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to attract the private sector are that policies have remain inconsistent and tax incentives have been offered and withdrawn repeatedly on knee-jerk decision making basis.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

captainanwarshah.blogspot.com 

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

Shipping only cost-effective, sustainable delivery mechanism for int’l trade, economy

PAKISTAN Commemorated World Maritime Day on 3rd October 2017, under the Auspices of Chartered institute of logistics and transport, institute of chartered ship brokers at P.C. Hotel Karachi.
The day is celebrated on 28th September at U.N. IMO Headquarters, London, to be followed by celebrations in the member countries. The theme for this year’s World Maritime Day is “Connecting Ships, Ports and People”. This year’s theme was chosen to provide an opportunity to focus on the many diverse stakeholders involved in the shipping and logistics sectors. Its aim is to build on the World Maritime Day theme for 2016, “Shipping: indispensable to the world”, by focusing on helping IMO Member States to develop and implement maritime strategies to invest in a joined-up, interagency approach that addresses the whole range of issues, including the facilitation of maritime transport and increasing efficiency, navigational safety, protection of the marine environment and maritime security. Tributes to organizer taking lead to celebrate the day in Pakistan, enable bring awareness to the common people and to those at the helm of affairs.

According to the United Nations Conference on Trade and Development (UNCTAD), around 80% of global trade by volume and over 70% of global trade by value are carried by sea and are handled by ports worldwide. These shares are even higher in the case of most developing countries. Shipping is the only truly cost-effective and sustainable delivery mechanism for international trade and the global economy. People all over the world rely on ships to transport the commodities, fuel, foodstuffs, goods and products that are so vital in their everyday lives. The shipping activities that I am referring to encompasses containerized multi-modal cargos, bulk and break-bulk goods, liquid commodities and the all essential project consignments.
The promotion of sustainable shipping and sustainable maritime development is one of the major priorities of IMO in the coming years. Therefore, energy efficiency, new technology and innovation, maritime education and training, maritime security, maritime traffic management and the development of the maritime infrastructure: the development and implementation of global standards covering these and other issues will underpin IMO’s commitment to provide the institutional framework necessary for a green and sustainable global maritime transportation system for the years and time to come.
There is indeed no denial that without efficient ports and logistics, shipping alone cannot remain viable and efficient. Similarly, we need to appreciate the concept of multi modal transport coupled with efficient supply chain management.Pakistan is blessed with two major ports, the first at Karachi and second at Bin Qasim. These ports collectively handle substantially all the sea borne cargos to and from Pakistan. The scenario is destined to change very soon with the full scale operations of the port at Gwadar and also with the sequential completion of the various projects under the CPEC initiative which is a part of the greater “One Belt – One Road” initiative. A flavor of what this change could look like has already been witnessed in the form of SAPT, the new deep sea container terminal currently being operated by Hutchison Ports which is operating four containerized berths on PPP/BOT basis efficiently. It is expected that SAPT, being deep water port may achieve the target of being a regional container hub. The Government of Sindh is equally keen to develop Keti Bandar at the Indus River Delta for which significant work remains to be done.
I had the honor and pleasure of recently being invited by the Pakistan Navy War College at Lahore to speak on topic “ How Sea blindness among leadership could affect Pakistan’s focus towards investment in maritime sector”. It was good inter active session with Senators, MNAs, MPAs, senior military and civilian officers in attendance. I reiterated what I said at Lahore that we as a nation have failed to develop shipping entrepreneurship due to inconsistency in our policies and also in the backdrop of trauma of nationalization of private sector ship owning. However, it is high time we look towards the future with a view to correct the errors of the past and to accord the importance to the shipping sector that it rightfully deserves.
We must learn from history that the British gained access in India in 1607, when their sailing ship Hector berthed at Port of Surat commanded by Capt. William Hawkins and gradually, the East India Company gained the physical territory and political grounds and end up creating an empire, thus importance of shipping is paramount and cannot be denied.
Pakistan has progressed in the port sector, but sadly the local private sector is unwilling to invest in ship owning. One must recall that between the mid 1950s and early 1970s, Pakistan had a vibrant shipping industry and that several Pakistan maritime experts took up senior management level employment in other countries to establish their shipping sectors. It is encouraging to note that the only Pak Flag bearer, PNSC, has excelled by making consistent profits inspite of being in public sector. We are proud of our PNSC as in the region Bangladesh Shipping and Ceylon Shipping are liquidated and the Shipping Corporation of India, being in Public Sector, but incurring loss, whereas PNSC is making profit with its professional team. However, one must also question how investment from the private sector can be attracted towards ship owning in Pakistan.
If our government is serious about ensuring participation from the private sector into the shipping sector, then a consistent policy regime is imperative. Funding by Banks/DFI at low interest rates is required as ship owning is capital intensive, has low IRR and long payback periods. I strongly recommend that the government engage in brain storming to remove impediments for growth of ship owning in private sector and that a think tank be set-up at the Ministry of Ports and Shipping level to come up with suggestions to resolve this and similar issues. Let the public sector compete with private sector in healthy way.
There is no denial that we need efficient ports, logistics and shipping industry to support our national trade. The aim is to reduce cost of doing business and improve global competitiveness. The aim should also be to develop self-sufficiency, strong local infrastructure and to support job creation.

