u l t s i n a decrease in supply, represented by a leftward s h i f t in the supply curve from SS to S«S* in Figure 4. 11. From a s o c i e t a l point of view the country i s worse o f f than before by the anscunt pOplBC due to the elimination of the cheaper foreign-flag operators. This type of analysis i s the 62 Price of Service.} S oti»( Cost of fiaj clis c rim in a Hon © Quantity of Shipping Serw'ces prime argument advanced in opposition of fl a g discrimination practices to encourage the establishment of a national . f l e e t . The costs of discriminatory practices are very real but they are not as obvious as other subsidy measures. The exclusion of low cost foreign operators w i l l eventually manifest i t s e l f in higher shipping costs, hence higher prices for consumers.. The choice of the correct shipping assistance measures requires an understanding cf the economic e f f e c t s that each measure w i l l have upon the behaviour of the i n d i v i d u a l firm, and upon the overall welfare of society. The selection of appropriate assistance measures i s also dependent upon an awareness cf the conditions prevailing i n the international shipping markets at the time. Certain measures, appropriate at 63 one particular time, may be t o t a l l y inappropriate at a l a t e r point in time. Because the international shipping environment i s in a constant state of change, i t i s important for government to monitor and re-evaluate their shipping assistance programs. 6 4 V. JORLD SHIPPING ASSISTANCE MEASUBES If the Canadian government hopes to introduce e f f e c t i v e assistance measures to encourage the development of a deep-sea f l e e t i t must f i r s t ; a) f a m i l i a r i z e i t s e l f with the i n t e r n a t i o n a l shipping environment b) i d e n t i f y alternative measures that could he used to achieve this objective and c) predict the impact that such measures would have upon the shipping industry and other sectors of the Canadian economy. • This chapter i s devoted to the f i r s t requirement, i t examines the varicus shipping assistance measures that e x i s t i n the major maritime nations, including L i b e r i a , Japan, Greece, the United Kingdom, Norway, Panama, the United States, France, I t a l y , and West Germany. On occasion reference i s also made to assistance measures that exist in countries with which Canada i s a major trading partner, such as B r a z i l , China, Belgium, Netherlands, Sweden and Mexico. V. FINANCIAL ASSISTANCE IN THE OPERATING PHASE To f a c i l i t a t e the discussion of f i n a n c i a l assistance measures in the operating phase, separate sections have been included for each of the following; operating subsidies, government-provided f a c i l i t i e s , s p e c i a l subsidies, and tax i n c e r t i v e s . Most of the information presented in t h i s chapter was drawn from the Maritime Administration's publication. Maritime Subsidies . Unless otherwise stated, a l l d o l l a r figures given are in U.S. d o l l a r s . JL Operating Subsidies 6 5 The country most involved in the administration of operating subsidies i s the United States. 1 Through the Merchant Marine Act of 1936, operating subsidies were o r i g i n a l l y extended to American shipping companies which provided regular service on e s s e n t i a l routes. The purpose of these subsidies was to offset the higher operating costs experienced by American operators, thus enabling them to compete against foreign-flag operators. The subsidy granted was based on "the difference between the f a i r and reasonable costs of Insurance, maintenance, repairs, wages of o f f i c e r s and crews, and subsistence of o f f i c e r s and crew and the estimated costs of these same items i f the vessel were operated under foreign r e g i s t r y . " 2 These subsidies are only paid to ships owned, registered and b u i l t i n the -U.S.., that are operating on "essential trade routes".} Prior to 1970, these subsidies were granted only to l i n e r operators, but the 1970 Amendments to the Act extended the p r i v i l e g e to include bulk-c a r r i e r vessels operating "essential services". Since 1970, owners who lease rather than own t h e i r boats may also be e l i g i b l e for operating subsidies. Prior to 1970, the size of the subsidy was based on the difference between the estimated costs of a foreign operator and the actual costs of the American operator. This method of ca l c u l a t i o n was cumbersome and i n e f f i c i e n t since an American operator's i n e f f i c i e n c y cculd be passed on to the government. In response to t h i s shortcoming, the Maritime Administration (MAPAt) introduced a new formula for calc u l a t i n g operating subsidies. The new formula, introduced i n 1971, pays U.S. operators 66 the difference between t h e i r "subsidizable costs" and the costs of their foreign competitors. The concept of "subsidizable costs i s based on an indexing formula and i s applied s p e c i f i c a l l y to wage costs (the most important component of the operating difference). Each year the index, based on wage increases from several ether i n d u s t r i e s , i s multiplied by the previous year's "subsidizable costs" to get the current year's "subsidizable costs." With the new system, ship operators can no longer acguiesce to labour's demands and s t i l l be reimbursed by the government. Under the new system, i f an operator i s successful in keeping down his labour costs, then he may keep the difference between his actual and "subsidizable" costs., I f actual wage rates increase by more than the a l l o t t e d percentage, then the cwner may only claim "subsidizable" costs. In e f f e c t , the operator "foots the b i l l " for the excess amount. In return for these operating subsidies owners commit themselves to certain reguirements. Subsidized vessels that become obsolete must be replaced by new ships, the number and design specified i n the agreement between in d i v i d u a l owners and the government.* In 1977, the U.S. .government distributed $344 million i n operating susidies to American ship operators. 5 An operating subsidy program also exists i n France where the government budgeted $222 mil l i o n to be paid out to merchant f l e e t operators over the next f i v e years.* These operating subsidies are granted to semi-public firms engaged in "services taken In the national i n t e r e s t . " I f a company earns s u f f i c i e n t l y high p r o f i t s on i t s "regular" trade routes, 7 then i t may not be e l i g i b l e for subsidies on i t s " n a t i o n a l - i n t e r e s t " routes even i f 67 an actual loss i s experienced. It i s a popular practice in many countries to offer operating subsidies to companies that undertake transportation services in the "national i n t e r e s t " that would not otherwise be commercially viable.,In the United Kingdom, shipping services to some of the cutlying islands are subsidized. In Norway, the servicing of outlying d i s t r i c t s with "adequate" transport services are granted f i n a n c i a l assistance. The I t a l i a n government grants operating subsidies to companies o f f e r i n g "new services or the maintenance of old ones which are economic or s p e c i f i c a l l y required by the national economy."8 In Peru, E r a z i l , the DSSB anc the Eastern Bloc countries, a l l shipping losses incurred by the national l i n e s are covered by the government. S i m i l a r i l y , i n Spain, the federal government pays operating subsidies to two shipping companies engaged i n special services in the national i n t e r e s t , a l l losses on coastal shipping are paid by the government since such operations are are c l a s s i f i e d as being a "public u t i l i t y . " 9 J A Government-Provided F a c i l i t i e s In many of the countries reviewed 1 0 the federal government is actively involved i n port expansion and development (especially i n Singapore and the South American countries). However, the most common example of government provided services was that of research funding. , In Japan, there are two ship research departments that receive government funding; the Ship Research I n s t i t u t e and the Nuclear Ship Development agency. , In B r i t a i n , the government 68 supports the National Physical laboratory which does some shipping research, and also apportions funds to selected R & D projects and the E r i t i s h Ship Researach Association. , Eoth Finland and Norway provide p a r t i a l funding for shipping-related research. In Finland, the government may cover 50 percent cf p a r t i c u l a r research projects although only about 2 percent of such grants are used for shipping-related projects. In Norway, most of the shipping research i s done by private firms but such projects may q u a l i f y for state assistance. In India, a l l insurance, including marine insurance, has been nationalized and ship operators are benefitting from subsidized insurance premiums. In the United States, U.S. operators may purchase special types of insurance ( i . e . , war insurance) from the government that might otherwise be unavailable. Many countries provide schools and i n s t i t u t i o n s for t r a i n i n g seamen and o f f i c e r s . For example, France supports a program of retraining shipyard employees who move to other i n d u s t r i e s . F i n a l l y , in both B r i t a i n and France there are programs designed to protect shipbuilders from "exceptional and unpredictable" escalations i n b u i l i n g costs. C._ Special Subsidies The most prevalent form of s p e c i a l subsidies i s the exemption of materials to be used in shipbuilding, from custom duties and taxes. In Spain and Canada, this exemption i s only granted to imported materials that are used for ships that are 69 to b€ exported. However, in most countries (United Kingdom, I t a l y , West Germany, China, B r a z i l , France, Belgium and the Netherlands) this duty exemption on construction material i s available to both domestic and exported ships. Quite often this duty exemption i s extended to materials used i n the a l t e r a t i o n , cleaning, repair, and reconditioning of ships. In Norway, a custom rebate of 6 percent on new imported ships i s granted to help offset the generally higher Norwegian custom taxes. In Spain, a rebate of 7 percent i s given on materials imported and used in the construction of domestic ships. The following countries also exempt imported ships, materials and supplies from a value-added-tax; Belgium, Denmark, France, West Germany, Netherlands, Sweden, Italy and the United Kingdom. . Peru i s a good example cf a country where special subsidies, in the form of discriminatory practices, e x i s t . In that country, i t costs Peruvian-flag vessels $0.05 per ton for dry-docking p r i v i l e g e s , while foreign-flag vessels pay $0.15 a ten for the same services. S i m i l a r l y , Peruvian operators pay only half of the regular prescribed rate for ship clearance services. Peruvian-flag vessels pay 40-50 percent less than foreign f l a g operators for the following items; mooring/ unmooring, wharf demurrage, docking for repairs, and f u e l i n g . Shipowners i n Panama are not required to withhold tax from crew members' s a l a r i e s provided they are not engaged i n coastal trading. Special subsidies abound in Greece which has recently introduced l e g i s l a t i o n intended to coax Greek shipping interests 7 0 tack to Greece. In that country, banks can extend short-term loans to shipping companies for p a r t i c u l a r reasons; such as f o r covering r e v i c t u a l l i n g , for compensating discharged seamen or making advance payments tc the family of crew members. Banks are also authorized to discount, without a supporting voucher, 90-day promissory notes of shipping companies operating vessels under the Greek f l a g . Special benefits are also extended to Greek seamen. Greek seamen and workers abroad are permitted to open foreign currency deposits with Greek commerical banks at rates that are substantially above domestic market rates ( i . e . , 6.25 percent vs, ,5 percent f o r savings accounts). Also persons of Greek descent, established abroad or employed abroad (including seamen serving onboard sea vessels) are exempt from transfer taxes (11-13 percent) i f they purchase r e a l property i n Greece through the importation of foreign exchange. p. Tax Subsidies Taxes are a prominent factor in determining where shipping companies locate and conduct their business. Therefore, i t i s not surprising to find that many countries offer very a t t r a c t i v e tax subsidies t c shipping companies that choose to locate i n t h e i r countries. One way of a t t r a c t i n g shipowners to a country i s by offering generous depreciation allowances. In some countries different depreciation rates are allowed depending on the type of ship involved. In China, depreciation allowances are 12 percent t c 15 percent f o r tankers and 15 to 20 percent f o r cargo 71 c a r r i e r s 1 1 while in West Germany the rates are based on an active l i f e of 14 years for cargo vessels and 12 years for other t y p e s . 1 2 In the United Kingdon, up to a 100 percent deduction i n the f i r s t year may be made on newly constructed vessels. The rate on second-hand ships i s 25 percent straight l i n e . 1 3 The calculation of depreciation allowances for tax purposes may be based on a s t r a i g h t - l i n e , declining balance, or formula basis. In I t a l y a straight l i n e rate of 10 percent i s permitted. In Eelgium 20 percent of a vessel's c a p i t a l cost may be written off during the f i r s t year cf a vessel's l i f e , 15 percent i n each of the next 2 years, and then 10 percent each year u n t i l the ship i s f u l l y depreciated. 1* In France, half the vessel's cost may te charged against income during the f i r s t three years of a vessel's l i f e , one guarter over the next two years and the remaining guarter over the next three y e a r s . 1 5 Swedish ship operators have a choice of depreciation allowances, a 30 percent declining balance or a five-year straight l i f e . 1 6 In Norway, the ordinary depreciation allowances are: 6-8 percent on passenger, tanker, ore c a r r i e r s and other special trade ships and 5-7 percent on dry cargo ships. However, Norwegian operators may choose between two alternative accelerated depreciation methods. 1 7 In Germany, e i t h e r the declining cr s t r a i g h t - l i n e method may be used, but i f the declining balance method i s used the rate applicable i s limited to twice that of the s t r a i g h t - l i n e method. 1 8 advance depreciation, allowing shipowners to depreciate vessels before they are actually received, i s permitted i n Denmark, Sweden, and the Netherlands. In Denmark, 30 percent of 72 a vessel's contracted price may be written-off between the signing of the contract and the actual delivery date. * 9 Similar conditions e x i s t i n , Sweden but only on ships delivered during the period 1966-60 . 2 ° m the Netherlands, one-third of a ship's investment cost can be depreciated i n advance of regular allowances. 2 1 Another form of depreciation allowance assistance i s accelerated or s p e c i a l depreciation methods. For example, i n Best Germany, owners may deduct allowances of 40 percent spread over the f i r s t f i v e years of a vessel's l i f e i n addition to the regular allowances permitted. .This p r i v i l e g e is only for German owners who are using s t r a i g h t - l i n e depreciation and who agree to keep the ship f c r at least eight years. The special depreciation cannot be used to generate accounting losses i n excess of 15 percent cf the vessels cost and can only be used i f at least 30 percent of the construction costs were financed by the owner's c a p i t a l fund. 2 2 In I t a l y , 40 percent of a ship's construction cost may be spread over the f i r s t three years from the date of the contract but not more than 15 percent may be claimed in any one y e a r . 2 3 The Japanese government grants special depreciation deductions (on ships over 3,000 g.r.t.) egual to 20 percent of costs in the f i r s t year, e f f e c t i v e u n t i l March, 1981.?* In Norway, owners may choose between two special depreciation alternatives, 15 percent of cost allocated over four years not to exceed 1 1/2 times ordinary depreciation f o r the period or 25 percent of cost over four years, the amount not to exceed 50 percent of "otherwise taxable income." 2 S In the United States, a reserve fund program known as the 73 Ca p i t a l Construction Fund exists (CCF). The rules governing the CCF allow the following deposits to be made; 1) earnings realized from the operation of agreement vessels, 2) net proceeds from the sale or loss of a vessel 3) earnings from investment of amounts in the fund.,The fund i s divided into three separate accounts; the ordinary account (consisting of earnings from the operation of ships), the c a p i t a l gain account (gains from sale cf ships) and the c a p i t a l account (after tax depreciation deposits). Withdrawals from the fund must be used to purchase U.S.-built and registered vessels that w i l l operate in the O.S. foreign trade, in U.S.., noncontiguous domestic trade, cn the Great Lakes, or the f i s h e r i e s of the O.S., Bules e x i s t that govern from which accounts the funds for new ships are drawn, since each account r e s u l t s i n a di f f e r e n t base for determining the c a p i t a l cost of the newly acquired v e s s e l . 2 6 Countries such as Panama, L i b e r i a , and Singapore: t o t a l l y exempt from income tax, earnings from the operation of ships engaged i n in t e r n a t i o n a l trade. In place of income tax, owners and operators must pay an i n i t i a l r e g i s t r a t i o n fee (Liberia $1.20/n. r. t., 2 7 Panama $1/n.r.t, Singapore $2.50/n.r.t. ) and an anual tonnage fee of $ 1. 20/n. r. t. , Panama $1/n. r. t. , Singapore $2,50/n.r.t.) and an annual tonnage fee of $0.10 per n.r . t . i n both Liberia and Panama. In L i b e r i a l e g i s l a t i o n e x i s t s which assures that these fees w i l l not be increased during the 20 years following the i n i t i a l l e g i s l a t i o n . . Several other countries have recently introduced tax-free exemption for shipping income s i m i l a r to the Liberian and Panamanian examples. In China, income taxes are not levied on 74 newly b u i l t Chinese registered ships for the f i r s t 4-5 years of a ship's o p e r a t i o n . 2 8 In Cyprus "income derived by the owner of a Cypriot ship f c r a pericd cf 10 years u n t i l 1983" w i l l not be t a x e d . 2 9 As was mentioned previously, the Greek government introduced special emergency l e g i s l a t i o n as part of a major e f f o r t to repatriate the Greek f l e e t operating abroad. Included among these l e g i s l a t i v e changes were several tax measures. For example, the new laws waived a l l forms of taxation, duties and fees for shipping companies that are established i n Greece. Greek ships are new taxed on a tonnage/age base. According to Emergency law So. 465, " F i r s t Category" s h i p s 3 0 are taxed according to the following schedule; Ship Age O.S. $ charge/ net ton Over 10 but less than 20 years $0.20 Over 20 but less than 25 years 0.30 Over 25 years 0.40 / Ships less than ten years old are granted tax exemption u n t i l they reach that age while Greek-built and registered vessels enjoy a twelve-year tax holiday. F i n a l l y , ships l e s s than 20 years old that are reconstructed, converted, or repaired i n Greece are e l i g i b l e f c r p a r t i a l tax exemption for a ten-year pericd, 2s. FINANCIAL ASSISTANCE IN THE CAPITAL PHASE As was dene i n the previous chapter, f i n a n c i a l assistance in the c a p i t a l phase w i l l be subdivided into the following t 7 5 categories; lean guarantees, dir e c t loans, construction subsidies and government ownership. A loan Guarantees Since the reconstruction of the Best German f l e e t i n the 1950s, the German governments, both l o c a l and stat e , have supported various loan guarantee programs. At the l o c a l level such guarantees are usually t i e d to l o c a l projects and construction, at the federal l e v e l they are linked to the national f l a g . Both l e v e l s of government have issued second mortgages covering 60 to 80 percent of the i n i t i a l investment. Owners pay 0.75 to 1 percent for such guarantees and are subject to government audits before such guarantees are granted.- 3 1 In Belgium, the government guarantees not only the reimbursement of p r i n c i p a l but also interest and administration Charges. Only cert a i n kinds of loans may qualify for the guarantee program. 3 2 In Greece, loans extended to shipowners by Greek f i n a n c i a l i n s t i t u t i o n s may gu a l i f y for the Greek Government Guarantee. Qualifying loans are those made for Greek b u i l t and registered ships that do not exceed 80 percent of the vessel's construction cost and bear a maximum rate of 7.5 percent .Furthermore, the Bank of Greece w i l l reimburse f i n a n c i a l i n s t i t u t i o n s f o r the difference between the 7.5 percent rate applied on these loans and the rate at which these i n s t i t u t i o n s may have to borrow. In addition, the i n s t i t u t i o n s are guaranteed a 2 percent p r o f i t margin. 3 3 In Norway, where i t has been estimated that 80 percent of 76 ship financing i s done abroad, 3* there exists an extensive government loan guarantee program. To enable Norwegian shipowners to obtain the finanacing required at reasonable rates, the Norwegian government issues guarantees for ships bought abroad ( t o t a l l i n g $308 mi l l i o n i n 1977) and for ships b u i l t domestically ($98 m i l l i o n ) . Sweden i s another country with a loan guarantee program which applies tc loans obtained by Swedish shipyards from domestic or foreign i n s t i t u t i o n s . Since 1977 the guarantee program has been extended to include loans to shipowners. 3 5 In the United Kingdom, loans extended to shipowners by clearing banks are e l i g i b l e for government guarantees. The Export Credits Guarantee Department, under arrangements with the banks, w i l l issue a f i n a n c i a l guarantee on loans intended to encourage the expert of B r i t i s h - b u i l t s h i p s . 3 * F i n a l l y , i n the United States there i s a program called T i t l e XI that provides government insurance on in t e r e s t and p r i n c i p a l payments for mortgages used to finance the construction of cert a i n vessels. To be e l i g i b l e f o r the guarantee, the managing agent, the bareboat charterer, and the shipowners must a l l be U.S. ..citizens. 3 7 The vessels which may qualify for the loan guarantee are passenger, cargo, and fishing vessels plus tankers, towboats, dredges and barges that are desicned p r i n c i p a l l y for research or to be used in the domestic or foreign commerce of the U.S. Normally, the guarantee may not exceed 75 percent of the cost; however, i n special cases the l i m i t may be increased to 87 1/2 percent . 3 8 The purpose of T i t l e XI i s to encourage private enterprise rather than 77 government involvement i n the financing of ships., As of 1977, the O.S. government had loan guarantees outstanding of approximately $5.8 b i l l i o n . 3 9 J . Direct Loans In Belgium, the Minister of Commerce i s responsible for advancing interest bearing loans to shipbuilders to be used for the construction of vessels or for renewing or developing maritime equipment. These loans must meet the Opportunity f o r Economic Co-operation and Development's (OECD) guidelines., The guidelines l i m i t the amount of the loan to 70 percent of the vessel's construction costs, and such loans may have a maximum term of 7 years, and may not have interest rates of less than 8 percent . Interest-free loans may be approved by the Council of Ministers i f a project i s deemed as being in the national interest. 4° In Denmark, the Ship Credit Fund, approves loans to Danish owners for ships purchased either domestically or abroad..Loans are also available tc foreign owners purchasing Danish-built vessels. Also the government may extend c r e d i t , amounting to a maximum of 50 percent of the transaction value, for the purchase of ships of f a i r l y new construction. In October, 1977 a new loan program was introduced for Danish owners purchasing ships from domestic yards. The terms were a maximum c r e d i t of 30 percent of the construction costs, a ten-year repayment plan, and an 8 percent rate of i n t e r e s t . There also exists supplementary credit for the difference between the domestic program and OECD guidelines for ships constructed i n foreign yards.