By SYED M. ASLAM
July 23 - 29, 2001
Can new shipping policy revive the industry?
The Pakistan Merchant Marine Policy 2001, announced
by Federal Communications Minister Lt. Gen. (Retd.) Javed Ashraf Kazi
on the 10th of this month, is seen by many as an attempt to exorcise
the demons of public sector monopoly and the inefficiency which it
implies.
The new policy has deregulated the shipping sector
and aims to attract investment; both local and foreign, public and
private, by offering a range of incentives. Unlike the Shipping policy
announced by the former Nawaz Sharif government in June 1998, the new
policy goes beyond offering duty-free import of ships. It offers many
new incentives to local and foreign investors including Income Tax
exemption till 2020.
For as long as one remembers, private sector was
not allowed to play any part in the shipping sector which enjoyed
absolute public sector monopoly. Till early 1990s private sector was
not allowed to play any role in the national shipping sector leaving
it in the hands of state-owned Pakistan National Shipping Corporation.
The number of vessels and Dead Weight Tonnage (DWD) of the PNSC fleet
has been on continuous decline over the years.
Today PNSC fleet comprises just 15 vessels 12
break bulk and 3 container vessels less than one-fourth its fleet
strength two-decades-and half ago. The break bulk vessels have long
past their economic lives the average age being over 18 years.
Tender to sell at least one of these break bulk carriers has already
been floated in the near past repeatedly by the PNSC and many more are
expected to be floated in the near future. The 3 used container
vessels were acquired by the PNSC in 1996 and were chartered by it on
the Asia Pacific routes. They were only brought to Pakistan some two
years ago.
PNSC is lifting less than five per cent of the
national sea borne trade thus leaving the country to rely heavily on
foreign shipping companies for which the foreign exchange-starved
economy has to cough out a staggering $ 1.5 billion each year. Besides
the already aged fleet the PNSC has incurred heavy losses for the half
year ended December 31, 2000 to push its accumulated losses to wipe
out paid-up capital & reserves as well as current assets. With
such serious cash flow restraints one can hardly expect the PNSC to
perform any better in the coming years enhancing an already heavy
dependence on foreign shippers even further.
Announcing a policy is a much easy task than
implementing it in letter and spirit. Remember the shipping policy
announced by the previous government in June 1998 and how it failed to
induct a single tonnage to the national merchant marine fleet. Perhaps
the reluctance of the private sector to invest in shipping sector can
be attributed to opening and closure of operations of Tristar
Shipping.
To soothe the fears this time around, the
Communications Minister added that the government will constitute a
Standing committee under secretary communications which will take
continuous input from all stakeholders to ensure effective
implementation and to make the necessary adjustments. The committee
shall comprise members from the relevant ministries/agencies and
stakeholders from the private sector to meet at least once every year
from the date of promulgation of this policy.
Putting the Pakistan's annual sea borne trade at 39
million tons, just 5 per cent or 2 million tons of which is carried by
the national carrier PNSC, the minister said that the country's annual
freight bill surpasses an staggering $ 1.5 billion which is causing a
colossal drain of foreign exchange resources.
He said that the new shipping policy aims to
attract all sorts of investors foreign, non-resident Pakistanis
and local- to reduce an already heavy dependence on foreign carriers
and to help save substantive foreign exchange. The policy, he said,
aims to facilitate and attract private sector investment in shipping,
create an environment conducive for unimpeded growth of the maritime
sector and to deregulate and provide free environment for investment
in the maritime sector. In addition it aims to maximise sea borne
trade through the merchant marine fleet flying Pakistani flag, to make
the country's merchant marine sector internationally competitive and
to ensure efficient operation of the country's ports and harbours
through availability of harbour crafts tugs, pilot boats,
dredgers, survey vessels and specialised craft.
In addition, it aims to enhance utilisation of
trained manpower in the maritime sector by augmenting the country's
training facilities by increasing productivity which are
internationally marketable. It may be mentioned that thousands of
trained and experienced individuals have been forced to find jobs
outside the country as the local merchant marine sector can offer only
limited opportunities mainly in PNSC.
So far so good. The policy does read good on the
paper. So what's the catch? The policy aims at achieving the under
mentioned tangible growth in the private and public sector a good 19
years from today- by 2020.
By 2020, the policy hopes to expand and upgrade
Pakistan flag merchant marine fleet to increase the present share of
cargo from 5 per cent to 40 per cent and to increase the deadweight
carrying capacity of Pakistan flag ocean-going vessels to over one
million tons compared to declining 261,836 DWD today.
The policy aims to revive and augment national
ship-building/capacity to meet 20 per cent ship construction
requirements of the country merchant marine and entire requirements of
support and ancillary crafts. At present, the sole ship-building and
repair facility, Karachi Shipyard and Engineering Works (KSEW), is
standing idle for want of its core activities forcing it to barely
survive on limited maintenance jobs from the Pakistan Navy and
diversifying its activities beyond its core activity. For last many
years, a large number of staff and workers are sacked by the KSEW and
at times the remaining are not paid salaries for months. PNSC is not
known to use KSEW to dry dock and maintenance work of its vessels
instead interested more in passing the work to foreign shipyards on
this pretext or that. The same has been the case with Karachi Port
Trust, the manager of the premiere port of the country, which prefer
to place orders with the foreign shipyards for floating vessels such
as dredgers, etc.