Digitization of Ports and Terminals

Karachites continue to suffer due to congestion on Jinnah Bridge, leading to Keamari and West Wharf. The congestion has played havoc to commuters to port and more due to emissions to environment around the old city area. Businesses and trade has suffered as a result of these congestions as goods and commitments are delayed and in many cases, perish due to being delayed under the scotching sun.
We in Pakistan are fully aware that transportation and logistics is in dire need of modernization, but what about supply chain visibility. I need not mention the devastation caused by petrol tanker loss of over two hundred human lives and recurring incidents of containers falling on humans at Karachi, as no proper twist locks were used, thus many lives are lost. This congestion is bound to aggravate any crisis situation should it occur at or near the Karachi port areas.
Karachi now has three container terminals and Karachi Port has miserably failed to live its commitment to connect new deep water port with bridge to Manora, as planned to connect Northern By-pass. Due to this utter failure the traffic to and from these three terminals is left with no option but to use Jinnah Bridge, causing massive congestion for hours. The situation is aggravated by oil products carrying tanker lorries, bulk cargo carriers, imported vehicle carriers, public and private transport. One cannot fathom the number of hours collectively wasted and the quantity of fuel burnt unproductively as a result of the unabaiting congestion. It is common knowledge that businesses have opted to relocate away from the main business district of Karachi and this in itself shall lead to numerous problems in the coming years.
Ports and terminals inherently are very traditional industries, if they want, this problem may be somewhat resolved by value adding technology and automation. The whole I.T. infrastructure may play key role in linking the road haulage, landing system with terminal operating system. The road to Keamari and West Wharf is laden with trucks waiting to pick up boxes thus causing congestion on roads and misery to commuters. Port and Terminals can link their road haulage system with logistic providers, so to know 12/24 hours when they need trucks near the port and terminal to collect / drop the box. This concept of truck calling system is being successfully managed even in several port cities in Africa and one can only wonder why such a system has eluded implementation in Pakistan.
No truck be allowed to enter the city and be kept outside city say about 30 miles and await terminal message or call that truck is on way and who is driving and what the truck is going to pick up or drop. This may facilitate port and terminal operators to clear the box buried under three or four containers, so that truck arrives it is loaded or discharged and cleared port may not be allowed parking of truck on road leading to Keamari and west wharf. Ports and terminals may develop IT infrastructure to liaison with logistic companies and trucks be called to drop or pick up by terminal operators.
In the short term, a similar arrangement can also be made for tanker lories that call at the oil terminals situated at and near the port area and after loading are destined for up country delivery of goods that include crude oil, petroleum products, chemicals, edible oils and other non-petroleum products. A recent study commissioned by the Oil Companies Advisory Council (OCAC) has forecast that the number of petroleum products carrying tanker lories carrying 40,000 liters each calling at the Karachi port is expected to balloon to over 800 trucks per day in 2019-20 from an average of about 400 per day that were actually counted during 2014-15. One is at a loss of how the city’s infrastructure, traffic police and environment will cope with such a growth. For the long term, the Keamari Oil Installation Area shall have to be linked to up-country storage and refining facilities through pipelines thus lowering the cost of fuel to the end users and mitigating congestion.