* 1 78 In West Germany, i n d i v i d u a l government loans may not exceed $3 million or 70 percent of the ship's construction costs. The maximum repayment period was twelve years and the i n t e r e s t rate was cnly 5.5 percent (1976 terms). Provisions i n the loan agreement provided for a two-year grace period i n which no repayments cn p r i n c i p a l needed to be made.*2 Shipping companies i n West Germany may also be e l i g i b l e for leans cn conversions (repayable over seven years, at 7.5 percent i n t e r e s t ) , the building of certain s h i p s * 3 (twelve and a half years, at 7.8 percent with a 2 1/2 year grace period), or repairs (up tc 80 percent at 9 percent rates). Japan i s the world's most prodigious producer of deep-sea vessels and i t i s not surprising to find that the industry i s assisted by a goverment lean program. This program, administered under auspices cf the Development Bank of Japan extends loans up to 7G percent cf a ship's cost. The i n t e r e s t rates on these loans ranged from 6.5 percent tc 7.5 percent as of &p r i l 1977. The Japanese government may also covers one third of the costs associated with exported vessels, and a further 27 percent may be paid as a loan d i r e c t l y to the shipyard.** Three European countries, I t a l y , Portugal and Spain, also have government loan programs. In I t a l y , shipowners "may be granted up tc 70 percent of the cost of construction, modernization, or repair cf ships."* s On these loans, repayable over f i f t e e n years maximum at 15.5 percent i n t e r e s t , half the inter e s t expense i s subsidized by the government on vessels greater than 3,000 g.r.t. . In Portugal the government has extended an open l i n e of credit to cover the needs of the two 7 9 government-owned shipping companies. In Spain, a loan program established by Royal Decree grants eight to twelve year loans on certa i n vessels at i n t e r e s t rates of 7 . 5 - 8 percent.* 6 Among the Scandanavian countries, Norway as of March 1 9 7 7 permitted the issuance of second mortgages up to 8 0 percent of costs with i n t e r e s t rates in the range 8 1 / 2 to 9 percent .* 7 Credit terms on loans to lesser developed countries f o r the purchase of Norwegian-constructed vessels were espe c i a l l y a t t r a c t i v e ( 9 0 percent of the costs, 1 5 years to repay, i n t e r e s t rates of 5 - 6 percent with a 3 -year grace period). .Loans made to shipyards for the restructuring of f a c i l i t i e s are twelve-year loans and may be interest free. In Sweden, there i s somethng ca l l e d the "write-off loan" for Swedish owners purchasing ships from domestic yards. The five-year loan may be granted f o r up to 2 5 percent Gf the vessel's cost. I f at the end of f i v e years the assessed value of the ship i s greater than the o r i g i n a l purchase cost, then the gain must be shared 5 0 / 5 0 with the government.* 8 F i n a l l y , in B r a z i l the government grants c r e d i t to shipping l i n e s up to 8 5 percent of the costs associated with having a ship constructed i n B r a z i l i a n yards at 8 percent i n t e r e s t r a t e s . * 9 £s. Construction Subsidies In B r a z i l , the Marine Befinancing Fund, 5 0 supplies funds to help finance the construction of cargo vessels b u i l t i n that country. The shipowners are able to borrow money from the fund and must repay to the fund.an amount equivalent to estimated construction costs of a s i m i l a r ship b u i l t abroad. , In e f f e c t , 80 the E r a z i l i a n government i s subsidizing shipowners for the difference between the higher B r a z i l i a n building costs and the lower foreign yard's costs. Obviously, no r e a l benefit i s accruing to the shipowners, since they are paying the same price for ships that they would have paid i f there had been no subsidy program and they had been allowed to purchase ships abroad. . In France, French owners may only place orders abroad i f they can show that domestic construction costs would be at best 10 percent higher than for a s i m i l a r ship constructed i n foreign yards. Between 19 76 and 1980, shipowners ordering French-rbuilt ships intended for French r e g i s t r y , may gualify for a construction subsidy that varies with the kind of ship ordered, 5 1 The subsidy rates are, (15 percent) for containerships, barge c a r r i e r s and SO/RO vessels, 10 percent for vessels with several decks, 2-8 percent on bulk c a r r i e r s and 3 percent on small c a r r i e r s . A modernization subsidy e x i s t s i n West Germany, and i s paid to German owners agreeing to put such ships under German registry vessels constructed with the aid of such s u b s i d i e s . 5 2 If these vessels are sold within six years the f u l l amount of the subsidy must be repayed (4-year l i m i t on vessels constructed after 1979). After s i x years, the amount of the subsidy to be repaid declines by 20 percent per year.„ The Dutch government has undertaken to repay shipowners for f i v e years an annual amount egual to 4.75 percent of a ship's construction cost. To g u a l i f y for the subsidy, vessels must be Dutch-built, registered, and crewed. , Shipbuilders also may receive interest subsidies that are intended to enable them to extend c r e d i t at competitive r a t e s . 5 3 81 In I t a l y , in addition to the regular 30 percent subsidy paid cn I t a l i a n - b u i l t ships, there i s also a "scrap and b u i l d " subsidy program. Shipowners who scrap obsolete vessels and replace them with approved vessels may receive a subsidy of 30,000 l i r e per weight ton ($417 Cdn/ton). Vessels scrapped must be at least 15 years old and the new vessel constructed must be put under I t a l i a n r e g i s t r y for a minimum five-year period.? 4 In the United Kingdom, new shipbuilding and programs must f i r s t be approved by the European Community Council (ECC). The Industry Act of 1975 provides for government c r e d i t to help finance the construction of ships in U.K. .yards ordered by U.K. owners.5'5 An extensive construction subsidy program exists i n the United States pursuant to T i t l e V of the Merchant Marine Act of 1936. . According to the Act, the government w i l l subsidize shipyards for an amount egual to the difference between the actual U.S. costs and a representative foreign construction, up to a maximum cf 50 percent of the vessel's actual cost. To q u a l i f y , the following conditions must be met, the owner must be a U.S. resident, the ship must be placed under U.S. r e g i s t r y for at least twenty years, and i t must be crewed by American seamen.5* M i l i t a r y features b u i l t into a ship's design are f u l l y paid by the government. Jk Government Ownership E r a z i l , i s probably one of the best examples of government ownership in international shipping., The government there controls 80 percent of the merchant f l e e t tonnage and a l l the 82 operating losses of Lloyd B t a z i l e i r o , the country's p r i n c i p a l foreign trade shipping company, are covered by the government. The government i s by far the largest shareholder i n Lloyd B r a z i l e i r c , the Vale de Bio Dcce Nabegacao (DOCEHAVE - o i l and iron ore) and in Frota Nacionale de Petercleiros (FBQNAPE) the nation's largest tanker f l e e t . , Government ownership and involvement exists to the same extent i n most of the other South American c o u n t r i e s . 5 7 France i s another country where the government i s a c t i v e l y involved i n shipping. The government of that country makes up any losses experienced by the nation's lar g e s t shipping l i n e , the Ccmpagnie Generale Maritime. Furthermore, the government contributes a s u f f i c i e n t subsidy to pay a small dividend to i t s public shareholders. 5 8 In Finland, the government has a minority i n t e r e s t i n Finnlines Ltd. (a Finnish shipping company), and has equity i n several non-commercial ships, such as icebreakers and survey ships. Valmet Oy, the country's largest ship producer, i s also controlled by government in t e r e s t s . In Sweden the shipyards have been nationalized under a holding company known as Swedyards Corporation. In Denmark, government ownership i s l i m i t e d to ferry services cn i n t e r n a l routes or operating between Denmark and Sweden or Germany. The government in L i b e r i a has recently become involved i n shipping through the Liberian Shipping Corporation (LSC) and has become a 50 percent partner in two Liberian Shipping companies, Total Involvement and The Providence Shipping Company.59 A high degree of B r i t i s h government ownership i s vested i n 8 3 the B r i t i s h Shipbuilding Corporation (BSC) established July 1, 1977. The corporation consists of 19 shipbuilding companies, 5 diesel marine engine companies and 3 training companies and i s t o t a l l y government owned, The government also has an i n t e r e s t i n BP Tankers through i t s interest in the parent company, B r i t i s h Petroleum, 6 0 Is. - NONFISCAL ASSISTANCE MEASURES The last form of assistance measure to be examined i n this chapter i s nonfiscal measures. Nonfiscal measures do not reguire any direct cash transactions or c r e d i t , and can be categorized as being, a) cargo preference, b) f l a g discrimination, c) b i l a t e r a l agreements and d) others. JU CARGO PREFERENCE In most of the countries studied, cargo preference practices were r e s t r i c t e d to government aid and m i l i t a r y cargoes. However, in some countries cargo preference i s also extended to cover s p e c i f i c commodities thought to be i n the national i n t e r e s t . In B r a z i l , and most of the other South American countries, imports and exports i n which the government provides f i n a n c i a l assistance must be c a r r i e d in n a t i o n a l - f l a g ships when available (unless a 50-50 b i l a t e r a l agreement i s i n e f f e e t ) . The B r a z i l i a n government also has a monopoly over the transportation of petroleum and has proclaimed that a l l ordinary paper products must be carried in national bottoms. 6 1 In Peru, the Compagnie Peruana de Vapores (CPU) i s to be 8a given preference In the carriage of a l l government cargoes, also, a l l cargoes that are exempted from import duties must be carri e d i n Peruvian s h i p s . * 2 In France, two-thirds of the crude o i l imported for domestic usage must be carried i n French-flag ships or i n ships belonging to approved charter parties, .ftn antiguated law passed in 1931 dictates that 50 percent of French coal exports are to be car r i e d i n French vessels; however, waivers are freguently granted to foreign operators wishing to carry coal e x p o r t s , 6 3 Four countries that have designated petroleum as a preferred cargo are: Korea, Saudi Arabia, Mexico, and Spain. In Saudi Arabia, 25 percent of that country's o i l exports are to be carried in Saudi-owned tankers. In Korea and Spain, o i l i s only one of several protected commodities. The Transportation Ministry of Korea sti p u l a t e s that imported crude, i r o n ore, logs, grains, and f e r t i l i z e r s are to be carried i n Korean-flag ships whenever possible. Petroleum, tobacco and cotton are the Spanish imports that are r e s t r i c t e d to national flag vessels. In Mexico, the government agency PEMEX owns and operates the nation's o i l tanker f l e e t that moves a l l the o i l exports of that country. In the United States, the Cargo Preference Act of 1954 provides that 50 percent cf specialized goods must be ca r r i e d by privately-owned U.S.-flag ships when avaiable. the spec i f i e d goods are defined as including "goods purchased by the government for i t s own accounts, goods provided by the government for the account of any foreign nation, and goods f o r which the government has advanced funds."** The M i l i t a r y 85 Transportation S e t 6 5 dictates that a l l supplies transported by sea for the U.S. armed services must be carried aboard U.S. „ registered or owned vessels. Jk ELAG DISCRIMINATION Flag discrimination refers to "a variety of p o l i c i e s , laws, regulations, or trading practices that some countries employ to favour t h e i r own shipping i n d u s t r i e s . " 6 6 I t seems that such practices are becoming mere and more prevalent in i n t e r n a t i o n a l shipping, especially in the South American countries. In B r a z i l , i t i s government practice to approve only those conferences in vhich Lloyd B r a s i l e i r o i s a member, and only conferences that are approved may engage in shipping operations in B r a z i l . Such rules guarantee a portion of the B r a z i l i a n l i n e r trade for the B r a z i l i a n - f l a g vessels of Lloyd B r a z i l e i r o . 6 7 In Peru, Decree Law No. .50759 (Oct. 74) dictates that a l l public bodies are to give preference to the Compania Peruana de Vapores (CPV) i n the transportation of goods for import or export. F i f t y percent of imports and exports (calculated on a monthly basis) must be reserved for Peruvian-flag ships. In the P h i l l i p i n e s , exporters are allowed to deduct from income f o r tax purposes, 150 percent of their shipping costs i f they use P h i l l i p i a n - f l a g vessels. This p r i v i l e g e i s increased to 200 percent i f the company i s registered with the Board of Investments. 6 9 In Mexico, a cheaper export tax i s charged f o r honey and cotton i f they are transported in Mexican-flag vessels. Provisions under the Mexico Expert Tax allow special rebates i f 86 Mexican insurance agents or c a r r i e r s are used. 7 0 Cabotage i s another form of f l a g discrimination that "denotes the widespread practice of reserving the trade along a nation's coast to ships of the national f l e e t " . 7 1 Cabotage i s perhaps the oldest and most common form of assistance to shipping. In Europe, the following nations have invoked cabotage l e g i s l a t i o n ; Denmark, Finlnd, France, West Germany, Spain, Greece, I t a l y . Some countries may make allowances to cabotage r e s t r i c t i o n s i n case of a shortage of national-flag vessels. For example, i n B r a z i l , coastwise trade i s reserved for national ships "unless public i n t e r e s t demands an increase i n services which national vessels cannot supply." 7 2 In West Germany, foreign ships are allowed i n domestic trade only i f no German ships are available or i f only available at substantially higher r a t e s . 7 3 In Panama, coastwise trade i s r e s t r i c t e d to Panamanian-flag vessels, however, i t i s possible for foreign ships to obtain a permit enabling them tc take part in coastal shipping providing the reguired fee i s paid. A In the United States, vessels must not only be U.S. , registered to engage in U.S. coastwise trade, but they must also be U.S. , b u i l t . Other l e g i s l a t i o n extends the coasting laws to U.S.?4 t e r r i t o r i e s and possessions. £ A BILATERA1 TRADE AGREEMENTS Many c o u n t r i e s 7 5 , in an endeavour to guarantee cargo for their national f l e e t s , have signed trade agreements with other countries. These agreements generally apportion trade between 87 the contracting states on a 50/50 basis. , In B r a z i l , Resolution 3669, dated A p r i l 1974, o r i g i n a l l y stipulated that coffee and cargo shipments from B r a z i l to the U.S.. were to be reserved on a 50/50 basis for B r a z i l i a n and O.S.-flag vessels. The rule was actually implemented on a 40/4 0/20 basis (40 percent reserved for B r a z i l i a n ships, 40 percent American and 20 percent others) but was changed i n 1971 to a 50/40/10 plan. B r a z i l also has 50/50 trade agreements with Argentina, Chile, Mexico, Peru, Uruguay and Algeria. Further agreements have also been signed with the USSR, Poland, Romania and West Germany. France has 50/50 agreements with Tunisian and Algeria plus a 40/40/20 agreement with the Ivory Coast. Germany has also signed a similar agreement with the Ivory Coast. As of 1978, Greece had signed shipping agreements with the following countries; the O.S.S.E., Poland, China, and Singapore. India has agreements with Bulgaria, the Soviet Onion, Poland and the German Democratic Republic. India also has an agreement with the United Arab Republic which s t i p u l a t e s 50-50 parity i n terms of cargo tonnage and earnings. Agreements among other countries include South Korea and the following countries; the United States, Best Germany, and Japan. . F i n a l l y , the U.S., has, i n addition to the agreements already mentioned, an understanding with B r a z i l that ensures egual access to government controlled cargoes traded between the two countries. There even exists a trade agreement between the two super powers, the U.S. and USSR that provides that each country s h a l l carry a "substantial share" {33 1/3 percent ) of 88 the b i l a t e r a l cargo traded between them. £ * 0 2 HJB NON FISCAL BEASU EES Included in t h i s section are flag- r e l a t e d assistance measures that did not seem to f i t under any of the previous three categories. These include l e g i s l a t i o n r e s t r i c t i n g the importation of ships, repair s t i p u l a t i o n s , and measures intended to combat fl a g discrimination. In France, the government has the statutory authority t c r e s t r i c t the charter agreements that French owners may have with foreign i n t e r e s t s . In Spain, special import licenses must be obtained for ships brought into the country and such licenses are granted only with great r e l u c t a n c e . 7 6 In both Peru and the Onited States there i s l e g i s l a t i o n that favours the repair of national-flag vessels in domestic yards. In late 1975, the Norwegian government introduced l e g i s l a t i o n allowing Norwegian ship owners to register t h e i r ships under foreign f l a g s under certain circumstances ( i . e . , Norwegian manning cost too high or to avoid fl a g discrimination p r a c t i c e s ) . 7 7 F i n a l l y , at least three countries have measures to protect their national-flag f l e e t s from the discriminatory action of other countries. In west Germany there e x i s t s "Measures Against Detrimental Shipping P o l i c i e s of Foreign Countries" which s p e c i f i e s that the "government can r e s t r i c t conclusions of freight contracts between German residents and c a r r i e r s of countries which exclude German ships from free competition." 7 8 Contracts with c a r r i e r s resident i n B r a z i l , Burma, Indonesia, Uruguay, Venezuala and the East Block countries must be licensed 8 9 by the West German government. Similar r e t a l i a t o r y l e g i s l a t i o n also exists in I t a l y 7 9 and J a p a n 8 0 where the governments may r e s t r i c t the use of ships, or prohibit t h e i r loading/ unloa-ding i f German ships are excluded from trade i n those countries. These are the shipping assistance measures that e x i s t i n the major maritime nations, and in some of the countries that are p r i n c i p a l trading partners with Canada.. The chapter demonstrates how, and to what extent, governments of other naticrs assist their shipowners and operators. This raises the guestion cf, "Which cf these measures, i f any, should Canada attempt to match"? To be able to tackle t h i s guestion, i t i s f i r s t necessary to examine the assistance measures that currently e x i s t i n Canada. This i s done i n the next chapter e n t i t l e d "Shipping Policy i n Canada." 90 VI. SHIPPING POLICY IN CANADA The previous chapter examined the shipping assistance measures that exist throughout the world. Now i t i s time to see what shipping assistance measures exist i n Canada. This chapter discusses current Canadian shipping policy, and some of the more important Canadian shipping studies that have influenced the formulation of t h i s nation's shipping policy. F i n a l l y , t h i s chapter finishes with a presentation of the s p e c i f i c shipping assistance measures that exist in Canada today. - U ,HAJCF CANADIAN SHIPPING STUDIES OF THE PAST DECADE Since 1970 there have been two major quantitatively-oriented studies conducted investigating particular facets of the Canadian merchant marine issue. The f i r s t cf these, produced in 1970 by Hedlin-fienzies & Associates for Transport Canada, was e n t i t l e d Canadian Merchant  Marine: Analysis of Economic Poten t i a l . , One objective of the study was; To evaluate the potential benefits and costs to the Canadian economy that would be associated with the operation of privately owned deep-sea Canadian s h i p s . 1 The study also attempted to quantify the public cost of various assistance measures that could be used to encourage the development of a privately-owned Canadian deep-sea f l e e t . One of the conclusions of the report was that the "net benefits generated by a Canadian merchant marine are extremely sensitive to assumptions and cost projections adopted." 2 The study also investigated the type cf vessels that would be most commercially viable. In t h i s category were ships over 45,000 9 1 d.w. t. designed to transport iron ore and coal exports or crude o i l imports. These conclusions sere based on a 6 percent s o c i a l discount rate, However, i f a higher discount rate were used (egual tc a private investor's expected return) then none of the vessels investigated would be economical. Furthermore, a cost-benefit analysis using the higher discount rate showed a s o c i a l e f f i c i e n c y loss i f Canadian privately-owned ships were introduced. The Hedlin-Menzies study also conducted s e n s i t i v i t y analysis on several of the model's key variables. These included the usage of d i f f e r e n t s o c i a l and private discount rates, varying assumptions regarding the opportunity costs of crewing, and various other cost assumptions ( i . e . fueling costs, crew siz e s , vessel costs, interest rates, vessel l i f e and vessel scrap value). with regards to s p e c i f i c measures intended to encourage the development of a Canadian f l e e t , the study concluded by saying; The preceeding analysis indicates that preferred forms cf assistance would include loan guarantees as a basic measure. In addition, investment grants, investment allowances, and direct government loans provide e f f e c t i v e methods for granting f i n a n c i a l assistance to merchant shipping. 3 and furthermore that; The s e l e c t i o n of a particular type or form of assistance i s beyond the scope of t h i s study, and could involve consideration of non-economic goals related to Canadian merchant shipping.* The second major shipping study done was the Alcan Study published i n September 1977, for the Research and Development Centre cf Transport Canada. Listed among the objectives was the following; 92 To quantify and compare direct benefits and costs which would accrue to the Canadian economy from the carriage of bulk, neo-bulk, general carqo and containers in selected commodity trades using: 1 . foreign shipping services 2. Canadian managed and operated foreign-flag ships 3. Canadian managed and operated Canadian-flag ships with vessels being purchased from the cheapest source of supply. , 4. Canadian b u i l t , managed, and operated Canadian-flag s h i p s 5 The report projected costs and revenues of the four options l i s t e d above then calculated t h e i r commercial v i a b i l i t y under varying assumptions. The most a t t r a c t i v e option was option 2 l i s t e d above, which was followed c l o s e l y by option 1. Substantially less a t t r a c t i v e was option 4 which was followed closely by option 3. 6 2* .COJHENT CAMAPI AN SHIPPING POLICY. The major Canadian statute dealing with shipping i s the Canada Shipping Act. 7 This Act covers many aspects of Canadian shipping including; the recording, registry and l i c e n s i n g of ships (PAET I ) , c e r t i f i c a t i o n of o f f i c e r s (PAST I I ) , the rights of seamen (PAST I I I ) , pilotage rules (PAET VI), safety l e g i s l a t i o n (PABT VIII), pollution of the water ana a i r (PABT IX), and the coasting trade of Canada (PABT XV). In 1975 the L i b e r a l government introduced B i l l C-61 i n parliament. This b i l l , referred to as the Maritime Code was intended to update cert a i n provisions contained i n the Canada Shipping Act that dealt with the r e g i s t r a t i o n and l i c e n s i n g of ships and the coasting trade. The B i l l , was never passed in that form because of the opposition raised to the proposed sections on the coasting trade. These sections were subsequently removed .93 from the Maritime Code and the Act was reintroduced into parliament where i t f i n a l l y received royal assent i n the 30th session of parliament. The objectives of the Maritime Code are stated i n Book I, Section 2 of the new Act. The objectives are to ensure that Canadian shipping laws; (a) more adequately recognize and provide for the i n t e r r e l a t i o n s h i p between the inte r e s t s of Canadians i n the continued and expanded use of that mode of transport and i n other economic, s o c i o l o g i c a l and environ mental considerations, including t r a d i t i o n a l considerations related to the safety cf l i f e at sea; (b) express the extent to which such law must, under current conditions, apply to ships and to persons on board ships both within and outside Canadian waters i n order to adequately protect legitimate Canadian interests; and (c) e s t a b l i s h a more e f f e c t i v e base of Canadian law from which to seek international regulation of shipping f o r the protection of the environment. 