Inducting Private Sector Into Ship Owning

Business Recorder, Sunday, 21 July 2019

Successive governments in Pakistan have been making efforts for the revival of the shipping industry since the early 1990s. A number of policy decisions and taxation incentives have been offered from time to time, however, these efforts have remained unsuccessful for a number of reasons. The primary reasons for the failure to attract the private sector are that policies have remain inconsistent and tax incentives have been offered and withdrawn repeatedly on knee-jerk decision making basis. The 1990s and early 2000s also witnessed damaging unionization of seafarers who did more harm to the shipping sector than any government could have. These unionized crew and officers did a wonderful job of shooting themselves in the foot and destroyed investor confidence completely. The 1960s and the 1970s witnessed a preference for Pakistani seafarers globally; however, today Filipino, Greek, Russian and Indian crews and officers are much preferred over Pakistanis.

It is in this backdrop that the Ministry of Maritime Affairs has recently made attempts for the revival of the Pakistani shipping sector. Realizing that any such revival cannot be brought about by Pakistan National Shipping Corporation (PNSC) alone, the Ministry has rightly laid the grounds for the private sector to participate in local ship owning. The Ministry has adopted a policy whereby various incentives have been offered to investors to establish private shipping firms and to register their vessels under the Pakistan flag. With the annual shipping bill for imports and exports touching about US$4-5 billion, the field is open for private ship owners to enter this field considering that PNSC caters to less than 10% of the said shipping bill.

The ECC of the Federal Cabinet, on a summary moved by the Ministry, has recently extended incentives to the Pakistan flag and offered the Pakistan flagged vessels certain protections. These incentives are not PNSC-specific; these are actually designed to promote the Pakistan flag whether the vessels are PNSC-owned or privately-owned, thus not to allow any monopoly for PNSC.

PNSC currently lifts a majority of the crude oil imported by refineries into Pakistan. This shipping is done by way of Contracts of Affreightment signed between the refineries and PNSC without any government involvement. Contracts have been formalized on internationally competitive commercial basis and with freight paid to PNSC in local Rupees. In spite of these agreements, some crude oil is also being imported through foreign shipping lines. Besides crude imports, the field for shipping of imported clean petroleum products is wide open to the private shipping sector as effectively all of the clean products imported by the 30 or so local oil marketing companies (OMCs) are shipping via foreign flagged vessels. Other categories of cargo are also open to competition for the private sector. The biggest such category is containerized imports and exports. This category is also the biggest in terms of the largest quantum of annual import bill.

A major tax incentive recently allowed by the ECC for attracting the private sector is the reduced tax rate of US$ 0.75 per GRT for the first five years of operations of private shipping firms whereas PNSC shall continue to pay US$ 1.00 per GRT as a full and final discharge of income tax liability for the shipping companies. The reduced rate offered vide the recent decision is broadly speaking lower than that being offered by other countries. Similarly, tax free imports of vessels registered under the Pakistan flag are equally allowed for both the private sector and for PNSC with a view to increasing tonnage in both the private sector and in the public sector.

It must be emphasized that PNSC is a government held and controlled organisation whose primary function is to ensure that vital and strategic supply lines remain operative and reliably functioning in times of both conflict and peace. In view of this, it is understandable that government cargoes deemed vital for efficient functioning of the country are diverted to PNSC for shipping to ensure that the national interests are effectively met. It must equally be emphasized that PNSC enjoys no preference for any private sector cargoes for which PNSC shall have to compete with the private sector on commercial basis.

Pakistan is situated in a region continuously engaged in conflict and with serious security and trade challenges. World powers are now, more than ever, competing for influence and control within this region and the situation continues to remain volatile and uncertain. Pakistan's neighbours remain cautiously hostile and regionally divided with divergent self-interest and ever shifting loyalties and friendships. It is in this backdrop that Iran, despite decades of war and sanctions, has remained focused towards its own self-interests and defiant towards international pressure and influence. It is widely believed that Iran has managed to do so in large part due to its almost entire self-reliance in shipping. The most recent sanctions imposed upon Iran have proved to be the most crippling ever, yet Iran continues to engage in international trade, including that of its crude oil, entirely due to the strength of its own merchant shipping fleet and their own officers and crew.

