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Cover Story
THE SHIPPING INDUSTRY

Its time to pull up our socks

By Syed M. Aslam
August 30 - Sep 05, 1999

Will Pakistan enter the next millennium without a shipping fleet of its own? The indications are; the heavy dependence on foreign shipping companies would get worse in the years to come due to two primary factors— the present national maritime fleet is in a badly dilapidated state and will not be able to meet the stricter International Security Codes of the International Maritime Organization. The stricter ISO security codes would mean a crushing blow to the aged Pakistani fleet.

Pakistani shipping has witnessed a series of setback since early 1990s when the private sector was allowed to bring investment into the shipping sector and one shipping company, Tri-Star went bankrupt two years ago.

Pakistan is heavily dependent on foreign shipping companies which is costing it a huge amount of foreign exchange annually. The total merchant marine fleet strength of the country comprises of 15 vessels with the state-owned Pakistan National Shipping Corporation (PNSC) and a single tanker, m.t. Johar, with its subsidiary, the National Tanker Company.

The PNSC is lifting less than five per cent of the national seaborne cargo on the vessels which have long run their economic lives. The total dead weight tonnage (dwt) of the 15 PNSC vessels, including three used container ships which it acquired in 1996, add up to 261,836. Including the tanker, m.t. Johar, the total tonnage available with national shipping increases to 330,000 dwt.

PNSC fleet comprises of 12 break-bulk vessels whose average age is 18 years, including m.v. Islamabad which was built locally by Karachi Shipyard and Engineering Works Limited (KSEW). Incidentally, it was also the last of the three ships built for PNSC by the KSEW in 1983. m.v. Islamabad is also the biggest vessel (17,200 dwt) built by the KSEW.

Six of PNSC fleet's break-bulk carriers were built in 1980, four in 1981, two in 1983 and one twenty years ago in 1979. Of the three used container vessels acquired by the Corporation in 1996, two were built in 1983 while the year of manufacture of the third was 1985. PNSC has not inducted any new tonnage since the early 1980s when it acquired 14 ships to take its fleet strength to sixty.

In less than two decades PNSC’s fleet strength declined to one-fourth and today its aging fleet is in a dilapidated state many of which are on the scarp list.

PNSC has remained in red most of the years since it was established in 1979 when Pakistan Shipping Corporation and the National Shipping Corporation were merged.

The Corporation earned an operating profit only five times during twelve years between 1984 and 1995. It reverted back into black for the first time since 1992 when it posted an operating profit of Rs 59 million in 1996. However, its accumulated losses soared to a record Rs 526 million during the same year.

Since then PNSC has managed to improve its financial performance to earn an operating profit of Rs 282 million in 1997 and Rs 203 million in the year ended June 30, 1998. However, as of June 30 last year, PNSC’s accumulated loss stood as high as Rs 353 million.

The Chairman of PNSC, Vice Admiral Obaid Ullah Khan, blamed low freight rates internationally and economic recession as the primary cause of decline in the operating profit in 1997-98. In addition, he also cited the slow-down in large-scale manufacturing sector, incessant currency depreciation and a cut throat competition for the declining profitability.

He also blamed the withdrawal of the Right of First Refusal which gives preference to the PNSC to lift the national cargo provided it matches the rates offered by the lowest bidder, for hurting the profitability. PNSC carried much smaller quantities of such captive national cargo as wheat and iron in 1997-98 which dropped from 2.4 million tonnes to 0.297 million tonnes and from 1.343 million tonnes to 0.597 million tonnes respectively over the previous year.

In the half-year ended December 31, 1998 PNSC managed to improve its operating profit by over six-fold from Rs 15 million to Rs 92 million over the corresponding period previous year. This was despite a 19 per cent decline in operating revenues which fell from Rs 2.5 billion to Rs 2 billion during the same period. According to the unaudited report, the reduction in operating revenues did not hurt the profitability as operating expenses also declined by 22 per cent.

The PNSC earned an after-tax profit of Rs 18 million and its accumulated loss decreased to Rs 335 million as compared to Rs 504 million during the corresponding period the previous year.