The policy also aims to rejuvenate and expand ship
repair potential to undertake the entire range of repairs and
maintenance tasks of 50 per cent of Pakistani Flag ocean-going vessels
and all ancillary and support crafts. Would this bring any relief to
the work-starved KSEW, which has built hundreds of ocean-going vessels
and ancillary and support crafts not only for PNSC and KPT but also
for foreign countries. M.V Islamabad was built by Karachi Shipyard and
Engineering Works Limited (KSEW) was also the last of the three ships
built for the PNSC by the KSEW in 1983. The ship was also the biggest
vessel [17,200 dwt] built by the KSEW.
Financial incentives
The new shipping policy offer many financial
incentives for the would-be investors. It offers tax exemptions,
concessional tax measures backed by assurances. It also aims at
simplifying the rules by deregulating the sector.
To begin with, ships and floating crafts tugs,
dredgers, survey vessels, and specialised crafts purchased or
bareboat chartered by a Pakistani entity flying Pakistani flag will be
exempted from all import duties and surcharges for good 19 years
till 2020. This exemption, however, will not apply to vessels imported
for demolition purposes and will be subjected to the condition that
the ships/crafts acquired will be used for the purpose for which they
were procured, that is shipping. In case, the ships/crafts are
demolished within 5 years of their acquisition, they would be
subjected to full import duties and other charges applicable to ships
purchased for demolition purpose.
The policy accords shop-building and ship-repair
the status of an industry under the investment policy which is
entitled to all incentives contained therein.
Ships and all floating crafts purchased or bareboat
chartered by a Pakistani entity and flying Pakistani flag will be
exempted from payment of income tax till 2020. Instead, they will be
liable to pay tonnage tax at the rate of one US dollar per gross ton
per fiscal year in lieu of income tax irrespective of the earnings or
whether the operator made a profit or incurred a loss.
The registration fee will be maximum $ 1,000 per
vessels upto 100 gross tons $ 50, 101-500 gross tons $ 100,
501-600 gross tons $ 200, 601-5000 gross tons $ 500, 5001 and above
gross tons $ 1,000. There will be a slightly different criteria of
taxation for ships, vessels and all floating crafts which are though
not registered in Pakistan is hired by Pakistani individual or group
under any type of charter other than bare-boat charter. The fee for
such vessels and crafts shall be fixed at $ 0.15 (15 cents) per gross
ton per chartered voyage provided that it will not exceed $ 1.00 per
gross ton in any fiscal year.
To attract foreign investment, all port and harbour
authorities in Pakistan will allow all ships and floating crafts 10
per cent reduced berthing rates when the same are berthed for purposes
of repair and maintenance.
Pakistan flag vessels shall be entitled to receive
freight revenues in any convertible currency subject to State Bank
regulations.
The long standing demand of Pakistani seafarers
working on foreign flag vessels, and there are thousands of them
serving abroad in all capacities, is accepted this time around. The
salary of Pakistani seafarers working on foreign flag vessels will now
be exempted from payment of Income Tax up to the amount repatriated
through banking channel.
To further induce the private sector, both local
and foreign, to invest in national merchant marine the government has
said that it will help it to secure a reasonable share of cargo of the
country with which it concludes a bilateral shipping agreement for
ships flying the national flag. The same principle of securing foreign
cargo shall be followed when the government of Pakistan concludes
international multilateral shipping arrangements.
To assure the potential investors that this time
around the government intends to implement the policy in letter and
spirit the Communications Minister said that the government will take
all necessary legal measures to ensure protection of local and foreign
investment made in the maritime sector. In addition, all foreign
direct investments in shore based shipping activities will be allowed
as per BoI policy.
Owners, charterers and operators of ships and/or
floating crafts may be allowed to open and operate foreign currency
accounts and will be permitted to operate these accounts for both
receipts and payments of foreign exchange. They may retain their
surplus earnings in these accounts and shall surrender the same within
three months of closing the financial year. Foreign partners in
Pakistan-based Joint Venture companies may receive their shares of
profits after tax.
In addition, Pakistani owners of ships/flaoting
crafts either owners or bareboat who register their vessels in the
country shall be authorised to remit foreign exchange at the official
exchange rate to the sellers/owners of the ships/floating crafts.
Furthermore, the Government of Pakistan shall authorise free and
uninterrupted repatriation of foreign exchange invested in the
merchant marine sector of Pakistan. It shall also allow free and
interrupted repatriation of profits made by foreign Joint Venture
partners of Pakistani entities or foreign ship-floating craft owners
running Pakistan-based companies and operating Pakistan flag
vessels/floating crafts.
Ships and all floating crafts are considered
bonafide collatereal against which financing can be obtained from
Banks and DFIs subject to policy of the financial institution. The GoP
will also make best endeavour to obtain financing from aid donor
countries on attractive terms for the specific purpose of
construction/acquisition of new ships and other floating crafts. Such
efforts shall include obtaining donor country financing for
construction of ships and other floating crafts in Pakistani
ship/craft building facilities.
