Shipping and Insurance (Opinion)

Banking and insurance services play a vital role in the economic development of any country. International trade, commerce and industry cannot develop and function without the key role of banking and insurance. We can understand how banking developed because it provides the facility to make collective investment in viable projects. But it seems nobody is certain as to how insurance came into this world. However, most people now believe that insurance originated from the needs of the shipping world.

In early days when there was no currency with universal acceptability, trade was done on the basis of barter exchange. In other words, traders used to exchange goods according to supply and demand. In those days, the ship-owner was the trader as he would collect goods and go to another land for profitable exchange. As he made money and became rich, he did not want to go to sea anymore and employed a captain. However, with the ship-owners off board, they became keenly concerned with the risks their ventures faced in their absence. Some people started taking bets on a ship’s safe return. This allowed a number of people to share the risk and thereby encourage traders and ship-owners to undertake more and perhaps bigger business ventures. This is how insurance provides the cover for risk in any investment.

The industrial revolution along with London and River Thames providing natural harbor from rough seas and piracy, galvanized its development as a trading port, eventually becoming the nucleus of maritime activities. Coffee was first imported into Great Britain in 1652 and soon became popular with the elites. After the great fire of London in 1666, the city started to re-build with coffee shops in places where people could transact business. Historical records from 1688 for the first time mentioned about Edward Lloyd’s Coffee shop situated on Tower Street. It was popular with traders, ship-owners and captains returning from overseas voyages.

Edward rented out boxes in his coffee shop for entrepreneurial businessmen to conduct insurance or risk undertaking contracts. One thing that Mr. Lloyd noticed was that there was a great demand for information for assessment of risk. Lloyd’s Coffee House started publishing daily shipping news, informing people about departures and arrivals, the cargo aboard each ship and where other country’s fleets were operating; and where pirates were known to be active. Thereafter Lloyd’s List was first published in 1734 and the last printed version was published on 25th September 2013, with the electronic version still continuing as one of the world’s oldest newspapers.

It is essential for underwriters to know about the operational and physical condition of the vessel and whether it is worth taking the risk. Underwriters need to know details such as type of ship, when and where it was built, materials used in its construction, when it was last docked and inspected, etc. Lloyd hired the services of a few ship-builders and engineers and the Lloyd’s List gradually started to provide such information as well. There was a clear need from the insurance world for an organization that was free of any vested interest that could certify the health of a ship as the doctor can certify the health of a person. This eventually led to the formation of the Lloyd’s Register of Shipping, a non-government organization not run for profit but to serve the industry with good advice and guidance, to enable ships to meet the required standards.

Until this time Lloyd’s Coffee Shop was the biggest facilitator and housed all – ship-owners/brokers, underwriters, classification society, Lloyd’s List and all others connected with the business. However, to exert its own freedom as a non-partial independent organization the Lloyd’s Classification Society had to stand alone on its own and this is precisely the reason why the two businesses eventually separated out. The insurance part of the business, i.e., the ship-owners and their brokers along with the underwriters were the first to move out to Royal Exchange in 1774. The Lloyd’s Register, the society for classification of ships moved out in 1786 to Lombard Street.

Today, the Lloyd’s Register of Ships is situated on Fenchurch Street, London, with offices and surveyors located in major international business and shipping hub cities across the world. Over the years, it has earned international reputation, trust and confidence as an organization dedicated to excellence, performing its job of quality control without any fear or influence and not having any interest in loss or profit for anyone. Underwriters accept Lloyd’s Register reports as the actual condition of the ship.

Lloyd’s House of Underwriters is simply known as Lloyds and is located at 1, Lime Street, London. It may be argued that there is no other insurance market that conducts even half the business that Lloyd’s deals with. However, it must be understood that there is no company known as Lloyd’s Insurance Company. It is the business house that provides all the facilities for its members from both sides of the industry to negotiate risk undertaking business. It operates in the same way as Lloyd’s Coffee Shop operated more than 300 years ago, except that it is now done under the law of the land as the British Parliament gave the Lloyd’s system and procedures the status of an act of parliament.

