A policy framed by the Union government in the 1960s to provide cargo support to Indian shipping is going to be scrapped now.
TheCabinet on 29 March allowed state-run oil refiners Indian Oil Corp. Ltd (IOC), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL) to contract shipping lines on their own for importing crude, bypassing Transchart, the government’s chartering service through which all such requirements had to be routed.
The government now feels that in a liberalized era, such intervention was not necessary. Similar demands for liberalization have started coming in from other state-owned entities.
“The Steel Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd (RINL), which hire ships through Transchart to ship coal to their steel plants, have already sounded out the steel ministry for freedom to make their own shipping arrangements. They were awaiting the Cabinet decision on oil refiners before making a formal proposal in this regard,” said a steel ministry official who did not want to be named.
SAIL imports about 10 million tonnes (mt) of coal a year to fire its steel plants while RINL buys around 5mt for its steel plant at Visakhapatnam.
In June 2005, the Cabinet had allowed IOC to make its own shipping arrangements for importing crude oil, for a trial period of one year. IOC incurs freight costs of about Rs2,000 crore a year on importing 35-40mt of crude. After it was freed from using the services of Transchart, IOC said it was able to save about Rs70 crore on its freight bill. Now other public sector undertakings, including steel and fertilizer companies, too feel they may realize similar savings by negotiating with shipping lines on their own.
Based on a status report prepared by the ministry of petroleum, the Cabinet on Thursday exempted IOC from the existing policy without any time limits. In addition, it gave similar freedom to HPCL and BPCL as proposed by the petroleum ministry, said a senior ministry official.
The existing policy makes it mandatory for state-run firms to buy their cargoes only on free-on-board (f.o.b.) basis. This means that the crude is delivered at a specified port overseas. The importer then has to decide how he wants it shipped to India. The buyer pays for the freight, insurance, unloading costs and transportation from the port of destination to the factory.
According to the existing policy as it stands for other state-owned companies, the shipping arrangements are to be finalized by state-owned firms through Transchart, which then grants first-refusal rights to Indian ships to carry the cargo. Foreign ships are hired only when Indian ships are not available.
The proposal to free the companies from this policy was opposed by the shipping ministry, and its minister T.R. Baalu, leading to a tussle with the petroleum ministry. “The Cabinet approved the proposal after Baalu softened his earlier stand,” an official familiar with the Cabinet decision said.
A large section of Indian shipowners wanted the government to continue with the policy that gave them assured business. Apart from captive business for their crude tankers, local shipping firms that also owned coal carriers, had secured contracts for carrying coal to India, as well.
The government’s fertilizer department also buys 4mt of urea a year from a factory in Oman jointly promoted by fertilizer cooperatives Iffco and Kribhco, as well as from suppliers in the Arabian Gulf and Ukraine. About 200 ships are required for this purpose and most of the business was grabbed by Indian shipping lines.
“The policy has now become redundant,” says T.V. Shanbhag, who headed Transchart as the chief controller of chartering from 1995 to 2005. It doesn’t matter who does the chartering, so long as the cargo is imported on f.o.b. basis with Indian ships given first-refusal rights, he said.
But, with “exemption from the policy, there will always be a tendency for firms to go for the easiest method of buying cargo on c.i.f basis (where the selling price includes the cost of the goods, the freight or transport costs and also the cost of marine insurance)”, he added.