Cyprus Special Report: Negotiating a strong future ahead

Cyprus is undergoing an interesting period in its economic history with several potential game changers poised to kick in if the right actions are taken. At the heart of it all is resolution of the Turkish crisis which involves a ban on Cypriot flagged ships visiting Turkish ports as well as the island’s emergence from its banking problems of 2013 and 2015 and the discovery of natural gas off its shores.

Yes, the Turkish situation remains unresolved and the true benefits of the estimated 30 trillion cubic feet of natural gas, valued at over $50bn, has yet to be realised, but there are some Cyprus watchers who believe that one could almost certainly influence the other. An accord has never been closer, as the European Union eyes Cyprus as a future energy hub that would give Turkey and Europe access to gas deposits discovered in the eastern Mediterranean.

And that leaves the financial crisis. But as Dieter Rohdenburg, CEO of shipping giant Intership Navigation, claims, development of the Cypriot economy since the banking crisis in 2013 is absolutely remarkable. “Last year saw nearly 3% growth (GDP) and similar levels are predicted for 2017. Business sentiment is high, and so is the determination of the local shipping community to strive and to grow the cluster.”

This was a point echoed by Thomas Kazakos, that ebullient and charismatic champion of Cyprus shipping. In his capacity as Director General of the Cyprus Shipping Chamber, Thomas is accepting of the important role shipping continues to play in the Cypriot economy, especially when you consider the dire freight rate situation shipping has had to bear over the last eight to nine years and when compared to how other international maritime clusters have fared.

Marios Demetriades, Cyprus Minister for Transport, Communications and Works, went even further. Talking to SMI he said: “The maritime industry is essential to Cyprus, and with plans for further significant growth, maritime is an integral part of our economic future. To this end, the government has prepared a draft bill to create a shipping portfolio assigned to a deputy minister, who will be responsible to handle all issues related to shipping.

“Shipping currently contributes around 7% to Cyprus’ GDP, however, with the new strategy we have put in place and the proactive steps we are taking to grow the maritime industry in Cyprus, we are expecting this to grow to 9% over the next three years,” he added.

While Cyprus as a cluster and as a flag may have grown extensively over the past 30 years, it is the interest the Government has seen from several sectors such as containers, tankers and gas carriers, where ship owners are looking for a well-established and quality flag with a strong and reliable professional services infrastructure that provides a round-the-clock service, as well as a package of favourable incentives.

Despina Panayiotou Theodosiou, Chief Executive Officer of Tototheo Maritime, added to the debate: “Cyprus offers the environment for companies to grow. It is strategically located, the infrastructure is advanced, as a member of the EU it also offers stability and safety. Furthermore, there is human talent, well-educated and skilled professionals, there is a transparent and uncomplicated legal framework as well as an attractive tax regime. All these advantages, combined with the resident shipping community, have allowed the maritime cluster to grow and shipping related services to be on an advanced level.

“Our group of companies was established and has its headquarters in Cyprus and through the years we have developed and grown into one major maritime communication provider globally and are expanding our physical presence in other countries. Cyprus provided the perfect setting for us to grow our business and allowed us to create the resources and capacity to enter such a competitive industry.”

Mr Demetriades again: “Cyprus’ tonnage tax system” (TTS) is of significant interest for quality ships and shipping companies. Approved by the European Commission in March 2010, the simplified tonnage tax system extends the favourable benefits applicable to owners of Cyprus-flagged vessels and ship managers to owners of foreign flagged vessels and charterers. It also extends the tax benefits that previously covered only profits from the operation of vessels in shipping activities, to cover profits on the sale of vessels, interest earned on funds used other than for investment purposes, and dividends paid directly or indirectly from shipping related profits.

“Cyprus has negotiated more than 50 double tax avoidance treaties and is the only open registry in Europe to have a TTS approved by the EC, providing assurance of a stable fiscal environment for the long term. Additionally, Cyprus understands that the evolution of existing regulations and the prospect of new regulations on the horizon have a significant impact on owners and operators. Our experts play a significant role in, not only, helping owners and operators ensure compliance, but we are also actively taking part in the discussion as legislation is being developed, allowing us to help shape the regulations,” he said.

