Will clar­ity pre­vail on Cabotage this time?

The govern­ment’s fo­cus is to im­prove trans­ship­ment sce­nario at Indian ports to save on lo­gis­tics cost for EXIM trade. And for­eign car­ri­ers are also keen to put Indian ports on the world map of trans­ship­ment hub ports. How­ever, due to the am­bi­gu­ity and lac

Maritime Gateway - - Contents - by Sisir Prad­han

Due to the am­bi­gu­ity and lack of clar­ity in the cabotage pol­icy, con­tainer han­dling ports and ter­mi­nals are shy­ing away from trans­ship­ment, and EXIM trade be­ing dy­namic in na­ture, no port and ter­mi­nal op­er­a­tor is sure of achiev­ing 50 per cent trans­ship­ment tar­get Y-O-Y.

With re­ports of Indian cabotage pol­icy un­der re­view, the de­bate has once again resur­faced whether In­dia should or shouldn’t al­low for­eign flagged ves­sels to ply on Indian coast. The most re­cent gen­eral or­der from the Indian govern­ment was an­nounced in March 2016 which states that in case of con­tainer tran­ship­ment ports with com­pli­ance of cer­tain con­di­tions could be al­lowed to handle for­eign flagged ves­sels, and the for­eign flagged ves­sels can trans­port EXIM and empty con­tain­ers from the tran­ship­ment port to any port in In­dia and vice versa. But even af­ter 2 years since the rul­ing came into force, there are hardly any tak­ers from the port and ter­mi­nal seg­ment. With the govern­ment’s fo­cus on lower cost of lo­gis­tics for man­u­fac­tur­ers which can dras­ti­cally im­prove Indian ex­porters’ com­pet­i­tive­ness in the global trade arena.

In­dia due to lack of tran­ship­ment ports, to a large ex­tent is de­pen­dent on hub ports in neigh­bour­ing coun­tries for the move­ment of its EXIM cargo where con­tain­ers are moved to Indian shores on smaller (feeder) ves­sels, and vice versa. Though many Indian ports have reg­is­tered sig­nif­i­cant growth in con­tainer­ised cargo vol­ume and have in­fra­struc­ture at par with their global peers, the ques­tion arises what keeps them away from tak­ing a plunge into the lu­cra­tive tran­ship­ment seg­ment. The rea­son is there is a trick off the sleeve, and here there are more than one, which ports are find­ing hard to deal with.

Un­like the rul­ing of 2015 which had very clearly men­tioned that for­eign flagged Ro-ro, car car­ri­ers, LNG ves­sels, project cargo car­ri­ers etc. af­ter ob­tain­ing statu­tory clear­ance can ply on Indian coast for a pe­riod of 5 years com­menc­ing from the date of is­sue of the or­der, on the con­trary the 2016 rul-

ing lacks sim­i­lar clar­ity.

Why the change in law?

In 2016, when the change in cabotage pol­icy came into ef­fect, the pol­icy mak­ers ar­gued that the cabotage re­lax­ation will en­able ship­ping lines to con­sol­i­date Indian EXIM and empty con­tain­ers at tran­ship­ment ports in In­dia for on­ward trans­porta­tion to des­ti­na­tion ports by main line ves­sel.

At a time when the govern­ment is con­fi­dent that the new changes will en­able the spare ca­pac­ity of the for­eign flag ships, which could not be uti­lized due to cabotage re­stric­tions, could be gain­fully uti­lized al­low­ing them to of­fer com­pet­i­tive con­tainer slot rates to ex­porters and im­porters lead­ing to com­pe­ti­tion led ef­fi­ciency in con­tainer trans­porta­tion and lower lo­gis­tic costs for ship­pers. How­ever, Indian ports and ter­mi­nals are not keen to take the ben­e­fit of tran­ship­ment and the rea­son for the jaded re­sponse is the ceil­ing im­posed by the law which de­picts that the con­tainer han­dling ports need to in­di­vid­u­ally ap­ply for cabotage re­lax­ation and the ap­pli­cant port should be able to trans-ship 50 per cent or more of the cargo han­dled in a year else the ben­e­fits will be re­voked, more­over, the port will not be able to gain the ben­e­fit of cabotage re­lax­ation for 3 years.

