Logistics

Enough lanes for all to ferry boxes

| Updated on: Jan 17, 2011
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Competition subsequent to the relaxation of cabotage law will lead to better pricing, services and efficiency.

Reservation of coastal trade exclusively for domestic shipping by the Government of India is not an unusual regulation as many developed maritime countries such as the US (Jones Act), China and Japan have regulated their coastal shipping services.

Several maritime nations in Europe also have their own regulations in place, notably Spain and Greece where a significant amount of restrictions still remain in force.

Fifty-two years have passed since the Indian Merchant Shipping Act 1958 was enacted and significant changes have taken place, particularly in the container shipping trade.

Even in the US, Senator Mr John McCain has proposed alternative legislation to the Jones Act of 1920 as he believed that Act hindered free trade and favoured labour unions over consumers.

He said the US economy could benefit by as much as $1 billion annually from repeal of the Act, citing a 1999 US International Trade Commission Economic Study which suggested that liberalising domestic shipping would reduce costs by approximately 22 per cent. ( Containerisation International, London, August 2010) .

relaxing Cabotage law

With the relaxation of Cabotage law, the monopoly hitherto enjoyed by domestic container lines will go away and both the foreign and Indian shipping lines will vie for cargo for movement along the east and west coast. When competition enters, quality, frequency, service reliability and speed of delivery will improve significantly resulting in a substantial reduction in freight rates.

One reliable source points out that domestic lines would charge about $ 1,000/TEU for moving a container from Kandla (Gujarat) to Kochi whereas the liberalised market environment would contribute to a reduction in freight rate to as low as $300. The reduction could to make a significant impact in bringing down India's logistic costs (13 per cent of GDP compared with 6- 8 per cent in the US and Europe).

In addition, exporters would then be able to compete more efficiently by offering lower prices. Landed cost of imports would be significantly lower, giving a boost to foreign trade.

A rough estimate suggests that road transport operators would charge an amount of Rs 80,000(about $ 1,800) to move a 20- foot container from Kandla to Kochi. Diversion of a significant volume of traffic from roadways and railways to coastal shipping will eminently suit efforts on energy conservation, reduction of carbon emission, environmental pollution and road accidents.

The recent ‘Marine Highways' initiative of the US Government to shift a sizeable portion of its container transport from roadways to coastal shipping and river systems deserves special mention.

An amount of $ 30 million under the “Transportation Investment Generating Economic Recovery (TIGER)” has been sanctioned by the US Government as federal grant.

Similarly, the European Union is making available €450 million over the next three years for its “Marco Polo Motorways of the Sea” initiative to divert road traffic to coastal shipping ( Containerisation International-London, October 2010 ).

Transshipment trade volumes

In view of the current restrictions, foreign shipping lines tare now compelled to use foreign ports namely Colombo, Singapore, Salalah and Dubai for transshipping India's export/import trade. Colombo which figures at the 31{+s}{+t} place among the top container ports handled 3.46 million TEUs in 2009 and 79 per cent of its traffic volumes represent trans-shipment traffic from the Indian sub-continent.

With the commissioning of Vallarpadam as the first international container transshipment terminal, India will be able to capture a sizeable portion of traffic of about 3 million TEUs annually currently passing through the above mentioned ports.

Demerits

With the proposed relaxation of cabotage law, Indian ship owners who provide container capacity will no longer be able to enjoy protection and cargo reservation under the statutes. The Indian National Ship Owners' Association would argue that the six Indian lines engaged in container movement along the coast would be able to meet the expected demand of about 10,000 TEUs/month while they have on the supply side a capacity of 45,400 TEU/month.

In the circumstances, the INSA would think that relaxation of cabotage law would be an unnecessary exercise and be detrimental to the interests of domestic shipping.

Benefits to consumers

Those who are familiar with shipping would know that the above mentioned supply and demand equations would hardly work in actual practice.

Indian ship-owners with container capacity could be insensitive to the demands of Indian shippers and importers as shippers have no choice but to depend on the domestic lines for coastal movement.

As long as this monopoly and cargo reservation remain in force, domestic lines would try to keep freight rates high.

Only when the freight rates get substantially reduced by subjecting this sector to intense competition it would be possible to divert container traffic from the roadways to a more energy efficient and environmental friendly transportation.

Published on January 17, 2011

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