Strengthening the backbone




Sep 08 - 14, 2003





The transportation is the backbone of the economy of any country. An efficient transportation network is imperative for economic growth, development, farm-to-market access, improved social service, and every other aspects of human interaction be it social, economic, cultural or otherwise.

Transportation system in Pakistan reels from high transportation costs, inferior service, limited penetration of rural areas, increasing congestion in the urban areas, poor condition of public transportation, unmaintained roads, the loss churning organisations in the public sector and most of all an overall indifference to realise the important role that transportation plays in an economy, any economy. It also lacks the much needed integration between various modes of transportation to help develop, and implement, effective policies needed to efficiently address the growing transportation needs, commercial cargoes in particular and human travel in general, which are exerting great pressures on the road transport to lift more cargoes despite the presence of a railway system whose tracks cover all parts of the country.

Developing a reliable air transport infrastructure is also necessary for the economic growth of the country and the introduction of Open Sky policy in the early 1990s was aimed at facilitating a viable affordable choice to the air travelers. However, many of the private airlines who make good of the opportunity has long closed their operations and just two of them Shaheen Air International and Aero Asia still remain in the business. The participation of the private sector has been encouraged in the construction of airports and the national flag carrier PIA has been busy implementing the 10-year fleet replacement plan having inducted a number of aircraft into its fleet already. The deregulation of the air transport can be attributed to increased volume of domestic passenger traffic, particular on such major routes as Karachi-Islamabad and Karachi-Lahore.

Similarly, the Pakistan Railways have also inducted new engines and bogeys imported from China to satiate the growing demand though cost of rail travel has incessantly been on a rise touching levels which are only marginally more than the fare offered by the private airlines on major domestic routes.

Around 50 per cent of the revenues of Pakistan Railways come from the passenger traffic. The revenues have increased to help the PR cut its losses since 1999-2000 when its revenues totalled Rs 4.8 billion. Pakistan Railways carry 65 million passengers annually.

Pakistan Railways Freight Business Unit operates over 200 Freight Stations on the Railway Network. The Unit serves two major ports of Karachi and Bin Qasim as well as all the four provinces of the country generates revenue from the movement of Agricultural, Industrial and imported products, Petroleum Oil & Lubricants (POL), Wheat, Coal, Fertilizer, Rock Phosphate, Cement, Container traffic and Sugar. About 39% of the revenue is generated from the transportation of POL products, 19% from Imported Wheat, Fertilizer and Rock Phosphate, the remaining 42% is earned from domestic traffic.




Shipping is considered the most vital of all the transportation modes because it moves the bulk of the international cargo traffic across the globe. Seaborne trade plays the most vital role to link links facilitating the bulk of foreign trade anywhere. Even land-locked countries enjoy special UN law that binds the neighbouring maritime nations to facilitate their foreign trade as is the case of Pakistani facilitating Afghanistan's imports through its ports.

Tasman Spirit has become a symbol of environmental catastrophe in Pakistan. The Maltese-registered Aframax type tanker has spilled over 30,000 tons of crude oil off the Karachi coast damaging marine life, the full magnitude of which can only be determined in the years to come, and has exposed thousands of residents close to the Clifton Beach to grave health risks, the severity of which is being played-down by the concerned authorities.

Attempts to mislead the people about the much too obvious environmental devastation first by not acknowledging it altogether than denying its severity have damaged the reputation of the minister of communication, chairman KPT and other related agencies. The disaster has resulted in a chain lawsuits KPT, PNSC and other related organisations are sued for Rs 10 billion by parliamentarian, KPT has sued the PNSC for $ 10 billion while PNSC has announced that it would be suing the owner of the vessel. The question: does the PNSC really expect the owner of a $ 4 million vessel to be able to cough a cool 10 billion dollars? Observers feel that the suits are mere formalities aimed at lessening the public anger.

The customary arrogance on the part of the authorities to downplay the all-too-obvious toll the spill has taken on the environment, marine life and human health also exposes the failure of the Pakistani shipping in particular and the country to become a maritime nation in general. The worst oil spill in the history of Pakistan, and one of major such disasters anywhere, also exposes the failure of the Pakistan National Shipping Corporation which was awarded a ten-year exclusive contract for the shipment of the crude oil for the 3 national refineries Pakistan Refinery Limited, National Refinery Limited and PARCO despite owning only a single tanker able to lift less than half of the total crude oil requirements which averages between 5.5-6 million tons per year. The vessel itself was scrapped at the port of Ghangzhou, China on the 12th of June this year leaving the PNSC entirely dependent on chartered vessels to lift the crude for the national refineries.