TRI-STAR GOES BANKRUPT

Talking to PAGE, the chief executive of Tri-Star, Masood Baghpatee, said that incentives alone will not help induct more vessels into the national maritime fleet. Blaming the malaise in the shipping sector he said that the government doesn’t want to support the shipping sector as it does not even consider it an industry.

He was alluding to the first-ever attempt by the present government to accord shipping the status of an industry and a number of incentives to attract the private sector investment in the shipping sector. Incentives include duty-free import of vessels and the removal of age and size bar on such imports. Ironically, it was the abolition of the import duty which made PNSC to bring its container vessels which since their induction in 1996 were chartered out by the Corporation on the Far Eastern route.

Baghpatee said that such incentives alone will not help induct additional tonnage into the maritime fleet as no consideration has been paid by the government to offer cargo protection to the operators. In a country where foreign shippers are paid better freight charges than the local shipping companies who would like to invest in the shipping sector, he asked.

The Local shippers are discouraged to lift any substantial quantity of such captive cargo as wheat, iron, cotton, rice and fertilizer which alone adds up to 10 million tonnes. The foreign shippers are not only encouraged to lift the bulk of the cargo but they are paid a much better a price than their local counterparts. For instance, US flagships get as much as $ 85 per tonne to lift a commodity as compared to just $ 20 per tonne by a local shipper for obvious reasons, he added.

Stressing the need of building a sizable maritime fleet, he said that no foreign shippers would ever like to risk catering to the needs of Pakistani trade if, God forbid, an eventuality takes place. In such a scenario even the PNSC would not be able to ensure supply of even such basic commodity as oil as it has just one old and dilapidated tanker.

Baghpatee said that he was ready to invest in the shipping sector once again if the sector was accorded the cargo preference and protection not only to the PNSC but all the local private sector shipping companies as freight rates worldwide were low and there was a cut throat competition. Without cargo protection who would like to invest, he added.

He also said that the government should establish a separate ministry for shipping like India where the prime minister himself heads the special committee on shipping. The creation of such a ministry is necessary to better coordinate the shipping requirements of various ministries. For instance, ministry of production is responsible for imports of iron ore and coal; ministry of food, agriculture and livestock makes recommendations about quantity of wheat imports; while ministry of petroleum looks after the oil imports. The centralization will help coordinate shipments of various commodities better to ensure timely shipment at the most economic rate for the overall benefit of the people and the local shipping, he added.

He attributed the flourishing of the Indian shipping on the much vital governmental support which is absent in Pakistan. It is a fact that state-owned India Shipping Corporation alone has an envious dead weight tonnage of 13 million tonnes as compared to just 0.33 million dwt of PNSC and National Tanker Company. Combined DWT under the private sector shipping in India adds up to another 10 million dwt.

Even Bangladesh which separated from Pakistan in 1971 has a merchant marine fleet of 225,000 DWT in its state-owned Bangladesh Shipping Corporation which serves the trade needs of a country whose population is three-fourth of that of Pakistan.

Baghpatee expressed concerns at the situation that no attempt has been made by the government to introduce the new shipping policy, a legal cover through the endorsement of the Parliament. The fact that the said policy and the incentives remain good only on paper without enjoying any legal sanctity speaks volumes about the low priority that the government gives to shipping, he added.

Baghpatee, whose three vessels, out of the total seven, registered in Pakistan have been auctioned at the foreign ports where they stayed for long duration to avoid arrest arising from non-payment of loans from local Allied Bank Limited, claimed that his company was forced to go out of business by the vested interests who did not like to see a Karachi-based company flourishing. "Had Tri-Star been a Punjab-based company it would have not been meted out the treatment which it was accorded," he added.

Baghpatee expressed absolute pessimism when asked about what the future holds for the local shipping. "Under present circumstances which include lack of support on the part of the government, the inability of the local shipping lines of not to get the cargo orders even if they are the lowest bidders, the aged fleet which has long past its economic lives, the immense competition for freight in the international market and the low freight rates worldwide, and the implementation of stricter IMO security codes from next year, I see no future for the national shipping. No, I don’t even see Pakistani flagship vessels in the years to come," he added.

