BackLack of coordination to the fore as new cargo support policy runs aground
A preference for Indian-built, Indian-registered ships and the promotion of Indian shipyards should be pursued in tandem, not in isolation and at the expense of one another
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The lack of coordination towards improving India’s maritime sector became evident recently when the regulator held back implementing a policy change announced in November that gave first preference to ships manufactured and registered in India for transporting cargo on local routes.
The decision was taken by the director general of shipping after a section of India’s fleet-owners objected.
The new policy is designed to help local shipbuilders tide over an order drought by incentivizing purchase of ships manufactured by Indian shipyards, and create a reliable market.
The idea was to encourage a buy India framework, similar to what is followed in countries such as the US, Brazil and Indonesia. The US’ Jones Act mandates that all goods transported by water between US ports be carried on ships flying US flags that are constructed in the US, owned by US citizens, and crewed by US citizens and US permanent residents.
It is true that India’s shipyards are struggling to get new commercial shipbuilding orders after the financial crisis of 2008 wreaked havoc in global shipping. It also holds true for fleet-owners who were not spared as freight rates continue to remain low due to oversupply, rising operating costs and weak demand for transporting goods.
To prop-up local shipbuilders, India’s shipping ministry asked state-owned Shipping Corp. of India Ltd to order some new ships—particularly those used in supporting offshore oil-drilling operations along the coast—at local yards.
This created a new category of ships that are built and registered in India, which were hitherto outside the cargo support policy of the government.
A couple of other developments also resulted in the emergence of Indian-built, Indian-registered ships. Local shipbuilders ventured into shipowning either by default or by design. When foreign fleet-owners who had ordered at Indian yards cancelled some of the contracts due to poor market conditions, shipbuilders could not find a new buyer and were saddled with ships, forcing them to turn fleet-owners. One prominent local shipyard even got into shipownership by acquiring a ship-owning company, hoping that this would provide captive business—the owner placing orders at the yard, both within the same group.
The issue of getting business for such ships within India then cropped up. India’s coastal trade (shipping cargo between local ports) is reserved for Indian-registered ships and foreign ships can be hired to operate in Indian territorial waters only when Indian ships are not available, after taking a licence from India’s maritime regulator.
Before the November policy change, an Indian ship (those owned by Indian entities and registered in India but not necessarily built in India) had a so-called right of first refusal to match the lowest rate quoted by a foreign flagship in a public tender and take the contract, according to rules set by the director general of shipping to develop the local shipping industry.
If the right of first refusal is not exercised by India-registered ships (not built in India), according to rules, then preference was given to foreign-registered ships that were manufactured at Indian yards followed by ships purchased by Indian citizens, companies or co-operative societies through a so-called bare boat charter-cum-demise route, in that sequence.
The November policy change included the new category of ships—Indian-built, Indian flag vessels—that are eligible to get preference for the right of refusal for carrying Indian cargo. This category got the first preference followed by the other groups in the sequence mentioned earlier.
The implementation of the new policy would have led to confusion among shipowners and cargo owners due to a lack of Indian registered bulk carriers, tankers and container ships that were built at Indian yards.
The maritime regulator’s decision to change the cargo support policy was obviously a quid pro quo for asking Shipping Corp. to order at Indian yards and that, too, at prices considered higher, compared with global yards.
But the government had not factored in the influential section of fleet-owners who ran offshore oil exploration support ships that were built at overseas shipyards. The November policy change would have hurt their interests. Some of them are now earning more money from operating such ships than oil tankers and bulk carriers.
Bowing to demand from this section of local fleet-owners, the maritime regulator put the policy change on hold till a new sequencing for exercising the right of first refusal is worked out.
It would have made sense for the government to give a reasonable time-frame to allow fleet-owners and cargo owners to prepare themselves for the change, ahead of implementing the new policy, instead of enforcing the new rules straightaway.
If the preference for Indian-built, Indian-registered ships is re-introduced, even private fleet-owners would have to buy ships from local yards to benefit from the cargo support policy.
But for this, the government will have to first put in place policy measures to ensure that local shipyards are competitive in pricing, compared with the shipbuilders in Korea, Japan and China, which have benefited from fiscal incentives and subsidies given by their respective governments to promote their shipbuilding industry.
A preference for Indian-built, Indian-registered ships and the promotion of Indian shipyards should be pursued in tandem, not in isolation and at the expense of one another.
P. Manoj looks at trends in the shipping industry.
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