The shipping industry of Pakistan is fast heading towards a total collapse unless the government takes immediate measures to revive it on war footing.
By Syed M. Aslam
Sep 29 - Oct 05, 1997
The deterioration in the shipping sector is obvious from the fact that though the volume of seaborne cargo has increased over three-fold from 9.5 million tonnes to 31 million tonnes from 1971-71 to 1996-97, the fleet strength of the national merchant marine has declined to less than a third, from 57 vessels to 17 vessels during the same period. This in turn has resulted in a sharp reduction in the cargo carrying capacity of the state owned national carrier, Pakistan National Shipping Corporation (PNSC) from 635,937 deadweight tonnes (dwt) to 290,356 dwt during the same period.
The national marine fleet comprises a total of 17 break bulk carriers, 12 with PNSC and 5 with private sector Tristar Shipping plus a oil tanker with Pakistan Tanker Association, a subsidiary of PNSC. Though PNSC acquired three container vessels last year they are not included as they are not lifting any national cargoes being chartered out by the Corporation.
The national shippers are lifting only about 7 per cent of the national seaborne trade while the rest is being lifted by foreign shippers to cost over $ 1.5 million to the exchequer annually. The situation would worsen as the average age of PNSC vessels is 15-20 years and soon many of them would be up for scrap like many others in last few years.
On the other hand, the private sector Tristar Shipping which has a fleet of used Korean vessels, is on the verge of collapse due to liquidity problems.
The president of Tristar Shipping, Masood Baghpatee had asked the finance minister, minicter for communications and the governor of the central bank to intervene for the immediate release of Rs 100 million loan by the Allied Bank of Pakistan (ABL) to continue its operations.
Baghpatee had said that the loan is needed to help meet such necessary expenses as purchase of diesel, to pay wages of crew, insurance and maintenance of vessels.
He had alleged that ABL was holding Tristars securities worth Rs 653 million out of which Rs 300 has been availed. While Tristar is entitled to avail 70 per or Rs 457 million of the security the ABL failed to release the loan.
He warned that failure to get the loan would result in suspension of operations of Tristar subsequently resulting in unemployment of hundreds of Pakistani seamen and loss to thousands of shareholders of the company.
Despite numerous attempts by PAGE to contact Mr Baghpatee and a number of assurances by his office that he would be replying to a PAGE questionnaire, no response was received from Tristar Shipping.
Masood Baghpatee, however, choose to fax replies to a PAGE questionnaire about other shipping related issues in the capacity of president of National Shipowners Association which forms part of this article elsewhere.
Coming back to the Tristar-ABL conflict, an analyst said that it is hard to take sides as the banking arrangement between Tristar and ABL is a matter of mutual understanding between the two.
The release of loan sought by Tristar depends on what kinds of securities arrangement it has with ABL and as as the same is known only to the two parties it would not be right to say anything, he added.
However, he added, the non-release of loans could reflect upon the lack of faith towards Tristar on the part of ABL and though politicisation could be a reason he ruled it out.
He added if the Tristar was not satisfied banking with ABL what stops it from taking its business to any other financial institution.
Tristars operating profit declined sharply by 72 per cent to Rs 27 million for six months ended December 31, 1996 compared to the same period the previous year. Its pre- and after tax profits also decreased by 79 per cent to Rs 14 million and 77 per cent to Rs 12.5 million respectively. While Tristar blamed the drastic reduction in profitability to a 7 per cent decrease in fleet operations , rupee devaluation, increases in prices of diesel, fuel and lubricants the claims seems to make little sense as PNSCs operating revenues register an increase of 4 per cent during the same period.
The years of neglect and the resultant deterioration is not only costing the country a huge amount to foreign shippers but the dependence on foreign shippers is also fearsome if hostility ever breaks out for foreign carriers they would be least interested to serve the nation for fear of losses.
It is for the first time that the sitting government has proposed to accord shipping the status of an industry.
The salient features of the Shipping Policy include incentives such as a five-year tax holiday, soft term loans from either donor countries or the international market and help raise finances and allocation of funds through commercial banks and DFIs.
Other incentives include a 30 per cent subsidy on construction of ships to local shipowners for placing shipbuilding orders with the national shipyard provided the vessels would not be sold to foreign buyers before 10 years of service under the Pakistani flag though there is no restriction on sale to other national flag owners.
In addition, local ship owners would be allowed to open and operate foreign bank accounts in Pakistani or foreign banks and insure with a local insurance companies in local currency or foreign exchange.
Setting up of a maritime commercial bank is also proposed.