He said low freight rates worldwide pose many challenges for the national shipping as the chartering rates have dropped by one-fourth during the last few years from $ 21,000 per day to between $ 5000-6000 per day today. Over 50 per cent of shipping companies today are posting losses due to slump in the international market but what makes the scenario different is that unlike Pakistan, shipping sectors the world over enjoys the support of their governments to lessen the blow, he added.

POST-SANCTIONS IMPACT

The developed countries imposed economic sanctions to punish Pakistan for using its option to conduct a nuclear test on May 28 and 30 last year. Like all other sectors it also had a detrimental impact on the seaborne foreign trade.

Not only the volume of both imports and exports decreased in 1998-99 but it also forced the foreign shipping companies, which carry the bulk of the national seaborne cargo, to increase the freight charges by 15.5 per cent being the ‘remittance adjustment factor.’ The substantial increase in the freight charges rendered the Pakistani exports incompetitive in the international market.

The introduction of dual exchange rate, which asked importers and shipping companies to buy half of the foreign exchange at official rate and half from the open market, provided the shipping companies with the opportunity at the higher open market rate which was over 10 per cent more than the official rate. This also inflated the prices of exports from the country to render them incompetitive in the international market.

The restriction to remit the funds to the principals, created problems for the foreign shipping companies the ultimate price of which were borne by the importers and exporters who have to absorb the increased shipping costs.

Just how the increased rates hurt the exporters is obvious from the following examples: Shipping a 20-foot container to the US was increased by $ 230 per container while that for a 40-foot container went up by $ 460 due to the increased freight charges. Similarly, cost of shipping one tonne of rice to Sri Lanka went up by Rs 60 per tonne as the shipping companies charged the exporters Rs 53 for each dollar instead of the composite rate of Rs 50 which depicts 6 per cent difference.

SHIPPING POLICY- LACK OF IMPLEMENTATION

For the first time the shipping was accorded the status of an industry in the Shipping Policy announced by the government last June. The government did not only abolish duty on the import of ship but also removed any restrictions of the age and type of the ship to encourage induction of fresh tonnage into the national maritime fleet.

However, there has been no induction of any new tonnage in the national maritime fleet. Many attribute the lack of interest on the part of the private sector as policies hardly ever materialize in the whole-hearted manner. In addition, the closure of Tristar Shipping for whatever the reasons may be, is also blamed by many to shy away any potential investors. The post-sanctions economic slump and the substantial decline in trade, both imports and exports, is also one of the reasons for the failure of incentives to attract any investment in the shipping sector particularly when the national flagship companies are not accorded any cargo protection and preference.

SHIPBUILDING, SHIP REPAIR

The years of neglect have taken a heavy toll on the shipping in Pakistan which is increasingly getting more and more dependent on foreign shipping companies to cater to its seaborne trade needs. Karachi Shipyard and Engineering Works Limited (KSEW) is the oldest heavy engineering unit and is fully equipped with shipbuilding, ship repairing and heavy/general engineering works.

Established in 1957, the fully government-owned organization, has built over 400 vessels of various types and sizes not only for the country but also for many other nations in the region. It is fully equipped to build passenger and cargo ships, oil tankers, bulk carriers of upto 26,000 dwt.

It has built three vessels for PNSC, m.v. Lalazar, m.v. Shalamar and m.v. Islamabad, the biggest 17,200 dwt vessel. It built its last ship in 1992, a 17,300 dwt vessel,, named Youyi for China. It has also built a number of vessels for port operations such as tugs, dregders, hopper barges, ferries, fishing trawlers, launches and special purpose craft.

It has built ships not only for PNSC but also for such foreign organizations as National Shipping Corporation of Dubai, China Ocean Shipping Corporation and China National Machinery Corporation.

Apart from building port maintenance vessels for the Karachi Port Trust, it has also built two dumb barges for Hasna Lines for the then West Germany which were used in the Gulf region. Other export orders included two tugs for the UAE, two propelled tugs for Saudi Arabia, four fishing trawlers and 19 vessels for the Iranian Navy, two mini bulk carriers for China and six port operation vessels for a Belgian company.

