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Indian Shipping – Meeting the Challenges of Globalisation
(By R.L.Pai)

 

R.L.Pai

Mr. R.L. Pai, a marine engineer by qualification, has been associated with the shipping industry for over 39 years. He served with the SCI between 1963 and 1981, in senior management positions at head office. In 1981, he joined L&T to set up a new shipping operation, where he spent the next 13 years as chief executive of a business group managing a fleet of modern bulk carriers.

In 1994, the Reliance Group invited him, to work on the project planning, development and commissioning of a new grassroots refinery at Jamnagar. He continues to be employed with Reliance as Group Senior Vice President and is involved in corporate logistics for the group companies. He is also director of Reliance Ports & Terminals Ltd., India’s largest oil terminal, which owns and operates the infrastructure facilities for marine, road, rail evacuation and tank farms attached to the refinery and petrochemicals complex at Jamnagar.

He has been on the board of directors of INSA (Indian National Shipowner's Association) since 1987, and was elected President of the association in 1993-94. He was re-elected Vice President of INSA in 1999. He represents Reliance as well as the shipping industry on the boards of several shipping organisations and at various national, international and government forums.

In this paper Mr. Pai presents an overview of the development of shipping in India since independence and what ails this industry presently. The connection with glorious past of shipping has been effectively dealt with. The views expressed in this article are Mr. Pai's own and do not reflect the policies of his employers or organisations he is attached to.

Among the many achievements in the glorious past of our country, our maritime tradition takes prominent pride of place. At a recent presentation made by the distinguished historian Dr Romila Thapar at Mumbai, we were taken on a spellbound journey through our maritime history. The Odyssey commenced sometime in the beginning of the first millennium and there were fascinating insights into the commercial acumen, the trading instincts and the technological innovation of our forefathers. We learnt of the maritime and trading expertise that enabled them to effectively compete and trade even with far-flung colonies of the Roman Empire. Historical artefacts of these achievements are still found around our coast. An interesting facet of this saga was, that free trade and globalisation were not complex issues debated and negotiated at WTO-like forums, but were taken as granted in the milieu of the era. There was free exchange of currency interspersed with barter, based on sound principles of economics and commerce.  Administrators of those days were obviously men of vision who were pragmatic enough to understand the longer-term benefits to the national economy and proactively facilitated vibrant, unrestricted international trade.

The inevitable question that one will ask is, whether the technology and commercial sophistication we boast of in our present world is a progression or have we made our lives and businesses redundantly complex? Whatever the answers to these philosophical conundrums, the fact of the matter is that we can scarce afford to continue to bask in our glorious past, and must come to accept that the process of globalisation and integration into the world economy is an inexorably irreversible process. On it will depend the pace of our GDP growth and the creation of better opportunities for our citizens.

In the first five decades of the post-independence era we have had the tremendous task of catching up with industrial and commercial progress in the developed world. Our post-independence rulers deigned it expedient to set up a centrally planned economy with the state and its enterprises at the commanding heights. All economic planning revolved around the National 5-year Plans with policy guidelines and attendant controls that sought to prescribe the total model of economic growth. Investment and asset acquisition was closely administered and rationed to the Public and Private Corporate sectors. In the total scheme of things, it was the public sector that was given first preference both in investment opportunity and pricing. This inevitably led to a system of slots for investment licences and administered or controlled prices for a large range of goods and services.

With adequate potential in national demand and insular protection, there was little need to look at international competitiveness.  This often resulted in inadequacies or anomalies in the system, manifested in inefficient use of capital and resources, indifferent quality and cost structures that were not aligned with international realities. Governments and their administrations can seldom play the role of business entrepreneurs. It would be fair to point out, though, that despite the many deficiencies, the system did contribute to economic growth, albeit, at a moderate pace. It also helped in generating employment for a burgeoning population, although at some cost to productivity and accountability. During this period we were able to effectively build up large manufacturing enterprises with the state playing a major role in the process of capital resource generation.

This developmental model was also deployed in the shipping sector. In the first 4 decades after independence, the Indian flag fleet grew from 0.2m to 5.7m g.r.t. – A compounded annual growth rate of over 9%. This is remarkable when viewed in the context of our national GDP growth during the same period. As part of the 5-year national plan exercises, a TAC undertook a tonnage acquisition plan, to dovetail into the requirements of domestic and international sea-borne trade. Each cargo sector was broken down into sub-sets to arrive at the number and type of ships required. A clear reservation was made for the public sector and private sector companies were licensed to acquire a limited number and specific types of ships. Investment by new private sector corporate was restricted. Ostensibly, a company had to first demonstrate to government its ability to run a shipping business, before a restricted licence was granted.

