Foreign fleet owners may gain as India allows state-run firms to hire ships directly

Foreign fleet owners may gain as India allows state-run firms to hire ships directly

Policy tweak gives govt departments, state-owned firms freedom to make own shipping arrangements for imports without routing their needs via Transchart

An Indian cabinet decision to decentralize shipping arrangements for import of cargo owned/controlled by government departments and state-owned firms will remove an assured business opportunity for local fleet owners. It will allow foreign-registered ships to corner a larger chunk of cargo such as crude oil, liquefied petroleum gas (LPG), liquefied natural gas (LNG), thermal coal, coking coal and fertilizer.

The decision ended a five-decade-old policy that mandated government departments and state-owned firms, when importing cargo, to make their shipping arrangements through Transchart, the centralized ship chartering wing attached to the shipping ministry.

That policy gave first preference to Indian ships to move cargo into India, provided they matched the lowest rates quoted by foreign shipowners when Transchart called for price quotations. This system was designed to provide cargo support to Indian ships.

From now on, government departments and state-owned firms will have the freedom to make their own shipping arrangements for imports without the need to route their requirements through Transchart.

The cabinet took the decision in the wake of demands from some quarters for permission to organize their own shipping arrangements and help them take quick decisions to efficiently manage their cargo supply and logistics.

While allowing government departments and state-run firms to hire ships on their own, bypassing Transchart, the cabinet said these entities will have to continue with the practice of importing dry and liquid bulk cargo on a so-called free-on-board (f.o.b) basis, whereby the Indian buyer has to take responsibility for shipping the cargo. This was a comfort given to Indian fleet owners so that they could still harbour hopes of getting a portion of this assured business, running into millions of dollars annually, providing a much-needed comfort in a battered freight market.

If the entities importing the cargo finalize their contracts on a so-called cost, insurance and freight (c.i.f) basis, such deviation from the policy stipulation will have to be approved by the shipping ministry. In the case of c.i.f deals, the task of shipping the cargo rests with the overseas seller because it is part of the supply contract.

But in the case of project cargo, heavy lift cargo, container cargo and other break bulk cargo, the cabinet gave freedom to government departments and public sector units to import such cargo either on f.o.b or on c.i.f basis. Prior approval from the shipping ministry is not required even when these entities opt for the c.i.f contracts.

The cabinet decision also marked a large-scale relaxation of the policy, which, so far, was done on a piece meal basis.

In 2007, the cabinet allowed Indian Oil Corp. Ltd (IOCL) to arrange ships on its own for bringing imported crude without taking the help of Transchart.

Similar exceptions were subsequently granted to other state-run refiners Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd. State-owned steel-makers Steel Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd (RINL) were also granted permission to hire ships directly for importing raw materials—mainly coking coal—without the mandatory policy requirement of doing this through Transchart.

The latest cabinet decision will cover firms such as NTPC Ltd, Mangalore Refinery and Petrochemicals Ltd (MRPL), MMTC Ltd, State Trading Corp. Ltd, Coal India Ltd and state-run fertilizer firms, among others.

The stipulation to continue buying dry and liquid bulk cargo—which forms a big part of the overall government owned/controlled cargo—will not give Indian fleet owners the kind of comfort intended by the cabinet. The earlier relaxation in policy given to IOCL, BPCL, HPCL, SAIL and RINL has proved that overseas cargo sellers would tailor price quotations in such a way that the Indian buyer will find c.i.f deals more attractive in terms of price than f.o.b deals during tendering. This is particularly so in the case of overseas suppliers having a dedicated shipping fleet such as oil exporters in West Asia who are known to offer cheaper rates if they are also allowed to take responsibility for shipping the crude oil sold.

Importers cannot be faulted for buying on a c.i.f basis as prices tend to take political overtones. As a result, the f.o.b. stipulation had to be waived in favour of c.iff deals in many cases.

Besides, there will be government entities such as the department of fertilizers that don’t have the expertise to make their own shipping arrangements. To get a grip on this task would take a while. For them, the government has said the services of Transchart will be available till 31 December 2015.

But what about those who don’t want to do this task at all by themselves?

In the new policy, the shipping ministry will don the role of approver (not Transchart) for c.i.f. deals when such requests are filed by the importing entities with the backing of their respective administrative ministries or departments. This has its own pitfalls and can hardly be cited as an improvement towards ease of doing business.

Local fleet owners have been lobbying the government to introduce a cargo reservation policy by issuing a directive to state-run firms to set aside as much as half of their annual cargo (raw materials) to be transported exclusively on Indian-registered ships. Such a move, they argue, would provide them a minimum level of employment and assured business during these unprecedented times.

To support their cause, local owners point out that the share of Indian ships carrying Indian cargo have fallen below 10% from about 40% in the 1980s. The government has ignored this plea.

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