The local shipping industry has sent an SOS to Prime Minister Manmohan Singh seeking a cargo reservation policy for Indian ships to help the cause of revenue stability and raise finance at lower rates for new ships. End-users of shipping services and the public should also then benefit from the resultant moderation in freight rates.
The shipowners are looking for a directive to public sector firms to set aside a predetermined quantity of cargo to be transported exclusively on Indian-registered ships. They say this will provide a minimum level of employment to Indian ships at a time when companies across the world are increasingly laying up ships due to a waning demand for goods and rock-bottom freight rates.
The demand for a cargo support policy, wherein Indian ships are hired by public sector firms for longer periods on a “cost recovery” basis to lessen the impact of “dumping rates” offered by foreign shipowners, is at once contradictory and half-hearted. It comes at a time when shipping contracts are facing defaults over non-payment of rentals.
Companies owned by the government, a sovereign entity, are now seen as the safest bet for shipowners when the best of names are defaulting due to the global financial crisis.
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The industry didn’t think along these lines in 2006. Then, an influential section had kept silent when state-owned oil firms led by Indian Oil Corp. Ltd, or IOC, sought approval to dismantle the system of shipping in crude through Transchart, the centralized ship-chartering wing of the government. This group felt that Indian shipowners would be better off dealing with oil companies such as IOC directly without a rule book-bound Transchart. Hence, they did not lobby as vigorously as they are doing now to retain the ship-chartering business of oil firms with Transchart. As a result, IOC, and then Hindustan Petroleum Corp. Ltd, or HPCL, and Bharat Petroleum Corp. Ltd, or BPCL, went out of the Transchart system. Till then, oil firms had to give first preference to Indian ships to move crude oil cargo into India, provided the lowest rates quoted by foreign shipowners were matched. Sometimes they did, and grabbed contracts. But, when the market was good, they rented their ships to global customers to get better rates.
Currently, at least 50% of the country’s shipping fleet is employed outside India and has no connection whatsoever with India’s export-import trade. There is no merit in the argument of local shipowners that they need special concessions to expand fleet to raise the overall share of Indian ships carrying Indian cargo, now below 12% from 40% in the 1980s. With the existing fleet, they can carry a higher share by participating more fully in the movement of Indian cargo.
Cargo reservation on a cost recovery basis is certainly not the best way to bail out the industry. In fact, cost recovery is the most inefficient way of shipping goods as it would be difficult to ascertain or verify the costs of shipowners. The companies will squeeze customers in the absence of competition, as is happening in the movement of petro products along the country’s coast reserved for Indian-registered ships. Shipping costs go up, contrary to claims that such a policy would fetch better margins for exporters and lower the costs of imported inputs and manufactured goods.
Already, the cost of shipping in countries such as India is about twice that in developed nations. It may be recalled that in December 2005, Petronet LNG Ltd, India’s biggest LNG importer, had invited bids for a tanker to ship liquefied natural gas to its expanded terminal at Dahej, Gujarat. The winning bid of $72,880 (Rs35.6 lakh) a day by a consortium comprising Mitsui OSK Lines-NYK Line-K Line-Shipping Corp. of India Ltd, using a foreign-registered ship, was about $9,000, or 11%, lower than the lowest price quoted by EXMAR NV–Varun Shipping Co. Ltd, that would have used an Indian-registered ship, in an earlier bidding round. This tender exposed claims by the industry that the tonnage tax introduced in April 2004 would give them a globally level playing field. The tax, based on the cargo-carrying capacity of a ship, cut the tax incidence on the companies to 1-2% compared with a corporate tax rate of 30.9-33.9%.
The winner in the Dahej tender was the Indian public. If foreign shipowners quote dumping rates, Indian consumers stand to benefit.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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