Within the region, India and even Bangladesh have over the years continued to focus on expanding their respective shipping fleets and India specially has focused on expanding and deepening its influence in the Indian Ocean region both in the merchant shipping sector and in military adventures through its Navy. India maritime doctrine recognizes that military influence cannot be complete without strategic influence within the merchant shipping sector.

The policy recently adopted by the ECC recognizes that shipping is a very capital intensive industry and highly cyclical in nature. Any investor wishing to invest in procuring vessels shall need a long-term uniform and consistent set of policies upon which that investor can base his commercial strategy. The global shipping sector has been going through the lower curve of the economic cycle in recent years and it is widely believed that the industry will begin its rise towards recovery early next year. The policy incentives of the ECC are therefore very well timed to attract investments at a time when equity will be looking for richer avenues for returns. It must, however, also be noted that the incentives offered by the ECC are not new within the international shipping circles. A large number of countries around the world have offered similar flag incentives and protection, thus recognizing the importance of local shipping. Some of them have also gone to the extent of imposing a maximum threshold for the quantum of cargo that foreign shipping lines can lift and any cargo lifted above that threshold would attract a penalty whereby the foreign shipper would be bound to pay shipping charges to the national flag carrier of the originating country despite it having done no work at all.

With the recent incentives, flag protection benefits and taxation advantages, the Ministry of Maritime Affairs has made a fresh attempt to attract private investment into the shipping sector. This latest attempt is far more focused and result oriented than the halfhearted attempts made by previous governments. However, this attempt is also just one of the many initiatives being taken by the Ministry to promote Pakistan's maritime potential, blue economy and tourism opportunities. It now remains to be seen if the private sector will recognize the opportunity being offered to it. This is indeed an opportunity for investors to capitalize on the first-mover advantage (FMA) as has been witnessed in India when private sector shipping was incentivized in 2010 and as was also witnessed in Greece when shipping-related investment was incentivized after the financial meltdown of 2011.

(The writer is an advisor to the Karachi Chamber of Commerce)

captshah1@hotmail.com

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Headwinds for Pakistan's shipping industry

PAKISTAN's shipping industry is facing severe challenges on multiple fronts. In addition to unfavourable market conditions, we also have had to grapple with our own shambolic shipping history.

Pakistan's shipping industry has devolved to a point where there is only a single, government-owned, shipping company active in the market. Much of the misfortune which has befallen the indigenous shipping industry can be chalked down to two major events in Pakistan's history, namely separation of East Pakistan and nationalisation policies of the seventies.

The forfeiture of the routes to East Pakistan and elimination of private enterprise led to a general loss of investor confidence in the local shipping industry. Despite various interspersed attempts by Pakistan's government over the years, Pakistan's shipping industry still hasn't recovered from the devastation wrought by these two events.

To further complicate matters, with the exception of Pakistan National Shipping Corporation (PNSC) there is no other local company operating in this domain. Foreign shipping companies have devoured the local market share. Moreover, these companies have large economies of scale and it is difficult to remain price competitive, as they have a higher threshold for withstanding financial pain.

The government has remained apathetic and unsupportive in this situation. An example worth highlighting is Pakistan's LNG sector which hasremained closed to the local shipping industry.

The national planers, when initially negotiating LNG contracts, failed to take the local industry into consideration and instead opted to rely on foreign companies.

In order to restore Pakistan's shipping industry to good health decisive action is required. Local industry and particularly PNSC, the last bastion of indigenous shipping in Pakistan, should be sheltered and protected from the global headwinds until it achieves the critical mass necessary for it to compete internationally.