Worldwide trucks turnaround time in port is 26 minutes whereas ours is in days, due to manual operation and permitting trucks on road in port due to poor efficiency of Port and lack of technology. It is essential that the port authorities take a lead in finding implementable solutions to this problem before a complete breakdown of the system occurs. It has been time and again witnessed that the system is strained whenever two or three holidays come up in a row. The most recent gridlock occurred immediately after the recent Eid ul Fitar holidays and is a repeat each year only that the situation get worst with each passing year.
The need for communication throughout the supply chain is imperative to line up fragmented nature of trucking infrastructure. Unfortunately, our trucking sector has not kept pace with advance in supply chain management such that today even the trucking system in Iran is much more advanced than that of Pakistan despite the years of sanctions endured by Iran. It remains to be seen how the local trucking sector will cope with the mix of right-hand drive Pakistani trucks and left-hand drive Chinese trucks once Chinese goods make their transit through Pakistan courtesy of CPEC. This may be a recipe for disaster and it puzzles me when our policy makers will realize that it is these seemingly small details that at times decide the fate of mega projects.
We, may resolve congestion and grid lock on Karachi’s roads if our ports and terminals jump to digitization the process, as it will not only reduce congestion but add value to it, ultimately digitizing the supply chain is crucial to build a mere robust and resilient chain that is flexible and maintain the visibility. The Karachi Port Trust shall also have to expedite the construction of either the elevated expressway planned to run from the deep water port all the way to Korangi Road or the cross-harbour bridge connecting Keamari with Manora and onwards with the Northern By-pass. Both these projects have been sitting on the shelf gathering dust while Karachi continues to suffer from congestions and delays resulting in an increase in the cost of doing business and environmental hazards. The cross harbor bridge was envisioned in the early 2000s and the contract for the container terminal at the deep water port was awarded to Hong Kong based Hutchison Ports with a promise that KPT will have constructed this bridge well before the congestion sets in. The new container terminal has been operational since December last year with the bridge nowhere in sight.
I, have taken pain to write this being sufferer every day at Jinnah bridge. It is time for Karachi Port to act, and digitize the supply chain to beat the gridlock. In my humble opinion project of connecting deep water port by either the elevated expressway or the cross harbor bridge is imperative as new port is our premier port and volume may increase as mother vessel will call due to 16 feet draft. Let us act by kick starting the project and ensure connecting Jinnah Bridge to northern by-pass by elevated express way by passing Mauripur road. I am sure that our Minister of Ports and Shipping may intervene to solve the issue by connectivity and avoiding congestion.

SUPPLY CHAIN ISSUES AT PORTS

Pakistan’s monthly exports volume reached an all-time high of Rs. 275,483 million in September 2013. January 2017 saw this number drop to Rs. 186,385 million whereas the number for February 2017 further declined to Rs.171,511 million. The downwards trend has followed more or less consistently in the months between September 2013 and January 2017. Naturally, this declining trend in Pakistan’s exports becomes yet more pronounced when the balance of trade is analyzed. The trade deficit that stood at Rs. 1,833 billion in fiscal 2011-12 sank to a deficit of Rs. 2,494 billion by fiscal 2015-16. One would think that the people in the corridors of power would be having sleepless nights while trying to evaluate where and how they erred and that these people would be running from pillar to post in an attempt to address and arrest this disaster.
 

