Plans to sell PNSC

Like many aspects of Pakistan’s economy, the story of the local shipping industry has been one of disappointment and unfulfilled potential. There are quite a number of reasons why history turned out as it has. Some may say it is the Pakistani shipping industry’s lack of openness and economic inclusivity. Others will tell you the opposite, stating that our policy makers have not gone far enough to offer sufficient protection to the local industry and half-hearted attempts such as these are the reason why the industry has failed to develop.

It may be worthwhile to recall that matters have not always as grim as they are now. During the 75 years of Pakistan’s existence, Pakistani shipping experts have contributed significantly towards setting up of international shipping firms that have gone ahead to boast global presence. The 1950s and 1960s are considered to be the heydays for Pakistan’s shipping industry. That was the era that Pakistan’s shipping was featuring on the international stage and those were the years when Pakistan’s shipping heritage made history.

While both points of view offer precious kernels of insight into our business, the true reason for the lack of growth is far more banal. For decades past, instability is the malady which has stricken Pakistan’s shipping industry, relentlessly smothering it in its vice-like grip. 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 investors yearning for confidence. A viable and sustainable national fleet in line with Pakistan’s economic potential and national security remains the need of the hour.

In this scenario, there is a single ship owning company registered and operating out of Pakistan, namely the Pakistan National Shipping Corporation (PNSC), the last bastion of international seaborne shipping, left operational within this space. Its creation was the result of an experiment in nationalization which merged all existing shipping companies into a single entity, thus eliminating private enterprise.

PNSC’s unique selling proposition has been its ease of utilization and cost effectiveness. By providing Free-On-Board (FOB) contracts, unbundled from the usual Cost & Freight (CNF) contracts, it offers cheaper services to Pakistan based charterers without the need of utilizing any Letter of Credit or Pakistan’s foreign exchange reserves unlike foreign shipping lines. This saves local businesses the uncertainty and hassle of dealing with a foreign currency. It would be accurate to state that had PNSC not existed, the cost at the pump (and for other products in general) would be far higher than it is today, a fact few today know about and yet fewer appreciate.

The purpose of PNSC is to facilitate and serve the people of Pakistan for their seaborne shipping needs. PNSC currently has a fleet of thirteen vessels, eight tankers and five dry bulk carriers. Today, PNSC carries crude oil for Pakistan’s refineries, clean petroleum products (such as petrol and diesel) for oil marketing companies, provides slot charter for government entities seeking container shipping and provides carriage of dry bulk cargo. In order to sustain its operations, PNSC also operates within the international charter markets to earn valuable foreign exchange.

PNSC serves a strategic purpose, to provide Pakistan with seaborne lines of communication, keeping its trade lanes open in the event of unfavorable external circumstances such as war and sanctions. The national fleets of Iran and Russia have played a similar role, keeping their country open for business despite bearing the brunt of international sanctions. It may be argued that for any nation, its shipping industry provides the second line of defense and for Pakistan, it is PNSC that provides this second line. It may be worthwhile to review how the national shipping aided Pakistan to remain open for business during the wars of 1965 and 1971 when international shipping firms refused to call at Pakistani ports.

In the past, Pakistan’s policy makers have been cognizant of the fact that Pakistan’s underdeveloped shipping industry requires protection and support from foreign outfits with whom competition may not be possible otherwise. As a result, they have sporadically introduced policies to sustain the single shipping company in Pakistan as well as to attract new entrants and private investment within the sector thus promoting private shipping in parallel to maintain a national flag carrier. The Pakistan Merchant Marine Policy 2001 (as amended in 2019) was such a policy. Although, well intentioned the policy largely failed to accomplish its intended objectives. It failed to secure additional (government impelled) cargo for PNSC (as well as other outfits) and it failed to attract new entrants. Furthermore, the tax breaks accorded to the industry, as per policy, in order for it to remain competitive with the international industry have largely been withdrawn. Despite, all of this PNSC still remains highly profitable, surviving on its own commercial merits rather than government handouts.