Now more than ever before, the role of flag states as a conduit between regulators and the industry is critical. “By working in close cooperation with clients and organisations such as the Cyprus Shipping Chamber and Cyprus Union of Shipowners, the Cyprus flag conveys the thoughts and opinions of those affected, directly influencing how legislation is created and implemented. This is a great benefit to those vessels flagged with Cyprus,” said the Minister.

“We know that a personal approach and continuous flow of communication is extremely important to owners and operators. This is why the Cyprus flag has maritime offices in Piraeus, London, Hamburg, Rotterdam, and New York City, comprising a highly skilled and multilingual workforce. We pride ourselves on our accessibility and personal, consultative approach. But let’s be clear – this is far from the norm; many flags have only a skeleton staff to answer emails and issue certificates,” he said.

An estimated 4% of the world’s fleet and around 20% of global third-party ship management activities are controlled from Cyprus, and with the eleventh largest merchant fleet worldwide and the third largest in Europe, Cyprus is continually looking to drive significant growth whilst maintaining a strong focus on delivering value to shipowners and operators.

Cyprus currently flags over 1,000 oceangoing vessels with a total gross tonnage exceeding 22 million. It is the largest third-party ship management centre in Europe and one of the largest crew management centres in the world. A large number of shipowning, ship management and shipping related companies maintain fully-fledged offices and conduct their international operations and activities from Cyprus.

Despite these positive sentiments, Ioannis Efstratiou, Acting Director at the Department of Merchant Shipping, remains realistic about the flag situation: “It seems that since last year, we have seen a slight increase in numbers but, of course, we should also take into consideration the situation as a percentage in respect of the world fleet. For the last 20 years we have seen a decrease of about 20% – not in absolute numbers but as a percentage of the world fleet; this means that the world fleet has doubled and we have stayed stable at about 22 million gross tonnes.” The main problem has been the Turkish embargo, but as Mr Efstratiou admitted, measures were being taken to try and remedy the situation.

“Since 2013, we have been taking a more proactive approach in promoting the Cyprus flag and have increased tonnage numbers by around 1.2% or 300,000gt in the year to 2016. The Cyprus flag is currently eleventh in the world but our short-term target is to return to the top 10. “We are now targeting new markets, for example in Asia, because we want to find companies and ships whose trading programmes are outside the Mediterranean because if anybody is trading within the Mediterranean, of course in the back of their mind is always the possibility of visiting Turkish ports,” he said.

But as Thomas Kazakos stressed, if, and when, a resolution to the Turkish ban is reached, and there has been a massive amount of intense negotiation already undertaken and common ground reached, it is acknowledged that shipping will remain one of the few federal services in the country.

“A lot of preparation is being done to ensure that the existing operational system of shipping in Cyprus such as the tonnage tax, one flag, will be adhered to. So far, the assurances suggest that will be the case. Couple that with the geopolitical developments in the region, and ongoing discussions for the exploration of natural gas in Cyprus, then this can only work to more positive understanding by Turkey to resolve the Cyprus issue,” he said.

The flag carried out a study last year which took into consideration shipping routes and trading patterns by a variety of companies and ship types. The Department is still analysing the results but is expected to target specific companies and specific ships during the second quarter of 2017. However, the preliminary findings of the study indicate the flag should concentrate on the Asian market because of where the vessels trade.

“We try to develop the cluster in general and not just the flag. We are also interested in ship owners and ship managers that want to join our tonnage tax system because we want to develop the industry,” said Mr Efstratiou.

And this includes motivating more young people to think of maritime and the sea as a possible career. “In Cyprus it is not customary for the younger generation to follow into traditional shipping professions. This is starting to change slowly, with more young Cypriots now joining training academies,” he said.

The Department has been staging some campaigns in High Schools and would like to see at least 100 students coming through each year. It will also look to the bigger maritime companies in Cyprus to start offering jobs to Cypriot ex-seafarers.

Another significant development is the decision by the Government to submit a bill to establish an independent Deputy Ministry of Shipping, as already alluded to by the Minister. That means that the political leadership can have the power to take political decisions directly to the Council of Ministers and the President of Cyprus. The Minister will also be responsible for drafting and monitoring national shipping policy and politically responsible for the day-to-day provision of the Department of Merchant Shipping. More significantly, the new Deputy Ministry will also permanently represent Cyprus shipping in the European Union, IMO as well as be responsible for the promotion of Cyprus shipping as an autonomous govt agency.

