SHIPPING : THE LOOMING CRISIS
A country like Pakistan heavily dependent on imports and foreign shipping lines the cost would be much more greater
By SYED M. ASLAM
Mar 03 - 09, 2003
The heavy dependence on foreign shipping lines is feared to take a heavy toll on the economic of the country in more ways than one as clouds of seemingly imminent war thickens in the region. The tell-tale signs are already there: Indian Pakistan Bangladesh Ceylon Conference (IPBCC), a group of some 15 shipping lines serving these four countries and Europe, has announced to increase the freight rates recently.
The IPBCC has allowed its member shipping lines to increase the freight rates of 20-foot container by $ 250 and that of 40-foot container by $ 500 pushing them from $750-900 and $ 1,400-1,500 respectively depending on the individual member of the group. While the actual increase in freight rates would differ from shipping line to shipping line depending on a number of factors — including performance of an individual company, its frequency of operations, timings, etc. — the proposed increase would result in increased shipping costs to Europe.
As shipping cost is an in-built expense of all foreign trade, the bulk of which is sea-bound, the costs of all exports from and all imports into the country would be more expensive. The increase in shipping costs of exports is feared to render Pakistani exports incompetitive in the international markets while it would push the costs of all imports the ultimate victims of which would be the consumers within the country.
The heavy dependence on foreign shipping lines is already costing the country as much as $ 2 billion a year and in case of US attack on Iraq it is feared to increase sharply to make an already bad situation even worse. The heavy dependence on foreign shipping lines is feared to make dictate their own terms regarding the price at the best or stop serving the country at its worst if there is a war in the region.
A war in the Gulf, the region through which Pakistani conducts its foreign trade to the US and Europe, would not only mean increased freight rates but also increased insurance premiums pushing shipping costs to uneconomic levels. On the one hand it would render Pakistani exports incompetitive in the international markets and on the other it would increase costs of imports for a country heavily dependent of all types of imported good, be it raw, semi-finished or finished products.
Talking to PAGE the chairman of Standing Committee on Ports and Shipping of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Capt. Abdul Rashid said that in case of any eventuality in the region the premium on extra-war-risk cover already imposed after 9/11 would increase drastically. "At present the rate of premium on extra-war-risk stands between 0.01 to 0.025 per cent of the Hull & Machinery value which if case of a war would increase sharply to 0.25 per cent to deliver a fatal blow to entire foreign trade of Pakistan.
"The hull and machinery value of vessels serving the country range anywhere between $ 5 to $ 25 million. This means that the cost of extra-war-risk premium for hull and machinery valued at $ 25 ranges between $ 2,500 to $ 6,250 at the current rates of 0.01 and 0.025 per cent at present. In case of war the cost of extra-war-risk premium alone is feared to drastically increase to 0.25 per cent of the hull and machinery value to touch extremely and absolutely unaffordable $ 62,500 — at last ten times than today.
"As insurance costs are an in-built part of all foreign trade a war in the region would take an extremely adverse toll on the economy of the country — by pushing the shipping costs to bleed the economy directly and by rendering entire foreign trade, particularly the exports, uneconomical.
"It is estimated that the country is already spending a huge $ 2 billion a year to cater to its shipping needs, almost all of which is claimed by the foreign shipping companies. In case of a war the shipping bill is feared to increase by as much as 10 per cent. The financial and economic impact of the war presents and extremely worrisome scenario."
Another troubling aspect is that insurance companies in Pakistan are forced to carryout the business as usual without the terrorism cover as foreign reinsurers are just not offering the cover anymore. They refused to include the cover in the new treaties since January 1, 2002 after the start of war in Afghanistan a couple of months earlier. Since then Pakistani insurance companies are operating without the terrorism cover and even the leading companies just don't have it though they have managed to offer it from their resources.
Expressing serious concerns about the situation Capt. Abdul Rashid said that God forbid if an act of terrorism does take place not only the local insurance companies would not be able to absorb the loss but it would also result in total closure of operations by the foreign shipping lines on whom the country so heavily depends for its foreign trade.
The former chairman of Insurance Association of Pakistan, M.I. Ansari, said that war would deliver a fatal blow to the Pakistani insurance industry because it would result in pushing the re-insurance costs to a level which would be uneconomical. "As is, the local insurance industry is reeling from low insurance rates, leakages and unethical undercutting practices."
The failure of the successive governments to accord shipping the status of an industry and the priority it rightly deserves has resulted to reduce the strength of national maritime fleet to bare 13 ships. The only shipping company, the Pakistan National Shipping Corporation (PNSC), today has just 13 vessels, compared to 71 ships 33 years ago, the majority of whom have long past their economic life ready for scrap within next couple of years.
