By Krishna B. Kotak, Chairman, JM Baxi
The year 1991 is considered the birth year of reforms in India, when the country had to tackle and overcome a bankrupt economy and usher in reforms to the Indian governance structure and the Indian economy.
The Licence Raj had to be dismantled, the private sector had to be ushered into the economic mainstream, the public sector had to be revitalised, capital had to be raised, foreign currency needed to be attracted, technology upgrades needed to be done, mindsets needed to change, and the to-do list went on and on.
For the ports and shipping sector, all the major and minor ports were faced with a shortage of funds, massive overmanning and strong unions, abysmally low levels of productivity, antiquated equipment, chronic congestion, pathetic and expensive port connectivity, high costs and inefficiency. The shipping sector was dominated by the public sector undertaking (PSU) Shipping Corporation of India (SCI), with a fleet comprising tankers, bulk carriers, liner ships and offshore vessels. The private sector shipping industry was led by the Great Eastern Shipping Co., which primarily operated bulk carriers and tankers, along with a handful of other shipping companies such as Essar Shipping, Tolani Shipping, Varun Shipping, India Steamship, Scindia Shipping, Apeejay Shipping and Mercator Shipping. Several new shipping companies emerged later as a result of the reforms.
Rail transportation was dominated by the monopoly organisation Container Corporation of India Limited, a subsidiary of Indian Railways, which ensured that the pricing of rail transport services remained higher than road transport costs, with containers moving at an average speed of 18 km per hour between locations such as Delhi and the Jawaharlal Nehru Port Trust (JNPT) by rail.
The shipbuilding and ship repair industry was largely confined to the major PSU shipyards, namely, Mazagon Dock and Scindia Workshop in Mumbai, Cochin Shipyard, Goa Shipyard, Hindustan Shipyard in Vizag, and Garden Reach Shipbuilders & Engineers in Kolkata. Most of these shipyards gradually began catering primarily to the requirements of the Indian Navy and undertook very little commercial shipbuilding. Ship repair activity was limited to a few workshops that handled emergency repairs. Most major ship repairs had to be undertaken in Singapore, Colombo or Dubai.
Despite reforms and liberalisation, meaningful change has yet to reach the ground level.
For shipyards, the real reforms and liberalisation began to happen in the early 2000s with the establishment and growth of Bharati Shipyard and ABG Shipyard. The two main reasons they were able to do well were the shipbuilding subsidy that the government provided and the relaxation of customs import procedures, which enabled shipyards to import the necessary components for building and fitting ships. The reforms and liberalisation also extended to the financial markets, enabling both Bharati and ABG to access the capital and stock markets and become powerful listed entities. Interestingly, the reasons for their downfall were also the delayed payment of the promised subsidies and the management’s taking the capital and financial markets lightly, coupled with inadequate corporate governance, leading to a collapse of value and confidence.
Today, the shipyard sector is almost exactly where it was before the reforms, except that Bharati and ABG have been replaced by Chowgule Shipyard, Larsen & Toubro Kattupalli Shipyard, Swan Defence Shipyard and San Marine. The only difference is that, at present, shipyards such as Cochin Shipyard and Mazagon Dock are doing exceptionally well on the back of the post-Covid-19 global shipbuilding boom, which has given a boost to India’s otherwise lacklustre PSU shipyards segment. They are also bolstered by continuous naval defence orders. Despite reforms and liberalisation, meaningful change has yet to reach the ground level. PSU shipyard companies remain entrenched, continuing to act as spoilers with their “dog in the manger” attitude, thereby preventing the Indian private sector from gaining entry. Let us hope we do not repeat the same model under which they succeeded in driving the Scindia Steam Navigation Company and India Steamship Company out of the liner shipping business, leaving India without a single domestic liner shipping company today.
The government is trying to attract and encourage foreign shipbuilding companies and is attempting to follow the Vietnamese model. The two most likely outcomes would be either what we saw in the automobile sector, where foreign companies use India as a production hub and leverage Indian labour while the technology and brands remain overseas, or another colossal failure similar to what we witnessed in the steel sector, where no foreign company eventually entered India after signing agreements and taking possession of land in states such as Odisha and Andhra Pradesh.
Indian businesses and bureaucrats may well ask whether these reforms have brought any meaningful benefits to them. Furthermore, in the steel sector, we have strong Indian champions such as Tata Steel and the Jindal Group. Such Indian expertise and presence in shipbuilding are either absent or very weak.
Reforms and liberalisation in the railway sector saw the establishment of private container train operators (CTOs), and amidst much fanfare, 12-14 licences were awarded to interested train operators. With the consolidation of just a handful of private CTOs in the market, one can now see some traction in rail freight with the operationalisation of dedicated freight corridors. One hopes that Indian Railways will truly move forward with the various planned reforms.
Investments need to be made in tracks, locomotives, trains, stations and signalling systems. At different times, the plans have changed. At the start of the reforms, Indian Railways sought to concentrate on passenger trains and let the private sector carry the burden of cargo train investments. This flip-flop in policy, by shifting the goalposts for freight terminals in private hands, has resulted in reforms and liberalisation being suboptimal and not taking place effectively, and also preserved the monopoly and inefficiency of Indian Railways.
We carry a very small percentage of Indian traffic. On the container side, we carry a minuscule percentage of India’s international or coastal traffic. The first reform initiative was to encourage foreign investment in India. International port operating companies were encouraged to come to India to build and operate port terminals, needless to say, largely to the exclusion of interested Indian companies. Companies such as P&O Ports and PSA International came to India and secured port concessions at JNPT, Chennai and Tuticorin. The government established the public-private partnership (PPP) framework and also designed a model concession agreement to create a “bankable document”.
State governments such as in Gujarat also developed their own port privatisation policies and rolled out greenfield ports such as Mundra and Pipavav in the private sector, led by Adani and Nikhil Gandhi, as well as captive port terminals at ports such as Hazira and Dahej.
Over this period of 35 years, and through several policy iterations, including the creation of a tariff authority for major ports and its subsequent abolition, India has evolved into a landlord port model, with most cargo handling activities being undertaken through PPP and private operation and maintenance arrangements. On the shipping side, over the past 35 years, the government has welcomed foreign investment and witnessed several foreign shipping companies establishing Indian subsidiaries and domiciling selected tonnage in India to carry coastal cargo. However, over the same period, India has also witnessed a reduction in Indian-owned shipping tonnage.
The international export-import (EXIM) trade in general merchandise is now carried primarily by container ships. With the absence of Indian container shipping companies, a handful of global container shipping companies have captured the Indian market, with 80 per cent of India’s EXIM trade being carried by just five shipping companies. Freight rates into and out of India are among the highest in the world. Furthermore, non-freight charges such as terminal handling charges, detention and demurrage levied by the shipping companies on exporters and importers are at least double the actual costs. This cartel of shipping companies has clearly misused progressive Indian policies and converted them into a tool for monopoly.
The government has endeavoured to take steps by encouraging SCI and the newly formed Bharat Container Lines to establish a world-class liner/container shipping company. India pays almost $60 billion-$70 billion in freight costs to foreign shipping companies. Apart from the service earnings that India can generate, the country’s EXIM trade will also benefit from greater competition and improved services.
India is now poised to enter the next stage of continuing reforms in the maritime logistics sector.