Development of the Cyprus cluster is high on the island’s agenda, especially when it comes to financial services. But as Maria Hajivarnava, Shipping Department Advocate at the Nicosia-based law firm Christodoulos G Vassiliades & Co explains, while the cluster may be showing signs of growth, the industry is still having to deal with the aftermath of what has been one of the toughest global economic crises in generations.

“We have shipmanagement companies as clients and more are coming to Cyprus and we are also starting to see ship owners coming over from Greece.

“There is optimism with reservation. We do know that the industry is still having a lot of problems and it’s going to take a lot of years to come out of this. We still see the closing of companies and the restructuring of loans.

But how strong is the legal sector on the island?

“People in Cyprus are very well-educated and most of the lawyers have been educated in some of the UK’s best universities. Many of them have worked abroad and this is great experience because we are an international centre and deal with international lawyers and situations all the time. I believe corporate services and legal services here are of a very high standard.

While restructuring of loans was making up a large part of the workload at the moment, Ms Hajivarnava said there were also smaller companies coming to Cyprus looking for a more advantageous solution to help them survive the crisis in the shipping markets.

“It is very easy to set up a company here in Cyprus and the system is very solid and straightforward. We are also noticing a movement from Limassol to Nicosia because rents are lower here. The cluster is spreading out from Limassol very, very slowly. Indeed, some of the big shipping companies have offices in Nicosia,” she added.

Growth of the insurance sector on the island has been strong with existing players strengthening their market share while others are building stronger footholds.

The American Hellenic Hull Insurance Company is one such positive example, having more than doubled the number of ships on its books since its launch in the middle of last year. The Cyprus-based insurance company, a wholly owned subsidiary of New York-based American Steamship Owners Mutual Protection and Indemnity Association, inherited business originally written by the Hellenic Hull Mutual, which is now in run-off. About 610 ships transferred cover under a novation deal but the fleet on the books of American Hellenic has now passed 1,286 vessels.

Ilias Tsakiris, CEO, told SMI: “We get a lot of our business still from the Lloyds brokers, and we’re growing business from the German market. The Greek broking market is a very important market for us accounting for more than 45% of our book.

“We are currently road showing in the Far East and we will be road showing in the US; the plan is to grow even more by the end of the year and to increase the number of our vessels.

“Looking at Cyprus as a cluster, there are certainly stronger prospects than most think in growing business down here. Cyprus is better located than several other clusters and is a crossroads geographically, which is why it is extremely resilient to disasters,” he said.

According to Costas Joannides, CEO of Marsh, the insurance sector has come under a lot of pricing pressure in view of superfluous capacity which has been partly the result of heavy investment in the insurance sector, as well as due to underwriters understanding of the difficulties that our clients face with freight markets.

Our clients on the island take a balanced approach as they do not wish to compromise long term relationships and broadness of insurance cover, and they insist on utilizing first class insurance companies. “While we are under significant pressure to push prices down there is no relaxation on the quality of the products we offer”.

“The majority of the local shipping industry is very loyal, preferring to rely on high levels of continuity as well as long term relationships. I have not seen any large breakouts or any claims unsettled. When we present a claim, it is looked at positively rather than at how it can be avoided. Insurers know that the systems that our clients are using are so advanced and so transparent; they visit the island several times each year and can audit their systems. The change that we are seeing in the insurance market is underwriters focusing not only on the operational risk of the ship, which of course is one element, but on the quality of the  management systems. They want to explore key people’s knowledge and ability to handle the ordinary day-to-day business as well as ascertain how responsive they are when it comes to crisis management.

“On the claims side, our clients are not keen to put through attritional or borderline claims because they use insurance for medium to catastrophic casualties, where they need the input and the financial support,” he said.

Anna Vourgos, Director of Aphentrica Marine Insurance Brokers, added to the debate: “What we are trying to do is understand the challenges our clients are facing. “We haven’t seen an increase in demand because of the state of the market. In a bad market, certain people make big changes if they need to take drastic measures, which can be an opportunity if you are not the broker involved, or a threat if it is one of your existing clients taking the drastic measures. So, we are in a constant attack and defend situation where we are trying to take advantage of situations while at the same time defending what we have. The majority of the market hasn’t been making big changes because they have been trying to lay low to see themselves through.

