Tag Archives: regulation

Increased complexity, cheap regulation, expensive crises: the price of (un)safety

This article of James Kwak was published on 2013.05.09 in The AtlanticAlthough it does not deal with the maritime industry, much of it seems to be applicable in our case. Consider the Deepwater Horizon…

When you get on a plane, you would prefer that it not catch fire in mid-air, right? You would feel better knowing that someone had checked out the plane’s designs to make sure that it wouldn’t spontaneously combust, yes? And you would hope that the person doing the checking was not working for the plane’s manufacturer, yeah?

Well, that’s not what happened with the Boeing 787 “Dreamliner.” Instead, as reported in The Wall Street Journal:

“Only about two dozen FAA officials were assigned to oversee certification of the 787. FAA manager Steve Boyd told the NTSB last month that the team started with scant knowledge of the plane’s advanced battery technology. Then it allowed FAA-designated industry experts from Boeing and its suppliers to run all tests and conduct final safety reviews ‘with confidence that they [would] make the right call,’ he said.”

There’s a reason for this. Modern airplanes are unbelievably complicated, and the FAA has nowhere enough staff with the necessary expertise in the latest technologies. That leaves the FAA with little choice but to depend on Boeing employees and contractors to review and test the systems they designed and built themselves.

This should sound familiar. There is perhaps no area in which increasing complexity outruns regulatory capacity more than in the financial services industry. Prior to the financial crisis, regulatory changes allowed large, supposedly sophisticated banks to calculate their own capital requirements using their own risk management systems–the thinking being that they understood the risks they faced much better than any poor federal bureaucrat could hope to. Even today, after those banks blew up the financial system, it is conventional wisdom in many circles that the only people who can understand derivatives — and who therefore should be allowed to weigh in on derivatives regulation — are Wall Street traders (and their lawyers).

What is the solution? For some, it is more of the same:

“Clay Jones, who is retiring as chief executive of aircraft-parts-maker Rockwell Collins Inc., recently said industry should receive a bigger role in vetting new planes because the gap between the technical expertise of regulators and manufacturers has widened over the past decade.”

But as an air traveler, is that really what you want? And as a human being, do you really want JPMorgan or Bank of America deciding whether or not they pose a risk to the financial system?

Lack of regulatory capacity is a real problem. We want the FAA to be able to evaluate whether a new battery technology is safe, just like we want the SEC and the CFTC to understand the derivatives markets that they oversee. If they can’t, that’s bad.

But the problem of incentives in the private sector is at least as bad. We know that bankers were willing to structure transactions that would later blow up their own banks because of the fees they would generate in the short term. Outsourcing risk evaluation to private third parties doesn’t work, either (can you say “credit rating agency”?).

There’s no way to fix the problem of private incentives. Executives at private firms will want to minimize or ignore risks, whether because they are trying to beat competitors to market, they are under pressure from shareholders to deliver in the short term, they are unwilling to admit that their pet project was a bad idea, or they suffer (like all of us) from optimism bias.

The only good way to make sure that our planes–and our financial system–are safe is to make sure we have enough regulators with enough skills and enough motivation to do the job. That means that regulatory agencies have to be able to hire more people than now, at near-private sector salaries, and keep them for long periods of time (with a rule preventing them from working at firms they regulated for several years). Only then can we have product safety reviews that aren’t tainted by obvious conflicts of interest.

Regulatory capacity is expensive. There are two ways to pay for it, either of which is fine with me. One way is through general government revenues, meaning taxes. Since that means individual income taxes in practice,* this would be somewhat progressive.

The other way is by levying sharply higher fees on regulated firms. These higher fees would, of course, be passed on to customers in the form of higher prices. But that’s only appropriate, since proper safety reviews are a cost that the market should take into account when deciding whether or not a new airplane (or a new derivative) increases social welfare.

Either way, we have to pay for it. But as a taxpayer or as a consumer, I would be happy to pay more if it means that the airplane I’m getting on was reviewed and tested by someone qualified who wasn’t being paid by its manufacturer.


* Payroll taxes are dedicated to specific programs; corporate income taxes and other taxes are only a small part of the overall tax system.

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SHIPPING REGULATION | Brussels’ bright idea


BRUSSELS has not endeared itself to shipowners over the years. The one-size-fits-all approach to regulation has often appeared unnecessarily awkward, uninformed and too often featured large sticks to beat offenders with while offering nothing in the way of carrots for those prepared to make an effort.