While PNSC has had a history as varied and as full of ups and down as the industry within which it serves, since the turnaround of the early 2000s it has remained profitable, providing a constant source of income and foreign exchange savings to the Government of Pakistan. In fact, it is unique amongst listed companies in Pakistan consistently providing an average Net Profit Ratio of around 20%. Even the most reputable and largest corporations in Pakistan cannot boast of such a high rate of return.

Despite the strategic importance and stable profitability, reports are circulating in media that PNSC is amongst the government owned companies being considered by the Federal Government for sale to investors from the Middle East. Needless to say, that whatever funds the government may raise from this Faustian bargain, it will be giving up far more in the long term. The new entity, operating on a profit maximization basis may not be considerate towards the Pakistani ship registry preferring to move its vessels to cheaper offshore destinations as well as employing cheaper foreign crew as a means to cut cost, thereby reducing employment, taxes and foreign exchange generated by PNSC for Pakistan. Pakistan would also lose its strategic ability to carry out sea voyages in troubled times, as a private entity will not be keen to risk its neck (and international repute and standing) for the sake of national priorities.

Setting up a new shipping company is not an easy task either in today’s highly competitive and cut-throat international shipping markets. The markets are far too saturated and it is not easy for a new entrant to be able to convert business from established entities. Spot markets may offer a point of entry but their margins are lower, with high volatility and in the event of a downturn it is tough to consistently generate gainful employment opportunities.

The United Nations Convention on a Code of Conduct for Liner Conferences, adopted in 1983, aimed at taking into account the special needs and challenges faced by developing countries such as Pakistan. One of the important elements introduced by the Convention was the cargo sharing formula, also known as the 40-40-20 rule. It suggests that cargo should be divided 40 per cent each to national vessels of the originating and destination country, and 20 per cent to other vessels. The purpose of this formula was to ensure that vessels of developing countries had an opportunity to participate in the carriage of their trade. Privatizing PNSC would result in vessels being removed from Pakistan’s flag and thereby forfeiting the opportunity to take advantage of the aforementioned rule, as a means of sustaining the national fleet, generating employment and losing out on securing favorable international trade deals.

Since, 90% of all trade is carried out through the seas, the health of an economy is inextricably linked to that of the blue economy. In view of this, other developing countries in the region are encouraging and growing their national shipping companies, particularly in view of the extreme economic volatility internationally. Countries such as Ethiopia, despite being landlocked, train their own cadets and maintain their own shipping corporation, since they too realize the importance of having an independent national shipping line, particularly as a means to ensure the growth of their blue economy.

It should also be noted by readers that this is not the first time PNSC has been on the chopping block to be sold off to the highest bidder, with PNSC being nominated for sale multiple times. The last such attempt by the Federal Government was in 2012. However, on that occasion sense prevailed when the decision was reviewed based on long term analysis. Subsequently PNSC was removed from the privatization list.

All of this simply underscores the aforementioned instability. Those at the helm of affairs seem to lack long term vision and direction, with the shipping sector being worse off as a result. Attempts at policy re-calibration are interspersed over the years only punctuated with untimely reversals. It seems we are doomed to repeat history with no regard for what the future may bring. Instability is what is keeping the shipping sector and the nation as a whole from advancing. Our neighbors have progressed by leaps and bounds simply because they have stability and continuation of policy, something the Pakistan desperately needs.

The Author is an advisor to the Karachi Chamber of Commerce and Industy.

Prospects Brighten For Shipping Sector

 

Growth or development has not come to Pakistan’s shipping sector naturally. In fact, for a large chunk of its history one bad turn would shortly be followed by another. An ill wind has gripped the industry for far too long.

We have seen the forfeiture of sea routes to the then East Pakistan (now Bangladesh) and subsequent downsizing of the national fleet. We have seen investments by private enterprises come in droves after Independence and then dry up after the nationalization policies of the seventies.

Then, finally, we witnessed several attempts by various governments over the years trying to draft and fine-tune merchant marine policies (and then later recanting after suffering hardships under the sporadic, cyclical and inevitable financial adjustments as dictated by foreign creditors) to encourage growth and development of the blue economy.

