Definition of a Pool
A Pool is a joint venture between shipowners to Pool vessels of similar types and sizes, with central administration, which are marketed as a single entity, negotiating voyage/time charterparties and contracts of affreightment and whose revenues are pooled and distributed to Owners.
Alternatively, to keep it simple and clear so that everyone could understand it, we could simply define a “Pool” in shipping, as follows:
“Joining forces by the collection of similar vessel types and sizes of various ownerships to form one alliance, with the aim to minimize risks and maximize revenue”.
Characteristics of a Pool
- Similar tonnage
- Central administration (Pool Management Company/Operator)
- Joint marketing
- Negotiation of freight rates
- Centralization of voyage costs
- Freight collection
- Weighing system
- Revenue distribution
- Fair share.
A Pool Charter is essentially a Time Charter with a floating charter rate. When the ship enters the Pool, its distribution key is agreed and this determines its share of earnings. This share is generally based on the vessel’s earning capacity compared with other ships in the Pool and will typically take into account cargo capacity, equipment onboard (types of hatches, cranes, number of cargo segregations, IMO Class etc.), speed and consumption – performance, vessel’s age etc.
When a Pool is formed, a “Pool Agreement” is drafted that specifies in detail the terms of participation i.e the Pool Members rights and obligations, the “entry and exit” prerequisites, the mechanisms in place for distribution of earnings, the evaluation procedure for the vessels and any other detail that is required to ensure the smooth operation for such new alliance.
Why participate in a Pool
In general, the Owner of a vessel has the following three alternatives for employment:
- Spot trade (High Risk / Return)
- Pool employment (Medium Risk / Return)
- Time Charter (Low-Medium Risk / Return)
Consequently, each individual Ship Owner that is joining a Pool anticipates that the vessel will be better off by joining the Pool, rather than remaining independent or fixed under a Time Charter.
The below table outlines the advantages and disadvantages of merchant shipping pools from an owners’ perspective:
- Ability to undertake CoA
- Economies of scope
- Diversification and Risk spreading
- Ability to benefit from volume discount negotiations / bargaining power
- Triangulation – higher load factor and minimise ballast legs and idle times
- Secure cash flow even when vessel is unemployed
- No control of tonnage by the ship owner
- Reliance on a 3rd party for securing employment of the vessels
- The ultimate Owner of the vessel has to adapt their operational mechanism to the Pool concept.
- The market is familiar with the Pool Operator and not the actual Owner.
Despite the various advantages of participating in a Pool, there are also some disadvantages.
The Owner has to adapt to the Pool’s operational mechanisms (Post fixture) which may not always be in line with the Owner’s policies or requirements. For example, an Owner may wish to undertake a higher Kidnap and Ransom insurance when sailing through a Piracy Area and to pass on these costs to the Charterer. But when a vessel is in a Pool, the Owner has to conform to the Insurance premiums as agreed by all Pool Members. Anything above the agreed premium will have to be paid by the Owner.
Another disadvantage is that the Owners become detached from the market as is the Pool Manager, and not the Owner, that markets the vessel to potential Charterers and cargo interests. Having no direct access to market information, Owners become dependent on the Pool with regard to cargo relationships and vessel’s potential earnings. In addition, due to this lack of knowledge, the Owner cannot check or verify the Pool earnings to evaluate whether the Pool Manager is employing the vessel in the best possible manner and to its maximum potential according to the current market.
Furthermore, theoretically, the Pool protect Owner’s interests. However, in practise, this is not always the case, since there are sometimes conflicts of interest that may arise between the vessel’s Owner, the Pool Manager and the other members.
This conflict of interest between parties is apparent in various circumstances. The most common example is when a vessel is placed off-hire due to a delay in operations. Pool Managers are usually inclined to place the vessel off-hire as their main task is to maximize the Pool’s earnings. In addition, they prefer not to take a strong position against an off-hire in order to maintain a good relationship with their Charterers/Cargo interests, which helps them enhance their position in the market as preferred tonnage providers. Furthermore, when a vessel is placed off-hire, such time will not be included in the calculations of the Pool’s earnings therefore increasing the daily reported income (Time Charter Equivalent – TCE). By showing a higher TCE, the Pool attracts more members and its bargaining position in the market as a tonnage provider is again further enhanced.
As it is logical from the basic principle of supply and demand, Pool Managers attempt to control as much of the supply of tonnage to the market as possible, in order to gain greater market access and control. This weakens the individual Owners’ position, who are unable to provide Charterers the flexibility and accessibility that the Pool provides.
As already mentioned, the Pool Manager depends on Charterers for the availability of cargos to keep the vessels in the Pool employed and for this reason is inclined to keep Charterers satisfied. Therefore, Pool Managers may be more flexible with matters relating to Bills of Lading approval, Letters of Indemnity, small cargo discrepancies, breach of trade limits such as calling an ice area, flexibility on security measures in High risk areas and many other dally operational issues that come up during the vessels’ normal trading. Ultimately, if potential claims arise from these issues, this will affect the Owner, not the Pool. For instance, despite the fact that the Pool may allow Bills of Lading to be issued without inserting a clause for commingling, in case of a contamination or off-spec cargo claim, it is the Owners that will be held liable. That is because the Bill of Lading is issued in the name of the Owner (Carrier/Vessel), hence the Owner is the responsible party for carriage of the cargo. Also, if the Pool Manager allows Charterers to call an ice area while the vessel is not designed as an ice class and without the proper measures, then in case of an incident, the Pool will not be liable despite the fact that the consequences to Owners will be a result from the Pool’s decision.
To overcome the disadvantages mentioned above and reduce their risk/exposure, it is common practise for Owners to appoint a third party, a Commercial Manager, to represent the Owner in the Pool and safeguard Owner’s interests.
The Commercial Manager will oversee the Pool Manager’s daily operations to ensure that Owner’s interests are always protected and their exposure is minimized. For instance, the Commercial Manager will check for any discrepancies during loading and/or discharge, will thoroughly review the LOI’s, will ensure that the Bills of Lading are issued correctly and with the appropriate clauses incorporated etc. Also, by appointing a Commercial Manager, Owners gain access to current market information enabling them to check and verify that the Pool Managers are indeed employing the vessel in the best possible way in order to maximise revenue. Furthermore, the Commercial Manager is able to validate how the Pool calculates and distributes revenue in order to ensure that Owners receive what they are entitled to and find ways to maximize the revenue/distribution.
Despite the above mentioned disadvantages, Pools are an integral part of shipping which cannot be overlooked as they provide access to remote markets and cargoes, as well as collective knowledge and expertise. More importantly, with the aid of a Commercial Manager, Owners can benefit from being members of a Pool as they are being provided with security and stable revenue in a volatile market.