With the passage of time, ship operations became more hazardous involving too many claims from too many corners. Some of these claims run into billions, especially those relating to protection of marine environment and removal of wrecks. No one ship-owner can pay those claims nor would the insurance market like to give cover to such unknown vast sums. The ship-owners finally found their own solution by forming mutual groups to protect each other. These groups are commonly known as Protection and Indemnity (P&I) Clubs. These function to protect and indemnify the owners/ members against any sudden claim from third parties.

It is not unusual for a ship to be arrested in port for not paying all claims on time but it is also customary for the relevant P&I Club to issue a bond or bank guarantee for the vessel to get released and continue its business while the judicial process continues in court. The P&I being mutual and not for profit, is aimed at rescuing a member, facing sudden and heavy losses, by collective/additional contribution from other members. Calls are subscribed instead of paying premium. Similarly, ships that are moth-balled or laid up for period exceeding three months may request for return of calls. The principle on which it works is that no engagement in voyages and ventures mean no risk or hazard and as such 80 to 90 percent of the subscription may be refundable.

An analysis of the history of the development of financial services in London shows that shipping was the base for most other developments. The systems and procedures were developed by the industry itself.

To quote Lloyd’s CEO: “For more than three centuries, the Lloyd’s market has been sharing risk to protect people and businesses, inspiring them to create a braver world”.

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

captshah1@hotmail.com, captainanwarshah.blogspot.com

IMPEDIMENTS TO REGISTERING VESSELS IN PAKISTAN

 

Over the last few decades, Pakistan's maritime shipping sector has been on the precipice; an endangered species at risk of vanishing into the void. This has been the consequence of an economy which has failed to live up to its promise, with its marginal productivity consistently declining over the years. Put simply, we do not sell anything in meaningful volumes nor are we self-sufficient in any key area; therefore, we do not have the financial resources to pay for the necessities we end up buying from the international market.

As a result, the domestic shipping industry does not partake in exporting much of anything from Pakistan; and it is importing a limited number goods to our shores. It is not a sound business model in the long term, to say the least. Sadly, a sizeable Pakistani flagged fleet with the ability to cater to the demand for merchant shipping emanating from our homeland remains an achievable yet distant dream. This is primarily because Pakistan's shipping industry has been unable to expand and has devolved to a point where there is only a single, government owned shipping company active in the market, i.e. Pakistan National Shipping Corporation (PNSC).

Although Pakistan has tried, on several occasions to undertake reforms in the maritime sector, as well as for the economy in general, these have seldom been successful, with the country's finance gurus being a regular feature at the IMF (International Monetary Fund), worriedly pacing its lobbies every 5 years or so. This economic frailty has severely impacted Pakistan's ease of doing business and has prevented significant foreign and domestic investment from materializing for the shipping sector. Despite recording improvements in various international publications on a number of fronts, the truth is that 'ease' whilst doing business remains an elusive concept, far removed from the reality most Pakistanis face every day.

It all boils down to two factors: high costs associated primarily with high taxation rates and extensive paperwork and approvals which stem from our national anti-corruption priorities and the need to maintain transparency. While good intentioned, both these factors breed inefficiency which slowly crumble organizations from within and can be the death of private enterprise.

Unfortunately for Pakistan, our shipping industry suffers from both high taxes and onerous paperwork; with the last bastion of indigenous shipping too under threat from the government's own policies. With one arm the government attempts at shielding the domestic shipping industry while the other arm seeks to supplant and terminate any concessions given.

The government has notified the Pakistan Merchant Marine Policy 2001 (last updated in 2019), which is its 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 and inviting participation from the private sector. The said measures included 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, extending tax breaks to shipping concerns until 2030, no federal tax (direct or indirect) on resident ship owning companies, reduced fees and berthing rates for Pakistan flagged vessels, cargo preference for PNSC (being a strategic asset and national flag carrier) and Pakistani flagged vessels having preference for transportation of cargo and passengers in voyages restricted to coastal operations only.