After suffering through all that the last bastion of shipping left standing in the country is Pakistan National Shipping Corporation (PNSC). PNSC is the sole entity whose vessels still ply international seaborne trade routes and the last commercial fleet proudly bearing Pakistan’s flag.

PNSC too was the product of nationalization policies and as such it too remained troubled until the early 2000s. Since then PNSC has slowly and steadily grown, consistently posting healthy annual profits.

As a result, PNSC’s fleet has developed, reducing the number of vessels but substantially increasing its tonnage (carrying capacity) by inducting larger vessels. To an all-time low of 243,749 Deadweight Tons in 2001, PNSC grew to 831,711 deadweight tons by 2021.

In July 2022, PNSC inked an agreement for the purchase and delivery of two Aframax crude oil tanker vessels of 107,123 deadweight tons each, to be called M.T Mardan and M.T Sargodha, increasing the fleet-carrying capacity in excess of 1 million deadweight tons for the first time in Pakistan’s history.

The new vessels are poised to provide PNSC with additional carriage capacity to transport cargoes for Pakistan’s domestic refineries as PNSC’s existing fleet of tankers ages and are planned to be phased out gradually in favour of further newer inductions.

This latest induction spells good news for the nation. The addition of more ships to Pakistan’s national fleet means that increasingly a larger proportion of cargo carried will be on Pakistan-flagged vessels, which will result in savings of precious foreign exchange as PNSC per federal policy can be paid in Pakistani Rupees instead of US dollars, as is the case with foreign shipping lines.

In fact, it was estimated in 2018 by National Institute of Maritime Affairs that Pakistan annually pays in excess of USD 3 billion in freight. Since then, particularly due to supply chain limitations, freight rates have increased at least 2 to 3 times.

As an example, average earnings for Aframax crude oil tankers were USD 3,509/day in July 2021, with the long term average being USD 19,455/day. In July 2022, the average earnings have spiked to USD 49,161/day, representing an increase of 1,301% from July 2021 and a 153% increase from the long-term average. Therefore, we can estimate that Pakistan in 2021-2022 pays at least USD 6 to 9 billion in freight alone.

 

Just to put the aforementioned freight bill figure in perspective, the size of State Bank of Pakistan’s reserves as at the end of June, 2022 was USD 9.8 billion. Just by saving the freight bill we could double SBP’s reserves.

Now imagine, Pakistan, a country already in the clutches of an economic crisis having to arrange a large surplus of USD in order to meet its obligations and keep trade flowing to the country. This puts an unsustainable burden on the exchequer.

Had PNSC or another domestic shipping entity been providing shipping services for the entirety of the cargo being imported and exported from Pakistan this large pile of foreign exchange could have been saved. Just from that annual freight bill, Pakistan can fund and build a massive fleet not only to serve all of its needs but the international markets as well to earn and generate even more foreign exchange for the country.

Increasing the size of Pakistan’s fleet has other immediate benefits as well. It will generate employment for Pakistan’s seafarers. Due to the relatively small size of Pakistan’s blue economy, Pakistan’s seafarers in the past had been unable to secure gainful employment domestically. With the addition of more ships to the national fleet PNSC will be able to create more job opportunities for our seafarers.

Furthermore, with an increased number of domestic vessels calling at Pakistan’s ports will result in stimulating and growing ancillary industries in the country’s maritime sector to provide for and service those vessels, adding even more growth and jobs to Pakistan’s blue economy.

Given the present state of affairs of the country and the need to generate/save foreign exchange, it may be wise for the government to draft laws and policies to aid and grow the shipping industry, exempting it by law from the ‘capriciousness’ of tax authorities and ‘foreign lenders’, giving it some much needed stability so it can grow and compete at an international level.

The federal government should pass into law merchant marine policies cementing their stature and making their compliance mandatory. This consistent stance will aid in restoring investor confidence as well as providing growth to the domestic shipping industry, whereby Pakistan funds and develops its own fleet, chartered for national purposes, trading to and from Pakistan’s shores.

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