Maritime laws should be enacted which give preference and protection to vessels flying Pakistan's flag. Unlike the current Merchant Marine Policy, legislation should be drafted to explicitly enforce United Nation's recommendations on shipping. These recommendations allocate 40pc cargo to each trading partner and 20pc to independent shippers, by adopting first right of refusal.

Furthermore, cargo preferences should be established favoring Pakistan owned and Pakistan chartered vessels. Additionally any cargos generated by an instrumentality of the government should be carried by domestic carriers.

Pakistan's maritime industry is not alone in facing poor prospects. The global maritime industry has gotten tangled up in cumbersome regulations and a massive oversupply of vessels. Costs of compliance with regulations are inevitably increasing the cost of doing business. Meanwhile oversupply of vessels has become so dire that areport by OECD stated that future vessel requirements are expected to equal only in 2030 the peak of vessel completions that was reached in 2011.

All of these conditions have coalesced into a perfect buyer's market. With opportunities for revenue enhancement limited and the cost of regulations and competition taking a toll, shipping companies across the world have unenviable prospects.

Shipping companies strained by perennially plummeting market conditions are always looking out to the horizon for new opportunities and for better, more efficient ships. The situation gets further exacerbated by the fact that governments of certain Asian countries keep subsidising both builders and buyers as an artificial means to keep their maritime economies chugging. All these conditions manifest themselves as an unintended oversupply of vessels, which ensures that freight rates remain low and the cycle continues unabated.

Ask any economist worth his salt and they will tell you that the right incentives (or disincentives) can solve almost any problem. The issue here is that due to the free hand given to the shipping industry and lack of cohesive global regulation (or incentives), everybody is acting shamelessly in their self-interest and therefore everybody is unwittingly contributing to the collective devastation of the market.

The writer is an adviser to the Karachi Chamber of Commerce and Industry. This article was also published in Daily Dawn, Monday 11-March, 2019

FLAG PROTECTION AN ECONOMIC OPPORTUNITY

Any country, when drafting its maritime policies, is faced with a dilemma that is similar in nature to most other economic matters. These countries have to choose between a protectionist stance and adopt flag protection policies or opt for openness and inclusivity allowing all individuals who choose to enter the market, the opportunity to indulge in free competition.

Although, openness and economic inclusivity clearly has merits and is largely responsible for the sustainable growth achieved by the West, it is not a one size fits all approach. Freeing up an underdeveloped market and opening it up to free market forces, in certain conditions, might yield undesirable results such as lack of local labor development as well as the dearth of essential services which are crucial yet unprofitable. 

The opposite is true as well; monopolizing and restraining the market is bound to fare badly which will eventually result in stigmatizing growth and disincentivizing new investment. However, neither of these two conditions can compare to the third economic malady which, afflicts Pakistan’s shipping industry. Non-committal policies of the past, switching between nationalist and private strategies along with the Pakistan’s high ranking in the unease of doing business have left the market devoid of stability, the one crucial factor all investors yearn for. A viable and sustainable national fleet in line with Pakistan’s economic potential and national security is the need of the hour particularly when considering the recent foreign investment programs jointly being implemented by the Chinese and Saudis. 

How we got here

Pakistan has a long history in shipping starting from 1947 when Quaid-e-Azam Muhammad Ali Jinnah asked Mr. Rustom Cowasjee along with Mr. Muhammad Ali Habib to assist in the formation of the first Pakistani shipping company which would come to be known as the Muhammadi Steamship Co. Ltd. By the early sixties there were 7 prominent Pakistani shipping companies. 