Like with most other industries in the country, this perpetuated the infamous “Licence-Permit Raj”, with licences often being acquired with the sole purpose of pre-empting a business competitor’s opportunity. The specifications and performance parameters of ships acquired were also, of necessity, optimised to meet the limitations of Indian ports and conditions. Cargo preference was implicit for Indian flag with some premium on rates. The system worked well for the state as well as for investing promoters but ended up with the economy in general and the consumer or taxpayer bearing the cost of inefficiencies.

With huge budgetary deficits financed through public debt and overseas borrowings, the need for change in policy and direction became imperative. With the advent of economic reform in the early 1990’s, deficiencies in the system became apparent in the harsh light of fiscal reality. In shipping, while the CAGR of 9% in g.r.t. in the first four decades after independence was indeed impressive, in the next 13 years to 2001 the comparable growth rate has been a dismal 1.5%.

Obviously, the central planning and control model of the first four decades turned out to be woefully inadequate in a global competitive environment. To better appreciate the challenges we face in coping with and exploiting globalisation, we would do well to examine some of the issues that contributed to this decline:

         The system encouraged subsidised finance and high gearing ratios without commensurate corporate accountability. Balance sheets of many shipping companies showed up serious weaknesses, with some becoming sick and in need of state financed bailouts. Quite a few sank.  

         Central planning of ship acquisition based on life-cycle projections showed up its inherent inadequacies in the dynamic world of international shipping with commercial and technical obsolescence cycles becoming ever shorter.

         The rigid system of licensing and controls inhibited the more progressive companies in exploiting the potential of asset trading as a legitimate means to profits and balance sheet enhancement.

         Over-dependence on domestic business created complacency and did not encourage managers to build up skill sets in marketing and international business practice.

         Inadequate infrastructure and inefficient port facilities resulted in the unsustainable situation of demurrage contributing a significant proportion of a shipping company’s revenues and profits – at the cost of the consumer.

         Poor ton-mile utilisation of assets and unproductive deployment of capital employed was endemic in many sectors.

         End users of shipping services were afforded little opportunity to optimise logistics strategy due to limitations in the type and capacity of available ships in the Indian fleet.

         Administered prices for some products and services created gross inefficiencies in the system. Cost structures tended to be non-transparent and were absorbed into pools or fed through subsidies. The economy and consumers paid the price with little benefit to those for whom such subsidies were intended.

         Ships designed for domestic port conditions found it difficult to compete in international cross-trades.

         Some provisions in the statutory and regulatory regime were (and continue to be) anachronistic and a throwback to restrictive policies imposed by our colonial rulers.

         Protection through licensing led to management complacency. Ironically, in some cases it was government that did the marketing for business.

With the progressive maturing of our economy, globalisation is no longer a matter of choice but a compulsion. It is the pace and effectiveness at which we are able to adapt into this ethos that will eventually determine how successfully we evolve and integrate into the world economy. Globalisation implies many things, but foremost among them is free trade. While economists will disagree on most issues, there is one on which they are almost unanimous i.e. free trade is always better than protection. The proposition that follows is that protection does not pay.

The main argument for free trade is based on one of the oldest theories of economics - the leveraging of competitive advantage. Put into effect, what it implies is, that in an increasingly inter-connected global system of input souring, manufacturing and services, each nation will do well to leverage its unique competitive advantages to be able to effectively trade its goods and services with other countries or sectors that are less competitive. There are innumerable examples of this theory put into practice. Globally based multinational corporations have long honed the skills of optimising the costs of goods and services they sell through sourcing inputs and production processes from geographically diverse sectors that give them the greatest economic advantage. International logistics management is a key arbitraging factor in the success of such strategy. This is where the cost efficiencies of ocean transportation step in.

India, though not a global player in ship owning, has over several decades built up certain niche competitive advantages in the maritime sector. This is perhaps, more an issue of circumstance rather than design or policy. Let us look at some of these:

       For decades, we have continued to provide the world’s best-qualified and skilled seafarers, which now stand at 21,000 officers and 43,000 ratings.

       Our training institutions and systems are reputed to consistently turn out quality personnel in all facets of management and operations.

       We have demonstrated world-class management skills in technical, operations, commercial and financial disciplines.

       Proficiency in English language and communication skills presently gives us clear advantages over other Asian competitors.

       Premier technical universities ensure that our expertise in Naval Architecture, engineering and ship design is state-of-the-art.

       The impressive safety record of the Indian fleet matches that of major maritime states.

       World’s leading shipping companies employ Indian managers and other shipping experts as a preference of choice.