8 The Act outlines the requirements for owning and regi s t e r i n g ships in Canada (Book II of the Code) and defines the rights, p r i v i l e g e s and r e s p o n s i b i l i t i e s of the owners of Canadian recorded, registered, and licensed ships. Section 19 of Book II declares that the only groups that are q u a l i f i e d to own Canadian registered ships are "Canadian c i t i z e n s domiciled i n a province" and corporations that meet c e r t a i n requirements concerning place of incorporation, place of business and the degree of Canadian management and directorship (see Appendix 5). The new rules concerning the r e g i s t r a t i o n of Canadian ships are much more stringent that they previously were under section 6 of the Canada Shipping Act (see appendix 6). Canadian r e g i s t r y i s no longer extended to other B r i t i s h Commonwealth subjects as i t 94 was previously. In March 1979, the government of Canada published i t s long awaited policy paper on Canadian deep-sea shipping. The report, A S hipping Pclicjy. for Canada "set out the main elements of a deep-sea shipping policy for Canada, taking into account recent and anticipated developments i n Canada and abroad."* The report examines the nature of Canadian waterbourne trade, recent trends and developments and international shipping, and other major Canadian shipping issues. Section 5 of the report discusses the guest ion of a Canadian deep-sea f l e e t , i t s commercial v i a b i l i t y , and hew i t could be encouraged. The paper expresses the objectives of federal government concerning Canada's deep-sea trade, "to ensure the continuing a v a i l a b i l i t y of adequate and economic shipping services as part cf the o v e r a l l transportation system serving Canada." 1 0 A second a n c i l l a r y objective i s i d e n t i f i e d as "being able to c a p i t a l i z e cn s i g n i f i c a n t opportunities." The exact i n t e r p r e t a t i o n of '"adequate and economic shipping" or " c a p i t a l i z e on s i g n i f i c a n t opportunities" i s not elaborated on in the report. Despite this ambiguous phrasing, the report does c l a r i f y , to a certain extent, the federal government's stance on the issue. The basic conclusion of the report i s ; that present circumstances do not warrant the provision of new tax or f i n a n c i a l measures to support the development of a Canadian deep-sea f l e e t . 1 1 f i n a l l y , the report mentions possible areas of further government study. These include; Canadian-flag p a r t i c i p a t i o n i n government aid cargoes, Canadian-flag p a r t i c i p a t i o n in a r c t i c development, and l e g i s l a t i o n to protect Canadian interests when 95 they are threatened by the action of foreign governments or c a r r i e r s . The Conservative government, during i t s brief sojourn i n power, published, i n October 1979, a report e n t i t l e d Background Paper on Deep-Sea Shipping . The conclusions reached i n this report are contrary to those reached i n the e a r l i e r L i b e r a l report A Shipping Policy for Canada. The conclusion reached i n the Conservative repcrt i s ; ... i n addition to steps to increase governmental competence and capacity i n the shipping f i e l d , i t would be desirable to put i n place measures tc encourage the gradual development of a Canadian deep-sea f l e e t , * 2 During the May 1979 e l e c t i o n , one of the platforms of the Progressive Conservative party was the encouragement of a Canadian deep-sea f l e e t , so i t was not surprising that the background paper reached the conclusions i t did. .Once again the Canadian merchant marine guestion has become a p o l i t i c a l 'hot potato'. The most recent Transport Canada publication on deep-sea shipping i s a c o l l e c t i o n of b r i e f s from various shipping parties on the, topic of Measures to Encourage the Gradual Development of a Canadian Deep-sea Fleet. The purpose of t h i s publication i s obviously as a follow up to the Background Paper and addresses the guestion "Rhat measures should the government use to encourage the gradual development of a Canadian deep-sea f l e e t " ? * 3 Once again the p o l i t i c a l climate i n Canada has changed with the re-election cf the L i b e r a l party. Transport Canada o f f i c i a l s have once again begun discussions with industry leaders involved 96 in shipping. I t should be very i n t e r e s t i n g to see which course of action Transport Canada w i l l follow under the new l i b e r a l regime. K i l l they revert back to th e i r o r i g i n a l *no assistance* stance promulgated e a r l i e r or w i l l they continue along the Conservative's l i n e cf thinking? In the meantime the industry i s l e f t in a state of limbo and does not know what to expect. 3. THE CJNflDI&N H EBCHANT JJJINJ ISSJE Ro discussion on Canadian shipping policy would be complete without mention of the Canadian merchant marine i s s u e . 1 * The basic dispute i s whether the government should undertake measures to encourage the establishment of a Canadian merchant marine (ships registered in Canada). The merchant marine issue has dominated Canadian shipping policy discussions f o r the past t h i r t y years and, as can be seen from the previous section, s t i l l remains an unresolved issue., The -two most commonly cited reasons against the establishment of a Canadian merchant marine are that the costs involved would be prohibitive and, reliance on competitive foreign flags has worked well i n the past, so why upset the status guc? Proponents of the free-market system argue that the needs of Canadian suppliers and consumers are best f u l f i l l e d through reliance on international shipping markets. , Any government involvement i s seen as interference i n an otherwise competitive market. The advocates of a Canadian merchant marine argue that not a l l the benefits associated with such a project are being considered and that i n t e r n a t i o n a l shipping i s no longer a perfectly competitive market. These supporters of the merchant 97 marine argue that i f i t was possible to guantify a l l the intangible benefits, then s o c i a l benefits would surely outweigh the s o c i a l costs cf such a program. The guestion thus becomes what are these nonguantifiable benefits and are they important enough to j u s t i f y the costs generally associated with the establishment of a Canadian merchant marine? The major arguments and counterarguments for a merchant marine are presented below., Employment Establishir-g a merchant marine w i l l generate jobs for Canadian o f f i c e r s , seamen, and people involved i n related industries such as shipbuilding, insurance, and freight forwarding. Through the economic multiplier the benefits w i l l s p i l l - o v e r into many other sectors as well. The counter to t h i s argument i s that the labour and resources attracted to shipping because of the new government incentives must ultimately be drawn from ether sectors in the economy. Productivity gains w i l l cccur i n shipping but they w i l l be o f f s e t by a decline in productivity i n the industries from which the factors of production are drawn. , Ealance of Payments Shipping because of i t s international structure i s an excellent earning source of foreign currency. Canada pays $2.5 b i l l i o n i n shipping b i l l s to foreign shippers every year. I f t h i s money were kept i n the country and paid to Canadian ship operators instead then the balance of payments problem would be lessened. The specious l o g i c behind t h i s argument i s that although a national f l e e t would generate foreign currency i t would also have to pay out many of i t s expenses i n foreign currency . Thus in t e r n a t i o n a l shipping would not help the balance of payments problem as much as o r i g i n a l l y proposed, & 1966 U.S. Maritime fldministration study done of the U.S. Merchant Marine indicated that only $0.30 of every $1 of shipping revenue would be retained by U.S. operators. This 30 percent contribution represents only the impact of the merchant marine on the balance of payments, i t does not represent the value of that impact. . Defence 98 In case of war, or a threat of war, Canada would have need cf a merchant marine that would he capable cf f u l f i l l i n g the l o g i s t i c reguirements of m i l i t a r y operations. The natural counter to t h i s i s that Canada does net need a merchant marine to support her during times of war because she can rely on her NATO a l l i e s . Secondly, Canada cannot afford the luxury of a military standby merchant f l e e t . , Continuity cf Service If Canada has a merchant f l e e t then there w i l l always be a supply of ships to carry Canadian goods to market regardless of the p o l i t i c a l s i t u a t i o n . The counter to t h i s type of reasoning i s that shipping services are offered by many countries and that i f one source of shipping were withdrawn then numerous other sources can be found.„ Prestige Shewing the Canadian f l a g on inte r n a t i o n a l vessels brings prestige and honour to Canada and advertises the fact that Canada can compete i n the international markets. Canada i s the tenth most important country for waterbourne trade, yet only has the f o r t y - t h i r d largest national f l e e t , does t h i s have to be? The rebuttal to t h i s i s that Canada can gain prestige and honour in a host of other a c t i v i t i e s i n which we have a competitive advantage such as communications or electr o n i c s . A merchant marine i s an expensive method of gaining world recognition. ., Protection from Discrimination With the increasing amount of f l a g discrimination that i s occurring the only way of protecting Canadian interests i s through the establishment of a Canadaian merchant marine. A strong merchant marine would dissuade foreign countries from implementing discriminatory measures against Canadian ship operators. The contrary reasoning i s that Canada can always designate Canadian-carriers and that they need not be f l y i n g the Canadian f l a g . The establishment of a Canadian merchant marine i s a more dra s t i c measure than i s reguired. These are the arguments for and against a merchant 9.9 marine. 1 S The issue s t i l l remains unresolved and judging from the l a t e s t government developments the controversy i s l i k e l y to continue. 4., EXISTING CANADIAN GOVEBNHENT ASSISTANCE MEASOBES To f a c i l i t a t e the comparison between the assistance measures that e x i s t in Canada and those that exist elsewhere the same three class categorization, as introduced in chapter IV, w i l l be used, f i n a n c i a l assistance i n the operating phase, f i n a n c i a l assistance i n the construction phase and nonfiscal assistance measures. JU Financial Assistance In The Operating Phase Operating Subsidies: In Canada, no operating subsidies are paid to ships operating i n foreign trade. Some subsidies are granted to a few ships that are engaged on "essential and coastal waters" 1 6 Subsidy applications are reviewed by Transport Canada o f f i c i a l s and are only granted on the grounds of public convenience or because such a service w i l l promote trade and be of economic service to the communities serviced.* 7 Domestically, the major ferry operators are in receipt of subsidy payments and payments "of the excess of the expenditures over revenue " are made to Canarctic Shipping Company Limited who own and operate the H.V.Artie, an experimental ice-breaking b u l k - c a r r i e r . 1 8 Gove rn men t- provided F a c i l i t i e s : The Canadian government provides many shipping related f a c i l i t i e s mcst cf which are intended tc aid domestic shipping, 100 but many of these f a c i l i t i e s axe also used by deep-sea operations as well.Transport Canada provides funds to the A t l a n t i c and the Great lakes Pilotage Authorities, the National Harbours Board, the St. . Lawrence Seaway Authority, and the Marine Transportation program. The funds allocated to these programs are used f o r a variety of uses including the construction of canals, maintenance of navigational aids, ship channels, search and rescue operations, icebreaking, and t r a f f i c c o ntrol. The Department of Public works also a l l o c a t e s funds ($52.76 mil l i o n i n the 1977-78 f i s c a l year) * 9 to i t s marine program for construction projects associated with harbours and r i v e r s . Special Subsidies: Special subsidies, as defined e a r l i e r , include exemptions from custom duties and value-added taxes f o r ships and ship construction materials, discriminatory dues and fees favouring national-flag ships, special exchange rate benefits, and the a v a i l a b i l i t y of short-term operating loans. The only special subsidy e x i s t i n g i n Canada i s that custom duties need not be paid on ships that are imported and which are to he used exclusively i n i n t e r n a t i o n a l trade. , Materials imported for the building of ships to be exported are also exempt from customs duties. This i s not, i n the true sense, a subsidy to shipping since i t i s general Canadian policy to exempt from customs duties any materials that are to be used i n goods intended for expert. Thus shipbuilding i s not the recipient of a "special right or p r i v i l e g e " and i s treated the same as any other industry that may be involved i n the export 10 1 trade. Vessels that are constructed and registered in a Commonwealth country are admitted into the country duty free and are permitted to operate i n the Canadian coasting trade. Commonwealth registered vessels that were b u i l t i n a non-Commonwealth country must pay a duty of 25 percent before they may engage in coastal trading. Tax Subsidies: Before investigating the tax subsidies existing i n Canada i t i s appropriate to provide a l i t t l e background on the Canadian fax law system. The f i r s t item of importance i s who i s l i a b l e to pay Canadian income tax. The Income Tax Act states that a PAST I tax w i l l be lev i e d on "the taxable income for the taxation year of every person 2 0 resident i n Canada at any time in the year" and also upon taxable income earned in Canada by a non-resident. The important difference i s that Canadian residents are taxed on t h e i r world income while residents are only taxed on their Canadian-source income. The tests f o r determining the residency of i n d i v i d u a l s are guite d i f f e r e n t from those that are applied to corporations. , An ind i v i d u a l w i l l be considered a resident in Canada, for the purpose of the Income Tax Act, i f they "were at the relevant time o r d i n a r i l y resident i n Canada," 2 1 or i f they f a l l within the extended scope of residency as defined in section 250(1). "Ordinarily resident" has been interpreted by the courts as "where1 in the settled routine of his l i f e he regularly, normally, and customarily lives.'' Factors considered when 10 2 determining " o r d i n a r i l y resident" may include the length of time the person stayed i n Canada, their reasons for being i n (cut of) Canada, the person's background and family t i e s , c i t i z e n s h i p held, and ether factors indicating permanence.,according to section 250(3) , an i n d i v i d u a l may also be deemed to be a resident cf Canada i f they were, during the year, physically present i n Canada for 183 days or more, or i f they were a member of the Canadian armed forces, a corporation i s deemed a resident i f i t s 'mind and management' meet i n Canada or i f the corporation was incorporated in. Canada according to some s p e c i f i c r u l e s . 2 2 Kany Canadian companies are able to defer the payment of Canadian taxes by establishing a foreign subsidiary i n a tax-haven country. Since the new corporation i s not incorporated i n Canada and the mind and management do not meet there, the shipping company i s only l i a b l e for tax on any income earned i n Canada, providing that Revenue Canada does not view the operation as being one established for the purpose of tax avoidance. However, even the shipping income earned i n Canada may not be taxable because of a s p e c i a l provision in the act which states that "income earned in Canada by a non-resident from the operation of a ship or a i r c r a f t i n i n t e r n a t i o n a l t r a f f i c " s h a l l not be included in taxable income provided that the non-resident's country extends similar r e l i e f to Canadian operators. 2 3 Thus, i t i s possible to defer payment of Canadian tax e n t i r e l y by establishing a head-office i n Bermuda, Bahamas, or any one of the many so calle d "tax haven" countries that extend s i m i l a r r e l i e f . Naturally the company must pay tax i n 10 3 that other country but the tax rate i s considerably lower or shipping income i s exempt from tax. It i s important to stress that Canadian taxes are deferred,not e n t i r e l y avoided i n these kind of arrangements. When p r o f i t s from these 'off-shore' o f f i c e s are repatriated back to Canada a tax must be paid on- them then. However, u n t i l the company elects to repatriate i t s shipping p r o f i t s i t may accumulate and reinvest i t s p r o f i t s in shipping v i r t u a l l y tax f r e e . 2 * Unless s p e c i f i c a l l y excepted, ships are included in asset c l a s s 7 that allows a maximum annual c a p i t a l cost allowance (CCA) of 15 percent based on a declining balance to be deducted from income. 2 5 The exceptions to t h i s general rule are i ) v e s s e l s acquired by fishermen before 1972 and i i ) vessels f u l f i l l i n g the reguirements set cut in Beg 1100 (1) (v) . , Regulation 1100(1) (v) allows a 33 1/3 percent s t r a i g h t - l i n e c a p i t a l cost allowance on i) new ships that were constructed in Canada and which are registered in Canada or in a country under s a t i s f a c t o r y conditions of the B r i t i s h Shipping Agreement2* and i i ) on conversion costs done in Canada. 2 7 Each vessel or conversion f u l f i l l i n g these requirements i s set up as an in d i v i d u a l asset c l a s s and then subject to the usual rules regarding c a p i t a l gains and recapture. Ships do not gual i f y for the government's investment tax credit that i s applied to the purchase of prescribed machinery and eguipment. Ihe basic t o t a l c r e d i t i s 5 percent of the asset's c a p i t a l costs and i s deductible from tax otherwise payable. Ships, however, do not qu a l i f y for the credit because 10 4 they are net used i n Canada in a designated a c t i v i t y as defined i n section 127(10). The advantages to shipowners would be substantial i f the Investment tax c r e d i t were extended to include ships since the industry i s very c a p i t a l i n t e n s i v e . ? 8 Concerning the disposition of ships, insurance proceeds that are used to acquire replacement property within a s p e c i f i e d time w i l l not be included in taxable income. Otherwise i f a ship i s disposed of, the owner i s subject to pay taxes on half of any c a p i t a l gain experienced, and an amount known as recapture may also have tc be brought into income. The amount recaptured would be egual tc the amount by which the s e l l i n g price exceeded the undepreciated c a p i t a l cost. I f the sale price was i n excess of the o r i g i n a l c a p i t a l cost (adjusted cost base) then there would be f u l l recapture of depreciation and the excess of the s e l l i n g price over the o r i g i n a l c a p i t a l cost would be treated as a c a p i t a l gain. There used to be tax l e g i s l a t i o n i n Canada that made i t possible to defer taxes on the recaptured portion of a ship's c a p i t a l cost but these sections are no longer in force. However, i t i s s t i l l possible for individuals who own ships to defer tax on recapture or c a p i t a l gains by purchasing an income averaging annuity. P r i o r to 1972, i t was also possible to avoid c a p i t a l gains on the disposition of ships since c a p i t a l gains were not taxable at that time., Canada has tax treaties with many countries and i n some of these t r e a t i e s shipping income receives s p e c i a l treatment. For example there i s the Canada-United States Tax Convention which states that "shipping income earned in one State from the operation cf ships registered in that state s h a l l be exempt from 105 taxation in the other contracting S t a t e . " 2 9 This means that a company that i s deemed to be a resident i n Canada fo r tax purposes i s not subject to tax on income earned in the U.S. by any 0. S.-flag vessel that i t might operate. Similar provisions e x i s t i n the Canada-U.K. Tax Treaty and i n other tax agreements that Canada has signed with other reciprocating nations. , When c o n f l i c t s arise between the Income Tax Act and a Tax Treaty i t i s the Tax Treaty that overrules the Act. There are several other tax provisions that d i r e c t l y affect Canadian shipowners and operators, the f i r s t of these deals with l e a s i n g . 3 0 These sections are relevant because many ships that are operated i n Canada are on lease or charter agreements (as was described i n chapter I I ) . These pa r t i c u l a r sections cf the Act l i m i t the amount of CCA which may be claimed by the owner of leased eguipment. These r e s t r i c t i o n s make i t unattractive for tanks and other intermediataries to become involved i n leasing operations. In a c a p i t a l intensive industry such as shipping leasing r e s t r i c t i o n s eliminate an alternative source of financing c a p i t a l . Another contentious issue i s the a p p l i c a b i l i t y of PAST XIII tax to charter and leasing arrangements with non-residents. . The Act through PAPT XIII l e v i e s a 15 percent withholding tax on certain payments to non-residents. One of these i s rental payments and the debate i s whether some types of charter arrangements are in fact lease payments and thus subject to the 15 percent withholding tax. Although the government has threatened tc interpret charter arrangements as consisting of rental payments i t has yet to actually apply t h i s p a r t i c u l a r 106 part of the act to such payments. However, the uncertainty created by the entire matter, has forced many chartering arrangements tc be done through "offshore" s u b s i d i a r i e s . , l a FINANCIAL ASSISTANCE IN THE CAPITAL PHASE The Canadian government does not have any government guarantee programs to a s s i s t domestic ship owners and operators. Canadian shipyards, however, do benefit from a guarantee-type program provided by the Export Development Corporation (EDC). This program "consists of insurance of export c r e d i t normally provided by Canadian charterd banks beyond f i v e y e a r s " 3 1 and enables shipyards to offer favourable c r e d i t terms to foreigners purchasing ships in t h i s country. The EDC i s also involved in providing d i r e c t loans to foreign owners and operators who contract to purchase vessels from Canadian shipyards. The c r e d i t terms of these loans meet OECD guidelines (1977) which i n s i s t that loans not be greater than 70 percent of the vessel's costs, do not exceed seven years, or carry less than an 8 percent rate of i n t e r e s t . Canadian shipowners and operators are e l i g i b l e for thes EDC loans and must raise c a p i t a l through the usual commercial channels or from the export loan programs of other countries. The shipbuilding industry l a s t year received construction subsidies from the federal government amounting to $75 m i l l i o n . These funds came from two basic sources, the Department of Industry Trade 8 Commerce (the Trade I n d u s t r i a l Program $59.2 m i l l i o n ) 3 2 and the Department of the Environment (the Fisheries and Marine Program). 