Flagging Out

Deep-sea shipping, Swiss flag, Blacklist, Flagging Out, Federal guarantee

Status quo

To ensure the supply of vital goods and raw materials by sea in times of crisis, Switzerland, as a landlocked country, began promoting the development of a Swiss merchant fleet in 1959 by granting shipping companies, under certain conditions, guarantees to financing for ocean-going vessels flying the Swiss flag (evolving into solidarity guarantees in 1992). This allowed Swiss shipowners to finance deep-sea vessels at favourable terms. While the shipping industry (including Swiss shipping companies) flourished until the 2000s, it experienced a severe crisis as a result of the economic and financial crisis of 2008. As a result, numerous federal guarantees had to be provided by financing banks and deep-sea ships under the Swiss flag had to be sold, which in turn led to financial losses in the federal budget. By early 2017, the federal government was left with a loss of around CHF 200 million. In November 2019, the Swiss parliament approved an additional credit of CHF 129 million.

As a result, the Federal Council was compelled in 2016 to question the significance of deep-sea shipping supply and to have it reviewed. The review showed that ¾ of vital goods are imported from European countries by land or air and not by sea. Consequently, the Federal Council has since refrained from entering new or renewing existing guarantee commitments. However, the ongoing guarantee obligations in the area of ocean-going vessels will not expire until 2032 and the ocean shipping market remains to be in a precarious state of imbalance, which is why the financial risks for the federal government as a guarantor remain very high.

Problem

The situation is currently further aggravated by the fact that ocean-going vessels flying the Swiss flag are threatened with a so-called blacklisting via the Paris Memorandum of Understanding ("Paris MoU"). Under the Paris MoU, 27 member states agreed on a harmonized system of port state control and created a quality assessment system in the form of so-called white, grey and black lists. Swiss blacklisted ocean-going vessels would no longer be allowed to call at ports in the 27 member states, which include important trading partners and transhipment centres such as the Netherlands (with Rotterdam and Amsterdam), Germany (with Hamburg and Bremerhaven), Belgium (with Antwerp) and Spain (with Valencia and Algeciras).

The Federal Council assumes that within the next two years, the Swiss flag will be downgraded to the blacklist as an above-average number of Swiss ocean-going vessels have been detained in European ports due to significant quality deficiencies, which were rendered hazardous and incompatible with the provisions of the Paris MoU. The shipping companies are expected to sustain serious financial losses, impacting the federal guarantees and generating a loss for the Swiss government.

Solution de lege ferenda

While deep-sea vessels without federal guarantees are already able to avoid the negative consequences of blacklisting by changing flags, a revised provision in the Ordinance of 14 June 2002 on the Guarantee of Loans for the Financing of Swiss Deep-Sea Vessels (SR 531.44) will now also allow deep-sea vessels with federal guarantees to change their Swiss flag. The regulation will be supplemented by Art. 11a on changing flags as of 1 November 2020.

According to this article, ships that received Federal Government financing in the form of a guarantee can be operated under a suitable foreign flag if the Swiss flag is blacklisted. Foreign flags are considered suitable if they allow economic operation and commissioning of the ship for the benefit of the economic national supply. The Federal Office for National Economic Supply ("FONES") may approve applications for a change of flag if (1) the blacklisting is imminent, (2) the possibility of putting the ship into service for the benefit of national economic supply is still guaranteed and (3) the securities of the Federal Government, in particular the lien on the ship, are not impaired. The Federal Government therefore retains a first-ranking lien even under a foreign flag to secure its guarantee and continues to have all claims under the usual ship insurance policies assigned to it.

Furthermore, the Federal Government may limit the licence or attach conditions to it. In addition, it can oblige the shipowner to conclude a surety agreement.

MME Legal | Tax | Compliance will be happy to support you in all matters relating to deep-sea shipping flying the Swiss flag and will assist you if you wish to flag out.

 

October 2020 | Authors: Raphael Brunner, André Santen

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