Expert opinion on maritime security of supply

Supporting tonnage under the Finnish flag has long been an inadequate and ineffective measure from a security of supply point of view, as potential disruptions are increasingly occurring far from our sea areas and affect only a small proportion of products. Tonnage management will not help if the product is not available.

Expert opinion Parliamentary Committee on Transport and Communications 21.4.2022

The international environment for security of supply has changed with the Covid-19 pandemic and the war in Ukraine, in particular. The report on the change in the security environment states that critical infrastructure preparedness will be developed through programs focusing on its key components. Special priorities in securing the operational capacity of critical infrastructure include: functioning logistics services and networks.

With the war in Ukraine, the prices and transportation costs of many products are rising. The price of raw materials such as grain, oil, coal and gas will rise as their supply decreases. At the same time, demand and prices for transport equipment are rising, as a significant proportion of the world’s raw material buyers have to look for new suppliers due to sanctions and products that have previously used other modes of transport (rail, pipelines) are being diverted to sea. There is less equipment available and the market is responding by raising transport prices.

The dependence of Finnish society and the business community on imported products, semi-finished products and raw materials has increased considerably in recent decades. At the same time, our ability to manage supply chains has diminished.

Supporting tonnage under the Finnish flag has long been an inadequate and ineffective measure from a security of supply point of view, as potential disruptions are increasingly occurring far from our sea areas and affect only a small proportion of products. Tonnage management will not help if the product is not available.

In the event of exceptional circumstances, complete management of all product supply chains is pointless. The goal should only be the availability of critical products and components.

Analyzing what is critical at the enterprise level, what is critical and what is not, and focusing measures on critical products must be a cornerstone of the new security of supply.

The background to the change in security of supply is the following phenomena:

1. Production has moved further and further to countries with cheap production, further away from Finnish control.

2. Products are increasingly made up of parts and components, each of which can be made from different raw materials in different countries. The lack of any part or component can stop the entire complex supply chain.

3. According to just-in-time thinking, unnecessary stocks have been removed from production, ie entire supply chains have become more vulnerable to disruption.

There are many ways to ensure product-specific security of supply. Traditionally, security of supply has been increased with large warehouses. In addition to this, we can also reduce dependence, for example by changing consumption habits, using more subcontractors, designing alternative products, predictability, moving the order point to the last minute and reducing losses.

Other tools for supply chain management include capacity flexibility, schedule changes and time buffers, and accelerating the flow of information from demand to production. In order to ensure security of supply for the fleet, it is also possible to consider contractual arrangements with shipping companies in times of crisis.

At the governmental level, attention must be paid to the most significant high-volume product groups, such as energy. The transition to domestic low-carbon production, such as alternative energy sources, should be significantly accelerated from a security of supply perspective. At the same time, incentives for non-fossil fuel transport and heating must be provided to accelerate change.

Finland’s unique security of supply model, based on cooperation between the public and private sectors, is an excellent starting point for reforming our security of supply system towards more secure and focused operations in crisis situations.

Background

• The Ministry of Finance states in its publication 2019: 19 that maritime subsidies are primarily competitiveness subsidies, but they are also considered to have a link to supporting Finland’s security of supply.

• With regard to maritime transport, the Security of Supply Act has been implemented by ensuring the adequacy of the equipment flying the Finnish flag and the maintenance of sufficient competence.

• The most important state subsidies received by shipping companies in Finland are crew support and tonnage tax, totaling approximately EUR 90 million per year. Crew support means that the state returns to the shipping companies e.g. taxes and pensions on seafarers. Tonnage taxation means that shipowners are taxed in proportion to the size of the ship instead of income tax. In addition to the above, in the corona year 2021, almost EUR 70 million in corona subsidies were allocated to passenger car ferries.

• State aid to shipping sometimes includes the halving of the toll and the exemption from VAT and excise duty on passenger ferries. In recent years, the halving of fairway charges has been about 40 million euros a year. However, it is considered to be more support for the export industry than for shipping. Exemption from VAT and excise duty is again based on EU regulations, in which Finland has little influence. Its size was estimated at more than 200 million euros in 2017.

• In terms of competitiveness, subsidies have been reasonably successful. At present, about a third of foreign trade transports fly the Finnish flag. Finnish merchant ships currently employ less than 5,000 people, of whom about 2/3 are in actual seafaring positions and 1/3 in restaurant and other service positions. In 2019, the Finnish maritime cluster, consisting of the maritime industry, shipping companies, ports, etc., employed a total of 50,000 people and had a turnover of more than EUR 14 billion. Compared to other European countries, our maritime cluster is small but vibrant and innovative.