Instead, I was shocked to read in an article that was published on 5th April 2017 in the Business Recorder that certain quarters within the Ministry of Commerce are of the view that the Rupee is overvalued and should be permitted a free fall. In the event that a free fall is allowed, as has been allowed a number of times in the past, and exports still don’t pick up steam, as has also happened in the past, then, what do we do? How does one get the genie back into the bottle one may ponder? A knee jerk solution to a problem that is bigger and beyond most in the Ministry of Commerce and the Ministry of Finance put together.
 

As this mindless bloodletting continues unabated, one may think that logistics and supply chain efficiencies may have come into focus with the intent to keeping costs at bay while the creases in the export strategy are being ironed out. With this goal in mind, where better to focus than the point where the biggest cash outflow is involved, i.e. at the sea ports. Well over half of the import and export cargo by value is containerized. It would be expected that the container ports might be the strongest link in the chain when all other links weaken by the day. An objective analysis of the situation may suggest otherwise. Structural impediments continue to plague the system.
 

Efficiencies and global best practices appear neither in words nor in spirit.
 

Within international shipping circles, Pakistani ports remain painfully notorious for their exceptionally high port charges in spite of their inefficiencies. August 2016 saw yet another increase in these charges when the Port of Karachi upped its port charges by an average of about 20% for a panamax sized container vessel. An analysis of total wet charges accumulated by a container vessel during a round trip for a service that regularly calls at Karachi Port reveals that the wet charges at Karachi Port were the highest during the said round trip when compared to all the other international ports that the same vessel called at during the same round trip. Not only were the charges at Karachi Port the highest, they were four times higher than the average lowest charges.
 

Naturally, this cost is promptly and diligently passed on by the shipping lines to the one next in line in the supply chain. Globally, port authorities have moved on to the "land-lord port model" to remain in step with the trends of the time.
 

The Port of Karachi, however, continues to experience gestation difficulties with time running out for a normal outcome. The matter of converting the KPT into a corporation has been pending for over a decade, with the aim of making the necessary structural and legislative changes so that KPT can be run in a business-like manner.
 

The President of the Karachi Chamber of Commerce and Industry (KCCI), Shamim Ahmed Firpo, has expressed concern over the matter of KPT’s unilateral increase in port charges in August 2016 and the matter of imposition of congestion surcharge by shipping lines. KCCI, being the largest trade Chamber in the country, was neither taken into confidence by KPT nor was invited in subsequent meetings where the issues were discussed. Both these matters, the increase in port charges by KPT and the imposition of congestion surcharge, remain unaddressed and, similar to the matter of declining exports, seem beyond the capabilities of the respective department heads.
 

Structural improvements to the national Maritime Policy are urgently warranted. This point needs to be kept in mind the next time that industry gurus bang their heads together in an attempt to improve upon the incumbent version. Our ports in general and container terminals in particular simply cannot continue to charge more in return for less.
 

The situation is prone to imploding as was witnessed during December 2016 and January 2017 when shipping lines unilaterally imposed congestion surcharge on imports to Pakistan. Some shipping lines, it has been reported, have withdrawn the congestion charge whereas other continue to collect it as a windfall. The lesson to be learned remains elusive. This lesson is that the supply chain as a whole needs improvements and a good place to start is with improvements at the ports.
 

While on the topic of surcharge, the point to ponder is why our ports and container terminals remain dumping grounds to empty and laden containers that either nobody needs or have forgotten about. The TPX yard at M.T. Khan Road in Karachi is a befitting example of what could have been achieved but was not. This stretch of prime real estate could have been developed into a modern business district or could have been put to other better use than being a resting place (final in most cases) for hundreds of thousand empty boxes that the shipping lines have forgotten all about. A similar sorry state exist within the container terminals where ground slots are occupied by empties that have nowhere to go except for creating trouble for efficiencies by increasing congestion and dwell times.
 

