Indian shipping Tonnage – The way forward

Saggi

Different objectives: Flag states have different objectives to augment their shipping tonnage. Package of registry needs to serve the intended object of the flag state. It must also incentivise ship owners to flag their vessels in their registries.

Motivation of open registries: Open registries like Panama, Liberia, Marshall Islands etc are all small nations. Ship registry fees and charges for various certification to ships and seafarers form substantial part of their country’s GDP. They attract tonnage by offering low or no tax regime to ships under their flag. They also offer full freedom to their ship owners to employ crew of any nationality, have their vessels classed with any classification and cover their vessels for hull and machinery and third party liabilities by any insurance company of their choice. Ships under open registries can be managed and operated from any location in the world. Flag owners need to only have a post box in the registered flag.

Objective of Singapore and Hong Kong Registries: Singapore, Hong Kong and some other similar flags have large shipping fleet. Owners are required to have offices in these countries This opens up employment opportunities ashore. Also the service providers in the country get an opportunity to serve the registered vessels and seafarers working on the flag vessels. Owners are attracted to such flags due to tax benefits, efficient services and high flag reputation.

Norwegian International Register and offshore registries:  Norwegian International Register and some other similar offshore registers have been created by West European nations. Due to restrictive national laws, the owners under these flags were flagging out their vessels to open registries.   To retain the national tonnage under their flag, more freedom of operation was offered to such vessels. They are also offered substantial tax benefits subject to compliance of certain obligations w.r.t. employment of flag nationals etc. Owners are attracted to such flags due to comfort of quality flag, operational freedom and tax incentives.

State owned tonnage : Countries like China keep large fleet, mainly state owned, under their flag, to meet their EXIM trade demand and strategic needs, create employment opportunities on board and ashore. Flag patronises its vessels for carrying cargo controlled by Government. .

Indian Ship Registry – possible way forward: Augmentation of tonnage under Indian flag would create numerous opportunities to India, such as employment of seafarers on board, employment ashore in ship owning, manning, management & chartering, logistics, hull machinery & third party insurance, training, ship building & repair, growth of ancillary industry, ship financing, shipping agencies and maritime law firms to name a few. Last but not the least, own tonnage offers trade and energy security to the nation, specially in time of war or embargoes. It would also obviate monopoly exploitation in freight rates by large foreign lines, keeping the cost of our EXIM trade affordable, our logistics cost low and consequently our produce more competitive in domestic and export markets.

Raise share of Indian EXIM trade to 40 %: Share of Indian tonnage in our EXIM trade is barely 7 %. We can easily raise this share to 40 %, assuming that 40 % of our cargo is carried by exporting country vessels, 20 % by third country vessels and 40 % by importing country ships i.e. Indian flag vessels. India’s current EXIM trade in value, per annum, is estimated as 1000 billion USD. It is estimated that 70 % of our EXIM trade by value or around 700 billion USD is carried by sea route. On the conservative side, it can be estimated that 5% of this value or around 35 billion USD is spent as freight by EXIM trade. Indian shipping can easily target to capture 40 % of this share or around 14 billion USD. Present share of cargo carried by Indian ships is only around 7 % of EXIM trade or only around 2.5 billion USD is earned as freight by Indian flag vessels. If through policy intervention we can raise the share of cargo carried by Indian ships to 40% of EXIM trade, the estimated recurring saving in foreign exchange would be around 11.5 billion USD or 11500 million USD per annum. This does not include offshore services

Many fold increase in employment opportunities on ships and ashore: If share of cargo carried by Indian ships increases from 7 % to 40%, there is likely to be 6 fold increase in employment opportunities in all related services on board Indian ships and ashore.

Option 1 – Tonnage augmentation through subsidy: One way to financially incentivise more tonnage under Indian flag is through subsidising ship acquisition cost or interest subvention on loans taken for ship acquisition under Indian flag. However such subsidy would need to be budgeted. It is also difficult to estimate the amount of subsidy required, as growth through such intervention cannot be estimated. More over shipping and allied services need to compete for budget allocation for this subsidy against more compelling budget demands for supporting farmers, have nots of society, education and infrastructure etc., which can be extremely challenging.

Option 2 – Tonnage growth though exemption / reduction of taxes: Alternative option is to exempt / reduce direct and indirect taxes earned from Indian shipping tonnage and shipping related services extended to Indian ships. Since the Indian shipping tonnage is minuscule, not even 1 percent of global shipping tonnage, the revenue from such direct and indirect taxes is negligible, which can easily be forfeited by the nation for its larger good. As the Indian shipping tonnage grows, the loss of revenue from tax exemptions proposed would also increase substantially. However this loss of revenue in future is notional and it need not be budgeted. Clearly this is a far better option. Moreover what is proposed for exemption or reduction is first tier of direct and indirect taxes to attract more investment under Indian flag. Since there will be substantial investment and increase in income and consumption due to multiplier effect of augmented tonnage on GDP of the nation, direct and indirect taxes collected from second and subsequent tiers would more than offset the notional revenue loss from exempted or reduced taxes for first tier.