Since those days Pakistan’s shipping industry has not come very far. In fact, one can argue that it has devolved to a point where there is only a single, government owned, Pakistani shipping company is active in the market. Much of the misfortunes which have befallen the indigenous shipping industry since then can be chalked down to two major events in Pakistan’s history, namely separation of East Pakistan (read Bangladesh) and nationalization of private shipping companies during the seventies. Pakistan’s division led to the end of trade between the two wings of Pakistan upon which the local shipping industry was heavily reliant. The second blow came in the form of nationalization which effectively eliminated private enterprise and led to a general loss of investor confidence in the shipping industry. Despite various interspersed attempts by Pakistan’s government over the years, Pakistan’s shipping industry still hasn’t recovered from the devastation wrought by these two events.

The Merchant Marine Policy 2001 is the government’s most recent and forceful attempt to rectify the problems in the local shipping industry. The Merchant Marine Policy 2001 specified a number of measures for reviving the shipping industry. They included inter alia, exemption from import duties and surcharges for ships and all floating crafts purchased by a Pakistani entity or flying the Pakistani flag, prescription of tonnage tax in lieu of income tax, cargo preference for Pakistan National Shipping Corporation (PNSC) & Pakistani flagged vessels as well as Pakistani vessels having preference for transportation of cargo and passengers in voyages restricted to coastal operations only. However, the said policy has now become stale and requires urgent revamping to bring it in line with the requirements of modern maritime trade. It may also be pertinent to add that despite the provisions of the said policy, the private sector could not be attracted towards this extremely important sector that is responsible for enabling international trade.
 

What is the globally practice
 

Shipping facilitates trade. Countries which have a large shipping sector are economically strong and developed. UN in 1964 with an aim to help the poorer countries develop their shipping sector and compete with developed countries allowed a role in Maritime transportation by making a provision of 40/40/20 rule, also known as the UNCTAD Code within the maritime circles. This rule allowed carrying of 40% cargo to each trading partner and 20% to Independent shippers. 

India has implemented a flag protection policy, which gives Indian ship-owners flying the Indian Flag, “first right of refusal”. However in case an importer moving cargo for domestic entities receives bids from foreign and local ship owners, technically acceptable Indian ship owners will be asked to match the rate quoted by foreign ship owners. If they do not match the rate, Contract of Affreightment (COA) will be awarded to the foreign company.

As per India’s Merchant Shipping Act, 1958, only Indian flagged vessels or vessels chartered by an Indian citizen or company operating under a license granted by the Director General of Shipping, can carry cargo or passengers from one Indian port to another Indian port. Foreign flag vessels are permitted only if Indian flagged vessels are not available.

The Bangladesh Flag Vessels (Protection) Ordinance, 1982 specifies that, at least forty percent of sea-borne cargoes relating to foreign trade of Bangladesh shall, subject to the other provisions of this Ordinance, be carried by Bangladesh flag vessels. However this limitation does not apply to any cargo required to be carried in accordance with any reciprocal agreement made between two trading partners or cargo in respect of which a specific or general certificate of waiver has been obtained. It should be noted that the Bangladeshi government plans to revise the seaborne cargo to sixty percent upon passing of the proposed act by parliament.

The Bangladesh Flag Vessels (Protection) Ordinance, 1982 further specifies that no flag vessel of any foreign country shall carry costal trade (known as cabotage in maritime circles) cargoes of Bangladesh, unless a certificate of waiver is issued by the Director General, Department of Shipping.
The United States’ Military Cargo Preference Act of 1904 requires that 100% of cargos bought for the Army, Navy, Air Force or Marine Corps be carried on board U.S flag vessels. Charges for such transportation are limited to charges made for transporting like goods for private persons.

The Cargo Preference Act of 1954 requires U.S flag vessel participation in the carriage of United States government impelled cargoes. The 1954 Act requires that 75% of the volume of government-impelled cargoes (including humanitarian assistance and agricultural commodities) be transported in privately owned U.S.-registered vessels, but only to the extent that such vessels are reasonably available at fair and reasonable rates.