The case for a 10-year award of crude oil contract to the PNSC was presented to the Economic Coordination Committee of the cabinet on October 7, 2002. On October 23 the three national refineries were directed by the Ministry of Petroleum and Natural Resources to sign a 10-year contract with the PNSC. The freight rates awarded to the the PNSC were 34 per cent higher than the market rates.



Since December 7 last year, when the now scappred M.T Jauhar arrived at Karachi from Ras Tanura, the major crude oil loading facility in Saudi Arabia, till the time it was sold for scrap at Guangzhou after undergoing a series or repair and dry-docking, PNSC was entirely dependent on chartered vessels to facilitate the crude oil shipment inducting a tanker this week. Besides the now infamous Tasman Spirit, it also hired two other tankers to help facilitate the crude oil shipment. This week the PNSC announced the acquiring of a 22-year-old crude oil tanker by one of its subsidiary Shalamar Shipping (Private) Limited M.T. Shalamar, an Aframax-type tanker named after previous PNSC vessel. The 1981-built tanker would be able to lift around 2.2 million tons of crude oil still leaving the rest of the 5.5-6 million tons of the crude on the chartered vessels.

Informed sources told PAGE that the newly inducted single-hull M.T. Shalamar, registered under the Pakistani flag, cost the PNSC subsidiary $ 5.5 million and the company is also negotiated the purchase of another Aframax tanker, a 1985-built double-hull, for $ 9 million. The induction of Shalamar in the PNSC fleet though welcomed, poses many questions about the acquirement of this single-hull tanker at this point in time because of uncertainties about future.

The concerns about the future of single-hull tankers need elaboration. During the early nineties, the global shipping watchdog International Maritime Organization (IMO), took note of the increasing spills and decided to take appropriate measures to contain them. In 1994, the IMO suggested to place a ban on the use of single hull crude oil tankers altogether, a move which was strongly resisted by the developing countries because replacing them with double-hull vessels would have had required immense monies which they just could not afford. Amidst strong resistance from the developing nations, particularly in Africa, the IMO decided not to impose a ban on the use of single-hull tankers altogether but asked the member 164 nations, the members of United Nations are also the members of IMO, to install ETA (Emergency Towing Arrangement) at both front and back of a single-hull crude tanker so that tankers can be pulled out to avoid pollution. Thus, IMO made it mandatory for all single-hull containers to install the ETA and yet Tasman Spirit was not equipped with the devise to help avoid the devastating pollution of unmatched parallel off the Karachi coast. The question why Tasman Spirit was not equipped with the mandatory ETA devise?

However, the growing incidents of environmental disasters may result in slapping of ban on the use of single-hull tankers when the Safety Council of the IMO meets on the 20th of December this year, sources informed. If that happens, and we may keep our fingers crossed, the recently inducted single-hull M.T. Shalamar would not be able even to repay back its cost to the financial inconvenience of the PNSC subsidiary which has bought it but would also once again leave the entire crude oil shipment of the country on chartered vessels.

The chairman of Federation of Pakistan Chambers of Commerce and Industry's (FPCCI) Standing Committee on Ports, Shipping, Maritime and Shipbuilding, Capt. Abdul Rashid Abro, said that the days of single-hull tankers are numbered nevertheless from January 1, 2007, no such tankers would be allowed to operate as per a directive of the IMO. Thus even if the IMO allows the single-hull tankers to operate till 2006, the recently inducted $ 5.5 million Shalamar would only have an operating life of 39 months at the max.

Let's look at the Tasman Spirit incident from a financial angle. Sources told PAGE that the international price of the 22-year-old vessel was around $ 4 million and the value of 67,000 tons of the crude it was carrying was about $ 13 million. PAGE's analysis about the value of the crude loaded on the doomed vessel is calculated on the basis that there are 7.28 barrels in a ton and the international price of a barrel of Iranian crude on the 3rd of this month was $ 28 a barrel.

Concerned officials have conceded that about 32,000 tons of the crude has been salvaged while over 30,000 tons of it is spilled. The value of the crude oil spilled off the Karachi coast by Tasman Spirit, thus, totals around $ 6.16 million, the claims of which would be paid by six local insurance companies who collectively insured the crude oil cargo. However, the actual costs of the claims would actually be much higher due to additional costs incurred to salvage around 32,000 tons of the crude. The financial cost of the environmental pollution putting the lives of thousands of people at risks and plumetting the seafood prices threatening the livelihood of tens of thousands of fisherman is yet to be ascertained but it would definitely be extremely high.



