Bangalore: The shipbuilding industry in India that has been gasping for funds and new orders got a fresh lease of life on Wednesday from the Union Cabinet which signed off on a new state aid scheme.
From now on, yards will get extra money from the government on each ship built, helping it offset the cost disadvantage from global rivals while bidding for new orders.
Unlike the scheme that ended in August 2007 after a five-year run, this time, the scheme is labelled ‘financial assistance’ and not ‘subsidy’, which is considered a bad word in economic policy-making.
The financial assistance to shipbuilders – both state-owned and private – will be for 10 years. The quantum of aid will come down by three percentage points every three years, starting with 20% for the first three years, 17% for the next three years, 14% for the next three years and 11% in the 10th year.
The assistance will be given on the contract price or fair price, whichever is lower. The government has set aside a budget of ₹ 4,000 crore to implement the scheme over 10 years. Mint first reported the government’s plan on 1 September 2015.
Shipbuilders say the financial assistance would help spur new orders. The scheme, which has been in the making since 2008, got a fillip with the Make in India initiative of prime minister Narendra Modi. “The prime minister and the shipping minister took a keen interest in getting the scheme approved by the cabinet," shipping secretary Rajive Kumar said in an interview on Thursday.
The new scheme will force shipyards to re-think on their strategy to focus mainly on defence contracts after commercial orders dried up in the wake of the 2008 global financial crisis. Local yards have been banking on government-funded defence orders from the Indian Navy and the Coast Guard to stay afloat.
“It’s a very good move by the government," said an executive at L&T Shipbuilding Ltd, a unit of India’s biggest engineering and construction firm. “Ten years of financial assistance is more than enough. It should see us through these difficult times for the shipbuilding industry," he said, asking not to be named.
“There is scope for a re-think now on our part from either going slow or exiting the commercial shipbuilding segment altogether. Our outlook will turn a little more positive towards taking up commercial ship orders with the new scheme in place," the L&T executive said.
L&T will complete its commercial order book of four off-shore oil exploration support vessels from Qatar’s Halul Offshore Services Company W.L.L.by April 2016. On the defence side, it is building seven patrol vessels for the Coast Guard and a floating dock for the Indian Navy.
In September 2015, L&T decided not to participate in the tender issued by GAIL (India) Ltd for constructing three of the nine new liquefied natural gas (LNG) carriers for use by state-run natural gas firm to ship the commodity from the US from January 2019 citing a clause that require shipyards to hold equity stake of as much as 13% in the LNG carriers that are to be built locally.
“In the case of LNG ships, it requires investment of ₹ 2,500 crore to help us prepare to build those sophisticated vessels. That is still a big issue for us. Whether, the new financial assistance scheme will push us to participate in the GAIL tender is a million-dollar question," the L&T executive said.
The shipbuilding policy approved by the cabinet also includes granting tax incentives and infrastructure status for shipbuilding and ship repair industry.
It further grants a so-called right of first refusal for Indian shipyards for government purchases, whereby local shipbuilders can take up state-funded contracts by matching the lowest price quoted by an overseas entity in a public auction.
The earlier shipbuilding subsidy scheme offered shipbuilders 30% extra on building ocean-going merchant vessels that are more than 80metres in length, if they are manufactured for the domestic market. For export orders, however, ships of all types and capacities were eligible for the subsidy. To illustrate, a company that received a $100 million order from a foreign buyer would have been eligible for a $30 million subsidy from the government.
In the new scheme, the assistance will be given for all types of ships. “There is no distinction as far as the ship size is concerned, though smaller boats and fishing vessels are not included in the scheme," Shipping secretary Kumar said.
In the earlier scheme, the government subsidy was given to public sector yards in instalments, while private companies got it after the ship was built and delivered to the buyer.
In the new scheme, both state-owned and private yards will get the assistance only after they construct and hand over to the ship to the buyer. “We don’t want a repeat of what happened last time. Shipyards took lot of orders and then delivery was not commensurate. We want to incentivize timely delivery," Kumar said.
In March 2009, the Cabinet Committee on Economic Affairs (CCEA) agreed to liquidate the committed liability for payment of subsidy on confirmed orders signed before an earlier scheme ended on 14 August 2007 after a five-year run. The government made budgetary provision in this regard till March 2014.
The new scheme will shore up the valuations of yards such as ABG Shipyard Ltd and Bharati Shipyard Ltd whose promoters are looking to exit to overcome financial distress.
Yards such as ABG, Bharati and Pipavav Defence and Offshore Engineering Co Ltd had to restructure their debt through a so-called corporate debt restructuring (CDR), but this didn’t halt their financial woes. Bharat had to exit the CDR after the firm failed to comply with its obligations as part of the debt restructuring.
India’s ranking among the major shipbuilders rose from the 10th position (0.4% market share) in 2006, to the 5th position (1.1% market share) in 2009. Thereafter, India’s ranking has steadily declined, and in 2014 India was ranked at the 11th position (0.6% market share).
The withdrawal of the subsidy scheme and the market collapse played a role in the decline. Korea, China and Japan have pursued a mix of fiscal and non-fiscal incentives for encouraging growth and development of their shipbuilding industry, a spokesman for the Shipyards Association of India, an industry lobby, said.
India is looking to achieve a 5% share of the global shipbuilding market by 2020, according to the shipping ministry. “We are looking forward to the scheme", shipping secretary Kumar added.