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to attract the private sector are that policies have remain inconsistent and tax incentives have been offered and withdrawn repeatedly on knee-jerk decision making basis.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)

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