Empties set aside, the menace of abandoned cargos lying at terminals draws one to wonder why this should happen when customs laws permit the auction of such cargo should it remain un-claimed or un-cleared at the container terminal for a period of more than 20 days. After all, it is in the interest of customs’ revenues that the cargo be auctioned as expeditiously as possible in order for it to fetch the highest possible price at the auction. Here too, as in so many other junctions, a mafia and certain vested interests have fine-tuned their act. Such auctions, in most cases rather than less, are finely choreographed acts where each actor has practiced the moves and lines so many times that they all now come naturally when the lights are switched on. The biggest losers from these auctions remain the terminals that recover none of their dues when all is said and done.
 

Recoveries on account of customs revenues are a fraction of what was owed. Some individuals on both side of the divide, however, could be seen laughing all the way to the bank, figuratively speaking as only a trickle of what was exchanged might find its way to any banking transaction.

As an example to the above, there is an average of about 1,500 laden boxes for the three years from 2014 to 2016 that are still lying at KICT for want of auction or destruction. These boxes will neither generate revenue for the terminal nor will vacate the space that they are occupying so that the same space can be occupied by revenue yielding boxes. The terminal is handicapped to take any action regarding these and similar long idling boxes in the absence of approvals from customs. Customs, as has been the practice for the past two decades now, will continue to drag its feet on the matter. Similar idle box issued are being faced by PICT and by QICT where the aggregate of idle boxes as at the end of 2016 was over 3,600 units.
 

What is alarming is that industry experts have indicated that idle boxes have also started accumulating at SAPT which started its operations recently in December 2016 warranting serious action from the concerned authorities to contain inefficiencies in the already stressed supply chain.

The point is that these are the inefficiencies that plague the entire system. The system related inefficiencies are not confined to any one port or to any one terminal. They are now an epidemic that adds unnecessary costs to the entire national economy. The unresolved matter of the Karachi Dock Labour Board, the improvements required to the road networks within port areas, the requirements for rail based clearance of cargo, the relocation of sites for handling of dirty cargo and the training of government officials towards use of modern technologies are some of the areas where significant improvements can be made.
 

As Pakistan’s exports continue to drop and imports grow, the trade gap widens by the day. Similarly, the inefficiencies in the system become more pronounced. The cost to the economy as a result of the inefficiencies highlighted above, and the costs originating from several others that could not be addressed herein for want of space, can be estimated to run in billions of rupees on an annual basis. This is something that a developing economy like ours can ill afford to absorb in the long term.

Congestion Charge by Shipping Companies

Drewry Maritime Research, a shipping consultancy of international acclaim, in its Annual Review 2016 of Global Container Terminal Operators has forecast a lackluster average global growth of 2.7% per annum for the next five years for global container ports as the industry moves from being a growth sector to emerging as a value sector. It turns out that the only global region wherein Drewry is confident of double digit growth happened to be the South Asia region of which Pakistan is a constituent. Indeed, the annual containerized growth rate for Pakistan for the last two years has remained double digit with the 2015 growth being over 14% and 2016 over 16%. Industry pundits foresee 2017 to clock an attractive 15%, thus far above the global forecast of 2.7% as prophesized by Drewry.

As the Advisor on Shipping to the Karachi Chamber of Commerce and Industry (KCCI), the Shipping Committee of the KCCI has during a recent meeting supported me in taking up the matter of imposition of congestion charge by shipping lines at the highest level with the government. The business logic behind this action by shipping lines eludes comprehension given that this region shall remain a cash cow for these shipping lines coupled with the fact that the capacity in Pakistanout paces current volumes.

