Madis Madalik, CFO of ESC Global Security talks about 2013 - the year of both change and survival for PMSC's 13.05.2013

The year of change

Shipping companies should always have a close look at the full scope of the offer for maritime security services, rather than only comparing the price tag at the end. But why is that so important? 

First of all, open-minded communication between the PMSC and shipping company should be established from day one. In some cases, it makes more sense to keep the security team on-board rather than disembarking and re-embarking it within the next few days. Taking this into consideration, then both, PMSC and client must be sure that the firearms and guards are allowed in the port of call. The initial information on this should arrive from the provider and must be double-checked by the client.

The goal behind this would be to achieve a win-win situation, where the security company does not have to cover additional third party costs and therefore can supply the services at a better rate.

In some cases (such as the Gulf of Aden, surrounding ports near Sri Lanka, and so on), the shipping company can save up to 10-30% if the voyage will be combined as one continuous voyage instead of two separate ones. In this case, we’re talking only about the direct costs, which relates to the PMSC, meaning indirect costs would drop, too.

The use of floating decks and their benefits

Although the use of floating armouries and their legal aspects are a mayor question for both PMSCs and shipping companies, it’s still clear that these will help save both time and money. The best example, of course, is Oman’s Muscat port vs Fujairah floating armouries. Using a floating armoury instead of the port avoids the rerouting of the ship, saves fuel, time and money. That means that if there’s a difference of a few thousand dollars or even more, it might be cheaper to hire a PMSC starting from Fujairah and pay it for the extra time, rather than absorbing the indirect costs that involve with embarking at the port. 

The second advantage of floating armouries is the fact that there are neither government regulations nor port dues, which usually add costs on top of the PMSC’s quotation. 

Comparing the same aspects in the Red Sea, the advantages of floating armouries are pretty much the same, with one addition: it also saves time for PMSCs, which, in turn, reduces time spent on the vessel – which, of course, reduces the costs.

Taking all this into account, it’s easy to see that the companies that would use the designated ports as embarking/disembarking hubs cannot compete with the companies that would use floating decks. This pushes the PMSCs towards using only the floating decks. However, listing all the actual pros and cons of floating armouries would require an entirely separate article.

160 security companies in more than 30 countries: is this good or bad for the market?

The current amount of security companies is too big – that’s a fact. Smaller companies will disappear entirely or merge with one another. The reason behind this is simple: to keep up with the standards – including all the insurances, licensing by the different flag-states and authorities, maintaining the equipment and daily operational costs – will become unbearable for the smaller PMSCs. Even SAMI believes that during 2013 the amount of the companies in the market will dramatically drop. 

In this sense, we are expecting strong price pressures on the market since a lot of companies will start cutting corners to keep a foothold, by not insuring the company properly or losing operational staff and legal support.

What does this mean for the shipping companies? 

This leaves the client in rather vulnerable position in case any claims arise. As security is a business of trust, then at some point the shipping company may forget to check its renewed policies or their actual content. 

Where is the breaking point? 

I believe that companies with less than 10-15 transits a month will have difficulties due to the immense pressure on prices. It will become really difficult to compete with other, larger companies if you only have two to three teams out at the same time. 

Of course, you might have a different view on the subject. As author and inspirational speaker Wolfgang Riebe once said: “If you think you are too small to be effective, you have never been in the dark with a mosquito.” I must add that it is much easier to be effective when you have three companies – the mosquitoes – with the same determined goal.

Every industry has gone through a period of mergers and acquisitions. I hope that 2013 will be the year for maritime security. In my personal opinion, I feel that in the end everybody will benefit from it, including PMSCs.

Changes in payment terms: it’s a 
buyers’ market

The time when security companies were paid upfront are pretty much over. Nowadays, clients are demanding payment terms of 30 to 60 days and counted from the date when the invoice is being issued. This means that shipping companies are looking for a strong financial partner or substantial equity to do business with. This all can be achieved with an open-minded communication between the client and the supplier. As of today, ESC Global Security has achieved the same with many of our clients. 

These measures will help to ensure that the co-operation between shipping company and supplier will remain strong as it will help avoid the constant pressure on paying the invoices on the date of disembarking or, as mentioned, up front. This ensures that both parties can concentrate on their usual day-to-day activities.

Standards are being raised. 
Are prices dropping?

As said earlier, cost efficiency should be obtained using alternative solutions rather than reducing team sizes or cutting corners. I strongly believe that PMSCs will become more focused on servicing certain types of vessels or flag states to ensure that they will be applicable to all the regulations in one segment or in one (group of) flag-state(s). 

The whole industry is waiting for the new ISO 28007 standard to differentiate serious companies from the ones who just want to try it out. Still, I see a weak point here – ISO standardisation does not ensure that the company is duly licensed to protect a specific vessel under a specific flag, nor does it ensure that proper insurance cover is actually in place. However, it will most definitely be a starting point and a bar for the shipping companies. 

I have spoken to many of the CEO’s from different PMSC-s and all support the fact that the regulations are being tightened daily, which helps to sort the serious companies from the start-ups. That is even if the prices are constantly pushed down by the industry and heavy competition within it. 

It is my personal belief that we must deal with a continuous decline in prices, but this can only happen up to a certain point. However, shipping companies must consider the fact that all companies are near to their break-even points and can’t go much lower than they are today. That is, of course, if they want to obtain the same level of quality and standards.

Piracy incidents have dropped since 2012. When can shipping companies sail without armed guards? 

Pirates in Somalia have earned about US$120 – 200m (different sources) annually as ransom or

as gross income, while the industry has lost billions of dollars. 

I sincerely believe that this is just an intermission in the attacks. I doubt that the pirates have just decided to close down their million-dollar industry without any particular reason and go back to their daily jobs, where they can earn as little as US$20 per month.

To explain my opinion in brief, I will use the thoughts of Peter Dobbs, Class Underwriter, Catlin asset protection: we can compare the current situation with that in the aviation industry. In the 1970s, there were pretty much no extra security measures in aviation. Could you imagine stepping into an airport and walking straight on to an airplane without any security control? Or would you actually step on to an airplane where the cargo and the persons onboard have not passed the security control?