Mumbai: The Indian government has introduced a condition that says shipbuilders should sign contracts only through global tenders if they want to avail of a proposed five-year subsidy of 20% on the deal value in a move that is likely to hamper the industry as most of the business is actually done through a network of brokers.
Meanwhile, shipbuilders note that the proposed subsidy is also below the previous rate of 30%. Shipping companies had been lobbying for an extension of the old scheme for 10 years. The old scheme, which expired in August, had been in existence since 2000 and was extended to private shipyards in 2002.
Core Infrastructure: L&T’s shipbuilding yard in Hajira. More companies are planning to enter the shipbuilding industry, seeing an opportunity as all international shipyards are overbooked for the next five years.
Executives of top shipbuilding companies now plan to meet new government shipping secretary A.P.V.N. Sarma on Tuesday to lobby for a higher subsidy rate and easier terms.
The shipbuilders are demanding that the government revoke its insistence on global tenders as it would be unrealistic.
“A recent cabinet note suggesting the extension of the subsidy scheme has insisted that shipbuilders sign contracts through a global tender (to avail the subsidy). But 99% of international shipping companies place orders for making ships through brokers based on negotiations,” said an executive of a shipbuilding company, who did not want to be identified ahead of more industry lobbying to try and alter the proposed subsidy. “We are hopeful that the shipping ministry will understand the issues faced by the companies.”
Though state-run companies such as Shipping Corp. of India Ltd (SCI) are required to float global tenders for buying ships, private companies such as Great Eastern Shipping Co. Ltd or Mercator Lines Ltd are free to opt for negotiations so they get a better price.
However, a shipping ministry official, preferring anonymity, said the government will only extend the subsidy scheme for five years, but may be sympathetic about potentially modifying the clauses.
“Shipbuilding is a critical infrastructure that is capable of generating total employment of about 0.48 million by 2012 and 2.45 million by 2017. It will also create a total investment of about Rs37,000 crore by 2012 and Rs2.22 trillion by 2017. Therefore, we have sought extension of the 30% subsidy for the next 10 years,” said Vijay Kumar, managing director of private shipbuilder Bharati Shipyard Ltd.
Government subsidy is given to public sector yards such as Hindustan Shipyard Ltd, Cochin Shipyard Ltd and Mazagon Docks Ltd in instalments when they are constructing ships, while private firms such as ABG Shipyard Ltd, Bharati and Larsen and Toubro Ltd get the subsidy only after the ship is built and delivered.
Apart from state-run SCI, new private players, such as the Adani Group and the Tata group, are planning to enter shipbuilding, seeing an opportunity as all international shipyards are overbooked for the next five years.
Consultant KPMG India Pvt. Ltd has recommended that shipbuilders in the country get a 10-year extension of the 30% subsidy scheme and the business be treated as an infrastructure activity, making it eligible for incentives such as tax holidays. In its report submitted to the shipping ministry last year, KPMG had recommended continuation of the subsidy till 2017 and that the rate be scaled down to 25% for another five years, through 2022.
The scheme has enabled the fledgling Indian shipbuilding industry to withstand competition from international shipyards, which benefit from extensive support from their respective governments. With the current rise in global shipbuilding, the subsidy has also been crucial in Indian shipyards penetrating the shipbuilding market dominated by Korea, Japan and China.