A new PSU isn't the answer

Government needs to rethink fleet expansion strategy

A lot has been written about India’s burgeoning freight costs and what must be done about them. Experts warn that the country, which incurred freight costs of $85 billion in 2019-20, will see that figure rise to about $400 billion by 2047. What rankles even more is that all this money is being paid out to foreign shipping companies. So now, public sector undertakings (PSUs) in the fields of gas, oil, coal and fertiliser are being asked to leap into the (for them) uncharted waters of shipping by floating their own shipping company. Once more policymakers seem to be going back to the old and tested remedy for any financial or managerial problem: Start another PSU.

The first point to be considered is whether a new company, whether government or private, will actually result in the reduction of freight costs. The plain answer seems to be a resounding no. Freight is a function of the market and freight rates are determined by the forces of supply and demand. It is true that you will be offered different freight rates depending on whether you access the spot market or go in for a long-term charter. There are pros and cons attached to both. But in either case, a government company is unlikely to offer a lower rate than that dictated by the market.

What upsets most people is that we pay freight to foreign companies in foreign exchange. Critics argue that this money should instead go to homegrown companies flying the Indian flag. These companies too will be paid in foreign exchange but the exchange so earned will come back to the country. With foreign exchange reserves now standing in excess of $650 billion, it seems a little odd to form a new government company simply because you want to save foreign exchange. It would be more sensible to ask for greater efficiency, lower freight rates, and quicker turnaround time.

The other concern would be that India already has a PSU in the shipping sector, which is, in fact (in terms of ships and tonnage owned), the largest Indian shipping company. But for the last several years, the Shipping Corporation of India (SCI) has been on the block for privatisation. For one reason or another, this has been delayed. However, news emanating from official circles after the election results reiterates the government’s firm commitment to proceed with the privatisation of SCI. So, why sell one government company and start another one in the same field?

Several commentators have pointed out the difficulties that a new company charged specifically with catering to the import needs of PSUs in the crude oil, fertiliser and gas fields would face. For one, in much of our oil imports, the seller gets to nominate the carrier. There is no guarantee that they will choose an Indian-flagged vessel. In fact, the chances are that they will not, especially if their agents or they themselves own ships. Even if we get the nomination, our crude carrier would have to go on ballast (empty) to the load port, thus making the operation much more expensive.  Uni-directional traffic is, by very definition, uneconomical and would seriously affect the company’s bottom line.

The problem really is that, with about 1,500 large vessels, the Indian fleet is still very small. In niche areas like containers, for example, it is almost non-existent. Experts agree that a country with a sufficiently large tonnage under its belt is usually able to secure lower freight costs. The very size of the fleet ensures that market forces work in its favour. The only question is whether the larger fleet should come solely through state investment.

One largely forgotten initiative that the government took to grow the fleet as far back as in 1959 was the establishment of the Shipping Development Fund (SDF). The SDF extended loans at highly concessional rates to shipowners to help them acquire ships. From its inception until it was wound up in 1987, the SDF extended loans to the tune of ~1,452 crore to the shipping industry, of which nearly half went to the private sector. The effect of the loans provided by the SDF was almost magical. From a size of 0.75 GRT in 1959, the Indian fleet reached close to 6 million GRT by the end of the 1970s. 

With a little fine-tuning, this method could be tried again. This time, lending for this scheme should come from banks, while the government’s contribution should only be to defray the interest costs to the shipowner. Not only does this ensure a much lower budgetary outlay, but project appraisal is now with the bank that has the necessary expertise to do this rather than the government that does not. This should greatly reduce the incidence of bad loans.

Other reforms could include scrapping the preference given to small enterprises owning only one ship. During industry downturns, these single-ship companies often become the first casualties, and their lack of other assets makes recovery difficult. The policy should prioritise those most likely to succeed regardless of their size. It should also ensure that the choice of which yard to buy from must be left entirely to the shipowner. It must not insist on ships built only in Indian yards or with Indian raw material like steel or electronics or engines. The objective of the scheme is to grow the flag and not to support local shipyards or suppliers.

The Golden Age of Indian fleet expansion has never been repeated, and subsequent growth has been tepid. Of course, there are also other reasons at play, but for policymakers the moral of the story is that starting a new PSU is not necessary to expand the fleet. A sound financial policy that supports all owners, private and public, is likely to be more effective.

The writer is former shipping secretary, Government of India