Pakistan’s capacity at the beginning of 2016 was approximately 2.5 million TEUs while the three container terminals, namely Karachi International Container Terminal (KICT), Qasim International Container Terminal (QICT) and Pakistan International Container Terminal (PICT), were handling a combined annual throughput of over 2.8 million TEUs. To elaborate this point, KICT for example handled 1.1 million TEUs in 2015 as against a designed capacity of about 0.75 million TEUs. The other two terminals too remained full past the brim to coupe with volumes above and beyond their designed capacities. Despite the difficulties faced by the container terminals in Pakistan, the profits of shipping lines calling at Pakistan remained bright green without any mention of a congestion levy.

The capacity situation by the end of 2016 changed for the better for all industry stakeholders including large importers and Customs when South Asia Pakistan Terminals (SAPT) commenced its operation by adding 0.55 million TEUs to the overall capacity upon completion of the first of four phases of the US$600 million project. With another 0.55 million TEUsin capacity expected by June this year upon completion of the second phase, the project is expected to yield a combined capacity of 3.1 million TEUs when all four phases are complete by the year 2020. With these numbers, the container terminals in Pakistan are nowhere near a state of congestion and are not foreseen to be in such a state for at least the next 8 to 10 years.

A related article published by  business recorder on 26 March 2017 states that shipping lines have initiated collecting from the consignee at destination before delivery US$150 and US$300 on 20ft and 40ft containers respectively. Shipping lines, it has emerged, claim that the dwell time for containers lying at the terminals is far beyond what it should be and thus have tried to justify this charge. The lines further contend that the loading and unloading of boxes to and from vessels has remained slow resulting in extending in port stays for the vessels. The said claims by shipping lines warrants a thread bare analysis as follows.

The overcapacity handling witnessed by terminals during 2015 and the better part of 2016 was as a result of growth in import volumes overwhelming the handling capacities available at the ports. The market shares of KICT, QICT and PICT as a percentage of total volumes remained pretty much unaltered on a year on year basis thus suggesting that there was no disruptive wheeling and dealing by the terminals resulting in kicking the market off balance by the terminals. Shipping lines continued to enjoy a growth in volumes during this period and there were no complaints by them of earning revenues above their forecasts despite terminals being overwhelmed. This was the period when a congestion charge could have been justified but not without argument. However, this was also the time when shipping lines were losing money globally and were focused on ways and means for containing the hemorrhaging to their bottom lines.

With SAPT adding not only land side capacity but also berth side capacity for shipping lines in Pakistan, the claim relating to congestion resulting in delays to the vessels seeking a berthing window remains hard to digest. As witnessed since December 2016, the capacity spillover of the terminals has been absorbed by SAPT and vessels are no longer confined to wait at the outer anchorage for up to two days at times for want of berthing space. Given rationalization of throughput post SAPT commencement of operations, the other terminals are no longer stretched beyond their limits thus naturally resulting in improved handing efficiencies both at the berth and in the yard. Thus a potentially win-win situation for all stakeholders.

It may be argued that shipping lines have been allowed to get away with imposing a congestion charge because there exists a void in the form of a unified forum empowered to take-up the matter directly with the shipping lines. The shipping lines must also remain mindful that as volumes grow in the coming years, both as a natural result of organic growth and the booster shots expected in the form of CPEC, the bargaining power of large Pakistani importers shall also grow which could potentially further depress that already rock bottom haulage rates being witnessed by these very lines. A congestion charge today may leave a nasty after taste in the years to come. This coupled with the possibility of a representative body such as the KCCI taking up the matter with the government seeking policy intervention could leave shipping lines being penny wise and pound foolish.

It remains to be seen if shipping lines will focus on developing trade within the region, especially in Pakistan or will prefer a short term quick gain in the form of a congestion charge and restricting maneuvering space in the future. Drewry in its report for 2016 also predicts a change in demographics within respective regions with this change being a natural outcome of markets within the regions maturing earlier than expected. These changes and their possible implications on the profitability for shipping lines in the long term as argued by Drewry could imply that shipping lines would be best advised to take a long term view of high grown markets as against a short term view.