In addition, KSEW has repaired over 4,000 vessels, half of which were foreign flagships. Many navies and shipping lines have a regular customer of KSEW. However, except for a number of orders from the Pakistan Navy which also uses its repair services often the KSEW which in better times bustled with activities today stands more or less idle as not only that it has received no orders of ship-building during the last seven years but as the state-owned, PNSC prefers to have its ships repaired at the foreign ports. Moreover, the Karachi Port and Port Qasim also prefer to give tenders for port maintenance vessels to foreign companies.

The KSEW thus is not only deprived of its core ship-building activity but also to receive orders for smaller port crafts by the Karachi Port Trust and Port Qasim, the two national port maintenance authorities.

This has forced the KSEW to divert its attention from its core activities to general engineering activities in the recent past. Over the years, the KSEW has emerged as one of the few heavy machinery manufacturers of the country. It has undertaken a wide variety of engineering and structural works for oil refineries, storage installations and oil based industries as well as engineering workshops, and cement and sugar factories.

Since KSEW works under the ministry of defence, it enjoys the support of the Dockyard of the Pakistan Navy in the designing, development and construction of submarines and warships. This support from the Pakistan Navy in the form of joint venture between the two organizations extend to designing, development of technical know-how, commissioning/trials and indigenization in the construction of small warship and support craft.

KSEW has been a partner in the construction of such vessels for the Navy as mine counter measure vessel, fast petrol boat, missile craft, floating docks and tugs. Its close liaison with the Navy has given it the capability to design and construct various types of submarines, warships and naval support vessels to friendly countries in collaboration with the navy. However, a big portion of KSEW facilities lay idle at present due to lack of shipbuilding and repairing work.

Rear Admiral Javed Iftikhar, in response to a fax sent by PAGE, said that there is not only complete absence of ship-building work but even the volume of ship repair work load is much too low to offer any real relief to the organization.

As KSEW’s three primary sources of revenue are ship-building, ship repair and general engineering,, the absolute lack of the core ship-building activity over the last ten-fifteen years has created immense financial problems for the KSEW, he added.

Asked if the incentives to the shipping industry last year have benefited the KSEW in any way, he said, the very fact that the drastic reduction in number of ships in the PNSC fleet proves that the sector is on a massive decline. There has been no new ship-building order for the KSEW from PNSC in the last 17 years. PNSC acquired three 11-13 years used container vessels for $ 50 million in 1996 even though KSEW has the capacity to build similar new vessels for the same price. Unlike India, where even the private shipping companies are required to place a ship-building order locally for every ship they import, the KSEW enjoys no such governmental support, he added.

Asked if PNSC is providing KSEW with enough ship repairing and dry-docking work, he told that for the last many years the PNSC has not given any mentionable work. Asked if the KSEW is systematically discouraged to bid for works by the Karachi Port Trust as well as the PNSC, the answer was a ‘yes, however, no comments could be obtained.

He expressed optimism that the government has recently set up a committee with major representation of the ministry of communications which has been given the task to ensure the new ship and craft building and repair works of the Karachi Port, Port Qasim and the PNSC be awarded to the work-starved KSEW.

The national shipping is also unable to meet the growing demand for containerized and bulk cargo as PNSC’s fleet comprises of 12 break bulk vessels and only three used container vessels. In the years the volume of containerized cargo is expected to increase substantially. The global trend would not leave Pakistan untouched. As is, about 67 per cent of all the cargo that could be containerized has actually been containerized in Pakistan. Today, over 20 per cent or 7.7 million tonnes of the total cargo; both imports and exports, liquid and dry, is containerized in the country. The annual flow of the containerized cargo has already reached 550,000 TEUs, which with an average load of 14 tonnes per container adds up to 7.7 million tonnes.

While this offers big business for the PNSC, it is lifting a small portion of the total cargo due to limited number of container vessels in its fleet. Unless it inducts more vessels the bulk of containerized cargo business would keep on going to foreign shipping companies.

CONCLUSION

Years of neglect, absence of long-term policies and the non-implementation of the ones which were ever devised, have taken a heavy toll on the local shipping.