“Our main strategy is to maintain our portfolio and look for opportunities where real opportunities lie. We are lucky that we have very loyal clients throughout. Most of our clients have been with us for a minimum of 10 years,” she added.

Professional average adjuster and marine claims consultants Albatross Adjusters is one such business on the island which has seen its role in the market strengthen. As Michael Steemers, Director, told SMI: “The company was established in 1983 and we now find ourselves dealing with  almost all of the shipping companies on the island.

“We are one of a small number of companies who will handle large general average cases such as large salvage cases on a general average basis.  We have a facility to collect general average guarantees and general average bonds and we have been doing this quite successfully,” he said. Getting to this stage of market respect is not only driven by the paper exercise of collecting the information, but it also has a lot to do with the number and the quality of the people employed.

“This expertise has been developed in-house; unfortunately competitors are very quick in copying new ideas and we are developing new ways of making the process faster. The whole thing could be a logistics nightmare but if you organise it properly it is doable,” he stressed.

“The Cyprus market has always been a very important market to companies like ours,” said Asad Salameh, President of SatComms specialists World-Link Communications, “and will become even more important following Brexit and the influx of EU regulations.

“It has become more of an attractive shipmanagement centre than it ever has; a fact demonstrated by the influx of Greek companies to the island,” he added.

Cyprus has become so important to World-Link that it now manages its operations in Cyprus, Greece, Germany as well as the UAE from the island as well as global technical support. “From here we support our clients 24/7 as well as attend to vessels worldwide from our base here in Cyprus,” he said.

But what are the challenges facing Cyprus as a maritime cluster? Asad Salameh again: “I think the implementation of more rigid EU rules and regulation may hinder some growth, but so far it has not been too big of an issue. While many Greeks have come to island, we’ve seen a few Greek companies move through Dubai to the UAE for instance against coming to Cyprus, so that basically is competition for the Cyprus market.”

Antonis Kasios, Operations Manager at Helica Maritime, added to the debate about the changing face of shipping towards a smarter future: “Digital transformation and Big Data revolution in shipping are inevitable. The fact that shipping companies are trying to have more efficient vessels, utilising IoT (Internet of Things) and Real Time performance data in combination with Historical Repository Data for each vessel, means this revolution has become a reality.

“The cultural challenges are enormous, and, of course, privacy concerns are only going to become more significant. But the underlying trends, both in the technology and in the business payoff, are unmistakable. Data-driven decisions tend to be better decisions. Leaders will either embrace this fact or be replaced by others who do,” he said.

“The future of technology lies in data and its analysis,” said Vassilis A. Kakampakos from SetelCyprus. “More objects and devices are now connected to the Internet, transmitting the information they gather back for analysis. The goal is to harness this data to learn about patterns and trends that can be used to make a positive impact on our health, transportation, energy conservation, and lifestyle. However, the data itself doesn’t produce these objectives, but rather it’s solutions that arise from analysing it and finding the answers we need. Two terms that have been discussed in relation to this future: big data and The Internet of Things (IoT); It’s hard to talk about one without the other, and although they are not the same thing, the two practices are closely intertwined.

“This disruptive technology requires new infrastructures, including hardware and software applications, as well as an operating system; enterprises will need to deal with the influx of data that starts flowing in and analyse it in real-time,” he added.

As Despina Panayiotou Theodosiou, from Tototheo Maritime, emphasised: “Satellite communications and data speeds are now available at affordable pricing to ship operators, thus driving the adoption of new technologies that provide smart operations. Another driving factor is the growing and different needs of the shipping companies in a very competitive environment. The need for improved performance has introduced concepts like the ‘connected ship’ and shipping companies are taking initiatives for organisational change which is significant. Almost every aspect of maritime operations is re-designed to better measure activity and optimise processes.

“During the last few years, Tototheo Maritime has been developing and specialising its offerings as well as adding new services and products to its portfolio. Our services now range from satellite communications to the sale of navigational equipment, the development of IT solutions and applications and engineering projects, etc.  “Onboard technologies and software are changing and evolving more than ever before and this is the area that we as a company invest and concentrate on,” she said.