The new shipping policy reads good on the paper but
would it help induct private sector-led investment to help fresh
tonnage to lessen heavy dependent on foreign shipping companies which
is costing country heavily in drain of foreign exchange not to mention
the security in case of an eventuality. We have to wait and see as the
private sector having witnessed the failure of private shipping
company may act like the proverbial "once bitten twice shy."
Certainly the PNSC fleet is an old and dilapidated
condition six of the twelve break bulk carriers were built in
1980, four in 1981, one each in 1983 and 1979. Of the three used
container vessels acquired in 1996, two were builtin 1983 and the
third in 1985. In less than two decades PNSC's fleet strength declined
to one-fourth today with all its ships in dilapidated condition
requiring constant maintenance and repairs costing huge amounts of
money, increased idling time, short trips for the financially troubled
corporation.
Despite enjoying absolute monopoly, PNSC has
remained a financially troubled organisation during the big part of
its existence since it was established in 1979 when Pakistan Shipping
Corporation and the National Shipping Corporation were merged.
PNSC 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 it to 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 at a
high 353 million. The rest is history.
Today PNSC fleet is in a badly dilapidated state
and will not be able to meet the stricter International Security Codes
of the International Maritime Organisation. The stricter ISO security
codes would mean a crushing blow to the aged Pakistani fleet.
The question is: Can incentives alone will help
induct tonnage into the national maritime fleet. As is, shipping was
accorded the status of an industry for the first time in June 1998
Policy. Incentives include duty-free import of vessels and the removal
of age and size bar on the import of vessels. 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. However, the policy failed to
induct any fresh tonnage or registration under the Pakistani flag.
What, however, makes the new policy different from
its predecessor is the fact that it also offers assurances by the
government to help secure cargoes from any bilateral arrangements as
well as loans from the international donor agencies.
Observers also highlight the necessity for the
creation of a separate ministry to better coordinate the shipping
requirements of various ministries. As is, the ministry of production
is responsible for imports of iron ore and coal; ministry of food,
agriculture and livestock make recommendations about quantity of wheat
imports or exports; while ministry of petroleum looks over the oil
imports. The centralisation is necessary to help coordinate shipments
of various commodities to better ensure timely shipment at the most
economic rate for the overall benefit of the people and the local
shipping sector. A government supported and encouraged shipping policy
can help build a strong maritime presence, if examples of India and
Bangladesh are any indications.
Indian maritime fleet comprise 13 million DWD and
even Bangladesh which separated from Pakistan in 1971 has a merchant
marine fleet of 225,000 DWT in its state-owned Bangladesh Shipping
Corporation to cater a populace which is three-fourth of that of
Pakistan.
Shipbuilding, shiprepair
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. Karachi Shipyard and Engineering Works Limited (KSEW) is the
oldest heavy engineering works and is fully equipped with
shipbuilding, ship repairing and heavy/general engineering works.
Establsihed in 1957, the fully government-owned
organisation, 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 foregn organisations as National Shipping Cororation of Dubai,
China Ocean Shipping Corporation and China National Machinery
Corporation.
Apart for building port maintenance vessels for the
Karachi Port Trust it has also built two dumb barges for Hansa Lines
of 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 4000 vessels,
half of which were foreign flagships. Many navies and shipping lines
have a regular customers 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 much or less idle as not only it has not received a
ship-building order in last seven years but as the state-owned PNSC
prefers to have its ship repair and dry-docked at the foreign ports
but also the Karachi Port and Port Qasim 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 organisations extend to designing, development of
technical know-how, commissioning/trials and indigenisation 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.
Conclusion
The greatest challenge posed to the local national
shipping sector which primarily comprises the sole state-owned flag
carrier PNSC is the imposition of stricter maritime security codes
next year. With a fleet of aging vessels, most of which are in
dilapidated condition, chances are there will be no flagship carriers
in the year to come unless of course the new policy succeeds to
attract comparatively newer vessels by the private sector.
Providing the legal cover to the new shipping
policy and its effective implementation at the earliest possible is
necessary to give it the needed sanctity. As is, the last policy was
never provided the legal cover.
The lack of work at the KSEW is actually an
extension of overall deterioration in the ports and shipping sector.
Of the two operational ports, Port Qasim still primarily remains a
day-time port after almost two decades of operation. The aged fleet
poses an immense financial challenge for the PNSC which is heavily in
red not only to meet its day to day expenses but more so its inability
to induct any fresh tonnage in its fleet.
KSEW is performing no better. While it needs Rs 700
million annually just to breakeven it is falling short of 25 per cent
of this bare minimum revenue just to keep it afloat. The absence of
any ship-building orders over the years and the lack of support by the
PNSC which did not provide a single ship repair and maintenance work
during the last decade till last has taken a heavy toll on the KSEW.
Will new shipping policy help induct more tonnage in the national
maritime fleet, floating crafts by the KPT and PQA and work for KSEW?
We have to wait and see how effectively the policy is implemented to
attract the local and foreign investment in a sector which remained
regulated for much too long.
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