No fresh tonnage has been inducted in the PNSC during the last two decades with the result that today its fleet comprises of vessels which are an average 18 years old costing it more and more money in repairs and maintenance to keep them running.

In addition, the imposition of stricter maritime security codes poses a major challenge for the sole shipping company of Pakistan, the PNSC. With a fleet of aging vessels most of which are in dilapidated state chances are that there will be no flagship carriers in the years to come unless measures are taken to encourage investment in the private sector.

Over fourteen months have passed and yet there seems to be no urgency on the part of policy makers to give a legislative cover to the Policy. In addition, provisions should be made to ensure that the local shipping be accorded the preference and protection which is imperative to attract investment. As discussed above, incentives alone would not be enough.

Its time to exploit the real potential to make shipping the backbone of the economy not only to save enormous foreign exchange but also to ensure smooth flow of seaborne trade which only a dedicated national merchant marine could do in times of peace— or war.

 

PNSC FLEET AS ON JUNE 30,1998

S.No Name of Vessel Year of Built Dead Weight Tonnes

1. m.v. Lalazar* 1985 13,346

2. m.v. Swat* 1983 14,355

3. m.v. Shalamar* 1983 14,170

4. m.v. Islamabad 1983 18,257

5. m.v. Khairpur 1981 16,414

6. m.v. Sibi 1981 16,436

7. m.v. Kaghan 1981 18,050

8. m.v. Ayubia 1981 18,050

9. m.v. Sargodha 1980 18,242

10. m.v. Malakand 1980 18,224

11. m.v. Multan 1980 18,257

12. m.v. Bolan 1980 18,144

13. m.v. Hyderabad 1980 18,257

14. m.v. Chitral 1980 18,144

15. m.v. Makran 1979 23,490

Total 261,836

 

* Container vessels

 

CHECKERED HISTORY

In 1947 Pakistan inherited a fleet of four privately owned cargo ships.

In 1963, the National Shipping Ordinance was promulgated and National Shipping Corporation (NSC) was established which procured its first used ship, m.v. Rupsa in 1965. The national fleet comprised of some 53 vessels which were owned by 10 private shipping companies.

The national fleet strength grew to a record 71 vessels just prior to the separation of East Pakistan and its emergence as Bangladesh in 1971. The fleet strength declined to 57 vessels after the separation.

In 1974, nine private shipping companies, which had a total of 26 ships, were nationalized. The national fleet strength increased to 51 vessels including 26 with the nine nationalized companies plus 25 ships with the state-owned NSC.

In 1977, 14 ships were inducted in the PSC during the Fifth Five-Year Plan. Two years later, NSC and PSC were merged to form the Pakistan National Shipping Corporation (PNSC) which still remains the sole state-owned shipping corporation. The total fleet strength increased to 60 ships with the induction of 14 vessels in late 1970s and early 1980s.

Today, PNSC’s entire fleet comprises 15 ships— 12 break-bulk vessels and three used container vessels purchased in 1996. Pakistan Tanker Company, a subsidiary of PNSC also has a single tanker for crude oil imports.

PNSC enjoyed a complete monopoly till early 1990s when the shipping sector was deregulated by the then Nawaz Sharif government.

Even the opening of the shipping sector to the private sector has failed to achieve the desired results of helping induct more tonnage as Tristar Shipping which started operations in 1992 went out business last year. Tristar owned cargo ships the combined capacity of which added up to 310,000 DWT.

The chief executive and one of the directors of Tristar, Masood Tariq Baghpatee and Mansoor Khalid Baghpatee were arrested in July last year on charge of defrauding the Allied Bank of Pakistan of $ 10.85 million as they did not pay back loans totalling Rs 440 million for the purchase of five vessels in 1994-95.

PNSC’s aging fleet is carrying just about 5 per cent of the national seaborne cargo while the rest is shared by the foreign shippers which cost the country over $ 1.8 billion annually. While the freight rates have remained constant over the last few years, not withholding the present low globally, the successive devaluation of Pakistani currency nevertheless has put a tremendous strain on the national economy to cater to its seaborne trade needs., which makes it a second top expenditure after Defence.