The latest move to name and shame substandard operators may on the face of it look like yet another indiscriminate salvo being fired in the direction of the shipowning community, but happily there is more sophistication here than many may assume.

Quality is finally being recognised as a positive force in Europe. The concept of rewarding operators with a good record with fewer inspections, while targeting resources on substandard offenders, is by no means a new idea, but the fact that it has now gained some traction in Brussels is a welcome turn of events.

The devil will inevitably be found in the detail, but if European Union transport commissioner Siim Kallas can genuinely implement a system of greater transparency and fair inspections then he will have offered the shipping industry a positive step forward and owners the opportunity to lessen their own regulatory burden into the bargain.

Bigger sticks are not in themselves an inherently bad thing. Substandard shipping is a justifiable target for any serious regulator and while those caught in the net may claim they are being unfairly discriminated against, we need robust standards to be set and policed.

In an ideal world, port state control should not be necessary if flag states and shipowners are doing their job effectively. But the reality is that inspections routinely find vessels riddled with even basic regulatory violations that are lucky to still be afloat.

We have said it before, but all regulatory shake-ups need time to bed in, and there is no reason to believe that these impending changes will be any different. What counts is how well these things work in the longer term and we have every confidence that given a fair chance, tastier carrots and bigger sticks could be a winning combination for all concerned.

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YEAR OF THE SEAFARER | Looking forward to a golden age in pilotage

Helen Kelly | LLOYD’S LIST

STEVE Pelecanos jokes that he only became a pilot to enjoy the ‘retirement-like’ lifestyle.

In 1970s Australia, with a young family to support, the shore-based vocation must have seemed halcyon compared with its more capricious ocean-going alternative. But a quiet life was not to be for this outspoken Queenslander with a fire in his belly in an industry in need dire of modernisation. “Our obligation as a pilot is to look forward,” he says. “Unfortunately, there are many people in shipping that gaze in the rear view mirror and look backwards to a ‘golden age’ that is past.”

His most recent campaign is to fix the broken system of pilotage on the Great Barrier Reef. It is a system inherited from a previous federal government, which believed greater competition between pilots would drive costs down at some of Australia’s biggest trading ports. Continue reading


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SAFETY | Dock death sparks Oz strike

DOCKWORKERS employed by Australia’s POAGS have walked off the job for 24 hours in reaction to a fatal accident this morning.

Worksafe Victoria said it appeared that a docker, 41, at Melbourne’s Appleton Dock was struck by a steel beam when a “lifting device similar to a gantry crane” collapsed, dropping its load on the victim. He was pronounced dead at the scene.

Maritime Union of Australia members stopped work at all P&O Automotive and General Stevedoring wharves in 15 ports nationwide to mark the third fatal accident this year; it was the second at POAGS operations and the third fatality at Appleton Dock in seven years.

National secretary Paddy Crumlin said stevedoring is in crisis: “It’s the third fatality on the wharves in five months – and we said last time we lost a worker in March we needed urgent action to overcome the lack of safety on the job.”

Crumlin said there was a yawning gap in state and federal safety legislation covering wharves, especially in bulk and general operations, after years of neglect and deregulation under previous governments.

“The industry’s safety record is appalling,” he added. “We need national legislation. We need regulation, not guidelines. We need the federal government to intervene.

“The industry has failed to regulated itself and urgent intervention is now required,” Crumlin said.

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SAFETY | Norwegian disappointment

WHEN the 26,800 dwt Panama-flagged Full City dragged its anchor on to the rocks off southern Norway in the summer of 2009, it leaked 200 tonnes of fuel oil into the country’s coastal waters and led to the criminal trial of two of the ship’s Chinese officers.

The ongoing investigation is a very important case for Norwegian maritime justice as it is the first full-scale test of the new Accident Investigation Board in Norway.

Previously, maritime accidents in Norway were investigated by way of traditional maritime inquiries.

The maritime inquiry conducted a general examination of the accident and its causes, and considered both safety at sea issues and the allocation of civil and criminal liability. The questioning of witnesses was led by an experienced mariner inspector.

This has, for several decades, been heavily criticised for the tendency to criminalise the seafarers as the same institution or person carried out both the safety inspection and the police investigation, and even claimed the criminal sentence to the victim.

But from July 1, 2008, Norway implemented a new investigation system, where understanding the cause and the criminal investigation were separated.