       Significant presence in world economic and regulatory forums provides India with strategic clout in the maritime and trade sectors.

With all these apparent advantages, what is it that inhibits the growth of our own national fleet? Foremost is the fact that besides the administrative Ministry of Shipping there is little national recognition of the potential that can be exploited from these competitive strengths. Our fiscal regime treats shipping no differently from other manufacturing or service industries. It does not need reiterating that if an industry has to globally compete, it must be provided a globally level fiscal and operating environment that is at least equal to that of the competitors.

International shipping is a prime example of classical economic theory at work. International freight rates are truly market driven and governed almost solely by the balance of supply and demand. Any cost input handicap of an individual player puts him automatically out of the competition or in a position of lesser profitability. Attrition levels, therefore, are high.

Specifically, then, what are the challenges we face in enhancing our global competitiveness? This is not just a task for industry, but also calls for concerted national teamwork of industry, government, service providers, port sector and users. To sell our products and services we obviously must learn to compete. Shipping while being a significant link in the chain of international trade has to play the role of cost efficient and reliable service provider. How should we approach this challenge at a national level?

           Foremost, is recognition by all sectors of government of the role of national shipping in our domestic and international trade towards the process of globalisation and integration into the world economy. This calls for attitudinal changes that perceive matters in longer-term perspectives that go beyond the annual budgetary rituals of revenue generation.

           Some sectors of sea transportation such as energy lifelines, coastal movement and offshore oil exploitation are strategically sensitive to a maritime state. In these areas, globalisation has to be confined to achieving globally competitive prices, with nationally owned or controlled assets.

           Capital costs represent 50-60% of a ship’s break-even daily rate. Weighted Average Cost of Capital (WACC) is high to Indian shipping companies, for various reasons many of which are within the control of government or regulators to alleviate. The imposition of withholding tax on external commercial borrowings is a typical case in point – it is not the overseas lender that bears these costs but the economy.

           Fleet build-up and renewal is a continual process towards maintaining competitiveness and quality in services with profitability. A significant part of capital for growth and development has to come from internally generated resources. The taxation regime must facilitate this fundamental vehicle for growth.

           Investor perceptions are reflected in the P/E ratio of a scrip. Raising resources from capital markets is an intensely competitive business and is driven largely by the perceived image and future revenue potential of a specific sector. Investor perceptions are modified only through changes in fundamentals – i.e. improved profitability with higher retained earnings geared towards growth.

           It is indeed a dichotomy, that while we provide the highest quality manpower to world shipping, we cannot retain enough of them for our own fleet on account of skewed personal taxation policies. Clearly, this is a task for government to recognise and set right.

           Mega projects that depend upon movement of large volumes of bulk goods have necessarily to be coastal located. Advanced maritime countries fully recognise and continue to exploit the advantages of water-borne movement. Our infrastructure policy must leverage the commercial advantages of coastal trade.

           Exploration and production of offshore oil and gas resources will play an increasingly important role in our energy deficient economy. There is vast potential and challenge for shipping in this sector.

           Despite recent setbacks in new power generation projects, energy shipping such as LNG has great future potential. The shipping industry must understand that it is one important link in the total chain and must play its supportive role as a cost-effective service provider. It is essential to remember that one player in the chain cannot expect a higher return on capital than its other team players.

           State monopolies in the ports sector continue to inhibit projects that wish to derive advantage from the economies of scale. A case in point is the inefficiency of crude and petroleum product handling at our ports. The cost of poor capacity utilisation of ships is eventually passed on to consumers. Port privatisation and corporatisation is one effective way to achieve better productivity with accountability.

           Managerial skills and systems in Indian companies have traditionally tended to be more domestic oriented, as this has been the main area of operations. Mindsets and attitudes need to change towards developing global competitive perspectives.

           Trade unions have to contribute in this effort to work in unison with ship owners to reduce manning scales and raise productivity to international levels.

           As an industry we tend to exhibit inertia to technological change. We must learn to more effectively use the new tools of information technology, communications and networking.

A major challenge to a country which accounts for a sixth of the world’s population and with ambitions to become a global player, is to cease revelling in its past achievements and continually maintain and leverage the longer term potential of its competitive advantages. This needs objective introspection to identify weaknesses and metamorphose them to strengths. We already possess the basic skill sets and inherent strengths to effectively exploit the opportunities that globalisation of world trade provides. We need to learn to leverage these strengths. To leapfrog in growth we need to look beyond our shores and have the ambition to become global players on our own merit in the example of our enterprising compatriots in the Information Technology industry. It is perhaps only then that we can again take pride in being a world-class maritime player in the glorious traditions of our ancestors.

 

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