As per Public Resolution 17, all cargoes generated by an instrumentality of the government are shipped 100% on U.S Flag vessels. This applies to shipping on transactions generated by the Export Import Bank of the United States.
Maritime Security Act of 1996, extended through National Defense Authorization Act, 2013 establishes a fleet of active, commercially viable, militarily useful, privately-owned vessels to meet national defense and other security requirements. All Maritime Security Program (MSP) operating agreements are currently filled by 60 ships. Participating operators are required to make their ships and commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency.

The MSP maintains a modern U.S.-flag fleet providing military access to vessels and vessel capacity, as well as a total global, intermodal transportation network. This network includes not only vessels, but logistics management services, infrastructure, terminals facilities and U.S. citizen merchant mariners to crew the government owned/controlled and commercial fleets.
 

What can be done locally

 
There is no simple solution to fix Pakistan’s shipping industry. With the exception of PNSC there is no other local company operating in this domain. Foreign shipping companies have devoured the local market share. Even if local private enterprises were to compete directly, in the cut throat and highly regulated world of international shipping, foreign companies have large economies of scale and it would be hard to remain price competitive as these companies have a higher threshold for withstanding financial pain.

There are other concerns as well. For the sake of Pakistan’s national security a national fleet, free from influence of foreign actors, which would be able to continue its operations to transport vital goods and ensure that the economy keeps churning even in the direst of circumstances, is of the utmost priority. Similarly the national fleet should logically be manned by the local population. In order to ensure that a national fleet is maintained and local mariners are available in sufficient numbers to man the fleet, financially self-sufficient shipping companies, which offer sufficient remuneration to attract and retain their employees, is paramount.

In order to restore Pakistan’s shipping industry to good health decisive action is required. Like a sapling in a greenhouse, Pakistan’s shipping should be nurtured and protected until it achieves the critical mass necessary for it to compete globally unfettered. Therefore, Pakistan’s shipping industry and particularly PNSC, the last bastion of indigenous shipping in Pakistan, should be sheltered and given the right conditions to thrive. Maritime laws should be implemented which give preference and protection to vessels flying Pakistan’s flag. 

An example worth highlighting is the Pakistani LNG sector that has, very unfortunately, remained closed for the Pakistan flag. It is unfortunate to note that the national planners when initially negotiating LNG contracts failed to take into consideration and learn from experiences and examples of other countries engaged in the LNG trade. This oversight on the part of the planners at that time borders incompetence. Had they sat up and paid attention, they would not have had to venture far. A neighbor across the border could have provided them relevant directions pointed towards self-sufficiency. The said neighbor has ensured that their local LNG shipping capacity is developed by way of mandating their state owned shipping line to participate in this vital sector thus ensuring that their national strategic interests are appropriately addressed. It is incomprehensible to note why our planners could not have adopted a long term strategic approach.

While the measures taken by Merchant Marine Policy 2001 were steps in the right direction, they failed to produce the desired results. This is largely because one of the most important provisions of the Policy regarding cargo preference remains largely unimplemented due to the fact that it is a Policy and not a law which is enforceable on all seaborne cargos coming into or going out of Pakistan. The government needs to grant legislative protection to the shipping industry by ensuring cargo preference for Pakistani flagged vessels by all Pakistani businesses and exporters / importers.
Unlike the current Merchant Marine Policy 2001, the legislation should explicitly enforce U.N recommendations on shipping through 40/40/20 rule by adopting first right of refusal. Furthermore, a cargo preference should be established favoring Pakistan owned vessels, Pakistan chartered vessels, chartered vessels flying the Pakistan flag and foreign flag vessels in that order. Additionally any cargos generated by an instrumentality of the government should be carried by Pakistan flag carriers.
The current situation of Pakistan’s shipping industry and for its promising future, an apt quote by Winston Churchill comes to mind. ‘Success is stumbling from failure to failure with no loss of enthusiasm’. 

The writer is an advisor to the Karachi Chamber of Commerce & this article was also published in Pakistan & Gulf Economist on March 05, 2019.
captshah1@hotmail.com, captainanwarshah.blogspot.com