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Tuesday, January 26, 2010

The importance of being a shipbroker (and shipowner) and its tax implications

Touches on the issue of certain countries lowering taxes to attract shipping companies. Smart move but a move that can decimate local commercial shipping scenes from London to Houston right through to Melbourne (down under).

Countries have been incredibly slow to respnd to these intiatives from relatively new shipping powerhouses like Singapore, Switzerland and Dubai.

quote


Bloomberg


London Shipbrokers Lose to Mobile-Home Owners in Political Feud

January 26, 2010, 04:56 AM EST Story Tools
By Simon Clark and Alaric Nightingale

Jan. 26 (Bloomberg) -- When Michael Drayton was chairman of London’s Baltic Exchange, politicians were more interested in his caravanning hobby towing a mobile vacation home than his job setting prices for $200 billion of world shipping.

“Everywhere I go wearing a Caravan Club hat, in they come,” Drayton, 59, said of Members of Parliament in Westminster. The veteran shipbroker is a vice president of the Caravan Club. He chaired the Baltic Exchange for two years until July. “Shipping, as far as Westminster is concerned, is neither a major money earner nor is it a vote winner.”
The 266-year-old Baltic Exchange epitomizes the City of London’s struggle to demonstrate its value to the nation after bankers saddled U.K. taxpayers with more than 800 billion pounds ($1.3 trillion) of liabilities from the financial crisis.
Defending City institutions has never been tougher as politicians of all stripes -- including traditional allies among the Conservatives -- question the purpose of the financial industry. Adair Turner, chairman of the Financial Services Authority, described parts of it as “socially useless.”


The financial crisis caused “a tear in the fabric of society,” pitting “ordinary citizens” against City bankers, Nick Anstee, who as lord mayor of the Corporation of London is a figurehead for the City, said at a dinner in November attended by Prime Minister Gordon Brown.

City Slammed
At stake for the City is the political support required to challenge overseas rivals and craft policies such as favorable tax laws to keep bankers and shipowners in London. Brown must hold elections by June.

“MPs feel inclined to slam the City for the current financial ills of the world, even though its risk-taking worked for over a decade,” said Liberal Democrat Lembit Opik, one of three lawmakers who liaise with the Caravan Club, which represents 1 million mobile-home enthusiasts. “Every MP knows people with caravans. Very few MPs know people with ships.”
London’s 15,600 shipping brokers, bankers, insurers and lawyers contributed 2.1 billion pounds to U.K. overseas earnings in 2008, according to International Financial Services London.
They help create a “critical mass” of companies and institutions that make London a global financial center, said Jeremy Penn, chief executive officer of the Baltic Exchange.
“We are absolutely trying to serve the worldwide shipping market,” Penn said, seated in his office next to the “Gherkin” tower, built on the site of the old Baltic Exchange after it was bombed by the Irish Republican Army in 1992.

Under Threat

City organizations like the 133-year-old London Metal Exchange, the worldwide price-setter for commodities like copper, the 322-year-old Lloyd’s of London insurance market and the Baltic Exchange face competition.
Norway and Singapore have been growing as shipping centers, the latter because of government help, said Andreas Sohmen-Pao, the Singapore-based CEO of BW Group, owner of the world’s biggest fleet of liquefied gas tankers.

“These changes happen over a fairly long period of time, but that doesn’t mean it’s not an issue,” said Sohmen-Pao. “As a distant observer it seems to be true that the U.K. government is not particularly concerned about the maritime sector.”


A spokesperson for the U.K. Treasury said in an e-mailed statement the government “values the contribution of the shipping industry to the U.K. economy.”


Penn and Drayton’s main concern is that perceived political indifference about the City has led to rising taxes that will drive London-based shipowners and brokers to relocate to places such as Monaco and Athens.


Non-Domiciled

In 2007, Brown’s Labour Party announced a new tax on so called non-domiciled foreigners resident in the U.K. after the Conservative Party said it would levy the “non-doms.”
“There’s been significant migration of ship ownership away from London following that,” said Penn. “Once that decision- maker moves, then the broker that wants to do business with him moves, and the lawyer moves, the banker moves.”
Clarkson Plc, the world’s biggest shipbroker, said in its 2008 annual report that it had opened an office in Geneva and “changed our focus from being a London-based broking business.”

