India to take stock of relevance of Shipping Corporation, Dredging Corporation3 min read . Updated: 14 Aug 2014, 11:37 PM IST
After several years, there appears to be clarity within the government on the urgency for some key structural reforms that have plagued the sector for long
Prime Minister Narendra Modi is said to be taking a keen interest in all matters related to shipping. During a meeting with shipping secretary Vishwapati Trivedi on 21 June, the prime minister made several suggestions that now form part of a comprehensive action plan for India’s maritime sector.
After several years, there appears to be clarity within the government on the urgency for some key structural reforms that have plagued the sector for long. For instance, the need to convert the 12 ports owned by the government into companies—these ports are currently run as trusts. The shipping ministry has now started work on amending a law to facilitate this task.
Also on the action plan is a long-pending demand of port operators to be allowed to set rates based on market forces at the dozen ports owned by the government. Amending a law is necessary for this as well. The action plan also focuses on state-owned Shipping Corp. of India Ltd (SCI) and Dredging Corp. of India Ltd—entities that are the biggest in their respective sectors.
The shipping ministry has started examining the relevance of SCI in today’s scenario, following a suggestion made by Modi, according to the action plan.
SCI has been reeling under three continuous years of losses and is becoming an embarrassment for the government as its private rival, the Great Eastern Shipping Co. Ltd, has been reporting profits during the same period, despite the operating environment remaining tough for both.
How did Great Eastern Shipping manage the turbulent times brought on by the global financial crisis of 2008 which SCI is finding difficult to negotiate? An answer to this is fundamental to the review exercise being undertaken by the ministry. Because the two companies are poles apart in their style of operations.
SCI, being a government company, is handicapped by a lack of flexibility to take quick decisions on asset play. SCI is a so-called navratna company, a tag that allows greater financial freedom to state-run firms in India. But in the case of SCI, this tag has not helped much.
The oversight of the government auditor is a big influence on its decision-making process, be it buying or selling ships, which is a normal part of the business.
A large part of Great Eastern’s success has been its ability to take quick decisions on buying and selling ships, more so, used ships, at the right time.
SCI has always purchased new ships because buying used ships is considered a passport to controversy. Such purchases have to be done through a cumbersome and long-drawn tendering process which has its own pitfalls because ship prices keep varying. As a result, SCI is unable to take advantage of the fall in ship prices.
In fact, when the shipping downturn was at its peak and used ships were available in plenty at rock-bottom prices, SCI did not buy a single such ship. Instead, it ordered new ships at high prices which are being cancelled one by one now as the yards falter on delivery schedules. Most of the relatively new ships that SCI is operating now were purchased at high prices, when the shipping cycle was at its peak. The company’s dilemma is to operate such highly priced ships in a depressed freight market where the hire rates cannot recover even the operating costs.
SCI also does not have the luxury of selling used ships from its fleet to take advantage of the market high, like its private rival.
On top of all this, SCI has to abide by government directions on investment in projects even if the company feels that it is unviable such as its ₹ 50 crore investment in the controversial Sethusamudram Ship Channel project, which has been virtually abandoned.
Examples abound of Dredging Corp. having to pay higher prices for buying dredgers because of the long delays in finalizing tenders. It is debatable whether the government should be in the business of running ships or dredging harbors or whether these are activities best left to the private sector because they can do the job much better and more effectively.
If indeed the government wants to continue running SCI and Dredging Corp. as state-owned firms, there is no point in ruminating over their lackadaisical performance unless the firms are given full operational freedom and flexibility to decide on what they think is the best for them. And if SCI is to remain relevant as a state-owned firm, the government has to look within and not outside for answers. It would be appropriate to look at Singapore, where that country’s investment company runs Neptune Orient Lines Ltd and PSA International Pte Ltd, two of the best managed global companies in shipping and ports sectors, respectively.
P. Manoj looks at trends in the shipping industry.