Long term contract of carriage: If contract of carriage are for long years, preferably over ships life, by reputed charters, shippers or consignees, the employment for the ship is assured for its life. With such contract in hand, a ship owner can negotiate much more competent rates of interest from lenders as ship financiers feel comforted that principal loan and interest repayments by ship owner would be honoured. As we all know, shipping by nature is a cyclic industry. Cost of ship acquisition along with freight and chartering rates fluctuate wildly. This fact inhibits long term contracts In shipping. However if freight rates or charter rates are linked to a relevant index for the concerned type of ship in the relevant operational area, both parties to the contract remain comforted. Such shipping contracts can be considered by all concerned and encouraged through policy interventions.

Other benefits of larger Indian tonnage: Additionally There are numerous multiplier effects of Indian tonnage growth such as trade and energy security specially in time of war and embargoes, rationalisation of freight for India’s EXIM trade, prevention of exploitation by foreign flags, reduced transaction and logistics cost, more competitive prices for Indian exports, massive savings of precious foreign exchange and huge capacity building in various associated services rendered to a large Indian shipping fleet. Man power trained in such services can also seek employment on foreign flag ships and on foreign shores. Classic example is the growth of Indian seafarers. Since the seafarers were initially trained on Indian flag ships, many were offered and opted to work on foreign flag vessels. Today 90 percent of our seafarers work on foreign ships. This is a big source of employment and remittances for the country. Likewise, more banks and financial institutions can gain experience and expertise in funding ship acquisition, which can then be used to fund acquisition even under foreign flag. Similarly the capacity building would be created in the country for law firms, chartering, Insurance companies, ship building, ship repairs and many other services related to shipping. These service providers would not only restrict their services to Indian flag but reach out to the whole world. Also the personnel trained in offering these services to Indian shipping could seek employment anywhere in world, increasing the influence of India and Indians in the shipping sector, like what we have seen in IT industry.

Tonnage acquisition through BBCD: We need to encourage Indian flag tonnage augmentation through ship acquisition using Bare Boat cum Demise Charter(BBCD) route. Under this,  the operator takes over full control of the vessel but the ownership rests with previous owner till full payment of principal and interest is paid. Main advantage of such acquisition is that tonnage under Indian flag or controlled by Indian nationals can grow fast,  as payments for ship acquisition in such deals is spread over 10 years or so. Basically BBCD operators pay as they earn. This can easily be made workable, if ships acquired through BBCD remain gainfully employed. Large country like India generates massive cargo volumes. Policy and planning interventions can make such acquisition viable. Even if such vessels cannot be registered under Indian flag, full or at least part of the benefits extended to Indian flag vessels can be extended to Indian companies owning vessels under BBCD,  as the multiplier effect of such tonnage is similar to that of Indian tonnage.

Extend proposed benefits to all or introduce Indian international register: Above proposed benefits can be extended to all vessels under Indian flag. If same is not possible there can be two registries ie Indian National Register with part freedom of operation but larger tax and cargo support and International Register or Offshore Register with more freedom to operate, more tax support but cargo support only if suitable national flag vessels are not available. Again, International or Offshore Registries under Indian flag would offer benefits similar to national tonnage. Freedom of operation can be linked with a quid pro quo to the nation.

Link tax benefits  to serving national interest: Tax exemption or reduction can linked to buying India built vessels, repairing vessels in India, employing Indian seafarers, using Indian class, using Indian banks for ship financing and using Indian insurance companies for hull machinery and third party liability cover and using many other similar shipping services provided by Indian companies.

Reduce cost of regulatory compliance but maintain quality of flag: Regulatory regime for Indian flag or Indian owned ships for ship registry, ship survey and certification, seafarers training, assessment and certification and other related maritime services need to be at par with international shipping services and bench marked against the best flag services offered. Same can also be made more facilitative by out sourcing same to competent agencies but under oversight of concerned regulatory authorities of flag to reduce cost of compliance under Indian flag but adding value to quality of Indian flag. No ship owner would risk port state detention by flagging vessels in substandard registries.

Marketing of Indian flag: All new initiatives need to be marketed passionately to internal stakeholders and policy makers to implement the proposals. Once in place, a professional agency needs to be hired to market same to prospective ship owners, mainly high lighting the fact that how Indian register is better than others. Main tool in our hands, to attract a large tonnage under our flag is our large and young population, growing GDP,  high consumption and growing EXIM and coastal trade, which can assure employment to flagged vessels.

Tonnage augmentation under Indian flag, a win-win deal for all stake holders: it’s obvious from above that tonnage growth under Indian flag is indeed in larger interest of the country and all stake holders. It can also be achieved easily through low risk but high return policy interventions.

Marex Media

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Capt MM Saggi (photo and details take from Look Seaward)