3 3 As can be seen from Appendix 7 the construction susidy rate offered by IT5C has fluctuated widely 107 from a high of 40 percent in 1961-62 to a low of 0 percent from February 3, 1965 to December 31, 1965. Effec t i v e March 6, 1975 the Ship Building Industry assistance Program was introduced. The construction subsidy rate was set at 14 percent and was to be reduced by 1 percent each subsequent year u n t i l i t reached the 8 percent l e v e l . .However, on March 1, 1977 the government introduced temporary stimulus measures for the shibuilding industry and increased the subsidy rate to 20 percent. These temporary measures have since been allowed tc lapse, and on July 1, 1980 the rate reverted back to 9 percent with a planned reduction to 8 percent next year. 3* Order a 1976 program, money spent by shipbuilders f o r the modernization of equipment w i l l be matched by the federal government up to a maximum of 3% of the modernization c o s t s . 3 5 Government ownership i n shipping i s almost non-existent i n Canada and i s r e s t r i c t e d to the ownership of s i x f e r r y vessels that are on charter to private ferry operators. The government also has 51 percent equity i n Canartic Shipping Company l t d . which operates the M*V. A r c t i c the world's f i r s t ice-breaking bulk-carrier. £i HCN-FISCAL ASSISTANCE MEftSOFES In Canada, there do not ex i s t any b i l a t e r a l shipping agreements or cargo preference laws, although the Canadian government has recently stated that i t "intends to assess the p o s s i b i l i t i e s for Canadian-flag p a r t i c i p a t i o n i n the shipment from Canada of aid and cer t a i n commercial c a r g o . " 3 6 The government also intends to r e s t r i c t the carriage of processed or p a r t i a l l y processed resources from the Arctic regions to 108 Cana dian - f l a g vessels "where they are available at a reasonable p r i c 7 Can ada, similar'to many other countries, has l e g i s l a t i o n that re serves some areas of shipp ing f o r national-flag vessels only . Tr a f f i c between Canadian port s located i n the Great Lakes, and the St.Lawrence i s r e s t r i c t e d to Canadian-flag vessels. Vess els other than Commonwealth regis t r y are not e n t i t l e d to enga ee i n the Canadian coasting t r a d e . 3 8 Vessels that are cons true ted and registered In Commo nwealth countries are allowed to oper ate i n the Canadian coastin g trade with the exception of the Grea t lakes and the St.Lawrence regions. The e n t i r e subject of tbe Canadian coasting trade i s currently being investigated by t he f ederal government a u t h o r i t i es. Thi s chapter has examined current shipping policy i n Cana da; the factors a f f e c t i n g i t s formulation, the major deep-sea shipping issues, and the s p e c i f i c assistance measures. The next chapter evaluates the appropriateness of these, and other proposed assistance measures, 109 v i i A caNADiaN PLaj O F A C T I O N This chapter addresses the central question of t h i s t h e s i s , "What assistance measures, i f any, would be appropriate for encouraging the development of a Canadian deep-sea f l e e t " ? The word "appropriate", used in the question, was chosen afte r great deliberation because i t could be defined i n such a manner so as to encompass a l l the desired c h a r a c t e r i s t i c s that an assistance measure should possess.. Thus the word "appropriate", as used i n thi s t h e s is, transcends i t s dictionary meaning, "suitable f o r , or belonging to the person, circumstance or place."* an appropriate assistance measure i s seen as one that i s adequate, economically e f f i c i e n t , eguitable, acceptable, adaptable and r e l i a b l e . 2 The meaning of each of these c h a r a c t e r i s t i c s i s discussed below. an assistance measure f u l f i l l i n g the majority of these c h a r a c t e r i s t i c s i s held to be a more appropriate assistance measure than one that f u l f i l l s just a few. Adequate: adequate means being "equal to what i s required.'? 3 An adequate shipping assistance measure i s one that has the power to achieve the desired objective, in thi s case, the development of a Canadian deep-sea f l e e t . An assistance measure must be adequate in two respects. F i r s t , i t must be adeguate i n r e l a t i o n to assistance measures that are offered in other countries and second, I t must be adeguate i n re l a t i o n to incentives offered to other Canadian industries. I f an assistance measure i s inadequate in either respect, then i t w i l l not be equal to the task required; the establishment of a Canadian deep-sea f l e e t . 110 Economically E f f i c i e n t : Economically e f f i c i e n t has been defined as the "absence of waste, i n terms of s a t i s f a c t i o n people derive from consuming goods and services."* Economic e f f i c i e n c y i s achieved when a l l resources are employed i n their most productive use. . Equitable: Any assistance measure that i s introduced should be equitable in two respects. F i r s t , i t should be f a i r and non-discriminatory towards i n d i v i d u a l Canadian operators engaged i n international shipping. Second, i t should also be f a i r and reasonable in reference to assistance measures offered to ether sectors i n the Canadian economy, For example, overly generous assistance to international shipping operators may be considered ineguitable (and probably economically i n e f f i c i e n t also) i f simi l a r assistance i s . not extended to coastal shipping operators, or international a i r c a r r i e r s . Acceptable: Finding an assistance measure that would be acceptable to a l l the groups involved i n Canadian shipping i s a near impossible task. I t i s possible, however, to i d e n t i f y measures that are acceptable to many of these parties, and others that are not acceptable to any group,, Acceptability i s a very desirable c h a r a c t e r i s t i c for an assistance measure to possess since even the most economically e f f i c i e n t programs may be in e f f e c t i v e i f net accepted by the parties involved. Thus the acceptability cf a p a r t i c u l a r measure depends upon how and i f benefits can be dist r i b u t e d in a manner such as to to make a l l parties better o ff. 1 1 1 a d a p t a b l e : Seme assistance measures are more adaptable and f l e x i b l e than ethers. In Chapter I I , some of the major trends and developments occurring in international shipping were examined. An appropriate assistance measure should have the a b i l i t y to adapt easily to these changes and new circumstances. To be able to discuss which assistance measures might be appropriate for developing a Canadian deep-sea f l e e t , one must have a basic understanding of the information presented i n the previous chapters. For example, i t would be impossible to determine the adeguacy of proposed assistance measures without knowing something about the assistance measures that e x i s t in other countries (Chapter V). A discussion of the economic e f f i c i e n c y and r e l i a b i l i t y of the various measures demands an understanding of the economic implications associated with each (Chapter IV). S i m i l a r i l y , the eguity and acceptableness of the measures would be d i f f i c u l t to ascertain without an appreciateicn of how the shipping industry operates i n Canada, or who are the major parties involved (Chapter I'll) . . Adaptability i s founded on the p r i n c i p a l s of change as portrayed in Chapters I I and III i n the sections dealing with trends and developments. The analysis and evaluation of the various assistance measures i s conducted using the, by now familar, three group operating phase, and nonfiscal c l a s s i f i c a t i o n , f i n a n c i f i n a n c i a l assistance i assistance measures. 1. FIN ANCI AL ASSISTANCE al assistance i n the n the c a p i t a l phase IN THE OPEBATING PHASE 112 As was done in previous chapters, f i n a n c i a l assistance i n the operating phase w i l l be subdivided into, d i r e c t operating subsidies, government-provided f a c i l i t i e s , s p ecial subsidies, and tax-incentive subsidies. JL. 0peratinq Subsidies Judging from the example of the American subsidy program, a s i m i l a r i l y designed Canadian program would probably be successful i n attra c t i n g more ships to Canadian r e g i s t r y . It i s doubtful that American operators of U . S . - r e g i s t e r e d vessels could be competitive with foreign operators, i f the operating subsidy were ever withdrawn. 5 To remain competitive, American operators would be forced to forsake American reg i s t r y i n favour of the cheaper operating costs associated with foreign r e g i s t r y . A Canadian program. If ever introduced, would be designed to eguate the higher costs of operating Canadian-registered vessels, with the lower costs experienced under foreign r e g i s t r y . The major subsidizable costs would probably be crew salari e s and wages, repairs and maintenance and insurance c o s t s . 6 Of these three the largest d i f f e r e n t i a l would probably be in the area cf crew s a l a r i e s and wages. In the O.S. program, the wage and salary d i f f e r e n t i a l accounted for almost eighty-f i v e percent of the t o t a l operating subsidy payments made.7 The reason for t h i s alarmingly high percentage was that American wage rates were three times higher than foreign wages, and that wages constituted approximately t h i r t y percent of t o t a l voyage costs. 113 Data c o l l e c t e d from Canadian sources would tend to suggest t h a t Canadian crew c o s t s account f o r a s i m i l a r percentage of t o t a l voyage c o s t s . , S t a t i s t i c s , s u p p l i e d by some c f the o p e r a t o r s i n t e r v i e w e d , r e v e a l t h a t manning c o s t s comprised t w e n t y - f i v e to t h i r t y percent of t o t a l o p e r a t i n g expenses or f o u r t e e n percent of t o t a l o p e r a t i n g revenue. a The Alcan Study , done i n 1976, r e v e a l e d that Canadian manning c o s t s were s i x t y - f i v e to s e v e n t y - f i v e percent higher than European manning c o s t s (see Appendix 8). Since the time of that study, the Canadian d o l l a r has d e p r e c i a t e d i n value by approximately f i f t e e n percent which has tended t o narrow the gap between Canadian and f o r e i g n manning c o s t s . , Today, Canadian c o s t s are probably f o r t y t o f i f t y percent higher than f o r e i g n manning c o s t s . I f the Canadian government were to s u b s i d i z e Canadian o p e r a t o r s f o r only the d i f f e r e n c e i n crew s a l a r i e s and wages, then these o p e r a t o r s would experience approximately a 7.6 percent decrease i n t h e i r o p e r a t i n g c o s t s and a 4.8 percent i n c r e a s e i n t h e i r o p e r a t i n g margin ( a f t e r tax b e n e f i t s of 2*6% -see Appendix 10). T h i s r e p r e s e n t s a f a i r l y s u b s t a n t i a l a f t e r tax i n c r e a s e i n p r o f i t a b i l i t y and would undoubtedly encourage more Canadian operators to become i n v o l v e d i n deep-sea a c t i v i t i e s . The c o s t to the f e d e r a l government of such a program would i n h e r e n t l y depend on the number o f s h i p s q u a l i f y i n g f o r the o p e r a t i n g subsidy. For the purpose of a n a l y s i s , i t i s assumed t h a t the s h i p s t h a t would g u a l i f y f o r the o p e r a t i n g s u b s i d y are the same ones that were i d e n t i f i e d i n the Alcan Stnd y as being commercially v i a b l e under o p t i o n 3 at the t e n percent c u t o f f 1 1 4 r a t e . 9 The routes covered by t h i s f l e e t and the vessel requirements to service these routes are presented i n Appendix 11. By hypothesizing the number of ships qualifying f c r the operating subsidy, and knowing the difference i n Canadian versus foreign manning cost, i t i s possible to estimate the cost of a Canadian d i f f e r e n t i a l operating subsidy program. I t i s estimated that such a program would cost the federal government a t o t a l of $5.5 million annually, with costs escalating to $7.7 m i l l i o n f i v e years hence and to $9.9 m i l l i o n by 1990 (see Appendix 12).., Appendix 13 shows another way of c a l c u l a t i n g the estimated costs of a Canadian operating subsidy program. Saguenay Shipping Ltd., in a brief presented to the federal government, estimated that Canadian annual wage costs were $250,000 to $350,000 higher per vessel than foreign vessels. I f such figures are used then the estimated annual cost of the program would be $4.4-6.2 million i n 197.9, $6.2-8.6 million i n 1985, and $7.9-11.1 million in 1S85 which tends to support the cost figures obtained above. The s o c i a l costs of an operating subsidy program are not necessarily represented by the cost of the program to the federal government. In f a c t , the subsidies paid by the government are not r e a l l y , in the d i r e c t sense, a cost to society at a l l since the government»s loss i s presumably the shipowners 1 gain. , However, to finance the operating subsidy program, the government may either have to increase taxes or eliminate other programs. Both courses of action must be considered when c a l c u l a t i n g the s o c i a l costs of an operating subsidy program. The true s o c i a l cost of an operating subsidy program i s the value of the inputs that are committed to 115 s h i p p i n g that might have been used elsewhere.. T h i s i s the concept that economists r e f e r to as o p p o r t u n i t y c o s t s . I f r e s o u r c e s would have otherwise remained I d l e then the s o c i a l c o s t of using them i n s h i p p i n g o p e r a t i o n s i s i n f a c t z e r o . 1 0 Thus, i f an o p e r a t i n g subsidy program generates jobs f o r people who might have otherwise been unemployed then . the c o s t to s o c i e t y of employing these i n d i v i d u a l s i n s h i p p i n g a c t i v i t i e s i s z e r o . T h e r e f o r e , i t becomes important to e s t i m a t e the employment a s s o c i a t e d with an expanded Canadian deep-sea f l e e t . Appendix 14 shows the t o t a l number of crew and o f f i c e r s that would be r e q u i r e d to man the f l e e t i d e n t i f i e d e a r l i e r i n Appendix 11. I f we assume t h a t ten percent of the manpower would otherwise have been unemployed then the annual c o s t of the program decreases by approximately one-half to one m i l l i o n d o l l a r s {see Appendix 15)., S i m i l a r cost adjustment would a l s o have to be made f o r ether i n p u t s used i n the p r o d u c t i o n of s h i p p i n g s e r v i c e s { i . e . , c a p i t a l , eguipment). Another s o c i a l c o s t t h a t must a l s o be c o n s i d e r e d i s the c o s t s a s s o c i a t e d with e s t a b l i s h i n g and a d m i n i s t e r i n g such a program. E e n e f i t s of an o p e r a t i n g subsidy program are r e p r e s e n t e d by the i n c r e a s e i n revenues experienced by Canadian o p e r a t o r s and by any other i n t a n g i b l e b e n e f i t s that might occur, such as i n c r e a s e s i n r e l i a b i l i t y of s e r v i c e , i n c r e a s e s i n n a t i o n a l s e c u r i t y , and p r i d e and p r e s t i g e . Operating s u b s i d i e s are an i n a p p r o p r i a t e form of s h i p p i n g a s s i s t a n c e i n the Canadian s i t u a t i o n because they do not encourage ship o p e r a t o r s to use resources i n an economically 116 e f f i c i e n t manner. Operators tend to use more of the subsidizable resources than they would normally use,.For example, i n the U.S. of every $1.00 in wages paid aboard American subsidized vessels, $0.67 i s paid by the government.M The d i s t o r t i o n of costs, caused by the introduction of an operating subsidy program, encourages operators to use more labour resources than i s optimal from a s o c i e t a l perspective. y Operating subsidies are also not an appropriate form of assistance because they are not acceptable to many of the groups involved in Canadian shipping. Ship operators, perhaps fearing a public backlash, simply have not asked for operating subsidies at a l l . The government does not want to implement such a program, because of the costs involved, the amount of data that needs to be co l l e c t e d , and the strong objections that would be voiced by Canadian shippers opposed to such a program. Also an operating subsidy program does not guarantee that e i t h e r the average freight rate w i l l decline or that shipped tonnage w i l l increase. F i n a l l y , operating subsidies also f a i l the adaptability test. Once an operating subsidy i s in place , i t s becomes very d i f f i c u l t t c remove at a future date. A good example of t h i s i s the O.S. program which has now been in ef f e c t f o r f i f t y - f o u r years and which shows no signs of being terminated., E. Government-provided F a c i l i t i e s We have seen that many national governments a s s i s t t h e i r shipping industries by providing funds f o r shipping and that Canada i s nc excepticn.,For the f i s c a l year 1979-80 the Research 117 Branch of the Canadian Transport Commission has been allocated $2.5 mil l i e n , a percentage of which w i l l be used to finance marine-related s t u d i e s . * 2 Increasing research expenditures would not a t t r a c t many ships. If any , to Canadian r e g i s t r y . This i s because shipowners prefer tangible benefits that can be counted i n d o l l a r s and cents. Benefits associated with increased research expenditures are d i f f i c u l t t c i d e n t i f y , nearly impossible to value, and accrue over an indeterminant time horizon. Thus, i t i s impossible to id e n t i f y an optimal l e v e l f o r research and development funding. In this sense research funding i s also a somewhat unreliable form of assistance which many or may not benefit ship operators. Some areas cf shipping research appear that they might be more be n e f i c i a l to society than others. I am ref e r r i n g here, to areas such as Arctic shipping, offshore d r i l l i n g technology, and ice-breaking. In these areas Canada seems to hold a competitive advantage and increasing research and development funding could res u l t i n substantial benefits to Canadian society such as sovereignty, security, and prestige. £jt Special Subsidies We have already seen that vessels imported into Canada to be used exclusively in international trade, are admitted free of any customs duties. I f an imported vessel i s not to be exclusively in international trade, then customs duties, amounting to 25 percent of i t s appraised Canadian value, must be paid, trade. On imported vessels that w i l l not be used 118 exclusively in i n t e r n a t i o n a l trade, customs duties amounting to twenty-five percent cf the vessel's appraised Canadian value. How much do operators of international trade vessels benefit from this customs duty exemption? Calculations done in Appendix 17 show that, for a shipowner purchasing a 28,000 dwt bulk-carrier, the benefit i s guite substantial, amounting to about $3 m i l l i o n (if a 20 percent construction subsidy i s assumed). In the case of a nine percent construction subsidy the benefits are even larger, t o t a l l i n g almost $6 m i l l i o n . The exclusion from customs duties, r e s u l t s i n Canadian owners purchasing ships abroad which from a Canadian standpoint i s probably more economically e f f i c i e n t than having them purchase vessels from domestic sources. With Canadian prices (before construction subsidy i s considered) being approximately f i f t y percent h i g h e r , 1 3 i t makes sense to purchase vessels abroad, both from an i n d i v i d u a l and s o c i e t a l perspective. Why should $27.5 m i l l i o n i n Canadian resources be committed to building a ship domestically i f the same ship can be purchased from foreign yards for $19 m i l l i o n ? 1 4 Granted, building the ship i n Canada w i l l generate employment, but how many of the people employed i n shipbuilding a c t i v i t i e s would have otherwise been unemployed? Unless the benefits of the increased employment, generalted by building these ships i n Canada, t o t a l more than $8.5 m i l l i o n then i t makes sense from an economic e f f i c i e n c y standpoint to have the ship b u i l t abroad. . Currently, materials imported into Canada, that are to be used in the building of ships to be exported, are also exempt from customs duties. If customs duties were eliminated on a l l 1 1 9 shipbuilding materials, regardless of whether the ship i s to be exported, would this benefit shipowners? No doubt such measures would benefit shipbuilders since i t would enable them to purchase their material from the cheapest source, whether Canadian or foreign. Presumably, the lower costs would be reflected i n lower shipbuilding prices and the cost difference between building a ship here and building abroad would narrow. The degree to which shipbuilding prices f a l l would be dependent upon market conditions, such as the portion of shipbuilding material purchased here and abroad, and the e l a s t i c i t i e s of supply and demand for new ships. . Benefits to owners of deep-sea vessels w i l l result i f , after the blanket exemption of shipbuilding material from customs duties, they are able to purchase ships at lower prices than before. Whether t h i s would occur i s uncertain, thus t h i s type cf assistance measure i s not a r e l i a b l e form of assistance with which to aid Canadian shipowners. Kany Canadian operators engaged i n domestic shipping have complained that the exemption from import duties should be extended to include a l l imported ships, whether they are to be used in in t e r n a t i o n a l or domestic trade. I t should be remembered, however, that domestic ship operators enjoy a pr i v i l e g e that i s not afforded to Canadian operators engaged in international shipping, that of a protected market., Domestic operators enjoy the protection of cabotage r e s t r i c t i o n s , that l i m i t and i n some cases excludes foreign competition., Thus the exemption of only ships to be used exclusively in in t e r n a t i o n a l trade, i s not ineguitable in t h i s sense, i t merely enables 1 2 0 Canadian to engage i n services from which they might otherwise be excluded. 'HA ,212 INCENTIVES There are fcur general areas in the Canadian tax law system that could be modified for the purpose of encouraging the development of a Canadian deep-sea f l e e t . These areas are, the investment tax c r e d i t (ITC), c a p i t a l cost allowances (CCA) , tax rates applied tc taxable income, and replacement or reserve funds. Ihe benefit to shipowners and operators of a tax incentive measure i s represented by the present value of taxes that would otherwise have been payable, i f not for the existence of that p a r t i c u l a r tax incentive. Of course, any benefit accruing to shipowners and operators represents a cost to the government i n the form of taxes foregone. The cost to the federal government of the four tax subsidy areas i s examined i n the subseguent sections. Hhen examining the economic e f f i c i e n c y of tax subsidy programs, taxes saved or taxes foregone become almost i r r e l e v a n t to the discussion except to the extent that they cause d i s t o r t i o n s in other sectors of the economy. This i s because taxes represent a transfer of resources from one sector i n society (ship operators) tc another group (government) and as such, they do not result i n any change in the t o t a l wealth of Canadian society. This i s not to i n f e r that tax subsidies have no effect whatsoever on the welfare of society. The decrease or 121 elimination cf taxes otherwise payable, enables Canadian operators to compete in more markets, thus benefits accrue to Canadians in the form of increased shipping revenues. What then are the corresponding s o c i a l costs? To increase shipping services , more Canadian resources s i l l have to be committed to shipping. Therefore, the s o c i a l costs are egual to the value or opportunity cost of these resources in their best possible alternative use. If resources, that might have otherwise been unemployed , are used to produce shipping services, then the cost • of these resources i s zero. Sometimes the benefits associated with tax incentives may not be measurable. , In these cases the benefits are l e f t as i r t a r g i b l e s and the nature, rather than the value, of the benefit i s discussed. A l l s o c i a l benefits and costs are to be valued at their pre-tax value, and discounted by an appropriate disccunt rate. For the purpose of analysis, a ten percent s o c i a l disccunt rate i s assumed.