While generally the incentives provided in the shipping Policy, which remains yet to be officially announced, have been welcomed by the shipping circles many said that since shipping is a highly capital intensive business, the tax holiday period should be extended. Most of them said that import of ships should be totally exempted from duty. Import tariff adding up to 26 per cent at present is too high to encourage the investment in shipping industry, PAGE was told.
While the strength of merchant marine is on the decline the volume of seaborne cargo is increasing by 5 per cent per annum.
Ninety-five per cent of the external trade, both import and export, is carried by sea. Being an import oriented country 82 per cent of this comprise imports, the rest export.
According to projection the seaborne cargo would increase to 35 million tonnes by the year 2000: Liquid bulk 14.2 million tonnes, dry bulk 10.75 million tonnes, break bulk 4.45 million tonnes, and containerised 5.6 million tonnes.
It is clear that failure to add tonnage would result in increased dependence on foreign shippers which would keep on costing Pakistan increased foreign exchange to cater to its seaborne trade.
PAGE talked to a number of players in the shipping industry, including PNSC and representatives of foreign shipping companies to understand how they perceive various issues pertaining to the industry.
The general manager planning PNSC, Syed Mahmood Ali said that many factors are restricting the growth of shipping in Pakistan.
Shipping, he said, has no place on the list of priorities of the government, a fact which is evident from the absence of a clear cut shipping policy.
He said that an import oriented economy like Pakistan which has no significant exports allows the ships to carry only a small export cargo out of the country. He also cited closure of Indian ports to merchant marine fleet of Pakistan and Pakistani ports to Indian merchant marine fleet as one of the causes that restricts the growth of shipping.
Costly financing for ship purchase which is a higly capital intensive business and an unprecedented 26 per cent levies on the import of ships restricts the growth of the industry, he added.
He said that most of the above hurdles can be removed by good decision making by the government while the opening of Indian ports depend on the resolution of political and regional disputes with India.
He hoped that a good shipping policy will go a long way in helping the industry to pick up, however, the problem of one sided [import oriented] business would remain.
Putting the average annual growth rate of the national seaborne trade at 2 per cent he added that at present the total seaborne trade is about 37 million tonnes 32 million tonnes imports and 5 million tonnes export of which only about 6 per cent is lifted by the PNSC.
Terming addition of new tonnage a tricky question, he said that private entrepreneurs have so far not shown much interest due mainly to financing arrangement. The government may consider establishing a shipping finance bank to provide loans to the private ship owners, he said. However, unless the private sector shows enterpreneurship, shipping has a bleak future in Pakistan, he warned.
The president of the National Shipowners Association (NSA), Masood Baghpatee cited inordinate delay in the announcement of shipping policy, frequent change in government policies and lack of financial support by the government and financial institutions as some of the major factors restricting the growth of shipping industry.
He also cited heavy duties and levies on the import of ship and the high-risk involved, for instance heavy losses due to any mishap, detention or an unfavourable fluctuation in the freight market as factors detrimental to the growth.
He stressed that the decisions taken by the economic coordination committee (ECC) on February 24, 1993 should immediately be made effective for net five years. The tax exemeption be extended at least till the year 2000, he added.
In addition he said that the Merchant Marine Shipping Bill which is pending for the approval of the parliament for the last 4 years be immediately approved as the shipping business at present is being regulated under Shipping Act of 1923 which makes it impossible to do the business.
A formal approval may be granted for the establishment of private bank in the shipping sector. The application from the private sector is pending with the State Bank of Pakistan for three years and the same should be approved so that capital be mobilised, he added.
Baghpatee said that a comprehensive shipping policy should be announced by the government without further delay and it must basically be aimed at the progress of the industry and not for merely protecting interest of brokers, operators, carters and agents.
Putting the payment to foreign shipowners at $ 1.7 billion annually for wheat , fertiliser, iron ore, coke, crude oil and other liquid imports he added that it is expected to increase by an annual rate of 10 per cent.
He warned that the prices of vessels are increasing and any further delay in the announcement of an incentive package to the shipping sector will not only result in additional capital expenditure by the Pakistani investors but will also force the prospective foreign and overseas Pakistani investors to divert their capital to more lucrative vistas to enjoy better benefits.
It is matter of great concern that our spending on freight to foreign shipping companies is the biggest expense after foreign debt service and defence and yet the authorities have failed to allocate due importance to the shipping industry, he concluded.
Rashid Barkat of Pacific Chartering and Trading, the representative of Noble Group of Hong Kong, said that shipping has never been given the status of an industry and thus enterpreneurs are shy to invest without any support from the government and the banking sector.