However, the implementation of the Merchant Marine Policy 2001 remains in letter alone, with most of these incentives awaiting implementation in spirit. Pakistani flagged vessels do not get their due share of cargo as enshrined in the Policy. Furthermore, the government, which is under pressure to increase its revenue, has resorted to withdrawing the aforementioned tax exemptions and has instead proceeded towards placing a 17% sales tax on acquisition of vessels as well as taxing the salaries of seafarers. While one can understand the need to increase revenue during these challenging times, it should not come at the cost of hamstringing an entire industry.

It may be pertinent to add that the incentives offered by the Pakistan Merchant Marine Policy 2001 are but a few when compared to numerous incentives being offered by other countries that continue to successfully attract large numbers of vessels for registration, aptly known as flags of convenience. Vessels having owners scattered worldwide continue to flock towards flags of convenience primarily due to the numerous incentives that are offered by them. The said international incentive primarily related to low taxes and ease of doing business, thus, being conducive to the business of international shipping. Had our tax authorities paid attention before imposing 17% sales tax on acquisition of vessels, they would have discovered that the opportunity cost of such a knee-jerk decision is too high. The maritime industry remains a small but growing industry, with few seafarers and even fewer vessels, contributing valuable foreign exchange to Pakistan. By imposing this tax, they will not gain much (if any) revenue growth but they will have ensured that vessel acquisitions, the cornerstone of any major shipping operation, will stop and the shipping industry will die a slow and painful death.

Before the patriotic amongst us jump up to say that paying taxes is our national duty and that we owe it to our nation, it should be noted that the shipping industry, even in the best circumstances, is operating on razor thin margins and in order to stay competitive, countries around the world make exceptions for their shipping industry to maintain their strategic advantages. In the parlance of financial economics, the rate of return for the industry is barely above that of what is known as the risk free rate, i.e., the maximum guaranteed rate of return with zero risk, one can receive by investing in fixed deposits/government securities. With the burden of additional taxation on the primary asset of the industry, no feasibility can allow investment into the sector.

Registering vessels is no mean feat either. New owners have to run from pillar to post, trying to register their vessels. Pakistan should accede to an international Memorandum of Understanding (MoU) on Port State Control (PSC) inspections, with Pakistani flagged vessels along with the flags of other signatories being subject to inspection at our ports as well as ports abroad. An international MoU on PSC will give Pakistan more credibility as an attractive destination which prioritizes health, safety and rule of law. Vessel operators will gain the confidence to register their vessels under Pakistani flag as investors, insurance companies, banks and other lending institutions view countries with PSC more favorably. A number of additional measures can also be taken towards making Pakistan more competitive.

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

Pakistani Ports

 

Pakistan’s ports handled a total trade volume of approximately 110.69 million tons during 2019. In 2020, with Covid-19 slowing the global economy, the volume dropped to 92.85 million tons, thus a difference of about 17.84 million tons or about 16.12% between these two periods. Almost the entire aforementioned volumes were handled by Karachi Port and Port Qasim, both situated at Karachi. These two ports remained operational throughout the height of the pandemic while numerous ports around the world either scaled down their operations or closed up shop altogether sending the global supply chain into a tailspin the effects of which are still being felt in terms of recent sky-high freight costs in the containerized sector.

Criticism has recently been levelled against the performance of Pakistan’s ports by certain quarters sans the required technical and operational knowledge required for a deep understanding of such complex matters. I have been involved in ports- and shipping-related matters for over the past 50 years, both as a seafarer and in various capacities as a subject matter specialist. Based upon my knowledge and experience, I shall seek to clarify various issues that continue to remain hazy.

It has been said that Pakistan’s ports are inefficient and expensive and in doing so, examples of European and East Asian ports are thrown about with the implication that we should compete with those ports. Dreams for a better future are essential but before one aspires to such lofty ambitions, we should be familiar with certain ground realties. Only by diagnosing the problem rationally and dispassionately can we grow as a nation.