The said rul­ing has been a ma­jor de­ter­rent for con­tainer ports even in case of large ports which are clock­ing tran­ship­ment cargo be­yond 50 per cent. EXIM trade is volatile in na­ture, and no port and ter­mi­nal op­er­a­tor are sure of achiev­ing 50 per cent tran­ship­ment tar­get year-on-year. Mean­while, with the tran­ship­ment pol­icy fail­ing to gain mo­men­tum, the govern­ment has hinted at go­ing back to the draw­ing board and re­frame the pol­icy to pave a mid­dle path for all stake­hold­ers, es­pe­cially to gen­er­ate in­ter­est among con­tainer ports and ter­mi­nals.

Speak­ing about the pre­vail­ing pol­icy regime for cabotage, sources at Adani Port said that the law doesn’t have much to do with the ports, and ports handle cargo of Indian ori­gin as well as EXIM. Be­cause of the cap of 50 pe rcent tran­ship­ment, ports re­frain to ap­ply for cabotage re­lax­ation. The 50 per­cent tran­ship­ment rider is not a prac­ti­cal ap­proach for any port, and rarely any Indian port could meet the tar­get on a reg­u­lar ba­sis. Adani Port wouldn’t like to re­strict it­self by opt­ing for the pre­vail­ing cabotage re­lax­ation which has a rider of 50 per cent tran­ship­ment tar­get. The EXIM busi­ness is very dy­namic, and ports would like to keep op­tions open and de­pend­ing on mar­ket con­di­tions they might be do­ing tran­ship­ment or might not. Also a port doesn’t take a call on whether to of­fer tran­ship­ment and it largely de­pends on the net­work plan­ning of ship­ping lines. Hence, ports have lim­ited con­trol over tran­ship­ment cargo.

How the mar­ket re­acts?

The Indian fleet op­er­a­tors have pro­nounced to dump Indian reg­is­tra­tion if the change in cabotage law and re­vo­ca­tion of right of first re­fusal (ROFR) ben­e­fit ex­clu­sively avail­able to Indian flagged ves­sels, comes into ef­fect. Speak­ing on the mat­ter, Anil Devli, CEO of Indian ves­sel op­er­a­tors’ in­dus­try body Indian Na­tional Ship-own­ers As­so­ci­a­tion (INSA), told Mar­itime Gate­way, “There is no cabotage law in In­dia for ship­ping sec­tor and if we take the ex­am­ple of do­mes­tic air­line sec­tor pas­sen­gers don’t have the priv­i­lege to go for a for­eign air­line fly­ing between two Indian cities as a re­sult do­mes­tic air­line op­er­a­tors in many in­stances charge ex­or­bi­tantly. Even in case of rail­ways, a for­eign rail op­er­a­tor has to have an Indian reg­is­tered com­pany to move cargo in In­dia. But Indian flagged ves­sels couldn’t have mo­nop­oly be­cause for an ex­porters or im­porter if there is no avail­abil­ity of Indian flagged ves­sel, then the ex­porter has the op­tion to char­ter a for­eign flagged ship on the Indian coast."

There are enough Indian ships to take care of cargo and tran­ship­ment be­cause Indian con­tainer ves­sels have grown by 100 per cent in past 2 years, and Shreyas, Sima Marine In­dia, and TCI are the three coastal con­tainer ves­sel op­er­a­tors that con­nect to 18 Indian ports, in­clud­ing all ma­jor ports. But de­spite that Indian ves­sels are not get­ting enough cargo and on many in­stances ves­sel slots are not get­ting utilised and have to run empty, ex­plained Devli.

In a bid to cur­tail a do­mes­tic air­line like mo­nop­oly, the Indian govern­ment had come up with the ROFR pro­ce­dure to keep a check on freight rate, and cre­ate a com­pet­i­tive mar­ket. As per the ROFR pro­ce­dure, the cargo owner can get a quo­ta­tion for freight rate from a for­eign ship­ping line, and ask an Indian ves­sel op­er­a­tor to match the low­est price of­fered by for­eign ves­sel, also called as L1 rate. And if the Indian ves­sel op­er­a­tor de­nies to of­fer a cor­re­spond­ing tar­iff, then the cargo owner is free to hire a for­eign op­er­a­tor, and the prac­tise in there for decades.