Following an international trend, the new rules gave the AIBN the authority to investigate the accident for the purpose of identifying circumstances of importance to improve the general safety at sea, but not to apportion criminal liability.

The responsibility of the criminal investigation was transferred to the local police authority that has the jurisdiction in the area where the accident occurs.

Regretfully, in view of the intention to put a stop to the unacceptable criminalisation of seafarers, the full-scale test of the new system, as we have seen by the Full City case, must be characterised as a great disappointment for the group of senior mariners, which for a decade were fighting for change.

The previous problem — that the same maritime accident investigators also carried out the police investigation and even instigated preliminary judgment — seems to have been replaced by the quite opposite problem, that the police are now investigating potential criminal charges following a maritime accident without being qualified.

Following the Full City case, the Norwegian Pilot Organisation sent a letter to the Norwegian Department of Justice claiming that the police should not be involved in the investigation of maritime accidents as they are not qualified.

After the Full City grounding most of the crew were interviewed, first by the police, later in court, presumably in order for the police to use their statements in any substantial criminal court. However, the ship master and third mate were almost immediately taken to virtual house arrest in Norway for nearly five months by detention of their passports.

They were preliminary charged with violations of Section 152b of the Norwegian Criminal Code and various sections of the Norwegian Ships Security Act.

Following the trial the master was sentenced to six months imprisonment, with three months suspended. The third mate received two months with three weeks suspended. The sentences are now at the appeal courts.

The present and common mandate to the accident investigation boards is to limit their activity to a maritime safety investigation and completely keep away from assessing probably criminal misdemeanour of the crew.

This is fair enough if there is no need for a criminal investigation. But in cases where the state’s public prosecutor wants to investigate possible civil liability or criminal offences, the accident investigation board should carry out a full safety management system evaluation and clarify compliance with the International Safety Management Code.

This is crucial information for the police before the starting up of a criminal investigation. We cannot expect the police investigator to have the full insight and understanding of the ship’s operational and navigational details and the sharing of responsibility between the company and the ship. Another flaw in the Full City case is that the court is acting and judging on behalf of a preliminary report, which clearly states that the investigation is not yet concluded. We see no evidence that the police have consulted anyone with a maritime background.

In the case of the Full City officers, they were detained in virtual house arrest by the confiscation of their passports. This must be considered as an illegal action and not justified in maritime laws.

Recent studies by BIMCO have identified 14 cases of seafarer’s detainment that took place during an 11-year period involving 12 coastal states. None of them were later convicted. According to BIMCO, this is unfair treatment of seafarers and a questionable application of law.

Marpol and the European Union’s directive 2005/35/EC give guidance on criminal proceedings being pursued only in cases where intent or serious neglect can be proven.

Even the United Nations Convention on the Law of the Seas urges that the human rights of the accused must be observed in all trials relating to the alleged violation of maritime pollution laws.

Has this provision been fulfilled for the Full City seafarers when their trial was based upon a preliminary investigation, and the police investigation was lacking professional maritime competence?

Arne Sagen is an authorised loss control manager, lead ISM code auditor and IACS quality assessor. He has been acting as port state inspector for Trinidad and Tobago, Namibia, Egypt and as flag state inspector for Antigua and Barbados. He is also on the advisory board of the Norwegian maritime safety lobby group, Skagerrak Foundation.

Source: http://www.lloydslist.com/ll/sector/regulation/article172372.ece?src=Search

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IMO as class leader: a fresh idea

From Lloyd’s List

AN INTRIGUING idea was recently floated about the auditing of classification societies by vice-chairman of the International Association of Classification Societies, Oh Kong-gyun, who is also chairman and chief executive of the Korea Register of Shipping. He suggested the International Maritime Organization become the umbrella organisation for class society audits.

This is attractive because at the moment audits by governments and groups such as the European Maritime Safety Agency are inundating class societies.

There are many flaws in the current approach. It is hard to glean how this welter of separate audits will improve standards globally. Moreover, the audits can be hijacked by local political agendas.

The long probe of IACS by the European Commission was criticised by some as being as much a political manoeuvre as a necessary step to ensure high standards.

If the IMO were to adopt such a role, it would help consolidate its own position as the global regulator of shipping, at a time when that position is being challenged by local bids to introduce laws and enforce regulation on the maritime industry.

The IMO has the strength and knowledge to oversee such a system, and it could ensure a more universal transparency.

Dr Oh is right in saying the current system is “not really an efficient process” and that quality is not really assured. His proposal should be taken seriously.

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