Ports play a central role in the materialization of economic growth in any country. Pakistan is indeed blessed and has often been touted as a geostrategic hub, a sliver of prime real estate located in close proximity to major economic power houses. Despite this, the realization of Pakistan’s geographic potential has remained elusive. Pakistan has been relegated to the position of a regional feeder port. In order for Pakistan’s ports, and consequently trade volumes, to grow and to evolve into a transshipment hub, a prime destination for global cargos, several expansive measures are required.

Geography plays an important role in the success of any port. Unfortunately, Pakistan’s two major ports of KPT and PQA are not located in close proximity to any major container shipping route. The main circum-equatorial maritime route that goes through Panama, the Strait of Malacca, the Suez and Gibraltar, which has the most traffic, passes from the Red Sea towards Sri Lanka almost entirely bypassing the Arabian Sea. The North South route, from Europe to the Middle East, moves from the Red Sea into the Arabian Gulf once again bypassing Pakistan’s territorial waters.

Since Pakistan cannot relocate near these routes the most ideal method would be for Pakistan to pull these routes towards it by growing exports substantially and sustainably. The reasons for higher imports and lower exports are well documented and beyond the scope of this article; however, a lack of significant generation of indigenous cargoes over the years has limited the growth potential of our ports.

Obviously, just like any other country, there are inefficiencies which certainly need to be resolved. Other international, high volume ports have deployed sophisticated modern technology and as a result are highly automated. Since Pakistan has lower volumes and low labour costs, the requisite investment in our ports sector has not been as substantial as that in many European ports. However, if we were to compare Pakistan’s ports with other such similar ports we would find that our volumes are not subpar. For example, Jawaharlal Nehru Port, the largest container port in India, has volumes of 56.43 million tons (2019-2020). Therefore, a comparison of Pakistan’s ports with leading ports of say Europe or Far East would be illogical. The cardinal rule is that like should be compared with like rather than unlike. Any such comparison should be restricted to similar regional ports such as Mumbai or Cochin, etc. In doing so, it will be concluded that Pakistan’s ports are efficient and the pricing of their services is competitive when compared to similar ports in the region.

In some situations, only one port can logically provide access to hinterland markets. This may result from geographical features, lack of adequate transport infrastructure from all but one port, political issues, or other factors. The port of Djibouti currently has a virtual monopoly on access to the Ethiopian market as a result of the conflict between Ethiopia and Eritrea and the lack of transport infrastructure from neighbouring Somalia. Dar es Salaam is the major entry point to Tanzania, as well as the neighbouring landlocked countries of Zambia, Burundi, Rwanda and Malawi. Although Pakistan is ideally situated to access landlocked countries such as Central Asian Republics, Afghanistan and Western China, the potential of Pakistan has not been realized primarily due to the conflict in Afghanistan resulting in low trade volumes.

More recently, containerized trade has seen record high rates which were caused by the Covid-19 pandemic and subsequent shuttering of large parts of the global economy. Containers were continuously being shipped from export intensive regions (an example would be China) to import-intensive regions (an example would be the USA). These import-intensive regions were not exporting sufficient volumes to recirculate containers back into the global pool due to the pandemic. This caused a massive shortage of containers. Combined with blank sailing imposed by carriers to compensate for faltering demand, it caused container rates to skyrocket. However, it should be mentioned that these high rates are not sustainable since they are caused by artificial means and a misallocation of resources. Pre-pandemic, volumes shipped were higher and the rates were lower but currently volumes shipped are lower and the rates are significantly higher despite the available floating tonnage remaining substantially the same during both periods. This situation is unsustainable and has already started to reverse itself as market forces, due to higher prices, are causing more supply to enter into the market.

The pricing at Pakistani ports is essentially driven by market forces beyond the control of Pakistan’s sea ports. The notion that our ports are inefficient and costly is absolutely unfounded as our ports cannot be compared with large, automated and hub ports. It must also be recognised that even though there is always room for improvement, given the available resources and ground realities, Pakistani ports remain the best performing ports in the region as already witnessed during the ongoing pandemic.

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