He said, it is pitiable that the private sector is made to run from pillar to post to obtain permission from numerous government departments to place a vessel, purchased entirely from his own money, under Pakistani flag.
The duty structure on the import of ship, he added, is based on a system which is centuries old. While the vessel remains outside the territorial waters of the country most of the time and while the freight is earned in dollars, the owners are forced to pay huge taxes for bringing in the vessel.
He also alleged that unionism and politics in the shipping office are also restricting the growth of the shipping sector, making it not only difficult but also unmanageable.
He stressed that the government should allow flagging under Pakistani flag duty-free though some duty may be imposed if the owner decides to sell the vessel for flagging under a third country or for scrap. No income tax should be charged for five years and ship owners should be allowed to employ their own crew instead of through the Shipping Office, the involvement of which should be totally abolished for the purpose of hiring the crew. The proposed shipping policy would have no positive impact unless these measures are taken, he added.
He expected an average annual increase of 7-8 per cent in the national seaborne trade adding that national flag carrier vessels are handling 5-6 per cent of the export and 15-17 per cent of the import cargoes.
The addition of new tonnage, he stressed requires revolutionary measures from the government and induction of technocrats and professionals in the Ports and Shipping sector which at present remains badly neglected and is run by bureaucrats and defence personnel.
Talking about the relative merits of the Port of Karachi and Port Qasim for container handling he said that Pakistan is already 20 years behind in the construction of container terminal primary due to an infighting between the two ports. The two ports should work together to construct the most modern terminals instead of competing with each other as none of them could handle the entire container traffic by itself. In addition, they must work to improve the infrastructure, modernise their crafts and equipment to enter the second half century of the country with better planning.
He stressed that Pakistan should encourage a local-flag shipping sector which would help reduce the unemployment level.
He disclosed that Pacific Chartering and Trading intends to enter the shipowning business provided the government provides meaningful incentives to the shipping sector.
An executive of shipping company who ask PAGE not to mention his name said that we have the market and the required manpower but what is lacking is investors willingness to invest the capital.
Shipping like any other business cannot work in isolation and without improving such basic factors as microeconomics, political stability and the law and order situation the revival of the shipping sector would be a hard to achieve, he added.
He stressed that the measures to facilitate financing area must to encourage investment in the shipping sector. Relaxation of prudential rules and allowing the foreign investors even up to 100 per cent equity in some cases may be some of the steps in that direction he added.
An source said that in this era of container business the national flag carriers has no container vessel and it is imperative to induct container vessels to meet the container traffic of the country.
The government should not encourage the local shipownership but also the joint venture with foreign companies to give a boost to the shipping industry, he added.
While the volume of seaborne trade is increasing, the two national ports, Port of Karachi and Port Qasim are severely underequipped to handle the ocean freight.
While lack of space restricts the expansion of Karachi Port, Port Qasim is yet to be opened for night navigation in spite of repeated assurances by the authorities.
The Port of Karachi which handles 80 per cent of Pakistans maritime trade has no shore gantries and there is a shortage of other cargo handling equipment and machinery.
Though it has over two dozen container yards at East and West Wharves it is yet to have a dedicated container terminal, Karachi International Container Terminal (KICT) which is expected to open for business in the first quarter of next year.
At present the container yards are held by a number of ship agents and the decentralisation in addition to absence of shore gantries and other equipment has resulted in haphazard stacking, congestion and irregular flow of goods.
KICT is built at beh nos. 22, 23,24 and 24 A at the West Wharf to handle 300,000 20-ft containers in the first phase and 400,000 in the second. The KICT is a joint venture between American President Line (APL) and KPT.
Meanwhile, the Port of Karachi is going to lose one-third or 160,000 of its container business of 550,000 to Qasim International Container Terminal (QICT), owned and operated by a foreign consortium.
With the shifting of business by a mega container liner like Maersk, which is one of the consortium partners of QICT, and seven other lines, the bulk of whose business comprise container would deprive KPT of a considerable operating income to fall short of projected Rs 5.05 billion during the current fiscal.
One other factor that the shipping circles feel is restricting the growth of shipping is that Pakistani Ports are the most expensive in the region, though tariffs at Port Qasim are still 5 per cent cheaper than the Port of Karachi.
Sources said that much depends on the implementation of the Shipping Policy in letter and spirit. It should also be revised to include many suggestions mentioned above to help encourage the investment to help add new tonnage to help ease the heavy reliance on foreign shipping companies to save foreign exchange.