*5 The adeguacy of the various tax assistance measures s i l l , n a t urally, vary from measure to measure and i s also discussed i n subsequent sections. Tax subsidies, are also perhaps the most adaptable form of assistance, since the infrastructure reguired to administered them i s already in place. F i n a l l y , tax subsidies are a f a i r l y r e l i a b l e form of assistance in that they are a d i r e c t benefit to shipowners and operators, provided that taxes are otherwise payable. A brief submitted to the federal government by the Council of Marine C a r r i e r s i s quoted as saying the "Canadian companies achieve a pre-tax p r o f i t rate of return on sales of only two to three percent.'! 1 6 S t a t i s t i c s Canada data 122 suggests a somewhat higher rate of return, about eight p e r c e n t . 1 7 For the purpose of t h i s thesis an average return on sales cf five percent w i l l be used. Investment Tax Credit S h i p p i n g i s a rather c a p t i a l intensive industry and i t would seem that an investment tax credit would be an appropriate assistance measure, one capable of attr a c t i n g more ships to Canadian re g i s t r y . However, upon closer inspection the benefits of an investment tax cre d i t may not be as bountiful as they might i n i t i a l l y appear. Tax c r e d i t s are applied against taxes otherwise payable. However, i f the company that q u a l i f i e s for the tax c r e d i t , i s not earning s u f f i c i e n t income then the tax credit deduction can not be used and must be car r i e d over to subseguent years when taxes might otherwise be payable. , I f shipping pre-tax p r o f i t s are only two to three percent on t o t a l sales as suggested by the Council of Marine Car r i e r s ' report, then i t i s questionable as to when such tax c r e d i t s could be used. How much tax revenue would the federal government forego i f a f i v e percent investment tax c r e d i t on new ships were introduced. That would depend on the number of ships that would gualify for such a c r e d i t and when such c r e d i t s could be claimed. Using the data c o l l e c t by Mr. . K.C. G r i f f i n , Marketing Director Overseas Trade S Petrochemicals with CP B a i l , i t i s estimated that twelve ships (valued at $184 million) would have q u a l i f i e d f o r the tax c r e d i t deduction i n 1977 (see appendix 16 for a l i s t cf the ships that would have q u a l i f i e d f o r such a tax 123 c r e d i t ) , Fcr the year 1978, seven ships would have q u a l i f i e d (value $125 B i l l i o n ) and in 1979 seven ships (value $95 m i l l i c n ) . The following analysis assumes that only newly-ccnstructed Canadian-owned ships engaqed i n international trade would qualify for the deduction. Based on such an assumption i t i s estimated that the e l i g i b l e investment tax cre d i t s f o r the years 1977, 1978, and 1979, would have been $9.2 m i l l i o n , $6.75 m i l l i c n , and $4.75 m i l l i o n respectively (see Appendix 16)., I t must be emphasized that the investment tax c r e d i t could only be claimed against Canadian taxes otherwise payable. Thus, one advantage of an investment tax-credit assistance program i s that the benefits accrue primarily to Canadian-resident in d i v i d u a l s and corporations. Unclaimed c r e d i t s could, naturally, be carried over and claimed i n subseguent years. The cost to the federal government of an investment tax cr e d i t program f c r new ships would be marginally lower than the figures gucted above since claiming an investment tax cr e d i t decreases the c a p i t a l cost base cf the newly acquired vessel.,. This means that c a p i t a l ccst allowance claimed i n subseguent years w i l l be smaller than they would have been i f no tax c r e d i t had been claimed.. Thus the cost of an investment tax c r e d i t program may have ranged from $3 mil l i o n to $8 million depending on when such cr e d i t s could have been claimed. . Thus, an investment tax c r e d i t program i s only a r e l i a b l e form of assistance i f taxes are otherwise payable. The s o c i a l benefits and costs of a tax c r e d i t program are simi l a r to those discussed previously. Taxes paid or foregone represent neither a ccst or benefit to society, except to the 124 extent that they cause di s t o r t i o n s in other sectors of the economy. The true s o c i a l cost of such a program i s equal to the increase in revenues less the corresponding increase i n costs {adjusted to r e f l e c t opportunity costs) associated with the introduction of the program. These increases i n revenues and costs should be discounted using the s o c i a l discount rate of ten percent. Capital Cost Allowances Chapter V examined the depreciation tax allowances that exi s t in ether maritime nations. In Canada, we saw that two CCA rates e x i s t , 33.3 percent s t r a i g h t - l i n e on newly constructed vessels b u i l t and registered in Canada, and 15 percent f o r a l l other types of vessels. This dual rate system was obviously intended tc encourage shipowners to build and register ships here i n Canada rather than abroad. A shipowner who operates a $20 million vessel that q u a l i f i e s for the 33.3 percent rate w i l l experience a present value cash flow tax saving of $2. 124 m i l l i o n compared to an operator with a s i m i l a r vessel that must be depreciated at the f i f t e e n percent rate (assuming a 12 percent cost of c a p t i a l , a vessel l i f e of f i f t e e n years, and a tax rate of f i f t y percent - see Appendices 18 and 19) . The present cash flow savings associated with Canadian-built and registered vessel may p a r t i a l l y offset the higher cost of constructing ships i n Canadian yards (estimated to be about $3.45 mil l i o n on a 28,000 dwt bulk c a r r i e r 1 8 ), however, i t i s not large enough to offset the higher annual operating costs associated with Canadian r e g i s t r y . i ' The Canadian f i f t e e n percent declining CCA rate i s 125 approximately equal to a ten percent rate under the assumptions l i s t e d above. Thus the Canadian system i s approximately egual to the rates allowed in I t a l y . The Belgium and French formulae systems are eguivalent to about a f i f t e e n straight l i n e rate, appendix 19 shows the cash flow savings that would accrue to Canadian percent shipowners i f the CCA rates were increased to leve l s that exist in some of these other countries. Changing from a f i f t e e n percent declining balance method to a f i f t e e n percent s t r a i g h t - l i n e method would r e s u l t i n present value cash flow savings of $886,000 per $20 m i l l i o n vessel. Changing t c a twenty percent s t r a i g h t - l i n e method, such as found in Sweden, would r e s u l t i n a $1.4 mi l l i o n saving.. I f the CCA rate was changed from a f i f t e e n percent declining rate to a f i f t y percent s t r a i g h t - l i n e rate then a cash flow saving of $2.5 m i l l i c n would accrue to shipowners. The CCA rate allowed on Canadian-built and registered new ships i s f a i r l y generous i n comparison to rates allowed i n other countries. If the rate for t h i s type of vessel were increased from 33.3 percent to 50 percent then a cash flow saving of $397,000 would r e s u l t . I f increased s t i l l further to a 100 percent rate, sucb as found i n B r i t a i n , then an additional benefit of $327,000 would accrue to shipowners. Another incentive for encouraging the development of a deep-sea f l e e t i s to allow special or advance depreciation. For example, suppose Canadian tax authorities were to introduce l e g i s l a t i o n which would allow t h i r t y percent of a vessel's cost to be written cff between the contract and delivery date (see Appendix 20). Under similar assumptions as before (and assuming 126 a one year gap between date of contract and date of delivery) cash flow benefits amounting to $1. 17 m i l l i o n 2 0 would accrue to shipowners, an an amount comparable to changing from a f i f t e e n percent tc twenty-five percent declining rate. The benefits accruing to shipowners could also be substantial i f special depreciation were introduced. If a special depreciation system s i m i l a r to the I t a l i a n system were in t r o d u c e d 2 1 , cash benefits of approximately $1.25 m i l l i o n would accrue to Canadian shipowners on each vessel (see Appendix 20). The introduction of a s p e c i a l or advance depreciation system would c e r t a i n l y be a start at narrowing the gap that exists between Canadian shipping costs and foreign shipping costs. , The o v e r a l l cost to the government i s once again dependent on the number of ships involved. Increasing CCA deductions might be a more e f f e c t i v e assistance measure than tax c r e d i t s since CCA can be deducted from taxable income and can be used to create a business loss for tax purposes. This loss can then be carried back one year or forward f i v e years and applied against income in any of those years. Thus the f l e x i b i l i t y emanating from a CCA assistance program makes i t appear to be a f a i r l y a t t r a c t i v e assistance measure, one that would be acceptable to both government and private industry. Induction i s Ipcpje Tax Bates In chapter "V, we saw that in several coutries income earned from the operation of vessels engaged in international trade i s exempt from income t a x e s . 2 2 In Canada, such a provision does not e x i s t and Canadian earnings from international shipping are taxed i n a similar manner as any other Canadian source income. 127 How serious a disadvantage does th i s pose for Canadian operators tr y i n g tc compete in international markets? And would the removal cr reduction in income tax rates be an appropriate form of assistance tc implement? It i s interesting to notice that none of the b r i e f s submitted for publication in the federal government's Measures tc Encourage the Gradual Development of a Canadian DeejD-Sea Fleet - Industry Submissions reguests the elimination or reduction cf the present tax rate. I t seems that shipowners would rather have assistance measures that could be used to reduce t h e i r taxable income rather than a reduction i n the rate that i s applied. The reason for t h i s apparent preference would seem to stem from the b e l i e f of shipowners, that the government would be more w i l l i n g to grant income-reducing incentives than i t would be to reduce rates. This i s probably a r e a l i s t i c attitude to take, since decreasing the tax rate applied to international shipping income might be a dangerous precedent, one which would be viewed by ether industry^ o f f i c i a l s as favouritism. There i s also a guestion of how r e l i a b l e a reduction i n tax rates might be in encouraging the develoment of a Canadian deep-sea f l e e t . Such an assistance measure would only be e f f e c t i v e i f taxable earnings e x i s t . Seducing tax rates may be an e f f e c t i v e incentive measure during periods of excess demand i n the shipping markets, but they would l i k e l y have a n e g l i g i b l e effect during periods of excess supply. Shipping p r o f i t s tend to display c y c l i c a l patterns and so i t may be d i f f i c u t to determine when and i f rate reductions should be applied. Because . of the 128 uncertainty associated with shipping p r o f i t s a reduction in tax rates on international shipping income wpuld probably not be a p a r t i c u l a r i l y r e l i a b l e fcrm of assistance. , Suppose that the government did agree to t o t a l l y exempt from income tax, shipping earnings on international shipping operations and that t h i s benefit was extended to Canadian domiciled ship operators. Hhat would such a shipping assistance program cost the government? Estimates are that the federal government under these conditions would forego approximately $6.74 m i l l i o n (see Appendix 21). I f the tax exemption were r e s t r i c t e d tc Canadian-owned and registered vessels then the progiam might cost close to $4.5 m i l l i o n (assuming average revenue per ship of $2.5 million and a 5 percent return on s a l e s ) . 2 3  Bese1ye Funds Reserve funds enable shipowners to defer the payment of taxes otherwise payable, on the condition that certain requirements are met. These requirements vary from country to country but they usually specify who may create such funds, what deposits may be made to the fund, and under what conditions the funds can be withdrawn. If a reserve fund program s i m i l a r to the current American program were introduced here i n Canada, then Canadian operators would probably be permitted to make the following deposits to the reserve; shipping p r o f i t s earned from the operation of vessels i n in t e r n a t i o n a l trade, taxable c a p i t a l gains experienced from the sale of ships, CCA deductions, and interest accruing on the reserve i t s e l f . Earnings, taxable c a p i t a l gains 129 and accrued interest deposited i n t o the fund would decrease the shipowner's immediate tax l i a b i l i t y . However, the c a p i t a l cost base cf the newly acquired vessel would be reduced to the extent that these funds were used to purchase the new vessel. This w i l l r e s u l t i n smaller CCA deductions i n subsequent years. The deposit of CCA deductions into the reserve would not e f f e c t the immediate tax l i a b i l i t y of the shipowner since these amounts are normally deducted from taxable income anyhow. Thus, they would not a l t e r the c a p i t a l cost base of the new asset purchased with such funds. An example may help c l a r i f y how such a reserve proqram would function. Suppose that a shipowner made $3 mi l l i o n i n int e r n a t i o n a l shippinq earnings, that his CCA allowances t o t a l l e d $1 million and that a $1.5 m i l l i o n c a p i t a l gain had resulted from the sale of a ship. If no reserve fund program existed, the owner's tax l i a b i l i t y would be $1,265,0002* assuming a 46% tax rate. With a reserve fund program, similar to the one described above, the operater could deposit $600,0 00 of earnings i n t o the reserve (assuming that a maximum of twenty percent t o t a l earnings can be deposited into the fund). . The operator could also deposit $750,000 in c a p i t a l gains and $1 m i l l i o n i n CCA deductions to the reserve. Accordingly, the owner's tax l i a b i l i t y would be reduced to $644,000 2 S representing an immediate tax saving of $621,000., However, when withdrawls are made from the fund to purchase a new ship the CCA deductions made in subsequent years w i l l be smaller because the c a p i t a l cost base of the new vessel w i l l be $621,000 less than i t would otherwise have been. By continuously reinvesting shipping earnings i t i s possible for 130 the shipowner to avoid paying taxes e n t i r e l y through the use of the reserve fund. How much would such a program cost the federal government? Based cn studies done on the American reserve program, and allowing for the fact that the Canadian registered f l e e t i s only one sixteenth the size of the O.S. registered f l e e t , a Canadian reserve fund program might cost i n the neighbourhood of $2 m i l l i o n tc $3 m i l l i o n annually (see Appendix 2 2 ) . . Other lax Subsidies In Canada, the f i l i n g of consolidated tax returns i s not permitted. If i t were allowed, then international shipping losses could be written-off against other forms of income thus mitigating the payment of income taxes. .. This i s unlikely to occur, however, since i t would represent a rather abrupt change i n Canadian tax policy. Another contentious Canadian tax law area, in respect to shipping, i s the a p p l i c a b i l i t y of withholding taxes to charter payments made to foreigners. Supposedly, a withholding tax of f i f t e e n percent i s to be withheld from charter payments made to foreigners. In practice, however, the government has been hesitant to enforce the tax. If the withholding tax provisions were enforced then a couple of things might happen. , F i r s t , foreigners might increase charter prices so that they could s t i l l earn the same afte r tax p r o f i t as before. Second, Canadian shipping companies might establish "off-shore" subsidiaries to conduct their charter business. In either case, the application of the withholding tax does not r e s u l t i n any net benefits to Canadian society. Furthermore, the current confusion that exists 13.1 concerning the application of the withholding tax does not make for a situation that i s conducive for stable charter agreements, f i n a l l y , in 1976, Regulations 1100(15) to 1100(20) of the Income Tax Set were added which r e s t r i c t e d the amount of leasing losses that could be claimed. These Regulations make i t unattractive for banks, trust companies and other f i n a n c i a l i n s t i t u t i o n s to become involved in ship leasing arrangements. Before the introduction of these provisions i t was possible for banks and commercial enterprises to o f f s e t leasing losses (created by the large CCA deductions permitted during the f i r s t years) against other income thus decreasing their taxes payable, Seme of these savings would would be passed on i n the form of lower interest rates to the operators who are leasing the vessels from the bank. Leasing i s a form of financing that was popular i n many indus t r i e s , and i t i s unlikely that shipping would receive a s p e c i a l exemption from these provisions. Is. FINANCIAL ASSISTANCE IN THE CAPITAL PHASE Chapter V examined some of the c a p i t a l phase assistance measures that exist in the various nations throughout the world. In seme of these nations such programs have been very successful in establishing and promoting the national f l e e t s of those countries. Included among the measures are loan guarantees, dire c t leans, construction subsidies and government-ownership. JU loan Guarantees Extensive loan guarantee programs for shipping e x i s t i n 132 most of the major maritime nations, including West Germany, Greece, Norway, the United Kingdom and the United States. With a loan guarantee program, the government, i n the event of default by the shipowner, guarantees payment of any p r i n c i p a l and interest on the obligation. Such programs are advantageous to 'Shipowners because i t enables them to secure better c r e d i t terms on their loans. These may include lower inter e s t rates, longer repayment periods, or larger loans than might otherwise be possible without the guarantee. Analysis done in the Alcan Study indicated that a change i n loan terms could, depending on the precise terms, make the Canadian-flag options more profitable than the fore i g n - f l a g options,"Canadian competitiveness i s highly s e n s i t i v e to financing c o s t , " 2 6 Appendix 23 shows that benefits accruing to a shipowner from a decrease in borrowing costs from 13 percent to 12 percent could amount tc $3.1 million on a $20 m i l l i o n lean.. Measuring the costs and benefits to society of a loan guarantee program i s a l i t t l e more d i f f i c u l t . Shipowners w i l l benefit since they w i l l be able to obtain loans with more favourable repayment terms, which should enable them to compete i n more markets. From these benefits to shipowners must be subtracted the premium payments made to the government (usually one-half tc one percent of the t o t a l loan value) by shipowners to secure the loan guarantee. The banks may or may not benefit from a loan guarantee program. They w i l l be receiving smaller repayment amounts from shipowners but the certainty of the repayments i s increased due to the guarantee from the government. F i n a l l y , the government receives benefits i n the 133 form cf premium payments received from the shipowners, but then must pay out some of these benefits to cover defaulted loan repaymants. Thus the cost or benefit to the government of a loan guarantee program w i l l depend on the premium rate charged to owners f o r the guarantee privilege and the stringency exercised by the government i n granting the guarantees. In the case of foreign borrowing, the analysis i s s l i g h t l y d i f f e r e n t . Shipowners must s t i l l pay premiums to the government which neither represents a cost or benefit to society. As a re s u l t of the government guarantee shipowners are able to secure lower interest rates from foreign lending i n s t i t u t i o n s . This represents a gain or benefit to society. However, i f Canadian operators default on t h e i r payments then the Canadian government would be obligated to pay the defaulted amounts. The payment by the government tc foreign lending i n s t i t u t i o n s thus represents a s o c i a l cost to Canada. Whether a net benefit s i t u a t i o n arises w i l l depend upon the number of payments the government must make on defaulted loans and the savings experienced by the shipowners through lower interest rates. Suppose that the Canadian government decided to guarantee loans made to Canadian shipowners by foreign i n s t i t u t i o n s and that because of these guarantees shipowners are now able to secure a lower rate of interest on the i r foreign borrowings (say 12 percent instead of 13 percent). Calculations done i n Appendix 23 reveal that net benefits accruing to shipowners might t o t a l almost $1 mil l i o n per vessel. Similar net benefits to Canadians might also r e s u l t i f owners could obtain longer repayment periods or larger loans. Another advantage of loan guarantee 13 4 programs i s that they r e t a i n incentive for shipowners to manage their operations e f f i c i e n t l y . 2 7 loan guarantee programs would probably be one of the more acceptable assistance measures from a governmental viewpoint,, This i s because lean guarantee programs do no involve any direct outlays of government funds, nor do they involve the foregoing of tax revenues. These programs are also easy to administer and e a s i l y understood by operators. From a shipowner's perspective a loan guarantee program takes f a i r l y high p r i o r i t y and i s an a t t r a c t i v e form of assistance since i t keeps government involvement i n shipping to a minimum. The adaptability of loan guarantee programs i s ensured by the fact that rates, terms and conditions can be changed t c meet the conditions prevailing at the time, also guarantee programs are r e l i a b l e , i n that they d i r e c t l y benefit the group that they were intended to benefit, the shipowners. IA Government Loans In the Hedlin-Henzies study dated 1970, the following conclusions were reached concerning the adeguacy of a government lean program to aid shipowners; ... a programme of government loans would by i t s e l f not previde an adeguate amount of assistance for Canadian shipowners (unless subsidized i n t e r e s t rates were provided to shipowners that were s i g n i f i c a n t l y below six per cent). Government loans u t i l i z e d in co-ordinatiorf with another form of assistance ( i . e . , moderate increase in c a p i t a l cost allowance rates), however, could generate adeguate assistance for many of the vessels examined. 2 8 although general conditions may have changed i n shipping and 135 f i n a n c i a l markets, there i s no reason to doubt the v a l i d i t y of t h i s statement when applied to today's s i t u a t i o n . Shipowners have l i s t e d the implementation of a government loan program as one of t h e i r top p r i o r i t i e s (along with tax incentives). Shipowners visualize a government loan agency that would provide financing to Canadian operators at rates and terms simi l a r tc those extended by the Export Development Corporation. Such loans would be limited to seventy percent of the vessel's cost, would not exceed seven years, nor bear a rate of interest lower than eight percent, 2 9 On the government's part, there seems to be general reluctance to establish such a program, , The government would prefer not to become involved in ship financing leaving the r e s p o n s i b i l i t y to private Canadian f i n a n c i a l I n s t i t u t i o n s , If the government decided to implement a loan program for shipowners, the cost of such a program would, once again, depend on a couple of factors. These factors would include how stringent the government decides to be in granting c r e d i t , the rates and terms at which these loans are made, and the r e l a t i v e l e v e l of intere s t rates elsewhere in the world. h discussion concerning the economic e f f i c i e n c y of direct government loan programs seems to evolves about the central issue of which s o c i a l discount rate should be used.; Take for example a statement taken from the Hedlin-Menzies study; ... assuming that i n t e r e s t charged for foreign financing i s less than the opportunity cost of Canadian c a p i t a l (the national discount rate), the Canadian economy would c l e a r l y be penalized by u t i l i z i n g r e l a t i v e l y more costly Canadian c a p i t a l resources. 