The Hindu Business Line : Move to allow IOC to choose shipping line

The Government's move to grant freedom to IOC to make its own shipping arrangements will be a bombshell for the domestic private shipping companies. In the new set-up, only SCI will benefit from the Government's purchase price preference policy while under the existing Transchart system, Indian flag vessels will get preference irrespective of whether it is a public or private company.

THE proposal to allow Indian Oil Corporation (IOC) to make its own shipping arrangements for crude imports bypassing Transchart, the centralised chartering wing under the Shipping Ministry, will come as a " windfall" to the public sector Shipping Corporation of India (SCI), much to the chagrin of domestic private shipping lines.

The proposal empowers IOC to float a tender/enquiry to charter vessels for importing crude but, being a public sector enterprise, will have to give preference to SCI, another PSE, to conform to the government's purchase price preference policy.

"For instance, say a foreign flag vessel emerges as the lowest bidder by quoting a price of World Scale 100, followed by an Indian private shipping company (say Varun, Essar or GE Shipping) with a quote of WS 105 and SCI the third lowest bidder with a quote of WS110. SCI, being a PSE, will have the first right of refusal to match the lowest price quoted by the foreign bidder and may even walk away with the contract since its price quotation comes well within the 10 per cent price band quoted by the lowest bidder as per the purchase price preference policy," a top official with a domestic private shipping company told Business Line.

Here, the claims of Varun/Essar/GE Shipping, despite being the lowest Indian bidder, to have the right of first refusal would be overlooked, he said.

If, on the other hand, the lowest bidder quoting a World Scale rate of 100 is a domestic private shipping company (say Varun) and SCI has quoted a World Scale rate of 110, IOC will not be able to award the contract to Varun, the lowest bidder. "Here also, since its bid is well within 10 per cent of the price quoted by the lowest domestic private company, SCI will be given the right of first refusal to match the lowest price quoted by Varun and awarded with the contract," he explained.

Under the existing arrangement wherein IOC is required to go through Transchart, the right of first refusal is given to the Indian shipping company that has quoted the lowest price, no matter whether it is a private company or a public sector company.

Thus, under the present arrangement, if the lowest bidder is a foreign line, followed by Varun/Essar/GE Shipping with SCI emerging the third, the first right of refusal to match the rate quoted by the lowest foreign bidder will be given to either Varun/Essar/GE Shipping and not to SCI even though its bid is well within the 10 per cent price band to attract the purchase price preference policy.

SCI will be given an opportunity by Transchart to match the lowest foreign bid only if Varun/Essar or GE Shipping decline to match the price quoted by the lowest foreign bidder.

In the event that the lowest bidder is a domestic private shipping company (say, Essar), the contract will be awarded straightaway without any opportunity for SCI to match the lowest price quote submitted by Essar.

"The Government's move to grant freedom to IOC to make its own shipping arrangements will be a bombshell for the domestic private shipping companies. In the new set-up, only SCI will benefit from the Government's purchase price preference policy while under the existing Transchart system, Indian flag vessels will get preference irrespective of whether it is a public or private company ," says the shipping company official.

The Ministry of Petroleum & Natural Gas is soon expected to pilot a note seeking approval from the Union Cabinet to exempt IOC from going through Transchart for making its shipping arrangements. This is necessary to formalise a decision taken by the Ministries of Shipping and Petroleum & Natural Gas on December 9 on the issue.

The domestic shipping industry has opposed the move, expressing concern that such a decision will divert cargoes from free-on-board (f.o.b.) purchases to cost&freight (c&f) purchases at the cost of Indian shipping.

Under the existing Government policy, the import of all Government-owned/controlled cargoes should be only on f.o.b. basis with the shipping arrangements finalised through Transchart to achieve the objective of least cost imports for PSUs. The buy f.o.b. policy was also aimed at providing cargo support to Indian flag vessels. Under f.o.b. contracts, the responsibility of making shipping arrangements rests with the buyer (importer) whereas, under c&f deals, the seller (exporter) reserves the right to nominate vessels.

In a representation submitted to the Shipping Ministry, the Indian National Shipowners Association (INSA) has sounded the caution that: "In the past, whenever a particular cargo has been de-canalised, like fertilisers, its import on f.o.b. basis dropped while that on c&f correspondingly jumped. The c&f suppliers have the advantage of subsidising the freight structure through adjustments in the price of the commodity to promote use of tonnage owned or chartered by them in preference to vessels owned or chartered by buyers.

"As more and more trades move into c&f, there is a danger of less and less cargo becoming available to the Indian shipping. This would obviously deter Indian shipping from substantial investments and consequently could lead to a decline in national tonnage."

INSA has urged the Government to consider all relevant facts before initiating any move to dilute the role of Transchart and the policy of supporting f.o.b. purchases for import of cargoes on Indian flag vessels.

"Transchart has provided a single window for all PSUs to make their transportation arrangements. Hence, if IOC is allowed now to make transportation arrangement independent of Transchart, other PSUs, such as BPCL, HPCL, SAIL and VSP, among others, may also follow suit in due course. This would eventually cause dilution of the role of Transchart", INSA has pointed out.

Allaying fears, a senior IOC official said that the public sector oil giant, even after it has acquired the freedom to choose its shipping line, will continue with the buy-f.o.b. policy and follow a system similar to the one currently being followed by Transchart.

"The national shipping companies are rendering yeoman's service and we are as committed as anybody else to the betterment of the domestic shipping industry. By asking for freedom to make its own shipping arrangements, IOC is not trying to hurt the national shipping industry. We have supported national shipping in the past and will continue to do so," he stated.

At the same time, IOC, said the official, would not like to waste time by going through a third party (Transchart). "This is not to say that Transchart is not doing a good job, but IOC understands the nuances of oil transportation and terminal business better than anybody else," he said.

The Government officials said that IOC would not be able to utilise the freedom (if and when it is granted by the Cabinet) to make its own shipping arrangements through negotiations with individual shipping companies if it was to opt for buying crude on f.o.b. basis. "IOC will have to strictly float a tender or an enquiry to finalise the shipping arrangements," they observed.

However, IOC sources felt that in the current liberalised climate, such bindings should better be dispensed with, more so when improving the bottomline was the key factor.

Freight, it is pointed out, accounts for nearly10 per cent of the total cost of crude imported by IOC. Hiring tankers through Transchart not only places an additional financial burden but also administrative limits.

But official estimates reveal that deals struck through Transchart actually resulted in savings to the oil industry. IOC alone benefited to the extent of Rs 200 crore in the past three years.

The risks and liabilities on fixture terms, in any case, have to be assumed by the oil PSUs as Transchart only firms up shipping arrangements at lowest possible freight rates without charging any fees and without any share in profits/savings made in transportation costs.

The performance of Transchart is also subject to scrutiny by auditors. It also assists in resolving post-fixture disputes whenever asked to do so.