Dredging is a booming business these days. Yet, recent entrants to the business want protection from the government to compete with foreign rivals on their own coast.
The Union shipping secretary A.P.V.N Sarma said the government is working on liberalizing pre-qualification criteria for firms looking to bid for dredging works at the 12 big ports owned by the Union government. The “competition-friendly” new dredging policy, as he put it, will enable new entrants to bid for projects even if they don’t have prior operational experience or the financial muscle, provided they have the technology and the equipment to take up the work.
India’s massive Rs1 trillion port development programme to boost cargo handling capacity coincided with a hard-ening of the global dredging market because of a shortage of dredgers. Dredging costs have soared 75-80% over the last three-five years. This is pushing up the already high port tariffs in the country. Indian ports are 50% more expensive for a ship to call at than Colombo, Singapore or Dubai.
The country’s ports accumulate silt quickly and require dredging through the year to maintain depths and make the waterways navigable for ships to come calling for loading and unloading cargo. Ships sizes are also getting bigger as shipowners chase economies of scale so that larger quantities of goods can be transported at one time, saving on freight costs. This requires deepening the channels and berths to accommodate bigger ships. Such works are carried out with the help of specialized ships called dredgers.
The Union government has decided to create a minimum depth of 14m—which currently in the range of 9-12m—at all major ports. In comparison, the global average is 12-23m, enabling the latest container, tanker and dry bulk ships to come calling.
India’s dredging market is estimated to be worth around Rs20,000 crore over the next five years. Globally, the market is worth $14 billion (Rs58,660 crore) annually. Half of the global market—in the US, Japan and China—is closed to outsiders. In other words, only local firms owning dredgers registered in these countries can undertake work there.
Four Dutch firms—Royal Boskalis Westminster NV, Van Oord Dredging and Marine Contracting Co. NV, Dredging International NV and Jan De Nul NV—control 70% of the open market and, hence, are in a position to dictate prices.
Indian firms are already protected. A dredging policy announced by the Union shipping ministry for the 12 big ports for a three-year period starting 1 April 2007 made it mandatory for these ports to award dredging contracts through the open competitive bidding route. In this process, local firms owning dredgers registered in India have the right of first refusal to take up the work if their rate is within 10% of the lowest valid offer of a foreign company. A few years earlier, dredging works at major ports were awarded to state-run Dredging Corp. of India Ltd on a nomination (without competitive bidding) basis.
The government also directed these ports to set pre-qualification criteria that were not very stringent so that potential Indian bidders were not restricted. Still, new entrants could not meet the eligibility criteria on financial turnover and prior experience in dredging.
Much earlier, in 2004, the shipping ministry also indirectly sought to protect local firms for taking up dredging works at ports outside the Union government’s control that were developed by private firms. The director general of shipping, India’s maritime regulator, issued guidelines in June 2004 for local private port developers looking to hire foreign-registered dredgers by giving the first right of refusal to local firms, as explained earlier.
This was necessitated because local laws gave preference to dredgers registered in India for operating on the coast. Foreign dredgers can be hired by Indian port developers only in case of a shortage and with the approval of the director general of shipping. Dredging accounts for 30% of the cost of developing a new port. The country’s new generation private ports are aiming for much deeper depths that can accommodate bigger ships.
New firms have entered the dredging sector, buying cheap Chinese dredgers for their own captive use to cut costs and also rent them out to third parties. They are attracted by the huge potential and also because dredgers are covered under the tonnage tax scheme—a tax based on the cargo carrying capacity of ships—that lowers tax outgo of firms when compared with the normal corporate tax.
Last year, the government also granted tax concessions for the upkeep of navigational channels in the sea and also fully exempted dredgers from payment of 9% customs duty.
By relaxing the eligibility criteria and increasing competition, the shipping ministry hopes to build adequate domestic capacity and cut dredging costs. But, whether such a move will fetch the desired results or backfire because of new firms’ lack of operational experience as well as a labour crunch, will be seen in the coming months.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
To read all of P.Manj’s earlier columns, go to www.livemint.com/allaboveboard
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