3 0 136 A numerical example may help to elucidate t h i s idea. Suppose a ship costing $25 m i l l i c n i s to be b u i l t and financed with an eight year loan. The money can be borrowed abroad at nine percent or here i n Canada at eleven percent. If the loan i s financed in Canada then the Canadian* economy has, i n e f f e c t , immediately committed $25 m i l l i o n i n c a p i t a l resources to the vessel's construction (a s o c i a l c o s t ) . The benefits associated with t h i s investment i s the value of the services i t provides (say $5 m i l l i o n per annum). If the money i s borrowed abroad, costs to the Canadian economy occur when loan repayments are made tc these foreign i n t e r e s t s . Benefits are, once again, represented by the value of the services provided by the new ship ($5 million per annum). Appendix 24 shows that under such assumptions, the net benefits of borrowing abroad are $0.9 m i l l i c n i f a ten percent s o c i a l rate of discount i s applied. However, i f the s o c i a l discount rate i s lowered to eight percent then borrowing i n Canada becomes more economically e f f i c i e n t from society's perspective. Therefore, the determination of the net benefits to Canadian society depends upon the r e l a t i o n s h i p between the Canadian s o c i a l discount rate and the foreign lending rate. . The introduction of a Canadian government loan program can therefore r e s u l t in either negative or positve net benefits as shown in the following set of examples. In case A, the foreign lending rate i s eleven percent, the Canadian i s twelve percent and the Canadian s o c i a l discount rate i s ten percent. In such a set cf circumstances, shipowners s i l l seek financing abroad since i t i s cheaper to them. However, because the s o c i a l 137 disccunt rate i s less than the foreign borrowing rate, i t would be mere advantageous from society's view i f shipowners borrowed funds here i n Canada. I f the government implemented a loan program so that shipowners could now borrow funds i n Canada at, say, 10.5 percent a net benefit would result as Canadian shipowners started taking cut Canadian rather that foreign loans. In case E we assume the same Canadian and foreign borrowing rates, only this time the Canadian s o c i a l disccunt rate i s assumed to be twelve percent. Under t h i s set of assumptions shipowners would, as before, borrow abroad which i s in agreement with society's desires since the foreign cost of borrowing i s less than the Canadian s o c i a l discount rate. If a government loan program were introduced, and loans were issued at a 10.5 percent rate of interest then shipowners would seek to borrcw in Canada which wculd be contrary to the s o c i a l desire. Hence, such a program would generate negative net benefits to the Canadian economy. Loan programs would be a r e l i a b l e form of assistance to shipowners since they d i r e c t l y aid this group by decreasing the cost of c a p i t a l . Loan programs, probably lack the desired adaptability c h a r a c t e r i s t i c , since once such a program i s established i t would be very d i f f i c u l t p o l i t i c a l l y to terminate. Establishing a loan program to a s s i s t shipowners would involve setting up the administrative structure necessary to run such a program, which in i t s e l f would represent a s o c i a l cost. F i n a l l y , i t seems redundant that in a country l i k e Canada, that has such a well-established banking i n s t i t u t i o n , the government should also have tc become involved in the lending function., 1.38 C. Construction Subsidies It i s a generally accepted p r i n c i p l e that construction subsidies are more an aid tc shipbuilders than they are to ship purchasers. Gerald Jantscher in his book Bread Upon the Waters comments, It [ a construction d i f f e r e n t i a l subsidy J i s i n fact a subsidy to U.S. shipbuilders, despite the purely technical feature that u n t i l 1970 i t was given upon application by the purchaser of the vessel - not the builder. Buyers do not benefit from i t , because the subsidy only losers the price of a new vessel to what the buyer would pay i f he ordered the vessel from a foreign yard. 3* In Canada, we do not have a construction d i f f e r e n t i a l subsidy but rather a straight-rate form of construction assistance. Such subsidies are calculated as a percentage of the vessel's price and paid t c Canadian shipbuilders according to the Canadian Shipbuilding Industry assistance Program. . The construction subsidies are only a benefit to Canadian shipowners i f the subsidy paid to shipbuilders i s passed on to shipowners in the form of lower vessel prices. To be of any benefit to shipowners the subsidy must have the e f f e c t of lowering the e f f e c t i v e Canadian price below the price that a shipowner might pay abroad for the construction of a similar ship., The Alcan study compared shipbuilding prices i n Canada with those cf ether nations and found that prices quoted by Canadian yards (after considering the subsidy) were twenty to twenty-five percent higher than most European yards. The discrepancy between Canadian and Japanese yards was even larger, ranging from sixty to 110 percent h i g h e r . 3 2 Bith such a substantial price 139 difference i t i s l i t t l e wonder that two-thirds of the Canadian owned deep-sea tonnage i n 1978 was of Japanese construction. To be competitive with Japanes yards, the Canadian government would have tc offer construction subsidies equal to f o r t y - f i v e to six t y percent of the equivalent Canadian cost which might increase the cost of the present program to $150 to $200 mil l i o n a year. In view cf the f a c t that the federal government has just recently allowed construction subsidies to f a l l from twenty percent to nine percent, i t i s doubtful that Canadian shipowners would ever experience substantial decreases i n vessel prices. , Even i f a large enough construction subsidy rate were introduced tc allow Canadian yards to be competitive with foreign yards, i t i s guestionable whether the benefits would ever be passed on to shipowners. The benefits accruing to shipowners from a large construction subsidy would depend cn the e l a s t i c i t i e s of demand and supply (see discussion i n Chapter IV), And so, i n addition to being inadeguate and i n e f f i c i e n t , construction subsidies are also an unreliable form of shipping assistance measure. p. Government Ownership While governments in the Eastern Block countries and the South American countries are d i r e c t l y involved i n the ownership and operations cf ships i t i s highly unlikely that the Canadian government would consider s i m i l a r action. Since the end of World War II the Canadian government has elected to abstain from interference i n international shipping matters. Today, the only examples cf government ownership i n Canadian shipping are six 14 0 vessels that are cn charter to c e n t t e l l i n g i n t e r e s t i n the H breaking bulk-carrier, although a r c t i c shipping technology i expressed no intention, for shareholder in any shipping com assistance i s automatically r the government. . 3 . j o N F i s c a i assisfawcE Currently, Canada makes no use of nonfiscal assistance measures (other than cabotage r e s t r i c t i o n s ) to promote i t s national f l a g fleet.,However, i n i t s most recent shipping policy paper, a Shipping Policy for Canada the government stated that i t , ... intends to assess the p o s s i b i l i t i e s f o r Canadian fl a g p a r t i c i p a t i o n in the shipment from Canada of aid and certain commercial cargoes. With respect to a r c t i c shipping, the government intends that, as a condition of approval to export unprocessed or p a r t i a l l y processed resources, Canadian registered vessels must be used i f they are available at reasonable c o s t , 3 3 In short, the government intends to examine the advantages and disadvantages cf cargo preference measures for foreign and Ar c t i c cargoes. If such measures were ever implemented they would prcbably be an adeguate form of assistance for vessels operating in those areas. However, ether than the adequacy c r i t e r i a , nonfiscal measures f a i l tc s a t i s f y any of the remaining c r i t e r i a , most notably those cf economic e f f i c i e n c y and a c c e p t a b i l i t y . If nonfiscal shipping assistance measures were ever introduced they private ferry corporations, and a .V. a r c t i c , the experimental i c e -i t may become more active i n n the future, the government has the time being, of becoming panies. Thus government-ownership uled out as being unacceptable to 14 1 would have the e f f e c t of replacing cheaper foreign-flag shipping services with more expensive Canadian-flag services. The s o c i a l costs to the Canadian economy would thus be the difference i n the shipping costs of the Canadian versus foreign f l a g ships. Today, Canadian-flag shipping costs have been estimated to be twenty to t h i r t y percent higher than foreign costs, although no immediate cash outlays would be reguired with nonfiscal measures the i n d i r e c t costs of higher transportation costs, hence higher prices could not be avoided. Further s o c i a l costs might be incurred In the form cf time delays, i f shippers must wait u n t i l a Canadian ship i s available to carry the preference cargo. , Nonfiscal assistance measures would not be acceptable to several key shipping i n t e r e s t groups. The most vociferous opposition to the establishement of cargo preference or flag discrimination measures would undoubtedly come from Canadian shippers. Groups that depend on shipping transportation to get t h e i r goods to market w i l l naturally oppose any proposed assistance measures that might r e s u l t i n an increase i n t h e i r transportation costs. . Thus groups such as the Canadian Export Association, The Canadian Ha.nufactu.rers* association and the Council cf Forest Industries of B.C..vehemently oppose cargo preference or f l a g discrimination practices in any form. another group, to which nonfiscal assistance measures would be unacceptable, i s foreign governments. . although the federal government should always be guided by the desires of the Canadian public i t must nevertheless consider the fact that foreign governments may take r e t a l i a t o r y action, thus a f f e c t i n g Canadian interests. 142 Shipowners, probably r e a l i z i n g that such demands would never be met, have refrained from requesting nonfiscal assistance measures. Thus there i s r e a l l y no group i n Canada that advocates cargo preference or f l a g discrimination measures to encourage the development of a Canadian deep-sea f l e e t . Nonfiscal measures also f a i l to meet the adaptability c r i t e r i a . By setting up a protected market f o r n a t i o n a l - f l a g vessels the government upsets the competitive markets and there i s a corresponding reduction i n the f l e x i b i l i t y of Canadian ships to respond to changes i n the market. Cargo preference or f l a g discrimination could conceivably be j u s t i f i e d from an economic e f f i c i e n c y standpoint, i f Canadian shippers were, before the introduction of such measures, captive customers to a foreign shipping company enjoying monopolistic p r i c i n g . If Canadian shippers had the choice of only one shipping company to choose from, then that company could charge higher prices than would be possible i n a competitive s i t u a t i o n . Creating another source of shipping service supply or excluding the foreign shipping company from p a r t i c u l a r markets might re s u l t i n lower shipping rates for Canadian shippers. , Any decrease in shipping rates would represent a net benefit to Canadian society. F i n a l l y , f l a g discrimination and cargo preference practices are by their very nature inequitable. Flag discrimination favours Canadian-ship c a r r i e r s over foreign-carriers which, as we saw, could conceivably lead to r e t a l i a t o r y measures by foreign governments. However, cargo preference measures are also inequitable in that they discriminate among Canadian c a r r i e r s . , 143 Those companies involved in the transportation of preference cargoes w i l l benefit while these i n ether markets w i l l not. Hhy should one group of ship operators be favoured over another? 144 V I I I SUMMARY AND C O N C L U S I O N S Eecent trends and developments in international shipping have prompted many national governments to re-evaluate t h e i r international shipping p o l i c i e s , Canada, because of i t s heavy reliance on foreign-flag shipping should be p a r t i c u l a r i l y concerned over these changes that are occurring. One proposed solution to deal with some of these recent developments i s through the development of a Canadian deep-sea f l e e t . The issue i s not a new one, i n f a c t , i t has dominated Canadian shipping policy for the past t h i r t y years. No one i s against the concept of more Canadian p a r t i c i p a t i o n i n the carriage cf international seaborne exports and imports, nor i s there anyone who would not care to see more ships f l y i n g the Canadian vessels. The controversy arises over whether the establishment of a Canadian f l e e t warrants the costs involved, and how such a f l e e t can most appropriately be developed. Naturally, each group involved in Canadian shipping has i t s own views on the matter. Shippers, are not opposed to the establishment of a Canadian deep-sea f l e e t i f they are l e f t with the choice of using either Canadian or foreign services. Governments would probably support the notion of a Canadian deep-sea f l e e t i f i t could be inexpensively achieved and i f i t could be j u s t i f i e d on cost-benefit terms. Meanwhile, shipowners are seeking assistance measures which would put them on equitable footing with their foreign f l a g competition who enjoy the benefits of various assistance measures offered in t h e i r home countries. The appeal for a Canadian deep-sea f l e e t i s seen by many as one way i n 145 which t h i s equality can be achieved. It i s these c r i t e r i a that t h i s thesis endeavours to emcompass i n i t s analysis and i t i s for th i s reason that the word 'appropriate* was chcsen tc be used in the central question of t h i s thesis. This thesis i s founded on the premise that i f an assistance measure could be found which i s adequate, economically e f f i c i e n t , acceptable to a majority of the parties involved, adaptable, equitable , and r e l i a b l e in achievinq i t s end, then such an assistance measure should be implemented. Realizing that finding an assistance measure that f u l f i l l s a l l these c r i t e r i a i s somewhat l i k e chasing dreams, i t i s nevertheless possible to id e n t i f y some measures that are more appropriate than others for encouraging the development of a Canadian deep-sea f l e e t . I t i s along these l i n e s that the analysis i n Chapter VII i s conducted.. Operating subsidies were considered to be an inappropriate shipping assistance measure primarily because they had never been reguested by shipowners or are not supported by any other qroups,and because they were shown to be economically i n e f f i c i e n t . Government-provided f a c i l i t i e s and services assist international shippinq but by themselves are not adequate forms of assistance. However, i f a Canadian deep-sea f l e e t i s established then such government-provided services as research and port management w i l l take on increasing importance. ,Special subsidies ( i . e . , removal of customs duties on a l l materials to be used i n the construction of vessels) are another form of assistance which by themselves are not adequate. With some of the special subsidy measures i t i s questionable to what degree 146 they w i l l a s s i s t shipowners, hence the r e l i a b i l i t y of these measures i s also questioned. Tax subsidies are perhaps the most promising group of operating phase assistance measures examined. although the government would probably oppose a special status for international shipping income i t might be w i l l i n g to grant other special tax incentives, foregoing short-term tax revenue i n the hcpe of long-term gains. When compared to ether countries, the c a p i t a l allwance rates allowed in Canada on ships i n e l i g i b l e f o r the 33.3 percent c c a deductions were rather low. I t i s recommended that c a p i t a l cost allowance deductions be marginally increased or that special or advance depreciation methods be introduced. Both investment tax c r e d i t s and tax rate reductions would only be e f f e c t i v e i f taxes were otherwise payable. With shipping earnings that t r a d i t i o n a l l y display c y c l i c a l tendencies the r e l i a b i l i t y cf such measures i s i n doubt. In times of low p r o f i t s these measures would also be found to be inadeguate forms of shipping assistance, Reserve funds, permitted i n many other maritime nations, do seem to make sense from an economic e f f i c i e n c y argument provided that a s u f f i c i e n t l y long accumulation period i s allowed. Such a measure would not affect the e f f i c i e n c y cf shipping operations and would assist owners i n accumulating funds to be used i n t h i s c a p i t a l intensive industry, although leveraged leasing would be an a t t r a c t i v e measure to a s s i s t shipowners and operators i t i s doubtful whether shipping would be granted a s p e c i a l exemption from the current leasing provisions. The f i l i n g of consolidated reports i s not allowed in Canada nor i s i t expected to become a part of 14 7 the Canadian tax system. F i n a l l y , the confusion surrounding the application of the 15 percent withholding tax to charter payments should be cleared up immediately., I t i s recommended that they should net be subject to such a tax since t h i s would only result i n an increase in Canadian charter costs and result in charter companies going off-shore* I t i s d i f f i c u l t at the present time to j u s t i f y the imposition cf nonfiscal assistance measures to encourage the development cf a Canadian deep-sea f l e e t , although such practices do seem to be gaining popularity in some regions of the world., Nonfiscal assistance measures f a i l the economic e f f i c i e n c y and a c c e p t a b i l i t y t e s t s . Interviews conducted with industry personnel suggest that the problems of cargo preference and flag discrimination have not yet seriously affected Canadian shipping i n t e r e s t s . Thus the introduction of nonfiscal measures i s seen as a premature solution to the problems of f l a g discrimination and cargo preference. I f such problems do persist and worsen, f i n a l l y posing a threat to Canadian i n t e r e s t s then possibly nonfiscal r e t a l i a t o r y measures might be j u s t i f i e d . At the present time t h i s does not seem to be the case. However, i t i s recommended that Canada begin to prepare l e g i s l a t i o n to protect Canadian i n t e r e s t s from detrimental foreign discriminatory action. Canada might look to the countries of West Germany, or Japan for examples of such protective l e g i s l a t i o n . In conclusion, the federal government, i f i t hopes to encourage the development of a Canadian deep-sea f l e e t - ships owned and registered in Canada - then i t should marginally 148 increase the CCA rates or introduce s p e c i a l or advance depreciation previsions. The government should reintroduce the use of tax reserve funds for tax purposes. Such a program could he s i m i l a r to the one that existed before i n Canada, or could be patterned on the current American C a p i t a l Construction Fund. , To a s s i s t the shipowners obtain more favourable c r e d i t terms the federal government should e s t a b l i s h a government guarantee program, one which covers vessels purchased from l o c a l yards and also from foreign yards. I t would also be b e n e f i c i a l i n conjunction with these other measures for the government to increase research and development i n areas of Canadian expertise and areas which may promote Canadian sovereignty and security i n the A r c t i c . These are the recommended assistance measures that would be appropriate for the federal government to introduce to encourage the development cf a Canadian deep-sea f l e e t . .Such measure's for the most part w i l l be adeguate, economically effic i e n t , a c c e p t a b l e , adaptable, eguitable and r e l i a b l e . , Having done this the government can rest assured that they have done t h e i r part. I t would then be up to Canadian shipowners and operators to determine whether they can survive i n the highly competitive international shipping industry. I f successful they w i l l f l o a t , i f unsuccessful they w i l l sink. 149 NOTES 150 Notes for Chapter I 1 Institute of Shipping Economics Bremen, Shipping S t a t i s t i c s (Bremen, Germany; number 4, Ap r i l 1980), p. 9. 2 Transport Canada, A Shipping Policy for Canada (Ottawa: Minister of Supply and Services Canada, 1979), p. 15. . 3 Maritime Administration of the U.S. Department of Commerce, Maritime Subsidies (Washington D.C: Government Printing O f f i c e , October 1976), p. 30. * Transport Canada, Background Paper on Deep-sea Shipping (n.p., October, 1979), p. 7. s "Once Again, Tough Talk about a Merchant Marine," Financial Pest, 14 A p r i l , 1979. 6 K.C. G r i f f i n , "Canada's Deep Sea Fleet i s Hidden Offsfccre," Seaports S the Shipping World (February 1979), p. 23. 7 Transport Canada, Background Paper , p. 7. i 151 Notes f o r Chapter II 1 Thorsten 'Bin-man and Eigmcr Linden, Shipping - How I t Works (Gothenburg, Sweden: Binman S Linden AB, 1978), p.,14. 2 In 1975, world trade, i n terms of ton-miles, decreased by seven percent. This was atributable to an eight percent decrease in wcrld o i l trade experienced that year; the result of the Arab o i l boycott and a world recession. 3 Deadweight tonnage (d.w.t.) expresses the number of tons (of 2240 lbs.) a vessel can transport of cargo, stores and bunker f u e l . It i s the difference between the number of tons of water a vessel displaces 'Might" and the number of tons i t displaces when submerged to i t s l o a d l i n e . * Tramp shipping i s "carrying cargoes on a time or voyage charter basis usually catering to a single customer and carrying one or two commodities at a time.'! 5 .Binman and Linden, Shipping - How i t Works , p. 16. 6 Binman and Linden, Shipping - flow I t Works , p.,55. 7 Samuel A. Lawrence, International Sea Tranport: The Years  Ahead Lexington, Kassachusetts: Lexington Books, 1972), p. 7. , 8 Bichard lienow. The Test of the Nationality of a Merchant Vessel , as guoted in Boleslaw Adam Boczek, Flags of Conveneince: An International Legal Study (Cambridge, Massachusetts: Lexington Books, 1972) p. .16. s Bienow, Nationality of a Merchant Vessel , as quoted i n Boczek, Flags of Convenience , p. 215. 1 0 Liberian Code of Laws 1956, v o l . II t i t . , 22, Maritime Law. »i Commercial Code cf Panama, UNLS, - p t 129. * 2 These countries include the O . K . , B r a z i l , Mexico, Peru, the U.S., Germany, Norway, and the USSR., 1 3 The most notable example being the United States.„ 1 4 S.A. Lawrence, International Sea Transport , p. 5. Canadian Merchant prepared f o r The Canada (Winnepeg: 1 6 Binman and Linden, Shipping - How I t Works , p. ,73. 1 7 Alan E. Branch, The Elements of Shipping (London, 1 5 Hedlin Menzies S associates Ltd., Marine Analysis of Economic Potential , Canadian Transport Commission, Government of Government of Canada, 1970), p. ,44. , 152 England: Chapman S H a l l , 1977), p. 238. 1 8 Lawrence, International Sea Transport , p. 13. • * 9 Ibid., p. 36. , 2 0 As cf June 1978, 29 countries had become contracting parties representing 6% of the world tonnage. To become ef f e c t i v e the Agreement must be supported by at l e a s t 24 countries and 25% of the world tonnage, 2 1 Transport Canada, Shipping Policy f o r Canada , p. 31, 2 2 If the EEC decides to support the Code then i t w i l l have s u f f i c i e n t 'tonnage 1 support to bring i t into e f f e c t . , 2 3 Transport Canada, Shipping Policy for Canada , p. 14, 2 4 In 1975, f l a g cf convenience vessels carried close to 199? of Canadian exports and 231 of Canadian imports by tonnage (includes trade with US), 2 5 Eranch, .Elements of Shipping , p, 214, 26 Transport Canada, Shipping Policy for Canada , p. 17. 