Even the Baltic Exchange, which has an office in Singapore, could move, Penn said. “We would respond to where the bulk of the activity takes place,” Penn said.


The government has announced a top level of income tax of 50 percent and introduced a one-time tax on bankers’ bonuses.


‘Transportable’

“Shipping, by definition, is very transportable,” Drayton said. “We never asked anything from Westminster other than please just keep a level playing field and don’t mess around with the tax.”
Financial services accounted for 10.1 percent of the U.K.’s gross domestic product and 27.5 percent of corporate taxes in 2007, according to the government and PricewaterhouseCoopers LLP. More than 1 million Britons were employed in the industry that year, according to the U.K. Office for National Statistics.
“How on earth you would replace the wealth which is generated in the City of London, if you were to undermine it, I’ve no idea,” Penn said.


When Derek Prentis started in the shipping industry after World War II, his firm was exporting British coal and Greek entrepreneurs were snapping up wartime Liberty ships to build shipping empires via the U.K. capital.

‘Respected’

London still calls the shots in shipping, even as new economic powers like China emerge, he said.
“Being a member of the Baltic is respected throughout the world,” Prentis, 84, said

For Baltic Exchange senior freight market reporter Willy Lyth, his job puts him at the center of the “universe.”
Every weekday, first at about 1 p.m., and then again about three hours later, Lyth and three co-workers huddle together to set global shipping costs, based on prices submitted from 52 brokerages from New York to Shanghai.

The Baltic Exchange, which publishes prices and indexes such as the Baltic Dry Index, had sales of 5 million pounds in the year to March 2009. Its prices are used as a benchmark for negotiating freight rates. It also produces a forward curve indicating trading values that hedge funds use and traders to evaluate contracts with a nominal value of $35 billion in 2009.

A few hundred yards up St. Mary Axe street from the Baltic Exchange stands Lloyd’s of London, where brokers do business face to face around the Lutine Bell, which once rang out when shipwreck news reached London.
Insuring Cargo

Inside, it takes Hiscox Ltd. ship underwriter Brendan Flood about 20 minutes of negotiations with a broker perched on a stool beside him to insure a Bangladeshi cargo ship based 6,740 miles away in Singapore.
London’s shipping market has been affected by the collapse of financial companies including Royal Bank of Scotland Group Plc

Edinburgh-based RBS, which is now majority-owned by the government, is refusing to lend to Drayton to start a new company on the grounds that he’s a new customer, he said. RBS spokesman Piers Townsend declined to comment.


“Now that is bloody ridiculous,” Drayton said. “I’ve built up two companies on the back of Royal Bank of Scotland money. Royal Bank of Scotland made money. I’ve made money. Everyone’s made money.”
Drayton said politicians should be proud of the shipping services in London. He also knows that convincing Britons outside the City of the virtues of capitalism can be difficult

In 2008, he bought an unprofitable maker of classic mobile homes in Lincolnshire, eastern England. The workers were afraid of the new owners, he said.
“They were shaking in their boots at representatives of the City taking over,” said Drayton, whose Blackberry has a picture of his green Bentley Continental and mobile home. “They stood there and thought this was a death sentence coming.”
Cash From Caravans
Instead, the seven employees still have their jobs. They now renovate old trailers instead of building new ones.
The manufacture of caravans and spending by people vacationing in them make up a U.K. industry that generates 3 billion pounds a year in revenue and employs 90,000 people, according to Caravan Club spokesman Nick Lomas.
As mobile homes lead ships in Westminster’s priorities, London’s place at the center of the shipping map is in the balance.


“I can understand that the Baltic Exchange is very important,” said Lomas. “But it’s not immediately apparent to people, whereas caravans and motor homes are visible.”
--Editors: Rodney Jefferson, James Hertling
To contact the reporters on this story: Simon Clark in London at +44-20-7673-2059 or sclark4@bloomberg.net Alaric Nightingale in London at +44-20-7073-3488 or anightingal1@bloomberg.net

To contact the editors responsible for this story: Edward Evans at +44-20-7073-3190 or eevans3@bloomberg.net Stuart Wallace at +44-20-7673-2388 or swallace6@bloomberg.net

-0- Jan/26/2010 00:01 GMT

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