With the modified cargo support scheme, has the Shipping Ministry lost its course to boost shipbuilding?

P Manoj Mumbai | Updated on February 19, 2019 Published on February 19, 2019

Without government support and burdened with high operating costs, Indian owners would end up flagging their registered ships to tax and operation-friendly jurisdictions   -  Shailesh Andrade

Redesigned right of first refusal policy may end up benefiting foreign fleet owners

The Nitin Gadkari-led Shipping Ministry has unveiled a gameplan to boost local shipbuilding and fire up the government’s faltering ‘Make in India’ initiative by giving top preference to Indian-built ships for carrying cargo or providing other services such as dredging and offshore oil exploration support activities to State-run entities.

A closer look at the redesigned right of first refusal (RoFR) policy, though, reveals that the plan does not guarantee the desired objective. Far from it, it would just end up benefiting foreign fleet owners without any India-built ship obligations in tenders floated by government undertakings.

Thus far, local shipping companies got a right to match the lowest rate offered by a foreign flag in tenders issued by State-run firms for hiring ships under the chartering guidelines framed by the Director General of Shipping. If Indian shipping companies declined, the foreign flag ship that had quoted the lowest rate was allowed to carry the cargo.

This policy enabled the Indian company to win the cargo at the same rate that was offered by the foreign owner. Therefore, the RoFR policy gave cargo support to the Indian owner and promoted their participation in the trade, while ensuring that no financial burden was levied upon the charterer or consumer.

The amended policy, which took effect on February 13, shifted the balance of power in favour of Indian-built ships from Indian-flagged ships, irrespective of whether such Indian-built ships are offered by Indian or foreign companies. In effect, the government is now extending cargo support to foreign entities if they offer Indian-built ships on public tenders.

As things stand today, foreign fleet owners carry as much as 92 per cent of India’s EXIM trade shipped by sea for which the annual freight outgo is a whopping $52 billion, all of which are paid in US dollars, draining the national exchequer of precious foreign exchange from such flight of freight.

To be sure, except for a few Indian-built offshore oil exploration support vessels, neither Indian nor foreign fleet owners run large Indian-built ships such as Aframax carriers, Suezmax tankers, very large crude carriers, very large gas carriers, dredgers and oil drilling rigs that are typically hired by public entities.

The new sequencing of RoFR priority will be Indian-built vessels followed by Indian-flagged vessels. In case none of the bidders -under the first and second priority - eligible to exercise the RoFR, matches the lowest rate quoted by a foreign ship owner offering a non-Indian built ship in a tender, then the charter shall be awarded to the lowest bidder.

The RoFR overhaul

Will the RoFR overhaul lead to a flurry of ordering at Indian yards by Indian and foreign firms to reap the benefit of government cargo support? Do the handful of Indian yards have the capability to meet the requirements of fleet owners?

New ship orders are placed by fleet owners based on commercial/price, quality, time and reputation considerations. Local yards are generally considered to be low on some of these parameters. This again can be attributed to the absence of a shipbuilding ecosystem in India compared with giants such as South Korea, Japan and China. Unless yards consciously improve these attributes that attracts buyers, new orders may remain a pipe dream.

Indian fleet owners including the State-run Shipping Corporation of India and the country’s largest, who have invested thousands of crores to buy ships based on the hitherto existing policy of RoFR, could find themselves in difficulty with the sudden policy change simply because the tinkering has already come into force, giving them no time to reshape their strategies. Building a new ship takes as much as 24 months, if not more.

With no government support and burdened with high operating costs, Indian owners would end up flagging their registered ships to tax and operation-friendly jurisdictions.

The new RoFR policy lacks rationale.

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Published on February 19, 2019
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