2 7 These practices ex i s t i n Peru, China, B r a z i l and Argentina. . 2 8 C . i . f . (cost, insurance, freight) refers to s e l l i n g arrangements where It i s the r e s p o n s i b i l i t y of the s e l l e r to arrannge transportation, insurance, and documentation of the cargo. With f.o.b. (free on board) these r e s p o n s i b i l i t i e s are bourne by the buyer. 2 9 S.H. H i l l , Study of Measures to Promote or Protect National Fleets Affecting Trade S Shipping . ,. 3 0 Transport Canada, Shipping Policy for Canada ... p. 24. 3 1 I b i d , , p, 79. 153 Notes for Chapter III 1 Transport Canada, Shipping Policy f o r Canada , p. 4. 2 Hedlin Henzies, Canadian Merchant Marine , p. 24. 3 Ibid. , p. , 28. , * Ibid., p. ,3 2. 5 Institute of Shipping Economics Bremen, Shipping  S t a t i s t i c s , p. 9 . 6 Transport Canada, Background Paper , pp. ,7-8. 7 Host of the material of t h i s section was drawn from Transport Canada's Background Paper , pp..2-8. 8 ft breakdown of these major Great Lakes cargoes i s presented in Appendix 4. 9 Tonnes refers to metric ton units. 1 0 C.I.F. <ccst, insurance, and freight) terms are where the s e l l e r of the cargo must arrange the transportation, insurance and documentation of the cargo. I f more Canadian exports were sold on a c . i . f . , basis rather than an f.o.b. basis there would probably be more Canadian p a r t i c i p a t i o n i n international shipping. 1 1 Making a voyage in b a l l a s t refers to a ship that i s not carrying commercial cargo and which must carry sand, gravel, or water to steady i t on i t s return voyage. 1 2 Neo-bulk products are goods that can be shipped either i n loose bulk or packaged form. 1 3 "Ottawa moves to Encourage Buy Canadian Policy for Marine Insurance," Globe 6 Mail , 22 May 1980. 1 4 F.O.B. stands for free-on-board which means that i t i s the buyer's r e s p o n s i b i l i t y to arrange for the transportation, insurance and documentation of the cargo. 1 5 "Windfall f c r Exporters," F i n a n c i a l Post , 14 April 1 S 7 9 . 1 6 Transport Canada, Shipping Policy for Canada , p. .8. 1 7 Transport Canada, Background Paper , p. ,8., * 8 "Conference C a l l s , " Financial Post ,14 A p r i l 1979, p. 35. 19 Mest of the material for t h i s section i s taken from K.C. 154 G r i f f i n ' s a r t i c l e e n t i t l e d "Canada's Deep Sea Fleet i s Hidden Offshore" published in Seaports S the Shipping World . 2 0 These suggested measures are examined la t e r i n Chapter V I I . 2 1 The r e s p o n s i b i l i t i e s and objectives l i s t e d here are a summarization cf the objectives l i s t e d in the Council of Marine Ca r r i e r s ' corporation charter. 2 2 "Conference C a l l s , " Financial Post , 14 A p r i l 197 9. 2 3 Canadian Manufacturers Association's brief submitted to Transport Canada and contained in the Background Paper . 2 4 Receiver General, The Public Accounts of Canada z J979 , vcl . I I (Ottawa: ministry of Supply and Services, 1979), pp. 27.3-27.5. 2 5 Canada, laws, Statutes, etc. Transport Act . Chapter T-14 of the Revised Statutes of Canada 1970. 2 6 S t a t i s t i c Canada, Water Transportation 54-202, p. 28.. 2 7 "Seafarers steer calm course now," Financial Post , 14 A p r i l 1979. 2 8 "Ihey're Subsidized but Shipyards Humming Along," f i n a n c i a l Post , 26 January 1980, p. 1. "Shipyard Production Value Rises 17.4X," Globe S Kail , 8 May 1980, p. E12. 155 Notes for Chapter IV 1 Gerald B. Jantscher, Bread Upon the Waters: f e d e r a l Aids to the Maritime Industries Studies in the Regulation of Economic A c t i v i t y (Washington, D.C.: The Brookings I n s t i t u t i o n , 1975), p. 10. 2 This c l a s s i f i c a t i o n scheme i s similar to that used i n the Hedlin-Menzies' study, Canadian Merchant Marine with the exception of a couple of modifications 3 Jantscher, Bread Upon the Waters , p. 20. * I b i d . , p. 54. 5 G.E. Germane, "Subsidy Mechanisms - The U.S. Experience" Transportation Subsidies - Nature and Extent , ed. Karl Buppenthal (Vancouver, B r i t i s h Columbia: Centre for Transportation Studies, University of B r i t i s h Columbia, 1974), PP- . 3 - 2 0 . , 6 Hedlin Menzies, Canadian Merchant Marine , p. ,69. . 7 Transport Canada, Shipping Policy for Canada , p. .17 * Ibid., p. 17. 9 For a more rigorous treatment on the economic e f f e c t s of construction and operating subsidies the reader should consult franz Eversheim*s book e n t i t l e d : Effects of Shipping Subsidization (Bremen, Germany: I n s t i t u t e for Shipping Research Bremen, 1958). 1 0 This s i t u a t i o n could only exist i n the short run. Some shipping companies would eventually go bankrupt or decide not to replace obsolete vessels thus resulting i n a decrease i n long run supply. This would eventually lead to an increase in prices in the long run. i * Ibid., pp. 29-36. 12 I b i d . 156 Notes for Chapter V 1 An excellent description of the OS d i f f e r e n t i a l operating subsidy program i s provided in Jantsher's book, Bread Upon the  Waters chapter 3. 2 Jantscher, Bread Upon the Waters , p. 20. 3 An "essential service" i s a commodity trade route or area that i s determined by the Maritime Administration to be of v i t a l national interest. * For a more thorough description of the rights and r e s p o n s i b i l i t i e s of subsidized operators, the reader i s referred to Richard E. Madigan•s book; Taxation of the Shipping Industry (Cambridge, Maryland: Cornell Maritime Press Inc., 1971) 5 Maritime Admin., Maritime Subsidies , p. 170.t 8 Ibid., p. 47. 7 A "regular" trade route i s one that i s not a "national i n t e r e s t " route. 8 Maritime Admin., Maritime Subsidies , p. 86. a Ibid. , p. , 150. io Most of the information presented in t h i s section was drawn from various sections of Maritime Admin., Maritime Subsidies . n Ibid., p. 29. »2 Ibid., p. 56. 1 3 Frank M. Fisser, "Financial Factors to be Considered before Venturing Into the International Arena," paper presented at the Third National Marine Conference, Ottawa, 22-23 May 1980. *• Maritime Admin., Maritime Subsidies , p. ,88. is Ibid., p. 48. » 8 Ibid., pp. 155-156.. Ibid., p.,123. * 8 Ibid., p. 56. , »» Ibid., p. 36. 2 0 Ibid. , P. , 156. , 21 I b i d . , P. 115. 157 a* Ibid., P. 56. 2 3 i b i d . , p. 88. 2 4 Ibid., p. 93. as i b i d . , p. 121. 2 * IBID. , P.87. . 2 7 Jantscher, Bread Dpon the Waters , pp. ,54-6 2. 2 8 Tonnage fees guoted are f o r the year 1976 as published in tbe Maritime subsidies . 2 9 Ibid., p. 29. 3 0 Ibid., p. 34. ai " F i r s t Category" ships are dry cargo vessels, tankers, and refrigerator ships greater than 3000 g.r.t. 3 2 F i s s e r , "Financing Factors," paper presented at Third National Marine conference. , 3 3 Maritime Admin., Maritime Subsidies , pp. ,12-13. 3 * I b i d . , pp. 66-67. 3 5 i b i d . , p. 120. 3 6 Ibid., P. 154. 3 7 Ibid., pp. 165-166. , 3 8 Ibid. , p. 17 3. 3 9 i n cases where special m i l i t a r y features are to be b u i l t into a ship 's design guarantees for up to 87.5% of the ship's, construction ccst may be issued. «o Maritime Admin., Maritime Subsidies , p. 174. Ibid., pp. ,12- 13. • 2 i b i d . , p. 36. * 3 i b i d . , pp. ,54-55. 4* Ibid. 45 I b i d . , pp.92-93., 4* Ibid,, p. 151 158 4 7 Ibid. , PP- .120-121. 4 8 Ibid., p. 155 4 9 Ibid., P- 17. S O Ibid., P. • 16. , S 1 Ibid., P- 47. , S 2 Ibid. , P- 54. S 3 Ibid., p. , 114 5 4 Ibid., P- 87. S S Ibid. , F- 165. 5 6 Madigan, Taxation of Shipping . Maritime admin., Maritime Subsidies , p. 19. sa Ibid. , p. .50. 5 9 Ibid., p. 104. so Ibid., p. 167. 6 i Ibid., p. 15 « 2 I b i d . , p. 130., 6 3 ibid,., p. 50. ** Jantscher, Bread Upon the Haters , p.,78. 6 5 act cf a p r i l 28, 1904, 33 Stat.518, 10 U.S.C. , 1970 edition, section 2631. 6 6 Transport Canada, Shipping. Policy for Canada , p. 17. 6 7 Maritime admin., Maritime Subsidies , p. 18. 6 « Ibid., p.,130. 6 9 Ibid., p. ,134. 7 0 i b i d . , p. 110. Jantscher, Bread Uo_on the Waters , p. 45. 7 2 Maritime admin.. Maritime Subsidies , p. 18.. 7 3 i b i d . , p. 58. . 7 4 I b i d . , p. 176. 159 7 5 The b i l a t e r a l trade agreements presented In t h i s section were taken from various sections of Maritime Subsidies ., 7* Ibid,, p. 152. 7 7 Ibid. , p. 121. , 7 8 Ibid. , p. 58. .  7 9 Ibid. , p. 88. *o Ibid., pp.,93-94. 160 Notes for Chapter VI 1 Heaiin Menzies, Canadian Merchant Marine , p. 3, 2 Ibid., p. 227. 3 Ibid., pp. 30 4-30 5. . * I b i d . 5 alcan Shipping Service l t d . in association with the Economist Intelligence Unit Limited, Shipping Options f_or Canadian International Deej3 Sea Trade (n. p., 1977), p. ,1.2. , 6 alcan Shipping Service Ltd., Shipping Options , p. 3.16. 7 The Canada Shipping Act of 1952; Chapter 29 of the Sevised Statutes of Canada (Ottawa: Queen's Printer and Co n t r o l l e r of Stationery, 1953). 8 The Maritime Code, Bkl section 2, paragraphs (a) , (b) , and (c). 9 Transport Canada, Shipping Policy f o r Canada , p. 1. 10 Ibid. p. 51. . n I b i a . 1 2 Transport Canada, Background Paper , p. .40. , 1 3 Submission were received from the Dominion Marine association. Upper Lakes Shipping, the Boyal Bank, the Canadian Export Association, the Canadian Manufacturers association, the Council of Forest Industries of B.C., The Canadian Merchant Service Guild, and Saguenay Shipping Ltd., i * The term "Canadian merchant marine" refers to s e l f -propelled ships of 1000 gross tons and over on Canadian r e g i s t r y . is For a more thorough discussion on the advantages and disadvantages of a Canadian Merchant Marine, the reader i s referred to S.G. Sturraey, a Consideration of the Ends and Means of National Shipping Policy (Bergen, Norway: I n s t i t u t e of Shipping Research - The Norwegian School of Economics & Business Administration, 1965), l* Maritime Admin,, Maritime Subsidies , p. 21., * 7 Ibid. 1 8 The M.V. Arctic i s the world's f i r s t ice-breaking (Class II) t u l k - c a r r i e r ana i s designed for operation i n the High A r c t i c . 161 1 9 Public Account of Canada . 20 The terns "person" as used i n the Income Tax Act refers to either an i n d i v i d u a l or a corporation. , 2 1 Income Tax Act, 9th Tax reform e d i t i o n , 1978, ed. , H. Heward Stikeman (Toronto: Richard DeBoo Limited, 1978), section 250 (3). 2 2 Income Tax Act, section 250(4). 23 Ibid., section 8 1(1) (c). 2 4 A prime example of an "offshore" shipping operation i n Canada i s CP Ships (Eermuda). 25 See schedule »B* of the Income Tax Act. 26 Members of the B r i t i s h Shipping Agreement 2 7 "Conversion costs" are defined i n section 13(14) of the Income Tax Act. 2 8 For example, the investment tax c r e d i t on a $20 mi l l i o n ship would be $1 m i l l i c n . The annual deduction allowed from taxes otherwise payable would be limited according to the provisions contained in section 127(5), the section dealing with the investment tax c r e d i t . 2 9 See either the Canada-O.S. Tax Convention, A r t i c l e V or the Canada-U.K. Tax Agreement, A r t i c l e 7. , 3 0 Leasing rules are covered i n the Income Tax Act under Regulations 1100(15) to 1 100(20). 3 1 Maritime Admin., Maritime Subsidies , p. 22. ,. 3 2 Public Accounts of Canada , vol.11, 1978, p 12-12. 3 3 Only commercial fi s h i n g vessels are e l i g i b l e f o r the Department of the Environment subsidies., 3 4 "Shipbuilders C r i t i c i z e Drop In Subsidy," Globe 6 Kail -Report on Business , 3 July 1980. 3 5 Maritime Admin., Maritime Subsidies , p. ,23. , 3 6 Transport Canada, Shipping Policy for Canada , p.,30, 3 7 Ibid. 3e Temporaty use of non-Commonwealth registered vessel may be allowed i f no suitable Canadian vessels are available., 162 Notes for Chapter VII 1 The Beader's Digest Great Encyclopedic Dictionary,(1975), s.v.."appropriate." 2 S.A. Lawrence, International Sea Transport , p. 20 1. , 3 The Reader's Digest Great Encyclopedic Dictionary, s. v„"adeguate." * Leonard G. Schi.fr in et a l . , Encyclopedia of Economics (Guilford, Conneticut: The Dushkin Publishing Group Inc., 1973), s.v. "economic e f f i c i e n c y . " s Container shipping i s perhaps, the only area i n which American shipowners have remained competitive without the aid of an operating subsidy. This i s probably due to the f a c t that container shipping has a very high capital/labour r a t i o . 6 Since these are the areas i n which a Canadian operator might be at a substantial disadvantage. 7 Jantscher, Bread Upon the Waters , p. ,20. , B S t a t i s t i c s Canada, Water Transportation 1977, p. ,15. , 9 Alcgn Study , Summary Beport, p. ,3.10. , Option 3 was a Canadian owned, registered and manned vessels. For a more thorough discussion of s o c i a l discount rates, and the theory behind them the reader i s referred to the book Cost--Eenef.it Analysis: Selected Readings , comp. Richard Layard (flamondworxths ,Penguin , 197 2). 1 0 In the case of unemployed labour the opportunity cost of that labour would not i n fact be zero since people place some value on t h e i r i d l e or l e i s u r e time. , n J a n t s c h e r B r e a d Upon the Waters , p. 15. 1 2 Budget figures were obtained through a telephone conversation with Transport Canada o f f i c i a l s . 1 3 Alcan Study. , v o l . 1 , pp. 4.1-4.10. i * fl.E. B e l l i n his address to the Third Marine Conference i n Ottawa, May 22-23, 1980. , 1 5 The choice of a 10% s o c i a l discount rate i s somewhat arbi t r a r y due to the controversy surrounding the theory and selection of an appropriate discount rate. In some cases, i t i s assumed tc be egual to the government's average cost of borrowing (sometimes even less) while i n other situations i t i s eguated with the cost of c a p i t a l experienced by a private firm engaged in si m i l a r projects. In both the Alcan and Hedlin-16 3 Menzies studies, a 10% rate i s one of the s o c i a l discount rates that are applied, and so i t was f e l t that using a 10% rate in t h i s thesis would also be appropriate. , 1 6 Council of Marine Carriers et a l . , Joint B r i e f on the Canadian Shipping Industry , p. 2. * 7 S t a t i s t i c s Canada, Hater Transportation , p. 26. »* The ships that would have q u a l i f i e d for the investment tax credit are l i s t e d i n appendix 16. » 9 H.E. B e l l i n his address to the Third Marine Conference in Ottawa, May 22-23, 1980, estimated that "the cost of a Canacian-built bulk c a r r i e r , after subsidy (20%) might be around $22 m i l l i o n OS ($25.3 mil l i o n Cdn.), compared to $19 m i l l i o n OS ($21.85 million Cdn.) i n Japan. 20 Canadian operating costs, according to H.E. B e l l would be approximately $950,000 Cdn. per year on a 28,000 dwt bulk c a r r i e r . 2* This i s similar to the advance depreciation program that exists i n Denmark. 22 The I t a l i a n special depreciation allowance permits 40% of the vessel's cost to be written off over the f i r s t three years, not to exceed 15 % per year. , 2 3 These countries include L i b e r i a , Panama, Singapore, Bermuda, Bahamas, China (4-5 years), Cyprus (10 years), and Greece (10 years). 2 * according to Br. G r i f f e n 78 ships with ocean-going c a p a b i l i t i e s are cwned by Canadians under Canadian r e g i s t r y . , If we assume that only these vessels would be e l i g i b l e for the tax exemption, and that each vessel generates on average $2.5 mi l l i o n (figures provided by industry o f f i c i a l s ) then taxes otherwise payable would have been egual to; = $2.5 m i l l i o n x .05 x .46 (per ship) = $57,500 / ship This figure times the 78 ships yields a t o t a l of $4,485 million which represents the t o t a l tax revenue foregone by the federal government. 2s Taxable income from business sources would be $3 m i l l i o n , less $1 m i l l i o n i n CCA deductions plus one-half of the $1.5 million c a p i t a l gain times a tax rate of 46%. ($3 m i l l i o n - 1 m i l l i o n + (1/2 x 1.5 million)) x .46 •= $1,265 m i l l i o n ) . 2 6 Taxable income would be $3 m i l l i o n l e s s $1 m i l l i o n i n CCA deductions less $600,000 i n allowable earning deposits made to the reserve fund times a tax rate of 46$. 2 7 Transport Canada, A Shipping Policy for Canada , p. 44., 164 2 8 Hedlin Menzies, Canadian Merchant Marine Analysis , p. 301. H i d . 3 0 These c r e d i t terms sere i n agreement with the 1977 OECD guidelines. 3 1 Hedlin Menzies, Canadian Merchant Marine Analysis , p. 224. , 3 2 Jantscher, Bread Upon the Haters , p. 36.„ 3 3 Alcan Study , p. 4.7. 3 4 Transport Canada, Shipping Policy i n Canada , p.,5 1. 165 BIBLIOGRAPHY Alcan Shipping Services l t d . i n association with Economist Intelligence Unit Limited, Shipping Options for Canadian International Deep Sea Trade . prepared f o r Transport Canada Research and Development Centre, n.p., December 1977. Baker, fi. Palmer., .Jr. "Flags of Refuge for the Shipping Industry - Federal Income Tax Consideration.'* Tax Law Review 13. (New York: New York University, School of Law, 1957-58)3137-166. Boczek, Boleslaw Adam. . Flags of Convenience:An International l e g a l Study . Cambridge, Massachusetts: Harvard University Press, 1962: chapter 2. ., Branch, Alan E. The Elements of Shipping . .London: Chapman S H a l l , 1977. Butter, D.L; Charman, F. ; Giroux, R; Murray B.S. A Program for a Canadian Merchant Marine . Prepared for Senior Transportation Management Course, n.p., 1974., Canadian Transport Commission, Research Branch., Transport Review; Trends and Selected Issues .,Ottawa-Hull: Minister of Supply and Services Canada, 1979. Colley, Geoffrey. Tax Pr i n c i p l e s to Remember ., n.p.: The Canadian I n s t i t u t e of Chartered Accountants, 1978 edition. Council of Marine Carri e r s ; Dominion Marine Association; Newfoundland Shipowners Association; St. Lawrence Shipowners Association. Joint Brief on the Canadian  Shipping Industry . Vancouver, B r i t i s h Columbia: n.p., 1978. Darling, Howard J . The Elements of an International Shipping Policy for Canada . Prepared for Transport Canada, n.p: "l974. Desman, Edgar J. The Canadian Deep-Sea Fleet Issue i n Comparative Perspective . n.p. , 1975. , Eversheim, Franz. Effects of Shipping Subsidization , ed. Gustav Adolf Theel. Bremen, West Germany: Insti t u t e f o r Shipping Research Bremen, 1958. , Ferguson, Allen; Lerner, Eugene M.; McGee, John S.; Oi, Walter Y. ; Rapping, Leonard A.; Sobotka, Stephen P. The Economic Value of the United States Merchant Marine . Evanston, I l l i n o i s : Transportation Center at Northwestern University, 166 1961. Pridlund, H. Maurice. "Tax Problems of the Shipping Industry.',' In Tulane Tax I n s t i t u t e {New Orleans: The Bobbs-Merrill Cc. , 1957) :744-780. Germane, G.E. , "Subsidy Mechanisms - The U.S. Experience." In Transportation Subsidies - Nature and Extent , pp. ,: 9-20. , Edited by Karl M. Buppenthal. Vancouver, B r i t i s h Columbia: t. p. , 1978. Gcss, 8.0. "Investment i n Shipping and the Balance of Payments: A Case-Study of Import Substitution P o l i c y . " In Studies In Maritime J c c n o j i c s , pp. 46-60. , Edited by R.O Goss. Cambridge, England:Cambridge at the University Press, 1968., G r i f f i n , K.C. , "Canada's leep Sea Fleet i s Hidden Offshore." In Seaports S the Shipping World (February 1979)., • Heaver, Trevor D. "Transport Subsidies i n Canada." In Transportation Sbusidies i n Canada . . Edited by Karl M. . Euppenthal. . Vancouver, B r i t i s h Columbia: n. p., 1978., Hedlit Menzies S Associates. Canadian Merchant Marine Analysis of Economic .Potential- . Prepared for the Canadian Transport Commission. Winnipeg, Manitoba: n.p., 1970. H i l l , S.B. Stud y of Measures to Promote or Protect National  Fleets Affecting Canadian Trade S Shipping , n.p., Jantscher, Gerald. Bread Upon the Waters: Federal Aids to the  Maritime Industries . Studies in the Regulation of Economic A c t i v i t y . Washington, D.C: The Brookings I n s t i t u t i o n , 1975. Lawrence, Samuel A. International Sea Transport: The Years Ahead . Lexington Eooks Series. Lexington, Massachusetts: D.C. Heath 8 Company, 1972. McGoldrick's Handbook of Canadian Customs and Excise T a r i f f s . 84th ed. n.p., 1976-77. . Madigan, Sichard E. Taxation of the Shipping Industry Cambridge, Maryland: Cornell Maritime Press, 1971. Meyers, H. The Nationality of Ships . The Hague, Netherlands: Kartinus Nijhoff, 1967. Maess, Earling D. The Great PanLibHon Controversy: The Fight over the Flags of Shipping . Epping, U.K.: Gower Press, 1972. , Purdy, H.I. Transport Competition and Public Policy i n Canada . Vancouver, B r i t i s h Columbia: n.p., 1972. Rochdale Committee of Inquiry into Shipping Beport . Presented to Parliament by the President of the Board of Trade by 167 Command of Her Majesty. London: Her Majesty's Stationery C f f i c e , 1970. S c h i f r i n , Leonard G.; *** . , Encyclopedia of Economics Guilford, Ccnneticut: The Dushkin Publishing Group, 1973. , S t a t i s t i c s Canada. Shipping Report 5 Parts. 1977. -water Transportation. 54-202 , 1977. Sturmey, S.G. J Consideration o f the Ends and Means of National Shipping Policy •» Bergen, Norway: Insti t u t e of Shipping Research - The Norwegian School of Economic & Business administration, 1965. Transport Canada, Marine Division.,The Coasting Trade act . Ottawa: Ministry of Supply and Services Canada, 1977. . Backgrcund Paper on Beep-Sea Shipping Ottawa: Ministry of Supply and Services Canada, 1979. , —— • Measures to Encourage the Gradual Development of a Canadian Deep-Sea Fleet . Ottawa: Ministry of Supply and Services Canada, 1980. . . a Shipping Policy for Canada . Ottawa: Ministry of - uPPly and Services Canada, 19 79. O.S. Department cf Commerce, Maritime administration. Maritime Subsidies . Washington: Government Printing O f f i c e , 1S76. Unpublished Papers Presented at the Third National Marine Conference in Ottawa, May 22-23, 1980; B e l l , H.E. "Financing Considerations in Determining Owners' Choice of Flag." Fi s s e r , Frank. "Financing Factors to be Considered Before venturing into the i n t e r n a t i o n a l Arena.'! Gibson, Andres E. "Ships, Finance, Personnel and the Missing Ingredients." Jebsen, Atle. "Consideration to Ponder before Venturing i n t o Deepsea Operations." Regan, Joseph M. "Financing Shipping." Newspaper A r t i c l e s ; "Alg cma Central R Carrier." Gl a i l cbe way Expected to Order a Conventional Bulk and Mail - Report on Business, 3 July 1980. 168 "Conference C a l l s . " Financial Post - Special Beport, 14 A p r i l 1979. "End of Aid Will Hurt B.C. Yards." Vancouver Province , 23 July 1980. "Harn Seen i n Seduced Subsidy." Globe and H a i l - Beport on Eusiness, 10 July 1980, p. B11. "Improved Taxation Climate Urged." Globe and flail - Beport on Eusiness, 5 July 1980. "Industry Blasts Ottawa's Shipping Policy.'» Globe and Mail . 26 January 1979. "Narby Cast his Lot with Mixed Cargo." Financial Post , 11 August 1979, p. 1. "Once Again, Tcugh Talk About a Merchant Marine." F i n a n c i a l Post - Special Beport, 14 April 1979. "Ottawa Forced to turn Blind Eye to O f f i c e r s Lacking Emergency Training.V Globe and Mail - Beport on Business, 15 May 1980, p. B12. "Ottawa Moves to Encourage Buy Canadian Policy f o r Marine Insurance." Globe and J a i l - Beport on Business, 22 May 1980, p. B12. "Owner's Charterers Uncertain over which Direction Ocean Freight Market w i l l take." Globe and Mail - Beport on Business, 24 April 1980. "The Bo-Bo Twins." Vancouver Province , 23 July 1980, p. D4. "Seafarers Steer Calm Course Now." Financial Post - Special Beport, 14 A p r i l 1979. , "Shipbuilders C r i t i c i z e Drop in Subsidy." Globe and Mail -iepcrt on Business, 3 July 1980, p. ,B11. , "Shipyard Production Value Bises 17.4%. '• Globe and Mail - Beport on Business, 8 May 1980, p. B12. "They're Subsidized, but Shipyards Humming Along.'? F i n a n c i a l Post , 26 January 1980, p. 1. "Vessel May Get Canadian Crew..',' Vancouver Province , 12 October 1879. "Windfall for Exporters." Financial Post - Special Beport, 14 A p r i l 1979. "Yards Obtain Orders." Globe and Mail - Beport on Business, 10 July 198 0, p. B11. A P P E N D I C E S Appendix 1 World Bulk Trade Figures W o r l d S e a b o r n e W o r l d S e a b o r n e C r u d e G i l Trade C o a l T r a d e Yvur 7<<ll. 7 . n - . M i ' / i - ' I V . i r I'tit I . . ' • \ «-' !'«>(. <>(|7 O'KI Will 2 i . 21 no:) ooo H IK I 1 >>W> d i (KM) 0011 m i .oo tm\ l ' l h 7 (.72 00-1 OOO 3 41)11 OIHI W O W i l l I K . 7 i't7 IHKI I ' d ) .H.1 ooo (Hill 0 0 0 I ' W i 70S IKK) (»HI 4 117 IV.MI t'.IXI IHKI I ' . ' M 7 3 o«:;i "t(h> . ' M l I'M, (HKI I;IXI 1 W.<) (? 71 (MMi OOO 4 (15.1 OOO (Mid l l iHl H i . ' , ' 8.'