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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.


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.