By comparison with many other classes of commercial vessel, the working lives of cruise ships are extremely long. Cruise ships are commonly passed for service long past their fifth special survey (i.e. 25 years). Indeed we have clients operating successful and profitable cruise ships built in the 1950s and 1960s, such vessels even attracting a loyalty from their passengers to which an accountant would, no doubt, ascribe a substantial goodwill value.

However where a vessel’s continued retention is no longer economically viable, there is no buyer willing to continue to trade the vessel or its machinery and safety systems simply become outmoded to the point that considerations of safety arise, there comes a time when the romance has to end and a hard decision has to be made. At this point there is only one realistic option and that is to sell the vessel for recycling.

So, what needs to be considered by the owner of a cruise ship that has, so to speak, “had its day”? Before reaching for the phone to call the broker, it is important to consider the current regulatory regime as well as the potential impact on the owner’s reputation that any decision on recycling might have.

For a business as public facing as a cruise line, any association with working practices that are injurious to the environment or to the safety of workers is to be avoided.

Why ship recycling?

Even when no longer economically viable, a vessel retains an inherent value based on its constituent parts and dead weight of steel. However, the prices offered by the so called cash buyers for end of life tonnage vary depending on where in the world the vessel is to be recycled in and the recycling practices of the chosen yard.

Ship recycling as a large-scale business is today practised only in India, Pakistan, Bangladesh and China. There are also substantial ship breaking facilities in Turkey, though generally the prices offered by cash buyers purchasing for delivery to Turkish yards are lower than they are when selling to yards in the Indian Sub-Continent. This is because the cost of recycling in Turkish yards is that much higher given their greener credentials.

The majority of vessels are therefore recycled in Indian Sub-Continent yards via the so called “beaching” method. There has been much debate in recent years over the sustainability of ship recycling in this way. In particular, focussing on the unregulated disposal of hazardous materials, the pollution of shorelines and water by chemical and oily sediments, and the dangerous working conditions of the personnel employed in the industry.

Arguments put forward by the shipping industry in response, focusing on points such as the economic benefits of recycling machinery and materials, the many thousands employed in the industry and, most importantly, that the ship recyclers were efficiently doing a job that the developed world considered too dirty and costly to perform have largely been silenced.

Whilst a number of Indian facilities have been approved by recognised organisations as Hong Kong1Convention compliant, the beaching method of ship recycling remains in the spotlight and there have been several incidences of pressure groups forcing high profile ship owners to reverse plans to recycle this way. There is a particular risk of this where the recycling of cruise ships is concerned.

The impetus for an enforceable international standard

Attempts have been made to regulate the ship recycling industry. The principal international regime covering the exporting of waste is the Basel Convention2. It provides the framework for the international movement of hazardous wastes and all EU Member States have ratified it. It is given effect by the EU Waste Shipments Regulation3 (the WSR). The applicability of the WSR to the export of vessels is, however, a matter of debate and controversy.

The Hong Kong Convention

Because of such controversy the Hong Kong Convention was signed in 2009. It aims to remove the concept of “export and import” and instead impose responsibility for the surveying and certification of end-of-life vessels on the flag states and oblige them to issue “International Ready for Recycling Certificates” certifying that a ship recycling plan has been duly authorised by the relevant agency in the recycling state4.

The Hong Kong Convention could prove more exacting than the Basel Convention by requiring the hazardous materials on board a vessel to be identified throughout that vessel’s working life and not just at the time of its export at the “waste” stage. It also requires the prohibition of the installation or use of hazardous materials on both new ships and by repair yards on existing ships5.

The process of implementation and ratification

As at the date of this bulletin, the Hong Kong Convention has been ratified by only four states representing 2.2% of the world’s gross tonnage. It will not take effect until it has been ratified by 15 states representing 40% of the world’s gross tonnage and with a combined annual ship recycling volume of no less than 3% of their combined tonnage. The Hong Kong Convention is unlikely to be in force any time in the near future.

European Ship Recycling Policy

Following the signature of the Hong Kong Convention, the European Commission established a working party to examine the efficacy of the current regime (i.e. the Basel Convention and the WSR), which resulted in the entry into force of the EU Ship Recycling Regulation (the SRR) on 30 December 20136. Although in force, it cannot be applied until the earlier of 31 December 2018 and the date which is six months after the EU Commission has approved a sufficient number of ship recycling facilities (the so-called “European List”).

The race for approval is on, with the issuance, in April 2016, by the European Commission, of a communication comprising technical guidance for those facilities seeking approval7.

Once in application the SRR will require all vessels flying the flag of an EU Member State and any vessel present in its waters at the time of its sale for recycling to establish and maintain an inventory of the hazardous materials (IHM) on board.

In addition vessels flying the flag of an EU Member State will have to be dismantled in one of the safe and environmentally sound ship recycling facilities included on the European list. It bans recycling via the beaching method for EU flagged vessels.

There are also requirements concerning preparation for recycling through minimising the amount of hazardous waste present on board, procuring a “Ready for Recycling Certificate”, developing a Ship Recycling Plan and carrying out surveys prior to delivery to a ship recycling facility.

As the SRR states, ships going for recycling under the new regulation will no longer be covered by the WSR and therefore there will be no question concerning whether ‘ships are/are not waste’.

Such requirements may put owners of EU flagged vessels at a competitive disadvantage. This may only serve to encourage the practice of flagging out of the EU before sale for demolition.

Recycling fund

Aware of this and the need to incentivise green recycling, the SRR requires the EU Commission to assess the feasibility of establishing a financial mechanism to facilitate the safe and sound recycling of vessels. There are six possible mechanisms under consideration. It is imperative that the chosen mechanism does not place EU shipowners at a commmercial disadvantage or otherwise distort competition in terms of who paid. Of these options, the ship recycling fund is the apparent front runner at the moment. It would function as a levy applied to all ships calling at EU ports thereby not distorting competition. However, identifying beneficiaries of the fund might be difficult and again care would need to be taken not to distort competition. It is likely to be a considerable amount of time before such a fund becomes a reality.

Where to go from here

The regulation of ship recycling is still developing with potentially conflicting regimes. For a cruise ship owner seeking to dispose of its end of life vessel, the challenge will be in adhering to its stated environmental policy and avoiding negative publicity by ensuring, as economically as possible, that the vessel is recycled according to appropriate standards by a facility that has the relevant “green recycling” credentials. This will require the owner to have an up to date IHM such that the eventual recycler can readily identify the location and quantity of any hazardous materials on board to ensure a safe environment during the breaking process.

There are various standard contracts used in the sale of vessels for recycling, in particular BIMCO’s Recyclecon, which can accommodate the concerns of the owner in these respects. However, given the relative paucity of cruise ships being sold for recycling, the sale of such vessels is, for many, an unfamiliar area. Given this, the complex regulatory regime and the public profile of cruise lines and their vessels, the guidance of an experienced professional adviser is recommended.