On the contrary, the number of merchant navy officers has increased from 2,280 in 1970 to around 12,000 at present. The PNSC is able to absorb just about 3000 merchant navy officers while a sizeable number of the rest of the officers were able to secure jobs on the foreign shipping companies. However, the 9/11 has worsened an already bad situation the ultimate impact of which is the closing of doors for employment on foreign shipping lines and loss in the foreign exchange earnings for the country on the other.
The General Secretary of Pakistan Merchant Navy Officers Association (PMNOA), Sheikh Muhammad Iqbal said. "In the post 9/11 world some 5,000 Pakistani seafarers were able to found employment of foreign shipping lines. However, stricter visa regulations by the US, European Union countries, Singapore, and other countries have closed doors for Pakistani seafarers and at present just about 1,000 seafarers have somehow managed to save their jobs.
"The foreign shipping lines are extremely reluctant to hire Pakistani seafarers because it means extra costs for them. Having a Pakistani seafarer onboard means additional costs for a foreign shipping company. For instance, in the US all ships having Pakistani seafarers are berthed 3 miles off the coast and special investigation teams then visit it demanding a security plan from the captain. This results in unnecessary delays to begin with. Later, when the vessel is allowed to be berthed the owner of the vessel is required to keep 2 American guards round the clock, the cost of which could be anywhere from $ 2,000 to $ 10,000 depending on the duration of the vessel. The US authorities do not allow any shore leave to Pakistani seafarers. The cost and inconvenience of hiring Pakistani seafarers is discouraging foreign shipping companies to affectively close the doors of opportunities overseas which is a great national loss."
Iqbal also blamed the continuous uneconomic increase in retail prices of petroleum and products in the country on high freight rates charged by the PNSC despite its inability to perform. "Pakistan has a secured cargo of about 7 million tonnes of crude, 18 million tonnes of petroleum products and about 8 million tonnes of bulk cargo for the Pakistan Steel Mill. In addition, 3 million tonnes of urea also make a part of the secured cargo. These quantities of secured cargoes just cannot be transported by the Pakistani flag ships since we do not have any bulk carrier for the Steel Mill or fertilizer. There is also just no ships in the national maritime fleet to carry petroleum products except an old Tanker M.T. Jauhar which is tied up at Dubai port for repairs, surveys and dry-docking for last two months.
"The inability to perform, however, has not discouraged PNSC to charter another tanker during last many months without floating any tenders at exorbitant rates. In April 2001, the President gave the permission to import crude oil for national refineries to the PNSC at the meeting of the Economic Coordination Committee on market, or AFRA, rates. However, the PNSC in connivance with the Ministry of Petroleum transported the crude more than double the AFRA rates- $ 7 per tonne instead of $ 3 per tonne. The inflated freight cost has thus pushed the retail prices the ultimate impact of which is borne by the consumers.
"The matter was taken up by the PMNOA and just a few days before the October elections last year the President took a notice allowing the PNSC to continue transporting the crude at AFRA rates +34 WS (World Scale) meant to cut the malpractice by restricting the premium by only 33 per cent instead of more than double as seemed fit by the PNSC. However, the PNSC flaunted the order by increasing the already high freight costs by an additional 33 per cent. The inflated freight costs is one of the major cause of pushing the petroleum prices to uneconomic and unaffordable levels in the recent years."
The clouds of war in the region is feared to push oil prices across the world. However, for a country like Pakistan heavily dependent on imports and foreign shipping lines the cost would be much more greater. The absence of national maritime fleet and dependence on foreign shipping lines which would be able to dictate their own terms in case of a war are feared to result in unproportionally high increase of petroleum and products to sent shock waves through the national economy.
In a world where nothing moves without oil the increase international prices would play a havoc on all economies the impact of which differ from national economy to national economy depending on how strong it is. For a developing export-lead economy of Pakistan increased oil prices in addition to high freight costs would push the retail prices of the product to render exports incompetitive and imports unaffordable to the people in Pakistan.
While we can not stop the US to attack Iraq, the relevant authorities can devise affective policies to ensure that freight costs of oil imports is not inflated to keep the retail prices in check. It is also the time that the relevant authorities come up with long term plan to accord shipping the priority it deserves in the greater national interest of the country. Failure to develop a strong national maritime fleet would keep bleeding the economy and the dependence of foreign shipping lines, particularly in case of an eventuality in and around the region, would keep on pushing the freight costs.