Talking to PAGE the General Secretary of Pakistan Merchant Navy Officers' Association (PMNOA) Sheikh Mohammad Iqbal said that the fact that Tasman Spirit was registered in Malta, one of the nations known for its Flag of Convenience, should also be a cause of concern because it is blamed as a one of the major factors for the use of rickety ships. Flags of Convenience (FoC), and there are about 30 such countries besides Malta including Liberia, Belize, Cambodia, Aruba, Bahamas, Barbados, Cayman Islands, Netherlands, etc., etc., easy registration at low fees with least concern for regulations. Flouting the safety and environment, which cost money, is one of the main advantages that FoC offers while it also allows the owners and the operators to pay low salaries to the crew and at times the workers are not paid the salaries. What makes the FoC more attractive is that it allows an owner to avoid accountability in case of mishaps such as the Tasman Spirit due to absence of a genuine link between the owner and the flag his vessel flies. "The absence of this vital link, laid down by the United Nations Convention on the Law of the Sea (UNCLOS), has allowed the FoC to flourish at the cost of developing countries such as Pakistan whose ability to enforce sea-worthiness and safe operations of ships in its waters is limited."

The exclusive 10-year contract for the shipment of crude has allowed the PNSC to dictate the freight price way above the market rates, the ultimate cost of which is paid by the consumers. Sheikh alleges that the PNSC is charging three-time more about $ 7 instead of $ 3 per ton. "Under the existing arrangement for the last several years, the PNSC is transporting the crude oil at around World Scale 200 which translates to around $ 7 per ton. Since PNSC has only one crude oil, tanker, and had no tanker at all for the last three months, it is heavily dependent on foreign vessels which are chartered on the market rate of the World Scale. The big differential between the freight rate that the PNSC charges for the transportation of the crude and the monies that it pays to the chartered vessels at the market rate has helped boost PNSC's revenues at the cost of the three national refineries and the exchequers to make up for the losses it is suffering from obsolete and loss-making 12 dry cargo vessels. Any improvement in PNSC's financial performance is due primary to high freight on the transportation of the crude."

Sheikh also said that the PNSC, since its very inception, has not lifted any portion of the petroleum products, mainly furnace oil and diesel, the quantity of which at present stands at around 12 million tons a year. PNSC's inability to lift the petroleum products which have an equal or even more strategic importance than the crude oil.



This is the first time the PNSC has inducted a crude oil tanker in last 22 years. Since 1974, the PNSC has scrapped a total of 26 vessels leaving it with just 12 bulk carriers presently, excluding the recently acquired tanker, in its fleet all of which have an average age of 22 years.


The new shipping policy, the Shipping Policy 2001, was promulgated in July 2001 but the trickled-down incentives provided in the Policy has failed to induct any private sector investment as envisioned. Sheikh said that the policy has failed to induct any tonnage in the national maritime fleet because most of the incentives provided in it are already offered by the Flags of Convenience on the one hand and the "Two-Flag Operations" permitted by most European countries.

In addition, induction of a ship under the Pakistani flag is encumbrances. For instance, financing of ships under the Pakistani flag is extremely difficult because most of the foreign banks charge extremely high mark ups to cover the country risk. The bilateral agreement between Pakistan and India prohibits the national flag carriers of the two countries to call at each other's ports without a NoC. Since 80 per cent of the cargoes in the area is generated to or from Indian ports, the Pakistani Flag vessels are at a great disadvantage compared to vessels carrying other national flags. The Right of First Refusal, for both the liquid and the dry cargo, accorded to the PNSC also discourages induction of ships by entrepreneurs in the private sector and PAGE has highlighted how it has discouraged potential investors to induct a tanker in the national fleet.

The unwritten policy of subsidising the PNSC by granting it the First Right of Refusal, including complete monopolisation of the crude oil imports, has not only discouraged the much needed private investment in the shipping sector but has also resulting in great loss to the national exchequers to pay the high freight rates way above the World Scale market rate. Trying to keep PNSC afloat through subsidy and protectionist monopoly will not only help revive the PNSC but would also discourage the private sector lead development of the national fleet not only in term of economy but also in term of assurance that the national seaborne cargoes would keep flowing even in case of an eventuality. Equitable distribution of cargoes, particularly 5.5-6 million tons of crude oil and 12 million tons of petroleum products, is necessary to provide the missing incentive to the private sector to help induct tonnage in the national maritime fleet.