New ship hiring system may raise govt agencies’ freight bills

New ship hiring system may raise govt agencies’ freight bills

Bangalore: Government agencies fear they may have to pay at least 5% more for shipping their cargo if a revised methodology on hiring ships for them is implemented.

The government on the other hand believes the process will become clearer and won’t be held hostage to bargaining.

Shipowners quoting the lowest rate within a 5% range (plus or minus) of the estimated freight rate will be given the contract, according to a draft of the new methodology put up on the shipping ministry’s website for comments from stakeholders.

It will offer no scope for negotiations to reduce the rates.

The methodology will in effect raise the shipping bills of state-owned firms such as Steel Authority of India Ltd (SAIL), Rashtriya Ispat Nigam Ltd (RINL) and MMTC Ltd, as most bidders would likely quote at the higher range of the estimated freight rate.

“We are apprehensive about how the new method is going to work out. Removing negotiations altogether from the process of finalizing the freight rate is not a good practice to adopt," said an executive at SAIL, India’s biggest steel maker, speaking on condition of anonymity.

In the existing system, ship owners quote rates knowing well that these will be negotiated, he noted. Currently, the formula for calculating the freight rate is known only to Transchart but will be made transparent in the new rule.

“Even Indian Oil Corp., which is allowed to hire ships on its own without going through Transchart, negotiates the final rate on the phone," the executive said.

V.K. Sharma, the chief controller of chartering in the shipping ministry, rejected this contention. “The new method is designed to make the whole process more transparent," he said. “By avoiding negotiations during chartering of ships and finalizing merely on the basis of the lowest bidder, we are taking the first step towards e-chartering of ships."

SAIL ships some 12 million tonnes (mt) of raw materials in a year, for which shipping arrangements are finalized through Transchart.

Government-owned firms fear that on routes such as the US east coast to India, where the current freight is about $40 a tonne, a rate of 5% over that would work out to an additional $150,000 (about 78 lakh) on one shipment of 75,000 tonnes. Local fleet owners, though, will benefit “because they can get 5% extra on the rate calculated by Transchart as they always have a so-called right of first refusal to move the cargo", said a Mumbai-based shipping industry executive, who also declined to be named. Under Indian policy, if a foreign shipowner is the lowest bidder for a contract, the lowest bidder among local ships will be asked to match the rate on a “take-it-or-leave-it" basis. This will continue in the new system but Indian ships would have to decide within two hours of an offer being made.

Foreign shipowners carry almost 90% of about 18 mt of government cargo in a year either because few local fleet owners participate in the tender or those that do are unwilling to match the rates quoted by the foreign shipowners.

Anil Devli, chief executive of the Indian National Shipowners Association, declined to comment. “We can comment only after reading the draft of the proposed new methodology," he said. In the present system, state-owned departments and undertakings are bound by a government policy to make their shipping arrangements through Transchart, which gives the first preference to Indian ships to move their cargo, provided they match the lowest rates quoted by foreign shipowners when price quotations are invited.

Under the present system, the lowest rate is negotiated on the basis of the offers received from fleet owners. Transchart’s chartering committee makes a counter-offer for a lower rate.

If the lowest bidder does not accept the countered rate, the same rate is offered to others in the queue and the process continues till the rate is established and finalized.

Another worry is that the new methodology will lead to cartelization by shipowners.

“As the formula for calculating the expected freight rate will be known to all, ship owners will bid closer to the higher side of the 5% range to take the contract," said a former government chartering officer, also requesting anonymity.

“I doubt whether this will lead to cartelization of shipowners," said the shipping ministry’s Sharma.