Devli said that the Indian ves-

Cabotage should be re­laxed com­pletely. Be­cause it will fa­cil­i­tate clear­ing and ship­ment of EXIM cargo at Indian ports, and it will also ease the move­ment of empty con­tain­ers. As a re­sult it will trans­late to sav­ings for the ship­ping lines and Indian trade as well. If we make a peer-to-peer com­par­i­son, there will be an av­er­age sav­ings of 28-30 per cent in op­er­at­ing cost.

sels have to match the rate quoted by a for­eign ves­sel, whereas do­mes­tic op­er­a­tors didn’t stand on a com­par­a­tive ground due to higher ex­pense on each sail­ing ow­ing to taxes and other statu­tory re­quire­ments, such as IGST and ex­pen­sive bunker fuel. Devli re­it­er­ated that Indian ves­sel op­er­a­tors have been de­mand­ing be­fore the govern­ment to pro­vide a level play­ing ground so that do­mes­tic ships could com­pete or the for­eign ves­sels shouldn’t be al­lowed to op­er­ate on Indian coast at all.

Mean­while, Capt. Deepak Te­wari, CEO, MSC Agency (In­dia) ex­plain­ing the stand of for­eign ship­ping lines, said, “Cabotage should be re­laxed com­pletely along the Indian coast. Be­cause it will fa­cil­i­tate clear­ing and ship­ment of EXIM cargo at Indian ports, and it will also ease the move­ment of empty con­tain­ers. As a re­sult it will trans­late to sav­ings for the ship­ping lines and Indian trade as well. If we make a peer-to-peer com­par­i­son, there will an av­er­age sav­ings of 28-30 per­cent in op­er­at­ing cost.”

Speak­ing on less fa­vor­able mar­ket con­di­tion for Indian flagged ves­sels, Deepak Te­wari said, “Since in­de­pen­dence there is cabotage law in place but there isn’t much ben­e­fit to the trade due to it and do­mes­tic op­er­a­tors didn’t do enough in the past years. The larger in­ter­est of the trade shouldn’t be kept on stake to ben­e­fit one or two do­mes­tic con­tainer ves­sel op­er­a­tors. If the Indian op­er­a­tors feel at a dis­ad­van­tage they have the op­tion to reg­is­ter as a for­eign flagged op­er­a­tor. Pro­tec­tion­ism is lead­ing to in­ef­fi­ciency and higher cost for the trade. If the cabotage law is changed In­dia will be able to re­tain trans­ship­ment cargo out­flow to over­seas ports.”

Trans­ship­ment: Can In­dia pull it off?

A study by Ship­ping Min­istry re­veals that around a quar­ter of In­dia’s to­tal con­tainer vol­ume is trans­shipped through Sin­ga­pore, Port Klang but the ma­jor out­flow is through Colombo. No­tably, In­dia’s con­tainer traf­fic is ex­pected to touch 25MTEUS by 2025. In such a sce­nario, coun­try’s for­eign cur­rency out­flow will be sig­nif­i­cant. Also trans­ship­ment through a for­eign port in­curs ad­di­tional cost in terms of feeder ser­vice from Indian port to trans­ship­ment port and it also adds to the bur­den of mul­ti­ple han­dling costs.

All these fac­tors put to­gether, Indian port sec­tor is losing roughly `1,500 crore per an­num on trans­ship­ment charges. It fur­ther trans­lates to an es­ti­mated loss of `3,000-4,500 crore to the econ­omy based on the eco­nomic mul­ti­plier ef­fect of 2-3 times for ports on coun­try’s econ­omy. If we take an ex­am­ple of an Indian trader ex­port­ing a con­tainer to Europe, trans­ship­ment at for­eign ports like Colombo in­creases the lo­gis­tics cost by about `5,000-6,000 (roughly US$ 80-100) per TEU mak­ing the Indian ex­port less com­pet­i­tive in the global mar­ket.