. l)(KI 0 0 0 IKK, (Kil l 0 0 0 I170 9 ' i ; IKIO .'KM) 5-'7 (KMt W i l l (KXt l ' l ; ( l 101 IMKI IHKI (KMI 0 0 0 0 0 0 1771 1 Ik.H IHKI (KHI (l 554 (Kil l OvKI OOO 1171 •J.J IKIII I K U ; 4<4 0 0 0 0 0 0 ooo 1 9 7 : 1 1HI ISO" (K IO 7 7 1 7 (Kill IMKI IK.1i i - ; ; : : 1i» I'O.'I (loo •III • MO (H):l (MM 1 V i ? (Kil l 'l-HI 4 : I X I (-.Oil (KM! (SOU l " 7 . i 104 ikKI IKIO •1*7 IK HI IhM! (KKI l '17-l 1 3 i . l l IKK) (KKI ' 0 (AO dim m«; c;>a l<)74 1 I ' l (M<1 (KM: 55K I K K : OOO (MX) r>7r. 1 25 ' l O i l i l (KKI H KM: ( K M IW.-.I IXXi 1-175 1 !7 OOO (HK) ( i l l 0 0 0 <K)0 110.1 l '»7ii 1 4 1 7 5IKI OOO III 221 I KK I 1HM) (Kil l I17f. \y> IH«I m i o S'l 1 ( KK I m m (MKI W o r l d S e a b o r n e W o r l d Seaborne. Gra in T r a d e I r o n O r e T r a d e 1 , ; „ • VV-ris T u n • Mil 1 tUI\ Ton-Milt". I'K'.O 7(, (KM (KHI 4 0 H (MKI om ooo I 1 M I5.< ( K M (MM) 575 (KXI OIHI llv.i l l ' « , 7 (..'! OOO ('.IN) .ISO WMI (MKI OOO 1 11.7 I W (Klii IHKI (.51 IHKI (MMI 0 0 0 ]>H,H <i5 (KXi (UK) .140 (KKl 0 0 0 (KM) i W . K IS.'i IKK) 0 0 0 775 (HfO (KHI O K I 1 tIM 0 0 OIHI (KKI .107 (Kid IHKI 0110 l ' K . - l ?44- (mo mm ' i | 1 (KM (KHI IKMI l ' ' 7 0 73 IKIO (KXI .1 ' ' . ' 1100 IHKI IMHl 117(1 247 (10(1 IKKI 1 ( I ' l l ( K M O K I (KHI 1<I71 7(i IHIO IKKI 411ft IHKI IMKI (NKI i!»7l 750 (NN) OOO 1 INS ( K M mm 0 0 0 1172 X 'J IMIil (MKI 4 5 1 OIHI O l d IMHl !972 2 4 7 (HWI IHKI 1 157. (KM) OIHI IKIO 1 173 1 . '7 (Hill ( M l 7(H) M M IMKI (MKI 197.1 ' 2 « IN'-.') (KMt 1 . I W (KKI w o (KHI 1171 130 W l (>0i) (.'15 01 111 I.«I mm 1174 .12" (Kil l (1(10 1 5711 0 0 0 (HK) (KKI l « 7 5 1 IKIO OOO 734 (Hid (NKI ('.HO H 7 5 212 (KM) IKK) 1 471 IHKI (MKI i«HI IV'70 141. OOO IKKI 7 7 1 IKKI 0 0 0 0 0 0 I17A 214 IHKI (IIMI 1 4 6 1 (MM) (Hill W o 1-1(1 S e a b o r n e W o r l d S e a b o r n * /Phosphate T r a d e B a u x i t e and Alumina T r a d e 1 c a r 7V>m / ' o l l - . U l f c s Yvar I V - l l . •f. .n-A/i7,-% I'K-O 27 IMKI 0 0 0 1(i (KIO !«KI (KKI !')A<< 23 l i lU l (KKI 55 O'.MI OIHI (KKI l ' K . 7 2K (Kl . l (KHI 103 (HK) (KKI IHKI 11(.7 I . " (Hill (KHI • Ijl (KHI 001) OiHI I'WiS .12 (KKI tK-0 1 I ' l IKKI IKKI (KKI 1 ^,'.B 26 (MM! K H I 70 IHKI IKHI OIK) I K - V .12 INX1 IKKI 1 IK (Hit) (KKI <»;<) 1 K i l 3d (.0(1 (KKI H I (Klli (KKl (k i l l 1170 .1 ! IKKI (KHI i 10 (KKI (Kill -K id 11711 3-1 OiKl (KKI 'CI (K.-O IKK) IKKI 1171 .15 IKKI (KHI 121 (MKI (1(1(1 (MM) .1? (KHI 0 0 0 1(1)1 0011 (KKI (MKI 117.?. 0110 0 0 0 135 (KKI (I.W) (KHI 117 2 . '5 00(1 K X I 1111 IK HI lt.\< IIV'.I I '»73 4.1 (MM 00(1 159 !K;I! (KKI (KKI 117.1 .<•( IMKI (V.KI l ^ i OIHI IHIO (KHI IStf IKOI IK 'd IKKI 1174 •111 (K..1I (mil If.g IHIO dim (KKI i 1174 4. ' (KKl (/.>:! 1175 <X INK) m u l 1 tl (((HI IHKI 01 Ki 1-175 J ! (KK! (Kill JiiS IKKI I'lH) (KHI l'!7<i ii i i : ^ i n.K> IJS '(HU) Will (KXI I-I7d> 42 IHM O'KI i -5 ix ' : i mm IKKI 171 Appendix 2 The World Merchant Fleet 1. T O T A L W O R M ) M E R C H A N T F L E E T BY H . A C S AS OP J A N U A R Y 1ST, 1980 W E L T H A N D E I . S F L O T T E G E S A M T N A C H F L A G G E N A M 1. J A N U A R 1980 No No of ships No No of ships l.fd. Nr. Flag Anz. i l i l del (b) Lfd. Nr. F lag A n z a h l der (b) Schiffe Birr Schiffe BRT - 1 Liberia 2 321 7 6 756 9 01 46 V e n e z u e l a 98 718 074 2 Japan 4 086 3 7 HI 7 616 4 7 C u b a 99 677 912 3 Gieece 3 075 35 144 550 48 Rep. South A f r i c a 44 645 751 4 UK 1 565 25 72 6 93 5 49 Ma la y s ia 94 584 337 i Norway 9 04 22 056 747 50 Peru 63 516 42 6 - G Tan am a 2 786 2 1 302 677 51 Pakistan 65 482 829 7 USSR 2 938 17 121 357 52 Egypt 109 4 81 911 S US 1 047 15 5'13 512 53 Israel 51 431 983 9 France 435 1 1 69 0 748 5 4 , C h i l e 59 410 607 10 Italy 966 11 053 162 56 Niger ia 3 6 3 58 791 11 FR of Germany 1 168 8 092 618 56 T h a i l a n d 90 338 101 12 Spain 733 7 63 4 5 29 57 M o r o c c o 47 308 080 • 13 Singapore 737 7 072 887 58 C o l u m b i a 50 3 03 4 31 14 PR C h i n a 714 6 055 705 59 Bangladesh 86 266 709 15 India , . 393 5 629 183 60 Lebanon 1 65 253 130 16 Netherlands 690 5 336 930 61 Switzerland 27 250 267 17 Denmark 668 5 121 372 62 C a y m a n Is 1. 106 239 514 18 Sweden 3 61 4 652 603 63 New Z e a l a n d 37 217 425 19 Brazi l 3 65 3 901 780 64 Ecuador 30 187 707 20 South Korea 442 3 59 7 463 65 V i e t n a m 50 180 859 21 Poland 334 3 132 2 75 66 Honduras 80 180 598 22 Kuwait 117 2 39 6 083 67 Uruguay 24 171 505 23 Yugoslavia 312 2 3 7 0 690 6S Eire 59 169 604 24 Finland 216 2 307 949 69 Ivory Coast 20 158 538 25 Argentina 221 2 22 6 409 70 C S S R 17 155 178 • 2G Cyprus 631 1 y&8 544 71 Ghana 23 133 855 • 27 Bermudas 87 1 753 581 72 Maled ives 39 127 441 28 Belg ium 80 1 624 902 73 T u n i s i a 25 125 194 29 Romania 183 1 573 289 74 U A E 47 116 184 30 T a i w a n 164 1 57] 651 75 M a l t a 35 113 174 31 Hong K o n g 107 1 557 137 76 North Korea 20 112 048 | 32 Austral ia 87 1 504 952 77 Sri Lanka 16 83 749 33 Phil ippines 279 1 472 064 78 Qatar 6 83 025 34 GDR 194 1 364 164 79 C a m e r o o n 5 81 497 35 Turkey 291 1 34 6 885 80 Austria 13 80 193 36 Saudi Arabia 110 1 23 7 960 81 Z a i r e 9 77 951 37 Iraq 41 1 229-159 82 Gabon 3 74 926 38 Portugal 108 1 204 917 83 Hungary 21 73 031 39 Indonesia 550 1 150 333 84 Iceland 49 72 055 40 Bulgaria 120 1 141 718 85 Ango la 18 51 427 41 A lger ia 76 1 126 634 86 A l b a n i a 14 51 338 42 Iran 93 977 477 87 Nauru Rep. 4 50 738 '13 C a n a d a 2 04 9 63 3 2 0 88 Bahamas 28 50 440 44 Libya 36 831 170 S9 Madagascar 16 47 348 45 M e x i c o 78 739 004 90 Burma • 14 46 389 Appendix 3 The Canadian Registered Merchant Fleet Eegicn Atlantic Coast tankers general cargo dry-bulk passenge r/cargc f e r r i e s leta I A t l a n t i c Coast P a c i f i c Coast: f e r r i e s passenger general cargo dry-bulk tankers Total P a c i f i c Coast number of vessels 25 22 14 6 16 83 28 1 3 2 2 36 Inland Waters (including Great Lakes): dry-bulk 115 tankers 11 general cargo 5 f e r r i e s 8 passenger 1 Total Inland Waters 140 Total Deep-sea 4 dwt tonnage 202,000 261 ,700 85,000 2,300,000 2,400,000 appendix 4 The Canadian Great Lakes Fleet Dry Bulk Cargoes - 1973 to o c H o re H o X "O Z Cl n n to CO n o Ci H- H- re o rt B> o H U) *: X) x- s O >— re B) o V) (/) ni re 3 rt H ' re • Ir *o 1 c 0 nt rt> 3 o (-<• P 3 3 rt-re O e o H M-3 era 13 re </l -O O --4 O I* ID to tO CO Cf 00 o* o -^ tn -o tM tn ~J 00 C7» W tn o H OO -u to ~o <£> O to o / N O o o to H to rt-c a. tn CO -o in 10 to o o to i i o\ -J •O VI tn O J i <i3 •—» ID 00 CD o t/J tn O 00 to -O. <i> —1 Ul tn tn tn 1—' CTN A. CO 10 i» * - - - - V. „ t3 tn ii o a £>. tn o O O O o o o o o o o o O O o o o o o o o o o o o o o o o o o o o o to o 1-* t-" Ol w to to - J ii i i i i O •"• *^  ~J •— o CTv 4^ O o o o o O o o o o o ii •o to to i» ii t/4 ii to cr> i—• t/J tn o - J o o » a 00 to o >—' tn i i to <o w to in tn ii o o * to o to t-> 00 CO t* ro i> o 00 re Appendix 5 Section BII-19 of the Maritime Code fill-19.(1) The following classes of per-sons are q u a l i f i e d . t o own Canadian r e g i s -tered ships, namely, (a) Canadian c i t i z e n s domiciled in a prov-ince; and (b) corporations incorporated by or pursu-ant tc an Act of Parliament or of the l e g i s l a t u r e of a province, (i) the p r i n c i p a l places of business of which are in Canada, ( i i ) at least two-thirds of the directors of which are Canadian c i t i z e n s resident In Canada,and ( i i i ) at least two-thirds of the persons who, pursuant to the by-laws or resolu-tions of the boards of directors or other governing bodies of the corporations, perform functions normally performed by the president, chairman of the board of directors or other governing body, sec-retary and treasure of a corporation are Canadian c i t i z e n s o r d i n a r i l y r e s i -dent i n Canada. 1 7 5 Appendix 6 Section 6 of The Canada Shipping Act "6. A ship s h a l l be deemed not to be a B r i t i s h ship unless i t i s owned wholly by a person q u a l i f i e d to be an owner of a E r i t i s h ship, namely, (a) a B r i t i s h subject; or <b) a body corporate incorporated under the law cf a country cf the Commonwealth or of the Republic of Ireland, and having i t s p r i n c i p a l place of business i n that country., 176 Appendix 7 Canadian Ship Construction Subsidy Hates 1961-80 March 12 , 1961 tc March 31, 1963 uo% A p r i l 1, 1963 to February 2, 1965 35% February 3, 1965 to December 31, 1965 N i l January 1, >1966 to May 31, 1969 25% June 1, 1969 to Man 31, 1970 23% June 1, 1970 to May 31, 1971 21% June 1, 1971 to March 5, 1975 193S March 6, 1975 to December 31, 1975 14% January 1, 1976 to December 31, 1976 13* January 1, 1977 to February 28, 1977 12S March 1, 1977 to August 31, 1977 20% September 1, 1977 to October 31, 1977 20% november 1, 1977 to June 30, 1980 2 0% July 1, 1980 tc 9% keypunch has LC no c a p i t a l automatically 177 Appendix 8 Difference Between Canadian and Foreign Manning Costs i Vessel Cdn Portage Foreign Portage Difference 1 1, 350,000 $1 ,104,535 $617,688 $394, 194 (tanker) 2. 17 5,000 dwt 1 ,048,045 588,456 - 2 ((CBC) 3. 150,000 dwt 1 ,048,045 588,456 — (bulk-car.) 4. , 8G,000 dwt 1 ,002,945 591,912 -(tanker) 5. 65,00 0 dwt 946,455 562,6 80 299,373 (bulk car.) 6 . 40,000 dwt 911,470 543,040 -(bulk car.) •7. 20,000 dwt 910,465 542,040 — (bulk car.) 8. Keo-bulker 910,465 545,808 282,786 9. Container 847,545 488,460 285,816 10. General 944,080 533,976 -1. To r e f l e c t the fa c t that the Canadian d o l l a r has depreciated b approximately f i f t e e n percent since these figures were compiled, foreign portage figures were multiplied by 1.15 to compensate for t h i s . Thus the amcunts given in the "difference" column were c a l -culated in the following manner; Cdn.manning costs - (Foreign manning costs x 1.15) 2. Entries marked with a dash are unimportant to the following analysis since none of these ships were found to be commercially acceptable; Cargo Source: Alcan Study , vol. I, pp. ,4.27-4.28. , Manning Cost Hatios (1976 Cdn$ = 0S$) (calculated as Cdn..portage / Foreign portage) 1. 1.788 2. 1.781 3. 1.781 4. 1.694 5. 1.682 6. 1.676 7. 1.680 8. , 1.668 ranges 1.668-1.788 9. 1.735 10. 1.768 178 Appendix .9 Breakdown of Canadian Shipping Expenses Jmillion as % of t o t a l Purchased transport $17 1. 2 23.4% Crew Wages and Salaries 167.4 22.9 Fuel and G i l 116. 9 15.9 Maintenance and Repair 70. 3 9.7 Be preciation 51.6 7. 1 Agency fees and berthage 49.9 6.8 Vessel and cargo insurance 34. 8 4.7 Provisions 11.8 1.6 Other 56. 9 7.9 Total $730.7 100.0 * = subsidizable items Source: S t a t i s t i c s Canada, Water Transport 1977, 54-202, p.15. .. Crew wages as a percentage of t o t a l operating revenue = $167.4 / 1180 = 14% 179 appendix 10 Calculations for Change i n Operating Margin associated with an Operating Subsidy Subsidy rate = (Cdn. manning costs - foreign manning costs) divided by Cdn. manning costs = (1.5 -1)/ 1.5 = 335? (assuming Cdn manning costs are 1,5 times foreign manning costs see appendix 8) Total subsidy payments: = Cdn. manning costs x 33% subsidy rate = 167.4 x 335? = $55.24 m i l l i o n Operating subsidy without subsidy: = t o t a l revenue less operating expenses / t o t a l revenue = ($1180 m i l l i o n - $731 million) / $1180 m i l l i o n = 385? Operating margin with subsidy = (tct. rev.- (op. exp. • subsidy)) / t o t . rev. , = ($1180 m i l l i o n - (730.7 m i l l i o n - 55.24 million)) / 1180 m i l l i o n =42.8% Change in operating revenue: = 42.8% - 38% = +4.8 5I Change in after tax p r o f i t : = before operating margin change x (1 - tax rate) , = 4.8 x .54 = 2.6% 9 180 Appendix 11 Proposed Subsidizatle Routes and Vessels BOUt € Type of Vessel Trade route Cargo E3 Bulk - 150,000 dwt P a c i f i c Coast/Japan Coal/ballast B6 Bulk - 65,000 dwt St.lawrence/W.Europe Grain/ballast B9 Bulk - 65,000 dwt St. Lawrence/S.amer. Grain/bauxite N3 Neobulk-25,0 00 dwt St.Lawrence/W.Europe Forest products / s t e e l N4 Neobulk-25,000 dwt Maritiraes/W.Europe Forest products / s t e e l C2 Container Baritimes/W.Europe Container S 1,750 TETJ* Bo-Bo C4 Container St.Lawrence/W.Europe Container S 800 TEU Bo-Ro {* TED = Twenty foot equivalent units) Source: alcan Study , Summary Beport, p. 3.10, Vessel Beguirements of Proposed Fleet Boute Type of Vessel Ships in f l e e t 1979 1985 1990 1995 E3 Bulk-150,000 dwt 3 5 6 6 B6 Bulk- 65,000 dwt 1 1 1 1 B9 Bulk- 65,000 dwt 1 1 1 1 N3 Neobulk-25,00 0 dwt 2 2 2 3 N4 Neobulk-25,000 dwt 3 4 5 7 C2 Container-1750 teu 1 2 3 4 C4 Container- 800 teu tt 6 9 12 Total # of Vessels 15 21 27 34 181 Appendix 12 Calculation of Cost Associated with an Operating Subsidy Program Per the year 1979: Type of Vessel Number Difference in Total Banning Manning Costs Dif.(subtotal) Eulk - 150,000 dwt 3 $394,000 f$1, 182,000 Bulk - 65,000 dwt 2 299,000 598,000 Neotulk-25,000 dwt 5 283,000 1,415,000 Containerships 5 286,000 1,430,000 Total Subsidizable Manning Costs $4,625,000 According to figures presented in Gerald Jantscher's book. Bread Upon the Waters , p.,20, the wage component constituted , approximately e i g h t y - f i v e percent of the t o t a l operating subsidy payments that were made. Therefore, tc estimate t o t a l subsidy payments f o r the Canadian program; Total subsidizable manning costs = .85 x 1.00 $4,625 mil l i o n = . 85 x 1.00 Similar figures can be calculated for the years 1985,1990,and 199 Total Subsidizable Manning costs: Year Tot Sub. manning costs Total operating Subsidy 1985 $6,554 m i l l i o n $7.06 m i l l i o n 1990 $8,375 m i l l i o n 9.02 mi l l i o n 1995 10.368 m i l l i o n 12.19 million 1. See appendix £ 2. ,See appendix 11 182 Appendix 13 Alternative Method for Calculating the Costs Associated With an Operating Subsidy Program Saguenay Shipping Ltd. i n i t s 1979 submission to Transport Canada on the question of a Canadian deep-sea f l e e t , estimated that Canadian crew costs were $250,000 to $350,000 higher per annun per vessel then were foreign crew costs. The cost of a Canadian d i f f e r e n t i a l subdidy can thus be estimated by multiplying the manning cost difference by the number of vessels receiving such a subsidy (see appendix 11) then multiplying by a factor or 1.176 (since subsidized wages account for approximately e i g h t - f i v e percent of t o t a l subsidy payments made) . Cost of Subsidy program for 1979: high (15 x $350,000) x 1.176 low (15 x $250, 000) x 1. 176 for 1985: = $6.17 million = 14.41 mil l i o n high (21 x $350,000) x 1. 176 = $8.64 mi l l i o n low (21 x $250, 000) x 1. 176 = $6.17 million for 1990: high (27 x $350,000) x 1. 176 = lew (27 x $250, 000) x 1. 176 = $11.11 mil l i o n $7.94 million ) 183 Appendix 14 Crewing Benefits Associated with the Proposed Fleet Year # of vessels # of o f f i c e r s # of crew t o t a l 1979 1985 19SC 1995 15 21 27 34 387 618 821 1022 446 729 972 1206 833 1347 1793 2228 Source: Alcan Stud_j , Summary Beport, p. 4.14 184 appendix 15 Social Costs of Labour associated with an Operating Subsidy Program Social CGSt = Subsidizatle Manning x .90 + Other Subsidizable of Labour Costs Items for 1979: = ($4,625 m i l l i c n x .9) + ((1/.85 -1) x $4,625 million) = $4.97 million for 1985: = ($6, 554 m i l l i c n x .9) • {(1/.85 -1) x $6,554 million) = $7.06 million fcr 1990: = ($8,375 mi l l i o n x .9) + ( ( ! / . 85 -1) x $8,375 million) = $9.0 2 m i l l i c n 1, See appendix 12 2. Estimated to be 155? of t o t a l payments. See appendix 12 185 Appendix 16 Vessels Qualifying f o r a Five Percent Investment Tax Credit Vessel Name Registry Type Country of Build for 1S77: Fort V i c t o r i a Fort Yale Fort Quebec Port Vancouver Federal Calumet Federal Clyde Federal Fraser Federal Rhine Federal Schelde Hellespont Cong. Sanko Trust Texaco Brave Total for 1S78: Algcbay Fort Carleton Fort Walsh Arctic Federal St.Laurent L i Fort Hamilton Federal Saguenay Total for 197:9 3 Federal Hudson Federal Huron A mste I s l e t Amstelsluis Amstelstadt Tc t a l Size Estimated Constr ucti Cost ($mill Br Bulk Japan 28,320 $15, Br Bulk Japan 28,320 15 Br Bulk Denmark 60,850 22 Br Bulk Denmark 60,850 22 L i Bulk S.Korea 43 ,630 15 L i Bulk S.Korea 35,925 13 L i Bulk Japan 40,200 13 LI Bulk S.Korea 35,925 13 L i Bulk S.Korea 35,925 13 L i Bulk Japan 56,090 15 L i Tanker Netherlnds 56,090 22 Li Tanker Japan 9,505 6 $184 Ca Bulk Canada 31 ,000 22 Br Bulk Japan 22,175 17 Br Bulk Japan 22,175 17 Ca Bulk Canada 28,600 22 L  Bulk S.Korea 30,000 19 Br Bulk Japan 22,175 17 L i Bulk S.Korea 30,000 19 $133 L i Bulk E. Ger. , 23,730 18 L i Bulk E. Ger. 23,73 0 18 Ne Cargo Canada 17,500 23 Ne Cargo Canada 17,500 23 Ne Cargo Canada 17,500 23 $105 mil. 186 Appendix 16 (cont'd) Summary of Sew Vessels Type of Vessel 1977 1978 1979 Eulk 10 7 2 Cargo 0 0 3 Tanker 2 0 0 Total 12 7 5 Estimated value of new ships ($mil.) 184 133 95 Estimated ITC 9.2 6.75 4. (in $ millions) 187 Appendix 17 Savings Associated with the Customs Exemption of Imported Ships to be Used i n International Trade Assuming a 20% Canadian Construction Subsidy: with no customs tax; -cwner may purchase a ship from eith e r Canadian yards or from foreign yards with costs being as follows, Cdn. yard (befcre subsidy) $27.5 mil l i o n Cdn. yard (after subsidy) 22.0 m i l l i o n foreign yard <no customs duties) 19.0 m i l l i o n The owner w i l l naturally e l e c t to purchase from the cheap source of supply (assuming a l l other conditions are similar) and w i l l purchase the vessel abroad f o r $19 m i l l i o n . with a 25% customs tax on imported ships; -cwner now has the following choice to make, Cdn. yard (after subsidy) $22.0 mil l i o n Foreign yard (after 25% import tax) f 19 m i l l i o n + (. 25x$27.5m) 25.9 m i l l i o n The owner wil purchase from the Canadian yard and w i l l pay a price of $22.0 million for the vessel. . The difference in the price that the owner must pay with and without the 25% customs duties tax represents the benefits to the shipowner cf this p a r t i c u l a r form of subsidy. 188 Appendix 18 Capital Cost Allowance Deductions Associated With Various Bates and Methods {in $,000s) 151 dec 30 51 dec 10% SL 15$ SI 20% SI 33% SL 50% SL 2 $3,000 $6,000 $2,000 $3,000 $4,000 $6,666 $10,000 3 2,550 4,200 2,000 3,000 4,000 6,666 10,000 4 2, 168 2,940 2,000 3,000 4,000 6,666 -5 1,842 2,058 2,000 3,000 4,000 - -6 1,566 1,441 2,000 3, 000 4,000 - -7 1,331 1 ,008 2,000 3,000 - - -8 1,131 706 2,000 2,000 - - -9 962 494 2,000 - - - -10 818 346 2,000 - - - -1 1 695 242 2,000 - - - -12 591 169 - - - - — 13 502 11 9 - - - -14 427 8 3 - - - - -15 363 58 - - - - -16 2,054 135 - - — - — Assumptions, 1. Ship purchase value i s $20 million 2. Discount rate used i s 12%. 3. L i f e of the vessel i s f i f t e e n years. 4. CCA begins at end of second year ( f i r s t two years of the vessel's l i f e are spent i n the shipyard). 5. Onclaimed Depreciation i s claimed at the end of the f i f t e e n year period. 6. F i f t y percent tax rate i s assumed 189 Appendix 18 (cont'd) Yr. . Fcrmula Formula PV factors (Belgium) (France) (12%) 2 $4,000 3,333 .79719 3 3,000 3,333 .71178 4 3,000 3,333 .63552 5 2,000 2,500 .56743 6 2,000 2,500 .5066 3 7 2,000 1 ,667 .45235 8 2,000 1 ,667 .40388 9 2,000 1, 667 .36061 10 - - .32197 11 - - .28748 12 - - .2566 7 13 - - .22917 14 - - . 2046 2 15 - - . 18270 16 - - . 16 312 Appendix 1.9 Present Values of D i f f e r e n t i a l Cash Flow Savings of Various Bates Yr. 15% SL - 10% SI - 20% SL - 33% SL - 50% SL -15% dec 15% dec 15% dec 15% dec 15% dec 2 $0 $ (398.6) $398.6 $1,461.2 $2,790.2 3 160. 2 (195.7) 516.0 1,465.2 2,651.4 4 264.4 ( 53.4) 582. 1 1,429.6 (688.9) 5 328.5 44.4 6 12.3 (522.6) (522.6) 6 36 3.3 109.9 661.6 (396.7) (396.7) 7 37 7.5 ' 15 1.3 (301.0) (301.0) (301.0) 8 175.5 175.5 (228.6) (228.6) (228.6) 9 (173.5) 187.2 (173.5) (173.5) (173.5) 10 (131.7) 190.3 (131.5) (131.5) (131.5) 11 ( 99.8) 187.6 ( 99.8) ( 99.8) ( 99.8) 12 ( 76.0) ( 76.0) ( 76.0) ( 76.0) ( 76.0) 13 ( 57.5) ( 57.5) ( 57.5) ( 57.5) ( 57.5) 14 ( 43.6) ( 43.6) ( 43.6) ( 43.6) ( 43.6) 15 ( 33.6) ( 33.6) ( 33.6) ( 33.6) ( 33.6) 16 (1675.5) (1675.5) (1675.5) (1675.5) (1675.5) Total s $886.2 $20.7 $1412.8 $2412. 1 $2520.8 SL = s t r a i g h t - l i n e depreciation method dec = declining balance method 19 1 Appendix 19 (cont'd) Yr. Belgian formula - 30% declining - 50% SL -15 9! declining 15% declining 33% SL 2 $398,6 $1195.8 $1328.9 3 160.2 587.2 1186.6 4 264.4 245.3 (2118.5) 5 44. 8 6 1.3 -6 109. 9 ( 31.7) -7 151.3 i 73.1) -8 175.5 ( 85.8) -9 187.2 ( 84.4) -10 (131.7) { 76.0) -11 ( 9 9.8) ( 65.1) — 12 ( 76.0) < 54.2) — 13 ( 57.5) ! 43.9) -14 { 4 3.6) ( 3 5.2) -15 ( 3 3.6) ( 27.9) — 16 (167.5) (156.5) Totals $882.2 $1355. 8 $397.0 192 Appendix 20 D i f f e r e n t i a l PV Cash Plows for Advance and Special Depreciation Methods yr. Method A 15% dec Method A - Method B Method 15% dec 15% dec 1 $6000 — $2679 — -2 2100 3000 (358) 5000 797.2 3 1785 2550 (272) 5000 871.9 4 1517 2168 (207) 4000 582. 1 5 1290 1842 (157) 2000 44. 8 6 1096 1566 (119) 2000 109.9 7 932 1331 ( 90) 2000 151. 3 8 792 1131 ( 68) - (301.0) 9 673 96 2 ( 52) - (228.6) 10 572 818 J 40) - 173.5 11 486 69 5 ( 30) - 131.5 12 413 591 ( 23) - 99.8 13 351 502 ( 17) , - 76. 0 14 298 429 ( 13) - 57. 5 15 253 363 ( 10) - 43.6 16 1437 2 054 ( 50) — 33.6 Totals $1173 $1244.0 Method A: 30% advance depreciation with regular 15% declining. Method B: 40% s p e c i a l depreciation with regular 15% declining. Appendix 21 Ccsts Associated with a Zero Tax Bate On Shipping Earnings Total Beveime of Canadian domiciled ship operators. Between Canadian and U.S. Ports {ether than Great Lakes ports) $47,272,174 Between Canadian and other foreign ports 197,588,466 Between two foreign ports 48,140,072 Total $293,000,712 Assuming a 5% return on revenue (see e a r l i e r discussion on operating subsidies) and using a 46% tax rate: Taxes otherwise payable = $293 million x .05 x .46 = $6.7 4 mil l i o n 1. Data taken frcn S t a t i s t i c s Canada, Hater Transportation 1S77, p. 37 . Figures l i s t e d above include f o r - h i r e and private c a r r i e r s but exclude data for government and sightseeing operators. 194 Appendix 22 Costs Associated with a Vessel Reserve Fund The U.S. registered f l e e t as of A p r i l 1980 t o t a l l e d 15,513,512 g.r.t. while the Canadian f l e e t t o t a l l e d 963,320 g.r.t. or approximately one-sixteenth the size of the larger O.S.,, f l e e t . Gerald Jantscher in his bock Bread Upon the Haters , pp. 54-6€, estimated the cost in 1974 of the U.S. Capital Construction Fund to be $35 m i l l i o n . Thus the estimated cost of a s i m i l a r Canadian program might cost in the neighbourhood of $2.17 m i l l i o n . . I f such a program was introduced i t would undoubtedly u encourage the r e g i s t r a t i o n of more ships i n Canada. Suppose that the Canadian registered f l e e t grew by 15 percent compared to five percent f c r the U.S. f l e e t . Under such assumptions the Canadian f l e e t wculd be one-fifteenth the size of the American f l e e t one year hence. The cost of the Canadian program might cost approximately $2.38 mi l l i o n . 195 Appendix 23 Benefit to Shipowners of a Loan Guarantee Program Assumptions. 1. Average ship cost i s $20 million. 2. Fifteen ships are ordered 3. F i f t y percent of borrowing i s done abroad. 4. loans cover eighty percent of the ships costs. Under such a set cf assumptions $120 m i l l i o n w i l l be borrowed abroad. (15x $20 millien) x .5 x .8 = $120 mi l l i o n without the government guarantee, the owners must make repayments amounting to $20,693,936 per annum i f the terms of cred i t are a 13% interest rate and an eight year repayment period. If because of the government guarantee program the owners are now able tc obtain loans at a lower i n t e r e s t rate (say at 12% ever eight years) then annual repayments w i l l be reduced to $20, 108,586. , thi s represents a redaction of $585,000 a year i n annual repayments. Spread over the eight year period of the loan and discounted by the firm's cost of c a p i t a l (assumed to be 1055) thi s yields a t o t a l benefit of $3.1 million to owners., Calculations of yearly Payments 12% inte r e s t rate 13% i n t e r e s t rate 196 Appendix 24 The Social Eenefits Associated with a Loan Guarantee Program As sum ptions. 1. Foreign borrowing rate eguals 9% percent 2. Canadian borrowing rate i s 11%. 3. The loan i s an eight year loan. 4. The loan i s for a t o t a l of $25 mi l l i o n . 5. Social Disccunt Bate equals 10 percent. , If borrowing occurs i n Canada the s o c i a l costs and benefits are; Yr. Item Amount PV (using 10%) 0 loan outlay $25 million ${25 million) If borrowing occurs abroad the s o c i a l costs and benefits are; Yr Item Amount Pv (using 10%) 1-8 loan repayments $4,517 mil. ${24,097 million) Ket s o c i a l benefits i n t h i s case from borrowing abroad in Canada are egual to the difference in the costs associated with each. This difference totals $0,90 3 mi l l i o n per vessel. , 

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            data-media="{[{embed.selectedMedia}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
https://iiif.library.ubc.ca/presentation/dsp.831.1-0094792/manifest

Comment

Related Items