The Hindu Business Line : ADB report on coastal shipping — Measures that would enable smooth sailing

In the backdrop of the Shipping Ministry's recent statement that it would consider all possible options to promote coastal shipping, an ADB report outlines several measures to boost cargo movement by the coastal route.

To promote coastal shipping in the country, a recent Asian Development Bank report has called for several steps that include reviewing cabotage laws, exempting Customs duties on spares and bunker fuel, extending tonnage tax and reduction in manning norms.

It also calls for making ship acquisition easier by ensuring capital availability under more attractive conditions, providing earmarked facilities at major ports, developing minor ports for coastal shipping, and reducing port charges for coastal shipping. The report has been released in the backdrop of the Ministry of Shipping, Road Transport and Highways' recent statement that it would consider options to promote coastal shipping.

Fiscal benefits should be provided to those who move cargo by coastal shipping, as is done in other countries. The Netherlands, for instance, provides a fiscal incentive equivalent to the freight cost incurred on coastal transport, the report states. While admitting that India's cabotage laws provide protection to the domestic industry by prohibiting foreign vessels from carrying cargo between Indian ports (exceptions are made if suitable Indian vessels are unavailable), the report states that if the primary objective is to increase the share of coastal shipping, it might be desirable to allow foreign vessels to compete for coastal cargo. This would bring efficiencies into the sector. However, recognising that ships with foreign flags usually operate under favourable taxation rules, it has also said that cabotage laws can be reintroduced once there is sustained growth in coastal cargo.

Special funding

The report also calls for developing specialised wings in development financial institutions to fund coastal shipping. "One reason why coastal tonnage has been stagnant, apart from the low profitability of coastal shipping, is the difficulty in getting finance at low interest rates. Although coastal ships are entitled to external commercial borrowing, they cannot effectively do so as they do not earn in foreign exchange," it stated. Companies have to rely on traditional bank funding, and that system not equipped to deal with the financing of ships, which is characterised by high interest rates and short maturity.

Since coastal shipping is more environment-friendly and fuel-efficient than any other mode of transport, there is a case for providing tax concessions, both for fuels and spares, the report says.

For instance, coastal ships, unlike ocean-going vessels, have to pay duties on bunker oil. Bunker fuel oil for a coastal vessel is estimated to cost about 28 per cent more than for an ocean-going vessel and around 36 per cent for high-flash, high-speed diesel.

Separate cadre

Import duties on capital goods and spares also cast a burden on coastal vessels, which depend heavily on imported spares. Only if the ships are repaired at ship repair units registered with Director General Shipping, are the imported spares not subject to taxes, the report explains.

Coastal ships have to comply with manning scales applicable for near coastal vessels that ply across India, Bangladesh, Sri Lanka, and the Maldives. These qualifications make the personnel costs higher for companies in the sector.

Since qualified officers prefer to work on ocean-going vessels, and given that coastal vessels do not have to conform to the different safety requirements in various foreign ports, the report calls for building a separate cadre of seafarers for coastal shipping with qualifications different from those for ocean-going vessels. This would ensure adequate personnel for the sector.

Additionally, the report says that the tonnage tax regime, as is available to companies with ocean-going vessels, should also be extended to coastal shipping firms. Shipping companies with ocean-going vessels have the option of choosing between corporate tax and tonnage tax, but not coastal shipping companies. This acts as a further disincentive for investment in coastal tonnage; ocean-going vessels are also not entitled to tonnage tax on coastal movement, the report says.