In such a sce­nario hav­ing a trans­ship­ment hub port would very much be in fa­vor of Indian trade, and In­dia of­fer­ing cost-ef­fi­cient feeder net­work could at­tract main­line ves­sel op­er­a­tors. Cur­rently, the ca­pac­ity of Indian feeder net­work for a weekly ser­vice is about 5,100 TEUS, which is ex­pected to grow to about 8,300 TEUS by 2025 which may not be suf­fi­cient to ful­fill the de­mand. Hence, In­dia needs to open up its shores to at­tract in­ter­na­tional feeder net­work. Fur­ther­more, Indian coastal ship­ping costs are rel­a­tively higher com­pared to in­ter­na­tional stan­dards, and it needs to be ad­dressed to make Indian trans­ship­ment port com­pet­i­tive. An Indian trans­ship­ment port could also im­prove cargo move­ment to Africa, Europe and Easter Amer­ica, and act as a more eco­nom­i­cal al­ter­na­tive for the Indian sub­con­ti­nent, es­pe­cially by pro­vid­ing bet­ter feeder link­ages to Bangladesh and Myan­mar which are trans­ship­ping their EXIM cargo at Sin­ga­pore.

While the do­mes­tic and for­eign ves­sel op­er­a­tors are look­ing to pro­tect their turfs, but there is no deny­ing the fact that Indian ports of­fer­ing trans­ship­ment ser­vice have added to the ease freight move­ment for do­mes­tic trade. It could lead to a com­pet­i­tive mar­ket en­vi­ron­ment and mul­ti­ple cargo han­dling could also come down sig­nif­i­cantly as a re­sult ship­pers can bet­ter plan the cost and most im­por­tantly the time needed to ship cargo.

An­other ma­jor fac­tor is avail­abil­ity of empty con­tain­ers to ex­porters, which plays a ma­jor role for ship­pers to make time com­mit­ments to over­seas clients. Let’s take a prospect for ship­pers re­lated to the im­por­tance of time; apart from de­ten­tion to move cargo to main­line ves­sels, the unpredictability in freight move­ment time leads to in­creased in­ven­tory cost for the con­signees. Con­signees who on an av­er­age main­tain 15-20 days of in­ven­tory stock round the year be­cause of var­i­ous lo­gis­tics un­cer­tain­ties they face dur­ing peak sea­son would in­crease their in­ven­tory to a 1 month to avoid any short­age of cargo.

From tran­ship­ment point of view dur­ing peak de­mand days such as Q1 and Q4 of the year, con­tain­ers had to wait at tran­ship­ment ports like Sin­ga­pore and Colombo longer than usual. But af­ter the in­tro­duc­tion of tran­ship­ment at ports like Kr­ish­na­p­at­nam, the de­lays could be re­duced, sub­se­quently the wait­ing time. More­over, ex­porters and im­porters can also save on freight cost as in­stead of mov­ing cargo on feeder ves­sels to over­seas trans­ship­ment ports, they can avail main­line ves­sels at Indian ports. Even if the do­mes­tic ves­sel op­er­a­tors have com­pet­i­tively lived upto the ex­pec­ta­tion and de­mand of grow­ing EXIM trade but in the long run In­dia re­quires its very own trans­ship­ment hub ports to com­pete glob­ally and it is also im­por­tant from strate­gic point of view. It is also a fact that In­dia doesn’t have a global ship­ping line backed by which the coun­try could float a trans­ship­ment hub. Whether any Indian port could be a trans­ship­ment hub or not largely de­pends on putting it on the map of port of call for ma­jor for­eign lines and it couldn’t be pos­si­ble with a re­stric­tive en­vi­ron­ment and clar­ity on poli­cies.

There is no cabotage law in In­dia for ship­ping sec­tor and if we take the ex­am­ple of do­mes­tic air­line sec­tor pas­sen­gers don’t have the priv­i­lege to go for a for­eign air­line fly­ing between two Indian cities as a re­sult do­mes­tic air­line op­er­a­tors in many in­stances charge ex­or­bi­tantly. Even in case of rail­ways, a for­eign rail op­er­a­tor has to have an Indian reg­is­tered com­pany to move cargo in

In­dia. But Indian flagged ves­sels couldn’t have mo­nop­oly like air­line or rail.

CEO, MSC Agency (In­dia)Capt. Deepak Te­wari

CEO, Indian Na­tional Ship-own­ers As­so­ci­a­tion (INSA)Anil Devli

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